Memoirs of a Minyan: Whaddya Say Y2K?
The purpose of the journey is the journey itself.
Chapter 7: Waddya Say Y2K?
The stock market soared to incredible heights and there was plenty of gold on the horizon—I simply had to find my pot. As the calendar flipped to 2000, I stepped into the new millennium and eyeballed the rainbow.
I already had several conversations with Jim Cramer and Jeff Berkowitz and we were seemingly on the same page. At $400 million, it was much smaller than Galleon but they dangled the elusive word: Partner.
We met on several occasions to discuss particulars. I would join the firm and run the entire trading operation. My base salary was $300,000, which provided the security I was looking for after a few lean years. More enticing was that I would receive a nice slice of the profit pie.
Jim was wildly emotional but from what I could tell, honest and fair. Jeff had become a close friend and was pragmatic and balanced. They complemented each other as partners and my skill-set seemed to mesh equally well.
When I told David Slaine of my plan, he asked me a very simple question. “Do you trust them?”
It was a simple yet critical criterion. When push came to shove, would they watch my back? Would they put my interests on par with their own? Would they do the right thing? I believed they would. We met at the Gramercy Tavern in Manhattan and chewed through the remaining details.
The energy was palpable as we talked about the markets, life and the world at large. Jim continued to reference a financial website called TheStreet.com, which he co-founded in 1996 and took public in May 1999. I heard of it but wasn’t familiar with what it was or how it fit with money management.
I would soon find out, for better and for worse.
The elasticity of the technology bubble shaped the collective mindset into the perceived reality that a new paradigm was upon us.
For those managing money at the beginning of 2000, the price action was nothing short of surreal. Each day was a journey unto itself, a volatile manifestation of emotion that somehow morphed net worth into self worth at the end of each session.
I couldn’t have scripted a better beginning to my newfound existence running the trading operation at Cramer, Berkowitz. After a flurry of emotional buying following the Y2K scare, the NASDAQ dropped 450 points--11%--in a matter of days. It was trial by fire and our desk gelled as if we worked together for years.
They say everything is funny when you’re making money and there were giggles all around as the ink dried on my contract. We were all on our best behavior but make no mistake, we were a collection of distinctly powerful personalities with proven formulas for success.
Jeff had a brilliant analytical mind, research director Matt Jacobs was plugged into the Street, Jim played momentum and I used volatility to my advantage. When we were on the same page, it was akin to four chefs mixing the perfect brew. As we captured the violent market swings, we drank the sweet taste of success like nothing I’ve ever experienced.
In February 2000, Cramer penned his infamous “Winners of the New World” column on TheStreet.com, extolling the virtues of ten high-flying technology stocks. Each of them sat on a parabolic perch after a massive rally but it didn’t matter. He believed they were the winners in the new world and tried to convince us in kind.
I tried to separate his online persona from our internal dynamic, sometimes successfully and other times in vain, and our first few months were blissful as profits padded our portfolio. While I struggled when I started at Morgan Stanley (MS) and Galleon, I was immediately at ease when I arrived each morning at the head of the desk.
As part of my charge, I was responsible for the implementation of risk management systems, commission allocation to our trading partners and staffing decisions on the desk.
The status quo that preceded my arrival would quickly change; I was ready to put my fingerprints on the operation.
The New Kid in Town
It all seemed very strange. We actively traded $400 million and calculated the profit or loss by hand each day. The actual number, along with trade errors, arrived from Goldman Sachs (GS) the following afternoon.
Our offices were on 40 Fulton Street adjacent to the Brooklyn Bridge. There were a dozen or so full-time employees, including three clerks directly under my charge. They made multiple-six figure salaries for executing orders on behalf of Jim and Jeff, which seemed awfully extravagant given my experience on the Street.
Within a few months, I ushered through several changes. The clerks were replaced with young guns that had skill-sets accretive to the trading process. Their base salaries were low but there was no ceiling if we produced.
Eat what you kill.
We installed a state-of-the-art risk management system that allowed us to monitor our performance in real-time and “stress test” various market scenarios.
I met with the desk heads of our brokers and told them commission would be correlated to their idea generation and the liquidity they provided.
It was pure meritocracy, within our walls and with regard to our relationships. We were tough but fair and always operated within the letter of the law.
Word of our approach quickly spread and our firm hummed like a well-oiled machine.
We got the first call from brokers when analysts changed a rating on a stock. Head traders communicated the directional flow from their most respected accounts and I was always quick to offer my opinion in an attempt to establish good will.
We treated people the way I wanted to be treated when I was on the other end of the phone. We always told them why we traded and rarely hurt them with our flow. If we ran over them with one of our orders, we adjusted prices as a matter of course.
My grandfather taught me that all we have is our name and our word. The trading operation at Cramer Berkowitz evolved into a direct extension of that.
Feeling emboldened in the spring of 2000, I swung at a pitch outside of my strike zone. One of my brokers alerted me to a special situation, a stock called Focus Enhancements (FCSE) that he believed was ready to run.
We were making money hand over fist and as I was trading particularly well, Jim and Jeff were happy to indulge me. After we weighed the opportunity, we established a six-figure position as it traded between $6 and $8.
We were in a groove and our confidence was matched only by our growing reputation. With the market swinging wildly—10 to 15% at a clip—we seemingly had the script in our hands before it hit the tape.
By the middle of the first quarter, we established a sizable lead on the averages and a boldness that bespoke our performance. In hindsight, that was the first warning.
“Focus Enhancements on the tape!” screamed Matt Jacobs as we all trained our eyes on the headline. The news was negative and the stock dropped 30% before we took our next breath.
Nobody said a word as phones rang unanswered and Maria Bartiromo chattered away in the background. I was frozen—we all were—despite the fact that the loss, while substantial, was a pimple in the much broader complexion of our $400 million portfolio.
I sat across from Jim and watched his face turn from white to pink to a sullen shade of red. And then the twitching started, a facial tick that would become all too familiar with time. He pushed back from his turret and walked into his office. Instinctively, we followed and shut the door behind us.
I’ve always been my harshest critic and hold myself to the highest standards. Nobody needed to tell me I screwed up. They knew it, I knew it; we all knew it.
But this was one trade—a big trade but one trade—in the context of a series of profitable decisions that netted our firm millions of dollars. I braced for some backlash but wasn’t prepared for the realities that came to bear.
Jim was relatively calm at first—relative to him, as it turned out. What began as a discussion regarding our alternatives to either mitigate risk or seize an opportunity quickly devolved into a soapbox rant.
It stopped being a dialogue between partners; Jim unloaded on me in a way I hadn't seen in my entire working life. All he could do was detail how horrible and unacceptable the situation was, over and over and over again.
Jim screamed. He swore. Here’s the odd part—I may have even seen a tear by the time he was done. It was the strangest display of emotion I ever witnessed in a professional setting or otherwise.
By the time I left his office, I wasn’t thinking about Focus Enhancements. All I could think was, “Who is this guy and what the heck just happened?”
I’ve worked with some serious personalities over the years but what I witnessed that day set a new standard and produced a valuable lesson.
Just as bad seasons define good fans and bad times define good friends, bad trades define the true colors of your partners in the pits.
Click here for the next chapter of memoirs, "Battle Lines Are Drawn"
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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