Down the Up Escalator (25 page)

Does Pru still worry that she’s about to be poor? She’s too mindful of the needs of others and the real conditions of other lives to call herself poor. What she answers instead is “I learned from the crash that my money is finite.”

“Does that mean no more art and charity?” I asked.

“Before, the money I was giving away was being replaced like magic by the stock market,” she answered. “Now I know, like that stingy husband of mine, that if you give it away, you don’t have it.”

Brenda Takes Charge of Her Portfolio

Brenda Staark and I bonded in jail when we did ten days for our part in the Free Speech Movement sit-in in Berkeley. (Mario Savio and all that.) Since then, we’ve found ourselves on different coasts and in different circles. But whenever I catch up with her, I’m always surprised.

One time she picked me up in L.A. in a pink convertible—with
a tiny dog riding next to her. Early in the computer age Brenda migrated to Silicon Valley to sell business computers and gradually moved up to more high-tech products. One of her last jobs was as a saleswoman for a huge (and to me scary) military contractor. To make sales, she had to visit civilian companies and figure out how they could use nonlethal adaptations of programs her employers developed for efficient killing. How did she learn enough to do that? I wonder.

Since Brenda keeps up with such a variety of people, I called to ask if she knew anyone who’d been affected by the recession. “Me,” she answered, so I started to take notes.

While she’d worked in Silicon Valley, Brenda had managed her IRA portfolio herself. “I knew which companies were building new buildings, buying thousands of computers. I had to see their budgets in order to take their orders, so I knew which of the dot-coms were real and which were mirages.”

Over the course of the 1980s and into the 1990s her investments in technology stocks grew by over 500 percent, she says, and what’s more, she got out before the dot-com bubble burst.

My friend Brenda has a lot of interests, so as soon as she felt she had enough money for the rest of her life, she retired. “I was traveling, going to the theater, I ate all organic foods, took the kids on trips. Yes, I lived well. But since I was no longer an ‘insider,’ I turned my portfolio over to a financial manager.”

When the Great Recession hit, she too was advised not to panic. Social Security and a safe annuity provided half her monthly income, so at first she watched, waited, and cut her discretionary spending. For instance, she changed the weekly lunch with her son from a restaurant meal to a picnic. “We still had our special time together.”

To get some new money coming in, Brenda looked for work as a nanny and quickly found more hours than she wanted. “There are still wealthy people in this town, and they want someone who speaks English well and is like them. I always get top dollar,” she assured me and then thought about the other side of that coin. “I guess some people must be losing their jobs because people like me are taking them.”

(A
Washington Post
article of June 13, 2009, supports Brenda’s conjecture with its headline “Nannies No Longer Rule the Roost: Parents Regain Economic Power to Be Picky in Hiring Help.” According to the head of a nanny agency whom the
Post
interviewed, clients now freely express their preference for “college-educated, American” nannies. And they’re easy to find. The nannies interviewed found their pay and working conditions worsening.)

“When the market got to the point where I had lost 40 percent of my life’s savings, I said to my manager, ‘This has got me scared,’ and he said, ‘It always goes down in the spring and will go back up.’ ”

At that point Brenda took back the active management of her portfolio. She studied intensively with a trader-mentor and read for about four hours each morning. When she was finally ready, she liquidated her mutual fund holdings entirely in order to begin investing in gold.

“I track the Dow, the S&P, spot gold, silver, crude oil, and copper prices every day and enter them on my own special spreadsheet. In January, when gold went down to eight hundred something dollars an ounce, I made my first purchase.”

Brenda’s plan was to shift about 10 percent of her worth into gold and silver and to buy dividend-yielding blue-chip shares while they were down.

I never felt I could ask my old friend how much money she had before the crash, how much she lost, or exactly how much she has now. But if she followed her gold, silver, and depressed blue chips strategy, Brenda should have come out of the crisis well ahead.

One early hint of her improving fortunes is that she was soon accepting only nanny jobs that fit into her schedule without breaking up the day. I suspect she only worked those few hours in order to keep a bit of warm baby in her life. But when I congratulated her recently on her gold strategy—the price had more than doubled—she reminded me that so far it’s still only paper gains.

By the summer of 2009, Henrietta’s portfolio hadn’t fully recovered, but she was only down by about $20,000. That should have been distressing to someone who buys day-old bread. But for Henrietta there’s no connection between the money she lives on and “the account.”

In some ways, Henrietta, the poorest of my three investors, adhered most closely to the rule of the very rich. She never went into capital. She lives off her Social Security and small pension. There’s little way she could have cut that spending when her portfolio went down, and there’s no way she’d dip into it when it goes back up.

At this point in the recovery she felt sure that she could pay for a couple of years of home help—as long as that didn’t include an overly extended period of round-the-clock care. Besides, the market was still going up. That left her confident enough to start giving me advice again.

She suggested that I interview her future caretaker’s sister about the recession. Under Henrietta’s management the caretaker herself had remained steadily employed throughout the downturn. But her sister, a housekeeper/nanny for a family in Brooklyn, had been laid off when the husband of the family took big cuts at his “hotshot” job.

As their situation stabilized, the family called the housekeeper back, but because of changes in their work schedules they now needed some weekend hours. “But they’re paying her the same!” Henrietta said indignantly.

According to Henrietta, the sister was scared because she knew so many other unemployed Nepalese they could hire. “I can’t make those women understand that if they called her back when they could hire someone new, that’s the time to ask for a raise.”

“You should manage both sisters,” I said.

In fact, Henrietta had already offered to call the Brooklyn brownstoners. Her plan was to say that she was interested in hiring their housekeeper herself and to ask if they could possibly work out some time sharing. By Henrietta’s theory of supply and demand, interest from another employer could only help. “But they’re so scared they won’t even give me the number.”

I suggested that the sister might be illegal.

“So what? They need her!” Henrietta argued.

I started to explain about twenty-four million unemployed, forty years of downward pressure on wages. “The problem is …”

“The problem is that these women are idiots!” Henrietta said. Yet she’ll go on hustling up better-paying jobs for them, I know. It was good to see her back in form.

“You Have to Put It Somewhere”

Henrietta, Prudence, and Brenda aren’t the only individual investors who saw their portfolios reinflate. Merrill Lynch issues an annual
World Wealth Report
, which tracks high-net-worth individuals (HNWIs) and ultra-high-net-worth individuals (UHNWIs). The highs are worth over $1 million and the ultra-highs over $30 million. That doesn’t include their houses, boats, art collections, jewels, and so on. It only refers to the portfolio wealth that Merrill might invest for them if it got their accounts to manage.

At the start of the Great Recession, “world wealth” took a dive. But in the two years following the crash, the numbers of highs and ultra-highs around the globe rebounded—most dramatically in the United States. The main factor in that comeback was the rise in stock prices. When stock prices went down, many individual portfolios dipped under those $1 million and $30 million marks. But as investors regained their “risk appetite” (to use a financial-page phrase) and got back into the stock market, share prices rose, and bottom lines floated back up.

But why in the world did investors bid stock prices back up when sales at the companies whose shares they were buying were still down? Our three retirees may be relatively small and unsophisticated investors, but they answered that question in exactly the same way as their ultra-high-net-worth brethren.

When Pru told me that her portfolio had more or less recovered, I assumed she would then transfer some money out of the stock market and into the safer, interest-yielding investments that her son thought appropriate.

“We should have done that before the crash,” Prudence said,

“but now no one is offering much interest. And my son says that the investments themselves do look very good, so …” Prudence trailed off, suggesting her helplessness to do anything but what her family brokers suggested. “You have to keep your money somewhere,” she apologized.

Brenda had dumped all of her stock market mutual funds after the crash. “You can’t find out what fund managers are buying, so you just have to trust them—which I don’t anymore.” Now she was buying gold whenever it went down.

“My other strategy is high-dividend stocks. This is what I do. When I get the dividend, it goes into a cash account. I let the cash build up, and when the market dips, I buy more stock. I spend several hours each day doing my research, and when there’s a scare like a few weeks ago, I’m ready with my list—the down triggers my buy order.”

“Weren’t you afraid?” The scare she referred to was so volatile that it made seasoned traders nauseous.

“The economy is in the shits,” Brenda answered, “but banks and mortgage companies are loaded with cash, and they pass it back. Some regular corporations are good buys too if you look at their price-earnings ratios. People are selling because of political crises and debt fears. But frankly, as long as companies keep paying me those 15 percent dividends, I don’t care if their stock drops to nothing.”

“Fifteen percent?!” I was shocked.

“I have one at 18 percent. Most are around 9 percent, but it all adds up.”

So Brenda was taking dividends from companies that couldn’t find profitable uses for money in their own line of business and using the money to buy more stocks in those companies.

“Do you think it’s right to be in the stock market?” I asked.

“The current run-up of the market is a bubble,” Brenda answered. “It’s based on people having billions of dollars that they need to invest, not on the prospects of the companies they’re investing in. But I still see opportunities, so I’m in the market.”

“Well, if your money is inflating another bubble, then, I mean …” I didn’t intend to attack my friend’s ethics, but I finally managed to say, “I’m not asking is it
safe
to be in the stock market; I’m asking do you think it’s
right
?”

“Do I think it’s productive? No. Am I going to take advantage of it? Yes.”

Much of Henrietta’s money also stayed in equities. When her portfolio was down by only a few thousand dollars, I decided it was my turn to give her advice. She’s almost ninety and has what she thinks she needs for home care, so I suggested that she preserve her principal even if she earned no return.

“Is it such a sin to keep your money in an insured bank account?!” I asked, adopting her own Socratic style of argument.

“Do you know what a bank pays?” she countered. “Under 1 percent. My broker”—she now knows a name there—“says it doesn’t even keep pace with inflation.”

After a particularly scary stock market week, I returned to the argument. “What if it drops again just when you need the money?” Having made a decision, Henrietta didn’t want to endure more doubt. She cut me off with the ultimate financial wisdom: “You have to put it somewhere.”

“If We Had a Market on Mars …”

Investors with a lot more savvy and a lot more money than my three ladies were saying the same thing.

In 2011, Terry Gross of the NPR show
Fresh Air
interviewed the renowned hedge fund “quant,” or quantitative analyst, Ed Thorp. She introduced him as the mathematician who basically invented card counting at blackjack tables and went on to develop the financial equivalents—mathematical formulas for trading mortgage derivatives and credit-default swaps.

“Things that were basically behind the market collapse of 2008,” Terry said. Her guest didn’t demur.

Thorp told Terry that the hedge fund industry had gone back to its risky practices once it seemed that there wasn’t going to be significant derivatives regulations anytime soon.

With her characteristic directness Terry asked, “So how’s that affecting how much you want to have invested in the market?”

“Well, it’s tough,” Thorp answered. “The question is, you know,
where do you go
? There’s—we only have one world we live in. If we had a market on Mars, you might think about going there. But …”

So a man who thinks in billions is also saying, “You have to put it somewhere.”

That “have to” is even more imperative for a financial institution than an individual investor. Whoever pays interest has to earn interest. A bank can’t keep your money in the bank. Even during a recession it has to put your money somewhere.

Goldman Sachs has emerged from past recessions in good shape because of its greatly admired acumen at buying up distressed
assets, including bad debts, excess shopping malls, discounted mortgages left after a bust. (Buying Litton was supposed to aid with that strategy.)

But according to a front-page story in the
Financial Times
on February 6, 2011, that was hard in this recovery even for Goldman: