‘I Always Knew I Could Make Money’ Forbes 400 Member Leon Levy
Leon Levy passed away this past Sunday. I was
fortunate enough to have the opportunity to interview him a few months ago just
after he released his book, “The Mind Of Wall Street.” Mr. Levy
was not only one of the great hedge fund managers and money managers in the
world, but he will also be remembered as being one of the great philanthropists
of our time, having reportedly contributed more than $140 million to numerous
non-profit organizations.
In memory of Mr. Levy, we’re reprinting this
interview we did with him back in December.
When I
was a young man growing up in New York City, I could never imagine that anyone
would pay me to do anything. I did not do particularly well in school, I am
easily distracted, and I have always been forgetful – not the list of
personality traits likely to appear in a help-wanted ad for any profession.
Still, from the age of thirteen, when I invested in the stock market $200 that I
had received as bar mitzvah presents, I always believed I could make money with
money. This turned out to be true.
–Leon Levy, “The Mind Of
Wall Street”
I had the honor of interviewing Leon Levy in early December,
2002. Mr. Levy has had an illustrious career on Wall Street as founder of the very
successful Oppenheimer Funds and partner of Odyssey Partners, a hedge fund
that over it’s 15 year history, put together one of the best and most
consistent records in history. This success has made Mr. Levy a member of
the Forbes 400 for many consecutive years.
First, I will tell you that if you are reading this interview in order to
learn the trading secrets from one of the masters, you will not find it
here. Mr. Levy is old school. And, old school doesn’t show their hand. This
means they play a game of possum. They tell you nothing they don’t want you
to know (in fact, I edited the times he imparted to me such wisdom as “if
you like a stock, you buy it, and if it goes down, you sell it.”) But, Mr. Levy was kind enough to share some gems. Read into his
words and you find some secrets. And the biggest secret he was willing to
share was how he obtained his returns. They came from hitting home runs.
Outsized gains from a few positions. Risk 25-100% on a position in order to
make 10, 20 and 30 times that number. These are not trades. They are longer
term holds that appreciate over the years. When you look at many of the most
successful “larger” hedge funds, that is the way they play. They take
a small piece of the portfolio, make many investments that they feel can
explode in price and then reap the rewards when they do. It’s a fairly risky
way to go about investing/trading. Mr. Levy was humble enough to point out
he’s had many, many losers along the way. In his book “The Mind Of Wall
Street,”
you’d think he had nothing but losing investments in his career as he spoke about them in great depth. But,
even though the losing investments tend to be more colorful, I believe Mr. Levy was
making a point. His point was that even the very best professionals make
mistakes, sometimes big mistakes. But these mistakes can be overcome, by
finding winning investments that overcome those mistakes. And how do you do
that? Simple. It’s risk/reward. It’s getting into positions that can
and will potentially lead to gains that far outweigh your initial risk. When you
correctly do that you end up with returns like Leon Levy has achieved over
his 50 year history on Wall Street.
As you know, there are many ways to make money on Wall
Street. Leon Levy’s way is certainly one of them. I hope you enjoy and learn and
profit from this interview:
Larry
Connors: I just finished reading your book.
It’s extremely well written. I congratulate you. I also congratulate you on the
success you’ve achieved over your career.
Leon Levy:
Well thank you very much, Larry. If you want the real story, it was
mostly luck.
Connors:
How’s that?
Levy:
Oh, there’s luck in life, in business and everything else.
Connors:
Your humbleness comes through in the book. Obviously, it’s
not that easy to achieve what you’ve done. Again, I commend you for this.
Let’s talk about your background before we get into your investment
philosophy.
Levy:
OK.
Connors: Maybe
we can start right from the beginning. One of the things I noticed is that your
father played a major role in your life and in your thinking. I know your book
is dedicated to him and it seems that a great deal of his work found its way
into your own thinking. Can you talk about that?
Levy:
I certainly can. My father was interested in economics because he heard President
Taft — that’s long before our time — give a a talk at Cooper’s Union, before
World War I. After Taft finished talking, a fellow raised his hand and said,
“Mr. President, what do you do if you can’t get any job and you’re a skilled
mechanic and you’ve got three kids?” And Taft said, “God knows. I don’t.” Then
my Dad went home and figured if the answer were in books, Taft would be likely to
know it.
He was a very skilled mathematician —
that’s what he studied at City College, the class of 1901. He asked, “Why do
people hire other people for work?” To make a profit. “Where do these profits
come from?” And he figured out a series of equations, if you will, which
included all the sources of profits, and he published them in a book called
Economics As An Exact Science. Like me, my Dad had no academic training, no
degrees, nothing. So nobody paid any attention to it.
That’s also my background. I never
studied business. Although I taught business at City College, and that’s a story
in itself… I used to work with my father and I helped collect securities. And
whatever I learned in business, he taught me. I taught at City College for a
while and then I got a job as a trainee at a firm that no longer exists and
probably no one remembers, called Hirsch and Co. Then I met some salesmen at Hirsch and Co. called Max
Oppenheimer and two other German fellows. They were refugees from Mr. Hitler and
they started their own firm and they asked me to join them as a partner.
To give you an idea of the importance
of this firm, I was head of research. But if Goldman Sachs printed a report,
say, on the Rio Grande railroad, I’d call up and ask for a copy, saying I would
send over my messenger. I was 26. Then I’d put on my raincoat and go over to
Goldman Sachs and I’d say, “I’m Mr. Levy’s messenger. Do you have a copy of the
report?”
Connors:
(Laughs)
Levy:
That’s completely integrated operations. In the beginning, I wrote all the
research reports. I was a financial journalist at the time — I wrote for
Barron’s and Financial World and so forth — but I was Oppenheimer’s
research department. I was head of research and chief bottle washer and all that
sort of thing.
Connors:
And the rest is history.
Levy:
Yes. And the rest is history. I did start the Oppenheimer funds, and by the way,
I just resigned as the head today. I felt 45 years is probably long enough.
Connors:
I’m sure we’ll read about in the papers tomorrow.
Levy:
Or Monday, I think they intend to release it. It was all on very, very friendly
terms.
Connors:
Congratulations. Let’s move onto your investment
philosophy. One of the things you wrote is: “Most people believe that markets
are driven primarily by economic factors and that psychology plays a minor role.
I take the position that markets are driven by both psychological and economic
factors.”
Levy:
I do believe that.
Connors:
Can you discuss a
little bit about what your belief is of psychology, and the role that
psychology plays in the markets?
Levy:
Sure. Assume a news event takes place. For example, we get into a war with
Iraq. Is that good for the market or bad for the market? I can’t give you
an answer right now. We have to wait and see how the market starts to react. And
then once we see, we get some feeling, and we’ll have more of an idea as to
whether it’s a positive for the market or a negative. But most events can go
either way. I noticed before World War II, every time there was a war scare, the
stock market would go way down. When we finally got into the war — not when
we got in — but the war started in September 1939, the market zoomed up. I
don’t know how you could have figured that out. It was a psychological
event. People sold before the war on the war scares but when the war started,
they bought.
Connors:
And…
Levy:
And I think there are many news events
that are rather like that. It depends on the public’s interpretation of the same
event. It can be different at different times.
Connors:
How do you
take advantage of that?
Levy:
Well, you can only take advantage once
you have a feeling that this is what’s going to happen and then you sell the
stocks you want to sell, or buy the stocks you wish to buy. But you have to act
with the psychology.
Connors:
Let’s use the example of the war with Iraq. Do you go in
there with a premonition that, for argument’s sake, it’s going to be bullish
because in previous events we’ve gone to war and markets have taken off as we’ve
gone into war?
Levy:
Yes, you have an intuition.
Connors:
And you see that just the opposite is happening. We go to war and in fact it’s
not selling off. Does that change everything for you or do you become more
aggressive at that point to the short side?
Levy:
Well, I think it depends on the event,
the mood of the market and other things which are going on at the same time. I
don’t think that you can tell. But you can have a gut feeling or an
intuition.
Connors:
If the market reacts opposite to that intuition, what happens?
Levy:
You’re wrong. But again the market will
tell you fairly early how it’s going to react and then you take it from there.
Connors:
And how do you react? How have you reacted in the past when you’re wrong? Are
you out immediately?
Levy:
Well, sometimes you run immediately, and
it depends on the whole circumstance, the economy, how you see these things
affecting economic practice and you have to make the best judgment you can make.
The odds are not 100, or 90 or 80, but they’re something over 50, maybe, if you
have a lot of experience. No two experiences are ever the same and this is where
your discretion comes into play.
Connors:
You mentioned you had given some money to a hedge fund manager who proceeded to
lose, I think it was 98% of its value, and you mentioned one of the stocks that
he was buying in the hundreds that found its way down to $2.
Levy:
Yes. Right.
Connors:
And he was still rationalizing his decision to be in the stock. This is a
gentleman who obviously meant well but along the way, price ultimately
dictated… it overruled his belief system. Do you claim at the same time that
price will ultimately overrule your belief system?
Levy:
Well, I think price and the action of a
security is one of the elements that goes into the decision making. Now we have
to say that this fellow is a little bit of a fool. And I know because he used to
work for us and he seemed to be a perfectly sensible, fine fellow. But he
obviously had a problem. He couldn’t adjust to different conditions and I think
a trader has to have the ability — or an investor I should say — has to have
the ability to adjust to being wrong. In other words, you can’t be too stubborn.
You must have a certain degree of flexibility as to what’s going on.
Connors:
Yes, I fully agree. Your performance with your fund — especially the hedge fund — is
extraordinary. Did you find that the performance was straight line, or…
Levy:
No, we had ups and downs. Every day was
another day… but it wasn’t a straight line.
Connors:
Obviously more ups than downs…
Levy:
Well, the record speaks for itself, so
apparently yes. I mean in my life — and I was in the markets for 50 years — the ups were better than the downs
Connors:
Were the ups from hitting home runs or a lot of singles?
Levy:
Well, my nature — and now we get back to
the personal psychology — I like to be a long term investor. Maybe it comes
from laziness. I don’t have to make too many decisions. But I like long-term
concepts anyhow.
Connors:
So for you, your performance came from hitting home runs?
Levy:
I would say I made more home runs than
most other fellows who were in the markets. And I traded less.
Connors:
The home runs were more than enough to overcome the losing trades.
Levy: Correct.
Connors: If you were to give advice to people who were just starting out
today, what would you tell them? The markets have obviously changed over the last 45 years and you’ve had
an influence in the change of the marketplace…
Levy:
The markets have changed, but I don’t
think psychology changes that much.
Connors:
Please explain that.
Levy:
I think that people are still motivated
by fear and avarice. And sometimes they are more fearful and other times they
are more greedy.
Connors:
And if you were to give advice to somebody who was just starting out today,
would you tell them to learn the psychology of the markets first?
Levy:
Well I would tell them that’s terribly
important and they ignore that to their own detriment.
Connors:
Did instinct play a role in your success?
Levy:
Oh yes, there is instinct. But then what
is instinct? It’s really all of your past experiences put together and somehow
— we don’t exactly know how the mind works but you make some decisions based on
everything that’s happened before.
Connors:
Another question… you talked about getting out of a position.
You say, “If I found myself in a position worrying about a stock and I have
learned from bitter experience and decide to sell, not to sell a small part but
to sell, for example, a third or a half.” How does that come about? Do you
basically make a commitment to walk away from your decision?
Levy:
What you’re saying is I’m beginning to
question the decision. And it takes so much energy to change one’s mind that if
you’re going to change your mind, you may as well do it for a meaningful amount.
I mean, we’re never sure of anything in the market. I don’t know if anybody could
buy a security and be certain it’s going to go up or do what it’s supposed to
do. So, you then say that if I decide to take a position, then change a position
I have thought a great deal about, I want to be sure I make a major change. It’s
like treating it with a BandAid to sell just a little bit… you might think you’ve
done something, but you haven’t. So if you’re going to do something, you might
as well do something that’s going to have some meaning.
Connors:
Great advice. Let’s talk about your market outlook. You’ve been pretty bearish for the past few years.
Levy:
Right.
Connors:
What would make you change your mind?
Levy:
Well you know my family are economists.
They run the Jerome
Levy Forecasting Center up on Mount Kisco
which is run by my nephew, David Levy. His work is probably more
analytical and less psychological but if he sees corporate profits trending
upward, and I should add he doesn’t see that now, he sees them going down… I would be
inclined to become more optimistic as far as economics is concerned.
Connors:
So, what would make you change your mind about the market? Would it be psychology combined with those corporate profits? Do you want to see those
corporate profits rising and money pouring again into the marketplace from
investors?
Levy:
Well I like to see corporate profits
rising and everybody very negative. You would have to think that’s
positive because then everybody can change and become positive. But if everybody
began by being positive as they were a few years ago, well, there’s no
room — if all the money that’s going to be invested, speculated in the market,
is committed, then you have to be pretty negative.
Connors:
Are we getting anywhere near levels of pessimism in your mind, where they
should be at these levels?
Levy:
No.
Connors:
You believe that some of the better opportunities are
in some of the smaller nations. I believe you favor Russia and a couple of
other countries.
Levy:
Well, that’s a long-term view and that has
to be intuitive as much as anything else, but I think that countries which have
much cheaper labor markets and highly intelligent people who speak English —
like India or China or Russia — are probably… and Russia certainly… are
going to be good places to invest.
Connors:
How do you go about creating a portfolio knowing how much risk you should
be taking in any position?
Levy:
Well, what I did in Russia — and I don’t
think any one person’s strategy necessarily applies to everybody — but in
Russia, I knew a portfolio manager who ran a fund and I thought it was he was
very straight and very able and knew his field very well, so I took a major
position in Russia through him.
Connors:
Are you more aggressive managing other’s money than you are managing your
own?
Levy:
Well I like to treat all money as though
it was my own money because I think everybody cares as much about… you care
about $1,000 as much as I do. I do think you have to
refer to what you would do yourself. I never liked the idea of buying a stock
that I wouldn’t buy for myself.
Connors:
Is there some point if your position starts moving against you, let’s say you’re 20% down,
or 30% down, that you say, “Uncle. No more. I need to get out of
this.”
Levy:
Well, if that happened, let’s say I owned
something. Let’s even say Russia, since we started talking about Russia. And I
would figure if it went down 20%, gee, there may be something out there that I
don’t know. There’s always something you don’t know. And I would probably
start lightening up.
Connors:
So price will dictate your action.
Levy: Yes,
but with one caveat. If it’s caused by some event
that I think is silly. In other words, it might be a reason why people get very
discouraged about Russia and I think that reason has no merit whatsoever. I’d
probably want to buy more.
Connors:
So you really are taking each position and taking all the pieces together and
making decisions along the way. There’s nothing mechanical about the approach.
Levy:
I think you put it very well.
Connors:
I’m glad we were able to get to that point. Many successful traders and
investors use a fixed formula for going about making their decisions. For you,
your fixed formula is a combination of psychology and corporate profits. And
then from there you use your experience to guide you on the proper way to
proceed with the position.
Levy: Yes,
exactly.
Connors: I greatly appreciate your time, Mr. Levy.
Levy:
Thank you very much. It’s been a pleasure
talking with you and I appreciate it.
Connors:
Thank you. I wish you the best of luck.
My thoughts:
First, as I mentioned in the
introduction, he’s old school. He’s sly as a fox. And he’s not going to show his
hand beyond what he wants to. But, he was kind enough to share a handful of
things with me which will ultimately impact my own viewpoint of the markets and
my own trading. Some of these are:
1) His unparalleled performance has
come from hitting home runs. He risks X to make many times X. He claims he’s
just lazy and just doesn’t want to do the work to get out of a position (I could see
him smiling through the phone as he was telling me this.) The bottom line is, he
does substantial homework before making a decision and if his analysis is
correct, he makes many times what he originally risks. If not, he aggressively
gets out and looks for other opportunities.
2) The early major move from a historic event many times is the beginning of a
much larger move. This information will be key if and when we go to war with
Iraq.
3) Psychology of the markets has
played a key role in his success. In his words, not applying it to your own
investment decision-making process would be a detriment to your performance.
4) Rising corporate profits combined
with bearish sentiment will lead the next bull market and likely every bull
market in the future. On the opposite side, declining corporate profits combined
with bullish sentiment precedes bear markets. You only have to think back
to Intel missing their numbers in the summer of 2000 to fully appreciate this.
5) Even the best are many times wrong.
But, what they do very well is walk away. They don’t let stocks drop 98% on
them.
6) Leon Levy has parlayed a stake of
$200 into a net worth which makes him amongst the wealthiest people in the
country. He is the epitome of someone who has learned how to correctly
“make money with money.”
The next Big Saturday Interview –
January 18.