Chapter 7: Making Plans

February 6, 1983, Chicago, Illinois

On Sunday morning, I met Marcia at Lou Mitchell's for breakfast.

"Are we still on for next weekend?" she asked after we were seated.

"Yes, of course! I'll pick you up on Saturday morning at 9:00am, as we discussed, and we'll head to Waukesha.

"Great! We'll have Ponza Rottas for lunch at Jimmy's Grotto, then we'll check into the bed-and-breakfast. We can hang out for a bit, then we'll have dinner at a club in Milwaukee. On Sunday, we'll go to the museums and head back to Chicago around 6:00pm."

The waitress came and poured coffee and took our orders.

"Our analysis says Washington is going to win the mayoral primary by about three points," I said, "He should beat Epton handily in the April election. Do you know what job you'll have in the Washington Administration?"

"No, and Congressman Washington can't really offer roles to anyone before the election in April. I mean, some things are obvious, but some people are likely to want to stay in DC and work for whoever succeeds Washington."

"There would be a special election, right?"

"Yes. I plan to try for a Deputy Chief of Staff role, and there's a very good chance I'll get it."

"What's your fallback plan?"

"There will be plenty of positions available which aren't covered by the 1972 Shakman Decree."

"That case is still being litigated, right?"

"Yes. Mayor Byrne is trying to have the 1972 order vacated, but nobody thinks that will succeed. There's likely to be an order in the next month or so confirming that politics cannot be a consideration for non-policymaking positions. I'm not interested in a civil service job."

"And if, for some reason, you aren't hired?"

"Then I'll try to stay in my same role. The 1st District will absolutely elect a Democrat, and I'd have a recommendation from my Alderman and Ward Committeeman, which would make it pretty close to a sure thing. How are things at work for you?"

"Mostly, I do research and write reports. It's not all that exciting, but the more I learn and the more analysis I do, the better I'll be as a full-time trader or investment manager."

"Will you allow me to invest?"

"How much?"

"$8,000. It's been in staggered one-year CDs I've been rolling over."

Which meant she didn't need immediate access to her money, meaning she passed the first major criterion for accepting her funds.

"Do you have other savings?"

"Yes. I have three months of expenses in a regular passbook account I could use for emergencies."

"And you understand the costs? There's a 1% charge to invest, and then 10% of all gains over the 8% hurdle?"

"What happens if you don't make the 8%?"

"Then I get zero; well, except that initial $80."

"What's your usual gain?"

"I just opened the fund, so I don't have any specific numbers I can give you; those will be available in the quarterly report, which Spurgeon Capital will issue in early April. That said, I've made a number of successful trades, and I've made some moves that could generate significant profits."

"How does it work if people invest at different times?"

"It's based on the overall value of the fund, and your basis is calculated on the day you invest. To simplify, if your share of the fund is 1%, you receive 1% of the returns beginning the day you invest. The actual formula is a bit more complicated, but the end result is very close to that, minus the 10% fee on gains."

"Have you made any bad trades?"

"I've made trades that didn't pan out the way I expected, but overall, I've had far more gains than losses, both in terms of the number of investments and in their returns. If everything I've done so far works out, I'll triple the value of my fund this year."

"TRIPLE?" Marcia exclaimed in surprise.

"Yes. I took some significant risks with the goal of building the size of my fund because the larger the fund, the better able I am to take advantage of smaller market moves."

"So you could lose a lot of money?"

"I could lose some, but I effectively insured against big losses by using hedges. That limits my upside a bit but limits my downside even more. But those kinds of returns are not common. The flagship fund earned 47% in 1981 in a crappy year. No promises, but I could beat that overall this year. 30% is certainly achievable, but again, I can't promise to earn that return."

"How could you not?"

"If any of the investments where I took a major position lost money," I replied. "And that's a real possibility. Nobody can be absolutely sure how a stock, bond, commodity, or currency will respond to various factors, such as economic conditions, diplomatic changes, and general news. My job is to analyze everything and predict, with some level of confidence, what will happen. But it's not perfect, and I'll make mistakes. The key is hedging against those mistakes, and it's the hedging that keeps the gains from being higher.

"My boss makes most of his money by making currency trades where he might make a half-cent on each currency unit traded, but trading ten million units is a profit of $50,000. If he can do that every day, he can make $10,000,000 in total returns, and of that, Spurgeon would keep roughly $1.8 million."

"And that's realistic?"

"Yes, some trades will lose money, but most won't."

"If I calculate correctly, eventually, you'll make a couple million a year."

"That's entirely possible," I replied. "But that depends on how successful I am at investing."

"Do you mind sharing how much you expect to make this year?"

"Low six figures, but my take-home pay isn't anything close to that as a portion of my bonus, and all of my profits stay in either my Cincinnatus Fund or the Spurgeon Select Fund."

"For how long?"

"I intend to not draw that money until I decide to retire. If I were to leave Spurgeon for some reason, then I'd have to work out the best solution to avoid a huge tax liability, but I don't plan to leave."

"Ever?"

"There would have to be some significant event that led to either me leaving voluntarily or Noel Spurgeon asking me to leave. Well, obviously, if I suck at investing, that would do it, too."

The waitress brought our food, and we began eating.

"Have you made progress on buying a house?"

"I put in an offer, which was accepted. I just need the mortgage commitment from Spurgeon, which I should have tomorrow. We'll move in at the end of March if everything goes according to the schedule provided by my real estate agent. I bought a house that needs some significant work, which, combined with current mortgage rates, allowed me to pay a reduced price."

"What kind of work?"

"A new boiler for the forced hot water heat; the floors need to be stripped, sanded, and stained; the walls need to be painted; the appliances need to be replaced; and the yard needs some work. I'm taking a week off from work during Loyola's Spring Break to do most of the work myself, with help from my housemates and friends. The current owner will replace the boiler as a condition of the sale."

"What about your lease? Doesn't it go through the end of July?"

"Yes, and I'm going to set up a meeting with my landlord to discuss it. Obviously, I'm on the hook for the rent for April, May, June, and July, but I'll offer an incentive for her to find a new renter."

"What kind of incentive?"

"A payment that I'd make for each week I didn't have to pay actual rent. We'll also leave the house spotless and painted so she can lease it right away."

"You seem to have your shit together for someone who is only twenty."

"It's all about analyzing a situation, determining the best course of action, then making it happen. There's nothing special or secret, just a matter of asking the right questions of the right people and putting the information to good use. That's basically my job and will be for a few years."

"But when you move up, you'll have to rely on someone else to do that?"

"Gather the information? Yes. Analyze it, no. My reports have three sections — a factual portion, which simply lists information I've gathered; an analysis portion, which tries to interpret the data; and a recommendation section, which suggests potential buy or sell opportunities."

"How long is that report?"

"Three or four pages, though the analysis and recommendations have to fit on a single page. The rest is backup. I also prepare more thorough Analyst Notes, which are used to show the rationale for a trade to the government. For any trade, there's a risk score associated with it by our Compliance Department. The higher the risk, the more important the Analyst Note becomes. Some trades are rejected by Compliance because they are too risky and can't be defended by anything other than 'gut feel', and that leads to government review, and we want to avoid that at all costs."

"Because you're cheating?"

"No, because we aren't cheating. The last thing we want to do is invite a government investigation. Our Compliance Department and Legal Department receive inquiry letters, which we respond to with Analyst's Notes and other backup for a trade, and that nearly always resolves things. On occasion, there are further inquiries, but those are rare and, again, are usually resolved by additional backup.

"Mr. Spurgeon takes Compliance seriously. Not long after I started, a trader was fired because he was violating SEC regulations. Spurgeon turned him in, he was arrested, and he's in prison now for securities fraud. He was frontrunning his clients in an unmonitored account, which means making trades ahead of theirs to gain an advantage."

"Wouldn't that be obvious? I mean, you could prevent it from happening."

"Yes, except he traded in unmonitored accounts, which is a violation of SEC regulations. That can result in losing your license and civil penalties. Cheating your clients can be civil or criminal, and the SEC referred him to the Department of Justice."

"How was he caught?"

"I don't know any details other than the IRS was involved. At the time, I was a mailroom clerk and had only been at Spurgeon for about two months. It's almost impossible to not be caught, eventually. Every single trade and every single transfer of funds is recorded in the system and will eventually be found. You'd need a way of secretly moving money in an untraceable fashion, and no such thing exists."

"Numbered accounts in Switzerland?"

"Sure, if the money never leaves Switzerland, but all it takes is one transfer of funds to an account in another country, and the entire scheme unravels. It's simply not worth the risk."

"But people do it, anyway."

"They do because either they don't assess the risks properly or they're not as smart as they think they are, and it's often both. It's like organized crime — they have to be right every single time; the government only has to be right once."

"It's amazing how much you've learned in less than two years."

"It's actually not difficult to learn the rules and the process. The challenge is in logically analyzing the markets and acting on that analysis. If by some chance I don't make it as a trader, I could, for example, work in Compliance. The head of Compliance makes a very good salary, though nothing like my potential earnings.

"But even that would be a massive improvement over where I was two years ago. And you know, I'm taking college classes, so I could try another field or be a manager at just about any business. Would I be disappointed? Sure. But my main goal was to improve my situation and live a comfortable life. I now have what I need to do that. Of course, I'm not settling for that, but it's a fallback position."

"What would you do if you couldn't be a trader?"

"Computers are certainly interesting, and the skills I have with logic and analysis apply directly, and there is a lot of money to be made in the future in computers. A lot. Current salaries for programmers without degrees are higher than starting salaries in other fields with a degree."

"You're taking a math course now, right?"

"Yes, and then a stats course in the Fall; I'm not taking a class over the Summer so I can have more free time, and I'm hoping to take the stats class on Saturdays, if possible."

"Can I ask you something about Jeri?"

"Sure."

"Her concern was about my relationship with you, wasn't it?"

"To some extent, yes."

"Do you think there's any chance of getting back into the group?"

"Almost anything is possible, but I don't know how Jeri would respond to that request."

"If you made the request, she'd say 'yes'."

"Don't be so sure," I replied. "I objected to her excluding you and got nowhere. I can't make any promises, but I'm willing to try again. If I'm successful, you're going to have to focus on controlling your feelings about certain aspects of my life."

"I'm past that," Marcia said. "I shouldn't have behaved so immaturely."

"The key to anything like that is to learn from our mistakes, resolve not to make them again, then move forward."

"Haven't I done that?"

"From my perspective? Absolutely. But I can't speak for Jeri. Out of curiosity, is there any bad blood between your family and Jeri's dad? I don't understand the exact sequence of relationships for a second cousin."

"Jeri and I both have the same great-grandparents on her dad's and my dad's side. The next generation were siblings — my paternal grandmother and Jeri's paternal grandfather. As I think you know, the money all came from Jeri's mom's side of the family."

"I was aware. And that explains the fact that your last name isn't Pemberton."

"Yes. That's my great-grandfather's last name, but my grandmother married Kenneth Blake. Kane is your mom's name, right?"

"Yes. Her sister married my Uncle Alec, which is why he and I have different surnames."

"And you don't have anything to do with your grandparents, right?"

"I've been in Chicago for nearly two years, and I haven't received so much as a birthday card."

"Why don't you reach out?"

"Because I have zero interest. If and when they try to make amends with my mom, then I'll consider contacting them. But seriously, if they were interested, a phone call or card would be enough for me to respond. They haven't done that."

"That seems a bit petty."

I shrugged, "I don't see why I should reward their bad behavior for decades, nor do I want any avoidable drama."

"So you agree with Jeri, then?"

"No, because one instance of a negative reaction is insufficient for me to make a judgment. And while there were a couple of instances between you and me, it was all related to a single event, and you clearly have moved past that. Your objection now is my unrepentant capitalism!"

Marcia laughed, "On that, we'll have to agree to disagree."

"I will pay whatever taxes are legally due," I replied. "If you don't think my taxes are high enough, you have a perfect opportunity to influence Congressman Washington. Remember, I don't object to taxes because they are, in effect, the bill for all the public services I use and also provide a safety net and retirement benefits. I also make my money legally and within the rules established by the government. You have a perfect opportunity to influence those as well. I voted for Reagan because Carter was, to put it bluntly, a pussy."

"Not the economy?"

"He's the one who hired Paul Volcker to solve a problem that had been building since the '73 Oil Crisis. And it's Paul Volcker, not Reagan or Congress, who is taming inflation, which is a prerequisite to a healthy economy."

"You have very interesting views for a guy who's likely to make millions."

"As if I could make them without all the things the government provides? Doubtful. You know I don't object to regulation, as most of it is simply about being honest and reporting what I'm doing, as well as requiring me to protect my clients' interests, something I'd do anyway because that's the way to be successful. It's why Noel Spurgeon is so successful — he follows the law and always makes money for his partners."

"So he's Hyman Roth?" Marcia asked.

I laughed, "In a sense, yes, though he actually is an investor, unlike Roth, who was a gangster."

We finished our breakfast, parted with a friendly hug, and I headed home, stopping at Jewel on the way, as I hadn't had a chance to shop on Saturday. While at the store, I went to the Osco side and bought an answering machine for Anala. At home, I put away the groceries, and about fifteen minutes after I'd arrived home, I left for Violet's house so we could go to Chicago Stadium to see the Hawks play the New York Rangers.

"Hi!" Violet exclaimed when she answered the door. "I'm ready to go!"

We walked to my car, got in, and twenty minutes later, presented our tickets at the gate. Five minutes after that, we found our seats.

The game went really well for the Hawks, with Al Secord scoring in the first, Denis Savard and Bill Garder scoring in the second, and Rick Paterson scoring in the third against a single Rangers goal by Chris Kontos in the second. The Hawks were having a good season, and though there were still two months to go, they were basically a shoo-in for the playoffs.

"I'll try to get first-round tickets from Spurgeon," I said. "I'm not sure I can, but I'll ask."

"That will be cool. Once you're successful, you should get your own season tickets so that you can attend every game!"

"I'm not sure I'll have time to attend forty games, but I suspect I could find someone to split them with, or at least who might be willing to buy some of the tickets from me. But that's something to worry about in a year or two. I don't want to overextend myself."

"That's smart!" Violet declared.

"Where did you want to go for dinner?" I asked.

"How about Greek Town? I'm OK with Mr. Greek, or we could go to one of the nicer places."

"Mr. Greek is awesome, and their gyros platter is one of my favorites."

"Then let's do that."

Violet and I had a nice meal, after which I took her home, where I walked her to the door and received the usual hug and kiss on the cheek. After she went inside, I went back to my car and drove home.