Chapter 15: Two and Twenty

September 7, 1982, Chicago, Illinois

On Tuesday afternoon, while I sat at Mr. Nelson’s desk, I made phone calls to get two quotes on an Apple II computer with the same specifications as mine. The salesman at the first company suggested, very strongly, that I include a Sup’R’Terminal card, which would overcome two serious limitations — the forty-column display and uppercase only. The card allowed for eighty columns and lowercase, something that would be important for writing memos.

I asked both salesmen to include the cost of the card in their quotes, and decided to purchase one for my computer, which I had the salesman at the computer store courier to the office so I could use it that night to type up the proposal using Apple Writer II, which had full support for the add-in Sup’R’Terminal card. He agreed to do that and gave me the total so I could make out the check.

The quotes were within thirty-five dollars of each other, and, with the lower one in the suburbs, the cost of having it couriered would be more than the savings, so my recommendation would be to make the purchase from the computer store in the city which was about six blocks away.

The rest of the afternoon was consumed with paperwork as well as ensuring everything would be completed for the new trading team, which would start on Monday. Fortunately, there were no office moves, so it was simply a matter of ensuring the empty offices were properly prepared. That meant coordinating with the computer guys, maintenance guys, and outside vendors.

At the end of the day, I left the office, took the freight elevator to the parking garage, and drove to University Village so I could have dinner with Violet before our computer class. After dinner, we went to class, and then to the lab to work on our assignment. We were still working when the lab closed at midnight, so I drove Violet home, then drove back to Rogers Park.

It was too late to type up the proposal or install the card in my computer, so I set those aside, climbed into bed, and quickly fell asleep.

September 8, 1982, Chicago, Illinois

“What time did you get in last night?” Bianca asked at breakfast on Wednesday morning.

“About 12:45am,” I replied. “We were still in the lab when they closed at midnight.”

“You’re not home for dinner tonight, right?”

“Correct. I’m meeting Anala for dinner. When I get home, I have to write a cover letter for a purchase I want to make at work. I bought a Sup’R’Terminal card for my Apple so I can get 80 columns and lowercase.”

“I take it you aren’t seeing Huifen during the week?”

“Correct. We agreed I’d see her on Sunday, and we’d do stuff just the two of us, and she’ll stay over Sunday nights. Friday or Saturday night we’ll go out with a group, or whatever, though not every Friday or Saturday. That lasts until I finish my Series 3 licensure course. Once I finish that, then we’ll reevaluate.”

“Don’t forget us little people when you become a millionaire!” Shelly teased.

“He won’t, because he’ll handle our investments!” Bianca declared.

“What investments?” Shelly asked. “We’re college students!”

“You are,” I agreed, “but if you can manage to invest as little as $5.00 a week, that’s $250 invested each year. Then, when you graduate, you’ve already started the habit, and you can increase the amount you invest. That’s how I saved enough for a bus ticket to Chicago, some new clothes, and some money in the bank as an emergency fund.”

“OK, but who’ll let us invest that little?” Shelly asked.

“You go into a fund,” I replied. “I plan to run one as soon as I’m licensed.”

Technically, I already was, with Jeri as an investor, but I couldn’t reveal that just yet.

“They’ll let you do that?” Bianca inquired.

“For friends and relatives, yes,” I replied. “I just need approval, and then the account will be monitored to ensure I comply with all SEC regulations and exchange rules.”

“How does that work?”

“I pool your money with mine, and with money from other friends, make the same investments I normally would, and we share in the profits. I get a tiny management fee and a small percentage of the profits, which would total far less than what you’d pay a broker, or what Spurgeon charges, even their best clients, which is why it’s limited to friends and family. I’d do it for free, at least at first, if I could, but that’s against the Spurgeon rules.”

“Because Mr. Spurgeon always makes money for his partners, right?” Shelly asked.

“Yes, but why do I feel you’re quoting something?”

“It’s from The Godfather: Part II,” Shelly replied. “Hyman Roth, a gangster, says that he was successful and survived because he always made money for his partners.”

“That is the only way to success,” I replied. “If you don’t make more money for someone than they could make by putting their money in a basic mutual fund, you’ll never attract and keep clients.”

“What are the normal fees?”

“The standard is ‘two and twenty’, which means a 2% management fee that is paid no matter what, and a 20% share of profits over a defined amount called the ‘hurdle rate’. Let’s say you have $1000 invested, that means you would pay $20 a year to the fund manager, no matter how well or how poorly the fund performs. That covers salaries and expenses, such as trading terminals, research, and so on.

“As for the 20%, a common hurdle rate is 8%, as that is a reasonable estimate of overall gains in the market in the long term. 20% of the annual profits in excess of 8%, after the fund is ‘marked to market’, that is, the value is calculated at the closing price on a fixed date, are retained by the fund manager. If he can’t ‘beat the street’, as it’s called, he makes no additional profit.

“To give you an example, Spurgeon’s flagship fund earned a profit of 47% last year, in a crappy market. So, if you had invested $1000, the value of your investment at the end of the year would be about $1450, after allowing for the 2% management fee which is paid when you invest and then annually. Of that $450, the first $80 or so is yours, free and clear. Of the remaining $370 profit, about $75 would be retained by the fund manager, yielding around $300 in additional profit, for a net total gain of $375, or 37%. That’s about four times the return you’d earn in a Dow or S&P fund.”

“So you’d end up with around $100, and I’d end up with around $375?” Shelly asked.

“Yes.”

“And you guarantee that?”

“Oh, hell no!” I chuckled. “First of all, no sane person would offer that kind of guarantee; second, depending on how it was stated, it might even be a criminal act. We’re even required to state on the prospectus — the documentation about the fund and how it operates — that ‘past results are no guarantee of future returns’. But the impetus is, of course, that you’ll pull your money if I don’t create better returns than you could achieve with a T. Rowe Price S&P fund, or something similar.

“Their fees are far lower, but they’re not doing anything other than keeping the portfolio matched to some determined mix of S&P stocks that matches how the S&P index is calculated. That’s why they’re called ‘index’ funds. It is possible to get lower fees from a fund at Spurgeon, but you have to agree not to cash out for a period of time, usually three, five, or seven years. In those cases, you might get a one and ten fee structure, something in between, or some form of rebate.”

“Why?”

“Because the more money you have under management, the more opportunities you can avail yourself of. At a certain point, there are diminishing returns, which leads to funds being closed to new investors, but we’re talking a billion dollars or more under management. Lock-up periods also ensure that the fund manager knows he won’t have to concern himself with redemptions — people cashing out — which can cause tax events or even force the sale of fund assets at the wrong time.”

“Why do you need to take the class?” Shelly asked. “It sounds like you know your stuff.”

“This conversation has just barely scratched the surface, and is about one type of fund and one asset class — stocks. And now I need to go, or I’ll be late for work!”

I went upstairs, brushed my teeth, then drove to the Hancock building, where I was greeted by one of the computer guys, Jim, who had a sour look on his face.

“The SNA terminal controller is down,” he said. “I’ve called IBM and they’ll have a technician here within the hour, but it won’t be fixed before trading starts.”

“Wonderful,” I replied. “What is affected?”

“The terminals for accessing customer accounts and recording trades. The quotation terminals are a separate system and those are working.”

“When did the controller stop working?”

“It went down about 6:10am. One of the traders who covers Europe called me at home. I came in, tried to reboot the unit, and when it didn’t come back, I called service. We have a two-hour guaranteed response time from IBM. I placed the call at 6:45am, so they have until 8:45am to get here, and then however long it takes.”

“What’s the procedure?”

“Manual recording of trades and manual verification of margins. It’s a pain in the ass, and you can be sure someone will land on your desk with both feet.”

“Great way to start the morning,” I said, shaking my head.

“Mr. Nelson keeps a bottle of bourbon in his desk drawer.”

I grinned and shook my head, “Not any more. His wife confiscated it yesterday!”

Jim laughed, “He’s going to be in even MORE of a foul mood than he was over the cigars.”

“I have to say, I don’t mind the smoke-free environment in our area. Some of the trading offices are like walking into one of the buildings back home where they smoked venison! Anyway, let me know when the technician is here.”

“Will do. Enjoy the bitching!”

“Gee, thanks,” I said with a grim smile.

I sat down at the desk in Mr. Nelson’s office and began his morning routine, as he wouldn’t be in until 8:00am. I wasn’t surprised when the phone rang less than a minute later.

“Kane, filling in for Mr. Nelson,” I said into the receiver.

“Kane, Matheson! What the fuck is going on with the computers?”

“One of the SNA controllers malfunctioned,” I replied. “The computer guys are on it and called IBM about forty-five minutes ago. A technician should be here soon, but the computer guys don’t believe the computer terminals will be operational before trading starts.”

“Not acceptable!” he declared.

“I agree, but this is where we are. Our contract with them specifies a two hour response time, which gives them another hour to arrive. At that point, the repair can begin.”

“Escalate the problem, Kane. This could cost us millions!”

“I’ll make the call right away,” I replied.

He hung up without another word, which was typical of the Suits. I got up and walked to the office where Jim and the other computer guys worked.

“Mr. Matheson wants to escalate the problem. Do you have a number for the service manager?”

“Of course,” Jim said. “It won’t do any good, though. The tech was at home in Naperville and is on his way here.”

“I need to make the call, anyway.”

He handed me a laminated sheet of paper with the numbers and names of all the companies who did support, along with escalation numbers. I took it back to Mr. Nelson’s office and dialed the number for the IBM Regional Manager, Tom Wright.

“IBM, Tom Wright.”

“Jonathan Kane at Spurgeon Capital. I’m calling about our non-operational SNA controller.”

“The tech will be there in about fifteen minutes, barring any severe traffic problems on the Ike. Paging him will only delay him arriving, as he’ll have to stop to make the call.”

“I understand, but I have traders breathing down my neck.”

“What happened to Jack Nelson?”

“He’s on limited duty. He’ll be here at 8:00am, and only working half days. Out of curiosity, is there a better service contract than the one we have with a two-hour guaranteed response?”

“For a company your size? No. Some of the larger installations have an on-site technician, but you don’t have enough equipment to justify that. Your option would be a redundant system.”

“How does that work?”

“Basically, we install a second matching piece of equipment for anything that could fail, up to and including the 4341 mainframe. That would obviously be expensive, but everything could be set up to fail over from the active system to the backup. Less expensive would be redundant SNA terminal controllers, which you could manually move the coaxial cables from the failed unit to the new one.”

“Do you know why we haven’t done that?” I asked.

“No. You’d have to speak to your account manager.”

“That’s way above my pay grade! I was just curious. Would you make a note that I called to escalate the problem?”

“I’ll jot it on my calendar. What’s your usual role?”

“Mailroom supervisor.”

“Tell Jack I hope he feels better.”

“Will do. Thanks.”

After saying ‘goodbye,’ I hung up and returned the laminated sheet to Jim.

“Supposedly in about fifteen minutes,” I replied. “But the technician is on the road, so paging him is only going to delay him. But I can satisfy the Suits that I made the call. I’m curious, do you know why we don’t have what Tom Wright called a ‘fully redundant’ system?”

“Money.”

“OK, that’s obvious. But if Mr. Matheson is correct and Spurgeon could lose millions, wouldn’t it be justified?”

“You would think!” Jim replied. “But it’s not up to me.”

I went back to Mr. Nelson’s office and both he and the tech arrived, with the tech arriving about five minutes before Mr. Nelson. I explained the situation to Mr. Nelson, then asked about the redundant systems.

“In the budget every year for three years,” Mr. Nelson replied. “Struck out each time.”

“You heard what Mr. Matheson said.”

“The same thing he always says. If it was the quotation machines, he might have a point. The IBM terminals being down is inconvenient and means more manual work, but you know that paper trade orders have to be created even when the computer is running. And every single trader or broker has a good grasp of his clients’ positions and margins, so there’s minimal risk unless they want to play fast and loose. The thing is, in the end, it all goes into the computer and they get caught if they do.”

“What about a redundant terminal controller? One of those has stopped working three times this year.”

“I’ve tried that before as well, but perhaps I can win given we’re increasing staff.”

“It strikes me as a small price to pay for what amounts to insurance.”

“Just remember, every penny spent comes out of Mr. Spurgeon’s pocket.”

“I guess I see the cost-benefit analysis dictates at least a redundant terminal controller.”

“Putting that college finance course to use?”

“Trying to, anyway. I’ll have the quotes for the computer and a cover letter for you tomorrow. I’ll include the cost savings based on the amount of time it’ll save us.”

“Keep up the good work and don’t move upstairs too soon!”

“I’ll have Jack fully trained and ready to go before that happens,” I replied. “I believe you’ve seen he has the same kind of work ethic I do.”

“He does. Get to it, then!”

“Yes, Boss!”

I went to the mailroom to discover that Bob hadn’t arrived. A minute later, Haley came in to let me know that he’d called to say he was in the emergency room having his ankle checked after a step leading to an L platform had given way. I asked Haley to arrange for a temp for Thursday, given the chance Bob might not be in, and she promised to check with Mrs. Peterson.

“How do we handle this?” Sandeep asked.

“I’ll cover Bob’s tasks this morning. Prioritize your work, because you’ll need to cover his afternoon work while I’m covering for Mr. Nelson. I’ll forward the mailroom phones to Mr. Nelson’s office. That’ll work for the afternoon, and we’ll have a temp in the morning if Bob doesn’t make it in.”

I let Mr. Nelson know, and he approved my plan. He also called Personnel and approved a temp for the afternoons if Bob was going to be out. A few minutes later, I heard from Jim that the computer problem had been fixed, which took that concern off my plate, at least for the moment.

The rest of the day was extremely busy as we were short-handed and Mr. Nelson was working half days. Just before 5:00pm, I heard from Bob and he’d simply had a bad sprain, but was told to stay off his ankle for a week. I relayed the message to Personnel and confirmed a temp would start on Thursday afternoon, then left for my dinner with Anala.

“Sorry I haven’t had much time,” I said when I sat down across from her at the diner in Bridgeport.

“It’s OK,” Anala replied. “I’ve been busy as well, and now that I’m a grad student, I’m not going to have much free time.”

“Nor will I because of my computer class and the class to prepare for taking the Series 3 licensure exam. How many years is grad school?”

“Two. I’ll earn my Master’s, then try for a job at the most important architecture firms here in Chicago.”

“I figure things should calm down by November for me.”

“May 1984 for me!” Anala declared. “But I’m so close to achieving my goal that I can’t let up one bit.”