Terror on Wall Street, a Financial Metafiction Novel (10 page)

CHAPTER TWENTY SEVEN

HALLELUJAH!

Ike took a place at the end of the line, which was actually moving, but slowly.  They waited in line for about an hour and finally made it to the pumps
.

     “Hallelujah!”

     “I never did understand that expression.”

     “It’s when you’re so glad that something finally happened, it just comes out of you without thinking.”

     “How can you say anything without thinking?”

     “Snookie, you’d be surprised how many people do.  In fact, I think most of what the majority of people say is said without thinking.”

     Snookie gave Ike a curious look as he exited the car and prepared to refuel.  There was a big paper sign on the gas pump that read “Prepay,” so Ike went into the store.

     He came out relatively quickly, gassed up the car, and slid back into the driver’s seat, holding a paper bag.

     “Got you some goodies.”

     Snookie didn’t pay much attention to the comment.  Ike started pulling things out of the bag, calling out the items as he withdrew them.

    “I got some nuts, and some yoghurt, and, oh, I thought you might like these.”

     Ike held out a deck of cards.

     “What made you think that?”

     “You said you liked to play cards.”

     “I said I can play cards.”

     “Don’t you like anything?”

     The driver of the car behind Ike began to honk his horn.

     “I guess we’d better go.”

     Ike pulled out and headed down the frontage road toward the onramp for the Interstate.  After about half a mile, they noticed a car by the side of the road that appeared to be broken down.  Outside it sat a woman, of about 35 years old and a little boy.  There was a man tinkering under the hood.

     “Ike, we should help them.”

     “I’m not a mechanic, Snookie.  And the gas station we came from is walking distance for that guy.”

     “There must be something we can do.”

     Against his better judgment, Ike pulled in front of the car and stopped on the shoulder. 

     “Snookie, slide over to the driver’s seat and leave the car running, just in case.  And stay here in the driver’s seat – no matter what.”

     Ike got out of the car and walked toward the man.

     “Hey, buddy, can I help you?”

     The man kept working on his car.

     “You got any gas?”

     “No, but there’s a gas station right behind us, and it’s open.”

     The man whirled around, pointing a gun at Ike.

     “I guess I’ll have to take your car, then.”

     The man motioned to Ike with the gun.

     “Move!”

     The man called out to the woman and her child.  “Meg, get Billy and the stuff.  We’re changing cars.”

     The woman began to gather their things as Ike backed away from the man, raising his hands.  The man kept walking toward Ike.

     “Turn around.”

     “You’re going to shoot me for the car?  It’s not even my car!”

     “I said, turn around!  And shut up!”

     Ike kept backing away on his feet, slowly, letting the man close the distance between them little by little.

     “What if I threw the keys away, as far as I could, before you had the chance to shoot me?”

     The man with the gun looked puzzled, confused.

     “I’m tired of talking to you.  Maybe I should just shoot you now.”

     The distance between them was becoming smaller and smaller.

     “Have you ever killed anyone before?”

     “What are you talking about?  Of course I have.”

     The man appeared even more flustered.  Ike could see beads of sweat forming on his brow.  Ike slowed down his pace and backed against the trunk of his car as the man came closer.  He looked back at his wife, who was nervously waiting with the bags and holding her son’s hand.

     “I said move it, woman!  We’re taking this car!”

     “You know, it’s one thing to hit a target on a shooting range.  It’s entirely another matter to shoot a living person.”

     “Shut up, asshole.”

     “You really want your son to see you kill someone?”

     “I said shut up!”

     As they came closer, the man could see there was someone in the driver’s seat of Ike’s car.

     “There’s someone in your car.  Get them out, now!”

     “I told you, it’s not my car.  I hitched a ride with this girl.”

     “I’ve had just about enough of you.  Tell the bitch to get out of the car, now!”

     “If that’s what you want.”

     “You heard me.  Or would you like me just to shoot you now?”

     The man spit as he spoke, and the sweat peppering his forehead poured into his left eye and he blinked.

     “Snookie!  This man with a gun wants to steal your car.  He’s asking you to get out of it.”

     Suddenly, Snookie hit the gas and covered both Ike and the man in a huge cloud of dust as she peeled away.  Ike lunged at the man, grabbed the barrel of the gun with one hand, and in a split of a second, struck his wrist with the other hand as hard as he could as he twisted the barrel, putting pressure against the man’s trigger finger until it broke.  Then Ike pushed the man to the ground, pulled the gun away from him, and pinned him down.

     “I should shoot you now, but I’m just going to take this gun.  Now, get out of here!”

     The man ran back to his car and his family.  Ike looked up and saw Snookie coming back in his direction.  He waved to her and she swung a U-turn and picked him up. 

     “How did you know to drive away?”

     “You told me to keep the car running, just in case.  And to stay inside no matter what.”

     Ike laughed.  “Yes, I did.”

     Ike’s legs were shaking.  The effects of the adrenalin injection his brain had given him were still strong. 

     “Well, did I do it right, Ike?”

     Ike smiled.  “You did perfectly.”

CHAPTER TWENTY EIGHT

THE GOOD NEWS

Harry was sweating and pulling at his collar as he and Jennifer sat in the waiting room of Dr. Rebecca Leaver.

     “Calm down, Harry.  Being nervous is not going to change anything.”

     “I guess.”

     Harry’s left knee bounced up and down continuously.  Jennifer put her hand out and steadied it.

     “Everything’s going to be fine.  We’ll deal with it.”

     The door to Dr. Leaver’s office opened and she stood there in the doorway, smiling.

     “Professor Mason?”

     Harry and Jennifer stood up and entered the office as the doctor ushered them in and directed them to two chairs in front of her desk.  Dr. Leaver looked not too far from 40, had a pleasant smile, and was nicely dressed.  To Harry, she looked more like a fashion consultant than a doctor.

     “I’ve reviewed your records from Dr. Reynolds.  From what I’ve seen, and especially the performance on your memory tests, I agree with his diagnosis.”

     Harry rested his forehead on his hand and sighed.  This is not what he wanted to hear.

     “Aren’t you going to run your own tests, doctor?”

     “Have you been experiencing short term memory loss lately, Professor?”

     “Yes, yes, I have.”

     “We can put you through more memory tests or we can talk about treatment.  The results of these tests are clear.”

     “No, no more tests.  What can we do about this, doctor?  I need to keep my wits about me.”

    “There are treatments for the symptoms, and also there’s a promising new drug in trials right now called EPPS that we should look into.”

     “Can I get on that drug?”

     “First let’s talk about what you’re dealing with, and then we’ll talk about the treatments, okay?”

     “Fair enough.”

     “First of all, there’s no cure - at least, not yet. The average life expectancy after diagnosis is from three to nine years.”

     Harry turned his head away and Jennifer squeezed his hand.

     “Your disease is in the early stages, where you may be experiencing difficulty remembering recently-learned facts.  As the disease progresses, you will eventually lose your writing ability.  In the moderate stages, as the memory difficulties peak, you will lose awareness of recent experiences and events and long term memory and will have increasing episodes of urinary incontinence. The final stages are marked by  personality and behavior changes and loss of the ability to speak, and ultimately to control movement.”

     “What’s the good news, doc?”  Harry forced a smile.

     “Alzheimer’s is a protein mis-folding disease, caused by plaque accumulation of abnormally folded amyloid beta and tau proteins in the brain. I’ll go over what is thought to be the actual mechanisms in a moment, but the EPPS treatment that I spoke about has been effective in that it reduces levels of amyloid beta.  It could actually reverse the effects of the disease.”

     “So what are the chances of my getting in on these trials?”

     “Pretty good.”

     “Then I guess that is the good news, isn’t it?”

CHAPTER TWENTY NINE

HAPPY LANDINGS

As they flew on, Harry removed a stack of index cards from his briefcase and silently reviewed  them over and over again.  Jennifer touched his hand.

     “You’re going to be fine, dear, don’t worry.”

     Harry smiled at her.

     “You’ve always been as wise as you are smart.  And with enough confidence for both of us.”

     The little plane finally touched down in Dulles after what seemed like an eternity of circling and holding.  When they exited the baggage claim area, it was a free-for-all.  Cops in riot gear were moving traffic and taxi drivers were offering rides into the nation’s capital for the unbeatable price of anywhere from $500 to $1,000. 

     “Don’t talk to anyone here.  Nobody can help us with anything.  Lead the way, Mr. Rodriguez.”

     Carlos led them to the driver who was waiting for them in a black Lincoln Town Car, which whisked them off to an apartment hotel near the Capitol.

     The monuments were dark, but still cast imposing shadows in the moonlight.

     “I always loved the Washington Monument and the Jefferson Monument.  They remind me of the something special about my adopted country.”

     “What about the Lincoln Monument?”

     “That, too.”

     “You know, Lincoln was the only president in history to ever declare martial law.”

     “Don’t remind me, Mr. Thompson.  I would say hard times call for hard measures, but the Constitution is an even a greater treasure than these monuments and the great men who inspired them.”

     “Looks like our president is following in Lincoln’s footsteps.”

     Outside the window, in the stop and go traffic, they saw protestors being rounded up by riot police and shuffled into paddy wagons.

     “I’m afraid so, Mr. Brammon.  I’m afraid so.”

     The hotel clerk greeted the group.  Carlos checked everyone in.

     “We’re on the ground floor just as you asked, professor.  They’ve had rolling blackouts, but this hotel has their own generator for emergency power.”

     “Very good, Mr. Rodriguez.  Tomorrow morning, we meet with the lawyers.  Then, we’ll take the afternoon to prepare.”

     “What about Ike and Snookie?”

     “What about them, Mr. Brammon?  Has anyone  heard from them?”

     They all shook their heads.

     “Then we just have to hope that they’re going to get here on time.  We can’t do this without them.”

CHAPTER THIRTY

A LOSER’S GAME

Fighting depression was hard enough, but fighting it along with Alzheimer’s seemed to Harry to be a battle he just could not win.  As he sipped his coffee and sorted through index cards for the next lecture, he put down his cup and the cards and looked up at his wife.

     “You know I love you more than words could ever express, don’t you?”

     “I love you too, Harry.”

     “Did you ever think, though, that you got a bum deal with me?”

     “What do you mean?”

     “I mean, well, we never had children.  And I’m so much older than you.  And now, this Alzheimer’s thing.  You must want to turn me in for a new model.”

     “Harry, don’t be silly.  Nobody said life was easy.”

     “But it’s just not fair – to you, I mean.”

     Jennifer looked Harry in the eyes and cupped her hands over his.

     “Harry, I’m your wife.  We’re in this together.  We
will
get you on those clinical trials and we
will
beat this.”

     “Thank you, dear.  The thought of growing old was bad enough.  But the thought of losing my mind is terrifying.”

     “You won’t lose your mind.  Your head, maybe, but not your mind.  Now, finish your coffee and get out there and give ‘em hell, like usual!”

***

Harry ventured bravely into the lecture hall, put his briefcase on the table, and arranged his index cards on the podium. 
This is a detailed one.  Here goes.
    

      "Good morning, everyone.  Do you  all remember the question I gave posed to you last week – ‘Can actively managed funds can actually beat the market?’ Anyone care to jump in on that one?”

     “I can answer that, professor. My research in this area is just about finished.”

     “Go ahead, Mr. Brammon.  Give it your best try.”

     “About 25 percent of them do, but they do it by taking higher risks.”

     “That’s right, Mr. Brammon.  As Ms. Baxter pointed out during our last meeting, you can expect to gain higher returns if you take higher risks. But in the case of actively managed funds, the fees often wipe out the higher returns.  Mutual fund companies that try to beat the market argue that it’s possible to do so. They are right. It
is
possible – it’s just that those who beat the market this year are not on the list the following year. In fact, it can be shown that the majority of mutual funds just buy value stocks, which are a classification of securities that have low book-to-market ratio.”

     “Book-to-market ratio?”

     “Yes, Mr. Rodriguez.  The book-to-market, or price-to-book, ratio (P/B ratio for short) is a financial ratio used to compare a company's book value to its current market price. Book value is an accounting term denoting the portion of the company held by the shareholders; in other words, the company's total tangible assets less its total liabilities.  The calculation can be performed in two ways, but the result should be the same each way. In the first way, the company's market capitalization can be divided by the company's total book value from its balance sheet.  The second way, using per-share values, is to divide the company's current share price by the outstanding number of shares.

     “As with most ratios, it varies a fair amount by industry. Industries that require more infrastructure capital for each dollar of profit will usually trade at P/B ratios much lower than, for example, consulting firms. P/B ratios are commonly used to compare banks, because most assets and liabilities of banks are constantly valued at market values.

     “A higher P/B ratio implies that investors
expect
management to create more value from a given set of assets, all else equal, and the market value of the firm's assets is significantly higher than their accounting value. P/B ratios do not, however
,
directly provide any information on the ability of the firm to generate profits or cash for shareholders.

     “This ratio also gives some idea of whether an investor is paying too much for what would be left if the company suddenly went bankrupt. For companies in distress, the book value is usually calculated without the intangible assets that would have no resale value. In such cases, P/B should also be calculated on a "diluted" basis, because stock options may well vest on sale of the company or a change of control or the firing of management.

     “Active managers often point to Warren Buffett, the famous CEO of Berkshire Hathaway, as an example. They imply that since Warren beats the markets, that we should believe that they, too, will win. That’s nonsense.”

     Harry went to the board and started to write as he spoke.  As he wrote, he referred to his handy index cards. 

     “Here are three reasons why it can’t be true. One: about one-third of mutual funds go out of business every 10 years.  Two: about 50 percent are defunct after 20 years. And, three: only about 1 in 3 of the surviving funds outperforms index funds. Surviving funds are the ones that don’t close, and it assumes you know which ones those will be, which is not possible. The excess return from the winning surviving funds doesn’t come close to the shortfall from the losing funds, and this is before accounting for the losses in the defunct funds before they closed.

     “We’ve addressed one mutual fund versus one index and the low probability for active fund success. But that doesn’t define the whole problem because people don’t usually own just one mutual fund. They own several funds across diversified asset classes such as US stock, international stock, bonds, real estate, and so forth. Does anyone know what else is wrong with this picture?”

     Nobody raised their hand on that one. 
Not even Snookie.

     “Well, I guess you really do need a teacher after all.  Even you, Ms. Baxter.”

     Snookie’s expression did not change.  She just sat there as usual, soaking up information like a sponge.

     “Having several active funds in a portfolio exponentially lowers the probability that the portfolio will beat a comparable index fund portfolio. As more active funds are added, the longer they’re held, the higher the probability that a portfolio of index funds will outperform the active fund portfolio. This increases dramatically to the point where the index funds have a 99 percent probability of outperforming a comparable portfolio of active funds. Now, that’s something that all investors should consider!

     “Can anyone tell us why active investing strategies fail to beat the market for the vast majority of investors?”

     Larry’s hand shot up.

     “Mr. Brammon, you’re on a roll today.  Go ahead.”

     “There are several reasons that active funds fail to deliver; not the least of which is the cost of trying to beat the markets. Hundreds of thousands of investment managers, investment advisors, brokers, mutual funds managers, pension funds managers, banks, trust departments, individual investors, and traders attempt to out-fox the markets every day. They spend hundreds of billions of dollars each year trading securities, paying managers and consultants, and buying research. The cost of trying to beat the market makes doing so impossible for most people.”

     “Very well put, Mr. Brammon.  A second reason why investors fail to beat the market is due to poor behavior. They seek high returns by looking in the wrong places for outperformance. Active investors chase after past performance, they chase star ratings, and they chase the news. As I mentioned before, the news is already old when you see it.  The market has already reacted to it.  They’re putting money in places today where they should have already had money. This tail chasing game costs investors dearly.

     “Back in my day, a chap named Charles Ellis wrote a book called
Winning the Loser’s Game. 
Can anyone tell us who Charles Ellis was?  Ms. Baxter?”

     “Charles Ellis was a leading investment consultant who advocated the use of index funds for investors.”

     “That is correct, Ms. Baxter.  I had the good fortune to meet Charley back in ancient times.”

     The class erupted with laughter.

     "In 1975, Charley wrote an article published in the
Financial Analyst Journal
reporting his study of a number of pension funds that invested in equities. The results floored the financial community. In brief, Charley found that the portfolios managed by the best and most highly paid professionals did not outperform the S&P index. Since that time, numerous studies over the last 35 years have consistently shown that selection of individual securities by our best professional “experts” yields results inferior to a mutual fund set up to track an index.

     “As Nobel Lauriat William Sharpe put it, ‘active buying and selling of stocks by individuals will only run up brokerage commissions and waste time and energy. Turning to a professionally managed portfolio is even worse, according to the efficient market hypothesis, because of the fees required to pay well compensated experts to waste their time.’

     “You heard it here, class.  One of the best-kept secrets in the securities industry is that security analysis, taken as a whole, does not appear to be either a useful or a profitable activity. The reports written by the highly paid analysts working for our Wall Street firms are worthless pieces of paper to promote and sell stocks to inexperienced investors.  One very simple solution to this problem is to buy the entire market. As one investor said, ‘Why look for the needle in the haystack? Just buy the entire haystack.’

     “Can this be done by the small investor? You bet it can. For example, there is a company called the Vanguard Group, owned by its investors, which has an index fund called the
Vanguard Total Stock Market Index Fund Investor Shares
.  This fund has 3,894 individual securities in it, as I write, with an expense ratio of only 0.19% and has returned (after taxes since its inception on April 27, 1992) 10.50%.

      “Mr. Ellis made a very good case for low-cost index funds. In the case of mutual funds, the fees aren’t the only costs. What other costs do investors bear?  Ms. Baxter?”

     “There are trading costs, commissions, advisor fees, taxes, 12b-1 fees, administrative costs, research costs - and the list goes on. Much of these costs are hidden from investors. For example, most companies participating in 401(k) plans don’t provide investors good transparency on the costs they’re paying.”
     “Yes.  Another bastion of gluttony is high advisor fees. This issue is just starting to come out in the media. The typical investment advisor charges one percent per year to manage a portfolio of mutual funds for clients. That’s crazy-high, given the huge advances in portfolio management software and other technology that have occurred over the years. Advisors today should be able to handle five times the amount of clients with half the amount of staff than they did in the 1990s. These productivity gains have not been passed on to clients in the form of lower fees.”

     “Then, what should investment advisers charge their clients?”

     “Well, Mr. Rodriguez, perhaps Mr. Brammon can answer that for us.”

     “Well, it’s not one percent, which is the ‘standard fee’ you’ll hear in the marketplace. I believe investors shouldn’t pay more than 0.5 percent per year to an advisor, and probably less. My firm, J.C. Mortenson, charges only 0.25 percent in annual fees. We’ve been charging this low fee for more than a decade, and it has saved our clients millions of dollars over the years. That’s real money in their pockets.”

     “So, why do so many people try to beat the market if the proof that passive investing outperforms active investing is irrefutable?  What is it that triggers their emotional brains to action, as Mr. Pendleton suggests?”

     Snookie raised her hand.  “Ms. Baxter?”

     “There’re big advertising dollars promoting active management – many more than passive managers can afford. Actively managed funds charge 5 to 10 times the fee of a comparable index fund. Much of this huge revenue stream is spent bombarding the public with nonsense about how active managers can beat the market, and it basically ensures that the truth about passive investing gets lost in the noise.”

     “Again: right on the nose, Ms. Baxter.  Did you know that for every new book published on passive investing there are at least a dozen books published on how you can beat the market? Did you know that for every media interview with a passive investing advocate like myself there are at least 100 interviews with people who claim they can beat the market?

     “It’s actually amazing to me that any information about passive investing gets to the public, and it’s a credit to investors who have looked beyond the smoke and mirrors.”

     “So what’s the solution?”

     “The solution, Mr. Brammon, is to start learning the real facts about the markets and investing.  Rick Ferri wrote a great book that is required reading for my course.  It’s called
The Power of Passive Investing.
  Passive investing can usually weather the investor through any storm.”