Often it is said portfolio managers of a superior investment management firm know not only when to buy but also when to sell, or not even to buy.
Conseco Capital Management Inc., Carmel, Ind., demonstrated that characteristic of quality money management in its dealing with the now infamous Long-Term Capital Management LP.
Conseco, in an account of Long-Term Capital published earlier this month, deserves accolades for an investment it did not make for the right reasons with the once highly regarded firm. Many other sophisticated investors leaped at investing with the renowned firm, often without questions and based mainly on its principals' reputation, according to the account. But Conseco turned it down after asking some fundamental and necessary questions.
Conseco was approached to invest in Long-Term Capital in 1994, when the Greenwich, Conn.-based firm was just beginning its investment fund. Just starting out, Long-Term Capital already was well thought of because of the intellectual depth of its principals - including Myron S. Scholes, professor emeritus of finance, Stanford University, Palo Alto, Calif.; and Robert C. Merton, professor of finance at Harvard University, Cambridge, Mass. Both had sterling reputations in academia and were considered leading theoreticians in options pricing theory.
Their award of the Nobel Memorial Prizes in Economic Sciences was still a few years away when Conseco executives were invited to invest in Long-Term Capital.
Mr. Scholes, accompanying a Merrill Lynch marketing executive, made a sales call on Conseco in 1994. They met with Maxwell Bublitz, Conseco Capital's president, and Andrew Chow, a Conseco Capital vice president. Spokesmen for Conseco and Long-Term Capital confirmed the meeting.
When Mr. Scholes extolled Long-Term Capital's ability to exploit anomalies in the capital markets, Mr. Chow expressed his doubts about the existence of as many anomalies as the professor suggested. Mr. Scholes responded by deriding Mr. Chow's questions. The Conseco executives then showed Mr. Scholes and company the door.
The spokesman for Long-Term Capital said Mr. Scholes was abrupt but he also was exhausted from meetings on behalf of Long-Term Capital. The spokesman said Mr. Scholes genuinely sought to respond to questions. The spokesman said Mr. Scholes does like to engage issues subject to debate and different opinion. But the spokesman said he felt Conseco executives were needling him and he blew his cool.
The spokesman said Conseco sought detail about the way the firm invests. The spokesman said the firm wasn't willing to reveal such detail, even to an investor.
Mr. Scholes may have felt he was needled by Conseco. But sometimes don't prospective investors test the mettle of an investment management by being a little trying and overbearing?
Markets are much more overbearing and testing of one's temperament than an uncomfortable interview.
Conseco's request for details sounds reasonable. The fact that many investors were willing to invest without such detail may have emboldened Long-Term Capital's principals to keep their strategy secret. But in the end, these investors were the losers.
A first-rate manager knows not only when to buy but also when to sell. That is sometimes belittled as a platitude. In Conseco's case, it also knew when to pass one up when this particular investment couldn't take some simple questioning.