Trading’s a bit like scaling a peak

“The market is no one place, and it is no particular group of traders or companies or investors. ‘The market’ doesn’t mean the floor of the New York Stock Exchange, or Merril Lynch’s trading room, or the mutual fund performance tables in the newspapers. It is always an undefined ‘out there’ or ‘they’.” An “anonymous, intangible, and unpredictable being,” it is, even for seasoned professionals.

Or, so Wall Street journalist Molly Baker tells us in High Flying Adventures in the Stock Market. A work of non-fiction by the author’s admission, the book chronicles a year in the lives of Jerry Frey and his team of fund managers at Delaware Investments.

We catch Jerry sometime in July of 1998. At 52, he has had “some great years in his nearly 20 on the Wall Street” and is wondering if he has “one more standout year in him somewhere”.

A meticulous professional, he is today in charge of an investment team that manages over $2 billion in assets in three mutual funds. His personal favourite is the Aggressive Growth Fund, which he has almost single-handedly built up from a few million dollars into a top-ranked name. But the other two - Trend Fund and DelCap - are doing well, too, and he is looked up to both by his team members and the market.

Right this moment, Jerry seems to have everything going for him. But knowing the vagaries of the stock market, he can’t be sure of maintaining or bettering the level of performance of his team until the year has actually ended.

Memories of the stock market crash of 1987, among a host of others, are hard to erase. And looming ahead is October, when it usually happens.

“When Jerry contemplates the future, he is not seeing his retirement years or his three children going off to college. The future is more immediate … The end of the year. December 31.”

And then, in January, it would start all over again, with digital precision - research reports, IPO prospectuses, conference calls and ticker tapes going now green, now red. “At the start of January, everyone’s year-to-date performance is exactly the same. Zero per cent. That’s how much you’ve made for your shareholders that year. And that’s exactly how much the stock market is up or down for the year. Zero per cent. Everyone is standing at the bottom of the mountain together. Anything is possible, nothing is predictable,” the author writes.

“During the summer of 1998, the three indexes were setting records - seemingly daily. The Dow was up 15 per cent, the S&P 500 was up 19 per cent, and the Nasdaq had gained 22 per cent for the year - and it was only the start of July,” the author writes.

Jerry has to constantly remind himself that he is competing with Harvard MBAs, the 28-year-old millionaire portfolio managers, and the egos that ate Manhattan, though he himself is rather down-to-earth, probably on account of his humble origins. That cautiousness reflects in his funds’ portfolios.

As the author writes, “Some stocks you own, some you simply rent. For an investment, you buy a stock, put it in your portfolio, and leave it there. You add to it at times and you sell from it at times. But it’s a member of the family and you build a relationship…Most of Jerry’s and the group’s funds are made up of core holdings that they have owned for several months and followed even longer.”

But Jerry also likes to “save a little room to try to boost the funds in the margins-the edges — with stocks he views as trades.” Like Amazon.com, which he still rues cashing out from way too early.

More than competitors, though, it is the investors who are making things difficult for his team. As the author tells us, “Investors had gotten used to getting more out of the market, and now they were demanding it. And the challenge for Jerry’s team, and every other mutual fund out there was to try to be the ones who could meet those demands.”

All in the game, the author tells us. “There are seasons and cycles, booms and busts. To reach the top, you need to be positioned in the right industries and the right companies at just the right time. You’ve got to be ready to ride them to their ascent and be out before their descent.”

Jerry’s team meets a couple of times every day, to discuss its positions and strategise for the trades to follow. They criticise each other, discuss rumours and seek counsel from others in the group, primarily Jerry. They even talk about shorting and going all-cash, both of which most mutual funds are not allowed to do anyway. For, shorting may mean taking on more risk than the average mutual fund investor should be exposed to, while cashing out and sitting on the pile would amount to do nothing with the money the investors have trusted you to put to good use and grow.

Wall Street investment teams that handle trillions of dollars of investor money, live, eat and breathe market. Jerry’s team, of course, has a $3-million carrot dangling in front - the bonus it could earn for its performance this year. But it’s not about money alone.

“For Jerry, as for many of the investment world’s top managers and traders, it isn’t the money. They have a passion for the ideas, the companies, and the constant challenge of the competition and the market. More than anything, it is about getting it right,” the author writes.

It is about striking jackpot with an IPO as much as it is about missed opportunities. When Jerry buys 20,000 shares of GeoCities at $17 and sells them two days after the listing at $44.67 a share, he reaps a cool half-a-million dollars in profit. But, a little over five months later, Yahoo would buy GeoCities at $124 a share! The market goes rollercoaster as it approaches October, shrouding investors in a pall of uncertainty. Jerry’s team loses a lot of money.

By November, though, they have recovered some of the losses and are wondering if the rest of the year would be any kinder. Jerry can’t have the team give up, but it’s not easy to pep them up. “The problem is, for us to beat the indexes, two things would have to happen… Everything would have to go right for the Delaware Aggressive Growth Fund, and everything would have to go wrong for the indexes. But if things were bad at the major indexes, it’d be tough for Delaware Aggressive Growth to do well,” Jerry tells himself.

Luckily, things take a middle path, as we get to know later in the day on December 31, 1998. The Aggressive Growth Fund had gained over 36% for the year, double the Dow’s return, nearly 10% ahead of the S&P, and just three points behind the Nasdaq. It had bested 99.5% of the competition in the last three years. Indeed, 1998 had been Jerry’s year.

And so was 1999, the author informs us in the epilogue. The asset piles had soared, as also the rankings of his funds by the end of that year. Knowing Jerry, though, he would still be wondering if he had one more year left in him somewhere.