The Magical Investment Corporation

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“For the record, I must make a correction to the statement that all investment trusts look liked monkeys at the time of the boom and crash.” So writes Fred Schwed in his 1940 investment classic Where Are the Customers’ Yachts? The boom in this case was the one that peaked in 1929. The crash was the famous collapse thereafter. “Once upon a time,” Schwed continues, “there were two small trusts, managed by the late John W. Pope, which were of such stuff as dreams are made on.”

No one remembers John W. Pope today. But for a time there, he was something special. Pope was one of those fellows that seem to make the best of a bad situation. He had the misfortune to start his investing career in 1928. Yet he would go on to distinguish himself brilliantly in his short career. Schwed took to calling his investment management firm “the magical investment corporation.” That was because Pope made money during what Schwed called “that impossible time in finance, 1929- 1931.”

I’ve been hunting around for success stories of the 1930s – investors or traders who found some success during that difficult period. John W. Pope is another to add to the list. One prominent Wall Streeter called him “one of the ablest statisticians in the New York district.” (This was back in a time when people called security analysts simply “statisticians.”)

Pope ran a very different kind of investment firm. It was the opposite of nearly all other trusts at the time. “Everything about the intellect and philosophy of the youthful Mr. Pope was the reverse of what I have explained a Wall Streeter to be,” writes Schwed. When Pope started managing money, he was only 29 years old. But he already had some different ideas about how to invest.

Schwed writes how Pope’s fund in 1930 was mostly in cash and short-term loans, “which, strangely enough, was precisely where it should have been.” Pope’s message to his clients that year also contained “an incredible statement,” which Schwed reproduces:

“It is the belief of the management of this corporation that a diversified list of carefully selected securities, held over a period of time, will not increase in value.” Pope seems to have been one of the few people to see the trouble on its way. Looking over his fund’s holdings, Schwed comments how “frequently his trusts had only one single large position, and that would be on the short side.” In other words, Pope bet against companies more than he bet on them.

He made a lot of money doing that, and it sometimes got him in trouble during a time when the reward for making a lot of money meant that a lot people thought you should be thrown in jail.

For instance, once Pope wrote to his clients telling them to sell Fox Theaters. Upton Sinclair mentions Pope briefly in his book Upton Sinclair Presents William Fox. Sinclair writes that Pope “did not like the looks of the picture and that their statements did not represent the true condition. For that, charges were brought against him before the New York Stock Exchange.”

Another author, Martin Armstrong (The Greatest Bull Market in History), relates how anyone who made money during the 1929 crash was a candidate for punishment:

“The cries to punish someone, anyone, for their losses were, indeed, numerous. It became common to talk of huge bears who were in control of the market, squeezing the very lifeblood from the market drop by drop.

“One such early victim was a young broker, 32 at the time, named John W. Pope. He was reported to have been a soft-spoken chap, quite independent and a student of values… John was accused of forcing Fox Films down.”

The NYSE interrogated him in a way Time magazine described as a “harrowing trial by statistics.” But our man Pope pulled through. As Armstrong writes: “John W. Pope pulled out his charts and his studies of Fox Films and demonstrated that the stock had been seriously overvalued in comparison to historical measurements.” It was an impressive enough display for the powers that be at the NYSE. Pope was completely cleared of all charges.

Fate had dealt poor Pope a bad hand, though. He died in 1931 after an illness of some sort. He was only 32 years old. Pope was “a sort of Keats or Shelley of finance,” Schwed writes. “It can now never be known whether his amazing track record could have been sustained; whether, indeed, he would have continued to be, as he was then, the brilliant exception that proves the rule.”

I found Pope’s obituary in The New York Times, published Nov. 22, 1932. “John W. Pope Dead; Youthful Financier,” it read. “Made Fortune Since 1929.” The Times called him a “spectacular figure in recent financial history”:

“Mr. Pope was little known up to the time of the falling market in October 1929. He was generally believed in Wall Street to have accumulated a substantial fortune as a result of his activities on the short side of the market.”

That ends just about all I could dig up on Pope. I thought I would share his story with you for a couple of reasons.

The first is to show you that being short can have its rewards in times of trouble. I am not and have never been a particularly good short seller. However, I know several who are very good at it. One is my friend Dan Amoss, who edits Strategic Short Report. There are few people I would entrust with my own money. Amoss is one of them. So if you are looking to add the protective (and potentially very profitable) strategy of going short, I would recommend you give Amoss’ service a try.

The second reason is to say that it can be worthwhile to heed the short sellers even if you never plan to short anything.

They are often very diligent in their fundamental research. They are often short stocks that have real problems. Knowing what they are is helpful if only to avoid them on the long side.

If you listened to Jim Chanos, a well-known short seller, you would never have owned Enron, for example, or even lesser blowups like Kodak. If you listened to David Einhorn, another famous short seller, you would never have touched Allied Capital – or any of the so-called business development companies (BDCs). They are not always right, of course. But they are right often enough in big ways.

And if you know what they look for, it can improve your own ability as an investor – again, mainly to avoid losers. There are not many books dedicated to the art of going short. But probably the best place to start is Kathryn Staley’s The Art of Short Selling. It covers some basic strategies, and gives plenty of anecdotes and history.

Among certain short selling principles is one that reads: “If you can’t read it, short it.” Companies with complex accounting are usually hiding something. Banks and insurers are notorious for complex financial statements. Also, “If you can’t fix it, short it.” Some companies have broken business models that just don’t work anymore because something fundamental has changed. (See the fiasco with America’s investment banks. Amoss, by the way, was short Lehman, and his readers cleared a 462% profit. Not a Strategic Short Report subscriber? Now might be a good time. See here.) Usually these things are good fodder for shorts. There are plenty of others I won’t get into here.

There is one other reason to share Pope’s story with you: He is part of a short list of people who did well in the aftermath of the great crash of 1929. As I’ve said, I’ve been searching out stories like these to see what I might learn. Even if you never plan to short anything, I hope you find Pope’s story of interest just for its own sake.

Chris Mayer
Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.
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