In this edition of Frank Thoughts, Frank reflects back to the mid-1960s and the key lessons on investing he learned from former Fidelity Magellan fund manager Pete Lawson.

ROBERT F. “PETE” LAWSON

           KLM 21 … KLM 1/8 … KLM ¼ … KLM 1/2  kept flashing overhead on the electronic tape.  Seemingly KLM Royal Dutch Airlines was every trade on the New York Stock Exchange that April morning in 1968.  I stood mesmerized by it.   “Pete” Lawson had told everyone at Estabrook & Co. to buy it months before.  The stock had already tripled.  And yet that morning the world was discovering it.  KLM Royal Dutch Airlines planes were taking off with Douglas DC-8-63 jet engines.  The plane, with 244 seats, was the largest commercial aircraft of the time.  I was becoming in awe of Pete Lawson’s stock prescience.

      Lawson was part of Boston’s “Our Crowd.”  He had attended “The Academy”… Milton.  “The College”… Harvard and “The Business School”… Harvard.  He had married Andria, an heiress to the Sears Roebuck fortune.  Pete was a man’s man with the good looks and personality of George Clooney.  The stock market to him was a conceptual challenge … and he was very driven.

      Shortly before I joined Estabrook in 1966, Pete had left Fidelity where he had managed the Magellan Fund.  In a world where your background was a ticket into the partnership, Lawson always remained an outsider.  In fact, I believe he made the Brahmins in the firm very nervous.  Without a doubt they respected him, and were very glad to have the revenue he brought to the firm, but in point of fact he viewed the investment world very differently than they did.  His approach to the stock market was opportunistic.  They viewed it as a dividend paying mechanism.  Pete was 20-30 years ahead of his generation in a world that was still held captive to the depression fears of 35 years earlier. 

      I got a glimpse into his thought process one night in the 1960s.  Getting off the elevator I heard a short wave police radio blaring in the distance.  Following the sound, I walked into Pete’s office.  It was in the basement of an historic, ten story building that is now a national landmark.  As I approached him he smiled and said, “Listen!!”  I heard massive police confusion.  “There’s a race riot going on in Roxbury.   This is going to go on across the country,” said Pete.  “I found a mace chemical company that we can buy!!!” The stock went on our recommended list that week and promptly moved from $30 to $40.  Pete had a rule; if you couldn’t see 50% upside in a stock you shouldn’t buy it … a rule I adopted as my own.

      How good was Pete?  On one trade he indirectly paid for my furniture as a newlywed and unintentionally taught me the greatest lesson of investing.  Let your profits run!  The stock was Digital Equipment.  It was a mini-computer company that had gone public at $20 in 1967.  I was living with my parents in a two- family house, engaged to be married and had accumulated $10,000 … a princely sum at the time … at least to me.  The stock had run straight up to $30 and then the fast money left.  I purchased 300 shares, below the original offering price, at $18 5/8.  Some two weeks later it was back to $30.  I now had $9,000 in the stock and $4,000 in the bank.  I felt very, very, rich!!

       But being “rich” changed my thinking.  When my fiancée and I went to choose furniture, I had mentally marked myself to the market.  That is to say, I felt I had $9,000 to spend on furniture.  The problem was that in 1967 furniture was delivered not from the store but from the manufacturers in North Carolina … C.O.D.   And one had no idea when it would be delivered.  The stock, of course, went against me.  I entered a stop order at 26 5/8 and within a week was stopped out.  Instead of feeling pleased with a 40% gain, it felt like a loss.  Especially when the stock immediately went higher and never looked back! 

      Pete Lawson was a right brain hemisphere creative thinker in an investment world that was not.  I remember his discovery of House of Pancakes and fast food stocks.  He recommended color television stocks when seemingly no one had a color television.  Pete, in a weekly research meeting, brought shock to the partnership when he recommended Bayfield Industries … a bomb manufacturer.  It was his “play” on Viet Nam.   It went up over 50%.  And then, of course, there were countless technology stocks.  When he recommended Las Vegas gambling stocks (“mobster management” said one partner) his relationship with the partnership got “stretched.” But as the stocks doubled and tripled all was forgiven. 

     The partners believed, as did all conventional investors, that one should buy “blue chips” such as Allied Chemical.  The problem, from Pete’s perspective, was the perceived “blue chips” were mature companies; a fact that was underscored by my daily encounter with “Cam” Deveny at the golf club.   Each day during the summer of 1967 I would be greeted upon arrival at my locker with, “Frank, how did the market close?”  I would invariable respond, “I have no idea,”… and I didn’t.  “Well what about General Electric?”  I would shake my head and Cam would walk away saying, “I can’t believe you went to work today!” And I couldn’t believe that Cam Deveny still owed General Electric!

     From 1966 to 1982, a period of 16 years, the Dow Jones and the S & P 500 went nowhere.  We are today going through a similar experience.  From January 2000 through August of 2010 the S & P is down -13.5% and everyone is negative.  Yet, as you will see from the performance enclosure, in the same time frame Contravisory Investment Management is up +60.5%.   We own mid-cap stocks.

      It is a mistake to assume the past, or even the moment, will foretell the future.  Guessing the immediate direction of the market, which is done on CNBC all day long, is not investing. That’s simply flipping an intellectual coin.  One should always attempt to find the best business opportunities … as Pete Lawson taught me to do 45 years ago.                                                

FRANCIS PATRICK BOLAND

9-15-10