Summer Essays [PDF] (GMO's 2Q 2014 Letter)


The defining event for me was in the summer of 1968, when my wife and I took a three-week holiday back in England and Germany, shortly after joining Keystone. Lunching with some of the hot shots - being a newbie I was by no means a fully-fledged member - I was fascinated, indeed, almost overwhelmed, by the story du jour: American Raceways. The company was going to introduce Formula 1 Grand Prix racing to the U.S. It had acquired one existing track and had one race, hugely attended out of novelty as well as genuine interest. With a few more tracks we could calculate how much money - a lot - the company could make. It seemed to me as a foreigner to have little chance of failure. With noise, speed, danger, and even the ultimate risk of death, it seemed, well, just so American. And every Brit’s hero, the then current champion Stirling Moss, was on the Board. So I bought 300 shares at $7. (For defining events in your life you do remember the details. Sometimes even accurately.) By the time we returned from our vacation - in those days we were never in touch with business, it was just too difficult - the stock was at $21! Here was my opportunity to show that I had internalized early lessons; to demonstrate my resolve. So I did what any aspiring value-oriented stock analyst would do: I sold everything else I owned and tripled up! Nine hundred shares at $21, mostly on borrowed money. In a Victorian novel aimed at improving morals, ethics, and general behavior, this is where tragedy follows hubris. But real life is more confusing as to how it delivers lessons and it likes to tease, apparently. By Christmas, American Raceways hit $100 and we were rich by the standards of those days, and certainly compared to my expectations. You could still buy a reasonable four-bedroom house in the London suburbs for £10,000 and in Boston for $40,000, and we had about $85,000 after margin borrowings and before taxes due. But, the possibility of continuing the storyline by cashing in our chips and going home to England quickly became more complicated: a year after joining Keystone in April 1968, I left with one of the fund managers, Dean LeBaron, to start a new investment management company. We started a reconnaissance patrol in mid- 1969 and by January we had an office in the Batterymarch building on Batterymarch Street in downtown Boston, bearing the unsurprising name of Batterymarch Financial Management. In deciding to leave Keystone, my new nest egg of late 1968 played a key role even though it had begun to decline some in early 1969.

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