A Bet with the Professor
The vast space of Sanders Theatre fell silent for a moment.
Professor Cromwell adjusted his horn-rimmed glasses.
“I hear one of the freshmen in the economics department memorized pi to a thousand digits? I’m told he’s taking this class too.”
Low laughter and murmurs drifted through the lecture hall from all sides.
“Wasn’t that just a drinking game?”
“Still, a thousand digits in three minutes is kind of insane.”
“I thought he was a math major. He’s in economics?”
Victor nudged my side with his elbow.
“Sanha, he means you. Professor Cromwell heard about it too. Looks like you’ve become a bit of a celebrity.”
At that moment, Professor Cromwell’s gaze landed squarely on me and stopped there.
“Mr. Lee, is that correct?”
“Yes, Professor.”
This old professor hadn’t called me out just to make polite conversation.
He looked like a man who had found a live wire and meant to see whether it would light the room.
Professor Cromwell nodded.
“Very well. If you can fit a thousand numbers into your head in three minutes, let’s see whether you can also spot patterns other people miss.”
He turned toward the blackboard and wrote in chalk across one side:
US ECONOMY 1991
The American economy in 1991.
“The Gulf War is over, and uncertainty has cleared. Wall Street’s consensus is calling for a gradual recovery beginning in the second half of the year. Mr. Lee, what is your outlook for the U.S. economy over the next six to twelve months?”
It was a textbook question.
I gave a deliberately respectable answer — enough to show I understood the basic narrative, but not so much that I gave away the whole point.
“Most analysts are optimistic, citing the end of the war and improving consumer sentiment. In the short term, that’s a reasonable reading.”
I acknowledged the conventional view first.
“But that analysis overlooks several structural problems. First, the commercial real estate market is collapsing. The aftershock of the overbuilding in the 1980s is hitting in full force now, and that will feed straight into regional bank losses.”
“Hmm?”
“Second, corporate restructuring isn’t finished yet. Layoffs that were delayed during the war will begin in earnest in the second half, and unemployment will probably keep rising for a while.”
“I see.”
“Third, consumer debt is historically high. The spread of credit cards in the 1980s already pulled future consumption forward through borrowing. That means there isn’t much room left for additional spending.”
“Well now...”
“Fourth, Chairman Greenspan is still maintaining an accommodative policy, but interest-rate cuts take time to reach the real economy. The lag will be at least six months to a year.”
“...”
“Finally, Japan’s bubble is beginning to burst. That will create deflationary pressure across global asset markets, and the United States won’t be immune.”
At some point, the amusement had drained from Professor Cromwell’s face, and he cut in before I could continue.
“So you’re saying Greenspan’s rate cuts aren’t enough? That the Fed still has room to ease further?”
“Exactly. Short-term rates are still in the mid-five percent range. That’s low compared to the Volcker years in the early 1980s, but it isn’t low enough to support a recovery. The Fed will have no choice but to cut further.”
I traced an invisible graph through the air with my finger.
“On top of that, the fiscal deficit limits how much stimulus the government can provide. In the end, the economy is forced to rely more heavily on monetary policy. I think there’s a strong chance the Fed will bring rates down into the mid-three percent range.”
“What about a short-term bounce? Some analysts say the end of the war will improve consumer sentiment.”
“There will definitely be a psychological rebound. But it’s likely to be temporary. Think back to the double-dip recession in the early 1980s. The moment people relaxed because they’d escaped the first downturn, the economy could roll over again if the structural problems hadn’t actually been fixed.”
I brought my answer to a close.
“In short, the U.S. economy right now isn’t on a stable recovery path. It’s still in the phase of groping around the bottom. A real recovery won’t begin until at least the second half of 1992. Until then, volatility will remain high, and rates will keep falling.”
The lecture hall went quiet.
“...”
“...”
“...”
Several students in the front row had stopped taking notes and were staring at me in a daze.
Victor was looking at my profile with his mouth slightly open.
In the middle rows, I noticed Grace Fairfax narrowing her eyes, clearly intrigued.
Professor Cromwell stroked his chin.
“That is... very... very... very impressive analysis, Mr. Lee.”
He smiled faintly.
“A student who can give that kind of answer could have succeeded in theoretical economics or mathematics as well. So why choose a practical finance course like this one among all the classes you could have taken? I’m curious about your goals, Mr. Lee.”
The man I had been in my previous life had ended up merely making other people richer until the day he died.
This time, I would not live that way.
“May I answer honestly, Professor?”
“Of course.”
“I want to make money. A lot of it.”
There were snorts of laughter and small exclamations all over the room.
“Damn, that kid’s got guts.”
“He just flat-out told the professor he wants to make money. A lot of it, too.”
“Maybe the crazy ones really are the ones who succeed. That’s depressing.”
I finished my answer.
“And I thought this class was the most direct path to that goal. By the end of the semester, this project will leave behind numbers. I already have a plan for exactly how I intend to use those numbers.”
“Ha! Good. Honest, and exactly the sort of answer the market would love. Ambition is capitalism’s fuel, after all.”
Professor Cromwell went on.
“Very well, Mr. Lee. And to all of you students sitting in this room who also want to make money: if things had gone according to the original plan, I would have given each of you a hypothetical $100,000 account and had you manage a portfolio over the semester. Your grades would have been based on the result.”
It was exactly what the brochure we’d been handed earlier had said.
But now there was one new variable.
“However, since I’ve just heard such an interesting answer, I think I’ll add a little twist.”
Professor Cromwell lifted his chalk and wrote in large letters on one side of the board:
PROFESSOR vs CLASS
Professor versus students.
“I’ll be running a hypothetical $100,000 account of my own. Same rules, same time frame. And if, on the final day, there is any student whose account outperforms mine...”
He let the silence stretch for a beat.
“That student will receive an A+ regardless of attendance or homework. Naturally, they’ll also be exempt from the final exam.”
The lecture hall exploded at once.
“What the hell, he wants us to go toe-to-toe with the professor?”
“This is basically a no-insignia death match!”
“Damn, I just got chills. An A+ and no final exam? That’s insane!”
Then Professor Cromwell poured cold water over the boiling room with one final remark.
“One more piece of advice. The market doesn’t care about your SAT scores or your talent for reciting pi. All it cares about is the price of risk. You’ll learn firsthand how powerless textbook theory becomes when it has to face the red numbers on a real account statement. All right. For the rest of the class, talk freely with the people beside you. I’ll start taking first orders next week. That’s all for today.”
Professor Cromwell gathered his papers and stepped down from the podium.
The lecture hall instantly turned into something closer to a small brokerage floor.
“What about IBM? Isn’t that guaranteed to go up?”
“My dad always tells me to buy GE. Says it’s the safest thing out there.”
“Microsoft? Isn’t that too expensive? It’s over a hundred dollars a share.”
Victor opened his campus notebook beside me and shoved it in my direction.
“Sanha! That was amazing just now. Still, we need to keep the portfolio safe. I was thinking something like this.”
Under the heading Blue Chips, he had written down a few company names.
IBM, General Motors, Pan Am Airlines...
In 1991, this was Victor’s list of companies he believed were “absolutely too solid to fail.”
I could only sigh inwardly.
How did this idiot get into Black Diamond?
IBM was a blue-chip name in 1991, yes, but in the early and middle 1990s it would suffer massive losses and restructuring as the mainframe market collapsed and it failed to respond properly to the PC boom.
General Motors would soon post record losses, launch massive layoffs and factory closures, and eventually end up filing for bankruptcy protection in 2009.
Pan Am Airlines...
That one was practically a foregone conclusion. It would go bankrupt just a few months later, in December 1991, and shut down operations.
I could short this guy’s entire list and make a fortune.
It was almost impressive, in a grotesque sort of way, how he had managed to pick out nothing but companies about to stumble straight into the abyss.
In one sense, it was a remarkable talent — the ability to move perfectly against the market’s current.
“Mm... for now, it’s good that you’ve written down some ideas. Let’s go back through them one by one later and filter them out.”
“Really? Yes!”
Whether he understood me or not, Victor was beaming.
I opened my notebook.
At the top, I wrote one large word:
ENERGY
I had chosen my first sector.
Right after the Gulf War, with oil prices catching their breath again, I wanted one of the most aggressive companies drilling and pumping crude out of Texas soil.
I wrote down a few candidates in the corner of the page.
Independent exploration and production companies with oilfields in Texas and along the Gulf Coast.
They weren’t as famous as the major refiners, but when crude moved even a little higher, their profits could surge much more sharply.
I underlined one name in particular: Apache Corporation.
Apache Corporation.
It had nothing to do with the Apache helicopter people knew from popular culture.
This was a Texas-based American oil and natural gas exploration and production company, a mid-sized producer that had been aggressively buying up fields in the post-Gulf War period, when oil prices were still subdued.
It was the kind of high-beta energy stock whose share price reacted sharply whenever oil rose.
In its most recent quarterly results, debt had increased because of its aggressive acquisition spree, but low production costs per well and rapidly growing proven reserves were beginning to draw attention.
When oil prices were suppressed like they were now, the market treated it as a discount name. But if crude rose by even five dollars a barrel, its cash flow would balloon exponentially.
I sketched out the rough scenario in my head.
If oil rose only twenty percent over the next year from current levels, the company’s valuation could at least catch up to the industry average.
For a mock-investment assignment, that was a sufficiently aggressive first bet.
Good, Professor Cromwell.
My first wager was the oil flowing through Texas veins.
...And besides.
Who says investing has to stay hypothetical?
I turned to Victor beside me.
“About what I mentioned earlier — could you call your father for me? If possible, could I speak with him now?”