There are three forms of persuasion: (1) the presentation of facts, which when revealed will indicate that a certain course of action must be taken; (2) obscuring facts that may be contrary to the action that one wishes another person to take; (3) the more subtle form of reallocating weights given to components of the decision-making that one wishes another person to make. Most persuasion is directed toward self-serving commercial interest: trying to get somebody to do something that will enhance one’s own financial status or well-being.

Occasionally one will find a higher form of persuasion—the expression of the professional view that someone else should do something that may not be in the best financial interest of the individual giving the advice.

My first experience with salesmanship at a workaday level occurred between my sophomore and junior year at Harvard, well before I thought of the investment business. The year was 1953 and the Vick Chemical Company, manufacturers of Vapo-Rub (or salve, as it was called in the South) and other cold products, customarily recruited twenty-five "eager beavers" from college campuses around the country.

The recruiting lure was sales training as a traveling salesman working for a large and sophisticated marketing company with full expenses paid and a chance to clear the salary of $25 a week. This program had its own illustrious alumni, who were currently engaged in high-level positions in marketing companies. Anyone who seriously wanted to consider a field in marketing entered this competition. The ingredients of selection were those factors that Vick considered important for future executive training as well as a good sales presence.

Since I was considering a career in some field of business and knew that salesmanship would be part of almost any activity, I applied for the program. Interviews were held at half-hour intervals in the college placement office. My interview was conducted by an affable Yale-like member of the personnel department named Thomas Buffum. In the course of one preliminary interview and a later visit to the company, he gave me the impression we were friends.

I was selected from among hundreds who applied and eagerly looked forward to a different summer-job experience. The program encompassed ten weeks. The first week we reported to the George Washington Hotel on lower Fifth Avenue, a low-cost hostelry that was convenient to the company's marketing headquarters in New York City. People came from all over the country and were a blend of all the types of students that one would find in a cross section of the college population. They were quick, social, ambitious—more likely to be officers of their social fraternities than scholars, but they were not an unintelligent group.

The week’s program was conducted by the sales-training department, the same group that does the indoctrination programs for full-time marketing people at Vick. Essentially, we were trained in the general concept that the druggists and wholesalers whom we were to meet in a sales situation were our enemies. Our task was to have a mentally combative frame of mind if we were to achieve victory in our contest with the sales prospects. There was no conviction expressed that we were there to do public service by bringing Vick goods to these needy retailers at special summer rates. We were here to put goods on the shelf and, having succeeded at that, to place prominently an unattractive point-of-sale placard showing a female model with a finger beside one nostril and a Vick’s inhaler in the other. During the week we sang Vick songs and drank Vick cocktails (gin and cough syrup) and were finally launched on our venture by an evangelistic message from the president of the company.

I was sent to Baltimore for several days of on-the-spot indoctrination before going to my sales territory. I had been assigned a rented car and a sample kit in New York, and sent on my way. My ultimate assignment was the southern half of Georgia, Alabama, and Mississippi, territories, which, for understandable reasons in the pre-automotive air-conditioning days, the regular salesmen were reluctant to cover.

In Baltimore I met a veteran salesman who was on his way north with the birds for the season. We made a few calls together in Baltimore while I listened to what he had to say to the druggist. "Hello, Mr. Druggist. My name is John Smith, and I’m here to tell you about the special opportunity available to acquire your profitable winter needs at a price that will help you make more money than you have ever before," and so on. These calls while I was a passive assistant—the obvious junior apprentice—were like the smell of battle. They further goaded one to a feverish pitch and reminded me again of the inspirational words of the president, explaining how small ideas could help make the company make the man who had them. He has used the example of the man who discovered that by widening the mouth of the large economy-sized Vapo-Rub, the average consumer would use three fingers to apply the salve, thereby increasing the wastage by 50 percent.

I was anxious to solo. After making a few dual calls, where I initiated the conversation, I still had the salesman standing by looking on like the teacher. From earlier sales reports an easy prospect was selected. We were in the slums of Baltimore, and sales figures on a very small drugstore indicated that it had been a steady annual purchaser of Vick’s products. With my new sample case and order pad and pen ready—even with a ratchet screwdriver which I bought with my own money to quickly install the point-of-sales sign before someone had second thoughts—I assaulted the door.

I entered the small, poor drugstore and went immediately to the back of it as my training had taught me to do. I met an elderly couple and began my pitch. "Mr. Druggist, I’m here to help you acquire your stock of profitable Vick’s products." The elderly couple continued to have a bemused expression throughout the pitch, although as I progressed toward what we call the "Oh, my God" size deal, I noticed that they were ready to buy, although the shelves I could see within my range of vision seemed to be adequately supplied. It occurred to me that they were not very intelligent. I broke off my spiel and asked a few questions and discovered that this nice old couple was deaf. Apparently their shelves had been more than adequately supplied by wholesalers who came along and took care of them in a fashion somewhat similar to the stocking of a blind newsdealer.

It was quite clear that they were ready to sign whatever order form I put in front of them, which, if they did, would have resulted in great praise from my teacher waiting in the car, and my release as a certified summer salesman to take over my own territory. On the other hand, they did not, as near as I could tell, need the goods. I could go back and explain that they were adequately stocked and had no further need of Vick’s services for the coming year. Furthermore, they didn’t understand a word I was saying.

Under those circumstances, I would go back to the grueling job of making several more dual calls on the presumption I had crashed on my solo flight and, at the very least, had lost my nerve. The moral of the dilemma was clear, and the decision I made then has affected my attitudes on persuasion ever since.

Few can understand now why I have been especially decisive in declining business opportunities that had attractive short-run possibilities but were of doubtful long-run value. I have felt that brokers had as much obligation in serving their clients to recommend the sale of securities that they felt lacked merit as to recommend their purchase. I have recommended to some investment management clients that they look for other good firms when their interests do not coincide with our capabilities. These acts are not the expressions of someone who is intentionally shortsighted commercially, but rather the result of decision-making by one who has returned to Baltimore many times looking for a small drugstore in the hope that he could buy back the $500 worth of Vick’s products that must still be on the shelves.

My father was a doctor, who aspired that his son would work in the same profession by getting a better education than he had been able to afford during the depression years. I had no problem with this, hut the sight of blood made me think of a butcher shop. He sacrificed enough to send me to the best private schools in the hope that I would see the wisdom of his view. Attendance at medical meetings and at surgical amphitheaters confirmed in my head and stomach that the decision to pass up medicine was correct.

I was excessively well prepared for Harvard and proceeded to play during my first two years there. I was nearly thrown out of college for majoring in girls, bottles, and planes, rather than books. The academic jolt was timely and useful. My last two years were spent seriously studying psychology and sociology rather than the typical premed program of biochemistry less suited to my personal aspirations.

I then spent one year working for a New England manufacturer, Norton Company, in its personnel section, and two years in the Army, during most of which I was stationed in Germany. I was fortunate there in being assigned to run psychological tests for the leadership training of noncommissioned officers under the scientific and professional personnel program.

When I had left college I decided to go to the Harvard Business School and undertake training leading me to a career in labor relations. The labor ferment of the fifties had been presold in my mind and my generally liberal leanings superimposed on the background of a fairly conservative education seemed to suit me for the middle ground as a negotiator. Harvard Business School had been reluctant to take me right out of school and a fairly checkered academic career. They were more inclined to accept my application when I visited the Admissions Office during a break from the Placement Office, where I was hiring members of that year’s graduating class for my employer.

The draft notice took precedence, but I came back to the Harvard Business School in September 1958 to begin my career in labor work. Several books have been written about the Harvard Business School and business-school experiences in general, but few have captured the intensity of the early weeks.

You start with a class of approximately 600 highly motivated, aggressive, competitive students. They all recognize that they are taking time out from other activities that might be quite valuable, and they want to utilize this time very effectively. The first nine weeks between September and Thanksgiving are similar to a marine boot camp. The work is piled on and one’s entire career at the Business School and, by inference, much of one’s business career, is shaped in this relatively short time.

If you are fortunate enough to room with a good student with a competitive spirit, as I was*, you are helped immeasurably. If you are with a more lackadaisical group, you may not get going at full speed at the beginning. Case assignments are issued, papers are assigned, and the work progresses seven days a week. I did little else but read, write, and study for the first two months.

* John G. L. Cabot, now Vice President, Energy Group, Cabot Corporation, manufacturers of carbon black and energy products.

I followed the premise that success at the Harvard Business School depends not only upon intelligence but upon the ability to persuade others of your view. It is intended to be an intensive business experience. Students were as much aware of the need for cooperation as the need for competition. It was a forum in many respects like Congress, where beneath the surface of respect and comradery rest the hard attitudes that realize the doorway of success is too narrow to accommodate all who have the ability to pass through.

One particularly fiendish method of training was the Saturday-night paper, called written analysis of cases (WAC). The cases were ostensibly to improve one’s writing ability, but they served a far more important function in establishing a requirement to complete an assignment that could draw upon one’s earlier education and training, like English composition. The cases were read by intelligent young women who were recent college graduates. One of my section-mates was an intensive Englishman with an athletic build, who, trying to make the 9 P.M. deadline, collapsed and had to be hospitalized once while racing to the chute in which papers were placed from his typist, who was located two miles away on the other side of Harvard Square.

About 200 of my classmates were interested in the investment business and one of the most popular courses was Leonard Langer’s course on investments. This was typical of a period of great prosperity and a bull market—clearly not the case today. Those who were not interested in some area of the investment field enrolled in the course on new enterprise.

For some years, the investment business was not considered to be a very critical profession. Certainly, during the depression years it was not a place where a young man sought to win his fortune. During World War II, brokers had the lowest possible exemption—in other words, it was a least critical industry for the war effort.

Following the war, a few people came back into the investment business; perhaps their experience had been either in the finance or payroll sections of the military. The basis of this experience was rather unstable. Many brokers seemed to get into the investment business because some had experience with wealth in their families. It was an appropriate place to park the second or third son after religion, education, or law had absorbed the elder, or more qualified, sons.

Most investment people in the early postwar period ventured into the business by chance. Those who succeeded most were sales-oriented marketing people who would have done well in any business. It was hard to sell securities in those low-volume years. It required effort and push. The institutions what were on the rise were mutual funds. As the twenty-five-year bull market progressed in the 1950’s, young men increasingly eager for riches looked to finance, whether in the corporate or investment area.

The investment course at Harvard Business School was for businessmen who might have to face the problem of investing their own funds later on, rather than for those who were going to undertake a professional investment career. There was a legendary character, Mrs. Heald, a widow, who had a variety of investment problems. These were handled in a paper-portfolio sense by students. It was not so much a course to pick stocks that would move up, since Mrs. Heald was very conservative and would have unusual cash-flow problems as the term progressed. Mrs. Heald communicated directly with each student in the course, as the students would communicate with her. It was indeed an exercise in handholding as well as in the design of a personal investment portfolio. It did seem incongruous, however, that most of us were dealing with the problems involving widows. It seemed about as far removed from what we might be doing with our own portfolio as could be imagined.

The first year course at the Business School is general and prescribed. The courses cover production, marketing, business policy, and the like. It is a general grounding on all the aspects of business that might be encountered. It was during this period that I became especially interested in finance. It occurred in the way in which most students fall into a subject—influence of my teachers. The instructors in the finance area were particularly striking. They seemed to grasp the whole sweep of business problems. I have always had a quantitative bent anyway, and this surely seemed more interesting than sitting down and haggling all day between labor and management.

My interest was fostered by a successful summer job in the investment business in New York between the two years at the Business School. No doubt there is little better way to encourage interest in a particular field than through a summer job. I was fortunate in being hired to work in the research and investment advisory departments of White Weld & Co. in New York. My immediate supervisors were two great men—Frank Ritger and Thomas Pryor.

They were patient teachers and scholars in their own right, and they confirmed my impression that this was the field I should pursue. At first, it seemed just like HBS. My first assignment was writing letters to widows whose money was handled by the White Weld Investment Advisory Department. In the latter part of the summer I moved forward to the other extreme, banking and analysis of the fiber-glass boat business, which had just burst on the scene through forty or fifty small companies with some gel and a mold or two. This was at the other end of the speculative spectrum.

I came back from this summer encouraged by the variety of investment problems and by the brilliance of the associates. During the second year, my concentration was directed very closely to finance. Academic performance continued to be good and I was doing work that was directly related to what I thought my career would be.

Early in the second year, I began looking for a job in the investment business in Boston. Each of the large mutual funds would typically take one or two students from the Harvard Business School as would the banks and, perhaps, the insurance companies. Salaries were low, but advancement opportunities were supposedly great.

I was fortunate to be hired by a newly formed research department for F. S. Moseley & Co. The young research manager, who preceded me by less than a year, Robert F. A. Lawson, was an aggressive investor, oriented to magnificent operations in the exciting bull markets of the fifties. He was an excellent salesman and a sufficiently poor administrator to let me find my own way. Six months after I arrived, he left for a job with the legendary Gerald Tsai at Fidelity Fund, and I was put in charge of building our research department. Fortunately, no one else knew any more about what I should be doing than I did myself.

Qualities of an Investment Professional

The most highly prized characteristic of an investment professional is an ability to detach himself from his own self-interest. When one visits a doctor, he expects to be advised correctly whether he needs surgery, regardless of the financial outcome to the doctor. You want legal advice to avoid a court trial, even though it might oppose the best financial interests of the lawyer. An investment professional should be able to operate for his client, whether he be an investment manager or a broker, without excessive concern for his own self-interest. This is a rare characteristic and one to be highly prized when found. It is frequently synonymous with integrity.

The old trustees of Boston had this quality in large measure. They were able to become a part of their client’s problems and therefore could act as the client would himself, although from the standpoint of better knowledge about investment alternatives. Unfortunately, these traditions are dying out, and the new aggressiveness plus tougher business conditions within the investment community are making these old characteristics rare. They can still be found on whatever level of investment expertise may be required. The client should grasp and cherish them.

As the founder of a new investment counseling firm in 1969, I am partial to other firms that have recently started. Those that have succeeded possess common characteristics that can be identified in other new firms: they have experienced people, they have a specific mission and, more important even than an established business base, they have a means of surviving, if only through their own savings, during the inherently difficult first several years. Some firms start on a marketing premise, and I think they fizzle out quickly. Others start to make an investment contribution and are apt to last and survive longer.

It is difficult when starting a new firm to assume that the founding fathers will be amicable. Investment people, as stated earlier, have large egos. They do not work well together, except by tremendous accommodation of their own personalities to the requirements of the organization or their security needs. It is for this reason that it is very desirable to start a new firm with people who have worked together, rather than just with those who think highly of themselves and may not respond well to the others.

One would expect institutional investors to be entrepreneurially oriented. Investment decisions are made frequently and on the basis of rather sketchy information. Those who are more methodical in their techniques would often be frustrated by their inability to obtain precisely the information that is proprietary to a particular company, but that also would be required to make a sound investment decision. To invest constantly with inadequate data would frustrate the more solid, scientific and often intellectual individual.

Despite the fact that successful investors share characteristics that might be damaging in other fields, investors are inherently conservative. Even when they throw their conservatism to the proverbial winds, they usually do so only when the consensus approach argues affirmatively. The late stages of a bull market, when the riskier and more highly leveraged securities are being bid up sharply in price, is the time when the most cautious investor tends to participate with the majority and follow the crowd.

The institutional investor is unhappy to be alone when the accuracy of his approach is not confirmed by his peers. He likes to see others who are similarly trained and similarly motivated doing ~e same things that he does at the same time. He often attempts to take a reading of the consensus and decides to join it.

It can be argued, however, that the consensus approach is unlikely to be profitable. Sensitivity to change is what investing is supposed to be about. Change presents opportunity as well as risk, particularly when it is appreciated by one investor before others. Change may take the form of an unfavorable surprise. It can also be the appreciation of an opportunity, which seems so obvious that it is difficult to see how it can be missed.

For example, after a decade of competing with cheaper goods from abroad, the United States textile industry is now in such a competitively strong position that we are and will likely continue to be net exporters to the world. The higher price for petroleum products will make small cars more economical and appealing to a larger segment of the market. Not only does this mean that fewer autos will be sold initially, but it accelerates the scrappage rate of older, less-economical vehicles and creates a better market for new units than would otherwise be the case.

The Third World now has money to accelerate its own industrial development from a greater proportion of the world’s wealth going to raw materials suppliers. The Third World—what we used to call less-developed countries—wants food and technology, two products in which the United States is pre-eminent. We can provide them on the cheapest possible basis.

Although one would expect the investment professional to be sensitive to such changes, he has not been. So far in the early seventies he has been more sensitive to negative short-run changes that have plagued his own business, such as declining assets, disgruntled clients, and low trading volume. The investment community has resisted changes designed to lower the cost of services in order to attract more customers. It has balked against changes intended to accommodate the needs of more customers by combining the services now required by institutionally managed money, which may want brokerage and management services joined together.

Late in 1968, Keystone Funds considered establishing a separate account-management subsidiary. Keystone was one of the few mutual funds without a department that would manage pension, endowment funds, and the like. This was a logical extension of its investment-management capability, for it involved the further utilization of the research arm of the firm.

Mutual-fund sales had been poor. The last new funds introduced in the "go-go" days of 1967 sold well initially, but had performed so poorly that open-market sales were disappointing. Although I had some reservations and still do about the operational procedures of combining a registered investment advisory business with an investment company’s business, it seemed a prudent step for Keystone.

There was general agreement among Keystone’s management that such an activity should get under way. I was instrumental in examining the several alternatives for getting into this growing field. We had two options—the same as any new company—to be imitative, or innovative, and I was a strong but unsuccessful endorser of the innovative approach.

Keystone’s investment activity is highly disciplined. It has funds of a defined-quality type, which must remain fully invested. It has the only fund division that can be designed to give the investment committee of sophisticated accounts an active hand in portfolio building. Most committees are frustrated when they delegate discretionary management to an investment manager. For one thing, they cannot tell whether they will get the product that they initially thought they should get. The manager they hire may change his mind. For another, they wonder if they will have any influence over investment decisions based upon their own opinion of the economic-market outlook.

The committee recognizes that they do not have access to the stock-selection information that will be required to make specific decisions. On the other hand, if one can operate on the Keystone system and produce a product of a defined-quality type, emphasizing only stock selection, the committee may—by taking various percentages of an account in S-l, 2, 3, 4, or some bond fund within the Keystone system—create a unique portfolio that will be responsive to the general business outlook of the committee and the stock- selection capability of Keystone.

Such a proposal would have also been an appropriate way to think of the fully managed fund at Keystone, known as K-2. It would have represented Keystone’s answer as to how best to apportion the mix if one wished to rely upon Keystone for the overall portfolio balance. But it was particularly apt for the establishment of a new management company, because it would have been a new procedure that would have appealed to sophisticated accounts.

Another possible innovative approach was to combine all charges related to investment management into a single charge. Commissions may be a large and variable amount, which fluctuates according to the investment manager’s desire for mobility. He obviously assumes this mobility, because he expects it to be more than compensated by results. But it seems logical to me that executions and mobility, like any other management cost, should be charged against the manager. He should have the incentive to reduce this charge and to test the level necessary to optimize the results. If any manager can operate more successfully with low transactions, he deserves to be rewarded with a higher profit margin. Correspondingly, the manager who requires a larger number of transactions to achieve his result should receive a lower profit margin.

I recommended that Keystone adopt a single fee and pay charges for brokerage out of the management fee, as well as absorb bank-custody costs. This procedure is often followed by investment-advisory departments associated with New York Stock Exchange brokers, where brokerage charges are credited against the management fee.

Keystone considered these options, together with a third option of establishing a conventional investment- management department with a sales-oriented individual, a single portfolio manager, and the very conventional approach of "doing the best job we know how." After all, Keystone had all of the research facilities of a large management company.

Characteristic of the conservative approach to business decisions made by the investment community, the decision to he imitative guaranteed that Keystone would not be embarrassed. Similarly, it reduced the chances of being highly successful to a very small figure.

Institutional Behavior

Institutional investors have risen steadily in importance throughout the post-World War II period. They dominate stock-market trading, are almost the sole investors in bonds, and, increasingly, have taken over control of venture-capital investment in private companies. Some institutional investors are required by law to be passive owners of corporations. Naturally, some have conduit tax treatment and few among them could seek to control companies even if they attempted to do so. The corporate role is essentially limited to selling a security when they are dissatisfied with the way a company is being run.

This abdication from the control function does not mean that institutions are not influential. Their attitudes are sought by companies; indeed, the institutions are courted. A merger between two companies is very difficult, if not impossible, to effect without the affirmative vote of institutions representing both parties.

Institutions are wooed by companies because their buying interest benefits security prices. A security with an institutional following usually sells higher on average than comparable issues without institutional sponsorship. The cost of equity capital thus becomes cheaper and an institutional following facilitates the company’s financial planning.

Institutional sponsorship obviously increases the volatility of a stock, for institutions tend to move in or out with market orders. The number of institutionally dumped securities is greater each year and is compounded by the fact that when one or two institutions decide to sell a stock the other institutions, fearing that a down-trend may develop, may actually create the trend by joining the selling movement.

Institutions have no hocus-pocus method of investing funds more profitably than anyone else. The publication of performance results is more common for mutual funds than for other types of institutions; indeed, they may be typical of a group of institutional investors as a whole. There is little evidence that mutual funds have done better in the aggregate than an individual might achieve by selecting securities at random from a particular risk level. By extension, these data imply that similar results would be obtained by banks, insurance companies, and large private investors with a staff of investment people working for them.

Institutional investors tend to be faddists. They are very concerned about what will be bought or sold by other institutions in the next year or two, and they are more interested in practicing successfully the "greater fool" theory than in making fundamental determinations of value. After all, values may be undiscovered for a long time, whereas the discovery of an industry itself can bring quick profit.

In the last decade, I have observed at least four substantial booms in housing-related securities, without the benefit of a housing boom. We still have that to anticipate. One sometimes forgets that institutions are the same as any other organization. There are internal politics; success does not correlate always with skill; and there are the normal organizational strains and jealousies, most of which hamper communications.

Organizations have become more tightly structured recently, primarily to protect members from criticism. This is fashioned after the old guilds; it prevents members from being picked off, one by one, for inferior work.

The amount of paper moving through institutions today is at least double that of two years ago, but I doubt if it reflects an improved quality of work. Although institutions are designed to provide a professional service, they are run by people with a sales background. Consequently, marketing usually receives considerable emphasis.

Keystone Funds is a good sample institution. In my three years there, I held a number of jobs: analyst, associate director of research, director of research, portfolio manager. Keystone was founded during the thirties, when many successful funds began. Any firm that survived the difficult Depression and World War II years had a good chance of prospering during the two decades of boom that followed.

The fund’s strong first-generation management died, or retired, and was succeeded by a second generation of employees, rather than by entrepreneurs. The Keystone spread of funds was unique. But it never capitalized upon this attribute, due to fears that it would appear less involved with the consensus than was actually the case. It has stressed conventional methods of marketing, and its newer funds have been conventional "me-too" products rather than the progressive investment vehicles that built the organization initially.

The Keystone investment systems were designed to be run by automatons. In fact, they were set up by a salesman so that he could control the investment process without having to hire expensive talent. In recent years Keystone has competed with conventional institutional investment talent and has run into problems trying to get creative people to adapt to an externally imposed system. The result has been a poor marriage of the two, an unspectacular result from persons misfitted to the product.

Two challenges have been presented to institutions in the last ten years. The first challenge came from academics in the mid sixties who processed huge amounts of stock-market data and concluded that institutional results were not the result of skillful professional selection but of chance. Furthermore, they concluded that the good institutions, as demonstrated by past records, had no greater chance to continue to be good institutions in the future than those that had been demonstrably poor. Rather than accepting this challenge, and adapting to it or refuting the figures, the institutions ignored the challenge. Currently, the institutions are suffering from this behavior because individual investors have been voting with their feet (by steadily redeeming their mutual-fund holdings) and because they have been reluctant to give other professional investors their money to manage.

Institutions themselves are now beginning to accept the academic notion without controversy. The same institutions that ignored the academic challenge earlier are now willing to accept it without attempting to find cases where they can make a professional contribution. They are willing to adapt their organizations around the idea that if they are going to achieve chance results, they should do everything possible to insure that they rest in the middle of the pack, rather than at the extremes of the distribution. They will rely upon sales techniques to achieve their business ends.

The second challenge has been steady pressure from government sources. Here, most institutions have fought with their own trade associations in an attempt to stop government regulation of their business. I think the institutions are correct in assuming that government regulations tend to solve last year’s problems and create an unnecessary burden on a continuing basis.

Political campaigns have been financed and pressure has been brought to bear on legislators. Preserving self-regulation in the institutions themselves is a losing battle. A few institutional leaders have taken constructive steps to educate regulators in the way in which securities markets operate, but they have been rare.

I have not seen, for example, any type of intern or executive-exchange program between government regulators and institutions. One would expect that the benefits to be received from such a program could be immense. Instead, an air of hostility and suspicion exists, which thwarts almost any constructive policy.

It seems to me that the sole function of an institution is to provide a professional service that individuals or companies cannot supply for themselves. The function of an institution is not to provide a means of livelihood for its employees. If one accepts my objective, institutions should strive to be innovative; otherwise, the clients would soon learn to emulate the institutions. Yet innovation may be risky for an institution’s employees. By being innovative, you increase the chance of being wrong as you are in unexplored territory.

Newer firms tend to have more satisfied clients because they have been founded on the principle of satisfying clients’ needs. Furthermore, they must be run without the expenditure of great marketing effort and talent. The professional service concentration of the newer firm is proportionately higher in most cases than of the older firm that is dedicated to the preservation of its employees’ base of livelihood.

The fact is that employees of institutions are characterized by their age, far more than by the type of institution they may be working for. The senior officers now are mostly former professional managers or salesmen who entered the investment field in the late forties or early fifties. It was not a choice industry at that time and not very many people were coming in. The investment business did not get first crack at the best brains. Those who have risen to a leadership position did so as much by being there at the right time as by their own wit. The earlier innovators and entrepreneurs who started the firms in the thirties have nearly all retired or died. In any event, they have lost their influence.

The equivalent of a middle-management group—department heads and the like—joined institutions during the late fifties to mid sixties. As a group, they are perhaps brighter and more aggressive than seniors. They entered the investment business believing that it was the fastest way to succeed financially. Most institutions have provided a somewhat disillusioning environment for these individuals who probably rose quickly through the junior positions. But throughout most of the recent time in which they have held senior responsibility, the institutions have been on the defensive with their clients and in a state of turmoil. These men did not expect to be engaged in a rearguard action. They were trained for exploiting bull markets.

This group is most disillusioned and harbors severe internal strains. On the one hand, livelihoods are threatened by life styles that require fairly large salaries. On the other hand, their particular work is not satisfying and growth requirements are not being met.

The third group—analysts, portfolio managers, computer people—is the happiest. Young people who have entered institutions in the last several years, like their top company officers, are not the pick of the crop. They were trained at business schools and were told that it’s all a marketing business anyway.

The most-skilled marketing people gravitate more toward Procter & Gamble than toward Morgan Guaranty. Those who did go into the investment business had low expectations—the immediate salaries were good, but career aspirations were modest. They are security conscious and find that the institutional world suits their preconceptions; that is, if they just put in their time they will advance at a normal pace.

These three groups find it very difficult to communicate with one another. At least half of their effort is spent in establishing communications channels. The healthy breakout of intensive competition is almost always missing. The competition is most destructive. There is no easy way to cure these problems, but in many institutions they’re not even recognized.

Institutional investors like to combine business and social affairs. After all, it is much better to conduct business over cocktails or a meal—essentially disarming social occasions. Small talk is more acceptable and the guest is under more obligation to listen to any proposal the host may discuss. Moreover, this practice allows one to extend his day from breakfast through dinner if required.

One of the more interesting social-cum-business affairs was arranged recently for a small group of investment leaders by a New York broker, who offered to introduce investors to a small group of European banking houses. This broker is also an investment-management firm that has a slight working relationship with European investment management and brokerage firms. A high-level friendship with a European banking firm is at least as important as technical confidence in maintaining good working relationships. Firms in Europe tend to exchange junior employees, so that working relationships are built up over a lifetime among them.

This broker has a tradition of being the U.S. arm of its European associates and is responsible for investing some U.S. dollars for the group members. He could offer the services of the European group to a small number of American institutions. This is a traditional way of servicing investors by arranging introductions.

I accepted an invitation to visit several countries on a European trip and spent several days in each country seeing government officials, company managements, and bankers under the auspices of the banking firm in each country. One of the more illuminating sessions, which best describes how a social affair establishes a business relationship, was lunch at the Rothschild bank in Paris.

The Rothschilds had just built a new building several blocks from the Bourse. It was the only building in Paris I noticed without a street number on the facade. Clearly, it was the most imposing building in the area. I learned later that it had been built on the site of the original Rothschild bank, the construction taking place while the Rothschild banking offices were headquartered temporarily across the street. The tradition of being on the same geographical spot as the original bank was important enough to justify this additional expense.

The program of the day consisted of a reception, followed by lunch on the top floor, and briefings at the Bourse that were arranged by the Rothschild officers. I arrived slightly early for lunch. My own business needed attention that morning, and I did not stay with the group.

A white-gloved, tail-coated usher directed me into a panoramic cocktail room overlooking Montmartre with the Basilica of Sacré-Coeur a mile away, but almost at eye level. We stood around for a while and I was offered a drink by yet another servant, a cocktail which a third butler served on a silver tray. Within a few minutes the Baron Guy de Rothschild appeared with a portion of his younger coterie in tow.

As nearly as I could tell, there were at least three hosts at each table; one senior gentleman, who guided the conversation and pleasantries, one of the young members of the Rothschild international department, and one miscellaneous official.

I was seated at a table with Baron Philippe de Rothschild, who reputedly is the style-setter for European fashions. Much of our conversation concerned the prices of wine and the desirability that such prices decline. My suggestion that California whites can be improved by adding C0₂ in a seltzer maker brought a look of anguish on Baron de Rothschild’s face. I described it as "goosing" the wine. I suspect that I provided him with an "Ugly American" story for years to come.

No business was discussed during luncheon. As soon as it was over, Guy de Rothschild made a short speech in which he touched lightly upon the views of the bank and conditions around the world. France was in good shape although inflation was increasing. Germany looked all right, but the rise of socialism should be bad for investment. Britain was like a poor aunt; Italy an errant child. Switzerland was not discussed, but I suspect it might have passed his test in the number-two spot after France.

I noticed that here and in other banking institutions there are two levels of management. Each group had a half-dozen or so young technocrats, graduates of École Politechnique, or an American business school, fluent in English and conversant with American institutional-investment terminology. These go-getters would seek out their guests and could have conversed with any American broker about European investment opportunities.

On the other hand, each firm had an older group that did not go out of its way to speak English, or, in fact, did not listen to the presentations of its own younger group. Perhaps I am overgeneralizing, but I have the strong impression that the older group represents the power center in each of the banks, whereas the others are merely senior employees.

The decision to do business with an American firm may involve far more personal judgment on the part of senior management than the rational assessment of business opportunities provided by the juniors.

After lunch we walked down the street to the stock exchange and entered a small amphitheater on the second floor. Here we sat in overstuffed theater chairs to view a twenty-minute film on the operation of the Paris Bourse. After a two-and-a-half-hour lunch and three wines, no one was awake when the lights were turned on again. It was especially courteous of our hosts to think of arranging an opportunity for the traditional European "siesta."

In an investment partnership, which so often must take place as one internationalizes a portfolio, class is important. Although there is a tendency to think of class-consciousness within the investment field as snobbery (and it may be), if one is going to turn over sums of money to another banking house in another country with an entirely different set of rules and to another person, predictability of behavior is critical. Individuals who have gone to school together, worked together as juniors, and played and socialized together are likely to be far more predictable than those who have developed only a recent commercial relationship.

In the continual discussion among institutions as to who is friendly with whom, friendship becomes in effect their technique of determining predictability. In every country visited it was de rigueur to attend a lavish banquet at night (if not also at noon). Each member consequently suffered from traveler’s indigestion. We soon developed a bond of sympathy that was founded upon the necessity of frequent and sudden departures from the meeting room.

As a result of banquets night after night, I now have a first-hand understanding of the problems of people in the diplomatic corps. As I said in a toast in Germany: "Napoleon’s army is not the only group to have traveled on its stomach!"

The cleavage between institutionalized and noninstitutionalized securities is much sharper in Europe than in the United States. Because the markets are thinner and the commercial base narrower, each European country has only a few major capitalized companies that can be internationally owned. These sell at triple or quadruple the prices of the smaller companies, which are essentially owned in the domestic markets.

We visited several of the major companies in each country—Sieman’s in Germany, Phillips in Holland, and others. Presentations at these companies were facsimiles of their American counterparts: a briefing by officials in the equivalent of the planning department, a luncheon, and, quite likely, a product demonstration.

I left with the impression that each company felt that conditions in its own country were not very good, but that expansion opportunities in all the other countries were excellent. In other words, the European company saw only limited opportunities in its traditional markets but expected to be able to move into somebody else’s market. On an overall basis, this expression did not augur well for the likelihood of success.