On the Brink of Greatness

One of my favorite books about the investment world isn’t a how-to-get-rich book at all. Its title is “Do You Sincerely Want To Be Rich?: The Full Story of Bernard Cornfeld and I.O.S.” Published in 1971, it’s the true story of Bernie Cornfeld, the one-time Brooklyn delivery boy who founded Investors Overseas Services (IOS), a mutual fund selling company based in Europe that shone like a star in the go-go 1960s but stumbled when the market began to tank in 1968 and collapsed in scandal in 1970.

Cornfeld succeeded–for a while–by guaranteeing outsized results. But an ambitious salesman is always tempted to promise more than even a very talented fund manager can deliver, especially when a bear market starts to gnaw on highly leveraged investments. IOS, like many similar enterprises, ran into a rough patch and began using newly invested money to cover existing obligations. Cornfeld wound up victimized by an even bigger crook, Robert Vesco, who came to IOS as a white knight, but wound up vampiring off $500 million of IOS’s cash reserves to cover his own investment losses.

Cornfeld spent some time in a Swiss jail and was forced to spend his final days in Beverly Hills with just one mansion. Tragic. In 1973, Vesco fled the U.S. with a reported $200 million and lived a colorful, scam-filled life before dying in a Cuban prison in 2007. But I digress.

Cornfeld himself was a classic huckster and playboy who lived very large during a time when that was less usual than it is now. But it’s not his (admittedly fascinating) life that interests me. Rather, it’s the famous one-line pitch that he used when he was still selling mutual funds: “Do you sincerely want to be rich?” It’s a psychologically astute question, because it’s really hard to say no. And once you’ve said yes, you’re probably hooked for whatever the salesman wants to sell you.

If you “sincerely want to be rich,” the salesman will continue, “you need to give me all your money to invest.” (If you only give part of your money, your sincerity is suspect.) And the rest is simple … at least until the pyramid collapses and your salesman shows up in handcuffs being stuffed into the back seat of a plain sedan and driven downtown.

Getting Rich Takes Work

A con artist will always tell you that getting rich is simple. That, as we all know is hogwash. The only simple way to get rich is to buy a lottery ticket. And since hitting the lottery (a Big One) is about ten times less likely than your chance of being killed by lightning, it’s not a good plan to organize your life around.

Getting rich takes work. It takes time. It requires a willingness to take risks and the gumption to keep trying when an attempt fails. And you may have to give up something you love (leisure time, a new kitchen, peace of mind) to get it. Getting rich is likely to be a full-time job, and you should regard anyone who dangles the promise of easy wealth in front of you with the sincerest skepticism.

About twice a year, when the payoff rises to an astronomical amount, everyone at Cabot kicks in a dollar and we buy a wad of lottery tickets. (We always include Tim, the boss, so he won’t feel bad when his entire staff fails to show up for work.) It’s fun to fantasize about what we would do if we hit the big one, and to swap stories about how sudden wealth has ruined the lives of so many lottery winners.

But deep in our hearts, we all know that sincerely wanting to be rich involves more than a dozen quick-pick lottery tickets. If we were sincere, we’d be starting new companies and acting more like venture capitalists.

Ultimately, the more important question is: “Are you willing to devote your life to being rich and to subordinate everything to that end?”

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The Beijing Gold Rush

Not that you asked …

I haven’t been getting a ton of requests for my opinion of what China’s dominance at the Olympics really means, but that’s not going to stop me.

My big reaction is … well, what did you expect?

When you have a country of 1.3 billion people and a national government with virtually unlimited power, an overflowing treasury and a big-time hankering for gold medals, chances are that’s exactly what they’re going to get. No surprise there.

For a long time, China has systematically identified talented athletes at a very young age, and they stepped up their efforts well in anticipation of the Olympics. The athletes selected were required to devote themselves totally to their preparation, with first class coaching and state of the art facilities. They knew they were expected to win, and many of them did.

It’s the same plan that used to work for East Germany, the U.S.S.R. and other countries. If the athletes involved really have the choice to participate or not, I say more power to them.

My only quibble is that there may be some who think that China’s success indicates some superiority on the part of Chinese athletes in general. I doubt it.

Personally, I’d be happy for the U.S. to make even greater efforts along those lines. There’s something noble about an athlete who holds down a full-time job while trying to train for elite competition. But there’s something a little discouraging, too; you always wonder what kind of potential might have been buried under the compromises of everyday life. Athletic competition may be relatively unimportant in the grand scheme of things, but Olympians carry a little bit of our dreams with them into competition. If our athletes are willing to devote their lives to the pursuit of perfection, I’m willing to support their quest … and see how the Olympics grades the results.

It will be very interesting to see whether China maintains its high level of interest (and financial commitment) through the games in 2012. My bet is that they will, but that’s just a guess. Still, I’d love to see what would happen if the U.S. picked up the challenge and gave more of our athletes the support they need to work on their skills without distractions (as the Chinese have done).

Olympic ideals–which used to favor the strictly amateur and even looked down on coaching-have morphed quite easily to include professionals. I say let’s get things back on an even footing. It could make for some really riveting events in London.

My investment idea today is a CRO, a Clinical Research Organization, that provides drug development services to pharmaceutical companies. The name is Kendle International (KNDL), and it’s one of a number of firms that take advantage of specialization and efficiency to organize clinical trials-from Phase I to Phase IV-while managing regulatory affairs, recruiting subjects, crunching the clinical data and writing up outcomes and educational publications.

With connections in 90 countries worldwide, Kendle can find subjects for any kind of clinical trial at much less cost than inside the U.S. The company partners with big pharmas early in the development process and handles as much of the clinical trial path as the client wants.

I picked Kendle rather than its competitor Icon (ICON), which has a beautiful long rally on its chart, primarily because of that rally. KNDL topped out at 52 back at the beginning of the year and has been correcting ever since, dipping to solid support at 36 in May, June and July. The recovery since then has been enthusiastic, and the stock is just coming off a correction from 49 back to 46, leaping above 50 to challenge the January highs.

With biopharmaceutical stocks doing well as a group, I think playing the trend by buying the companies that provide support services just makes sense. It spreads your risk around a little. And in a touchy market environment, risk control should be the top priority on your list.

Paul Goodwin

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