Unwinding with a Charleston

Having given up golf, cards and his fund because he was too intense about them, Dreyfus took up tennis - and plays the game with grim intensity.

Between cards and weekend golf Dreyfus had little time for Wall Street.“I had a good instinct for trading and I was pretty good at charts,” he says. “At my first job my boss was a chartist. I kept them for him, posting the high and low each day on individual stocks and drawing a line at the end of the week from top to bottom.” But as a customers’ broker he was timid and retiring. “He wasn’t very good,” says his old boss. His problem was that he had no stomach for saying to a client, “I bought his stock at 50, now it’s 40 and I think you should sell.” Then, in 1946, Dreyfus’ life changed suddenly. One of his wealthy golfing pals, a department store executive named Jerry Ohrbach, helped him buy a seat on the New York Stock Exchange. Within two years he was head of his own brokerage house. But 2 l/2 years after that the young firm of Dreyfus & Co. was on the verge of collapse.

“I was trying to run a business with very little knowledge and very little experience,” Dreyfus says. In addition to limited knowledge Dreyfus had no research department and no equity. All he did have was a black eye in the trade. A trading infraction by an employee caused Dreyfus to be suspended by the Curb Exchange (now the American Stock Exchange) for three months. Customers drifted away. But Dreyfus had trained himself never to complain about bad cards. By his code this was just as inexcusable as a golfer complaining about putting badly. “You say that and it’s an excuse for defeat in advance,” he says. “You putt poorly just to prove you’re a good prophet.”

Dreyfus reacted by deciding that the time had come for him to either put up or shut up. He cut his own salary to zero and lived for the next year on some small savings and on his considerable winnings at gin rummy. With $20,000 of borrowed money—roughly what he had been making as senior partner of his firm—he embarked on the advertising campaign that was to make his name in Wall Street. In Schwartz’s Restaurant, a few doors from the office he then had at 50 Broadway, he personally worked out the details with an agency man in endless sessions over liverwurst, Swiss cheese and iced tea (Dreyfus limits his alcohol to wine with dinner).

Beginning in 1950, the conventional decor of the financial pages—sober compositions of black type surrounded by discreet white space—was disrupted by the appearance of Dreyfus ads which consisted largely of cartoons and old print illustrations accompanied by catchy captions. One of them showed the awesome visage of an African chief above the caption, “Confidentially, I`m bearish.” Another portrayed Columbus as “America’s First Speculator.” The unorthodox approach paid off. “We weren’t doing any business,” says Dreyfus. “Then all of a sudden we were.” In 1951 the now prosperous firm won the Standard & Poor`s award for advertising. But by that time its ingenious and thoroughly aroused proprietor was already moving in a wholly new direction. Dreyfus had become fascinated with the idea of mutual funds. Why, he wondered, weren’t brokerage houses sponsoring more mutual funds? Quite apart from the slice of the premiums paid by buyers of fund shares to the operators of the fund, there would be the healthy annual management fee paid by the fund to its operators and also the considerable commissions that would, of course, accrue to the brokerage house as it handled the fund’s day-by-day transactions in the market. In 1951, prompted by this twofold attraction, he had taken over the small and faltering Nesbett Fund, set up a corporation to manage it with himself as president and changed the name to Dreyfus Fund.

The fund’s policy, he decided, would be flexible, not to say aggressive. “We’re interested in outcome [capital gains] and not income [dividends],” he said. His policy, would be to operate on what is known as the “technical side” of the market, playing its ups and downs. But for almost two years, while he was working out a system for doing this, Dreyfus marked time with his fledgling fund. He applied himself, as though he were coping with a problem in cards, to the problem of discovering what made the stock market go up and down. “The same laws of percentages and probabilities are involved,” he explains. “And, people’s emotions come into it, too.” As a first step Dreyfus divided all buyers and sellers of stocks into two categories—speculators and investors. Upon further study he concluded that while the investors (those hoping that the prices of their stocks would increase over the long pull) far outnumbered the speculators (those who traded for the quick profit), the latter exerted far greater influence on market fluctuations. The speculators, to Dreyfus’ mind, were the Jeb Stuarts of Wall Street. They acted in concert, getting in and out of the market very fast. By using the pyramiding effect of margin and credit, they caused the upward surges and triggered the downward spins.

Dreyfus decided to operate against the speculators. But to play this risky game he needed a special intelligence system—some beacons and barometers that would give him a special advantage. The ordinary clues wouldn’t do indicators like housing starts, machine tool orders, railroad carloadings or unemployment. “The obvious just doesn’t work out in the market,” he says. “If it’s obvious, everybody sees it and there’s not much advantage.” The first clue Dreyfus seized upon was what is called the short interest. When speculators “go short,” they sell—at the going market prices—shares of stock which they do not own but borrow from brokers. Eventually the speculators must buy stock to replace the shares they have borrowed. They are gambling that, before they do, the price of the stock will have declined and they will be able to replace the borrowed shares for less than they received for selling them—and pocket the difference. Until Dreyfus started studying the matter, a large short interest was generally regarded as a pessimistic sign. But Dreyfus interpreted it simply as backed up buying power and therefore a manifestation of strength. In October of 1953, when the size of the short interest suddenly increased by 700,000 shares in one month, he made his first significant move with his fund.

Within a few days he shifted the fund`s position from a 50 percent investment in common stock to 93 percent—and caught the market taking off on an upward spiral. Among the stocks he bought for the fund were spectacular movers of the time, like American Motors and Lukens Steel. But in Dreyfus’ system what stocks he bought was less important than when he bought them—the exact timing of the purchase.

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