At the pinnacle of his career, Morris Smith obtained one of the most coveted positions in finance. He was chosen to succeed Peter Lynch, the undisputed all-star of the mutual fund world, as manager of the Fidelity Magellan Fund. Smith, an Orthodox Jew, recently addressed an assembly of students gathered in Weissberg Commons. He recounted his years at Fidelity and offered constructive advice to those students planning careers in finance. Smith also discussed broader issues relating specifically to functioning successfully as an Orthodox Jew in the field of investment management.
His Odyssey
Fresh out of Queens College, Smith embarked on a career in accounting. Although he was very happy being an accountant, his wife (a Stern College graduate), mother-in-law, and mother encouraged him to attend business school. He acquiesced and sent an application to the world-renowned Wharton School of Business in Philadelphia. After receiving his acceptance letter, he moved with his wife to Philadelphia for two years. Out of a class of some six hundred students, Smith was one of two Orthodox Jews.
Upon graduating from the Wharton School, Smith was hired by Fidelity as an analyst. The economy was pretty lousy at the time; a recession had been plaguing the country since 1980. Unemployment was at 10% and the job market was quite tough. When Smith started working at Fidelity in July of 1982, the Dow was at 780. There had been a 16-year bear market during which the Dow fell 22%.
In the mid-1960's, Fidelity was managing four billion dollars in equity assets. By 1982, total assets under management had plunged to three billion dollars. The company's survival through the tumultuous 1970's, according to Smith, can be attributed solely to their having developed the original money market fund that allowed check writing from one's own account. "They were also a very successful venture capital investor in the mid to late 1970's and were one of the original investors in MCI," he explained.
As an analyst, Smith covered the lodging and gaming industries and all of the housing-related industries. The lodging and gaming industries included all of the gambling companies, and the housing-related industries included the homebuilders, construction material companies, and asbestos companies. Because the country was in the midst of a bad recession, interest rates collapsed, and all of the housing-related industries took off. "You could have taken a dart and thrown it at any home building stock and the stock would have done well," recounted Smith.
After about a year, Fidelity asked Smith to accept a position as an assistant on the Fidelity Fund, the flagship product at the time. The fund was a general equities fund that invested in many different industries. Working as an assistant on the fund, Smith got a sprinkling of experience in many different industries.
In the early 1980's, Fidelity started the Fidelity Select Portfolio Funds, a group of funds that specialized in individual industries. Fidelity started a new product within this group of funds in 1984 called "The Fidelity Select Leisure Fund" and drafted Smith to manage the fund. The Leisure Fund was born with $500,000 in assets and ballooned to over $340 million in assets within a short two-year stint. The primary reason for the growth was the fund's investments in areas that flourished during the period. The bear market had come to an end in 1982, and markets began to rally. Any historian of the market will know that the mid-1980's was a period in which media became extremely hot. It was the golden era of the cable television industry, and Smith invested quite impressively and benefited significantly. Smith considers himself extremely fortunate because he began his career at the beginning of a major bull market.
In June 1986, Paul Stuka, who had been managing the billion-dollar "Fidelity Over-the-Counter Fund" decided to leave the company and start his own hedge fund. Smith was then asked by Fidelity to take over the fund. Because the over-the-counter market in the mid-1980's was highlighted by companies that were in technology, Smith knew he had a new universe of stocks that he had to learn. He embarked on six trips to California over a period of twelve months in order to learn technology. Smith summed up his approach by explaining that "even though you are managing money, you never stop being an analyst."
The most challenging situation during Smith's reign at the OTC Fund came in 1987. The Dow plummeted some 30-40% in the span of two or three weeks, highlighted by the infamous Black Monday when the market crashed roughly 22% in a single day. Both the OTC market and the OTC Fund collapsed into negative territory and the fund was trailing the market. "That was a once-in-a-lifetime experience," recalled Smith. "It was probably the scariest experience I've ever had in anything related to the professional field of management."
By selling 5% of Magellan's top twenty positions and all of the fund's foreign assets, Smith reduced the fund's exposure to the market. Consequently, he was able to handle redemptions (requests to sell out of the fund) reasonably well. On October 6, 1987, the OTC Fund carried a value of $1.432 billion. By October 28th, one week after the crash, the fund's assets had crumbled to a mere $560 million. "The drop was partially due to the decline in stock prices and partially due to the redemptions," Smith explains. He deemed the episode simply "humbling." Smith believes that one of his most sound decisions revolved around his refusal to react defensively and sell everything. His confidence was rewarded, as the market rallied strongly in December and the OTC Fund beat the market for the year.
In 1990, Peter Lynch, the Babe Ruth of the investment business, decided to leave Fidelity and retire. "When he announced his retirement, it was front page news in The Wall Street Journal, and it was on all of the radio and television stations," Smith remembers. Fidelity asked Smith to take over for Lynch, who had been managing the thirteen billion dollar Fidelity Magellan Fund, and Smith quickly agreed, deeming it "one of those once-in-a-lifetime opportunities."Lynch left at the end of May, and Smith began his term on June 1st. Things went well for the first six weeks. At the end of that span, however, the next major market correction began. At that time, Saddam Hussein was causing trouble in the Middle East, and markets went into turmoil. Additionally, a major banking crisis at the time had weakened the market. During the late 1980's, every major bank in this country took on unsound commercial real estate loans. If it weren't for the Federal Reserve, these loans would have probably wiped out this country's entire banking industry in 1990-91. "The Federal Reserve was smart enough to ease interest rates dramatically and that got the banks through a very difficult period," recounted Smith.
In late 1990 and early 1991, the country went into a recession. Stock markets fell dramatically, and so did Magellan. About three months after Smith's taking over of the fund it was down 20%. According to Smith, this was one of his most difficult periods.
In early 1991, the market had started to show signs of rallying, and Smith was very aggressively invested. He figured that the possibility of war was discounted into the market because everyone knew it was going to happen. Additionally, he predicted that the country would emerge from recession within six months. Smith was on the money; as the day the Gulf War began marked the ascent of the markets took, and 1991 turned into a tremendous year. By the end of the year, the Magellan Fund shot up over 40%. Commenting on his dismal performance in late 1990, Smith emphasized that "one should not judge an investment manager based on his or her weekly performance."
At Magellan, Smith used to log seventy hours a week. "There was a lot of pressure to perform," he recalled. In the springtime of 1992, Smith decided that he would retire from Fidelity because he was getting tired of running the fund. "I had accomplished the various professional goals that I had set out to achieve. I had proven that there was life after Peter Lynch," he remarked. At the time of Smith's departure, the value of the Magellan Fund exceeded twenty billion dollars.
Commenting on his decision to leave Fidelity, Smith quoted Vince Lombardi, former coach of the Green Bay Packers. "Vince Lombardi was a very big believer that there are three things that are very important in life - your religion, your family, and the Green Bay Packers. I could say the Magellan Fund. Vince believed in what he said, but he got his orders all mixed up, and I think that's what happened to me. I kind of believed in that tripod; however, I felt to some degree I had my priorities a little bit mixed up. The job was taking up so much of my time and I really wanted to spend more time with my family and really doing some more religious studies."
After handing in his resignation to Fidelity, Smith packed his bags and moved with his family to Israel for the next seven years. Today, however, he and his family are back in America. He spends his days learning, managing his own money, and contributing his time to various tzedakah organizations. "I try to learn roughly thirty hours a week, and my learning is now the anchor of my week. I love my learning and I have become a big Daf Yomi fan. I made my first Siyum HaShas last year," he explained to an intrigued audience.
Religious Observance and Investment Management
Smith offered students advice on incorporating religious observance into the field of investment management. As an Orthodox Jew who reached the apex of the financial world, Smith knows better than many the trials and tribulations that present themselves in the workplace. "Whether or not you are wearing a kippah, you are really representing Hakadosh Baruch Hu and the Jewish people. There is an issue of tikkun haolam [improving the world] involved, and when you can present yourself in a way that speaks very well of yiddishkeit, you're doing a tremendous kiddush Hashem. Unfortunately, when the opposite happens, it is a tremendous chillul Hashem," he remarked. He further added that "being frum in the investment management business is a challenge, but a challenge that is a lot more manageable than it is in some other fields. The nice thing when you are on the buy side (investing side) is that companies are catering to you. Companies were able to put up with my crazy dietary food requests or wearing a yarmulka. I never experienced any anti-Semitism from any companies that I visited over all the time periods that I was at Fidelity. Issues of Shabbos and kashrus were never a problem," he told the students.
Smith encouraged students who wish to continue learning while they are working full time, to add one half-hour onto their day. "I am really a believer that everybody can extend their day by one half-hour. If you want to be successful in learning when you work full time, I think this is critical. Most of you can probably get up half an hour earlier or stay up a half-hour later at night and learn during that half-hour. A half-hour a day is 150 hours a year. That is a tremendous amount of time to learn. When I was at Fidelity, I used to learn Mishnayot on the trains commuting to work. I did my first siyum of Shisha Sidrei Mishna in 1996 in Israel."
Advising Yeshiva Students
As he concluded his remarks, Smith offered his take on the world of investment management and provided some valuable insight for students hoping to enter the field. "One of the great things about the field is that you are so in touch with everything that's going on in the world. It's unbelievable. I could tell you things that are coming out in technology, in biotech, or in healthcare a year or two from now. You are really cutting-edge on all the changes. The intellectual stimulation of talking to companies plus the challenge of trying to win in the investment business is tremendous. It is a very unique field. You can't hide your results. At four o'clock everyday, you know how you did that day; there is no hiding," Smith explained. "The other thing that's so wonderful about it is that in a zero-sum game when you beat the opposition it is a great personal feeling."
"People often ask me what the key aspects are to being successful in the business. There are two things that I think are critical to be successful. The first thing is flexibility. You have to understand that when there are changing trends, you have to be flexible and understand those changes and adapt your investment style for that changing environment. One of the biggest mistakes investment managers make is that they live in yesterday and forget about today," Smith told his audience. "The second thing is a proper mix of what I call ego and humility. On the one hand you have to be humble because this is the sort of business where the second you think you have it conquered you just sort of get decimated again. On the other hand, you need an ego also. If you have no ego, you will never have the impetus, you will never have the guts, to make the critical investment decisions necessary to be successful."