A Giant In The Bond World

Editor’s note: Today, Porter turns the Daily Journal over to his colleague, Distressed Investing analyst Marty Fridson. Marty spent years at leading firms like Salomon Brothers, Morgan Stanley, and Merrill Lynch. While doing innovative work in credit analysis and investment there, he became friends with the late Martin Leibowitz – the subject of today’s essay.

Here’s Marty…

There’s more to life than a yield curve…

Earlier this summer, I attended a memorial service for Martin Leibowitz, a giant of financial analysis whom I had the great privilege of getting to know when I worked at Salomon Brothers in the 1980s.

The event’s distinguished speakers explained how he revolutionized bond management. One opined that if Marty had published his work as an academic rather than a practitioner, he would have received a Nobel Prize in Economics. As it was, he published more articles in the prestigious Financial Analysts Journal than anyone else and won numerous awards for his contributions.

Even more impressive than the recitations of his extraordinary accomplishments was the praise of his character. On Wall Street, brilliance is rarely found in combination with humbleness, but Marty exemplified both qualities. People meeting him for the first time expected to be intimidated by his intellect, but he instead made them feel special by taking a sincere interest in them. One speaker recounted how, newly arrived from India and with little experience, he approached the legendary man fearing he’d be overawed by a barrage of technical talk far beyond his comprehension. But Marty most of all wanted to know what his name meant in Sanskrit.

Hearing these comments, as well as descriptions of Marty’s wonderful sense of humor and his devotion to his family, it occurred to me that he could have written another book just as successful as Inside The Yield Book (co-authored with Sidney Homer), which became the bible for newcomers to the bond business. If he’d distilled his approach to dealing with his fellow human beings into a volume along the lines of Dale Carnegie’s How To Win Friends And Influence People, it would have been a bestseller.

In the bond world, Marty transformed the way portfolio managers perceive their jobs. Before he came along, they basically had two options:

• Buy-and-Hold
• Try to gain an edge over a market benchmark, one bond swap at a time

That second option involved transactions such as switching to a longer-maturity bond, which will experience a bigger gain if interest rates fall – and being right about which way interest rates are headed. After Marty’s work became known, portfolio managers and chief investment officers saw the task as designing the most efficient portfolio to achieve the institution’s long-range objectives, for example, satisfying pension obligations or funding an insurance company’s liabilities.

Marty’s extraordinary influence over bond managers’ practices resulted from two factors. One was his application of highly sophisticated mathematics. The other was his ability to explain the practical implications of his findings in terms accessible to people lacking a PhD. A sad truth is that many supersmart financial researchers know how to communicate only with other quants and consequently have far less impact than they might.

Another key reason that Martin Leibowitz became the obvious choice to be the very first inductee to the Fixed Income Analysts Society Hall of Fame was that he sincerely and passionately wanted to get to the right answer.

That might seem the obvious way to go about things, but it’s not how all Wall Street research is done. Too much of it is conducted with an eye toward confirming a predetermined conclusion. Evidence that fails to support the desired message – “You should buy this!” – is excluded from the analysis. Marty had a master’s degree in physics and applied that discipline’s rigorous scientific method as fully as possible to finance.

As an investor, you need to be on your guard against research that doesn’t measure up to Marty Leibowitz’s standards. Make sure the findings are not just assertions, but instead are backed up by logically sound arguments.

When Marty started making his logically sound arguments at Salmon Brothers in the 1970s, his conclusions weren’t universally welcomed on the trading desks. He showed that the valuation methods then being used there were mathematically incorrect. The traders’ reaction was, “I’ve been consistently profitable. Where does this rocket scientist get off telling me I’ve been doing it wrong?”

Later on, though, they became more accepting of the brainy newcomer. The practice among traders was to agree to a transaction based on the yield of the bond they were buying or selling. To translate the yield into a price, such as 95.5, or $950 per $1,000 face amount, they’d go to the “yield book.” That was a thick volume containing rows of coupon rates and periods-to-maturity, matched up with prices.

But the coupon rates shown in the tables went up only as high as 6%. As rates rose above that level, the traders had to turn to another source. That was Marty, who had a computer terminal at his desk and knew how to get it to calculate prices based on the numbers they brought to him. The Wall Street Technology Revolution was underway and Marty Leibowitz was at the forefront!

Years later, I had the great fortune of getting to know Marty on a social level as a result of his involvement, along with his wife Sarah, in the Orpheus Chamber Orchestra. My wife, Elaine Sisman, is a musicologist specializing in Haydn, Mozart, and Beethoven.

At the memorial service, a chamber group consisting of orchestra members played some of Marty’s favorite pieces, ending with “Londonderry Air,” otherwise known as “Danny Boy.” That irresistible melody was a fitting tribute to a life very well lived.

Tell us what you think of today’s Journal: porterstansberrydirect@gmail.com

Good investing,

Martin Fridson
New York, New York