Chapter 5. Ariel

Ariel Rosenberg was just twenty-two when he arrived in New York. His life had been ripped apart by forces he could not understand. Only a year earlier he had been the proudest man in Mastok, a small village south of Uta just west of the Urals. After a seven year apprenticeship beginning when he was just thirteen years old, he had at last earned the prestigious right to call himself a journeyman tailor. With this new prestige, he won the love of his life, and married a pretty dark girl named Rachel. His parents were themselves of modest means, but on the occasion of this wedding they had, with considerable personal sacrifice, endowed him with his greatest treasure, a pedal sewing machine.

Perhaps his happiness had blinded him to the approaching danger, so when the decree came that no non-Russians could own a business or a home, he was totally unprepared. Others had secretly moved to the big cities, and had hidden their Jewish heritage in the clutter of urban society, but in Mastok, there were only a dozen Jewish families, and all were well known. Within days of the decree, he, his young wife, and his aging parents set out on foot for the long journey to Warsaw where his Uncle lived. Their worldly goods were stacked high on a hand drawn cart, topped by the precious sewing machine. In Warsaw, he left Rachel, who unbeknownst to him was pregnant with their first child, and his parents, while he set out to voyage to America.  He would send for them soon, he had promised, even as he fought back the fear that this may not be a promise he could keep.

It did not take the young man long to realize that the welcome in this new country full of promise was something he himself would have to make, as opportunity did not actually knock at all. It had to be sought out and seized upon. Unfortunately, the reality was that there were insufficient opportunities to go round, and sometimes one had to be snatched from someone else, someone less crafty and cunning than oneself.

Craft and cunning were skills Ariel found he had in good measure, and soon he established himself as a successful tailor on the corner of 10^th Avenue and 36^th Street. His greatest happiness was four years later when he welcomed the arrival of his wife and three year old son. His mother came too, but his father was too ill to travel, and indeed he died in Warsaw before the rest of the family completed their terrifying voyage across the stormy ocean.

The family settled down into their new life with gusto, with Rachel helping in the business, and mother running their home above the store. Their business flourished, and the shop became well known as a source of fine hand crafted apparel. The building was a three level sandstone, with an imposing façade, and grand entrance opening into a bright and airy showroom. In the back, hidden from the view of customers was a large room, this one with little ventilation, and even less natural light. During the day, the room was illuminated by stark electric lamps, and buzzed with the sound of twenty sewing machines operated mostly by women who had not been as lucky as Ariel. At night, as the hum of the machines subsided, and the lights extinguished, the women had nowhere else to go, and they crowded into an even smaller space a sort of mezzanine over the storage area at the back of the room. Here they cooked, ate, washed sometimes, slept, and not infrequently entertained male friends, most often as a supplement to their meager wages.

Ariel had initially resisted the use of the mezzanine as a living space but had succumbed to the pleas of early employees, who had promised to find an alternative. The separate entrance into the lane behind the store, allowed the girls to come and go, and soon both parties came to accept the arrangement as part of life.

Young Ariel Jr. grew up fast, and was the light of his parent’s life. When Rachel had delivered the boy in the spring of 1900, she had named him Ariel, so that even if he had never met his father, he would always know his name. Both she and Ariel Sr. knew they would never have another child, as the birth had not been easy, and they let no opportunity for his education pass them by. The boy learned fast and well. It was not his parents fault that there were also lessons to learn in his neighborhood and his world that were not taught in schools, and he learned these lessons well too. Nor could they predict that his blend of athleticism, good looks, and raw intelligence would propel him to a leading role in the street world they knew existed, but had never really experienced.

The first signs of young Ariel’s preeminence in the street world were his clothes. There were fine styles more reminiscent of Paris than New York, shoes from Milan, and hats from London. His friends, who seemed to admire him immensely, were also well dressed, always with money. Ariel Sr. and Rachel, well-off themselves by almost any standards, could only watch with rising concern.

The twenties were great years for criminals. Prohibition was a godsend. No one in the mainstream of the population really believed that bootlegging was a crime, and even the police only bothered the gangs when they bothered them. By the time the party ended in 1933, Ariel Rosenberg Jr. had become a wealthy man, and he moved his family to Long Island where they settled in the small town of Far Rockaway. Here he married and took on the trappings of a successful businessman.

The move out of New York had not been entirely by choice. During the heady days of prohibition there was more than enough action for all the gangs of the area, but as the gravy train dried up, so the bigger families turned on the heat. The several Jewish and Irish gangs had been tolerated by the Italians mainly because they provided excellent logistic support to their operations, but the message was soon clear, “Retire gracefully, or you will be retired.”  Apparently Ariel Jr. may not have accepted the full implications of the message because just a few years after the birth of his second son, he and his young wife died in a very suspicious auto accident while returning from an evening at the theater.

Raised by their grandparents, Ariel Sr. and Rachel, in the old brownstone in the city, the two boys lived a comfortable middle class life wanting for nothing. It was strange therefore that Jeff, the youngest of the two had several brushes with the law involving petty pilfering and shop lifting and were it not for his grandfather’s eminent position in the community, he would undoubtedly have become involved in the juvenile correctional system.

 

Once through college, and at last with the ability to earn his own income, the young Jeff began his career selling penny stocks on the telephone and watched with fascination how some would provide their purchasers with bountiful rewards while others, indeed most, would be a disaster.  After his own first such disaster he vowed to never let it happen to him again. He very quickly learned what became his first law of eco-dynamics, “never buy any stock unless you have knowledge, preferably knowledge that very few others have.”

Applying this principle he amassed his first million by the time he was twenty seven and several more followed in quick succession. His second law of eco-dynamics was “It’s easier to make lots of money if you already have lots”.

 

By the beginning of the eighties the mutual fund “bug” had truly bitten the financial community. It was not lost on Jeff, nor indeed on a host of other financial guru’s, that this was a much easier way of getting his hands on other people’s money. Rewrite Jeff’s second law to read “It’s easy to make lots of money for yourself if you have lots of other peoples money to play with” and you have the mantra by which the world of finance works. So Jeff launched the first of several mutual funds creating what would become Franklin Capital, eventually a stable of 22 such funds. His timing initially proved to be inopportune. The financial turmoil of 1982 when interest rates climbed to the mid twenties, and stocks plunged to historic lows was most stressful and while the Rosenberg fortune was never in any real danger Jeff emerged with the belief that there had to be a better way.

Watching the ticker one day, Jeff noticed the same stock pass by in three consecutive trades, each at a slightly higher price. Who, he wondered idly, was the first seller, and who was the last buyer. Then, germ of an idea came to him.  At first Jeff tried the idea in his own family of funds with limited but definitive success. As he later explained it to a group of his friends in the industry when persuading them to join him in his program, “It all depends on statistics. The price people pay on the Stock Market is really the median of all the prices that the group of players would be prepared to pay on any one day. Now if you take out a section of that group and you artificially change that sub group’s median, even though you have had no effect on the rest of the group, you will push the median for the group as a whole to a new level. As long as you can adjust the subgroup’s median at no real cost you have achieved an effective change in the price on the market. The best part of the system is that it is entirely legal.”

 

In the highly competitive mutual fund market, success is measured in hundredths of a percentage point. Each quarter the funds performance is compared with the indices, and beating the Dow and all the other funds spells the difference between success and failure. Jeff was good, but not always good enough. The system made the difference. His funds began to regularly outpace the market just enough for him to attract more than his fair share of the new unit sales, but he knew that to be really successful he needed the cooperation of others in the industry also.

Very selectively he approached some colleagues in the industry. At first he was joined by just a few other fund managers but gradually this number grew. Most of the stocks selected for the process were so called small caps, companies with relatively low capitalization's, and by their nature often high tech. They were suitable candidates because it did not take enormous resources or risk to have a significant effect on the price, and because the companies were not actually making any money, profitability therefore did not cloud the issue. As more and more companies seemed to be making price advances, so the excitement grew, more and more cash was channeled to the mutuals, more and more pressure was exerted upon the managers, and the cycle spiraled on.

 

The part that all the participants did not expect was the effect their actions began to have on overall market sentiment. The historic growth of ten to twelve percentage points per year over the entire market turned into twelve to fourteen, then sixteen to eighteen. Where would it end, and how long could it last?