Coping in the Aftermath : Californians Playing Market More Conservatively

<i> Times Staff Writer</i>

For many New Yorkers in the heart of the U.S. securities industry, the Crash of 1987 seemed like the beginning of the end. Hundreds of brokers, traders, research analysts, back-office workers and others--who reaped the fruits of the 1982-87 bull market--lost their jobs or high salaries in the weeks after Oct. 19. Trading volume skidded. The mood on Wall Street changed from euphoria to malaise.

But in Southern California, gloom and doom never set in. Layoffs have been kept to a minimum, and some firms have even continued expanding. Money managers, away from Wall Street, have maintained a more positive outlook and in many cases are outperforming their New York counterparts.

Nonetheless, Southern California has not totally escaped the realities of the crash. Small investors here still are leery of stocks, more enamored with the safety of money market funds, certificates of deposit and other conservative investments. Brokers, money managers and other market pros are changing their investment strategies to adapt to a market where the sky is no longer the limit for the Dow Jones industrial index.

Here is a look at the experiences of five diverse Southern Californians--from an individual investor to a program trader--who continue to cope with the Crash of 1987:



The bull market of 1982-87 was good to J. Jay Shapiro. But today, the 59-year-old Tarzana attorney doesn’t want any part of the market.

While Shapiro still holds a few stocks that he owned before the crash, he sold most for a nice profit in June, 1987--four months before the collapse. He has not bought any new shares since.

“We’re in a bear market; everything we’ve gained has just been a rally in a bear market,” said Shapiro, adding that his opinions are influenced by newsletter editors who also are bearish these days.


Now he invests in Treasury bills and short-term municipal bonds--two of the safest investments he can get.

“There’s nothing wrong with being in T-bills. I don’t think I’ll do as well in the stock market, and there’s no risk in T-bills. And short-term munis are paying so well, and I’m doing something safe.”

Will Shapiro ever plunge back into stocks in a big way? Certainly, he said, but not until the market drops far lower than it is now. Stocks, he said, make great long-term investments, but now is not the time to buy.

“I don’t intend to go back in until we point to an end to the bear market, which I think is quite a bit away.”


No group of individuals was subjected to more criticism and finger pointing after the crash than program traders--the math-savvy professionals whose computerized buying and selling of massive blocks of stocks and stock index futures was widely blamed for aggravating volatility and the market meltdown.

At the center of that criticism was John W. O’Brien, chairman and chief executive of Leland O’Brien Rubinstein Associates of Los Angeles, the biggest practitioner of portfolio insurance, a type of program trading that sought to help pension funds hedge against market losses. Portfolio insurance drove stock prices down in the crash, some critics charged. Others claimed that portfolio insurance, when put to the ultimate test in the crash, didn’t work. Clients still lost money.

Leland O’Brien Rubinstein has paid a price for such heat. In the year since the crash, its volume of business conducting portfolio insurance strategies for clients is down. A greater proportion of its business is coming from Japanese investors and from those wanting to hedge interest rate and currency risks.


But the firm is not sitting still, O’Brien said. It hopes to win regulatory approval next year for new risk-hedging securities it is developing that will address some of the weaknesses of portfolio insurance, O’Brien said.

Does O’Brien feel bitter about the crash experience? Not so much anymore, because attention now has been directed more at improving the mechanisms of the market and away from passing blame on program trading and portfolio insurance, he said.

“It was clearly unfair but probably inevitable,” he said of the blame. “People were looking for a quick answer and easy solution, and the activity that stood out most dramatically, being new and large, was portfolio insurance.”


James B. Rea Jr. and his Los Angeles-based Rea-Graham mutual fund weathered the crash as well as could be expected, posting only minimal losses. And the fund has performed moderately well since, gaining some 9.48% so far this year.

But like many other stock fund managers who have done well this year, Rea is finding that success in a bear market does little to excite investors about buying fund shares.

“Our fund lends itself to this kind of market, yet I’m not seeing the sales activity like I’d want to,” Rea said.

Nonetheless, Rea isn’t changing his fund’s philosophy one iota. That approach is based on the conservative, “value-oriented” strategy developed by legendary investor Benjamin Graham and applied by James B. Rea, Rea’s father. By applying strict criteria to indicate whether stocks are undervalued and thus suitable for purchase, the fund was only 25% invested in stocks at the time of the crash. Consequently, it lost only 3.7% in October, 1987, far less than most other stock funds.


Following the crash, Rea saw bargains galore and thus bought shares, raising the fund’s percentage in equities to 40%. But since June, the fund has soured on stocks, dropping to only 20% in equities. The rest is in short-term government securities and other conservative money market instruments.

Why won’t investors buy shares of stock mutual funds, even those like Rea-Graham with a decidedly conservative bent?

“I think people are scared,” Rea said. “A lot of people lost money on Oct. 19, a lot more than will admit it.”


As a “back-office” employee in the brokerage industry, Kathleen Balassi knew she was more prone than her broker colleagues to getting a pink slip when business declined. After all, back-office workers process trades; they don’t bring them in. So when trading volume drops, so does the need for clerical support.

So when Balassi, 29, was laid off in January from her job as a margin-account clerk at Morgan, Olmstead, Kennedy & Gardner in Los Angeles, she was hurt but not devastated. Fortunately, Balassi was more marketable than many other back-office workers who also lost jobs following the crash. She was taking night courses at Cal State Fullerton, aiming to get a master’s degree in business administration.

“Economically, I couldn’t afford to not work. But, in a way, I suppose it was a kick in the pants to know that . . . if anybody had to be laid off, I was better equipped academically than other people in my department. Several people didn’t have undergraduate degrees and had been in the business seven to 10 years and didn’t know anything else.”

But even after getting her MBA in May, finding a new job wasn’t so easy, thanks to the industry slump. Balassi said she sent out close to 50 resumes and interviewed with seven firms before finally landing a job in August as a marketing assistant with Boston Co., a money management firm.

Does Balassi feel any regrets about working in the securities industry? Not at all.

“I still feel this is the industry I belong in. I’m out there and willing to give it my all to succeed. I don’t think the industry let me down. All industries have cycles--you just have to focus on the positive aspects.”


After the crash, many retail stockbrokers have been forced to sell a greater proportion of non-stock products, such as CDs and bond mutual funds. But Jonathan J. Pallin is bucking the trend.

The broker at the downtown Los Angeles office of Prudential-Bache Securities continues to sell stocks with about as much success as before the crash. His sales volume is about the same as before last October.

Pallin, who considers himself one of the top-producing salesmen in his office, said the difference is that now he’s working harder. In a less exciting market, he said, brokers must work more diligently for clients, looking for special situations or plain old good ideas.

“There is a more subdued environment out there, so you need to have a more compelling reason to (get clients to) make an investment,” Pallin said.

“The emphasis is more on stock selection and industry selection, rather than just buying the top 50 capitalized corporations because you think the market is going to 2,400. . . . Before the crash, most everything was moving, and stock selection was not quite as important.”

To be sure, Pallin recognizes that his clientele--mostly high-income executives--is not typical of the average investor. For brokers with less-affluent clients, times are tougher, he acknowledges.

“There’s been an absolute flight to quality, no question. Fixed-income products are much more fashionable than growth products. . . . But higher-scale clients and more sophisticated clients are still there and are very much interested in making money,” Pallin contends.

“There’s an enormous amount of individuals who really need attention and advice. That’s refreshing if you’re willing to do the work now.”