Wall St.’s Rocket Scientist
In a world full of promoters with get-rich schemes, Dennis A. Tito guards his formulas for wealth like a white-coated scientist protecting his laboratory secrets.
This former rocket scientist has built a career, a company and a fortune taking the personality out of investing. Believing money management is a science, not an art, Tito uses mathematical formulas to advise pension funds and weed out the good money managers from the bad.
After helping develop the trajectories for Mariner spacecraft to reach Mars and Venus while only 23, he went on in the early 1970s to found Wilshire Associates. Tito took the methodology used to project a spacecraft’s path and applied it to missions on Wall Street.
Since then, he’s made a fortune, conservatively estimated at more than $200 million--he owns 70% of Wilshire--trying to take the uncertainty out of Wall Street.
“You don’t get to Mars by luck. It’s like threading a needle 10 miles away to get there,” Tito, 58, said during a recent interview in the library of his Pacific Palisades mansion. “In dealing with the stock market, you could just throw darts and end up with a portfolio that might luck out and beat the market, but you don’t get to Mars that way.”
Wilshire Associates, based in Santa Monica, advises hundreds of large pension funds, including the massive California Public Employees’ Retirement Systems. The accuracy of its advice can help determine whether someone retires to a mobile home or a Malibu beach house.
Indeed, the man who once worked in a cardboard box factory now lives alone in a $20-million-plus hilltop estate, so high it looks down on Getty Center and city lights don’t dim his view of the stars. Some call the 30,000-square-foot villa “Ego Mansion”; others call its owner “King of the Hill.”
Considered one of the founders of what has become the lucrative industry of investment management consulting, Tito and the more than 250 specialists at Wilshire have helped shape how money is moved and managed throughout the world.
Wilshire is known for its emphasis on “quantitative analysis,” which uses mathematical tools to analyze market risks, as opposed to more traditional security analysis that scrutinizes specific companies.
“Finance has become extremely mathematical,” said Lang Wilson of Numeric Investors, a Cambridge, Mass., money manager. “We can use mathematics to figure out where the gains and risks are in an investment strategy. And Wilshire takes that approach. They are one of the most prominent forces in our industry.”
Though not a household name, Wilshire was the third-largest independent investment management consulting firm in the U.S. last year, trailing leader Frank Russell Co. in Tacoma, Wash., according to Nelson’s Guide.
Wilshire provides consulting to clients with nearly $500 billion in assets and directly manages about $11 billion in investment and pension funds. Most recently, Tito and his son Michael, 24, moved beyond giving advice to actually managing money for wealthy individuals. Clients include Richard Ferry, co-founder of executive search firm Korn/Ferry and Peter Mullins, a Los Angeles consultant and philanthropist.
The firm is best known, however, for its Wilshire 5,000 stock index, which tracks nearly all U.S. publicly traded companies, including fast-growing Internet firms. Some respected Wall Street experts, including Burton G. Malkiel, author of “A Random Walk Down Wall Street,” believe the Wilshire 5,000 is a better index for investors than the Standard & Poor’s 500.
The Wilshire 5,000, which currently is computed only after the end of daily trading, will be offered in “real time” in the near future, available on financial Web sites and TV news channels.
Focused on the Bottom Line
If Tito’s tale were a movie, it would be a black and white classic Horatio Alger story, complete with George Gershwin soundtrack: The driven boy from Queens, son of uneducated Italian immigrants, goes on to help develop a new industry.
Along the way, Tito angered some early comrades and earned a reputation as a hard-edged bottom-line operator. Now, having amassed a fortune, he is embarking on a series of philanthropic projects, such as building a new cancer research lab at UCLA.
Tito abhors risk and calls himself a traditionalist--someone friends describe as a person who needs to be told “when you are telling a joke.”He owns several Ferraris--his current favorite is a titanium-colored convertible F-355 Spider--but he drives them slowly. They spend more time in his eight-car garage than on the road.
Lavish events at his home are frequent--most recently a wedding for Southern California real estate mogul Fred Sands--but Tito still prefers to drink plain Lipton tea out of china cups. He learned to ski, but moves cautiously on the slopes.
Tito is active in fund-raising for Republican candidates and the Los Angeles Opera--Placido Domingo has sung in his living room. After serving as president of the Los Angeles Board of Water and Power Commissioners, he became disenchanted with city politics. You won’t find his name in the headlines, but Tito is an extended part of Mayor Richard Riordan’s business power network.
However, Nobel Laureates or graduate business school students have heard of Tito and know about his use of his complex theories to make millions.
In a nutshell, Tito does not believe that picking individual stocks can really add value to an investment portfolio, given market risks, the expenses of money managers and other trading costs. In fact, in his life Tito has bought only one stock, Singer Sewing Machine Co., on which he made a 30% return. To keep his record intact, he never bought another one.
After graduating from New York University with a bachelor’s in astronautics and aeronautics in 1962, Tito earned a graduate degree and then signed on with Pasadena’s Jet Propulsion Laboratory in the heyday of the space race. JPL scientists remember Tito as focused.
“He was not a nerd, though some might have called all of us nerds,” said Roger Bourke, who worked at JPL with Tito and is now with the Mars Exploration Directive there. “It was very unusual at the time for someone to leave the world we orbited.”
But Tito was becoming increasingly fascinated with another universe of stars, the one that made up the stock market. To learn more, he read every book he could find--more than 100, he says--on Wall Street.
“I just became more and more confused. Each one contradicted the other. I decided it was a lot of B.S.,” he said.
That’s when Tito found some academic articles on such things as “modern portfolio theory” and become involved in the burgeoning field of “quantitative analysis.”
Armed with scientific grounding that backed up his own burgeoning investment theories, Tito decided to step out on his own. In the early 1970s, he began working with a young MIT and UCLA graduate named John O’Brien. The two men broke new ground in developing tools to assess pension portfolios and started the O’Brien stock index, now known as the Wilshire 5,000.
In 1975, O’Brien, along with several others, left to join another firm. Tito, with his wife, Suzanne, and two men, bought them out and named the firm Wilshire.
“They’ve been a leader at developing diagnostic tools, the technology to pull apart a portfolio and see where gains are coming from. Is it market timing, stock selection or sheer luck?” asked Michael Clowes, editorial director of Pensions & Investments, a New York trade journal. “Most firms have stumbled somewhere along the way, but Wilshire has sailed along without missteps. I attribute that to Dennis.”
The firm has been a trailblazer, one of the first in the early 1980s to recommend index funds to clients. Tito recently entered the business of running his own enhanced index fund, which aims to reduce the risk of traditional index funds. Wilshire’s biggest potential for future profits will be global, with plans to offer its services to pension funds worldwide.
“Tito, as much as anyone, is responsible for building that industry. He’s one of the founding fathers. He’s an important figure in L.A., and I don’t think many people realize that,” said Marc Stern, president of TCW Group Inc., the parent of Trust Co. of the West, a major Los Angeles investment firm.
Like many entrepreneurs, Tito didn’t succeed by being a nice guy, say some former executives who did not want to be named. Wilshire was plagued by departures in the early 1990s, especially after the end of Tito’s 20-year marriage. Indeed, there are more than a dozen boutique investment firms in Southern California started by executives who left Wilshire. “I’ve never seen anyone so single-minded in pursuit of what they wanted or work so hard to get it,” said Wilshire co-founder Wayne Wagner, who left the company more than a decade ago and is now president of financial consulting firm Plexus Group.
Tito’s ex-wife was key to the firm’s success, employees say, and served as Wilshire’s chief financial officer. She and her father both owned significant portions of Wilshire, helping to invest in the firm’s formation. Tito bought them out. Now 54, Suzanne is keeping her life low-key and enjoying time away from the firm.
Wilshire Associates, located in a white building on Ocean Avenue in Santa Monica, has sweeping coastal views and offices with sliding wooden doors with screens, a far cry from the Mahogany-lined offices of Manhattan.
“The fact that we aren’t on Wall Street means we don’t have Wall Street people, salespeople,” Tito said. “Here we have a different pace. We don’t look from deal to deal, we look strategically.”
In their newest venture, Tito and son Michael are testing their own theories of money management on a $100-million-plus portfolio they manage. Last year, the firm raised $25 million in a private financing through Los Angeles investment bank Houlihan Lokey Howard & Zukin that added to Tito’s investment portfolio.
To develop their theories, Tito and his son sometimes sit side-by-side with their laptops working on projects to develop new formulas. It’s a familiar scenario for Michael.
“He had a workbench in the garage where he would build model sailboats. I had a little workbench right next to him,” he said. “My sailboats weren’t as perfect, the sanding and everything.”
Michael said he got a “17-year MBA” during family dinners where his mom and dad would discuss Wilshire strategy. “He’s a self-made man; that’s something I want to be.”
Some of those close to Tito say the scientist is finally coming out of his shell. “I’m going through a transition phase in my life right now,” he said. “The first phase was JPL, the next Wilshire, now it’s philanthropy. If I could help to cure even one disease, to be able to say that on my deathbed, that would put it all into perspective.”
But some who know Tito can hardly believe he will easily be less active in his company. “I don’t see him ever being able to get away from all this,” said one person close to him. “I see him going full speed, right up to the end.”
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Who’s in Third?
Wilshire Associates was the third-largest independent investment management consulting firm in the U.S. last year, trailing leader Frank Russell Co. of Tacoma, Wash., according to Nelson’s Guide. Top ten independent investment management consultants in 1998, by assets:
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Total sponsor Number assets, of Rank Firm in billions clients 1 Frank Russell $561.2 78 2 RogersCasey 542.2 67 3 Wilshire Associates 483.2 67 4 Callan Associates 463.3 106 5 PricewaterhouseCoopers--Kwasha 431.4 52 6 William M. Mercer 417.8 196 7 Capital Resources 370.9 110 8 Chase Consulting Group 268.0 23 9 Evaluation Associates 219.0 58 10 Cambridge Associates 208.7 158
Average sponsor assets, Rank in millions 1 $7.20 2 8.09 3 7.21 4 4.28 5 8.30 6 2.13 7 3.37 8 11.65 9 3.78 10 1.32
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Source: Nelson’s Guide
