Hetty Green: Wall Street Witch or Wizard? by James A. Maccaro This article was published in slightly different form on Traders.com. It is copyrighted, 2007, by Technical Analysis, Inc., and is used with the permission of the original publisher. Hetty Green was an iconic figure of American finance during the Gilded Age of the late 1800’s and early 1900’s. She was the heiress of a sizable fortune derived in the 19th century from the shipping and whaling industries based in Massachusetts, and multiplied her wealth many times over as the only woman tycoon on Wall Street during that era. Indeed, her success was so great that J. P. Morgan invited her to a meeting he called in 1907 to address a financial panic that threatened the stock market and the entire American economy. She was the only woman included. Hetty’s full name was Henrietta Howland Green, but everyone called her Hetty (it is even the name on her tomb stone). Unfortunately, she became infamous because of her miserly habits, which were extensively documented in the tabloids of the day and earned her the title, “the Witch of Wall Street.” Even though she amassed a fortune estimated at $100 million (worth at least a couple of billion dollars in today’s spending power) she lived in a series of small apartments in low-rent working class neighborhoods. She typically wore worn and outdated clothes, which she avoided washing for as long as she could, and she would carry a container of oatmeal with her, which she would warm on a radiator in order to save on restaurant meals when away from her home. Most infamously, she would present herself at charity wards when she needed medical care in order to not pay doctors’ bills. Tragically, she followed this strategy when her son, Ned, injured his leg. When her identity was discovered and treatment was refused, she would not take the boy to a private doctor until the boy’s father, from whom Hetty was estranged, was informed of the situation and promptly agreed to foot the bill. But by then too much time had been wasted and the leg eventually had to be amputated. Although it is easy to sneer at Hetty as the Witch of Wall Street, an argument can be made that she was also a financial wizard. Indeed, her operations in financial markets remind me of tactics used by modern-day hedge funds. Her independence, clear-thinking and steadfastness about matters of finance equipped her for spectacular material success. One of Hetty’s most effective attributes was her contrarian outlook. While this resulted in a brittle personality that was difficult to get along with, and generated decisions that are very questionable as they pertain to her personal life, it also produced brilliant financial results. The essence of contrarian investing is to go against the crowd, which came naturally to Hetty. The contrarian outlook was ably summarized by Hetty’s slightly older contemporary, Russell Sage, who advised investors to buy summer hats in the winter, when no one wanted them, and to sell them when the warm weather returned. Article Continued After Sponsor's Message Hetty did just that following “Black Thursday,” September 18, 1873, when the stock market crashed. The first thing the following morning, she appeared on Wall Street and placed large orders, reaping a bonanza when prices soon recovered. She did the same in 1907, when she also underwrote a $1.1 million New York City bond issuance at a time when no one else was interested, essentially serving as a one-woman investment bank and thereby saving the city from default. Another hedge fund tactic that she used was risk arbitrage, the strategy of investing in a company in anticipation of a takeover. In 1886, a group of New York investors bought shares in the Georgia Central Railroad, a marginally profitable railroad. The investors recognized that the railroad, which encompassed about 2,000 miles of track, could be made much more profitable if management was improved. In addition, the company also owned a lucrative steamship line that ran between Georgia and New York, which was not reflected in the stock price. By targeting the Georgia Central, the New York investors were acting in the same way as contemporary private equity funds, which seek publicly- traded companies that they can buy-out and then "flip" at a high mark-up. The management of the railroad fought back by relying on southern pride (only a couple of decades after the Civil War) and by denouncing the New Yorkers as greedy interlopers. Into this battlefield, Hetty stepped, accumulating close to 7,000 shares (about 15 percent of the shares outstanding) at an average price of $70 a share. The price soon reached $100. It appeared that the proxy vote on the takeover would be close. Therefore, the New York investors offered Hetty $115 a share, a 15 percent premium over the market price, but she demanded $125 per share. She was relying on her prediction that they would not risk losing the takeover fight and would pay-up. The investors balked but then made a counter offer. They would pay her price but not until after the election, when she would be paid without regard to the outcome. Hetty agreed but upped her price to $130 on the grounds that she should be paid more if she had to wait for her money, even for a short time. The investors made a counter offer of $127.50, which Hetty accepted but with the added provision that the investors would have to put-up collateral for the full amount. The New York investors learned that Hetty was a tough negotiator, and Hetty made a sizable gain in a short period of time. Another modern hedge fund strategy that Hetty used was “vulture” or reorganization investing, whereby she would purchase at a deep discount the secured bonds of a troubled company in the anticipation that she would profit after the firm emerged from bankruptcy. Under American bankruptcy law, then as now, stockholders are wiped-out when a corporation goes under, but the secured bondholders have a claim against the firm’s assets and their assent is needed for a reorganization. In 1887, Hetty bought over a million dollars worth of bonds in the Houston and Texas Central Railroad, a poorly run and rickety operation. When railroad titan Collis Huntington took control of the firm and attempted to intimate bondholders into accepting bonds worth much less than their purchase price, he did not anticipate having to deal with Hetty. She knew her bonds were secured by first mortgages on the railroad’s property, and that Huntington lusted after the operation because he wanted to join it with his own Central Pacific empire. In the fight between Huntington and Green, the proverbial unstoppable force met the unmovable object. Hetty refused to give her ascent to the railroad reorganization for nearly another year, keeping Huntington’s takeover plans in limbo, and playing havoc with the stock prices of both the Central Pacific and the Houston and Texas Central, until Huntington satisfied her terms. Huntington was not stopped, but he was certainly diverted, and Hetty made a handsome profit. After a long and profitable life, Hetty died on July 3, 1916, with her son Ned at her side. He inherited the bulk of her fortune, and forged his own successful career as a railroad executive and financier, but he lived in style, building himself a palatial home and enjoying the best that money could buy. HOME LINKS |
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Research Report: Hetty Green (Wall Street Witch or Wizard?)