Passion for Reality: The Extraordinary Life of the Investing Pioneer Paul Cabot

PASSION FOR REALITY

Columbia University Press

Publishers Since 1893

New York   Chichester, West Sussex

cup.columbia.edu

Copyright © 2014 Michael R. Yogg

All rights reserved

E-ISBN 978-0-231-53702-5

Library of Congress Cataloging-in-Publication Data

Yogg, Michael R.

Passion for reality: the extraordinary life of the investing pioneer Paul Cabot / Michael R. Yogg.

        pages cm

Includes bibliographical references and index.

ISBN 978-0-231-16746-8 (cloth : alk. paper)—ISBN 978-0-231-53702-5 (e-book)

1. Cabot, Paul. 2. Investment advisors—Biography. 3. State Street Investment Corporation—History. 4. Mutual funds—Massachusetts—Boston—History. I. Title.

HG4621.Y642 2014

332.6092—dc23

[B]

2013026156

A Columbia University Press E-book.

CUP would be pleased to hear about your reading experience with this e-book at cup-ebook@columbia.edu.

Cover design: Chang Jae Lee

Cover image: Harvard University Archives, HUP Cabot, Paul C. (1)

In memory of

Howell J. Yogg and

Ellen C. Johnson Yogg

CONTENTS

Foreword by John C. Bogle

Acknowledgments

Introduction: That Passion for Reality

1   Family, Education, and Army Service

2   The Twenties

3   The Crash, the Depression, and State Street’s Response

4   The Revenue Act and the Investment Company Act

5   Moses and Jeremiah

6   Harvard’s Treasurer

7   North Haven and Needham

8   Letting Go

Epilogue

Notes

Index

FOREWORD

As Thomas Carlyle once said, All that mankind has done, thought, gained, or been; it is lying as in magic preservation in the pages of books. Yet there are precious few books that have focused on the history of the U.S. mutual fund industry, a burgeoning field that has revolutionized the way that Americans save and invest over the past nine decades and that carries the potential to play an even larger role in the future.

From its modest beginnings in 1924—just three funds, with assets totaling only in the tens of millions—mutual funds now comprise America’s largest financial institution, and fund assets have steadily grown to some $14 trillion. Through the ups and downs of our economy and international markets, war and peace, and societal and political change, the industry has helped more than 100 million investors invest for their retirement security, their children’s education, and other needs—long-term and short-term alike.

Few authors have successfully chronicled this incredible growth. With its story rarely told, the role of its pioneers and their successors in the mutual fund industry has been largely ignored and is now almost forgotten. So when I came across a biography of one of the industry’s founding fathers a few years ago, I immediately pushed it to the top of my reading list.

I was not disappointed. Passion for Reality: The Extraordinary Life of the Investing Pioneer Paul Cabot¹ far exceeded even my highest expectations. It is a thoroughly researched, comprehensive, candid, elegantly written, and eminently readable volume by Michael R. Yogg, a former investment analyst at Paul Cabot’s firm, State Street Research and Management Company, the investment advisor to State Street Investment Corporation. Paul Cabot founded the fund in 1924, and by one measure (the date operations began) it is the nation’s oldest mutual fund, a truly American invention.²

It is fair to say that if you haven’t read this book (or otherwise been inculcated in the industry’s early history), you might not realize how far the modern mutual fund industry has strayed from its early ways. Its values have changed, its investment principles have eroded, and its early culture of trusteeship has been debased. Paul Cabot would not be amused by the abandonment of so much of the industry’s early Boston Trustee character.

Sadly, the long history of State Street is over. The advisory firm was acquired by the Metropolitan Life Insurance Company in 1983, and in 2005 it was resold to BlackRock Investment Management, another financial giant. State Street Investment Corporation was promptly merged into another BlackRock mutual fund—a tragic ending for that pioneering mutual fund. The life of Paul Cabot also inevitably ended, though much more happily. Born in 1898, he lived a rich, full, and exuberant life until death came in 1994.

Two Stories

Michael Yogg’s book actually tells two related yet, in a sense, separate stories. One story recounts the remarkable life of a Boston Brahmin of impeccable lineage—one whom the author compares with the fictional protagonist in John Phillips Marquand’s The Late George Apley. In Yogg’s telling, Cabot—according to his family, relatives, friends, business associates, and Harvard classmates—was impulsive, candid, abrupt, and given to a more-than-occasional cigar and a stiff whisky. He was fun company, and had a wide range of interests and pursuits. He was, in a word, a character.

That narrative, of course, is integral to the second story, the one that caught my attention: the career of Paul Cabot, his investment values, his approach to investment research and strategy, and the record of his stewardship of the mutual fund that he and his firm founded and managed. Even more, I learned with delight of Cabot’s view of the relationship between the manager/agents of the fund as well as that of the investor/principals who entrusted their investments to them. In retrospect, this industry giant of the 1920s–1950s anticipated my view, solidified during the 1970s and 1980s, that stewardship and fiduciary duty must permeate these bonds.

The Boston Trustee

The culture of the Boston trustee—rational, realistic, and intellectual, buttressed by independence and shrewdness—is in Yogg’s view more Yankee than Puritan. Still, Puritan values—trust, prudence, and fiduciary duty—do help to explain (albeit with some grandiosity) why Boston became the ideal place for the money management profession to flourish.

And so it did, particularly when the mutual fund industry was born in 1924. Indeed, my 1951 senior thesis at Princeton University was inspired by a 1949 article in Fortune magazine entitled Big Money in Boston, which lauded the potential of this tiny but contentious industry (then managing aggregate investor assets of but $2 billion) as rapidly expanding, [which] could become immensely influential.³

At the time the Fortune article was published, more than half of fund industry assets were managed in Boston. The industry in those days was dominated by the Big Three—Massachusetts Investors Trust (M.I.T.), State Street, and Incorporated Investors. (Philadelphia’s Wellington Fund was the sixth largest fund manager, a sort of interloper among the proud Bostonians.) Their respective leaders—Merrill Griswold, Paul Cabot, and William Parker (whose partner, George Putnam, started his own fund, the George Putnam Fund of Boston, in 1937)—seemed to embody the concept of prudent trusteeship.

After the industry shook off the paralyzing impact of the 1929 stock market crash and the Great Depression that followed, it solidified its basic elements. With Cabot as their leader, the Boston crowd worked with Congress to ensure that mutual funds would be treated as conduits passing along their dividend income, untaxed, to shareholders. By eliminating the double taxation of dividends, the Revenue Act of 1936 cleared the way for the industry’s future growth.

Cabot and his fellow Bostonians also played a pivotal role in the drafting of the subsequent Investment Company Act of 1940, which provided investor protections that would pave the way to building investor confidence in the mutual fund industry. The improper practices of some early investment trusts were, happily, regulated away. For sound fund managers, the 1940 Act, in Cabot’s words, merely wrote into the law the discipline which [we] had long practiced.

A Major Flaw in the 1940 Act

But there proved to be a major flaw in the new law. The legislation did not specifically bar the sale of mutual fund management companies at a premium over book value. In 1958, despite a long legal challenge led by the U.S. Securities and Exchange Commission, the courts ruled that such sales were not prohibited by the 1940 Act or by general standards of fiduciary law. Privately-held management companies thus gained the right to sell their ownership stakes to outsiders, then to the public, and finally to giant financial conglomerates.

Paul Cabot did not approve of this change. For him, the private ownership by the managers who ran the funds was essential. Indeed, it represented the very essence of stewardship and fiduciary duty to clients, a moral imperative. He sharply criticized those firms that would sell out to insurance companies and other financial institutions. In 1971, as Yogg reports, Cabot said as much when he recalled the negotiations preceding the 1940 Act:

Both the SEC and our industry committee agreed that the management contract between the fund and the management group was something that belonged … to the fund … and therefore the management group had no right to hypothecate it, to sell it, to transfer it, or to make money on the disposition of this contract … the fiduciary does not have the right to sell his job to somebody else at a profit.

However, in 1983, Paul Cabot’s successors did exactly that. The partners of State Street Research and Management Company sold the firm to the (paradoxically, then-mutual) Metropolitan Life Insurance Company for the astonishing sum—in those ancient days—of $100 million ($242 million in today’s dollars). The stated reasoning of the fund’s board: The affiliation of State Street with an organization having the financial and marketing resources of Metropolitan Life will result in the development of new products and services which the fund may determine would be beneficial to its [the fund’s] shareholders. Mr. Cabot, still a partner at the time of the deal, was nicely enriched for this violation of his principles.

It is hard to imagine how such new products and services would be beneficial to the fund’s shareholders, even as they would more likely benefit the management company, which became a subsidiary of the insurance behemoth. In fact, the merger hurt the fund shareholders, as performance lagged, and the manager’s position in the industry declined from tops to average. By 2005, Metropolitan Life abandoned the mutual fund business, selling State Street Research and Management Company to BlackRock Financial for an estimated $375 million. One of BlackRock’s first moves was to put State Street Investment Corporation out of its misery, merging one of the industry’s first two funds into another BlackRock fund. To this day, I refer to this event as a death in the family.

In Passion for Reality, Yogg presents the State Street fund record under Cabot’s leadership. It’s certainly an impressive one. State Street’s decade-long returns exceeded the returns of the Standard and Poor’s 500 Index with reasonable consistency (during the 1950s, however, it lagged the Index return). From 1926 through 1979, its annual return averaged 10.4 percent in comparison to 9.0 percent for the Standard & Poor’s 500, a 1.4 percentage point margin—surely a singular success. Under the MetLife-Black-Rock aegis, however, the fund lagged by more than 2 percentage points annually. The abandonment of Paul Cabot’s fiduciary principles proved to be a tragedy for State Street’s fund shareholders.

The Old Boston Culture Fades

State Street was hardly alone in abandoning its once-Puritan heritage. In 1969, the managers of Massachusetts Investors Trust formed a new firm called Massachusetts Financial Services. For virtually no personal investment, the trustees gained ownership and control of a new management company worth an estimated $25 million. These executives would then sell the firm to Sun Life, a Canadian insurance company, in 1983. Incorporated Investors, the last of the three original pioneers, was acquired by Putnam Management Company in 1963, which in turn was sold to insurance giant Marsh & McLennan in 1970 for an undisclosed sum (estimated at $30 million), and then sold once again in 2007 to a subsidiary of Power Financial Corporation of Canada for $3.9 billion. (If an article similar to Fortune’s 1949 piece were written today, would it be titled Big Money in Canada?)

Part and parcel of the fund industry’s change from its original focus on professional investing, security analysis, and long-term perspective was the gradual development of a sales culture. In the industry’s early years, investment managers were largely a step removed from the sales and marketing aspects of their funds, often retaining unaffiliated underwriters and brokers to assume responsibility for that function. Here’s what Cabot said:

At no time have we undertaken any sort of selling campaign believing that good results must eventually attract the investor, and realizing that such results can be most effectively attained through … security selection and supervision of securities best suited to meet the needs of the company.

But over the years, distribution and marketing gradually became more and more inextricably linked with management and research. Today, the modern mutual fund has become a powerful marketing machine. This change in focus has ill-served investors. To his credit, Paul Cabot resisted the powerful tide, and even ceased the public offering of shares of State Street Investment Corporation in 1944 when assets totaled $55 million. By 1990, when assets had increased to $525 million, the fund was reopened by Metropolitan Life.

Strategy Follows Structure

Of the industry’s largest fifty firms today, forty are held under public ownership, including thirty that are owned by financial conglomerates. Such a structure clearly calls for two distinct sets of fiduciary duties. The management has an obvious obligation to its own (now largely public) shareholders, but it also has a responsibility to place the interests of its mutual fund shareholders ahead of the interests of its directors, officers, investment advisers, and underwriters, to paraphrase the express language of the 1940 Act. The Biblical warning that no man can serve two masters has seldom been more brazenly ignored.

It is apparent that the absentee ownership structure places more focus on gathering assets to manage, creating new mutual funds to meet the fads and fashions of the day (the industry pioneers typically managed only a single fund, but today the average manager handles 117 funds—117 separate sets of fiduciary duties!), building firm revenues, and minimizing manager expenses (but not necessarily fund expenses). Success is measured by increasing the firm’s profits. In stark contrast, success under a structure dedicated solely to fund shareholders is measured by earning above average, risk-adjusted returns for them. Since all managers cannot, by definition, provide above-average returns (on average, inevitably, their performance will be average), the focus must be on low costs for fund shareholders. Such an idea, of course, is antithetical to the interests of the management company shareholders.

Ultimately, the marketplace must respond to this dichotomy. And so it has. As Boston largely turned away from the industry’s original professional values and prudent stewardship and moved toward the new values of marketing and salesmanship, its domination of the field first eroded before vanishing. From being home to one-half of the industry’s asset base in 1949, Boston’s share has fallen to about one-sixth, currently a hair behind Philadelphia’s share. That share, in turn, is held almost entirely by a single firm: Vanguard, a reconfiguration of that original Wellington Fund. It was founded by Walter L. Morgan in 1928, a surprisingly unsung pioneer who shared the values of those early Bostonians exemplified by Paul Cabot.

Today’s Vanguard reflects much of the industry’s old time religion. If Puritan Boston can be likened to Quaker Philadelphia—characterized, as Quakers often are, by plainness, simplicity, and thrift—then that dominant Philadelphia firm has held firmly to Cabot’s founding concepts. (In a curious parallel, Vanguard’s shareholder-owned, at-cost structure also has many parallels to the original structure of M.I.T.) By offering its funds to shareholders on a no-load basis, Vanguard is not beholden to an external distributor. In addition, Vanguard has now become the industry’s largest firm, largely because of its creation and advocacy of the market index mutual fund. (Full disclosure: I founded Vanguard in 1974 and ran the firm for 23 years.) The goal of closely matching the stock market’s return—a simple goal—and operating at rock-bottom costs and focusing on long-term investment has made all the difference.

I applaud this book as a vital link to returning the mutual fund industry to the high fiduciary standards that were once its hallmark. Far too few investors are aware of how far the fund industry has departed from its founding values, and many will profit greatly from understanding that shift, acting accordingly, and demanding that the industry go back to the future. By the same token, far too few industry participants seem aware that today’s ethically challenged industry structure was built all those years ago on a far firmer foundation. Michael Yogg’s beautifully presented narrative of Paul Cabot and State Street—yes, through the magic preservation of history that Carlyle described—gives us an all-too-rare insight into what has been lost, and provides an analysis that should inspire investors to force the mutual fund industry to heed the better angels of its original nature.

John C. Bogle

Founder of the Vanguard Group

Valley Forge, Pennsylvania

September 2013

ACKNOWLEDGMENTS

This book builds upon the research and scholarship of others. While the notes make this clear, some contributors deserve special mention. Natalie Grow’s PhD dissertation, The ‘Boston-Type Open-End Fund’—Development of a National Financial Institution: 1924–1940, placed Paul Cabot’s activities in context and greatly enriched my understanding of the events of this period. Her bibliography of sources was an especially useful aid. But I only found these sources, and others, due to the resourcefulness of Paul Keane, a researcher (and something of a detective) working in the Washington, D. C. area.

While I heard all of the Paul Cabot stories directly from the source himself, I would not have remembered them all without the interviews, particularly those conducted by Jessica Holland for the Columbia University Oral History Research Office Collection.

The best part about writing a book is the new friends one makes and the old friendships that are rekindled. The following contributed to this work by supplying information, documents, photographs, advice, and, most importantly, encouragement: Bernard Bailyn, Frederick Ballou, Bob Beck, George Bennett, Peter Bennett, Francis H. Burr, Frederick C. Cabot, Paul Cabot Jr., Paul Cabot III, Wayne DeCesar of the National Archives and Records Administration, Charles Ellis, Charles Flather, Bill Frohlich, Bart Geer, Andrea Goldstein and her colleagues at the Harvard University Archives, Kathleen Victory Hannisian, Llewellyn Howland, Morton Keller, Phyllis Keller, Paula Kerrigan, Edward M. Lamont, Robert A. Lawrence, George Lewis, Marten Liander, Ken Lisotte, Jacqueline Lynch, Frank Mandic and Larry Mills of the SEC Records Office, Paul Morgan, Robert H. Parks and his colleagues at the FDR Presidential Library, H. Bradlee Perry, George Putnam Jr., William Saltonstall, John Schwartz and his colleagues at Goldman Sachs, John Thorndike, Rosario Tosiello, Peter Vermilye, Ike Williams, John Wood, Virginia Chris Cabot Wood, and last but not least, Joan Yogg.

I also wish to acknowledge John C. Bogle, Richard H. Daniel, Matthew P. Fink, and Ron Rosenbaum, who helped me with the Columbia University Press edition of this book.

This biography of a little-known figure, written by a totally unknown biographer, started out as an author-published book in 2006. I am very grateful to Bridget Flannery-McCoy and Myles Thompson of Columbia University Press for seeing its value and potential, and for helping me through the publishing process.

Introduction

That Passion for Reality

[He felt] hatred of all shams, scorn of all mummeries, a bitter merciless pleasure in the hard facts. And that passion for reality was beautiful in him. … He was a millionaire, and yet scrupulously simple …

—GEORGE SANTAYANA, THE LAST PURITAN

How can I write objectively about someone I liked and admired? In the case of Paul Cabot, this question almost answers itself. He wouldn’t have had it any other way. Paul is often associated with the phrase, First, you’ve got to get the facts. Then you’ve got to face the facts, the quintessential expression of hardheaded rationalism, applied to the investment business. He faced the facts about stocks, business associates, and himself.

Why am I writing about Paul Cabot? To explain this I must go back to 1978. In that year I completed my PhD in history without prospects for a good academic job. So I entered a six-week program that prepared humanities scholars for positions in business, and I went to work at Paul Cabot’s State Street Research & Management Company. Six years later, in 1984, the program sponsors asked me to contribute an essay for a book chronicling the experiences of its graduates. The essay traces the path that led to this work.

In that essay I compared the values of successful scholars and successful investors by drawing parallels between the thinking of historian Oscar Handlin and that of Paul Cabot. The former was the dissertation advisor to my dissertation advisor, Bernard Bailyn; the latter founded the company I was then working for and hired, trained, and influenced the men who had hired, trained, and influenced me.

I defined a scholar as someone who studies evidence and develops an insight into its significance that contributes to the understanding of a broader range of issues. The scholar discovers value that others have missed, either by uncovering fresh evidence, or by looking with fresh insight into material previously studied by others. [He] sees something no one else has seen, understands its value, and knows how to make use of it. Similarly, the investor either uncovers fresh evidence about a company, perhaps from its customers, or studies publicly available information with fresh insight. The key skills these searches share are the intellectual honesty to see the facts (rather than what confirms one’s preconceived notions) and the creativity to understand their significance. Handlin identifies the key event as the discovery of facts in conflict with the scholar’s original thesis, when this encounter with the evidence pushes him toward a new version of the thesis. I concluded, Encountering evidence in the world of scholarship and facing the facts of the investment world are very similar intellectual and emotional experiences.¹

During his long and productive life, Paul Cabot (1898–1994) founded the first mutual fund and compiled an extraordinary investment record with it. He championed high standards of fiduciary responsibility at a time when mutual funds were new and helped shape crucial legislation when the mutual fund industry was under attack in the 1930s. He also shifted the bulk of the Harvard endowment from preferred stocks and bonds to common stocks just in time for the post-World War II bull market, thereby setting an example for other colleges and universities to follow. But I have written this book as much to capture who Paul Cabot was—his character, personality, and intellect—as to chronicle what he did.

Handlin uses the analogy of the puzzle to describe the work of the historian, a person who struggles to put the pieces in place but frequently comes upon unexpected fragments, those stubborn facts in conflict with his original thesis.² While the facts of Paul’s life are clear, how they fit together and contributed to the development of his personality is a puzzle, which this book depicts but only partially solves. The pieces are these.

First of all, family. Paul saw his father as the epitome of complete honesty and frankness who instilled in his children the necessity of trying to make something worthwhile of [their] lives and have regard for the well being of others.³ He was also equally appreciative of his mother, who took responsibility for his religious education. Paul’s children remember that their grandmother supervised even their own religious education—with a vengeance, according to one of them. While Paul was known more for his cigar smoking, whiskey drinking, and coarse language than for his religious faith, he adopted the rhetoric and the mindset of a Massachusetts preacher, some might say the prophet Jeremiah, when he railed against the abuses of the investment trusts in the 1920s and 1930s.

Second, the milieu of upper-class Boston. Behind the conventions of Brahmin society lay a culture of rationalism and realism dating back to when the Puritan settlers, with their rigorous intellectualism, encountered the harsh conditions of the New England wilderness. Their experience, as related by twentieth-century historians, transformed their culture over the course of more than a century into one that valued independence, shrewdness, and philanthropy—qualities that today are identified more as Yankee than as Puritan. This culture, along with commercial success and certain legal developments in Massachusetts, created the conditions for the growth of the money management profession in Boston in the nineteenth century. Paul possessed that independence and shrewdness. Years before his birth, his family had achieved commercial success, social position, and the mastery of legal and financial affairs required of the Boston trustees. When Yale University honored Paul with a doctor of laws degree in 1965, the citation praised the bluntness of your speech and the soundness of your cold-roast Boston eye for the Yankee dollar. Paul was a product of place as well as of family.

Third, liberal education. Paul downplayed and underestimated the importance of all but the most practical, business-oriented portion of his schooling. He showed little overt interest in the study of literature, the core of an upper-class Boston education, but beneath the surface he absorbed certain values of classical and some modern writers, such as simplicity, clarity, and intellectual honesty. His choice of an undergraduate major, mathematics, reflected a penchant for analytical rigor, which was most evident later on in business school and in his career.

Fourth, professional education. In business school he explored questions that really fascinated him. He became a top student and a scholar, doing research that, while never culminating in a completed doctoral dissertation, had an important impact on the history of American finance. Paul’s hardheaded rationalism complemented the German Enlightenment empiricism of his advisor, Arthur Stone Dewing, who had begun his academic career studying philosophy.⁴

These four pieces of the puzzle all played important roles in Paul’s business career and later life. While it is difficult, perhaps even arbitrary, to separate them, a story about a decision he had to make shows them coming together. In 1932, Paul’s company, State Street Research & Management, had the opportunity to purchase Lee, Higginson & Co., which went into liquidation after the suicide of Ivar Kreuger and the collapse of his Swedish Match Company. Paul wanted to consult his partner and cousin, Richard Paine, on the matter, but Paine was extremely ill and could not be disturbed. Because of his respect for his uncle and because father and son thought so much alike, he decided to consult Dick’s father, Robert Treat Paine II, instead: I remember trying to give him all the pros and cons of taking it over, … all the facts, … answering any questions he had. … And then I ended by asking him, have you any knowledge, Uncle Bob, of whether it is my judgment that we should or should not buy this company, because I wanted to try and just give you the facts without putting my personal opinion in them. Bob said that he did not know where Paul stood on the matter and proceeded to give him unbiased advice.⁵

In Truth and Politics, Hannah Arendt identifies the deliberate confusion of fact and opinion as a form of lying. She then traces the disinterested pursuit of truth back to Homer.⁶ Paul did not consciously trace intellectual honesty back to the ancient Greeks, but he grew up with writers like Homer and Thucydides. While literature never captured his imagination, what Thucydides called the simple way of looking at things, which is so much the mark of a noble nature had an impact on his careers as mathematics major, business student, scholar, and investor.

All of this still does not explain Paul Cabot. As rich as his background was, it was not unique. Hundreds of his contemporaries had similar advantages and grew up more like John P. Marquand’s fictional George Apley than Paul Cabot; that is, they lacked the insight to question things and the force to change them. But Paul stands in sharp contrast to Marquand characters like Apley, who said, I am the sort of man I am because environment prevented my being anything else.⁷ Paul adopted the highest ideals of Boston society—learning, leadership, service, honesty—but fused them onto a pragmatic, sometimes iconoclastic, personality. Marquand did not give Apley the courage or perspective to break through the limitations of his time and place the way Paul did. Instead, he relied on Apley’s biographer, Mr. Willing, to face the facts that Apley suppressed during his lifetime, though Marquand makes it clear that Apley shared some of Paul’s honesty and would have lived more authentically had not the bonds of family and the conventions of society discouraged it.

Marquand wrote The Late George Apley in the form of a biography. George Santayana called The Last Puritan a memoir in the form of a novel. They both created fictional characters and biographers to present their views on Boston culture and society, among other subjects. But Paul’s personality was much more powerful than those of Marquand’s and Santayana’s protagonists. He was born with a mental and emotional confidence that developed in the unique culture of Boston to produce an extraordinarily independent, forceful, and productive individual—more American than Bostonian or New Englander. To understand Paul and what he represented we must look to the specific, in his words, the realities and facts.

1

Family, Education, and Army Service

Dear Ma,

I just received your letter advising me to quit. Nothing doing. I have been through half of this course & I’m going to finish it. It will take a stick of dynamite to get me out of here. … I hate this life… so much that it makes me obstinate and pig-headed & come what may I’m going thru with it.

—PAUL CABOT, IN A LETTER FROM THE ARMY, 1918¹

That got me into studying these common stocks—other people must have been doing the same thing but I wasn’t aware of it. At any rate I used to study the earnings and I still believe that the single most important fact, other than the honesty of the management, is the amount and direction of your earnings. So it got to me, and that’s what I think started me in this sort of business—got me studying… the companies and trying to determine what is the real value.

—PAUL CABOT, REFLECTING ON HIS 1922 HARVARD BUSINESS SCHOOL SUMMER JOB IN 1971²

C-R-A-C-K!

Paul Cabot fired, pulled his ROTC rifle in from the window of Persis Smith Hall, and gleefully surveyed the damage. Students were holding a dance in the quadrangle below, and the shot had a terrific effect. All the little girls thought the Germans were out for them. They all rushed for shelter and there was terrible excitement.

It was a beautiful warm spring evening, May 29, 1918, at the end of Paul’s freshman year. The next day he would leave Harvard for ROTC camp in Lancaster, Massachusetts, and, one month later, move on to the army training camps at Plattsburgh, New York. That day he had drilled with his unit at Fresh Pond under the direction of Lieutenant André Morize, later a Harvard professor of French literature, and other disabled French officers sent over to train Harvard students for the war in Europe. Perhaps in his mind, Paul was already in France, though with service in Massachusetts, New York, and Kentucky, Harvard was as close as he would get to the fighting. But whether it was the idea of going to war or the whiskey he was drinking, he thought nothing of shooting blanks into a group of Harvard students and their dates. Then he did it again: "I let go another round. The door opened and the disciplinarian of the dormitory came in and caught me with the rifle with the smoke coming out of the barrel. Luckily my friends kicked the booze under the bed. … I knew I was