Lee Vance - The Garden of Betrayal

Claire nodded her agreement.

“Okay,” I said. “What else?”

“Picked up some odd news on Rashid. His secretary’s right that there’s some sort of tug-of-war going on over his remains. My guy couldn’t find out exactly what the issue was, but he heard that the State Department was involved.”

“You have any guesses?”

Reggie shrugged.

“I’m clueless.”

“Ta-da,” Kate announced loudly, holding her arms over her head. “Your daughter’s a genius.”

“We already knew that,” I said, starting toward her. “What geniuslike thing have you done now?”

“Figured out that Mohler has a personal firewall on his PC, which makes it really tough to break into, but that he’s also running backup software. His entire document folder is getting copied to a stand-alone network hard drive every fifteen minutes. And the backup drive is completely unprotected.”

“Wow. Why would he protect his PC but not his backup?”

“Gabor predicted that I’d find a whole mix of different security protocols on the network, when I told him it was a small business. Most small businesses don’t have their own IT person, which means they have different technicians working on the network at different times, and even that people sometimes install stuff themselves without thinking about the security implications. I bet that Mohler or Ellen Cho bought the backup drive at Staples and just plugged it in without thinking.”

“Incredible. Can we see his mail?”

“One thing at a time,” she chided. “Documents first, maybe mail later. I’m copying the backup files to my Google account now, but if you get your laptop out, I can log you on simultaneously, and you can start looking through his records right away.”

“You’re the best,” I said, kissing her on top of her head.

“Never forget it.”

I looked at Claire. She smiled at me, and I smiled back.

“Shit,” I said, tossing my pencil at my computer screen. “I’m an idiot.”

“I already knew that,” Kate shot back deadpan. “What idiotlike thing have you done now?”

It was just after eight. Claire and Reggie had left ten minutes before to pick up dinner from an Italian place a few blocks away.

“Spent the better part of four hours trying to figure out Mohler’s bizarre trading strategies without ever spotting the obvious. Come look.”

She carried her chair around the table we were working at and sat down next to me. I picked up my pencil and touched the eraser to my screen.

“Thanks to your genius, I was able to copy all Mohler’s positions and transactions for the past six months into an Excel spreadsheet. He’s operating in thirty-four different accounts, so I copied each one to a separate page. The first thing I noticed is that he only trades on the first business day of every month.”

“Is that unusual?”

“So-so. There are a lot of money managers out there who practice something called ‘technical trading,’ which means they make buy and sell decisions based on statistical measures, like the moving average price of a stock and the daily trading volume, and pretty much ignore fundamental information, like how much money a company happens to be earning at any given point in time.”

“Wait a second,” Kate objected. “That’s crazy, isn’t it? How can you invest in a company and not care how much money it makes?”

“Two reasons. First, because you assume that any news a company might release is already reflected in the price of the stock-”

“There’s something wrong with that logic,” she interrupted, frowning.

“You’re not the first to think so. There’s an old Wall Street joke about two economists walking to lunch. The first spots a ten-dollar bill on the sidewalk and tries to point it out to the second. The second refuses to look, asserting that if there were a ten-dollar bill on the sidewalk, someone would have picked it up already.”

“I thought jokes were supposed to be funny.”

“Nice. At any rate, the second reason technical traders don’t bother with fundamentals is that they believe that stocks go in and out of favor, like women’s fashion, and that it’s more important to figure out what stocks other investors want to buy than it is to have an opinion on what stocks they actually should be buying.”

Her lips moved silently for a moment as she parsed my explanation.

“So, they just follow the crowd, no matter how stupid the crowd might be.”

“Pretty much. You remember the whole dot-com bubble?”

“Not personally, but I’ve heard of it.”

“The dot-com bubble was this weird period where people paid crazy prices for Internet companies that didn’t have any realistic prospect of making money. Fundamental traders recognized that the stocks had no value, sold them short, and got murdered. Technical traders didn’t care that the stocks were junk. They bought them because other people were buying them, and made buckets of money on the ride up.”

“But the dot-com bubble collapsed, right?”

“Right. In the long run, stocks tend toward the value of their discounted cash flow, which for many of the dot-com companies was zero. But it’s a basic trading aphorism that the markets can stay irrational longer than most people can stay solvent. The fundamental guys were wiped out years before the bubble burst. The technical guys who were long on the way up sold out and went short when the market started going down, just because everybody else was selling. They made money both ways.”

“So, are you a technical guy?” she asked dubiously.

“No. I pay attention to technicals, because they drive so much flow, but I’m a fundamental guy at heart. The real problem with technical trading is that it’s easy to get whipsawed, which is what happens when you’re constantly buying on small up moves and selling on small down moves, and losing a little bit of money each time. All of which brings us back to Mohler. One way the technical guys try to avoid getting whip-sawed is by not reacting to every small up and down move, and only trading at fixed time intervals. Once a day is pretty standard, and once a week isn’t unusual. Mohler trades once a month, which is less common but still regimented enough to make me suspect he had some kind of technical program going.”

“And does he?”

“Nope. That’s why I’m an idiot-because I kept looking for the pattern I wanted to see and ignored the one that was staring me in the face. Check it out,” I said, clicking over to a second Excel workbook. “These are all Mohler’s trades. This particular box here lists a group of trades he did in Intel about a month ago. You notice anything unusual?”

“No.”

“Mohler’s buying in some accounts and selling in others. If he was a technical guy, he’d be getting a buy signal or a sell signal, not both. When I dug a little deeper, I noticed that all of his buying was through one broker, and that all of his selling was through a different broker.”

“Which tells you what?”

“The benign explanation is that he’s stupid. He’s paying two spreads and two commissions to buy and sell the same security, when he could just be moving stock between the accounts and saving himself the transactions costs.”

“But he’s not stupid?”

“I don’t think so.” I dragged my cursor down the screen and highlighted a box at the bottom. “Look. This number here is the net profit of all of his purchases and sales of Intel in all his different accounts on this particular day.”

“Zero?”

“Zero. Exactly. And it’s the same with every stock he trades, every time he trades. He buys in some accounts and sells in others, always through different brokers, and the net always works out to zero.”