By Jason Zweig | Dec. 22, 2016 3:34 pm ET
Image credit: Frederic Edwin Church, “Rutland Falls, Vermont” (1848), White House Historical Association, Collection of the White House (Wikimedia Commons)
When an inmate in federal prison reminisces about what you were like as a child, you pay attention.
For the past couple years, I’ve been mulling over an article in which the art collector and convicted felon Ralph Esmerian describes me when I was a boy. In 2011, Mr. Esmerian, a dealer in luxury jewelry, a prominent collector of American antiques, and a former chairman of the Museum of American Folk Art, was sentenced to six years in federal prison for embezzlement and bankruptcy fraud. In 2014, from the minimum-security Canaan prison camp in Waymart, Pa., Mr. Esmerian emailed a reminiscence of his collecting career to Scudder Smith, editor-publisher of Antiques and the Arts Weekly. Someone called my attention to the following passage, which is so well-written that it’s worth quoting in full:
In 1973, just one year after the Durands, I had another fortuitous first-time visit to a dealer in Salem, N.Y. Martin Zweig had a strong reputation as an excellent picker for several of the antique dealers in New York City and New England. I was greeted at the door by him and his wife, and we immediately began a walk through their home to view the inventory set up in various rooms. Martin appeared shy and self-conscious, ill at ease with perfunctory small talk, but he came alive and sparkled when pointing to objects and discussing their relevance as antiques. Upon completing the house tour, the Zweigs suggested we sit down in the living room — adding the caveat that none of the pieces in the parlor were for sale.
As I entered this dimly lit room, I was mesmerized by the sight of a great white rabbit carousel figure. Short-tailed, glass eyes and long-eared with an original paint surface showing slight wear and tear, the rabbit dominated the room and all the inventory I had seen — giving a reason for my visit as it appeared to bound over its surroundings of formal furniture and folk art.
Not for sale was the very quick retort to my question. As we talked some more, I exclaimed over certain pieces but always returned to the fabulous rabbit. Perhaps 15 minutes later, the husband asked his wife to call Jason from his room, explaining that Jason was their son whom I had not met on my tour. Martin admitted that he was never comfortable discussing not-for-sale objects for fear of risking a client’s hostility at the apparent conflict of interest between being a dealer and a collector as well. Thus he wanted his son included in our conversations. I nodded sympathetically, feeling for the man’s innate awkwardness.
Enter Jason — my expectation of the adult son evaporated on the sight of a boy, small of stature but serious of demeanor. We shake hands, exchanging names, as his father explains my interest in folk art and the rabbit. Jason immediately picks up when Martin has finished and proceeds to elaborate on the Zweigs’ love of pieces and that they are not meant to be teasers but simply the furnishings they want to live with. I am impressed by the kid’s delivery and merely repeat my request to have the rabbit, adding that I own a rooster and horse carousel figures that I feel are of similar workmanship quality as the rabbit.
Jason never takes his eyes off me, listening intently, then turns to his father and declares that the family should sell the figure to me, that the rabbit would have a good home. Martin asks if he is sure of his decision. Although shocked by the turnaround, I never get the sense that I am being set up, listening to a duet sung by good cop, bad cop. Jason never breaks stride and affirms he would sell it. Martin then instructs him to put a price on the figure since that is his decision.
Jason has yet to smile since entering the room. He continues to look at me and without glancing away out of embarrassment or hesitancy, proceeds to price the rabbit at a value three times the individual costs of my horse and rooster. As politely as I can, I ask Jason his age. “I’m 10,” he says. I stare back, slumping slightly in my chair as I feel the room spinning. Have I followed Alice down the hole in Wonderland? Maybe Dorothy’s tornado has tossed me into this scenario, starring a live American Gothic dealer and wife, a 10-year-old son precocious beyond the experience of most lifetimes, and the four of us absorbed by the great white rabbit.
Still smiling and noticing that even Martin was aghast at his son’s temerity, I asked Jason how he had determined the price so quickly, so definitely, all on his own. Without hesitation he elaborated, and I got up to shake a congratulatory hand and to thank the Zweig family.
And so the white rabbit came home, a superb painted carved figure from the Dentzel works in Philadelphia at the beginning of the Twentieth Century when carousels twirled their spin throughout the country. Every time I looked at him I remembered a very first visit with a dealer in Salem, a memory filled with a youngster’s fluency and audacity that matched the magic of a white rabbit. I paid two more visits to the Zweigs over the years, but never saw the filial prodigy. I have heard that a Jason Zweig is considered one of the more respected financial writers in this country. No surprise for one who remembers his 10-year-old presence and reasoning.
It is a strange feeling to find yourself written about without, at first, remembering what the writer describes about you. But, yes, that was me. My parents — literate, cultured, ambitious people — raised me to be peculiarly knowledgeable about the past at a very young age. I was, effectively, junior partner in their antiques business before I was a teenager, although I hadn’t thought about those days in many years until I read that reminiscence.
I remember Ralph Esmerian well, although I confess I don’t recall the specific conversation he describes. And a few of his details are incorrect — understandable, of course, with the passage of four decades. My father’s name was Irving; my family isn’t related to Martin Zweig, the mutual-fund manager who died in 2013. My parents weren’t itinerant pickers who scavenged antiques from yard sales and the like, but respected dealers who exhibited as prestigious antique shows and frequently sold to fine museums.
Nor was my dad quite as shy as Ralph described; he was contemplative, but not diffident. My dad had taught political science at Ohio State and seemed to have committed every significant moment of American history to memory — no trivial advantages for him once he became an antique dealer. He also had been the proprietor, editor and publisher of newspapers in small towns for more than a decade, so he could turn any great antique into a great story. Finally, I would have been 14, not 10, at the time of the event Ralph is recounting — although I probably looked as if I was 7.
But everything else Ralph says sounds right to me. He had extraordinary taste and elegant manners, even as he insisted that I call him “Ralph.”
My parents did trust me in the way he described. I accompanied them on most of their buying trips to auctions and shows, and I regularly crawled around under tables, peered behind desks, turned furniture upside-down, rummaged through boxes of old books, went into attics and basements and barns with a flashlight, and so forth. Every once in a while I would spot something wonderful that everyone else, including my parents, had missed. That was partly because my parents had taught me extremely well — and partly because I was patient.
I think my youthful enthusiasm for the hunt and chase, the intellectual puzzle of connoisseurship, must have appealed to Ralph, a kindred spirit. I had no qualms about going down on my hands and knees in dust or dirt to distinguish fake from real, or about going through enormous piles of old papers in search of one document of historical importance, or about turning the bottom of a drawer back and forth in the sunlight for ten minutes until I could finally read a feather-faint pencil inscription that my intuition had told me could be the cabinetmaker’s signature.
I have no recollection of what price Ralph paid us, but I know my only motivation would have been to match the rabbit with its rightful owner at a price warranted by its quality. I would simply have said what I thought it was worth; if he was worthy of owning it, then he would accept the price — as he did. And he is right that my dad wasn’t using me as a kind of stooge; we often would set prices in this kind of informal discussion, right in front of the customers. Warren Buffett does something similar when he buys businesses: He asks the seller to name a price. If it’s acceptable, Mr. Buffett buys; if not, he politely declines to negotiate and walks away. While my father did like to haggle when he bought, he refused to haggle when he sold. It was as if, once he owned something rare and beautiful, it was beneath the object’s dignity for him to negotiate over it.*
We were all fond of that rabbit, partly because of its spectacular vigor as a sculpture but also because of its radiant condition, still in all its original pigments and with most of its patina intact. You hardly needed to imagine it on a carousel to picture it leaping up and down; you could see the wooden muscles coiled to spring under the wooden fur, and the joy on its face as it prepared its wooden leap. I still remember sitting on it and imagining what it would be like to be a boy in the 1890s escaping to the carousel for a quick spin on this magnificent sculpture — which did evoke the rabbit in “Alice in Wonderland,” just as Ralph says.
Our adventure with the rabbit wasn’t unusual. In the 1970s — before the duopoly of Sotheby’s and Christie’s had grown to dominate the art world, before Antiques Roadshow became a public-television hit, and before Google put a universe of knowledge at everyone’s fingertips — the market for art and antiques was extraordinarily inefficient. Prices could be, and often were, out of whack by several orders of magnitude.
In financial markets, information asymmetry often favors the sellers; those who have held an investment have access to inside knowledge and may be far better informed than those who are interested in buying it. In the art and antiques business of the 1970s, however, that information asymmetry was inverted: Buyers could often know far more than the sellers.
I thus learned a lesson, as a child, that has never left me and that has stood me well when, as an adult, I sought to understand the financial markets:
Things are not what they seem: Much of what most people think is treasure is, in fact, trash. And much of what they think is trash is, in fact, treasure.
To tell the difference, art dealers and value investors alike must develop what the great investor Michael Steinhardt has called variant perception. You have to know much more than most of the other people in the market, and that knowledge becomes most valuable when it is at odds with the common perception of the other participants.
When I was a kid, that variant perception was based on vast amounts of study and preparation, along with stubborn — almost ornery — patience.
Realizing that rare books were chronically undervalued and easily overlooked, I spent a few days one summer, probably around the age of 13, going through our encyclopedia and writing down the dates when America’s greatest writers first published their works. Author by author, one to an index card, I listed all their major books by date (some, like Mark Twain, required more than one card). Then I memorized all the dates, flash-card style.
That way, I knew, I would be able to spot first editions almost instantaneously. In the 19th century, book publishers typically didn’t designate that a book was a first edition on the title or copyright page; but if you knew which year great books were published in, you could work your way through a crate full of dusty old volumes at remarkable speed. Knowing which ones didn’t matter enabled you to focus your attention on those that did.
I did the same thing with paintings in art-reference books and at museums, memorizing dates and styles and compositions until I could see a landscape or portrait from the other side of the room and instantly identify the artist and, within five or 10 years, when it was painted.
Speed, in an inefficient market, is important. An enormous value can exist, because the market is inefficient; but it might not persist, because its very enormity may call the value to someone else’s attention. Whoever is first to appraise it correctly wins.
So my parents taught me to move through a display booth, a room, a house — even a lawn strewn with items for sale — at high intensity. You rake your eyes everywhere: from floor to ceiling, from one end of the area to the other. But you don’t look at one object at a time; that would take forever, and devil take the hindmost.
Instead, you train your eye to take in whole groups of objects at once: everything on this table, all the objects on that wall, that cluster of furniture, the entire contents of this cabinet. You are searching for the incongruous, the oddball, the thing that doesn’t belong there — the mahogany chair at the oak table, the silver porringer amid the modern dishware, the oil painting or watercolor tucked in among the photographs or prints or posters, the hand-woven rug alongside the rolls of synthetic carpeting. My parents also gave me prompt and unambiguous feedback — one of the keys to developing expert intuitions.
Only much later in life did I learn that similar training is the basis for many forms of pattern recognition by experts in a variety of fields.
The situation has provided a cue; this cue has given the expert access to information stored in memory, and the information provides the answer. Intuition is nothing more and nothing less than recognition.
At an estate sale in the early 1970s, I walked up to a table covered in old books, swept my eyes across it looking for the gold-stamped leather bindings that typified early editions, and instantly took in that all the volumes were 20th-century — except one, which I immediately picked up. It was The Song of Hiawatha, by Henry Wadsworth Longfellow; I opened it, and the publication date, 1855, matched the entry in my mental database. I bought it for 10 cents.
At another auction, I went through what must have been two dozen boxes of old books until my hands were so dusty it looked as if I were wearing tan leather gloves. At the bottom of the last box was one book bound in magnificent red Moroccan leather. I opened it without even looking for the title. The inner covers were lined with superb Florentine marbled end papers, and the pages were edged with gold leaf. It wasn’t just a first edition of A Connecticut Yankee in King Arthur’s Court by Mark Twain (1889); it was one of 250 presentation copies the publisher had printed, and tucked inside the back cover was an original Christmas card drawn by Dan Beard, Twain’s illustrator. This copy had evidently been given to Beard by Twain, although the book wasn’t autographed. I stuffed it back under the rest of the books it came with; we bought the entire box for $40 and gave all the other books away.
But vast preparation and expert pattern recognition were only half the battle; patience and stubbornness mattered at least as much.
We never assumed, on any buying expedition, that we wouldn’t find anything good enough to be worth owning. My dad often said, “If you don’t see anything good, you haven’t looked hard enough yet.”
He often took that principle to extremes. My dad was one of the most intelligent people I’ve ever known, but he did commit one cognitive error: the sunk-cost fallacy. He hated to come home from any expedition empty-handed and would often devote absurd amounts of effort to find something — anything — worth buying in order to “justify” the trip.
On one such wild goose chase, we had driven to a house in Schoharie, N.Y. for the preview of an estate auction. Everything in the house turned out to be junk at a glance: the pieces of Chippendale and Hepplewhite furniture that had looked enticing in the ad were reproductions, the pottery and porcelain was chipped and cracked, the rugs were tattered, the paintings were poor quality, and so on. My parents kept trudging from one room to another and up and down the staircase in endless loops of frustration, trying to find something worthwhile.
After all too many of these laps, I refused to waste any more energy and flopped down on a sofa in the dim and dingy living room; I was a teenage boy, after all. The upholstery expelled a musty puff of dust. I coughed and squinted my eyes shut. When I opened them, I found myself looking at the same hideous painting, propped up against the fireplace, that we and a couple hundred other treasure-seekers had already walked past almost a dozen times.
The auctioneers had retrieved it from the attic; the surface of the painting was so dirty it looked as if it had been varnished with a mix of caramel and coal dust. Some of the paint was peeling off the canvas in an upper corner. The picture had almost certainly been moldering in the attic for decades: Its giant gilded frame was chipped and cracked and almost black with dust. Mud wasps had built nests between the elaborate curlicues of the frame.
I was just bored enough to look at the painting just long enough to realize that something about it was bothering me.
Why would anybody put such an ugly painting into such an ornate picture frame?
The instant the idea came into my head, I stopped wondering when my parents would give up and started wondering about the painting. It was some kind of landscape. A few trees, some clouds, maybe a river — nothing else was discernible through the murk.
But the frame was huge and heavy and had once been beautiful.
No one, in a thrifty community of Dutch and Scotch-Irish farmers, would have let an empty picture frame sit around; it would have been sold for whatever it would fetch. And no one would ever have bothered putting any frame at all onto this ratty old painting once it had gotten so dirty in the attic.
Which meant that the painting must already have been in this beautiful frame when it went into the attic long ago. Which meant that long before that, before landscapes in ornate frames became unfashionable, somebody must have thought this one was valuable.
Behind the sofa, the curtains were partly drawn. I stood up and pulled them all the way open. A shaft of sunlight hit the painting and cut through the grime. It was as if I had set off a miniature nuclear explosion: Brilliant pink and orange clouds boiled above a line of trees and a waterfall. I walked around the sofa and over to the fireplace, then crouched in front of the canvas and stared at it from a few inches away. Under the accumulated dirt of five or six decades, water cascaded over rocks, wind whipped through a line of trees, and those clouds erupted into towers of fire.
I knew instantly that I was looking at a long-lost masterpiece of the Hudson River School of 19th-century American landscape painters. My thumb had an intuition of its own: I licked it and pulled it lightly across a rock in the bottom left corner. “F CHURCH 1848,” I read through the little window I had just opened in the dirt. My mind raced: Frederic Church, born in 1826, one of his earliest major paintings.
Here it is, after subsequently being cleaned and restored to its original glory. I can assure you it looked nothing like this on that day in 1975:
I shot up the stairs like a rocket. I found my parents, grabbed each of them by the arm and hissed, “There’s a Church downstairs.” My parents, understandably, hesitated — there could be no place of worship in this house of junk. Then they looked in my eyes, and they knew what I meant. I led them downstairs. We lugged the painting outside into the sunlight to look at it — then wordlessly, breathlessly carried it back into the living room.
The sale was the next day, held in the back yard, as so many auctions were in those days. We waited patiently for the painting to come up. The auctioneer, not knowing what it was, called it “an old landscape” and told the crowd that the frame might be worth salvaging if you could find someone to repair it. The audience was astonished when we paid about $2,000 for what one woman sitting in front of us called “a dirty old rag.” The underbidder was a dealer who often followed us around and bid on whatever we did, assuming that anything my parents wanted must be good; my dad called him “the pilotfish.” If not for him, we would have been the only bidder; there were no other takers at any price.
When we got the Church painting home, we worried about its condition. Working with cotton balls dabbed in art-restorers’ cleaning solution, we got most of the grime off it. But parts of the paint were loose and flaking away. It needed urgent care. Before we could even get it to a restorer, Donald Webster, an attorney and art dealer who ran the best auction house in Washington, D.C., C.G. Sloan & Co., visited. He bought the painting on the spot, for what I remember as about $16,000 (or a bit more than $70,000 in today’s money). We hated to part with such a tour de force, but Mr. Webster agreed that the first thing he would do was to take it to the same restorer we would have used.
As always, we didn’t think of what we had done as profiting from the ignorance of others; we thought of it as rescuing an artistically and historically important work of art from oblivion. What would have happened to these treasures if we hadn’t found them? In many cases we were all that stood between them and another century in somebody’s attic or pantry or toolshed — or, eventually, the town dump. I have no doubt, even today, that had we not identified the Church painting for what it was, it would have gone unsold that day and ended up in a landfill.
Shortly after Mr. Webster bought it from us, the painting found its way into the collection of the White House, where (at least as recently as 1990), it hung in the Oval Office.
President-elect Trump and his family have what we might describe, diplomatically, as different taste in interior decorating.
As I think back on my childhood and adolescent career, two things stand out for me:
First, how fortunate I was to be raised by such a brilliant mother and father who imparted so much knowledge and intellectual excitement to me at so early an age. And with their zest for the hunt as my inspiration, it’s no wonder value investing had such attraction for me when, later in life, I studied the financial markets.
Second, how important it is to be in the right place at the right time. The art and antiques business in the 1970s was a remarkable confluence of inefficiencies and opportunities to exploit them. Back then, we could drive a few hours in any direction on any weekend and come home with a stationwagon full of beautiful old objects whose intrinsic value almost no one else had recognized. Nowadays, you could comb much of New England for weeks on end and find nothing except art and antiques priced at more than they are worth. The bargains that once abounded have been replaced by immense quantities of overpriced, undesirable mediocrities being passed off as rare and valuable. In a world in which it takes a few seconds to Google what an object sold for on eBay, undervalued art and antiques have all but disappeared.
I’m not nostalgic for my childhood, nor do I regret that I no longer practice much connoisseurship, because I know full well that those days are gone. The market for art and antiques today bears almost no resemblance to the world of my childhood, and the return to those skills, if I tried to earn my living by exercising them again, would be close to nil.**
The analogy to investing seems, to me at least, so obvious that I hesitate even to point it out. Decades ago, stock-picking was a handicraft in which information moved slowly and unevenly, so the person who knew the most could perform the best — by a wide margin. Think of Warren Buffett buying such tiny flecks of corporate plankton as Sanborn Map and Dempster Mill Manufacturing. Today, with more than 120,000 chartered financial analysts and 325,000 Bloomberg terminals worldwide and with Regulation FD requiring companies to disclose material information simultaneously to all investors, the playing field is close to perfectly level.
If you’re applying the tools that worked so well in the inefficient markets of the past to the efficient markets of today, you are wasting your time and energy. An investor who devotes weeks or months of research to analyzing a single widely-traded stock is like an antique dealer driving across the back roads of New England searching for bargains that, for the most part, disappeared decades ago. It isn’t impossible that you will find a bargain, but the odds that the rewards will justify the pursuit are low.
Today, being able to identify mispriced investments isn’t nearly enough; you also must be able to identify where mispriced investments are still likely to be found.
If investors are to prosper from inefficient markets, they have to evaluate which markets still are inefficient. Areas like microcap stocks or high-yield bonds, where index funds can’t easily maneuver, offer some promise. Areas increasingly dominated by index funds offer little.
An individual investor can still benefit from time arbitrage: You can buy into a stock when bad news poisons the price with negative emotion and then hold for years until euphoria finally returns. That’s a luxury most institutional investors no longer have.
But the skills that worked in inefficient markets rarely yield sufficient returns in efficient markets to make them worth bothering with.
Take it from one who has been there.