[Tell me what it is that you do.]

... My job is to invest our clients' money, primarily in stocks, as opposed to bonds or other instruments that are investments in companies that range from ... drug companies to power utility companies to technology and media.

How do you keep up on all of that?

We have about 400 analysts around the world who keep us educated as to what is going on in companies. But you spend your day meeting with companies. You do a lot of reading, and you try to really just invest in what you know and CEOs you like and trust and believe are moneymakers.

So you look for people. Well, that makes sense, especially in the times that we went through, where normal bets were off. How do you make a rational decision in that environment?

It's difficult. The challenge is finding the truly great companies in all the noise. I think in a four-year period, I saw over 500 IPOs. We probably owned 200 or 250 of them for ten minutes, many of them for ten minutes, where at $8 or $10 a share you thought, "OK, I can understand how this can compound at 20 percent a year if they hit their target."

But when the first print of the IPO was $95, it was very easy to sell, because that company ... which you would stretch and get to a value of $12 or $14 a share a year from now was suddenly $95... It no longer made financial sense, so you'd sell the stock and go on.

It made sense to sell it?

It did, but for us as a large institution, it was actually very frustrating. Because in the era of hot IPOs and banker allocations of shares from those IPOs, we didn't get enough shares for the positions in those companies to be meaningful to us as a fund. When there were very hot IPOs, if you wanted a half a million shares, that would then be a half a percent position in the given fund or something like that. You'd only get 32,000.

And even if they tripled, they were still 0.0001 percent of the total fund or something like that. And it made it not enough of a meaningful position then to hold. So you either had to buy a lot more at $95 a share, or just sell them and move on.

You could do volume business.

You could, but really many of us would have rathered the companies not be so hot, and we could buy them and own them and hold them for three or four, five or ten years. ...

People listening to this are assuming that you're having a great time of investing in these things.

Well, let's do the math: 32,000 shares that would go up -- and I'm making these numbers up--

And you're picking 32,000 because--

That might be the average of an allocation. If you asked all the investment banks, "What was the top-tier allocation that you gave to Janus, Franklin, Fidelity, Capital Research and so on," the larger firms who generate the most commissions typically for those banks and allocations are made in part because of commissions -- or at least it was during the very hot IPO era.

If you look at 32,000 shares going up $20, that's $600,000 that you would make on that one IPO. All of those funds that I mentioned manage well over $100 billion; some of them many hundreds of billions of dollars.

So let's say you did that a hundred times. And not every IPO went up $20. There were a few that went up a lot, but most of them went up $5 or $10 and kind of then traded back down. So let's be generous and say it went up $20 per IPO, and there were a hundred of them that you participated in those funds. So you made $600,000 times a hundred; that's $60 million that would then be spread out over several hundred billion dollars of funds. So if you do the fraction, the $60 million is in the numerator, and the $100 billion is in the denominator, as a percentage of the total, it's really small. It's not that meaningful.

That makes the race for bigger allocation; puts a lot of pressure on.

Not really. Because let's say you doubled the allocation and it was 64,000 shares instead of 32,000. So then instead of $60 million in the numerator and $100 billion in the denominator, you have $120 million in the numerator, you're still less -- you're about 0.1 percent of the total. It's a rounding error. ...

So you're saying IPOs were not a significant way for the big funds to make money?

Correct.

So what was their significance?

The press loved crowning newly minted hundred millionaires who were 23 years old.

The press just liked the big story?

It's a great story. Americans love entrepreneurs. And going public was considered a validation of wealth: that if you have a publicly traded currency, a stock that you could fungibly rationalize and sell into the open market at a given time, then that was a validation of success.

For the large funds buying stocks and things, it just wasn't that meaningful. But it was very meaningful to the people doing the IPOs. It was very meaningful to many of the bankers and the other people around.

Why?

The bankers get to do another deal. They make money for doing deals. And for the entrepreneur going public meant that they went from living in a trailer in Santa Clara or whatever, to being a millionaire or a hundred millionaire or a billionaire, whatever the right number is. Suddenly there was wealth. ...

The returns on your funds were very healthy.

Yes. We invested well. The funds did very well -- and again, I'm not here as a spokesman for Capital Research. But the funds themselves avoided a lot of the really high-priced companies that didn't materialize to becoming very high-priced companies. We had our money in companies that did well. I mean, we did it reasonably well.

The way our funds are managed is that there are multiple managers of any given fund. So there's no one person making a call. So I'm one piece of a pie with many other pieces of other opinions that then manage the fund.

Checks and balances and consensus.

Every individual is empowered to act of their own volition. ...

Very significant for the entrepreneurs.

Yes.

But not so significant for you. But at the same time you drove it, they needed [your industry].

The institutional investors, yes. But that ranges from very large firms like ours, to hundreds of smaller hedge funds, to lots of retail investors. The thing you have to understand historically about IPOs to place all this in context is that, for decades, IPOs were considered very risky -- risky enough that a lot of private investors didn't invest in them. A large percentage of IPOs ended up at half, or worse, of the price they came public at.

It wasn't until this very short-lived bubble that an IPO was "found money" and you had to get there quickly and beg your broker to give you 84 shares that would print up $20, and you make a quick $1,500, you pay $800 in tax for the short-term gain or whatever, and you move on.

So it became a feeding frenzy, something that everyone was caught up in. But the perception that the institutions made a lot of money on the IPOs, I think, isn't quite accurate. The institutions owned a lot of the technology stocks that went up a lot -- Cisco and Microsoft and Dell. I could come up with a long list of the hot technologies stocks that were up hundreds of percent from 1994 to 1999 or 2000.

And that's where you really made your money, putting a billion dollars into -- I'm making this up -- a billion dollars into AOL in 1995, or 1996, and seeing it go up ten times. That's impactful; that's meaningful to our shareholders.

What is a road show?

...When you have a company that makes browsers in 1995, that's a new thing we hadn't seen before. And the education process to bring Wall Street to a level to where they can invest intelligently and speak intelligently about this new thing called a browser and what it implies with all the other plumbing that goes behind it and all the other investment spending that it's going to take to change the world -- that requires unique amounts of effort. And so that's why [road shows] are dedicated toward educating the kind of population of buyers like me. ...

The process works as follows. You get a phone call from the sales trader, the sales broker who is responsible for covering your account. You have a previous relationship with this person. He's generally someone who's an advisor who will call you. He knows certain stocks that you care about or certain issues that you care about. [If] something goes on in the media industry usually, I get a phone call from a lot of the sales guys. And they give me kind of their spin on what their analyst is saying about whatever event is happening.

Trying to get you to buy more shares? Or to try to service you?

To service, so that they're remembered down the line and so on. And there isn't a quantitative relationship there directly.

Ultimately, there is?

Ultimately, there is. But you have nice relationships with the companies. And it really does feel collegial. People do try to help each other. So what happens is a sales trader will call and say, "I have an IPO that you ought to look at. It's this new thing called a browser, and they're coming around April 7. And they're going to be in San Francisco, can you sit down and meet with them an hour and hear their story?" ...

So this information coming from the sales manager about how hot the deal -- is this public or private information?

I don't know. I really didn't participate that much in that kind of discussion. There was certain price that we were willing to pay for a company, and we pretty much stuck to our guns. If it went too far out of the comfort range of where we thought we could make money for clients, I didn't worry too much with the deal, how hot the deal was. Many of the hedge funds and smaller shops where 32,000 shares, whatever, could be more meaningful, paid a lot of attention to that.

The Joe & Bob's Furniture Store?

Joe & Bob's Furniture thing, because if they got an allocation, if they were managing $100 million -- a ton of money in the real world, but relative to large institutions, it's not -- they get 10,000 shares and those go up $20, all of a sudden you've made a very nice chunk. It's 2 percent of your portfolio right there, I think, if I've done the math right. Or maybe not, that's .2 percent. But you can affect the performance of your fund. It's not like a multi-hundred billion-dollar fund getting a $2 million or $3 million gain on an IPO. ...

You say you buy these things and you might have them for 10 minutes after they pop up. That's not what the bank wants you to do.

When a stock is originally priced from $8 to $10 a share, and it eventually comes at $14, and you're really stretching to get $14 to believe it can compound a nice rate for you, and the first print of the stock is $80, nobody in the world would be surprised that you sold the stock and moved on.

So the reality is we don't talk about that to the bankers. Those are all individual, or decisions within our own investment groups that we make. You don't really consult with the banker on what price you might sell at and those kind of things. It's our job to make the investment decisions for our shareholders independently. ...

Were you surprised that that kind of demand was out there in the retail?

... Yes, it was shocking to find the valuations [accorded] companies with close to no revenues who would have $30 billion valuations the first day of their IPO. But the people buying the stock at $130, hoping it would go to $200, were not the wizened educated institutional investors. I guess at that point for the retail investors buying them, it was like a lottery or a trading scheme to see who was going to play chicken first and leave the game. And that's just not the business that institutional money managers are in.

So you kind of didn't worry about it. What you focused on was that you bought a company at $14 a share, it went up to $85 in two days, and you sold it and you made a lot of money for your shareholders; and you moved on.

But there's a lot of people that, over the last five, ten years, absorbed this message that E*Trade has that said, "Fire your broker." We used to be a nation investing in mutual funds, and still are. But especially recently, people move towards individual investment. There was a sense that, with all the information the Internet was offering, you could buy the same technology over the Internet and level the playing field. Were the professionals in the business happy to let individuals think that there was in fact a level playing field? You were playing in a different universe. You had allocations.

... You're getting outside of my real area of expertise. But on a given deal, it would be reasonable to have 80 percent -- I'm making the numbers up -- but 80 percent allocated to institutions and 20 percent allocated to the retail constituents of the bank.

Merrill Lynch is a very strong company in the retail sector as well as the institutional, and they have wonderful service for their retail customers. So they might be able to buy IPOs. And I say that guardedly, because, again, for a long, long time, they were a very risky entity that people didn't want to sell to retail consumers, because retail people a lot of times didn't really know what they were buying.

We knew a group of women in North Carolina who had an investment club and talked about various investments. One of them wanted to get a little hotter and decided to get into an IPO, somehow thinking this was the hot thing to do. So without knowing anything about the company, jumped in and bought an IPO. It seems like this crosses the line to gambling.

Yes. I agree. It was speculation at its peak. You've labeled many of these things with the tag that people were "investing" in IPOs. And investing, in my mind, is a different thing -- where you put money to work with a long-term perspective. ...

I'm trying to think if I can think of anyone who's made a lot of money over a long period of time by trading stocks. I can think of a lot of people who've made real money owning stocks forever. Warren Buffett's the most famous, probably, of that. To my knowledge, he doesn't really trade stocks. He has owned Washington Post and Coca-Cola and a bunch of other companies for really long periods of time, and has done fantastically well. That's what I think of as real investing. What you're focusing on is a different issue.

The SEC is investigating this allocation process now. They are looking at what those sales managers were saying to people like yourself. Do you think this investigation is legitimate?

... In fairness to the sales guy, they will never know as much about a given company, even an IPO, than the analyst who specializes and spends their whole life covering a given industry. ... When you work at a large company and we have the resources to focus and spend a lot of time on a given area, the sales traders don't spend much time trying to convince you to buy or sell a stock, because they know you know more than they do usually about the given area. And so all they do is try to schedule the meeting and be sure things go smoothly. ...

But aren't they coming to you to try to get some sense of how much you're going to buy in the future?

They're asking the questions, but [laughs] we're not really answering them, because there's no incentive for us to tell them one way or the other. It just doesn't really work like that. You have a relationship. There's bounds that they don't ask. I don't say anything, and you kind of evaluate the investment just on a company-by-company individual basis. ...

Something you said earlier strikes home: that this wasn't investing, it was speculating or gambling. And when it's relatively small amounts of money, when it's 1 percent of your total portfolio and you're investing because you like the feel of that, and you're doing that instead of going to Vegas, that's fine, that's one thing; but that's not what you do with your pension money.

What happened in all of this is there was the façade that there was no risk. And I think where people got into trouble is that they took their real investment monies, put them into Internet stocks and other things, believing that the market couldn't go down. And for a long time, it looked like they were right. The market continued along.

This is a bull market unprecedented in any time in history, and we've got a lot of volatile history to look to. So there was a transition there where things got truly crazy. You feel bad for the people who got hurt, because they just didn't know what they were doing. ...

Is there anything we haven't covered that you would like to address?

There is one thing to think about, and John Doerr really gets credit for this. He said something like, "The American capitalist system and the fragile nature of the capital market is our most valuable asset, or one of our most valuable assets."

When he talks about fragile -- capital markets are built on trust. Companies fail all the time. Investments go down, companies miss quarters, and people lose money all the time.

But you have to believe that the company is making its best efforts for you; that the governing bodies behind that are taking care of that process to be sure that it's there, and done in a reasonable manner. And all this Internet craziness, that capital market system, probably was tested pretty brutally.

There were lots of opportunities for people to abscond with huge amounts of money. And you will find some glitches. You will find some people who did bad things. But overall, if you look back, I think the system works pretty well. ...

If you were an entrepreneur in Silicon Valley and you had an idea for a dotcom name, my guess is the odds were really good that you got a meeting with one of the Top Ten venture capital companies. You got your hour, your hearing to pitch.

And you might have won or lost, but it wasn't based on your color or your race; it wasn't based... Even if you were poor, you didn't have the money, you could certainly take the car over to [Sandhill Road] and pitch your idea. And if you had an idea that had reasonable opportunity for growth, the venture capitalists were sure to see that you got a meeting with an investment bank to try to get them to take you public and raise money.

So in that sense, the system really kind of worked under extreme duress for what you'd expect the normal market conditions to be. So that's [something] to feel pretty good about.

It is the individual investor who feels like he has been let down, because the large investment firms had analysts out there selling I-don't-know-what.

Caveat emptor. ...