Passion for Reality

The Extraordinary Life of the Investing Pioneer Paul Cabot

Michael Yogg

• Publisher: Columbia University Press
• Year: 2014
• ISBN:
  9780231537025
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

Paul Cabot (1898–1994) was an innovative mutual fund manager and executive known for his strong character, charismatic personality, and trendsetting financial achievements. Iconoclastic and rebellious, Cabot broke free from the Boston Brahmin trustee mold to pursue new ways of investing and serving investment clients.

Cabot founded one of the first mutual funds—State Street Investment Corporation—in the early 1920s, campaigned against the corrupt practices of certain other funds in the late 1920s, and lobbied on behalf of key New Deal securities legislation in the 1930s. As Harvard University treasurer, he increased the allocation of the endowment to equities just in time for the bull market of the 1950s, and as a corporate director in the 1960s he campaigned against conglomerates' abusive takeover strategies.

Having spent nearly two decades working for Cabot's company, State Street Research & Management, as an analyst, research director, portfolio manager, and chief investment officer, Michael R. Yogg is well positioned to share the secrets behind Cabot's extraordinary success and relate the life of an extraordinary man. Cabot pioneered the use of fundamental stock analysis and was likely the first to take up the progressive practice of interviewing company managements. His accomplishments all stemmed from his passion for facts, finance, and creative thinking, as well as his unbreakable will, facets Yogg illuminates through privileged access to Cabot's papers and a wealth of interviews.

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 in major trouble.”

Paul tried to save his situation. He apologized to the “disciplinarian,” Reginald Coggeshall, told him that he knew that what he had done was wrong, and explained that this was his last night at Harvard before going on active duty. Coggeshall, according to Paul, said that he would not report the incident, but he did.³ An unsigned memo in Paul’s folder reads, in part,

When the affair [the Freshman Jubilee] was nearly over, some one shot a rifle from Paul Cabot’s window. Mr. Coggeshall was down below, and just as he looked up, he saw someone at the window drinking, then the rifle was thrust through the window, and another shot was fired. He went up immediately and found the room filled with fellows, all more or less under the influence of liquor. J. Otis ’20 and Richard Saltonstall ’20, who was in a sailor’s uniform, were particularly ugly and disagreeable. … Then John Connolly, the yard policeman, came up. Otis and Saltonstall were rough in their attitude toward him.⁴

Another memo reads, “Coggeshall says that before the dancing ended a freshman came to him and complained that Cabot insisted on dancing with freshman girl & that Cabot was drunk. Cabot’s appearance and talk gave Coggeshall the impression that Cabot was drunk.”⁵

Shortly after Paul arrived at Plattsburgh, he learned that Harvard planned to expel the entire group in his room that evening, including his future partner Dick Saltonstall and his future brother-in-law Sumner Roberts.⁶ Paul’s family connections, however, saved him and his friends. His father, Henry Bromfield Cabot, interceded with his friend, Harvard President Abbott Lawrence Lowell, and, after being “admonished,” Paul and his accomplices ended up graduating with their classes in 1920 and 1921. Dean E. R. Hay had written President Lowell on June 3, “I know that you will be personally interested in the matter, and if you wish to make any suggestions I shall be glad to have them.”⁷ Paul’s father wrote a thankyou note to another dean.⁸

Paul would later earn a reputation for honesty and integrity, and during the Great Depression was called upon to help rewrite the laws—and, in some ways, the culture—governing the investment industry; but none of this was evident in 1918. On June 12, writing in his own defense from the Plattsburgh training camp, he insisted, “In the first place I was not drunk and no one in my room was drunk. … I do not consider the disturbance was in the slightest way serious. … Thanking you for taking no action on the word of a watchman, reputed to be dishonest, I am sincerely yours, Paul C. Cabot.”⁹

At Paul’s memorial service seventy-six years later, his son Frederick tried to capture the spirit of his father’s mischief making, specifically the shooting incident, by quoting Yeats. “Not but in merriment begin a chase, / Nor but in merriment a quarrel.”¹⁰

The Henry B. Cabot Family

Paul had known Harvard’s President Lowell all of his life as perhaps the most brilliant and prominent of the many social and intellectual leaders of Boston who came frequently to Sunday lunch at the Cabot house on Heath Street in Brookline.¹¹ The brother of poet Amy and astronomer Percival, Lowell came from what one could call a Renaissance family, equally accomplished in art, science, scholarship, and making money. President Lowell himself, according to Samuel Eliot Morison, had a mind of “Greek agility,” meaning he was both a quick learner and an enthusiastic teacher.¹² Lowell was also a man of his time and place. Typical of many Progressives of his day, he worked on behalf of the Immigration Restriction League, supported the Massachusetts judicial system in its conviction of Sacco and Vanzetti, and opposed Louis Brandeis’s appointment to the Supreme Court—on grounds of character.

Not only were Lowell and Henry Cabot friends, but in 1893 they had worked together in the formation of the Boston Personal Property Trust, a precursor of the mutual fund, which had helped Harvard faculty members and staff invest in stocks. This trust differed from the modern mutual fund in that it was valued only four times a year; redemptions could only occur on those four dates and, even then, only if buyers for the redeemed shares could be found. The trust was later absorbed into the George Putnam Fund, one of the early mutual funds.¹³

Henry had built his house shortly after his marriage in 1892 on land that his father had bought in 1871. Today, six large luxury homes sit on that twenty-five acre parcel of land along a private road. But when Paul was a boy, at the beginning of the twentieth century, only three houses stood there: the house of his grandparents, Elizabeth Mason and Walter Channing Cabot; that of his aunt and uncle, Ruth Cabot and Robert Treat Paine II; and Paul’s own family’s house. The twenty-five acres at the top of Heath Hill were all Cabot territory and Paul, along with his siblings and cousins, had the complete run of the place. Paul’s cousin and future partner Richard Paine, born in 1893, was the second oldest of nine Cabot grandchildren on the hill, while Paul was in the middle—fifth oldest of the nine.

Built to suit the family’s needs, the Henry Cabot house was a very long rambling brick edifice, with the parents and the four brothers sleeping on the second floor. When the girls were born, Henry had a third story built for the boys, who moved up to make room for their sisters. The ground floor included a dining room and several living rooms. The kitchen was below, adjacent to the cellar, and connected to the dining room by a dumbwaiter. The Cabots generally had about five people serving as help, several of whom stayed with the family for over twenty-five years, including one for almost eighty years.¹⁴

Henry and Anna McMasters Codman Cabot, also known as Anne, were married at Trinity Church in Boston by the Reverend Phillips Brooks, who had been rector there for twenty-two years but who at that time was Episcopal Bishop of Massachusetts. The charismatic preacher had been a national figure since the Civil War and had been an important factor in drawing many upper-class Bostonians away from Unitarianism to the Episcopal Church during the last third of the nineteenth century. Her grandchildren remember Anna Cabot migrating back and forth between the Episcopal and the Unitarian churches depending on the quality of the preaching. They saw her as an intellectual, very interested in the issues discussed in the sermons.

The Cabots moved to Brookline shortly after their marriage and their boys Henry Jr., Powell, Paul, and Charles were born in 1894, 1896, 1898, and 1900 respectively.¹⁵ Paul was almost five when his sister Anne was born in 1903 and almost nine when Susan, the youngest, arrived in 1907. Henry Senior was a lawyer, a trustee, and an investor, primarily in real estate but also in stocks. His real estate interests extended as far away as Seattle. He also served as a director of the Edison Company (later Boston Edison), a director of the Boston-Lowell Railroad, and a trustee of six real estate trusts in Massachusetts, Minnesota, and Washington.¹⁶

Years later, Paul remembered “an extremely happy household; and I think we all got along beautifully.” From left to right: Paul, Anne, Susan, Anna (mother), Charles, Powell, Henry Sr., Henry Jr. Courtesy of Paul C. Cabot III

Anna stayed at home with the children. In his early eighties, Paul looked back on “an extremely happy household, and I think we all got along beautifully. … We were all very fond of one another. Of course we had our scraps every now and then. … There was always a lot of … good fun practical joking. … I and my younger brother always had a lot of guinea pigs that we kept down in the cellar, and much to my mother’s annoyance we’d bring the guinea pigs up and take them to bed with us. You can imagine the result.”¹⁷ For Paul, who was rambunctious even in his nineties, a happy household would necessarily include scraps, practical joking, and guinea pigs in his bed.

According to Paul’s sister Susan, the “scraps” didn’t only involve the boys.

[T]he first green peas had come from John Crockett’s and they were absolutely yummy. They’d gone all the way around the table before they came to Charles. Anne, next to him was the last on the totem pole; and Charles took every last pea! Then, with a dimple and a twinkle he turned to her and said,

“Did you want any?”

At which, without a word, she turned and knocked his chair over backward. I can see him now, upside down with his legs in the air, absolute amazement on his face, and grinning like a Cheshire cat.¹⁸

The “good fun practical joking” apparently increased when their grandmother, Elizabeth Cabot, was in charge. Paul remembered that “when our parents took a vacation from their four howling young men and their two little daughters,” Grandma Cabot took on the “God-awful job” of looking after them. Elizabeth Cabot’s diary notes, “Get my exercise by walking the piazza [of her summer home]. 62 times from one end east to west it makes a mile. I drop a bean [in a jar] & walk 30 times several times a day very fast.” But as Paul remembered it, “She had a system how to measure the distance. She’d put stones in a little jug, indicating how far she’d walked; and of course we’d add stones and subtract stones and drive her nearly crazy.” When they had finished driving her crazy, they liked to scare her by blowing cigar smoke through chinks in the kitchen wall and make her think the house was on fire.¹⁹

Yet Paul had a serious side too, even as a child. According to Susan, he never played with his sisters. “He was absolutely absorbed in his own interests and his own friends.” On one occasion he and Sumner Roberts built a log cabin “museum” in the woods. It was supposed to be a secret but Paul couldn’t keep from talking about it and, “We knew just where it was.”²⁰

Anna, Paul’s mother, dedicated her time to her family, friends, home, music, and church. She was a religious woman devoted to her children. As Paul remembered it, “It was her whole life.” She listened to their prayers every evening and took them, as well as her husband, to church every Sunday. She studied homeopathic medicine, gardening, and the piano. It seems that she was at least as responsible for their Sunday luncheon guests and other aspects of their social life as Henry was. She was a woman of strong interests but, typical of her era and her social class, she pursued them at home and at church. According to her daughter Susan, “Nowadays she would have been a doctor.” She not only read the New England Journal of Medicine, she “digested” it. When the boys’ friends at Harvard were sick, they came to her, rather than go to the Stillman Infirmary.²¹

Henry was an equally strong influence on his children, as Paul remembered it. When asked if a favorite uncle, Ellery Sedgwick, ever advised him on anything important in his life, Paul answered bluntly:

I looked to my father for advice.²²

My father was the epitome of complete honesty and frankness, which I hope we’ve inherited from him.²³

I think that my father instilled in us the necessity of trying to make something worthwhile of our lives and have a regard for the wellbeing of the nation, the state and the town we live in.^2...

Table of contents

• Cover 
• Title Page
• Copyright
• Dedication
• Contents 
• Foreword
• 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