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Sox owner’s success driven by numbers

John Henry

Globe File Photo

Red Sox owner John Henry participated on a panel in 2003.

FORREST CITY, Ark. -- Twenty-six years old, and left by his father’s death to run the family farm here in the rich soil of the Arkansas Delta, John Henry penciled out his problem this way: 1,000 acres planted with soybeans, each producing 40 bushels, equaled 40,000 bushels of soybeans. What to do with all those soybeans?

Henry’s pursuit of a solution led him to the commodity markets, where contracts for agricultural products are bought and sold, and sparked a fascination with price movements that ultimately transformed him from farmer to financier. In less than a decade, Henry, a college dropout, not only taught himself the risky business of commodity speculation, but in short order devised his still-working trading model; pioneered a type of investment called “managed futures”; and launched a firm that is among the most successful of its kind in the world.

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In Boston, Henry is best known as owner of the Red Sox, an enterprise that he, like the Yawkeys before him, has so far been unable to lead to the pinnacle of the baseball profession. But in the investment industry, Henry, 54, is an established superstar, described by friends and colleagues in the business as a “genius,” “visionary,” and, most of all, “winner.” In a game in which they really play for keeps, Henry has not only risen to the top, but stayed there through innovation, discipline, and an unconventional philosophy that makes money, as Henry wryly puts it, by “buying high and selling low.”

Through booms and busts, and against doubts that a trading system, tested against figures scratched out in the Memphis public library, would stand the test of time, Henry has stuck confidently to his approach, and produced solid returns for investors who have stuck with him. The result: his firm, John W. Henry & Co., ranks among the world’s biggest traders of futures, with about $2.5 billion under management.

‘A proven winner’

“He’s a proven winner who has won at everything he’s done,” said John Damgard, president of the Futures Industry Association, a Washington-based industry group. “I would just say, `Mr. Steinbrenner, watch out.’ “

Henry’s remarkable rise is the product of an equally remarkable journey which, on the way from farm to Fenway, wound through rock ‘n’ roll, Eastern philosophy, and even Las Vegas, where a young Henry was politely bounced from blackjack tables for counting cards. Although viewed by many as a number-crunching nerd an image enhanced by his championing of statistical analysis in Red Sox baseball operations Henry is, in many ways, as complex as his firm’s computerized models which each day ingest and analyze constantly changing prices in dozens of markets around the world.

Those who know him describe him as a warm and generous man who mixes as easily with fans in the stands of Fenway Park as he does with celebrities, whom he entertains on his 164-foot yacht at stops near Monte Carlo and Cannes. Once, after jetting to New York in his private plane, and getting chauffeured to a friend’s home in the city, he then happily squeezed into a New York subway car to catch a basketball game at Madison Square Garden.

Keeping it lighthearted

He has a sense of humor, too and a mischievous one at that. Red Sox president Larry Lucchino recalled grabbing a nap in his office during a particularly hard day early in his tenure, only to awake to find that Henry had snapped a photo of the dozing Lucchino, posted it on a bulletin board, and added the caption, “New Red Sox CEO hard at work.”

Friends and colleagues add that his interests range far beyond money and sports to include everything from music (he composes songs and plays three instruments) to computer games (he participates in a simulated auto racing league with Henry & Co. employees). He is not only a keen student of world markets, they note, but also of human nature and philosophy both of which have played a vital role in his trading success.

Henry, in the parlance of his industry, is a “trend follower.” Unlike so-called fundamental traders, who analyze economic and market data in an attempt to predict where prices will go, Henry tracks actual price changes to try to pinpoint market trends early on, and ride those trends. Henry’s traders buy after prices come off absolute bottoms and sell after they pass peaks, but still end up with enough of a price spread to profit.

Henry says this approach focuses on “what is, not what should be,” a lesson he learned in his early 20s after meeting Jiddu Krishnamurti, the late Eastern mystic who influenced millions, including author Aldous Huxley, playwright George Bernard Shaw, and Anne Morrow Lindbergh, the wife of the aviator. The other key underpinning is a belief that humans, by nature, are trend followers, reacting mechanically to events, much as the clapping of one person in Fenway Park will be followed by another and another until it becomes a crescendo of applause.

“Markets are really people,” observed Henry. “If you make a certain type of statement, you can make a pretty good prediction of how George Steinbrenner will react.”

Private, soft-spoken, and with perhaps a touch of the painful shyness he overcame by fronting rock ‘n’ roll bands in his teens and his early 20s, Henry seems very much the opposite of the Yankees owner. Despite his phenomenal success and legendary reputation for numbers he built and tested his trading model using only a hand calculator, pencil, and graph paper he remains unabashedly modest. He eschews the description “genius” and says one of the most important lessons he learned was to recognize how little he really knows.

The numbers don’t lie

His numbers-driven trading model, in fact, is designed to strip ego and emotion from investment decisions and is grounded in another modest, and, for the financial industry, somewhat heretical, assumption: no one can predict the future. And unlike Steinbrenner, who meddles in both front office and field decisions, Henry’s management style is to put “competent, committed, and passionate” people in place, and let them do their jobs, say those who work for him at the investment firm, Red Sox, and the family farm he owns in Forrest City.

Rex Twist, a family friend who manages the farm property here, recalls suggesting that Henry might buy some nearby land that had come up for sale. Henry’s response: “Do what you think is right.”

Not that Henry is removed. Lucchino said Henry not only keeps close tabs on batting and earned run averages, but also revenue, expenses, and ticket sales. He asks tough questions, wants solid answers, and demands performance. And whether at a ballgame, in his sprawling mansion in Boca Raton, Fla., home in Brookline, or his substantial yacht, which includes a recording studio, Henry has access to the same market data that pour into the John W. Henry & Co.’s Boca Raton office day and night.

“It doesn’t matter where he happens to be,” said Ted Parkhill, vice president for marketing at Henry & Co., “he’s here all the time.”

Henry, for his part, follows both his businesses with the ardor of a fan. He can not only rattle off the relevant statistics of Red Sox players, but also those of the opposing team. He is one of the team “owners” in the Henry & Co. rotisserie league. And he stays up into the wee hours of the morning following the Asian markets until they close, and then turns his attention to the opening of European markets, following them until the day’s trends are established.

“Going to bed before that,” he says, “is like leaving in the fifth inning of a ballgame.”

Henry has long credited baseball with his fascination and facility with numbers. Born in southern Illinois, where his father, Charles, owned a farm, and later moving to eastern Arkansas, where the family had another farm, Henry grew up in the heart of St. Louis Cardinal country, listening to games on the radio and calculating in his head the batting averages of Stan Musial, Ken Boyer, and other Cardinal heroes.

‘Something terrible’

He was 10 years old when he saw his first major league game, brought to St. Louis while his father underwent surgery for a brain tumor, which ultimately left him incapacitated. “Talk about heaven and hell,” said Henry. “I was finally going to St. Louis, and had a chance to actually see the Cardinals. But at the same time my father and family were facing something terrible.”

The operation of the farm was left to a court-appointed conservator, and Henry later moved to Florida, and then California, where he finished high school. He took classes at a number of colleges and junior colleges in Southern California, studying philosophy, but never earning a degree. He also was writing and performing music, and organized a rock ‘n’ roll band, called Elysian Fields.

After the death of his father in 1975, he returned East to manage the farms, eventually selling the Illinois farm in the early 1980s. Twist, the family friend who then owned a nearby farm, said it became obvious that the young Henry was not quite cut out for farming. “Most farmers want to talk about their tractors,” said Twist. “All John talked about was the market and prices.”

Henry’s interest in markets brought him to a small commodities brokerage in Forrest City, where Twist remembers him carefully recording the up-and-down prices of various commodities in notebooks. Henry later continued his studies at a brokerage in Memphis, where he began trading commodities by “the seat of my pants” and doing well at it.

The magic bean

At one point, he decided that soybean prices were going up, and started buying. And up they climbed, from just under $11 a bushel to more than $13, with Henry expecting them to climb even higher. Just then, Henry recalled, his girlfriend in Illinois began suffering severe anxiety attacks, so he cashed out his contracts so he could go to help her.

Shortly after that, the price of soybeans collapsed, plunging to about $4. While other traders hailed him for his extraordinary acumen, Henry knew that only coincidence had saved him from financial disaster. He decided he needed a more systematic approach to commodities trading if he was going to make it over the long term.

He launched himself into the effort, spending more than a year combing libraries and reading ev erything about markets he could get his hands on, including the work of W. D. Gann, who in the early part of the 20th century used mathematics to trade in commodity markets, Henry pored through newspapers, microfilm, and microfiche to collect commodities price data back to the 19th century, and developed his model.

Using a hand calculator, he spent another nine months testing the model against historical data, and found that it worked in the deflationary period of the 1930s, and the inflation of the 1970s. And he found it worked in a wide variety of markets, whether soybeans, wheat, and Japanese currency. He established his company in 1981, offering a “managed futures” fund, which, like a mutual fund, but much riskier, allows individual investors to get the benefits of professional management and a diverse portfolio.

He signed up his first clients in 1982. Four short years later, Henry was able to turn over day-to-day operations to his professional staff, and today, John W. Henry & Co. offers 11 funds, trading in more than 70 markets worldwide.

Not that the trajectory has been straight upward. In 1985, when industrialized nations suddenly moved to weaken the dollar, Henry lost as much as 10 percent of his clients’ money in a single day a devastating reversal that led one client, an investment firm, to fire him as the manager of a futures fund and turn it over to a rival adviser. The fund’s name: Iroquois.

But Henry stuck to his approach, rode out the plunge, and went on to have one of his best years ever, which ultimately proved to be a turning point for his young company. Meanwhile, the lost fund and the rival adviser went belly-up. Henry later named his luxurious yacht, “My Iroquois.”

The gut-wrenching volatility of the commodity markets may well be a perfect background for overseeing a franchise that, in the matter of moments, can take fans from elation to despair and back again. Already, techniques that worked for Henry in world markets are being applied to the Red Sox’s pursuit of the World Series, including a greater role for statistical analysis to reduce reliance on “anecdote, hunches, and feelings.”

That philosophy, of course, is shared by Henry’s 30-year-old general manager, Theo Epstein, among baseball’s devoted practitioners of number crunching, computer modeling, and trend-following in the building and operation of a team. Epstein, who moonlights as a guitarist in the ban Trauser also shares his boss’s passion for rock ‘n’ roll, although they’ve never played together.

“We’ll wait to jam together until we really have something to really celebrate,” Epstein said. “A world championship would be nice.”

Robert Gavin can be reached at rgavin@globe.com.
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