Aye Wonder

Twelve years ago, the New York Times Magazine featured me on their cover. Over the years, friends have asked for a copy of the article. Recently, I found a copy in the basement, ran some optical character recognition software and volia. It is a very long read but a pretty good snapshot of what I used to do. As an aside, if you did buy AOL during the time frame mentioned in the article, you would have become very rich indeed!

New York Times Magazine
December 1, 1996

Michael DiCarlo runs what has been one of the most successful mutual funds in America, and believes things can only get better. But with tech stocks turning tricky, and one of his biggest stakes heading south, Sept. 11 (1996) was the kind of day that tested even his confidence.

By Diane K. Shah

AT 7:15 AM Michael P. DiCarlo steps out of his condominium and under a murky sky, finds his partner, G. Ross Forbes Jr., waiting to start the one mille walk up Beacon Hill to Boston’s financial district. By 7:45 when they enter the gleaming office tower at 75 State Street, heels are already clicking across the marble floors. It’s Wednesday, Sept. 11, and Will Street is purring along its stocks soaring ever-higher in defiance of the odds, history and perhaps logic itself.

Soundlessly the elevator climbs to the 25th floor. At the end of a deserted hallway, the two men enter the glass doors of DFS Advisors, a money management firm they and a third partner, Andrew St. Pierre, opened in June. Padding along the mauve carpeted hallway, careful to mind the odd golf club leaning against a wall, DiCarlo turns right at a putting machine and straight ahead enters the corner office.

There, sitting Oz like on a shelf, is a brown fedora perched atop a gray foam rubber brain. Good morning.

Across from the brain, hermetically sealed windows (the industry apparently learned a lesson in 1929) overlook the Boston Harbor. Amid fluttering sailboats, barges heave slowly into port in a jarring counterpoint to the global economy whirring at breakneck speed above. This economy is flashed onto a 17 inch computer screen that instantly updates with the latest market hiccups. Noiselessly.

DiCarlo immediately begins to study it. A 40 year old portfolio manager, he oversees the John Hancock Special Equities Fund and its $2 billion worth of assets. Most of that money belongs to some 160,000 wage earners who have put their trust, if not their retirements, in this man’s hands. With one of those hands on a mouse, the other within reach of his phone, DiCarlo steers his fund like the captain of a jumbo jet, his voice confident, reassuring, his manner relaxed, as in, No way is this baby going down on my watch.

It hasn’t. Since 1988, when DiCarlo took over Special Equities, the fund has averaged an annual return of 24 percent. This means if you had invested $10,000 in January1988, by October 1996 it would have been worth $66,051. In 1995, based on DiCarlo’s strong position in America Online and other technology stocks, the fund brought a 50.44 percent return. In seven of his eight years, DiCarlo finished in the top 20 percent of all mutual funds. Three times he has been in the top 1 percent, which may, be why Smart Money, a personal finance magazine, recently named Special Equities one of the seven best run and most consistent performers in the country.

Such is DiCarlo’s status that last March, when he and Andrews St. Pierre, a fellow portfolio manager, told the Hancock Funds chairman, Edward J. Boudreau Jr., that they were leaving to start a hedge fund – a high risk, high stakes investment vehicle for millionaires Boudreau took the unusual step of signing them to a five year contract to continue running Special Equities out of their new offices across town. Which are here. Tomblike.

Hanging on one wall, like a ghost, is an aerial black and white photograph showing dazed men dragging forlornly along Wall Street on Oct. 29, 1929, the day the market crashed. By contrast, the color picture on DiCarlo’s monitor shows today’s market clinging to a six year run up of stocks, a record bull market that has many investors biting their nails –when will the damn thing fall down, With DiCarlo, you get the feeling the only thing that might crash is his computer. “If you are very positive about the long term future of this country,” he says, as if quoting Scripture, “you have to be bullish about stocks.”

Still, it’s a tricky business. Even for a stellar performer like DiCarlo, the road to profits can be filled with potholes. Special Equities, which was up 20 percent through May, took a tumble after the market’s July “correction,” when stocks, as if dizzy from their heady climb, swooned a bit. The political and interest rate pictures were murky then, and several bellwether technology companies weighed in with less-than expected earnings. The market rebounded. Special Equities did not. On this day in September, the fund is up only 2.1 percent.

Looming even more craterlike is America Online, DiCarlo’s fourth largest holding and a Goliath among Internet-access providers. His fund owns two million shares, or roughly $50 million worth. From November 1994, when he first bought the stock, through August of this year, it returned 208 percent. Then, after hitting a high of $71 a share in May, it began a nose dive as investors grew alarmed about competition from direct access providers and especially about the way AOL’s accounting practices resulted in distorted profit figures. Now, in September, the stock has hovered around 24 and rumors of AOL’s troubles spume across the phone lines daily. But DiCarlo, who never appears rattled, faces this peril like a man straddling the tracks with a train bearing down on him, confident it will come to a screeching halt. “AOL is the company Wall Street loves to hate,” he says, undaunted. “People are going to have to recognize it’s the McDonald’s of the on line industry.”

Despite his surface optimism, the pressures are mounting for DiCarlo, from both above and below. “If a portfolio manager has two bad years of performance, they get put on warning as a minimum,” says Boudreau. “If we feel it’s caused by something that’s extraneous to the manager, we’ll stick with the manager but we’ll measure performance closely to make sure he’s staying with his philosophy. But if someone waffles around, they’ll probably be removed.”

The other half of the vise squeezing DiCarlo is his investors, who are aware of the risks of a growth fund like his but still expect to make a profit. And with all the competition from other funds some returning between 10 percent and 16 percent investors could pull out after just one bad quarter. “My fiduciary responsibility is to recognize that people have put their trust in me to accomplish long term growth,” he says. “They are dependent on this fund to buy their houses or put their kids through school. I’m aware of that every second I’m awake.”

He slips off a custom made jacket, revealing a Turnbull & Asser shirt, and opens a container of coffee. It’s 8:15 A.M.

At this very moment, mutual fund managers across the country are also ripping the lids off of their coffee cups as America continues to pour its savings and its hopes into what has become the cash cow of the 90’s. The latest count puts the number of stock and bond funds at more than 7,000 (there are another 1,000 money market funds), representing some $3 trillion in individual and institutional accounts. The Investment Company Institute, the trade and lobbying organization for the fund industry, concludes that nearly one third of all American households are invested in mutual funds, either privately or through their office 401(k) plans.

There are 21 categories of funds, which run the gamut from U.S. bond funds to the far riskier aggressive growth funds. Small capitalization funds invest in newer companies in the case of Special Equities, those with a market value between $100 million and $750 million and aim for long term growth. These are the most volatile of stock funds. Over a five-year period, they tend to generate the highest returns, but investors may need heart medicine to survive the punishing drops small-cap funds can suffer year to year before rebounding. In 1990, for instance, Special Equities dropped 8.7 percent, only to shoot up 85 percent in 1991.

“People shouldn’t be shocked by what’s happening to DiCarlo’s fund,” says Pat Regnier, associate editor of Morningstar Investor Monthly” which tracks the performance of mutual funds. “Part of what you’re getting is the long term, which looks very strong. Mike is a skilled, aggressive investor with a volatile, risky, investing style. There are many opportunities to lose money- - or make it.”

Although every mutual fund is guided by Its own investment philosophy, in the final analysis, whether a fund prospers, stagnates or flounders is pretty much in the hands of the portfolio manager, typically, a man who has yet to see his 40th birthday - if his 30th. Most have known only this extraordinary bull market, and much of the $3 trillion they have invested comes from baby boomers, who are no more experienced in bear markets than then, are.

Before the day is out, Hancock Special Equities will either creep up or slither down in value, depending on how DiCarlo, like the sailboats swanning in the harbor below, navigates around the lumbering barges of economic factors, the capricious mood of investors and the tricky undertow of rumors that constantly tugs at the Street.

Ring, ring.

“Mike DiCarlo. Larry, how the hell are you?”

Ring, ring.

“Mike DiCarlo. Hey! You did? What’s he saying about Apple? Know what I read the other day? Microsoft has to keep this company in business and the reason is the F.T.C. was all over Microsoft about a monopoly in the operating platforms of the PC. So if Apple goes away, de facto, Microsoft has a monopoly. So they’re working with Apple right now to try and figure out a way for them to use the Microsoft platform . . . yeah. Would you ask him about that?” Although DiCarlo invests in neither company, he keeps on top of them because what they do could affect the performance of the software stocks he does have, like Intuit.

Ring, ring.

“Yeah, Tommy. If you can find any stock with a 3-liandle on it, buy some more. I’ve got an appetite for at least as much as we’ve bought so far.”

On this call, DiCarlo is speaking to a trader about a company called Structural Dynamics Research, which is selling at 24 and something. If it gets down into the 23 range - i.e. a 3-handle - he wants the trader to buy. A purchase of, say, 800,000 shares at 50 cents a share less than its current price would save his investors $400,000.

Ring, ring.

“Kevin, you handsome devil!”

And so the day begins.

When DiCarlo was assigned Special Equities in January1988, the fund was three years old and wobbly - -and DiCarlo was a newcomer. A graduate of the University of Massachusetts, he had worked part time, then full time, for Hancock’s insurance company, but toward the end of 1984 he got a job with Hancock Funds. Around the same time, Robert Freedman, who is now chief investment officer and vice chairman of John Hancock Funds, arrived. “I was hired to run John Hancock Growth Fund.” Freedman says. “It was only a $40 million fund and the only growth fund we had. We were a tiny little firm.”

DiCarlo was doing back-office work, but everywhere Freedman went, there was Mike. “He’d stop and talk to me about the market,” Freedman remembers. “What was I buying or selling? He was always watching the Quotron. He’d say, ‘I looked at this company,’ and he’d tell me all about it. He was not only incredibly smart, but he really loved the market. So when I decided I needed an assistant I picked Mike.”

In February of 1985, Freedman started Special Equities. Though the fund showed a nice 21 percent return that year, it lost 4.31 percent in 1986, its first full year of operation. The next year brought more bad news: jolted by the market crash of October 1987, the fund lost 17.28 percent. “Management wanted to shut down the fund,” says Freedman. “But I felt strongly we should have a small-cap fund in our stable. I argued that we keep it for another year.” And then he said to DiCarlo, “You take the fund.”

DiCarlo had an interesting background for it. The eldest of five children, he grew up in the Hyde Park section of Boston, the son of an Italian immigrant cement mason. Mike was bright enough to gain entrance to the highly competitive Boston Latin School, which, he remarks, “Was the hardest work I ever had to do.” There he turned entrepreneurial, booking bands for high school events - local acts like Aerosmith and Ocasek & Orr before they became the Cars and headliners like Robert Palmer and Bonnie Raitt before they hit the charts. By the time he was 19, DiCarlo had earned enough in booking fees to buy a house. True, it was a $15,000 fixer-upper. But 10 years later, he sold it for S129,000.

“The way I look at it,” DiCarlo is saying, “if you got down on your knees and prayed opportunities couldn’t be hand-delivered to us better than they are now.”

He is on the phone reviewing his philosophy, with the faceless, far-flung Merrill Lynch brokers who are among the many selling Hancock’s funds to the public. Leaning back in his chair, he speaks fluidly, all the while staring at the changing blips on his computer screen. “Even though the year s been pretty flat so far, we’re really standing on the doorstep of a terrific move to the upside,” he says.

DiCarlo’s bullishness is both reassuring and terrifying. It’s true that during this year, more than $20 billion a month has been pouring into mutual funds and that even July “correction” only, slowed the gush. Still, it conjures the vision of millions of people frantically climbing the stock market ladder, wondering when it will topple. The market can rebound from the kind of mini-topple that was inspired by Saddam Hussein and the gulf war, but there are other kinds of topples - like the one from 1968 to 1974, when the stock market lost 70 to 80 percent of its value. Even in 1979, a Business Week cover proclaimed the death of equities.

“Now there are moments in time, like a few months ago, when stocks do go down and it can be very painful,” DiCarlo tells the brokers. “But the long term, from where we stand, looks exceptional.”

With that, he lists three guidelines for selling a stock. Once he has a full position in a company that is, the number of shares he has decided to buy if that stock goes down 12 percent from his average cost, he unloads it. “Too many times,” DiCarlo reminds the brokers, we’ve seen companies that lose 15 percent go down 30 percent, go down 60 percent. And you just can’t have too many of those in your portfolio before you really start to affect performance.”

The second guideline stems from DiCarlo’s belief that his fund should be fully invested. “So anytime you’re looking for at a new candidate for purchase,” he says, “you have to look at it vis-à-vis everything else you already own and replace the purchase with an offsetting sale.” Third, if a stock goes up beyond what seems reasonable, get out.

Underpinning these principles is DiCarlo’s taste for technology stocks, which, though nerve-rackingly and often inexplicably fickle this year, make up 38 percent of his portfolio. “We’re still undergoing a productivity revolution,” he tells the brokers. “You want to know what inning we’re in with technology? Try spring training. It’s not that dissimilar from investing in TV in the 1940’s.” Then he uncorks his favorite pitch. “The next five years will be the most significant time to really accumulate wealth this country has ever seen.”

Ring, ring.

“Mike DiCarlo. Fine, thank vou. Yeah, can you believe it?” Word on Wall Street seems to travel at the speed of a Pentium processor. Only the night before, DiCarlo learned that his charity raffle ticket had won him the main prize: a week with America’s Ryder Cup team in Spain next fall. An 18-handicapper, DiCarlo has just returned from a week’s golf outing in Ireland with his partner Forbes, and he cannot believe his luck. “It’ll be like going to heaven without dying,” he rhapsodizes to the stream of callers who have somehow heard.

DiCarlo typically gets 60 to 70 calls a day from brokerage house analysts, who keep him up to date about companies he already owns, or from brokers eager to sell new ones. They know they have from 30 to 90 seconds to state their business, so they have their bullet points ready. As DiCarlo listens, he checks the stock’s history on his computer. Some of the voice mail messages get deleted in midstream. “I can tell in 10 seconds if I’m interested,” he says.

When he’s not on the phone or checking the Nasdaq, DiCarlo meets with the people who make the products he might invest in. The day before, he had gone to see a demonstration by the Navigation Technologies Corporation, a company prepar¬ing to go public. Its product, the dream of anyone who is direction impaired, is a satellite connected computerized map on a car’s dashboard. If you key in a street address (or even ask for the location of the nearest Starbucks), printed directions flash on the screen.

Alas, there is a technical glitch, and the start up plans seem weak. “They’re not projecting a profit till 2002 based on a 1.8 percent penetration of the market,” DiCarlo will say later, meaning of all the cars in America, fewer than 2 percent would be navigationally equipped. “They’re coming public too early. Also, the technology’s great but it will be labor intensive keeping the software up. Someday it could be a razor blade you know, like once Gillette sells the razor, people have to keep buying the blades. But right now it’s too early to expect consistent earnings and sales growth.”

Scratch that stock. (His instincts prove right. Getting few takers for its planned stock offering, the company, delayed going public.)

DiCarlo meets with pitchmen from 25 to 30 companies a week, most of which the public has never heard of. Like an army of ants marching across a picnic blanket, these eager men and women parade through with their charts, their prospectuses and their hopeful smiles - the very backbone of capitalism at work.

An institutional broker who has dealt with DiCarlo for four years says: “Mike’s very focused. He has this ability to identify a trend early and pick stocks with the best earnings and growth prospects. Last year, for instance, he was in early on Netscape and out early,” for a profit of 120 percent.

Netscape, another software provider, went public in August 1995, just as Wall Street was waking up to the possibilities of the Internet. As a preferred customer, DiCarlo was able to get in on the initial offering at $28. Then he sat tight as the stock shot up into the 70’s. When it briefly dropped back into the mid 40’s, “I bought the living hell out of it,” he says. In three months it rose to $194. “We were selling it all the way up,” he says with a smile.

By now it is 9 A.M. a half hour before the markets open and DiCarlo is processing Information as fast as he can get it. He picks up the phone and dials Pam Kustas, one of his traders at Hancock. “I think we’re going to have a strong technology day,” he says. “Sell 400,000 shares of Prism. And I want 500,000 shares of H & Q” Hambrecht & Quist, a San Francisco investment bank that specializes in technology, health care and information service stocks “no, make that 461,000.”

He hangs up. “Last night before I went to bed,” he says, “I hooked onto the Internet and checked the overseas markets, read two prospectuses, three research reports and looked at the portfolio. I tried to decide what I want to do with the bottom 20 holdings, what I want to get rid of.” He pauses. “I fell asleep with a thick stack of reading material that my wife cleared off my chest.”

This is typical. DiCarlo wakes up to the business news and 16 to 18 hours later checks his com¾¾puter and reviews his portfolio before hitting the sack while, across the bed, his wife, Christine, finishes her day, writing down a few ideas for her corporate events planning business, Front Row Associates. It will be well after 11 tonight, for instance, when DiCarlo decides to buy, into the Altera Corporation, a semiconductor company. Tomorrow, with prescient timing, he will order 400,000 shares at 43¼. By Friday, it will be up 4 points. “I’ve been watching it for two weeks,” he later explains. “For the second month in a row, its numbers ticked up. Its book-to bill ratio came out this week” that’s orders versus sales – “and that looked good. And its volume picked up nicely the last four days. It seemed like the right entry point. Maybe this uptick is just I head fake, but I don’t think the risk is that great.” (Indeed. Altera climbed 12 points in two weeks and mid November was trading in the high 60’s.)

Ten minutes after the markets open, the Dow and Nasdaq are both down and Special Equities is off 2 cents. “The bond market is sucking wind,” DiCarlo moans. “We need to get a clearer direction on interest rates.”

Two or three times an hour he’ll check the Nasdaq to see what stocks arc moving; several times a day he’ll study the Nasdaq carefully to see specifically what his 86 stocks are doing.

Twenty minutes later, the picture has brightened. DiCarlo’s second biggest holding, Cascade Communications a company that makes switches for high-speed data communications is up five; another stock is up two. And Structural Dynamics has drifted into the 3 handle range. St. Pierre wanders in. “We’re up 16 basis points and the world is down 16 basis points,” DiCarlo notes. (A basis point is one hundredth of a percentage point.) Although his prime goal is to make the fund richer, beating the Nasdaq even for this fleeting moment gives him a psychological boost.

“I think,” St. Pierre says, “we’re going to have a killer fourth quarter.”

In Bethesda MD Peter Krasilovsky, an analyst, is shaking his head. A vice president of Arlen Communications, a new media consulting firm, Krasilovsky researches Internet companies. AOL “has a tough road ahead because it’s operating in such an uncertain environment,” he says. “It doesn’t know what it’s doing. They’re working very hard to get it right, but it’s one of the least predictable companies out there. It’s interesting to me that AOL is still a favorite of fund managers.”

AOL has been trying to increase its subscriber base as a lure for advertisers and buyers of their goods. But according to Krasilovsky, only 10 percent of AOL revenue comes from advertising and transaction fees, and prospects for more remain iffy. The Internet is still too embryonic for Madison Avenue to pledge big bucks to it. “Maybe it will prove a good long term investment,” he says, “but right now, a lot of funds are going to have to cover themselves.”

The same instinct impelled DiCarlo to book up-and-coming bands followed him into the stock market. As an analyst, he grew fascinated with growth stocks and he studied the traits of the most successful. First he ze¬roed in on companies that produced annual revenue and earnings growth of 25 percent. Then he looked for companies that ranked number 1 or number 2 in market share. Finally he decided on two more requirements: A company must be able to finance its growth internally, not through excessive debt. And the management must be visionary and driven and own a substantial stake in the company.

Within five years of his taking over Special Equities, Morningstar rating service gave the fund five stars and DiCarlo was hailed by Barron’s as the next Peter Lynch, Fidelity Magellan’s legendary portfolio manager who, though no longer running the fund, retains the standard by which all managers are judged. During Lynch’s 14 years with Magellan, it averaged an annual return of 29.2 percent. “Next to Lynch. Mike’s the most optimistic person I know ‘ ” says a broker. ” Look, in this business, everybody is a workaholic and everyone is incredibly bright. What sets managers apart are instinct and personality. Mike’s always going after embryonic companies. What’s the next Microsoft? He loves to find managements with new ideas.”

DiCarlo is always hungry. In 1990 he was in a sandwich shop when he noticed a bottle of flavored water called Clearly Canadian. Nice packaging, refreshing looking drink. He bought one and liked the taste. The next day he learned the company was publicly held. For nine months DiCarlo did due diligence. He dispatched an assistant to the well site in Canada and then met with the firm’s top management himself. “The kind of touchy-feely impressions you get by sitting down with management can be important too,” he says.

Next he talked to middle management to find out if what top management said was actually in play. He consulted with analysts to get a fix on Street’s reaction to the stock, which was then selling in the $2 to $5 range. DiCarlo began buying. Five months later, when it reached 22, he started to sell. Other companies were coming out with their own brands “and I figured the run was over,” he says. By the time the stock reached 24, he had completely sold out. The stock hit 26 7/8 before heading downward. Now, in mid September, it is selling at 2.

He can also be wrong. His biggest disaster came three years ago when he learned that Hunter Environmental Services owned the rights to salt domes in Texas and Louisiana. The company proposed to the Texas Water Commission that it use the domes to store hazardous waste. At S5 a share, it looked like a sure thing. DiCarlo bought. “I thought using salt domes for this purpose made so much sense they would have to see the benefits,” he recalls. But after heated political infighting, a permit was denied. Overnight the stock went into cardiac arrest and DiCarlo sold his shares for 75 cents to $1. He lost 90 percent of his investment in two days.

Ring, ring.

It’s an analyst. “‘The one thing I’m hearing about AOL,” he reports, “is that if you unsubscribe, they’ll offer you free hours to stay on.”

“That’s pretty bad, huh?” says DiCarlo. “I mean, if you take the offer, you can use the free hours, then cancel.” He pauses. “For two and a half months their stock’s been playing like the Red Sox. Wall Street’s like an elephant going through a door. One goes, they all follow. And the door is only so wide.”

As DiCarlo hangs up, his assistant, Cathy Taylor, materializes in the doorway. “I just thought you’d like to know, another $25 million in new money’s already come in today.”

DiCarlo merely raises an eyebrow –interesting– before returning his attention to the screen. And the trading volume of AOL.

It’s 10:40 A.M.

Across the country in Portland, Ore., Jim Crabbe of the Crabbe Huson Group is also watching the stock. Still mired in the mid 20’s, AOL is being shorted right and left. This tactic allows an investor to sell a stock he doesn’t own by “borrowing it” from someone who does, at the stock’s current price. If the stock goes up, the investor must pay the lender the difference. If it drops, the investor collects the difference.

Like many fund managers, Crabbe is making a bundle on AOL. Well, maybe not a bundle. His Special Fund, a small cap fund like DiCarlo’s, is worth only $500 million, but so far he has made $5 million on AOL by shorting it. “At some point, you have to ask some hard business questions,” he says. “America Online has been funded by Wall Street offerings and it’s time to say, show me some earnings. If things don’t change soon, I think it’s on the road out. The time has come to cook that pig.”

DiCarlo did not suffer through the market’s crumbling in the 70’s and his only point of reference to a Wall Street earthquake came on Oct. 19, 1987, when the market fell 508 points. “They said in December of ‘87, after the thing had cracked, this was the wrong time to sell,” DiCarlo says. “And if you had held on, a year later you would have been ahead, and two years later well ahead. Seven years later you would have made a bloody fortune. People have learned their lesson. What you see now is when stocks go down, people are in there buying.”

The skeptics, and they are hard to ferret out, tend to be older, war worn and, as their doom and gloom refuses to produce the downslide they are predicting, hesitant. In late August, Byron Wien, Morgan Stanley’s market sage and dedicated bear, was still predicting a market drop of 1,000 points. “Growth stocks were in favor in the 60’s, too,” he said. “They peaked in 1968. But we didn’t understand how overpriced they were until the terrible bear market hit in 1970. High quality growth stocks continued until Jan. 11, 1973. Then a sec¬ular bear market” a long term downward trend “hit, persistent and relentless. We had the oil embargo, inflation and Nixon resigning. It was a pretty gloomy period. Mutual fund managers lost their jobs. Salesmen left the business. Analysts went to work for corporations. And this is what he thinks will happen again, “I think we haven’t purged the excesses,” Wien said. “Stock prices will come down. Portfolio managers should be defensive. Most weren’t around in the bear market of 1982. They don’t have a feel for how deep the plunge could go.”

Even as he spoke, the stock market continued its march to the 6,000 mark and eventually Wien concluded that the bulls would have their way through the end of the year. James Grant, the editor of Grant’s Interest Rate Observer, who accurately predicted the end of both the real estate and the junk bond parties of the 1980’s at a time when people were still giddy with them, puts it another way. “The paradox of financial markets is that the times of greatest risk appear to be the times of least risk,” he says. Meaning now, with the Dow, Nasdaq and the Standard & Poor’s 500 priced it record levels. “The story of the markets is one of cycles,” Grant adds, “not one perpetual upturn. To suppose record high valuations will continue requires near perfect conditions, which is the height of arrogance.” He pauses. “This isn’t pessimism. It’s history.”

Although even the most bullish sorts concede a correction is bound to happen, Grant shoots down that thinking as rosy. “The downturn will be severe, and severe enough to change attitudes about financial markets,” he asserts. “It’s highly unlikely that the culmination of the greatest bull market ever would be a meek bear market.”

When confronted with this dismal assessment, DiCarlo shakes his head. “History, does repeat itself,” he agrees. “You have to be conscious of what caused market trends in the past. And I know what people are saying. They say, ‘Oh, these young people never saw the crash of ‘29.’ But that doesn’t mean you can’t deal with a crash.”

Nevertheless, as noon approaches, the day pulsates with the kind of drama that Wall Street does so well. The rumors about AOL are taking on a life of their own.

“I just thought you’d like to hear what’s going on with America Online,” says Bob Nowlin, a managing director of the brokerage firm Robertson Stephens & Company, over lunch. Nowlin has arrived from San Francisco equipped with a scrap of paper enumerating bullet points for the stocks he wants to pitch to DiCarlo and Forbes. Nowlin isn’t pitching AOL, but he wants to alert his clients to the rumors he has been hearing.

“They’re losing subscribers,” Nowlin says. “When someone calls to cancel their membership, I hear they’re offering 15 free hours.”

“Un uh,” DiCarlo says

“Also, they pulled out of the Montgomery conference. No reason given.”

“That’s interesting,” DiCarlo says and continues eating his pasta. But once he is back in his office, he calls Richard Hanlon vice president of investor relations at AOL headquarters in Virginia. He has already called Hanlon twice this morning. Now he is again told Hanlon is unavailable.

Next he phones Montgomery, Securities in San Francisco. In late September, the company will hold its annual investment growth stock conference for 1,000 fund managers, analysts and C.E.O.’s. For AOL to suddenly pull out does sound odd, and DiCarlo wants to know why.

“Oh,” he says into the phone. “You mean they never accepted the invitation? They sent a letter declining in June? O.K. Thanks.”

Now DiCarlo calls AOL’s 800 number and says he wishes to cancel his membership. “It isn’t as helpful as just going straight to the Internet,” he bluffs. The AOL man asks for his credit card number, then says, “O.K you’ll receive a letter confirming your cancelation 10 days.

Clearly, DiCarlo is not going to be offered the rumored 15 free hours. “Actually,” he says, “I changed my mind. I don’t wish to cancel after all.”

“As you just heard,” he says, hanging up, “they offered me nothing. That’s just another example of the rumor mill”

He taps a pen on his desk. “When Windows 95 came out with the Microsoft Network attached to it, that was going to be the end of America Online,” he says. “Only Windows wasn’t the rocket shot people thought it would be. It was more like a Roman candle. A nice light for a couple of months, then it sort of petered out. And America Online just kept churning along. Now the story is that subscriber growth has slowed significantly. People who have the stock short are trying to drag the price down by disseminating stories and rumors. If these rumors prove true, I would have to start paring the stock back.”

Despite its free fall, AOL stock has not dropped below 12 percent of the average price he paid for it, so he intends to hold it. “Something has to happen to change the psychology of the stock for it to go up”, he says. “Once it does, all the short interest out there will have to cover their positions. That would represent an excellent source of demand for shares because people would have to start buying to cover their short positions.”

Still, no word from Hanlon, who, DiCarlo says, normally returns his calls within minutes. So now he dashes off an E mail message. Then DiCarlo walks into the conference room to meet with executives from the Credit Acceptance Corporation, a firm that lends money to people with bad credit to buy used cars. But 10 minutes into the presentation, he is called to the phone. Hanlon.

DiCarlo is affable. He repeats the rumors, then says: “Richard, did you just say ‘poppycock?” You sound like Clint Eastwood in ‘Line of Fire.’ ” He laughs and listens. “At the moment, it seems the shorts just want to have their way with you,” he puts in. “They’re working the rumor mill pretty good. The other thing that is bothering me people are still focused on subscriber growth. Obviously that’s important.”

Because of the strict but somewhat murky guidelines governing insider information, Hanlon can’t tell DiCarlo much. If, for example, earnings are weak, DiCarlo can’t know that until the third quarter report comes out. So Hanlon mentions a report, which is in the public domain that stated subscriptions were up for July, August and so far in September. “All I can tell you,” Hanlon says, “is that I agree with the report.”

Half an hour later, DiCarlo is on a conference call with brokers from Tucker Anthony. Having heard the AOL rumors, they ask his opinion. “I think,” DiCarlo says boldly, “AOL is going to prove one of our better home runs.”

DiCarlo needs one. This year, not even his nose or the crystal ball on his desk or the pair of dice, one with bulls, the other bears has been reliable. The July “correction” took much of the wind out of tech stocks. When the market righted itself in August, DiCarlo revamped his portfolio, reducing the number of companies he held from 105 to 86 to make it more manageable. He took bigger positions in companies that he strongly believed in, like Cascade Communications, Electronics for Imaging, two billboard companies – Universal Outdoor Holdings and Outdoor Systems and Pride Petroleum Services. Then, seizing on the lower prices, he bought companies whose stock was now affordable, like Iron Mountain, a document storage and retrieval company.

The renovated portfolio reflects his passion for the energy industry; gas and oil exploration companies now compose 10 percent of his holdings. “China is reindustrializing,” he says. “I know this may sound goofy, but can you imagine a billion people converting from bicycles to cars? Reindustrializing is happening in India, and in Russia to a degree, and Iraq doesn’t look like it’s going to come on board anytime soon as a provider to the rest of the world.”

He stands and points out the window. “I’m looking at the Southeast Expressway and I will bet you that of the next 100 cars that go by, 40 will be Blazers, Broncos, Jimmys or Cherokees. These are not the cars we were driving five or six years ago.” He pauses. “We think energy stocks have a lot farther to go.”

Yet the fund still hasn’t bounced back. Does he feel bear’s breathe on his neck?

“If you look at the fund’s history, you’ll find that it typically underperforms in the first half, then outperforms in the second half,” he says. “Technology is having a difficult year. But it’s been up significantly since the bull market began in October 1990, and you can t go up on a straight line. We still think we’re in the middle of a secular bull market with technology, not that dissimilar from the 70’s, when if you owned energy stocks, you made a lot of money, or the 80’s, when if you owned health care stocks, you made a lot of money. In the 90’s, if you own technology stocks, you’re going to make a lot of money.”

Despite the pressures of his work, DiCarlo insists he is not ulcer prone. “I’m pretty good at letting things roll off my back,” he says. “I don’t worry about what I can’t control.”

His attitude may derive partly from a life threatening episode when he was 20. He was going to school and working nights processing payments for the John Hancock Insurance Company. His eyes began to bother him. One morning he awoke, looked in the mirror and couldn’t see a thing. A tumor on his brain had hemorrhaged. The tumor was benign, but its removal slowed DiCarlo for two years. “The biggest way it’s affected me,” he says, “is I don’t get stressed over small things. If I get up in the morning, that’s a great day.”

Suddenly in the hallway outside DiCarlo’s office, a putting sound. Late in the day, DiCarlo’s two partners are competing to see who pays for an earlier takeout lunch. The serious-looking one with the wire-rimmed glasses sighting the ball down the hallway is Andrew St. Pierre. Thirty-five with a Harvard degree, he managed five of Hancock’s closed-end funds with combined assets of more than $1 billion and, with DiCarlo, was among Hancock’s marquee players. “Andy, has one of the brightest business minds around,” says DiCarlo. “He can out-negotiate and outthink them all.”

Standing in his office doorway watching is G. Ross Forbes Jr., 47. Tall and ruddy complexioned, he always looks as if he is suppressing a laugh. After receiving an M.B.A. from the University of Chicago, he worked in management for several companies before finding his way 12 years ago to William Blair & Company, a Chicago investment bank, as a partner in equity sales which is when he met DiCarlo. “At the time, Mike was low man on the totem pole and the only one at Hancock who would take my calls,” Forbes says.

A fourth partner, Robert Ott, a fund manager from Marin County has just been hired for his technical analysis and knowledge of technology stocks but has yet to report for work.

This is the team DiCarlo formed to start the DFS Advisors hedge fund, Integrity Partners. Considered riskier investment vehicles, hedge funds arc private partnerships that fly under the S.E.C.’s radar screen by limiting the number of investors to less than 100. While the minimum investment for a Special Equities account is $1,000, the bottom line to buy into Integrity Partners is $1 million. In addition, hedge fund investors pay an annual fee of 1 percent to DFS to manage the fund and DiCarlo and his partners collect 20 percent of the yearly profits if there are any.

Although the partners work interchangeably on both funds –popping into one another’s offices, trading information and ideas, covering for one another in meetings - Forbes describes the breakdown of duties this way: “Our financial philosophy is the car. Mike’s the driver. He makes the choices. Andy’s the pit boss. He changes the tires, tells you how many laps are left and suggests strategies. Me, I put the decals on the car. I do the selling and the servicing.” He grins. “I’m very good at telling a story.”

As the newest breed of cowboy on Wall Street, hedge-fund managers can earn far more than, than their mutual fund colleagues. But the risks involved are enough to corner the market on sleeping aids. DiCarlo has almost all of his savings he won’t say what he is worth invested in his two funds; 70 percent in Special Equities, 30 percent in Integrity Partners. St. Pierre and Forbes, each with three children and their money tied up in the funds admit the decision to go out on their own wasn’t easy.

“Basically, we were tired of all the meetings and bureaucracy,” St. Pierre says. “Mike and I made a bet the money would come. We’ve always had this notion that by outworking everybody around us, posting good numbers, living by our wits and taking chances, the money will follow.” He hesitates. “But there’s no guarantee that past performance will carry forward.”

It is 8 P.M. when DiCarlo walks into the Peabody Marriott. A brokerage house is presenting a seminar for people interested in mutual funds and DiCarlo is the main speaker. A mixed crowd of about 100 sit expectantly on folding chairs as DiCarlo clears his throat.

“When I was thinking about what to say tonight,” he begins, “I remembered the Roman senator Cicero, who was a great speaker. He said a speech should be like the art of making love. It should start slowly, build to a climactic finale and it should never last longer than the act of making love itself.” He pauses. “So in conclusion….” As the laughter dies down, DiCarlo says: “My emotions range from bullish to very bullish to extremely bullish. The average bull market for funds is 72 months. Next month will be 72 months. People are nervous.” He smiles. “I love when people are nervous.”

Proclaiming his passion for the technology sector, he tells the rapt audience: “let me put it this way. Your home computer probably has a modem, speakers and CD ROM. But corporate America still doesn’t have this multimedia computing. It will. They’ll have to. The other day I was looking for a birthday card. I opened one up and it played ‘Happy Birthday.’ That one card had more computing power in its little chip than the whole world had in 1950.”

Then, putting forth his case for mutual funds, he says: “In the 80’s we bought like it was going out of style. We bought every toy known to mankind. We thought it would last forever. But when the decade came to a close, it was like someone threw a light switch and we all collectively got religion. We started to realize we were mortal. Then we started looking at things that would require long-term financial planning, like our children’s college tuition and our own retirement. All of a sudden we went from a nation of conspicuous consumers to a nation kicking up the saving and investment rate.

The questions are fairly sophisticated, and when the talk ends, people line up to speak to DiCarlo, even asking him to autograph their programs. “It used to be only doctors and lawyers that I talked to,” DiCarlo notes. “Now it’s plumbers and electricians.”

It is the close of business on Friday the 13th. Special Equities is up 51/2 percent for the week and DiCarlo is, as usual, upbeat. “I still have confidence we’ll pull this year out,” he says as he packs his briefcase. “But the fact that the fund is underperforming bothers me. I would hate to think that one bad year would get me kicked out the door. If I had two bad years in a row, I think there should be serious consideration of taking me off the fund.”

He pauses and glances out the window, where a real storm is brewing in the distance. “I feel confident my stock picking skills aren’t going to desert me.”

Over the next two months the hedge fund will open its first two week subscription period and attract $51 million. A second offering at the end of this month promises to bring in more.

But the potholes still lurk. By Nov. 19, neither AOL — which had descended to seventh in DiCarlo’s portfolio because of other acquisitions and stock price fluctuations nor Special Equities seems to have produced the home run DiCarlo has been waiting for.

Special Equities is still trudging along, up 5.1 percent for 1996 as of Nov. 15. By comparison, on the same day the average return for the 153 small cap growth funds followed by Morningstar was 15.31 percent. “This is the most difficult tape I’ve ever seen,” DiCarlo says on the phone, referring to the market. “Microsoft had better than expected earnings, I.B.M.’s were great, but the market isn’t responding.”

Though I.B.M. stock finally surged, the market still has not responded to AOL’s new competitive pricing plan (to go into effect today) and its revamped accounting system. DiCarlo, however, remains optimistic. “The short story said that AOL’s old pricing would drive members straight to the Internet,” he says over the phone. “So when AOL changed its pricing strategy, it shot the shorts right between the eyes. Since AOL offers original programming along with the Internet, it’s going to put the pure Internet providers right out of business. I think,” he says with his usual bravado, “It’s only a matter of time before the stock is off to the races.”

As of Nov. 19, AOL’s share price had ticked up to 27 1/8. DiCarlo’s gamble was protected at least for the moment.