In 1998, Sanjeev Sardana joined the San Francisco office of DLJ as a junior member of the wealth management division. A little more than a decade earlier, he had emigrated from New Delhi at age 17. Sardana neither came from wealth nor knew anyone in Northern California. Nor did he really understand the difference between software and hardware. But he arrived with a few compensatory advantages.
First off, he wasn't afraid to make a cold call and wage a polite, but relentless, campaign. That's how he had persuaded his boss to give him a job in the firm's sought-after California office in the first place. Second, he knew that nearby Silicon Valley was home to other Indian immigrants. Overall, he estimated that as many as 30% of startups there were begun by Indians.
"My premise in moving to Silicon Valley," Sardana says, "is that there was a lot of wealth being generated there and how am I going to be different?"
To that end, he turned his relentlessly polite campaign to his fellow Indians at a time when one of the strongest and most irrationally exuberant bull markets was nearing its peak. Fueled by the first wave of dot-com startups, double- and triple-digit millionaires were being minted, on paper at least, overnight. In this overheated environment, Sardana made his pitch advocating caution. It didn't always work.
One early client was a software engineer who owned one million shares of InfoSpace, an online Yellow Pages startup. After going public in 1998, the company's shares hit $482 in 2000 before starting to slide. When Sardana began working with him at the end of that year, the price had dropped to $60. "I went to see him and his wife at a restaurant," Sardana recalls. "I said, 'Hey, why don't we hedge some part of this stock to give you some downside protection?' He said, 'Yeah, that makes sense.' "
Before the client could sign the paperwork, onetime high-flying Merrill Lynch analyst Henry Blodget predicted InfoSpace stock would rebound. Blodget had called Amazon's meteoric stock rise accurately, and Sardana's new client was swayed. "So this guy says, 'Hey, I'm not capping my upside; I could be worth a quarter of a billion dollars,'" Sardana recalls.
Instead, the slide continued until the price hit $1.40. Because the client had exercised options, he ended up with stock worth $1.4 million - and a $10 million tax bill on shares he had sold as the stock was dropping. "It was bad," Sardana says.
More fortunately, other new clients listened. During the dot-com boom, Sardana recommended that his clients with large concentrated positions in single stocks create hedges while putting a portion of their holdings into a "costless collar" investment structure. A collar protects against downside exposure while limiting the upside of a holding. To create one, Sardana helped his clients buy put options at the floor of a target price range. Corresponding call options at the top of the range capped the upside. This strategy is used to restrict the sale of shares to a price between, say, $9 and $10.
Sardana used this strategy for a client who, at one point, held $200 million in the stock of a very large computer networking company that had purchased two companies he founded. The conversation started on a similar footing as the one with his InfoSpace client. "I said, 'Hey, why don't we sell some?'" the planner recalls. "He said, 'This is going to be the first $1 trillion company.' I said, 'If you had $200 million, would you put it all in this one stock?'"
That line of argument worked, to a certain extent. The client gave Sardana $40million to invest and the $160 million balance to a broker at UBS. "A year later, the client calls me up and says, 'I have bad news,'" Sardana says. The UBS broker had diversified him into other tech stocks that went down. As with the InfoSpace debacle, the tax man came knocking. But due to Sardana's hedged holdings, the client was able to pay his tax bill.
He moved the rest of his portfolio to Sardana, who helped him hang on to a net worth in the high double-digit millions, Sardana recalls, at a time when many of his friends were wiped out by similar missteps. "In some ways, it's easier to make the money," he says, "but much harder to hold on to it."
Certainly, if there's one lesson for planners in Silicon Valley, it's that monumental loss often goes hand-in-hand with monumental gain.
With two market downturns under his belt, Sardana is now CEO of his own wealth management firm, BluePointe Capital Management in San Mateo, Calif. The name of the company derives from the Blue Point oyster and the concept of a protective hard shell, inside which assets can grow in a defended environment. With $300million in AUM, the firm has about 60 clients, most of whom have made their fortunes in hardware and software, and about 70% of whom are Indian.
In his work, he rolls the dice regularly - if cautiously - alongside his clients. Two years ago, his firm began hosting venture capital forums routinely attended by a dozen or more clients. "The way it started is our clients would call me up and say, 'Hey, I am investing in this company. Do you have any other clients who might be interested?'" he says. Instead of calling clients one by one, they would hold a meeting and the primary investor would bring in the entrepreneur to answer questions.
"If a client comes in and says, 'I'm not tech savvy,'" Sardana says, "I tell them, 'You have to make your own decision.' We make sure they don't get too exposed on something that may not be good for them." The number of forums has grown this year to roughly one every two to three months; Sardana says he has invested in many of the presenting companies.
Shamik Mehta, one of Sardana's most active clients, who used to keep his money with a bank advisor, says he likes the fact that Sardana's independence allows for unique investment opportunities. "You can create a loosely functioning forum of like-minded people and be creative and think out of the box," says Mehta, a veteran of several large technology companies in the Valley. "You couldn't do that in a large financial institution."
From 2008 to 2011, for example, Sardana and a group of clients, including Mehta, put together a limited liability company to take advantage of the depressed real estate market by buying and flipping homes. After distributing the proceeds, Sardana and his clients are now putting together another fund.
"The thing about Sanjeev," Mehta says, "is he will tell me if I'm wrong or right. He does the research and gets back to me. We do agree on parameters. One thing he does not let me do is take too much risk. He says, 'You are done taking risk.'"
Ann Marsh is senior editor and the West Coast bureau chief of Financial Planning.