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October 14, 2008

Wonderful World of Trading

What Disney World and portfolio managers have in common

By Jeffrey Alexander

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In 1959, Walt Disney started looking for land on which to build a resort to supplement Disneyland, the family theme park in Anaheim, Calif., that opened in 1955. Market surveys revealed that only 2 percent of Disneyland's visitors came from east of the Mississippi River, where 75 percent of the U.S. population lived. Additionally, Disney disliked the businesses that had sprung up around Disneyland and wanted to avoid a similar problem with his new project.

Much like a portfolio manager would evaluate an investment idea on a set of criteria such as cash flow, earnings and book value, Disney made his decision based on abundance of cheap land, well-developed highways and infrastructure, a location near a major city with an airport and dependable year-round weather. The location was sealed when he flew over Orlando, Fla., and saw McCoy Air Force Base (now Orlando International Airport) and a well-developed network of roads, including Interstate 4 and the Florida Turnpike.

Robert Foster, secretary and general counsel for Disneyland, was assigned the unenviable task of being the "trader" for this order. From the time Foster first purchased a five-acre lot until the Orlando Sentinel printed the headline "We Say: 'Mystery' Industry Is Disney," Disney had quietly accumulated more than 27,000 acres of land in central Florida for a little more than $5 million. Prices for land jumped from $183 per acre to around $1,000 per acre after the news broke.

How Walt Disney accumulated this land illuminates the importance of best execution to investment returns and the importance of cooperation between portfolio managers and traders.

Lessons include:

>Implementation Costs

One of the key factors in Disney's "investment decision" was the ability to purchase the land cheaply. Accumulating a mass of land twice the size of Manhattan in the wrong area would have been prohibitively expensive. Similarly, investing moderate time with your trading desk, reviewing the post-trade results and understanding the factors that make a trade "expensive" will allow you to make better investing decisions.

>Communication 

Walt's brother Roy Disney proposed buying land in Florida and discussed his strategy directly with company lawyer Foster. As a result, Foster quietly starting buying lots of land ranging in size from five to 10,000 acres. Foster understood what Disney was trying to accomplish and closely communicated with him throughout the process, resulting in a successful trade. Likewise, it is crucial for portfolio managers to let traders know of the circumstances surrounding an order. Are you buying a stock ahead of earnings or is there no rush to complete the trade? Are you selling to raise some cash or as the first step toward liquidating the position? The trader will incorporate these factors into the execution strategy.

>Don't Fear the Block