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
The bulk of the land comprising Disney World came through the acquisition of three parcels: 12,400 acres owned by a group of home builders, 1,250 acres owned by a local investment group and 8,500 acres owned by a Florida state senator. Without these three parcels, Disney World would not have been possible. Today, a focus on benchmarks makes traders reluctant to execute in large blocks for fear of missing their arbitrary benchmark. A good trade is not measured by beating the VWAP, arrival price or some other benchmark, but by whether the trader helped the portfolio manager meet an objective. Make sure your traders understand that your objectives are more important than the benchmark.
>Let Liquidity Drive Orders
At one meeting between Roy Disney and a local landowner, Disney learned that there was a large parcel of land available for purchase. This land was not key to his plans, but when the opportunity to buy it was presented, Disney immediately responded, “Buy it!”
Finding liquidity is difficult. Years ago, Foster had to search through newspapers for land offerings. Fortunately, your traders have more advanced tools at their disposal. Indication of interest and trade advertisement data can be linked to an order blotter or position list and proactively alert traders to natural trade opportunities. All your traders need is the ability to act on those opportunities.
Let your traders help you meet your long-term goals by giving them the leeway to take advantage when they find a large block in an illiquid or hard-to-trade name.
>Don’t Sweat Small Stuff
Much of the land acquired by Disney had been subdivided into five-acre lots in 1912 by the Munger Land Company. These lots were, for the most part, swampland, and the owners were happy to get rid of them. Over time, Foster had purchased and put together thousands of acres from these small lots-a time-consuming activity. If Foster had access to algorithms, he would have been able to define his parameters and let the system execute on his behalf, freeing him to concentrate on more value-added activities. Algorithms are a good way to automatically access liquidity.
>Camouflage Intentions
The Disney company used numerous shell companies to keep its activities secret. Entities such as M.T. Lott Real Estate Investments, Retlaw (Walter spelled backward) and Ayefour Corp. (The I-4 is the highway that passes through Orlando) allowed it to anonymously acquire the vast swath of land now known as Disney World. It is no less important for you and your traders to keep your intentions quiet. Traders have similar shell companies at their disposal: dark pools, where buyers and sellers anonymously transact large blocks of stock.
>Use Specialized Expertise
When Foster started looking for a site, he hired a real-estate agent experienced in Florida to help find a suitable area. Investing is no different. Historical trade advertisement data will help your traders find the most experienced sellside firms for your orders by displaying which brokers have been trading the most volume in a security or basket over any period.
It is also important to quickly identify the brokers or algorithms that have provided superior trade execution. Ironically, the rise of transaction-cost analysis systems has made this identification process more convoluted by promoting the use of best/worst broker reports. A broker ranking that does not identify the situations in which a broker performed well or poorly is misleading. I can’t emphasize enough how important it is to use a system that shows which brokers are best for circumstances similar to the trade you are working.
>Learn From Experience
Walt Disney learned from his Disneyland experience. In California, the failure to buy enough land resulted in tacky hotels, gift shops and restaurants within sight from the park, detracting from the visual experience of the family-oriented theme park. In Orlando, Disney wanted to guarantee that he would control the surroundings. Correspondingly, the portfolio manager can take away lessons from the trading experience. Order sizing, pre-trade momentum and volatility are some of the factors that can influence the success of an order. Using historical data to learn which brokers and strategies worked best for those different factors will allow your traders to pick the most likely sources of outperformance for future orders.
>Conclusion
The Disney experience shows the importance of a partnership. Traders and portfolio managers often do not communicate well, except to air grievances over a trade. Opening the lines of communication can result in a more successful trading process and bring a little bit of the Magic Kingdom to every trading floor.
Jeffrey Alexander is a trading strategist at Bloomberg and heads its analytics group, where his is involved in issues and products that impact best execution. He can be reached at jalexander19@bloomberg.net.
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