Right on the Money

When money talks, Mendelsohn listens

by Mark Pendergrast

windham0911_jc_64_LEADPaul Mendelsohn, president and chief investment strategist of Windham Financial Services, manages his company and his clients’ millions from his home office control center in Ferrisburgh.

At a U-shaped desk in his gracious Ferrisburgh home on Lake Champlain, Paul Mendelsohn, 63, calls up chart after chart on a computer screen. The other three monitors surrounding him display financial cable news, current stock market movements, and other investment esoterica.

As president and chief investment strategist of Windham Financial Services, Mendelsohn manages millions of dollars and helps advise institutional clients on how to allocate their billions. On this particular Tuesday in August, the market is almost hysterically volatile as it awaits an afternoon announcement from the Federal Reserve.

Yet Mendelsohn is preternaturally calm as he explains in detail how he came to be sitting in that chair, how he manages money, why he thinks we may be in for another recession, and why his clients don’t need to worry too much about it. During this conversation, he pets one of his four dogs, makes some trades with a few keystrokes, talks to reporters from Thomson Reuters and the Japanese Nikkei News, and consults several times with Paul Levine, his Windham partner in West Hartford, Conn.

His 46 technical charts, which include names such as the Regression Time Series, the Moving Average Convergence/Divergence (MACD), Parabolic Stop and Reverse, the Polynomial Cycle Regression, and Fibonacci Retracement, show a squiggly upward line for the last few months that turned downward in the last week, breaking below a steady upward line representing a critical three-year market support.

“See this?” he says, pointing at a chart. “This is a major warning signal. It says, Not a good time to be in the market.” Consequently, he has hedged his clients’ positions so they are market neutral or, for his more aggressive clients, slightly short the market. The only chart that shows a consistent upward trend is the price of gold.

“I have two fundamental investment rules,” Mendelsohn says. “Number 1: Never lose clients’ money. Number 2: Never break Rule Number 1.” Because of complex compliance requirements for broker-dealers, Windham Financial can’t publicize performance results, but Mendelsohn and his team have amassed an impressive track record while protecting their clients’ assets during the bear markets of 2001 and 2008.

Mendelsohn grew up on Long Island, the son of a Manhattan jewelry designer and retailer. He arranged his classes at Long Island University so he could drive up to Vermont for long ski weekends — the beginning of his long love affair with the state.

“Connected” seems like a gross understatement when speaking of Mendelsohn, who takes full advantage of the most recent technology to ply his trade.

Richard King, his closest friend in college, was a street kid who complemented Mendelsohn’s intellectual bent. As an undergrad, King was an undercover narcotics agent and ran a nightclub, later becoming a top executive for Panasonic. “He taught me to read people; to look under the surface,” says Mendelsohn.

After earning his joint degree in sociology, history, and political science, Mendelsohn planned to become a professor and writer, but he quit grad school at New York University when he discovered how much fun it was to work in the garment district, tracing the logistics of goods flowing in and out.

Then in 1973 he saw a newspaper ad for a Xerox salesman. “You’d make a great salesman,” King told him, so he applied and got the job. Two months later, when Cannon came out with a competitive copier, Mendelsohn went undercover to get a demo of the machine, then wrote a 30-page report analyzing its flaws and strengths, suggesting how to build sales scripts to counter it. His report made its way up the corporate chain to the Xerox CEO, who was impressed.

As a result, Mendelsohn was plucked from sales training to help launch the first color copier in New York City. “Nobody could see the use of this expensive color copier,” he recalls. He met with art directors in the advertising world and photo-print shops and developed a whole genre of applications for them. The product launched successfully.

That led to his heading sales for national accounts such as Metropolitan Life and Mobil Oil. Mendelsohn threw himself into learning everything about each business, meeting with people in every department. “That was my business education,” he says. “In analyzing how our product would fit into their departments, I needed to know how the work flow functioned.”

He was frustrated that a Met Life product manager refused to increase productivity by upgrading from clunky old photocopiers, so Mendelsohn learned discounted cash-flow analysis to show the tax benefits of buying new machines. In a dramatic meeting with the CEOs of both companies, he sold the concept. “I was the company’s number one salesman for two years in a row, and it made me a lot of money.”

In 1978, Mendelsohn became the manager of market planning and forecasting for Xerox’s Latin American business, for which he learned econometrics. His undergrad study of demographics and political science came in handy. Seeking forecasting models to track the runaway inflation of those times, he concluded that he could use gold as a baseline, though in 1971 President Nixon had ostensibly abandoned the gold standard by allowing the price to fluctuate from its traditional $35 an ounce. From his mathematical regression analysis, Mendelsohn concluded that “gold was very cheap and was key to holding the international monetary system together.”

He went to his brother, Hank, who was buying gold for their father’s jewelry business and said, “I have $10,000 I want to invest in gold.” Underpaid and restive, his brother suggested co-founding a company, which they called Gold Standard.

When the oil crisis hit in 1979, the price of gold skyrocketed. “Hank had people standing in line to sell him gold at $600 an ounce,” Mendelsohn recalls, “so he asked me to cancel my Aspen vacation and help out.”

His brother led him to a computer screen. “You sell a 100-ounce option contract when we buy that amount of gold so that we are hedged and are guaranteed to make our spread.” So there he sat in the heart of the diamond district, watching the screen flashing, buying and selling gold. “It was the most exciting day I’ve had in my life.” He never returned to Xerox.

Soon Mendelsohn concluded that they could make more money. “When gold is going up $50 a day,” he told his brother, “maybe we shouldn’t be hedging.” He bought one of the first TRS-80 personal computers from Radio Shack and taught himself programming in order to do technical modeling to find out when, and when not, to hedge.

All along, he was skiing in Vermont in his spare time. In 1983, he and Hank sold most of the business and, at 36, a newly affluent Mendelsohn took his computer and moved to West Dover.

“I put a satellite dish on my roof so I could play with my money, work on models, and go skiing,” he says. He expanded from gold into currencies, futures, and the stock market. “I was one of the first day traders in the 1980s.” He taught himself to read balance sheets and cash flows and to research company managers.

By 1987, friends and acquaintances had noticed his success and asked Mendelsohn to invest their money, using his models. He called his business Windham Financial Services because he lived in Windham County. In 1993 he decided to become a broker so he could give advice on a commission basis instead of just managing money. He quickly passed the necessary tests.

In 1997 he married Karen Kelly and moved to Burlington to be near her daughter, Krissie, and her two grandchildren. He hired other managers and staff, and by 2000, Windham Financial had six branches and 18 employees. Then the market crashed, compliance rules became bizarrely complicated, and Mendelsohn decided to downsize.

He cut back to just himself and two others: Levine in Connecticut, trained as an attorney and CPA, and Michael O’Connor in Scituate, Mass. O’Connor runs the retail brokerage, advising clients in a more traditional approach, but not managing accounts.

Levine, 71, manages money for his own clients. He and Mendelsohn might call each other 20 times in a day. “We consult and argue,” Mendelsohn says. “Sometimes it can get very heated. I get no volatility during down times, while he tends to outperform me on the ups.”

Despite their somewhat different approaches, they have enormous regard for each other. “We’re like brothers,” Levine says. “We respect and admire each other. Paul is very protective of his clients.”

In 2008, Fred Piumelli, a New Jersey investor who made a fortune from founding and selling a financial software company, had what he calls a “bake-off” between Mendelsohn and another longtime financial adviser. “I gave them each half of my liquid assets to invest,” he recalls. Just before the market crashed, the other aggressive manager was outperforming Mendelsohn by a few percentage points, but Piumelli decided to call off the contest and go completely with Windham Financial, thus saving himself from the catastrophic 40 percent beating that the market subsequently took. Since then, his investments have steadily grown. “I live in an affluent place, and I have never met anyone who is doing as well as I am,” says Piumelli.

Mendelsohn won’t divulge the names of his other clients, which include major charitable trusts, pension plans, and mutual funds. For such institutional customers, he does not manage money directly but advises, for a healthy commission.

Although a fiscal conservative, Mendelsohn thinks it is absurd to cut government services while refusing to tax the wealthy because they supposedly create jobs. “I make millionaires more money, and it’s a game I love. But do we create jobs? No. By slashing funding for government programs, you will lose many important service jobs.”

Two of his longtime friends aren’t surprised by this attitude. “Paul is a high-energy, dynamic person, committed and passionate, but he is also extremely honest and generous,” says Virginia Milkey, executive director of Community of Vermont Elders (COVE) in Montpelier. Mendelsohn has recently joined the COVE board.

Robert Balaban, a Charlotte psychiatrist, calls Mendelsohn “a carnivore for knowledge” and a constant learner. “But what also radiates from Paul is warmth and kindness. He is an empathetic, caring guy.” He is also an active guy: a skier, hiker, runner, sailor, guitarist, and photographer.

But just now, he is watching the markets gyrate after the Fed’s lackluster announcement that it will keep interest rates extremely low at least until mid 2013. Mendelsohn keeps his calm as the Dow rises 200 points, drops 400, and rises 400 before the end of the day.

“In the midst of the worst market furor,” says his wife, “Paul just sits there in his rocking chair with a smile on his face. It amazes me.” •