Saturday, October 01, 2005

Investment at the Ivies.

THE MONEY GAME

For years the Ivy League rivals have had dueling geniuses running their endowments. Now Yale's man is seeking the spotlight while Harvard's heads for the exit.

MARCIA VICKERS
REPORTER ASSOCIATES Doris Burke; Eugenia Levenson
4,621 words
3 October 2005
Fortune
U.S. Edition
155
English
© 2005 Time Incorporated.

ON A HAZY AFTERNOON IN LATE August, two of the most successful moneymen of our age made their way among the steep bunkers and double-blind holes of the venerable Yale Golf Club. Their showdown wasn't much of a contest: Host David F. Swensen, who runs Yale University's $15 billion endowment, shot "somewhere in the 90s," he says. His longtime friend and rival Jack R. Meyer, manager of Harvard's $22 billion endowment, shot a 76. "Jack's a spectacular golfer," Swensen admits. "He crushed me."

When it comes to running money, though, Swensen and Meyer are much more closely matched. Swensen, 51, has managed Yale's endowment for two decades and built one of the most spectacular investment records on the planet--up 16.1% a year (while the S&P 500 index gained 12.3%). "Yale has the best returns of any endowment anywhere," he is quick to tell you. Meyer, 60, can't argue with that. Since he got the job at Harvard in 1990--thanks in part to a glowing recommendation from Swensen--he has trailed his Connecticut rival 15% annually to 15.5% (vs. 10.6% for the S&P 500, through June 30, 2004).

Meyer has a substantially bigger lead in pay, taking home $7 million last year to Swensen's $1 million. That big paycheck, though, is about to put an end to this remarkable rivalry-cum-buddy act. While reasonable enough by Wall Street standards, the pay doled out to Meyer and his top lieutenants has the university community up in arms--and Meyer heading for the exits. He will start his own hedge fund as soon as the university can find a new endowment chief. After years of neck-and-neck competition, Swensen may soon put Harvard in his rearview mirror.

THIS RIVALRY BETWEEN HARVARD and Yale matters not just because they are Harvard and Yale. That of course adds some spice--the nation's most prestigious universities, the oldest (Harvard) and third-oldest, combatants in a football rivalry that dates to 1875 (Yale leads the series 64 to 49, with eight ties). The fact that the two universities' endowments are the biggest is of some interest too. "An overwhelming part of what academia at the university level is about," says Bard College president Leon Botstein, "is managing its money." But the success that Swensen and Meyer have achieved, and even more important, the way they have achieved it, have given them both influence that goes far beyond their universities or even academia. It's not too much to say that Swensen at Yale and Meyer at Harvard have transformed the way endowments and pension funds invest. "Meyer and Swensen are both talented visionaries," says David Kabiller, a founding principal at AQR Capital Management in Greenwich, Conn. "They've carved out this space, and others are striving to replicate their success."

They did this not by riding the great stock and bond bull market of the 1980s and 1990s but by bucking it. Back when endowments and just about all other big pools of institutional money sported plain- vanilla portfolios of domestic stocks, bonds, and cash, they were the first to branch into different types of assets that don't move in sync with U.S. stocks. That strategy has delivered not just blowout returns but lower volatility. The proof came during the bear market that followed the crash of 2000. From July of that year through June 2003, while the S&P lost 33% of its value, Yale's endowment gained 20%, and Harvard's earned 9%.

For all that they have in common--and their current portfolios are remarkably similar -- Swensen and Meyer have achieved their results by very different methods. Meyer has run Harvard's money as a huge in-house hedge fund. That makes it hard to understand and even harder to emulate. Swensen, with a much smaller staff, has achieved his big gains in a way that at least superficially resembles what we all try to do: He picks really smart people to invest his money, outsourcing Yale's billions to some 100 different managers, including dozens of hedge funds. Twenty years ago hedge funds were a rarity, available only to wealthy individuals who traded investing tips at polo matches. Then David Swensen started putting Yale's ivy-covered money in them, and his success did not go unnoticed. Soon other institutions were knocking on hedge fund doors, hoping to capture some of the magic. An industry obligingly sprang up to service them. Now (as of January 2005) there are more than 8,000 hedge funds worldwide, according to the Hennessee Group, a New York City hedge fund advisory firm. The funds manage more than $1 trillion in assets--triple the figure of five years ago. And David Swensen is at least in part responsible for that.

For most of his career, Swensen was content to have his achievements celebrated only among Yale higher-ups and investing cognoscenti. His reputation among the latter group is remarkable: "Swensen is one of only a handful of investment geniuses on the planet," says Vanguard Group founder John Bogle. "Swensen is a true investment leader," says Burton Malkiel, a Princeton professor and former Yale dean and the author of A Random Walk Down Wall Street. "He was one of the first to realize illiquid investments could pay off." Even Meyer, who wouldn't comment about Harvard or his future for this story, is happy to praise Swensen: "David is the best in the business. He has an uncanny eye for investment talent, and he's not afraid to stray from convention. At the end of the day, if we're close to Yale, I'm generally a happy person."

The past few months have been something of a coming-out party for Swensen. After years of shunning what little press attention came his way, he now finds himself enjoying the limelight. He has a new book aimed at regular investors, Unconventional Success: A Fundamental Approach to Personal Investment. (One of his somewhat disheartening conclusions is that because so many mutual funds are high-fee, low-performance disasters, individuals are better off just buying index funds.) He's made the rounds of CNBC, the New York Times, and the Wall Street Journal to promote the book and has gotten gobs of other media attention. Swensen also recently was on the cover of the Yale Alumni Magazine, which dubbed him "Yale's $8 Billion Man"--the difference he has made for Yale over 20 years, vs. the 11.6% average annual return for all college and university endowments.

If Swensen had been working at a hedge fund for the past 20 years with the same assets and returns, he could now be worth around $1 billion. That led David "Tiger" Williams, who runs a trading operation for hedge funds and calls himself a "big Swensen fan," to ask Swensen at an alumni function in Manhattan last year, "What's the matter with you?" Swensen's answer: "A genetic defect."

On a recent morning Yale's endowment meister sits in his cozy, book-filled office with its antique roll-top desk and offers another explanation for his willingness to live with less than master-of- the-universe compensation. Looking more professor than portfolio pro in a crisp, yellow button-down shirt, khakis, and pristine loafers, he leans slightly back in his chair, relaxing his 6-foot-2 frame. "I once heard Goldman Sachs's Hank Paulsen give a speech listing five characteristics of Goldman and other great organizations," he recalls. "The last was having 'balance in your life.' I thought, that's a fallacy. I don't believe high achievers on Wall Street can have a balanced life." At Yale, he says, the story is different.

A divorced father of three who coaches his 11-year-old son's Little League team, Swensen grew up in an academic environment with a socially conscious twist in River Falls, Wis., which hosts a University of Wisconsin campus. His father and grandfather were chemistry professors, and his mother became a Lutheran minister after he and his five siblings were grown. In high school Swensen started a recycling project through a church group. People dropped off glass. Swensen smashed it and sent it to a plant. "Nobody was doing this stuff in the '60s," he says.

After getting an economics degree at the University of Wisconsin, Swensen headed east to Yale, where he was "exhilarated by the intellectual environment" and grew especially close to economics professor James Tobin. In Tobin's later years (he died in 2002), Swensen even shoveled his driveway and bought his Christmas trees for him. Among Tobin's many accomplishments were his contributions to portfolio theory. Building on ideas developed in the 1950s by Harry Markowitz at the University of Chicago, Tobin showed how spreading money over various asset classes that don't move in step with one another could lower risk and improve returns. In 1981, a year after Swensen got his doctorate, Tobin won the Nobel prize in economics.

Armed with his Ph.D., Swensen moved to Wall Street. At age 27 he earned a permanent place in Wall Street history by inventing the derivative instrument known as the swap. While working at Salomon Brothers, he spearheaded a deal that allowed IBM to reverse currency exposure on some foreign bonds by arranging to have the World Bank issue dollar-denominated bonds with matching terms. He proudly picks up the three- by three-inch Lucite tombstone sitting on his office shelf trumpeting the deal. "It was actually very simple," he deadpans.

WHILE SWENSEN'S WALL STREET career was flourishing, Yale's endowment was floundering. From 1970 through 1982 it earned a meager average of 6.5% a year. The university's buildings were ragged, and the surrounding city of New Haven seemed a Dickensian model of urban decay. The bull market that began in August 1982 provided a big boost, but Yale officials still believed they needed a fresh approach. In 1985, at the suggestion of Tobin and economics professor William Brainard, then Yale's provost, Yale offered Swensen the job of running the endowment.

At first Swensen, who had never managed money before, was overwhelmed. "I was dumbfounded about what to do," he recalls. Early on he hired Dean Takahashi, a pal from his grad school days, who remains his partner. He and Takahashi spent a year assessing the portfolio and considering different strategies. After a series of meetings with leading Yale investment thinkers, including Tobin, Malkiel, and finance professor Roger Ibbotson, Swensen decided to put portfolio theory to a real-world test. He started spreading Yale's money, three-quarters of which was in domestic stocks and bonds, over a wide array of investments that included buyout and turnaround funds and hard assets such as real estate, timber, and oil and gas. He also began putting money in hedge funds, a category he dubbed "absolute return." And he sharply deemphasized bonds and cash, which to him were sure ways of making below-market returns. While many of the investments he made would have been risky on their own, the combination turned out to work just as the theories predicted: Volatility went down, and returns went up. Says renowned pension consultant Charley Ellis, who as chairman of Yale's investment committee is the closest thing Swensen has to a boss: "David really got it!"

His success wasn't all a matter of science, however; gut instinct played a role. Swensen has an unusual knack for picking talented money managers. According to a 2003 study by Harvard economics professor Josh Lerner, "manager selection accounted for more than half the superior performance by Yale relative to the average endowment over the last five years."

How does he do it? "I'm interested in anyone who has an edge, regardless of the asset class," he says, "and a passion, bordering on obsession, for what they do." One telling sign: Swensen favors managers who invest a lot of their own money in their funds. And he is notoriously dogged when it comes to vetting his choices. Years ago he was interested in a manager named Glenn Greenberg, a Yale grad, who typically owns only five or so companies in his $4 billion fund, Chieftain Capital. So Swensen and his team called the heads of the companies Chieftain owned--Burlington Resources and Freddie Mac among them--and asked, "Who's your smartest institutional investor?" Unsolicited, each CEO mentioned Greenberg, recalls Swensen: "That's when we decided to approach him." Swensen has been one of Chieftain's biggest investors for over a decade. He has also long invested with Farallon Capital, Bain Capital, and Sutter Hill Ventures, among others.

Then there is the simple fact that the Yale name gives him his pick of the best managers anywhere. Yale economics professor Robert Shiller ponders if the "Yale effect"--the intense loyalty graduates have for the school--could be one reason for the endowment's stellar returns: "David has no shortage of top Yale graduates on Wall Street who really want to help. Their priorities are God, country, and Yale- -with Yale being first."

His clout within the financial world often helps Swensen to negotiate highly favorable terms not available to ordinary investors, according to Lerner. Low fees are essential, of course. But Swensen also occasionally demands that Yale's money be put in a separate account, reducing chances his performance will suffer from "hot money"--short-term investors who bail out the minute a fund loses steam. Swensen has also been known to request that certain funds--particularly in the private-equity arena--limit their assets at a specific amount. "David's not shy about requesting a cap," says Donald Gogel, head of Clayton, Dubilier & Rice, a New York City private-equity firm. More recently Swensen has been seeding small funds that focus almost entirely on Yale. "Being the 12th $20 million investor in a fund isn't going to impact our bottom line," says Swensen.

Then there's transparency: a must for Swensen. He once approached Eddie Lampert, the hugely successful investor and Yale grad. Swensen says he was impressed with Lampert's style--he typically holds fewer than ten companies at a time and takes an aggressive approach with their management. But there was one little catch: Swensen wanted Lampert to disclose the nooks and crannies of his portfolio. Lampert refused, causing a bit of a rift between the two. (Lampert declined to comment.)

Swensen also has a gift for dodging disasters. "David will sometimes meet with people who have stellar resumes and returns-- everything will seem perfect--yet he'll decide not to put money with them," says Ellis. "It's uncanny, but usually he's proven right in a couple of years." Swensen says he refused to take meetings with Long Term Capital Management because "the fee structure was greedy." He also dissed the Enron guys when they came calling.

Ironically, Yale's employee and student unions have faulted Swensen for not disclosing more details about the endowment's own holdings. Swensen says he understands the demands for more transparency but doesn't want to divulge the details of his strategy for competitive reasons. The unions have also complained that Swensen invests with firms run by some members of the Yale Corp. Investment Committee, including Joshua Bekenstein, managing director at Bain, and Henry McCance, chairman of Greylock Partners. Swensen says he follows Yale's strict code of ethics. And the unions are unhappy with Swensen's timberland investments in Idaho and Maine-- areas he's particularly focused on right now.

Despite those tensions, not to mention the amounts of money on the table, the atmosphere in Swensen's offices in a six-story brick building on Yale's neo-gothic campus has the feel of a graduate seminar. Around 20 professionals, mostly Yale alums, work there, vetting managers and debating new investment ideas. ("We usually have one or two Princetonians for diversification purposes," Swensen jokes.) It's a relatively relaxed, collegial atmosphere where people often end up staying for years. "David's people are very loyal to him," says Lerner. "They share a common language and have an incredible institutional memory. It accounts for part of the endowment's success."

LIKE HIS YALE BUDDY, JACK MEYER OF Harvard is often described in contradictory terms: self-effacing, genial, yet fiercely competitive. The small, wiry redhead also shares some of Swensen's unpretentious traits. He seldom wears a tie and takes the subway to work, according to the Boston Globe. But he presides over an operation that couldn't be more different from Yale's. With its rows of flat-panel monitors and mini televisions tuned to CNBC, the Harvard Management Co.'s trading floor, in the Boston Federal Reserve building, five miles from the Harvard campus, looks more like a Midtown Manhattan hedge fund than a college endowment. The 120 or so people who work there are masters of short-term trading, initiating as many as 250,000 transactions a year. Their bets have often focused on undervalued situations and arbitrage opportunities in global stock and bond markets.

"Yale's endowment has always been much more integrated into the life of the university," says Lerner. "For years Harvard has had a much more typical Wall Street approach. It's always been somewhat separate from the Harvard community." And some members of that community, at least, have never been comfortable with the money machine in their midst. The biggest complaint has been that Meyer and his team are paid too much. Meyer and his top six managers earned $78.4 million last year and $107.5 million in 2003. While their take would be nothing exceptional on Wall Street, it's Brobdingnagian by academic standards.

Over the past two years, people familiar with the situation say, Meyer has had to deal with a particularly knowledgeable and powerful critic: Harvard president Larry Summers, who wrote some influential papers in the 1980s on the workings of financial markets, then went on to jobs in the 1990s as World Bank chief economist and U.S. Treasury Secretary. He has voiced strong ideas about how HMC should be run. He's known to favor market-timing strategies (shifting the weighting of stocks and bonds depending on the market's direction) that Meyer has always shunned. Meyer, used to years of relative autonomy under former Harvard president Neil Rudenstine, "is fed up with Summers," says someone familiar with Meyer's thinking.

The public flap over Meyer's pay put Summers on the spot. He knows as well as anyone that Harvard could end up spending far more on outside money managers than it was paying Meyer and his crew. But for Harvard, a nonprofit institution, appearances can be more important than accounting.

While the dispute over pay has grabbed headlines in the national press, the complicated web of relationships Meyer has built up with former Harvard managers has attracted far less attention. In 1998, in the midst of the roaring bull market, Meyer became concerned that he wouldn't be able to keep the top-notch managers he'd worked so hard to recruit and cultivate, people close to HMC say. HMC went before the Harvard Corp., which oversees the endowment, and proposed that HMC be allowed to manage money for other universities so that Meyer and his staff could earn additional fees. The board, seeing a potential conflict, turned HMC down flat.

That refusal seemed to touch off an exodus of talent. Over the past seven years, Harvard managers have started at least five hedge funds, including Highfields Capital Management, launched by Jonathan Jacobson in 1998, and Regiment Capital, founded by Timothy Peterson, also in 1998. And of course Meyer himself is planning to launch a hedge fund, to be called Convexity Capital, after his departure. He plans to take four HMC executives with him, including bond stars David Mittelman and Maurice Samuels.

The managers who leave HMC don't go away empty-handed. Once they set up their funds, they often get a big chunk of Harvard money to run. Highfields received at least $500 million. And Adage, launched by Robert Atchinson and Phil Gross in 2001, got $4 billion--almost a quarter of the endowment's assets at that time. In most cases, the fees they pocket from Harvard and other clients are far greater than what they earned while on the university payroll.

But Harvard, too, has benefited from its cozy relationships with its former managers. For one thing, the university owns stakes in at least four of the offshoots. Documents show that the funds return a portion of the fees they earn from managing other institutions' money to HMC in "revenue sharing" agreements. In some cases the money HMC earned from those deals was enough to offset the management fees it was paying and create a profit. "You got the sense that HMC was clamoring for fees and more fees, which is inappropriate for a nonprofit academic institution," says William Strauss, one of a group of 11 members of Harvard's class of 1969 who have taken to publicly skewering HMC and Meyer.

In January the group of angry alums threatened Summers with "enormous opposition" if he hands Meyer and his team a hefty check as they walk out the door. They also want to bar Meyer and other former managers from running Harvard's money for at least five years. James Rothenberg, Harvard's treasurer, who is president of Los Angeles--based fund giant Capital Research & Management, responded that Harvard was "listening to all sides." But a source close to Summers' office says that Harvard will probably continue to invest with its former managers and Meyer after he leaves.

This hullabaloo couldn't come at a less opportune time: As Meyer exits, Summers will soon embark on a gargantuan fund-raising campaign. But big donors often shy away from controversy. "If there's any question over the effectiveness of the money management, that gives people a reason not to give," says Verne Sedlacek, president and CEO of the Commonfund, which manages money for universities and other nonprofits. Said Rothenberg in a recent interview with the Harvard Crimson: "It would be wrong to tell you that people aren't concerned."

Looking ahead, both Harvard and Yale face the same challenge. The hedge fund boom they helped create has shown signs of peaking. Now that everybody is investing in hedge funds, it's hard to see how they can keep trouncing the stock market. Yale finance professor William Goetzmann, who heads up a hedge fund research initiative at Yale, warns, "As hedge funds increasingly chase the same strategies, there are fewer anomalies to exploit." So managers will find it much harder to produce exceptional returns.

Yet Harvard is becoming more reliant on outsiders, especially hedge funds. At the end of 1997, it doled out just 15% to outside managers; that figure is now up to 50%, and when Meyer finally leaves, it will probably reach 80%. In other words, Harvard's endowment will look more like Yale's. Of course, Harvard hasn't built up anything like Swensen's years of expertise at picking outside managers and driving hard bargains with them. Meanwhile, the search for Meyer's replacement seems to be proceeding slowly; people in the investment community speculate that the pay brouhaha and the prospect of working for Summers may be discouraging top candidates. A Harvard spokesman says such talk is unfounded, but admits that the search "is challenging because it's such a visible position."

For his part, Swensen isn't concerned that hedge funds are losing their edge. "There are still opportunities for funds that are well positioned to take advantage of anomalies in the market," he says. Swensen, who continually rebalances his portfolio, is maintaining his hedge fund allocation but has added to his holdings of hard assets. In addition to his prized timberland, for example, he recently invested in an upscale boutique hotel and restaurant chain. Such investments now account for 25% of his portfolio, up from 18% last year.

On the dust jacket of Swensen's new book, a quote from Jack Meyer appears: "A masterful work by the master himself. We at Harvard wish that David Swensen would find a new job." Too bad for Harvard. David Swensen says he isn't budging.

HEADS OF THE CLASS

When universities are ranked by the size of their endowments, Harvard and Yale come out on top--and their returns lead the pack as well.

Figures are as of June 30, 2004, unless noted. 1 As of June 30, 2005. 2 As of Aug. 30, 2004.

FORTUNE TABLE / SOURCE: BLOOMBERG; NATIONAL ASSOCIATION OF COLLEGE AND UNIVERSITY BUSINESS OFFICES; THE UNIVERSITIES

REPORTER ASSOCIATES Doris Burke and Eugenia Levenson

FEEDBACK mvickers@fortunemail.com

IN A LEAGUE OF THEIR OWN

Swensen and Meyer have been pioneers in diversification: spreading their money over a variety of asset classes that do not move in sync with one another. The resulting portfolios tend to be less volatile than simple stock-and-bond mixes and produce better returns.

Harvard

Domestic equity 15% Foreign equity 15% Private equity 13% Fixed income 27% Real assets 23% Absolute return 12%

Yale

Domestic equity 14% Foreign equity 14% Private equity 17% Fixed income 5% Real assets 25% Absolute return 25%

Data as of June 2005 for Yale and June 2004 for Harvard. Figures are target allocations; actual portfolio composition varies with market conditions. Harvard's total exceeds 100% because of leverage. Foreign equity includes emerging markets. For Harvard, fixed income includes inflation-indexed, high-yield, and foreign bonds. Real assets can include real estate and commodities.

HE'S YALE, YOU'RE NOT

Being chief of Yale's $15 billion endowment gives David Swensen an undeniable edge. He has a long time horizon and his pick of the nation's best money managers, and he can demand low fees and is free to invest in hedge funds, private equity firms, and real assets such as timber, golf courses, and luxury resorts. His advice for ordinary investors might be boiled down to "Don't try this at home." Since you don't have the Yale name behind you and billions to invest, what's your best strategy? Here are his tips:

-Diversify--hold U.S. and foreign stocks, inflation-indexed and other government bonds, and real estate.

-Avoid actively managed mutual funds, most of which "put profits before fiduciary duty."

-Buy low-cost index funds and exchange-traded funds.

-Avoid hedge funds and corporate bonds.

-Rebalance your portfolio at least once a year.

-Don't try to time the market or chase performance.

Meyer and his top six managers took home $78.4 million last year and $107.5 million in 2003."I'm interested in anyone who has an edge," says Swensen, "and a passion, bordering on obsession."

The essence of genius.

"The essence of genius is to know what to overlook." -- William James (1842-1910)

Wednesday, September 28, 2005

No one ever failed by underestimating the taste of America.

---

The Gawker King

Nick Denton Is Either the Luce or Hefner of New Age, But He’s Building Web Empire on Gossip, Sex, Smarts;
Inspiring Tale of Skinny Bloke With Oxford Honors

By: Tom Scocca
Date: 10/3/2005
Page: 1

On Sept. 21, Arianna Huffington, the Los Angeles social catalyst, former California gubernatorial candidate and self-appointed anti-Drudge of Web hostesses, tore off her shoes, jumped up on Nick Denton’s coffee table and anointed him: Mr. Denton, said the Amazonian queen of L.A. society—a world that one of Mr. Denton’s 14 Web sites assesses and reports on—is “the Rupert Murdoch of the blogosphere.”

Mr. Denton, her 39-year-old host and the publisher of Gawker Media—the combination steroid and tonic that both inflates and slaps down societies in New York, Los Angeles and Washington, as well as the borderless society of Web-porn fans—was ostensibly welcoming Ms. Huffington to New York. Really, he was throwing his own coming-out party, and had opened the doors of his Soho apartment—a sprawling, high-design affair with massive open kitchen, ebonized wood floors and windows—to some of the mob that clicks on the Gawker site five, six, seven times a day, looking for names, gossip and the kind of Internet astringency that Alexander Woollcott and his crew of gossip-wits would almost certainly have been sprinkling on the blog world if they were around to click and cluck in 2005.

It was hardly the Algonquin Round Table: Mr. Denton had gathered erstwhile rock idol Michael Stipe and New York Times restaurant critic Frank Bruni in a crowd of hundreds, his own staff photographer ready for the close-ups.

Ms. Huffington’s speech had the smooth, professional cadences of Los Angeles copy laid out on a teleprompter. It was a contrast to Mr. Denton’s introduction, moments before, when he’d cleared away his chessboard and climbed up on the table himself, newly trimmed down and glammed up.

He pulled out a much-folded piece of paper and began to read excerpts from a hostile notice that the celebrity-heavy Huffington Post had gotten on its debut. His hands shook just a little. Nikki Finke had declared the site “horrific,” adding that Ms. Huffington—“the Madonna of the mediapolitic world”—had “undergone one reinvention too many.” The disaster that was the Huffington Post was “unsurvivable.”

“I think contrition is in order from the doubters, including Nikki Finke,” Mr. Denton said. The partygoers applauded.

But the contrition could have been self-administered. Like so many rising press lords, electronic or not, Mr. Denton had gotten in the business of celebrating what his own publication had recently stomped: Gawker.com had sneezed at the Huffington Post’s debut, “When important celebrities have a platform from which to dispense their well-informed opinions, everyone wins!”

Within two days, many of the party guests—and selected others in the outside world—would receive e-mailed invitations to join an exclusive-but-not-too-exclusive group of readers who would be allowed to post comments on Gawker.

One of them was Nikki Finke.

The comments group, Mr. Denton wrote in an instant message, is “like the effort to create a New York nightlife institution. Invite in too many people, and the cool kids will move on. You want them to bring their friends, but not too many of them.”

Nick Denton was building a media elite for the electronic age, as he has for two decades. For, one way or another, he’s been engineering social circles since he was at Oxford in the 1980’s. “He likes to be the center of the carousel,” said Financial Times business columnist John Gapper, Mr. Denton’s former boss at that newspaper and his co-author on a book about the collapse of Barings Bank. “Somebody said, at university what Nick was very good at was [running] a club.”

Later, in London in the 90’s, Mr. Denton created a networking group for tech-industry members called First Tuesdays—which he and his co-founders sold for a reported $50 million in 2000.

But Mr. Denton doesn’t wallow in society and publicity. “He’s not doing it because he wants to be Donald Trump or he wants to be on the front pages of things,” Mr. Gapper said.

Instead, it’s the editorial products—particularly the gossip sites Gawker and Defamer and the political-gossip site Wonkette—that carry the aura of celebrity. They have filled their conceptual niches so well as to seem obvious and inevitable, despite the eldest being less than three years old.

Mr. Denton prefers to be an electronic presence himself. Asked, via instant message, to meet up and discuss Gawker Media, Mr. Denton gave phone numbers for staffers instead, then offered to conduct his share of the conversation via IM.

“IM is so much more me,” Mr. Denton wrote.

“You know,” he added, “I haven’t met a couple of our writers.”

The Blogosphere is a long way from 1970’s Hampstead, in London, where he was raised by an English father, a Hungarian mother, and the splashy gossip magazines like Private Eye that were churned out of British presses. “Father an academic, mother a psychotherapist,” he wrote in an e-mail.

He went to University College, Oxford, and majored in economics. “Economics? Required maths, but socially acceptable.”

After college, he became a stringer for The Financial Times in Budapest, then ended up as a reporter for the paper, covering investment banking.

At The Financial Times, Mr. Gapper noted, he had an air that set him apart from other staffers.

“Nick is a semi-detached character in a lot of ways,” Mr. Gapper said.

He was a dedicated reporter—“not a great writer as a stylist, I would say; he’s very good at working contacts and very good at extracting information out of people.”

But Mr. Denton was clearly treating the job as a job, not as a lifelong commitment. That “pissed some people off,” Mr. Gapper said, as did Mr. Denton’s tendency to drift onto other reporters’ turf if they were covering topics that interested him.

Mr. Gapper said that he had personally found Mr. Denton a pleasure to work with, and an ideal co-author. When a shared task is divided up, Mr. Gapper said, “he will do exactly what needs to be done and a bit extra.” And when it came time to sell the book, Mr. Gapper said he found himself in awe at his partner’s skills.

“He is, I think, the most brilliant marketing person I’ve ever met,” Mr. Gapper said.

And there was one particular topic that had caught Mr. Denton’s attention, Mr. Gapper said. “One thing I can say about Nick is that very early on—very early on—he understood what blogging would be.”

In the mid-90’s, when even publishing a link to an outside article was a controversial move, Mr. Denton was interested in aggregation. As Mr. Gapper recalled it, Mr. Denton’s belief was that on the Internet, “I’m going to want X’s view of what’s interesting.”

Mr. Denton shuttled between San Francisco and London during the dot-com boom. He created an information-aggregator company called Moreover Technologies.

“Nick saw the potential in blogs,” said Meg Hourihan, a co-founder of Blogger.com and a former partner of Mr. Denton’s at Gawker Media. He was more enthusiastic about Blogger, she said, than the company’s own founders were.

“I was crazy about Blogger,” Mr. Denton instant-messaged. “Tried three times to buy it.” When the financial backers of Moreover vetoed his bid for Blogger, he wrote, he quit the company’s board.

“But, whatever,” he added. “We would probably have messed it up.”

This is the story of blogs: Once upon a time, there was the Mainstream Media. The Mainstream Media lived in a tall, impregnable castle, where it paid people to write and paid other people to edit the writing. It printed the results on paper and tossed it down from the balconies, ordering the public to buy and read it.

Then a bunch of people—unpaid, many of them dressed in sleepwear—discovered that they could publish their own writing on the Internet, for free or close to it. Armed with their opinions and raw strength in numbers, they laid siege to the castle: amateur against professional, democracy against autocracy, new against old. The Mainstream Media retreated to an upstairs bedroom and barred the door, as the masses streamed into the throne room, waving Dan Rather’s head on a pike.

It’s a stirring story, but it doesn’t very well provide for a Rupert Murdoch of the Blogosphere—and even less so for a Frederick W. Taylor, who is the figure Mr. Denton also calls to mind. Gawker Media has 14 sites, spanning gossip, gadgets, sports, pornography and sundry other niches. What separates them from outsiders’ blogs, whatever the topic, is a unified and stripped-down industrial approach.

There is no Gawker Media newsroom. The writers are freelance contractors, paid a base rate per posting and bonuses for drawing traffic. They rise early and post throughout the day, following scheduled quotas. When they take a vacation, guest bloggers are brought in to keep the factory lines running on time.

“Writing Gawker,” said co-editor Jessica Coen, “there’s no way I’d have time to read something like Gawker, the way people do.”

Mr. Denton’s managing editor, Lockhart Steele, is largely charged with making sure the copy flow goes uninterrupted.

“You know The New York Times is going to be on your newsstand every morning,” Mr. Steele said. Gawker Media operates on the same principle, replacing amateur bloggers’ intermittent, as-the-mood-strikes postings with a steady, predictable feed.

“People read blogs obsessively,” Mr. Denton said. He had relented on his electronic-communications policy for a live lunch at Balthazar, directly across Spring Street from his condominium, in a building he shares with Harvey Weinstein and Kelly Ripa.

The daily targets have grown from six posts to 12 to 24 to as many as 40—in the case of Gizmodo, the gadgets blog and the oldest of the sites. “I think that 40 a day seems like a lot,” Mr. Denton said.

Yet while his operations are futuristic and virtual—unencumbered by the cost or inconvenience of paper—in his background and ethos, Mr. Denton is a classic old-fashioned journalist, of a particular subspecies.

“I’ve always been a magazine junkie,” Mr. Denton said. He grew up, he said, on the British press: The Spectator, Private Eye, The Economist, The Guardian. In college, he edited the campus magazine Isis—“I think Tina Brown edited it in her day,” Mr. Denton said.

“Weblogs are way less alien if you come from a British journalism background,” Mr. Denton said. It is, he said, a “more rumbustious media culture.” Its echoes are most noticeable now at Sploid, his news site, which strips down all the world’s events to screaming tabloid-beyond-tabloid headlines. (Britney Spears having a baby becomes “Forgotten Whore Makes News Again.”)

At The Financial Times, however, Mr. Denton encountered a more reserved media culture. The best stories he heard there, he said, were “the stories the journalists tell each other privately.” Over drinks, he said, his fellow scribes might say that someone had a “weirdly lopsided face”—things that would never make it into print. The polite edition of the facts, Mr. Denton said, struck him by comparison as “fundamentally dishonest.”

Honesty—brute honesty—was a theme that Mr. Denton hammered away at, directly and indirectly, in person and electronically. When the talk turned to Fleshbot, his pornography blog, Mr. Denton bristled at the upscale attitude of erotic-themed sites such as Nerve.com. “It’s porn, for God’s sake!” he said. “It’s supposed to get you off, so don’t pretend it’s art!”

Likewise the gossip sites: “It’s not supposed to be uplifting!” Mr. Denton said.

Gawker Media does approach some things with delicacy. Fleshbot, for instance, is omitted from the company’s main media kit—though its omnivorous gay/straight/classy/sleazy approach is a prime example of the Gawker format, and Mr. Denton said he was proud of the site. “It also helps me when people ask me what I do,” he instant-messaged. “‘I’m a porn publisher,’ I answer, which deters the bores, and intrigues the more interesting reprobates.”

“Most everyone at Gawker is a misfit of some sort,” Mr. Denton instant-messaged. He ran down a list of his present and former employees’ characteristics: “rumored to have been fired … for being high on the job”; “never went to college”; “only wears 1960s clothes”; “notoriously unemployable.”

And Nick Denton? “You have the gay, Jewish, atheist, surprisingly right-wing,” Mr. Denton wrote. “Or you ought to, from the clips.”

Brutal, reporter-over-drinks-style honesty would—and has, especially in blogland—also note that Mr. Denton’s face, though not lopsided, is mounted on a gigantic head, a head worthy of Linus Van Pelt or Antoine Walker. It would also touch on Mr. Denton’s match.com singles profile, recently propagated on the Web, in which he described himself as a successful entrepreneur seeking a partner able to “take me down a peg or two when I deserve it.”

“It’s hard for me to get outraged, given how many times we’ve done that,” Mr. Denton said at lunch. He predicted, without visible dismay, the arrival of a “world entirely without privacy”—along with 15 minutes of fame, he said, “everyone gets their own 15 minutes of cringing embarrassment.”

But is he rich? The principal taboo subject, in dealing with Mr. Denton, is not sex but money. The $50 million sale price of First Tuesday, for instance—“the number was wrong,” Mr. Denton instant-messaged. Also, he warned, the “deal was a mix of cash and stock, and stock was worth a lot less than assessed value.”

Still, he forwarded along an entry from his own blog in which he described the results of cashing out as “an unexpected windfall” for him and his partners. And at Balthazar, discussing his vetoed bid to buy Blogger, he said, “That’s why I’ll never work with venture capitalists again”—adding that Gawker Media is “self-funded” with the proceeds from First Tuesday.

Mr. Denton may soon be even more free from ever needing venture capitalists: On Sept. 26, blogger Tom Foremski’s SiliconValleyWatcher site reported that Moreover Technologies is on the verge of being bought by a “much larger multi-national company.”

As for Gawker Media’s figures, forget it. Mr. Steele once publicly suggested a blogger could make $2,500 a month with Gawker, a number picked up by the Web site I Want Media and propagated—ending up this month on the cover of New York magazine, in the form of an assertion that Ms. Coen was making $30,000 per year.

To demonstrate the imperfect public understanding of blogging as a business, some Gawker readers sneered at Ms. Coen for making so much money, while others sneered at her for making so little. “Someone screamed that I was fucking pathetic with my $30,000 salary, at Nick’s party,” said Ms. Coen, who said (and blogged) that the figure was wrong.

The actual numbers are rumored to have gone up to the point where they’re in line with print-industry salaries. And after initially hiring journalistic novices, Mr. Denton lately hired staffers with established print careers in Mr. Steele and Ms. Coen’s co-editor, Jesse Oxfeld.

It also seems reasonable to guess that Mr. Denton is bringing in revenue, given the number and frequency of ads on the site. The only concrete information he would give, however, was that a $4 ad buy—the minimum for Gawker on the company’s rate card—would be good for 1,000 appearances. At 5.5 million page views a month, if each page carried one bottom-shelf ad and if a good half-dozen reasonable objections were ignored, that would mean more than $20,000 in monthly revenue. But it would probably be quicker and simpler to use a dartboard.

“I do find bizarre the level of interest in the finances of a private company,” Mr. Denton instant-messaged. “A small private company …. Without an office, even.”

In his humility, Mr. Denton sounded like a man cruising the Jersey Turnpike on a motor scooter that appears to run on bathwater: Why are you interested in my little scooter? It doesn’t carry anywhere near as many people as your gasoline-powered S.U.V.

If you’re interested in measurements other than money, however, Mr. Denton has lots of information to show you. Lots. All the sites—even the ones that aren’t thriving—have traffic monitors, and Mr. Denton compiles the results on his own home page.

Sitting on the banquette at Balthazar, frothy coffee drink in a tiny cup at his elbow, he angled his laptop to show the charts: the steady upswing of Gawker and Gizmodo; the post-election dropoff of Wonkette; the unfaltering launch and rise of the do-it-yourself Lifehacker.

The traffic numbers, Mr. Denton said, tell all. “I didn’t like Wonkette when it first came out,” Mr. Denton said. He thought the site featured “too much satire and not enough gossip,” he explained. But the numbers said people were reading it.

“No one can really argue with the data,” Mr. Denton said. “I can’t argue with the data. The writers can’t really argue with the data.”

One of his bloggers, he said, keeps the traffic chart as a screen saver. As for Mr. Denton, “my own personal mood is dependent on two things: how many times I’ve actually worked out, like gone to the gym, in a week. The other thing is traffic.”

And what do the data say about the blog revolution? Mr. Denton scrolled on his laptop through the history of the last few months, as expressed in traffic on various Gawker Media sites. “I think it was Paris Hilton in March,” he said, pointing at a spike. More spikes, on more sites: “I’m completely blanking on what the story was … oh, Jude Law …. That bump there was Kate Moss …. Political news, they had spikes for Katrina …. Geneva auto show …. ”

Mr. Denton switched to a page showing how readers had arrived at his various sites. One had been led there, the tracker showed, by a search for “Recent Relationship Pitt and Jolie.”

“You can’t pretend to yourself that people actually have highfalutin taste,” Mr. Denton said. “ … Nobody ever searches for ‘Inequality in America.’

“I’ve stopped reading blogs,” Mr. Denton said. He’d stopped what now? “I’ve stopped reading all the blogs about blogs,” he qualified. “It just annoys me too much, so I don’t read it.”

Instead, he settles down at Balthazar, thumbing through the paper papers.

Tuesday, September 27, 2005

The Tail Brings the Head to Its Knees.

The follow up to the masterpiece "When The Pawn Hits The Conflicts He Thinks Like A King What He Knows Throws The Blows When He Goes To The Fight And He'll Win The Whole Thing 'Fore He Enters The Ring There's No Body To Batter When Your Mind Is Your Might So When You Go Solo, You Hold Your Own Hand And Remember That Depth Is The Greatest Of Heights And If You Know Where You Stand, Then You Know Where To Land And If You Fall It Won't Matter, Cuz You'll Know That You're Right" finally will be visited upon us.

Moody's is apparently reevaluating Sony's debt rating, by the way.

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September 26, 2005
Re-emerging After a Strange Silence
By LOLA OGUNNAIKE

Fiona Apple, the soul-baring singer who hasn't released an album since 1999, wishes she had a more compelling explanation for her absence. "The truth is that I haven't been doing anything that interesting," she said, shrugging one afternoon late last week. "I got off the road last time and I just felt like not writing and not doing anything for a long time."

Ms. Apple will finally be back next week with the release of "Extraordinary Machine," the third album in her decade-long career. And judging from the 500 fans who flocked to the Virgin Megastore in Union Square in Manhattan on Tuesday to hear her sing, her return is none too soon.

Ms. Apple attained cause-célèbre status earlier this year when fans pressured her record company, Sony, to release the album, an early, unfinished version of which had been leaked on the Internet.

She called her decision to step back into the limelight a "really big experiment," given her past public struggles with popular success. Will the touring, television appearances and photo shoots cause her to "freak out again," she wondered? Or will she manage to find some pleasure in it all?

While promoting her first album her attitude was, "Please like me, please understand me," Ms. Apple, 28, said chuckling. "The second time was: 'Please don't misunderstand me again. Please understand me this time.' And this time it's really about me taking something that's been so stressful in the past and making it joyful. I don't want to be suffering all the time."

Suffering - Ms. Apple has made a cottage industry of it. She even addresses her penchant for pain on the title track of "Extraordinary Machine": "I seem to you to seek a new disaster everyday."

But she writes: "I mean to prove I mean to move in my own way, and say,/I've been getting along for long before you came into play."

In 1996 she made her debut with "Tidal," which sold three million copies and won a Grammy. Her second effort, "When the Pawn. ..." - the unabridged title is 90 words long - was hailed by critics but proved a commercial disappointment.

It did not help that Ms. Apple had a reputation for being difficult, a tortured soul with attitude to spare. In one of her more infamous tantrums, she berated audience members at the 1997 MTV Video Music Awards ceremony for worshiping celebrities. A Manhattan concert in 2000 was cut short when the singer, upset over sound difficulties, began sobbing uncontrollably onstage. Ms. Apple, who admits to being emotional ("it runs in my family"), said she was cast as a troubled loose cannon by the media because controversy makes great headlines.

"I was the right girl for the part," she conceded. "I cried a lot. I said a lot of stuff. There were lots of great rumors about me. Everything I did was put in bold print and italics."

It is difficult to believe that this tiny sliver of a woman once caused such a big commotion. Dressed in a floor-length peasant skirt, T-shirt and faded navy-blue hoodie, a genial Ms. Apple spoke in sprawling, uninterrupted sentences as she sat in a restaurant at her Midtown hotel. Thoughtful and introspective, she was all too willing to have her haunting blue-silver eyes look inward.

During her sabbatical, she said, she would often sit in her backyard in Venice, Calif., thinking and playing with pine cones. "I was making little pine-cone people with razor blades," Ms. Apple said, raking her fingers through her wavy brown hair. "That's all I did."

Her inertia did not sit well with some in her immediate circle. They accused Ms. Apple of being lazy, crazy and unproductive, she said. "It really hurt a couple of close relationships of mine," said Ms. Apple, who split with her boyfriend Paul Thomas Anderson, the film director, three years ago. "It infuriated me because they couldn't believe that when I'm sitting and thinking that's how I work."

Several years ago she decided that she was ready to begin recording again and called on Jon Brion, who produced "When the Pawn. ..." Their collaboration, while smooth before, was shaky this time. "Jon would play me stuff and I wouldn't be able to tell what I liked and what I didn't like," Ms. Apple said. After emerging from a deep funk, she eventually decided to rerecord her songs with the producer Mike Elizondo, who has worked with Dr. Dre.

According to Ms. Apple, things were going well until executives at Sony began asking her to submit individual songs for their approval. Only then would they determine how much more recording money she would receive. Sony had already sunk nearly $800,000 into recording the original version of "Extraordinary Machine."

"They basically wanted me to audition my songs," Ms. Apple said, visibly offended.

Lois Najarian, a representative for Sony, denies this and blamed Ms. Apple's perception of events on miscommunication. "That was surely not the case," Ms. Najarian said.

Unhappy with what she termed an "unlivable" arrangement, Ms. Apple threatened to abandon the project.

When the Brion-produced version of "Extraordinary Machine" showed up on the Internet earlier this year, Ms. Apple, upset that her unfinished work was available, thought Sony would scrap the album. "Who is going to give me money to make songs that are already out there?" she recalled thinking at the time.

Little did Ms. Apple know that a group of fans was pleading with Sony to release her album, which they thought had been shelved. Both Sony and Ms. Apple say it was not. On the Web site www.freefiona.com they railed against the "corporate giant" standing between them and their beloved.

"Please give us Fiona and we'll give you money back," read one poem posted on the site. Hundreds of foam apples were sent to the company, and in January a dedicated band of protesters, led by the Free Fiona founder Dave Muscato, stood outside the Madison Avenue offices of Sony BMG chanting, "We want Fiona."

She is quick to credit her freefiona fans with her comeback. "It's good to know that if you organize you can make change, because that's certainly not what I was doing," Ms. Apple said, "I was walking away."

Copyright 2005 The New York Times Company

Monday, September 26, 2005

enlightening research on cellular communication

Sunday, September 25, 2005

Best article I have read in months.

Point made, and point taken.

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September 25, 2005
Don't Blink. You'll Miss the 258th-Richest American.
By NINA MUNK

THE latest Forbes 400 list of the richest people in America has just hit the newsstands. The idea for the Forbes 400 - rather than, say, 300 or 500 - was inspired by Mrs. Astor's 400, the definitive list of New York high society in the 1890's. It's rumored that Mrs. William Backhouse Astor Jr. limited her social list to 400 because only 400 people could fit into her ballroom, but that may not be true. In any case, they had to be the right 400 people. As her escort, Ward McAlister, explained to reporters in 1888: "If you go outside that number, you strike people who are either not at ease in a ballroom or else make others not at ease."

The first edition of the Forbes 400, dated Sept. 13, 1982, included mainline families like the Rockefellers, the Mellons and the du Ponts. But they found themselves together with self-made men, some of whom were not terribly at ease in a ballroom: William R. Hewlett, who had started Hewlett-Packard in a one-car garage with his classmate David Packard and was then worth $1.3 billion; Robert C. Guccione, the founder of Penthouse magazine, then worth $400 million; Saul P. Steinberg, a corporate raider who had accumulated a $260 million fortune; An Wang, originally of Shanghai, who had started Wang Labs with $15,000 in 1951 and was worth around $400 million in 1982; Meyer Lansky, a mobster whose estimated net worth that year was $200 million; and Laurence A. Tisch, who built a fortune then valued at $600 million by assembling a huge conglomerate, the Loews Corporation. (Note: all net worth figures are in 2005 dollars.) All you needed to join the Forbes 400 list was money.

Right from the start, the Forbes 400 reflected an American ideal: we were a nation of smart, hardworking, resourceful, determined, innovative, daring self-starters. Above all, the Forbes 400 suggested mobility and unlimited opportunity. Every year, more of the old names fell off the list, only to be replaced by names you'd never heard of - names of people who had been inspired to build something from nothing. Inherited wealth, which once dominated the Forbes 400, has over the years come to account for less than 40 percent of the list. The number of Ivy League graduates has dropped, too. And New York City is no longer the epicenter of American wealth.

A few days ago, I read through the newest Forbes 400 list of the richest people in America, hoping to find many names I'd never heard of. They're not there. Through no fault of its own, the list no longer reflects a dynamic and elastic economy; instead, it reflects a growing concentration of wealth and economic power. Warren E. Buffett, Paul G. Allen, Kirk Kerkorian, John W. Kluge, Carl C. Icahn, Michael R. Bloomberg, Ronald O. Perelman, Leona Helmsley, Henry R. Kravis, the Waltons, the Pritzkers, the Newhouses, the Lauders - the same old names, one after another.

It's hard to say when the Forbes 400 list started to stagnate, but 1999 may have been a turning point. That was the year when Bill Gates's estimated net worth hit $100 billion. So quickly had his fortune grown that over the previous 12 months, according to Forbes's calculations, Mr. Gates had made himself another $1 billion every eight days.

Mr. Gates, who has held the No. 1 position on the list continuously since 1994, is an extreme example of accumulated and self-generating wealth, but he's part of a trend. Twenty years ago, there were 14 American billionaires on the Forbes 400. Today, the list includes 374 (known) billionaires. In 1985, the combined wealth of the Forbes 400 was $238 billion, adjusted for inflation. Today, the 400 richest people in America are together worth $1.13 trillion. To put that number in perspective, $1.13 trillion is more than the gross domestic product of Canada. And it is more than the G.D.P. of Switzerland, Poland, Norway and Greece - combined.

The median household income of Americans has been stuck at around $44,000 for five years now. The poverty rate is up. Members of the Forbes 400, meanwhile, are richer than Croesus, and every hour they are getting richer.

Lawrence J. Ellison, founder of Oracle, whose net worth has swollen to $17 billion from $4.2 billion in the last 10 years, is profiled in the latest issue of Vanity Fair alongside his new $300 million, 454-foot yacht. ("It's really only the size of a very large house," he remarked off-handedly.) In Manhattan, where the disparity between rich and poor is now greater than in any other part of the country, Rupert Murdoch (net worth: $6.7 billion) has bought the penthouse at 834 Fifth Avenue for $44 million, all cash. The hedge fund manager Steven Cohen (net worth: $2.5 billion) recently paid $52 million for a drip painting by Jackson Pollock.

Making my way down the latest list, through the names of billionaires worth two or three times what they were just a few years ago, I felt a sudden nostalgia for the old Forbes 400 and the promise it held out. Then an unfamiliar name caught my eye: Brad M. Kelley. Who is Brad M. Kelley, America's 258th-richest person?

According to Forbes, Mr. Kelley is 48 and worth $1.3 billion. I Googled him. Nothing, or at least nothing substantial. I ran a LexisNexis search, only to discover that, until now, Mr. Kelley had for the most part been overlooked by the news media.

I called him at home. (His number is listed.) Mr. Kelley was not at all glad to hear from me. At one point, frustrated by my questions, he blurted that he felt he was on some sort of reality show: "I'm trying to, you know, my purpose in talking to you is not so much being courteous, which I try to be, it's damage control and it's really uncomfortable for me and I really wish you'd avoid as much personal matter as possible," he said.

The truth is, if you buy up 1.25 million acres of ranching land across southwestern Texas, Florida, and parts of New Mexico, as Mr. Kelley has done recently, you can't escape attention forever. If you proceed to dedicate parcels of that land to wildlife conservation, as Mr. Kelley has also done, you're practically crying out to be noticed. Eventually someone like Mr. Kelley, who's spending millions of dollars conserving black rhinos, white rhinos, pygmy hippos, okapi, anoas, impalas, white-bearded wildebeests, Nile lechwe, Eastern bongos and Beisa oryx is going to be the subject of an article in The New York Times.

Mr. Kelley is not what we've come to expect of Forbes 400 billionaires. For one thing, he's never been on a yacht. He drives a white Ford pickup and is the only member of the Forbes 400 from Kentucky - though he recently moved to Tennessee to be near his children's school. Mr. Kelley and his wife, Susan, have been married for nearly 20 years. He did not go to college. "I guess I just don't find that as unusual or remarkable as apparently a lot of other people do," he told me. "I mean, I've had a lot of M.B.A.'s that've worked for me over time, off and on, that, excuse my French, were useless as teats on a boar hog."

Born and raised in Franklin, Ky., a small town (population 8,000) about 40 miles north of Nashville, Mr. Kelley seemed most likely to take over his family's farm. According to the Franklin-Simpson High School yearbook of 1974, the year he graduated, Mr. Kelley was not an athlete. Nor was he especially handsome. He was secretary for the Future Farmers of America, winner of the Courier-Journal Louisville Times Future Farmers of America contest and a member of the Who's Who Among American High School Students. As well, he was named Corn Derby winner.

Here's the business story: In 1991, when few wanted to be anywhere near the tobacco business, Mr. Kelley started a cigarette company from scratch. Called Commonwealth Brands, and established with a handful of employees in Bowling Green, Ky., it set out to undercut the big tobacco companies by producing discount "branded generic" cigarettes. In 2001, just 10 years after starting the company, Mr. Kelley sold Commonwealth to Houchens Industries for $1 billion in cash. By then, Commonwealth Brands was the fifth-largest cigarette maker in the country, with sales approaching $800 million. Its top brand, USA Gold, was, and still is, the nation's eighth-best-selling cigarette.

Asked for the secret to his success, Mr. Kelley replied: "I like to think it was discipline and patience and avoiding pitfalls and working for the long term - a whole lot of corny things that'll make me come off looking like an idiot in your article," he answered, before adding quickly: "I'm sure as heck not Horatio Alger. There are a lot of people out there who are real smart and work real hard, and it doesn't happen for them. I just happened to be the one that it did. Sometimes you get dealt a good hand."

When we were done, I said to Mr. Kelley, "You know, you may need an unlisted phone number after this."

There was a pause.

Then he said: "You think so?"

Nina Munk is a contributing editor for Vanity Fair.

More on Novartis.

Novartis Hedges Its Bets

Robert Langreth, 09.23.05, 12:00 PM ET

Over the last few years, the drug industry has gone into a funk, beset by patent expirations, empty research pipelines and safety scandals. But Swiss drug firm Novartis seems to keep rolling along.

Led by the cerebral Chief Executive Daniel Vasella, the company has introduced more drugs in the United States since 2000 than any other drug firm, according to A.G. Edwards. It has few big patent expirations coming up soon, and double-digit sales growth. And now it says it has an impressive 52 new drugs in mid-to-late-stage trials, four of which could be submitted for approval next year. The company's shares have produced steady if unspectacular returns, rising over 20% in the last two years, although the stock is basically flat this year.

Most important, the company has two potential big sellers that it expects to submit for consideration by the U.S. Food and Drug Administration next year. One, called vildagliptin or LAF237, is a new type of diabetes drug (see: "Diabetes Drugs To Watch"). The other, aliskiren (formerly known as SPP100), could be the first in a totally new class of blood pressure drugs called renin inhibitors (see: "Cardiovascular Drugs To Watch"). The diabetes drug faces competition from Merck (nyse: MRK - news - people ), which plans to submit a similar drug in 2006. However, the Novartis (nyse: NVS - news - people ) blood pressure drug appears to be well ahead of a similar compound in early tests at Merck and Actelion. Novartis says it has finished trials on over 8,500 patients, with no signs of any serious side effects.

"It looks better than Diovan" in terms of efficacy, Vasella says of aliskiren, comparing it with the company's big-selling Diovan hypertension drug. "If the drug proves to be as good as it looks now, it certainly would be a multibillion-dollar product."

In a clue as to how Novartis might market the drug, Vasella emphasized that the compound appeared to be particularly good at keeping blood pressure down in the predawn hours, when it tends to spike. Still, the drug will face tremendous competition from numerous existing drugs, such as Norvasc from Pfizer (nyse: PFE - news - people ), as well as various generic compounds. "The road to success...is likely to be a long and arduous one if for no other reason than that the hypertension market is well-satisfied," said Prudential analyst Tim Anderson in a research note this week.

Like a savvy hedge fund manager, Dr. Vasella is constantly adjusting his research portfolio to ensure profitable output, no matter what types of drugs end up being the new hot growth areas. Long before it became fashionable, Vasella established separate specialty- and cancer-drug units to make biotech-style bets on less common but more severe diseases, supplementing the traditional big pharma focus on primary care. While these areas might be smaller in terms of numbers of patients, breakthrough drugs for severe diseases can command premium prices.

"We have tried to get a portfolio where we have some really breakthrough drugs, but at the same time we have less risky projects where we know the mechanism," Vasella says. Noting the ever-increasing market share for copycat generics, Vasella has vastly increased Novartis' presence in this area as well.

One of Novartis' more promising cancer drugs is AMN107 for chronic myeloid leukemia, a successor to the firms' breakthrough drug, Gleevec. Initial trials showed that the drug could help many patients whose leukemia has become resistant to Gleevec. Pivotal second-stage trials are underway, and the drug could be submitted for approval in 2007. Novartis is in a race with Bristol-Myers Squibb (nyse: BMY - news - people ), which has a similar drug in testing.

Under the direction of research honcho Mark Fishman, Novartis is also moving into a number of surprising new areas, including spinal cord injury, cystic fibrosis and a rare immune system disorder called Muckle-Wells syndrome. His novel concept is that by testing drugs on less common diseases first, Novartis can conduct a relatively small clinical trial and quickly get a good idea whether a new drug is hitting its intended target. This could then pave the way for longer, more difficult trials for common diseases.

Separately, Dr. Vasella said that purchasing Chiron (nasdaq: CHIR - news - people ) is not crucial for the Swiss drug firm, and that he would not wait forever to come to a merger agreement with the biotech firm. The two companies have been mired in a stalemate ever since Chiron's independent directors rejected Novartis' offer to acquire the Chiron shares it doesn't already own, for $40 per share--or $4.5 billion. Chiron's independent directors called that amount "inadequate" in a statement.

"Everything is possible. We have made our offer, we stand by it, and we wait," said Vasella. He added that while it "would be nice" to do the deal, it "is not a necessity, it is not critical for Novartis." Chiron shares were recently trading above $43, indicating the market expects a modestly higher bid to eventually emerge.

© 2005 Forbes.com Inc.™ All Rights Reserved