Deal From Three Decade Ago Reflects AOL Strategy.

NOT everyone was totally shocked by the America Online-Time Warner merger. One market veteran said he saw a variation of the deal three decades go.

"Back in the late 1960s, certain computer leasing companies were very hot, with very high valuations, and (financier) Saul Steinberg was running one such company, named LeaseCo Financial," recalls Bill Mason, an investment manager with Cullen, Fortier Asset Management in Woodland Hills and a finance professor at Pepperdine University.

Though LeaseCo had no assets -- only agreements to take. IBM computers and lease them to other companies -- it achieved a huge market cap for that time on paper.

Steinberg evidently reasoned that he needed to strike while the iron wash hot.

"He actually tried to buy Chemical Bank (which later became Chase), but the New York banking community wouldn't put up with it," recalls Mason.

Retreating from Manhattan, Steinberg ended up buying Reliance Insurance, which had invested in real companies and proved a good vehicle for other corporate maneuvers.

"The lesson is, you buy real assets while you can," says Mason.

Of course, things are much different today, and the analogy wears thin quickly. True, computer leasing in the 1960s was perceived as a growth industry, even though it was somewhat limited in scope. By comparison, AOL collects revenue for providing Internet service, which is not only a growth industry but a fundamental one in the new economy.

Says Mason: "Like Mark Twain said, 'Maybe history doesn't repeat itself, but it sure does rhyme a lot.'"

'Small Potatoes'

Speaking of market veterans, 51-year-old Ken Shaffer began investing on his own behalf in the early '70s and remembers when the Dow Jones Industrial Average was below 1000 and going sideways for what seemed like an eon.

"I bought a lot of companies for fractions of their all-time highs," he said. "We had bad inflation. It was a different world from today."

Now Shaffer is chief investment officer for the Los Angeles County Employee Retirement Association, where he oversees a $28 billion stash set aside for county pensioners.

Even though he is "taken aback" by the roaring 1990s bull market and the heady valuations, Shaffer is not retreating from Wall Street now. His steadfastness may explain in part the ongoing resilience of the bull, in which so many investors are pension funds and other long-term players.

"We have obligations extending out 75 years," explains Shaffer, referring to benefits that will be owed to survivors of current pension plan members. "We are very long-term investors. I am not hired to be a gunslinger and determine when the market has topped or hit bottom. I don't know, anyway."

So when stock prices get scary, Shaffer digs in. But he isn't one to keep 100 percent of pension fund assets in the equities market at all times. True, some foundations and other "permanent" investors, citing historical data showing equities outperform bonds in the long run, now invest exclusively in stocks and eschew all else.

But following a policy laid down by the pension fund's board of investments, Shaffer has "only" about 55 percent of assets in stocks, and the rest in bonds, real estate or alternative investments, including about 6 percent in venture or private equity funds.

"We have obligations to meet every year -- the pay-outs to pensioners," said Shaffer. "It helps to have income (from bonds) to meet that need. And I don't think a public fund is ready to face the risk of being 100 percent invested in stocks during a serious market drop."

With venture funds red hot, why not put more money there?

"The amounts that venture capitalists can handle are very small," said Shaffer. "We have had a hard time getting it up to even 3 percent (of total pension fund assets)."

An interesting note is that on famed Sand Hill Road, the Palo Alto street known as world headquarters for venture capital, there is about $25 billion under management -- $3 billion less than Shaffer manages. "So you can see why we can't find much (venture-wise) to invest in," said Shaffer. "We have to think in terms of hundreds of millions, and billions. Venture funds are small potatoes."

Old China Hand

It's always rewarding to check in with R.M. "Dick" Torre, principal with Global Capital Markets Ltd., which has offices in Century City.

Unlike stock market analysts, Torre takes hefty equity positions in real businesses overseas or arranges mergers. As a result, he must look a lot deeper into economies and political structure. All the while, he's not liquid and can't bail tomorrow.

Torre has been haunting the Far East for decades and is gloomier than ever on the prospects of Japan. In addition to restricting imports, the island nation has an aging population and a strict immigration policy.

The leadership there apparently sees no reason to change, and fearing for economic security, consumers don't spend.

"What you are seeing in Japan is the dead cat bounce," Torre said about the recent modest economic growth there. "But they are on the long road to significant decline."

He believes that only gigantic deficit spending by the government -- amounting to 7 percent of the gross national product -- has pushed the economy to mild growth. Now, the yen is strengthening against the dollar and that probably will continue because of the huge trade surplus Japan runs with the U.S. every year.

"The dollar has been strong, as sort of a safe harbor currency, but that is going to wear off," Torre said.

On another point, Torre noted that the Canadian dollar is very cheap compared with the greenback (read 67 cents), and that Canadian companies sell for very modest price-earnings ratios, such as four times earnings.

So does Torre plan to buy a Canadian company and convert it to American, where small cap companies are worth 15 times earnings?

"I just might do that," he said.

Contributing Columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal.