September 12, 2014 / 5:10 AM / in 3 years

As music sales fall, sax player Kenny G turns to stockpicking

NEW YORK (Reuters) - Kenny G, the best-selling jazz musician who once played at President Bill Clinton’s inaugural ball, wakes up every morning to Starbucks.

Musician Kenny G performs at a fund-raising reception before a fundraiser chaired by then first lady of California Maria Shriver in Monterey, in this September 5, 2008 file photo. REUTERS/Bill Auth/Files

The saxophonist doesn’t drink coffee. Instead, the man whose real name is Kenny Gorelick obsessively checks the company’s stock price. Gorelick was one of the first investors in the Seattle-based chain. He was introduced to Starbucks chief Howard Schultz through an uncle, before the company went public, and soon bought a stake. Shares are up more than 12,000 percent since beginning public trade.

That success helped spark a stockpicking habit that consumes his attention as his music earning potential is eaten away by digital music, which pays less than physical album sales, and online piracy.

These days, Gorelick spends his mornings in front of his computer screen, trading blocs of shares of the approximately 30 companies in his portfolio. Over the last decade, he has earned about as much money from stock trading as from music, he said.

“Most people in the music business don’t make as much money as we used to,” said Gorelick, who topped the contemporary jazz sales charts for several years running in the 1990s and whose 2010 album cracked jazz’s top ten. “You have your 1 percent of Beyonce and U2, who are playing stadiums, who are going to make tons of money. I’m going to put myself in the normal category of a music person who has been successful.”

Gorelick, who holds a degree in accounting from the University of Washington, keeps his assets in two main accounts: one for his own trading and one that is overseen by Todd Morgan, a founder of Los Angeles-based firm Bel Air Investment Advisors.

Morgan said that it was common for his clients, all of whom must meet the firm’s $20 million minimum in investable assets, to keep a portion of their portfolios for stock trading.

“We encourage them that if they are active traders to open an account away from us. Why get in the middle of it?” Morgan said.

Wealthy investors with more than $1 million in their accounts are unusual in their affection for trading individual shares, according to data from E*Trade and other brokers.

Wealthy investors are the most likely to prefer individual shares, with 30 percent or more of portfolios invested in single company positions, according to a study from E*Trade Financial. Smaller accounts, meanwhile, tend to keep roughly 20 percent of total portfolios in individual stocks, a figure that has dropped since 2008 with the rise of index funds and low-cost exchanged traded funds that track the performance of the broad market.

Picking stock winners is not easy. Only 30 percent of professional fund managers outperformed the benchmark Standard & Poor’s 500 index over the last decade, according to data from Lipper, a Thomson Reuters company.

Yet individual shares do have advantages, advisers say, including the ability to defer tax liabilities during an investor’s lifetime and favorable tax treatment for their heirs. Wealthy investors who trade a portion of their own accounts may also be able to increase the diversity of their portfolios.

GROWTH STOCK PICKER

Gorelick has been more fortunate than other musicians when it comes to the income he’s lost to streaming and digital downloads. His 2010 album, “Heart and Soul”, sold nearly 12,000 copies in its first week, with an unusually high 86 percent of sales coming in higher-priced compact discs, according to figures from Nielsen SoundScan, which tracks music purchases. His next solo album is due later this year.

As far as stock performance goes, “I have a good batting average but I‘m definitely not perfect,” Gorelick said.

He asks people he considers smart about what is happening in their fields. If he comes across a company that looks promising, he watches it for a while, reading coverage of the companies and doing other research, and then might buy on a dip.

One of his biggest recent winners was a stake in Potash Corp of Saskatchewan Inc, one of the world’s largest fertilizer exporters. He heard about the company from a friend in Canada. The friend was a successful stock picker and that “made his advice easy to follow,” Gorelick said. He watched the stock for two months, and bought significantly when it dipped one day to around a split-adjusted $30 per share in 2010.

The shares shot up to a split-adjusted $62 per share the following year as the company fought off unsolicited takeover bids. Gorelick sold on the way back down, at $60 and below. “I made a lot of money on that stock,” he said.

Nearly the opposite happened with his stake in biotech Dendreon Corp, recommended by a friend. Gorelick began buying shares around $35 in early 2011. Not long afterward, the company announced that sales of its prostate cancer vaccine Provenge were not meeting expectations. Gorelick sold for less than $5 a share. It now trades at less than $2 per share.

“I don’t listen to tips from friends as much anymore,” Gorelick joked.

Gorelick still has “a fair amount” of his original shares in Starbucks Corp and watches the stock price every day, he said. Yet he tries to keep himself from getting caught up in every change of the ticker.

“I can get emotional in my music, and try to make more sense when it comes to trading,” he said.

(story fixes incorrect figures on small investor ownership of stocks after update by E*Trade, paragraph 10)

Reporting by David Randall, editing by Paritosh Bansal and Peter Henderson

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