csinvesting

Eventually we will discuss investable ideas but now we have to develop a reference library of readings and case studies to have a framework to place investments into context. Most of the investing public craves immediate gratification or as this song says, “Show me the money!” http://www.youtube.com/watch?v=OaiSHcHM0PA. The goal of this blog is to teach others to fish not be given fish.

As Seth A. Klarman points out, “The real secret to investing is that there is no secret to investing. Every important aspect of value investing has been made available to the public many times over, beginning in 1934 with the First Edition of Security Analysis (1934). That so many people fail to follow this timeless and almost foolproof approach enables those who adopt it to remain successful.  The foibles of human nature that result in the mass pursuit of instant wealth and effortless gain seem certain to be with us forever. So long as people succumb to this aspect of their natures, value invest will remain, as it has been for 75 years, a sound and low-risk approach to successful long-term investing.” [1]

This post will help beginners learn more about how to think about prices. For  amusement let’s read what two writers describe as the “secret to investing.”

Advice  from Where Are the Customer’s Yachts? by Fred Schwed, Jr., 1940 (pages 180-182). A fantastic little book on the psychology of investing.

“For no fee at all I am prepared to offer to any wealthy person an investment program which will last a lifetime and will not only preserve the estate but greatly increase it. Like other great ideas, this one is simple:

When there is a stock-market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them. Take the proceeds and buy conservative bonds. No doubt the stocks you sold will go higher. Pay no attention to this—just wait for the depression which will come sooner or later. When this depression—or panic—becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks. No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you will have the pleasure of dying rich.

A glance at financial history will show that there never was a generation for whom this advice would not have worked splendidly. But it distresses me to report that I have never enjoyed the social acquaintance of anyone who managed to do it. It looks as easy as rolling off a log, but it isn’t. The chief difficulties, of course, are psychological.

It requires buying bonds when bonds are generally unpopular, and buying stocks when stocks are universally detested.

I suspect that there are actually a few people who do something like this, even though I have never had the pleasure of meeting them. I suspect it because someone must buy the stock that the suckers sell at those awful prices—a fact usually outside the consciousness of the public and of financial reporters.   An experienced reporter’s poetic account in the paper following a day of terrible panic reads this way:

Large selling was in evidence at the opening bell and gained steadily in volume and violence throughout the morning session. At noon a rally, dishearteningly brief, took place as a result of short covering. But a new selling wave soon threw the market into utter chaos, and during the final hour equities were thrown overboard in huge lots, without regard for price or value.

The man never had a loss on balance in 60 years.

His technique was the ultimate in simplicity. When during a bear market he would read in the papers that the market was down to new lows and the experts were predicting that it was sure to drop another 200 points in the Dow, the farmer would look through a S&P Stock Guide and select around  30 stocks that had fallen in price below $10—solid, profit making, unheard of companies (pecan growers, home furnishings, etc.) and paid dividends. He would come to Houston and buy a $25,000 “package” of them.

And then, one, two, three or four years later, when the stock market was bubbling and the prophets were talking about the Dow hitting 1500, he would come to town and sell his whole package. It was as simple as that.

He equated buying stocks with buying a truckload of pigs. The lower he could buy the pigs, when the pork market was depressed, the more profit he would make when the next seller’s market would come along. He claimed that he would rather buy stocks under such conditions than pigs because pigs did not pay a dividend. You must feed pigs.

He took “a farming” approach to the stock market in general. In rice farming, there is a planting season and a harvesting season, in his stock purchases and sales he strictly observed the seasons.

Mr. Womack never seemed to buy stock at its bottom or sell it at its top. He seemed happy to buy or sell in the bottom or top range of its fluctuations. He had no regard whatsoever for the cliché’—Never send Good Money After Bad—when he was buying. For example, when the bottom fell out of the market of 1970, he added another $25,000 to his previous bargain price positions and made a virtual killing on the whole package.

I suppose that a modern stock market technician (on CNBC) could have found a lot of alphas, betas, contrary opinions and other theories in Mr. Womack’s simple approach to buying and selling stocks. But none I know put the emphasis on “buy price” that he did.

I realize that many things determine if a stock is a wise buy. But I have learned that during a depressed stock market, if you can get a cost position in a stock’s bottom price range it will forgive a multitude of misjudgments later.

During a market rise, you can sell too soon and make a profit, sell at the top and make a very good profit. So, with so many profit probabilities in your favor, the best cost price possible is worth waiting for.

Knowing this is always comforting during a depressed market, when a “chartist” looks at you with alarm after you buy on his latest “sell signal.”

In sum, Mr. Womack didn’t make anything complicated out of the stock market. He taught me that you can’t be buying stocks every day, week or month of the year and make a profit, any more than you could plant rice every day, week or month and make a crop. He changed my investing lifestyle and I have made a profit ever since.

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As another example of such an investment strategy, note John Templeton in the book, Investing the Templeton Way by Lauren C. Templeton (2008) is quoted
as saying, “People are always asking me where the outlook is good, but that is
the wrong question. The right question is: Where is the outlook most miserable….There is only one reason a stock is being offered at a bargain price: because other people are selling. There is no other reason. To get a bargain price, you have to look where the public is most frightened and pessimistic.

Mr. Templeton made a successful career out of being on the other side of panicked sellers and euphoric buyers. He could focus on probable future events rather than react on the basis of current events.

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Of course after reading those pieces, you realize there is no secret to investing. All the principles are laid out in Security Analysis and The Intelligent Investor by Benjamin Graham. The application and evolution of value investing principles are laid out each year in Mr. Buffett’s shareholder letters. The study, application and discipline are up to you, but then who would want it any other way?

Enjoy your journey!