Monday, May 08, 2006
When you pass through the waters, I will be with you; and when you pass through the rivers, they will not sweep over you. When you walk through the fire, you will not be burned; the flames will not set you ablaze. Isaiah 43:2. A friend of mine gave me a daily prayer journal just days before Black Monday. I sat at my desk before the market opened that morning, and seeing the prayer journal, I opened it to October 19. The above verse from Isaiah was written across the top of the page followed by blank space for personal observations. When I saw the passage, I realized how much I needed to hear those words this morning. The financial storm that was Black Monday had demolished the Japanese and Europeans markets and within minutes would slam ashore here in the US. I tried to collect my thoughts and take a few minutes to meditate on the scripture, but the phones had begun to ring and my thoughts were not collectible. I just bowed my head and uttered, “Lord, give me your strength and your wisdom.” I said last time that I received three calls during the day that changed my perspective of investing forever. Two were from clients; the third was from a colleague. The first call came from a client. Mrs. H. was (and is) a remarkable woman. She had given birth to twelve children. She and her husband had built one of the largest farming operations in this part of the country, and after her husband died, she added coal and oil to her business interests. She was a delightful lady, and I had had the privilege of working with her in municipal bonds for many years. Around midmorning, she called and waited on hold for several minutes. When I was able to get to her, I was surprised to hear her voice. Thinking she was worried about the market’s effect on her holdings, I started into my Black Monday talking points. Mrs. H. was surprisingly direct. She asked how much money she could borrow from her account. I read the amount to her, which was in the hundreds of thousands of dollars. She said that she had been listening to the radio and knew that the market was down over 200 points and wanted to buy some stocks. I was surprised to hear that she wanted to buy stocks because, normally, she bought only municipal bonds. I had no doubts Mrs. H. was of sound mind and meant what she said, but I did not think buying into the crash was a good idea. I told her that in my opinion the day’s selling would likely be followed by more selling, and it might take weeks, even months, before the markets could put in a solid bottom. I told her I thought buying into the crash was very risky. She then became more direct. She said that she had watched her husband accumulate thousands of acres of prime farm ground by buying when everyone else was selling. She had continued that strategy after he had died, and it had always eventually resulted in large gains. I tried to get a word in, but she continued. She said, “Greg, I know what I am doing, and I am a big girl. If I am wrong and it doesn’t work out, I won’t blame you. And while I have no intentions of losing this money, if I do, my life will not change.”I asked her, “If your decision is final, what would you like me to do?” She said, “Erwin always bought when everyone else was selling, but he only bought the best ground. I want you to give me a list of what you consider to be the best companies I can buy; companies that are going to come out of this bad market stronger than they went in. That is what I saw my husband do time and time again, and that is what I want to do now.”In all the years I had worked with Mrs. H, I had rarely heard her speak of her husband. I don’t believe I knew his name before that day. I realized in the span of a few minutes a very successful person -- a self-made person -- had shared with me a priceless bit of investment wisdom. Everyone says the secret to success is to buy low and sell high. Hardly anyone, however, invests that way. Most people really want to buy high and sell higher; they have no appetite for buying low, because when prices are low, times are usually tough and tough times call for tough minds. She told me how much she wanted to spend and asked me how long it would take for me to come up with a list of companies. I told her I was swamped, but that I’d pull something together by 1:00 PM. Then I asked the only intelligent question I would ask during the entire conversation. “Mrs. H., are you thinking of buying these stocks to take a short-term profit if the market bounces back, or are you thinking of holding them for awhile?” She said, “Greg, I want to buy companies that I can own for the rest of my life. That’s the way I buy farm ground, and that’s the way I’m thinking about these stocks.” In between calls, I kept thinking about which stocks were the “best.” Words like: “test of time,” “blue chip,” “high quality,” “powerhouse,” “winner,” and “sure-fire” passed through my mind. What did it mean to own the best stock? I realized that before the crash, my definition of the best stock was the one that made the most money in the shortest time. But I quickly realized that this way of thinking about “best” was only possible by looking back. In this case, Mrs. H. wanted to know the best company on a present and forward-looking basis. She was not asking me to pick a company with the best value, she was not asking me to pick a winner; she was just asking me to pick a small group of the best companies. The more I thought about it, the more I realized that there was no answer to her request. There was no such thing as the best company. There were companies that were great values, and companies with the best risk/reward ratios, but “best” was just too relative of a term to apply to companies. For a while I thought I’d have to tell her I could not help her. Then I thought about what she was asking me to do according to her perspective in the world of farming. I had grown up in a farming town. I had friends and relatives who were farmers. If I were to ask them what the best land in their county was, I knew they would have an answer. They would use terms like lay of the land, richness of the soil, length of the rows, and width of the fields. They would consider access, creeks, out-buildings, and locations. But this line of thinking was not helping either; farm ground was tangible, stocks were intangible. Was anything tangible about a company? Stocks possessed a book value, but it was not what truly gave most companies their value. Book value was just a measure of the value of the means of their production. What gave a company its value was how much its products and services were prized by consumers, the company’s ability to successfully extend their products to new markets, the company’s profitability, and how good the company was at bringing new products to market. Then it hit me. At the county fair, the best animal wins the blue ribbon; the most attractive girl in the beauty contest wins the crown. A man gives his best girl a diamond. A great athlete becomes a star. In all societies, the best are given the prize and are prized. So what companies in the US were most prized? Immediately Coca-Cola came to mind, then Disney (it was a much different company then than it is now), General Electric, Wrigley, and Johnson & Johnson were also prized. They were not just blue chips; they were icons that had stood the test of time, defeated all comers, were very profitable, and had star quality. As I ticked down through their qualities, I realized that they were what some people called their “brand.” The strength of a brand was as close as a company could get to being tangible. I called Mrs. H. back and gave her my line of thinking and the shortlist of names. I asked her one more time to wait a few days. The market was coming apart and I told her that I had no idea where these stocks were trading. She agreed. We did, however, start to buy some of the “best” stocks by the end of the week. It still did not feel right to me, but it was what she wanted. Sure enough, just as she had predicted, eventually almost all of her “best” stocks did very well. I spoke to Mrs. H. this week and asked if I could tell this story. We had a delightful converstation. She is 84 years of age. She recently remarried – in a barn – to a man she met bowling. “He’s a great guy,” she said. I would say you could bank on that. The second of the three important calls on Black Monday was from a colleague and friend who had a problem. Next time I'll describe that call.
Labels: The Rising Dividend Story