The Rising Dividend Story -- Call # 3 -- Billy T. -- Part II

Billy said he was so worn out that he didn’t think he could stay awake another 5 minutes. He said he would listen to the story as long as he could, but he was making no guarantees that he wouldn’t fall asleep. The story I began to share with him was neither fully formed in my mind, nor entirely clear to me. But as Billy’s mood grew darker, something inside of me started to speak in a way I had never thought of before, so I started slowly. “Billy you know there is a drought in this part of the country. Corn and bean yields are way down, and some farmers have plowed under whole fields. Have you seen that field at the corner of Highway 57 and Kansas Road?” (Billy lived North of Evansville, and I knew he drove past the field nearly everyday.) “It’s burned up,” He answered. “Yeah, I know the farmer, and he said he’s going to plow it under. There is nothing to harvest. The sun has just roasted the beans. What do you think the odds are of anything ever growing in that field again?,” I asked. “Better yet, are you willing to bet me that that field is somehow broken and will never produce crops again?” Billy wouldn’t take the bet because he knew, as I did, that the field would indeed grow crops next year. I asked him on what basis he believed this. He said it’s only natural. I said, “Billy, just think of everything that has to go right for that field to produce crops—just the right amount of rain all year, not too much or too little; the absence of a blight and destructive insects; the right seed, the right fertilizer, and the skill of the farmer.” I asked Billy if he thought the value of the field had gone down because of the poor crop this year. He said he did not think so. I asked him why not. He said because in nine out of ten years the field would produce a crop, and some big crops would make up for the shortfall this year. Billy was warming to the discussion, but I knew he would soon grow quiet. I said, “Billy, what if I told you that the force that produces the crops--and the rain and sunshine that they need to grow -- is the same force that produces corporate profits?” Billy did not say anything, and I went on. “What if I told you that the same force that provides for a harvest 9 out of 10 years is not Mother Nature. . . but God? And what if I said that God is not only in control of nature, but He is also responsible for profits of all kinds?” I said, “Billy, I realize I might be in alien territory here, but if it’s OK, I’d like to go on.” Billy said, “Go ahead.” I said, “Billy, I have no idea where you stand on matters of faith, but let me give you a short course in biblical economics. When God kicked Adam and Eve out of the Garden of Eden, He said, ‘You will eat your bread by the sweat of your brow.’ In those words were a curse and a blessing. The curse was that they were being thrown out of the Garden of Eden and had to work to eat, but the blessing was that this work would work. They would eat. God did not say that Adam and Eve might eat, he said they would eat. In doing so, he blessed work. In short, work works. Many people believe that, but I suspect that few people have thought about what I am going to tell you next.” There was a brief pause. Then I continued, “Billy, what if I told you God is involved in the stock market.” Billy was silent, so I asked him, “Are you still with me?” “Yes,” was his only reply. I was almost wishing Billy had fallen asleep on me at this point, because as I went deeper into where my heart was taking me, I honestly did not know where it would lead. I was worried that I might say something wrong and make matters worse for Billy. I continued, “The Bible says that the world and everything in it is God’s doing. He created it, He sustains it, and He loves it. The part of His creation, however, that He loves the most, is us – human beings. In the book of Isaiah, God says something that is just amazing: ‘. . . because you are precious in my sight, and because I love you. . .’ ” I went on, “Most people get hung up in the ‘thee’s’, the ‘thou’s’ and the ‘thou shalt nots’, but I believe that the Bible is at its core a love story. God is not a cop, but a lover. He does not wish to destroy us; that would be easy for Him to do since we are such fragile beings. No, instead, He desires to bless us; to commune with us. Because God cannot be seen, he provides another kind of evidence of His presence. He provides order: gravity, seasons, night and day – the nature of things. Billy, there are lots of theories floating around that attempt to explain why things are the way they are, and I have listened to them all, but a few years ago I realized that for me, the one that spoke to every molecule of my body was God’s story revealed in the Bible. The bottom line on this story is that God has dominion over all things. For the first time in my life, tonight, Billy, I am coming to the realization of how God is involved in the stock market. Billy, a corporation is nothing more than group of people working together for a common goal. I don’t know if God blesses businesses directly, but I believe He blesses the work of the people who make up the corporation and that blessing manifests itself as profits. When you and I invest in a company, we are sharing in that blessing, and likewise the company is blessed by our investment.” I continued, “The thing to remember is that God’s blessing is in the fruits of labor of the workers’ hands and minds, not necessarily on the price that the market says this fruit is worth. Prices on the New York Stock Exchange are man’s attempt to value God’s blessing. While the prices may reflects man’s best guess of what a company is worth, prices also contain man’s greed, fear, and biases of all kinds. In short, prices are the best man can do, but price is a poor substitute for how God values things, which is revealed in the fullness of time. Billy, you said that even though that field at Highway 57 and Kansas Road is burned up that it would produce crops again, and that the true value of the field had changed very little because the owner could expect crops nine out of ten years. What I’m trying to say is that the stock market, by extension, is like the field on Highway 57. It caught on fire today and some of this year’s harvest has burned up, and it may burn even more in the weeks ahead. But, the ability of the millions of groups of people that work together in what we call corporations to produce profits is unchanged. The true value of corporate America is unchanged unless God has changed his nature and is no longer blessing work.” I said, “Billy, if God has decided he will no longer bless work, there is no place to hide. Everything will fail. On the other hand, if God is still true to his word and is still blessing the work of people; better yet, if He is still a lover rather than a destroyer, the value of most companies will continue to grow, and in time so will prices.” As this story came out of my mouth, I thought surely I must be out of my mind to try to explain the mind of God. I prayed that God would guide me to the end of this story and forgive me if I veered too far in my explanation to Billy. Billy asked, “What if my understanding of God is not the same as yours?” I said, “Billy, what I just told you I have never told anyone before. I don’t know if I have ever thought these thoughts before. But tonight, we both need peace. Either I am making all this up, or God is talking to us both, and he is saying, ‘Do not be afraid. I do not seek your destruction; indeed, I seek to bless you’.” I continued, “Billy, I am going to ignore your instructions to sell everything. Sleep on it tonight, and if you still want me to sell, call me tomorrow before 9:00 am.” Billy did not call the next morning, and we never spoke about that night again during the next 20 years I continued to work for him. I had never thought the thoughts that I told Billy that night, and I am sure I would not have told him had I not been concerned about his state of mind. Billy was special to me, and I was honored to serve him. I have thought a hundred times about the story I told Billy that night, and as I explained to him, I believe God was speaking to the both of us in the story that I told Billy. I realize some of what I told him could be debated by theologians, but Billy wasn’t talking to a theologian that night, he was speaking to an investment guy who, when he came to his wits end, found that a bigger, infinitely better Wit was there with a story of hope. This was the third call of Black Monday that would change my mind about investing forever, but it was not the last call. At 12:00 AM my friend Dr. S. called. He said, “Sorry to call so late, but your note said you would be up ‘til midnight, and your phone has been busy all night. How are you doing?” “I’m shot,” I replied. He said, “Hey, you don’t need to waste much energy on me. While I was trying to reach you it dawned on me that three more days like this and we’ll be starting all over. (The market was down over 500 points and had closed at just over 1700.) He, said, “I don’t know why, but seeing what happened today and realizing that there cannot be many more days like this convinced me that this whole thing is not real. The market is going to turn around, and it’s going to turn around faster than most people think. I’m thinking about getting a second mortgage on my house so we can be a buyer in through here.” “Stop,” I said. “Can we just sleep on it?” “Goodnight,” he replied. “I just wanted to be sure you were hanging in there.” I told him, “I’m on fumes, but thanks for the call.” Next time: What the three calls meant to me and where they led me.

The Rising Dividend Story -- Call # 3 -- Billy T. -- Part I

Introduction: The third important call I received on Black Monday came near midnight. It was from an important and influential client whom I had not spoken to during the day. He was very troubled. In the years since Black Monday, I have told very few people the nature of that call. It was an intensely personal call to a person I cared a lot about. I have changed the circumstances of the person completely for matters of privacy. I am sharing the essence of the call because in my inability to calm my client with rational arguments, a new way of thinking about business and investments was born for me. A way that I may have believed all along but had never put into words. But in those critical moments, when my client had lost his ability to think clearly, and I had exhausted every way I knew of reaching him, a story came to my mind. A story that was like a rope of truth handed down to us that pulled both of us out of the dark place where we had fallen. Due to the length of the description of the third call, I have broken it into two parts. Part II will follow shortly. The Third Call, Part I Billy T was in his own words “large and loud.” He had one of the keenest minds of anyone I have ever known. He was a voracious reader, a student of history, and a computer wizard. Billy T advised me regularly that he did not need a money manager because he had done well on his own for years. Indeed, the million dollar account I managed for him was only a third of the assets that I knew he had. But while he regularly told me he did not need me, I continued to manage a large portfolio for him for over 20 years. Billy T was a mystery to me. He’d be my best friend one day and interrogate me the next. He always seemed to delight in telling me that the portfolios he managed were outperforming the one I managed. The odd thing was that every time I asked him why he still did business with me, he would say only that he needed me because I managed his conservative money. On Black Monday, I traded calls with Billy T all day. It was the pre-cell phones days, and he was on the road trying to reach me as he hop-scotched across the country from pay phone to pay phone. He knew that I was not selling into the crash, and he informed my assistant that he agreed with that strategy. As Black Monday closed, Billy T was one of the few clients I had not spoken with directly. So, just before I left the office, I called his home telephone and left a message saying that I would be working at home all evening and that he could call me anytime up until midnight. At 11:00 PM, my phone rang, and I heard a voice on the other end that I did not recognize. It was very faint and almost sounded like a child’s voice. “Gregor,” the voice said. “Glad I caught you. I just got in, and I’m shell-shocked at my losses.” Each word was labored, and spoken as if it was being read from a piece of paper. I knew it was Billy T, but he was anything but large and loud. “Gregor, how much is my account with you down?” he asked. I told him somewhere between 15%-20%. He said that he was down much more than that in his other accounts because they were fully margined. He explained that he was sure he would have margin calls in the morning, and he wanted to know what I thought was going to happen in the next few weeks. I told him my best guess was that the market would continue its volatility and that I would be surprised if it did not go at least 10% lower before finding its footing. I added that big sell-offs are usually followed by a rally, then a retesting of the bottom. He said he was so stunned by the day’s events that he was having trouble comprehending it. He said he thought he might have lost a million dollars. He asked me to remind him why I had decided not to sell into the crash. I repeated to him what I had been telling everyone, that I did not think it was prudent to throw good companies at bad prices, and that it was becoming increasingly clear that Black Monday’s bad prices were the result of a structural malfunction in the market that had caused the system to crash. I told him the news was full of stories of computerized trading that had careened out of control, and that there was talk that the New York Stock Exchange was going to suspend computerized trading. He said that one of the gurus on his stock hotline was calling for a bottom in the Dow Jones 30 of 400 points. That was over thirteen hundred points lower than Black Monday’s close of 1738 for the Dow. . I asked who was making the prediction. He told me the advisor’s name, and I responded to Billy that the guy had never seen a sunny day in his life. I told him that the advisor in question had been predicting the sky would fall, for one reason or another, for the past decade with little to show for it. I asked Billy why he continued listening to the guy when he had been so wrong for so long. Billy T then informed me that the advisor had been predicting a crash for a long time and that he should have listened earlier. The way Billy said it, it was clear he had not heard me. Billy T said that if the market fell to 400, he would be wiped out, and he just couldn’t take the chance of staying in the market. Somehow talking about the advisor’s doomsday prediction had sent him into a downward spiral. He repeated several times that if the Dow fell to 400 he would be wiped out. Again I countered with the Black Monday talking points I had been using all day and again realized he wasn’t listening. Losing everything had become a certainty to him, and my arguments were like bubbles against the hard steel of his state of mind. It was now clear to me why I worked for Billy. The morbidity with which he now saw the market was not the Billy T of living loud and large. Indeed, in the course of this short conversation, the terror in Billy’s voice caught me by surprise, and I did not know what I was dealing with for several minutes. A dark state of mind had engulfed him; a darkness that, perhaps, he had never confessed to anyone; a darkness that he had just learned to live with. But, in the grip of this dark mood, Billy T told me to sell everything at the opening of trading tomorrow. It was now 11:30 PM. After a hard day of dealing with everyone’s emotions, including my own, and speaking with clients for going on 17 hours, there was little left of my voice, or my energy. Billy T’s irrational and dark mood had found a crevice in my own psyche, and the slow-motion clarity and confidence that I had felt all day were being eclipsed by his sense of dread and loss. Billy had lost hope, and witnessing the despair of such a bright and seemingly well-adjusted man now shook my own confidence. For a moment, I forgot my responsibility to do the right thing for Billy, and like him, started to run. I realized that Black Monday was the first of many long days and nights for me. If I was to save the relationships with my clientele for our small firm, I would have to come up with a post-crash strategy and work it night and day. I could not exhaust myself on any one person, because there would be nothing left for everyone else. I remember muttering, “If that’s what you want, Billy, I’ll do my best. . . .” But as I said the word “want,” I remember realizing that in Billy’s state of mind I was doing him no favor to do what he wanted. I was the captain of one of his financial ships, and I knew better than he did how to navigate this storm. I knew in the current stock market that there was a complete disconnect between prices and values. I did not know what the correct price for the Dow Jones 30 was, but I was sure that bailing out now was wrong. I also knew that trying to have an intelligent discussion with Billy in his present state of mind was useless. Billy had been there for me when I needed him, it was time for me to be there for him, no matter the cost. I stopped in mid-sentence and said, “Billy, you realize in giving me these instructions to sell everything, you are firing me. We will never work together again.” He tried to protest, but I interrupted him and said, “I think what you are doing is dead wrong, and you will soon be sorry.” Billy did not respond and I continued, “As we have been talking, something keeps coming into my head. I’m not sure you will agree with it, and it might even offend you, but I cannot let our relationship end without telling you what is on my mind. Would you allow me to tell you a story?”

Market Comment

A number of our staff has been in Tuscaloosa and Birmingham Alabama over the past few days visiting clients and our friends at the regional TD Waterhouse office. Yes, we were telling our dividend story, but we were also sharing our views on the economy and stock markets. On Tuesday night at a gathering of clients and prospects, I asked for a show of hands on three questions regarding inflation: (1) Inflation is a big problem, (2) The Fed has done its job and inflation is reasonably under control, and (3) Inflation is overstated and will diminish in importance quickly. As I told the group, I had my own opinion, but I was interested in what they had to say. The vote was 50% for #1, inflation is a big problem and 50% for #2, inflation is under control. No one asked me to vote, but I would have voted for #2, inflation is under control. I told the group that the dead-even split appeared to be consensus of the investment community. The reason for this is contained in Chart-I.

There are two graphs on the chart. The green (dark) line is nominal or headline CPI, which measures the actual rate of inflation, and the brown (light) line is the "core" CPI, which excludes food and energy from nominal CPI. The core CPI is what most economists watch because food and energy are very volatile and can distort the data when viewed too narrowly. Chart I shows that the nominal CPI has been on a steady march higher since the end of 2001. Core CPI has been much steadier, spending most of it time between 1.5% and 2.5% over the last 9 years. Interestingly, the 80 year average of both indices is near 3%, and this is the reason that the Fed and most economists pay more attention to the core rate of inflation. It is less volatile than the nominal CPI and, in the long run, it has increased at the same rate. Yesterday almost $200 billion was chopped from the value of the S&P 500 because both measures of inflation were slightly higher than forecasts. The nominal CPI was .6% for April and the core CPI was up .3%. Most experts expected nominal CPI to be a big number because oil prices had risen nearly $5 per barrel in April but forecasted that the core CPI would come in at .2%. So in a manner of speaking a .1% miss on the core CPI was worth about $200 billion in stock values. The reason the stock market reacted so negatively can be understood by looking again at ChartI. The core CPI has gone sideways at near 2% annual growth for the last year. It has done so in the face of a big increase in oil prices and some food commodities, and the effects of Katrina, et al. The problem is the .3% increase in the core CPI for the month of April has now turned the nose of core CPI up. If core CPI is, indeed, moving higher, then the Fed will continue to push rates higher and the recent rally in stocks will stall. The reason is simple: even though first quarter earnings have been outstanding, at least some of the rally in recent weeks, has been based on the notion that the Fed was nearing completion of its rate hikes. I am not in the camp that believes that the Fed has a lot of work left to do, and the reason can be seen in Chart II. Chart II shows the monthly price of crude oil since 12/31/04. The most recent three bars of the data are the key drivers of the inflation story in the short run. The last bar on the right hand side of the chart shows today's price for oil of $68.80 per barrel. The data that was released yesterday reflected the nearly $5 per barrel run up in the price of oil for the month of April, which ended the month at $71.9. Since the end of April, prices have fallen about $3 per barrel. If this price decline holds through the end of the month, May's CPI data will be much lower than the just-reported numbers for April.

But, even if oil prices stay high, I believe inflation will stabilize and begin to fall in the months ahead for three very big reasons: (1) It is well known that Fed rate actions work with a lag of 6-12 months. Thus, the effects of their recent hikes have not yet been felt by the economy. (2) There is little doubt that the hot real estate market is cooling. A slowing real estate market will slow the economy and diminish price increases in housing related raw materials, which have been rising sharply in recent years. (3) The effects of higher oil prices, while affecting inflation, also impact economic growth. The reason is simple: higher energy prices come right out of consumer's pocket books, leaving them less money for other discretionary spending.

Additionally, substitution is starting to take place. As I write this letter the CEOs of the major auto manufacturers are in Washington DC lobbying for more filling stations across America capable of pumping grain-based alternative fuels. There is, obviously, a lot of politics in the promotion of alternative fuels, but, in my judgment, it has now become clear to leaders of all stripes that our country cannot continue its dependence solely on oil rationed to us by countries who are our enemies.

One sign that things are changing was the recent announcement by Archer-Daniel-Midland that they had hired a former Chevron executive as their new CEO. ADM is the leading player in the ethanol alternative fuels market and giving its top job to an oil executive is not a publicity stunt. They see a change in the winds and they are moving to capitalize on it.

Other anecdotal evidence that consumers are changing their buying habits is news that big SUVs are not selling well, and that high mileage used cars are bringing remarkable prices. CNN reports that a year old Toyota Prius is now fetching a higher price than when it was new, even with 20,000 miles.

Inflation concerns will continue to be the driver of both stocks and bonds until nominal CPI falls below 3%. And, while I am not claiming that inflation is whipped, a final look at Chart I shows that, even with the recent bad CPI data for the month of April, nominal CPI appears to have peaked and is now trending lower. Couple this with the falling oil prices in recent weeks and the inflation picture becomes a lot brighter.

Finally, even factoring in higher interest rates, our valuation model for the blue chip indices are suggesting that stocks are underpriced.

I will continue with the third call from Black Monday 1987 soon.

The Rising Dividend Story -- Call #2 -- The Bond Purchase

After finishing my call with Mrs. H., I received a telephone call from a friend and fellow employee of the Indianapolis based investment firm I was with at the time. He was a broker, and I was in the money management department. He explained that he needed a bid on some Indiana University bonds for a customer who was panicked by the crash and wanted to sell. I asked him why he called me and not the bond desk. As he put it, the bond desk was “shut down.” Actually, what was happening was that the stock market crash overloaded the quotation systems, and no one knew for sure if the prices we were seeing on our Quotrons were current or hours old. Under normal circumstances, municipal bonds trade with a spread to US Treasury bonds. The collapse in stocks had caused a flight to the perceived safety of Treasury bonds, thus the prices of municipal bonds like IU’s should have been rallying along with Treasuries. But correctly valuing municipal bonds in the middle of the stock market crash was next to impossible because, again, no one was sure if the prices on our Quotrons were accurate, and no one knew if the normal spreads between Treasuries and municipals were holding. As a result, many bond desks at firms across the country had almost suspended operations. When I heard the news that our bond desk was not bidding on bonds, my heart sank. This was a proud and prosperous firm. To effectively shut down the bond desk was shocking to me, and opened my eyes to how big the crash was. It was starting to shut down the whole system. Shutting down the bond desk was like the power company shutting down one of its generating plants. The only reason they would do it was to salvage the system. Stocks were collapsing and bond desks nationwide were shutting down. Momentarily, I was seized with the notion that maybe this was, indeed, another 1929-type crash and everyone would lose everything. I had to practically shout at my ruminations that this kind of thinking was not true. The economy was strong. Furthermore, only about 25% of the American people owned stocks. They would wake up tomorrow, brush their teeth, eat an Egg McMuffin, drink a cup of coffee or a Coke, get in their car, and drive to work. Life would go on. My friend said that the seller of the bonds was a long-time client who was convinced that a 1929-type depression was imminent and wanted to hold cash. My friend said, he really needed the favor. He needed a bid on the bond because the client was intent on selling and the bond desk could not help him. I told him I could not do favors with other people’s money. He said he didn’t mean a favorable bid; he just wanted a bid, any bid he could show his client. I asked him, “If the bond desk doesn't know where the market was trading, how was I supposed to know?” He said he understood the problem, but that he had nowhere else to go. He thought that since I bought bonds for the firm’s money management clients that maybe one of them would be interested in his client’s bonds. He was in luck by mentioning this last point. I had several clients tell me during the day to keep an eye out for bargains on bonds. I told my friend that I would think about it, and that he should call back in 45 minutes. I also told him that if he could sell the bonds somewhere else he should do so since I was unsure I would make a bid. By law, the State of Indiana cannot have direct debt. The law was the result of the Wabash and Erie Canal debacle of the 1840s, which forced the state into bankruptcy and produced an 1851 statute prohibiting any future issuance of debt by the state. The law was still in effect, and the prohibition against debt meant that Indiana had one of the strongest financial conditions of any state in the nation. As I thought about the bonds, I realized that Indiana University was as close to state debt as you could get. The good citizens of the Hoosier state would sell off their family jewels before they would let Indiana University go under. In addition, Bobby Knight and his Indiana Hoosier basketball team had won the NCAA championship the preceding March, and the state would have probably sold off the capitol rotunda rather than give up the basketball arena. The bonds were safe. The only question was…what were they worth? The toughest hurdle to get over in valuing the bonds was that they were 20 years from maturity. As I thought about it, however, I realized life and taxes would go on no matter what happened in the crash, and that the tax exempt interest the bonds paid would always be prized by investors in high income tax brackets. I knew that US Treasury bonds had started the day yielding about 10.25%, and I knew that bond prices were rallying, so the yields were probably near 10%. I remember thinking that if I could buy the IU bonds to yield 10% that I had a real bargain, and one that I was comfortable making. The broker called me back and I told him I would buy the bonds to yield 10%. I told him to call the bond desk and get their approval before he told his client about my bid. The head of the bond desk called me immediately and tried to explain what was going on with the bond market and his inability to bid. I stopped him and told him that I was aware of what was going on, but the broker had asked me to make a bid, and if he approved it, I was willing to buy the bonds. He said he thought that 9% might be a better level for the bonds. I told him he was welcome to buy them there, but my bid was 10%, and if he did not think it was fair, I was fine with dropping the whole matter. He said he had learned through my broker friend that the client wanted the bonds sold by the end of the day, and that he could find no one else to bid. I told him my bid was good until the close of business. He said he would call me back right away. The broker called back in minutes and said the bond desk would not approve the 10% level. I said that that was fine with me. He stopped me and said, “but they will allow it at 9.40*%.” I told him if his client would take it, I would buy the bonds at that level. I then called the bond desk and told them I would offer a bid on any other bonds that people wanted to sell. I had budged on my level, but I realized that buying Indiana University bonds when no one would make a bid was sure to be a good buy, ultimately. The destruction of hundreds of billions of dollars by the crash was a deflationary event, and I was convinced that this would cause interest rates to fall. As I returned to my blinking phone, I paused for a moment. Something had happened here -- something that was new to me; something that I had never done before. I had just valued a bond in the absence of a trading market. I had just committed my clients to up to 20 years of ownership of this bond, and I had done it in the middle of a panic unlike anything I had ever seen. But what surprised me the most was, as I said earlier, that it moved almost in slow motion and almost intuitively I was able to clear away all of the clutter surrounding the decision and zero in on just the few details I needed to make the decision. *This is my best recollection of the final level. I know it started at 10% and the bond desk asked that it be lowered. I have checked the records as far back as I can, but the company has changed hands twice and no one seems to know where the old records are.

The Rising Dividend Story -- Call # 1-- Mrs. H.

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.