Tuesday, July 24, 2012

Never Lost?!



Jeffrey Saut is the Chief Investment Strategist and Managing Director of Equity Research at Raymond James & Associates. He began his career on a trading desk in New York City. In 1973, he joined E.F . Hutton, where he began following equities and writing research. For more about Jeffrey Saut, go here.

Like Pimco's Bill Gross, Jeffrey can write very insightful articles that are enjoyable to read (here). The secret for writing on a dry subject is the ability to engage the readers from the beginning to the end and, in between, you put in your points in small nuggets. The latest article from Jeffrey meets this objective perfectly.


Never Lost?!
July 23, 2012



Wall Street folklore suggests that in 10 years any fool can make every mistake there is in the stock market and that a really smart person can do the same in half the time. I don’t know how long it took me, but I have tried to learn from those mistakes and avoid repeating them! Indeed, everybody who finally learns how to make money in the stock market learns his own way. I like this tale.

Right after I was discharged from the Army at the close of World War II and went into the drilling-rig building business, I began buying and selling stocks on the side, at first as a hobby. At the end of each year I always had a net loss. I tried every approach I would read or hear about: technical, fundamental, and combinations of all these, but somehow I always ended up with a loss. It may sound impossible that even a blind man would have lost money on the rally of 1958 – but I did. In my in-and-out trading and smart switches I lost a lot of money.

But one day in 1961 when, discouraged and frustrated, I was in the Merrill Lynch office in Houston, a senior account executive sitting at a front desk whom I knew observed the frown on my face that he had been seeing for so many years and motioned me over to his desk. ‘Would you like to see a man,’ he asked wearily, ‘who has never lost money on the stock market?’ ‘Never had a loss?’ I stammered. ‘Never had a loss on balance,’ the broker drawled, ‘and I have handled his account for nearly 40 years.’ ‘If you want to meet him, you’d better hurry,’ the broker advised. ‘He only comes in here once every few years except when he’s buying.’

I introduced myself. The stranger, to my surprise, was happy to talk about stocks. He pulled a sheet of paper from his pocket with his list of stocks scrawled in pencil on it that he had just finished selling and let me look at it. I couldn’t believe my eyes! The man had made over 50% long-term-capital-gain profits on the whole group. One stock in the group of 30 stocks had been shot off the board, but others had gone up 100%, 200%, and even 500%. He explained his technique, which 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 is was sure to drop hundreds of points more on the Dow, the farmer would look through a Standard & Poor’s Stock Guide and select around 30 stocks that had fallen in price below $10 – solid, profit-making, unheard of little companies (pecan growers, home furnishings, etc.) – and paid dividends. He would come to Houston and buy a $50,000 ‘package’ of them. And then, one, two, three, or four years later, when the stock market was bubbling, and the papers were talking about the Dow soaring to new highs, he would come to town and sell his whole package. It was as simple as that.

... The Craft of Investing by John Train

For more, go here (look for the article dated July 23, 2012) or here.

If you are wondering who is John Train, the person who has to learn the art of investing from a simple farmer, well he is none other than the famous investment guru who had written about 25 books, translated into many languages, including The Craft of Investing & Money Masters of Our Time. Train has also written several hundred columns in the Wall Street Journal, Forbes, London's Financial Times, and other publications. This story simply shows that if we are humble enough or open-minded enough, our life journey can be very enriching.

2 comments:

Mat Cendana said...

Losing money after various trades, switches etc. - that's me, too, in the 1990's. I'm trying ti implement the lessons that I think I have learned from those experiences.

This farmer is like my father, who is now 70. He was `only' a religious education teacher at a government primary school until he retired in the late 1980's. But he was one of the few Malays who were already in the stock market in the early 70's. The fact that he *is still* in the market now, after all these years while many others have been burnt, shows something.

Unlike me, who is `more sophisticated' (but not being as successful as him!), his methods look so simple and naive. Would you believe that he doesn't even know about PE ratios, until I told him about it?! But yet he is well in the plus and makes big money! These counters include KLK which he had bought at well below RM10 (which he isn't selling any time soon due to the great dividends).

He would look at the one-year high and low of different counters and would choose those dividend-paying ones that are closest to the lowest point. Or not more than the halfway line.

I've been thinking about what separates him and me, and the answer is astonishingly similar to this farmer - HE WAITS. No "cut loss" for him - if a counter goes down, he will just wait... sometimes for YEARS. Not many have this kind of patience. With many of us, six months is already considered as `long term'.

But that's how the market goes. "Buy low, sell high" is what we often hear. But there's another one - "Sit and wait", or "Patience". There are bad times but if one is brave enough to buy and willing to dig in and wait, he will eventually reap the benefits in holding fundamentally solid counters.

Alex Lu said...

Hi Mat Cendana,

I am glad to see your comment on this topic. I can share with you my own experience with my mother. She is a housewife and I won't even try to explain PE to her. Over the past 10-15 years when Renong was still listed on our exchange, she would call me to buy that stock whenever it hit the RM1.00-1.50 level. I would be concern for her small investment but she was unfazed. And sure enough that stock would go back up to RM3.00 or more & she would sell it. Her logic is that it is a government stock (not quite correct) and it will recover. Simple logic and it worked for her.