My grandfather used to say that the sun should never catch you in bed. Well, that's easy to say for a for a guy who had a string of successful businesses in his life, established the first post office in his district, built the first underground weir in his country and raised eleven children.

However, today is auction day and if the sun catches me in bed I will miss half the auction. On a cool morning it takes me two and a half hours to get to market on horseback but, if the sun catches me, it can take up to an hour longer. The handlers have already driven the cattle up against the Trinity River, where they rested them. The cattle need to be in peak condition for the auction across the Trinity at Fort Worth, Texas. The dark just starts to lift as I head south along Eagle Mountain Lake. I'll cut across the Trinity and then it's a short ride along Lake Worth and I'll be there. The journey gives me plenty of time to think about today's auction. Although there are four auctions a year at Fort Worth, I usually only attend two. However, if the prices ain't good then I attend another.

My business strategy is simple. I buy young lightweight cattle and fatten them up to sell 6 months later. So, at the auction I will buy new stock and sell old stock. It's not brain surgery, but it works. It happens every now and again that the prices are a bit low but then we just drive all the steers back to the farm. Prices can be low due to poor attendance at the auction or due to an oversupply of cattle. However, these situations usually sort themselves out by the time of the next auction. The secret at auctions is to buy low and sell high. Anyway, I attend the auctions primarily to catch up on what's happening in the community and to stock up on supplies. The auction itself is somewhat mechanical. I could just as well send one of my handlers with instructions: "Don't pay more than X and don't accept less than Y". Despite what you might think, this is not that simple for all the folks. Most get very excited by the bidding process and, even if I say so myself, start taking things just a little too personal.

The bottom line is that when you are selling you need to know exactly what your livestock are worth. When you are buying you better know what future prices will be able to get for livestock of a certain weight, because you will be selling them in a few months time. It might sound strange to you that you actually make your profits the day you buy and not the day you sell. If you pay too much at purchase you will never make a profit, no matter how good the market is on the day you sell. If you buy at a very good price you will make money, even during a bad market day. If you catch the market on a good day you will make even more. However, the most difficult thing is to stay rational. It's easy to be a successful cattle rancher but you will be surprised how many talented folk come and screw up six months' hard work in one day at the auction. They don't realise that paying too high a purchase price can render all the labour of the next six months futile. On the other hand, by selling at too low a price they worked for the last six months for absolutely nothing!

Rationality is the scarcest commodity in the business world. I always thought the most desired personal trait is to be wise. The older I get, the more I realise that it is to be rational.

TO BE WISE...IS TO BE RATIONAL!

In the world of stock markets things work exactly the same as cattle auctions: buy low, sell high and don't pay too much or sell for too little. Above all, stay rational and don't get swept off your feet by the market's euphoria or pessimism. Here are some of the core values I believe one needs to live by as a value investor.

If you can't convince yourself 'When I'm down 25%, I'm a buyer' and banish forever the fatal thought of 'When I'm down 25%, I'm a seller,' then you'll never make a decent profit in stocks.

-Peter Lynch

"Even the most thoughtful and steadfast investor is susceptible to the influence of skeptics who yell 'Sell' before it's time to sell...We've all been taught the same adages: 'Take profits when you can,' and 'A sure gain is always better than a possible loss.' But when you've found the right stock and bought it, all the evidence tells you it's going higher, and everything is working in your direction, then it's a shame if you sell. A fivefold gain turns $10,000 into $50,000, but the next five folds turn $10,000 into $250,000. Investing in a 25-bagger is not a regular occurrence even among fund managers, and for the individual, it may only happen once or twice in a lifetime. When you've got one, you might as well enjoy the full benefit."

-Peter Lynch

"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value." -Warren Buffett

"We try to price, rather than time, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess? "We purchased National Indemnity in 1967, See's in 1972, Buffalo News in 1977, Nebraska Furniture Mart in 1983, and Scott Fetzer in 1986 because those are the years they became available and because we thought the prices they carried were acceptable. In each case, we pondered what the business was likely to do, not what the Dow, the Fed, or the economy might do. If we see this approach as making sense in the purchase of businesses in their entirety, why should we change tack when we are purchasing small pieces of wonderful businesses in the stock market?"

And also "We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%. "But, surprise - none of these blockbuster events made the slightest dent in Ben Graham's investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist. "A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results." -Warren Buffett

"I drew this beautiful woman as my dinner partner a few years ago, and I'd never seen her before. Well, she's married to prominent Angelino, and she sat down next to me and she turned her beautiful face up and she said, "Charlie," she said, "What one word accounts for your remarkable success in life?" And I knew I was being manipulated and that she'd done this before, and I just loved it. I mean I never see this woman without a little lift in my spirits. And by the way I told her I was rational."

-Charlie Munger

So here's to rationality and screw the markets...forever!

Whatever you are up to, I hope it is profitable and ethical!

Mr. B

mail_mrb@yahoo.com

Posted: 2002/10/21 08:05 View Archive