An old story of an equity investor from rural America shows us how to invest in stocks
30-Oct-2021 •Dhirendra Kumar
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 sellers' market would come along. He claimed that he would rather buy stocks under such conditions than pigs because pigs did not pay dividends. You must feed the pigs.
That's a paragraph from an old story, but it teaches you as much about value investing as anything else can.
The other day, I was going through some old files in which I used to keep newspaper and magazine clippings in the pre-internet days when I came across a magazine column from 1978. Of course, I must have found and saved it much later because I was a child in 1978 but I don't remember when. This was a column in 'Forbes' magazine by an investment manager named John Train, who is still around. Although at 92, he is probably retired. In this column, Train narrates a letter sent to him by a reader who narrates how he got started in investing in the 1940s, after he was demobilised from the US Army at the end of the World War.
He could never make any money. One day he had gone to his local Merrill Lynch office when an account executive pointed out another customer to him who had never lost money. The account officer said that in the 40 years in which he had handled that customer, there had 'never been a loss on balance'. "If you want to meet him, you'd better hurry," the broker advised. "He only comes here once every few years except when he's buying. ...He's a rice farmer and a hog raiser..." The farmer had made a sustained 50 per cent per annum capital gains over the years!
The narrator of the story stuck up a conversation with the farmer who readily revealed what he did. "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 it was sure to drop another 200 points in the Dow, the farmer would look through a Standard and Poor's Stock Guide and select around 30 stocks that had fallen in price below $10 ... and paid dividends. He would come to Houston and buy a $25,000 'package' of them. And then two, three, four years later when the markets were bubbling and the prophets were talking about the Dow hitting 1500, he would come to town and sell the whole package. It was as simple as that.
Even though a lot has changed about stock investing globally since those times, it still is as simple as that. You don't have to find a rice farmer or a pig breeder to tell you that much; you can take it from me. If you buy at a good low price, and take some care in picking your stocks and then wait for a high point to sell, you can't go wrong. You may not sell at every high point; you may hang on to some stocks - the details can differ slightly nowadays. But fundamentally, you must apply to stocks what the old farmer learned about pigs.
The one part of the old man's story that won't replicate exactly is the 'Standard & Poor's Stock Guide'. Without that basic help in identifying the investment-worthy stocks, the farmer wouldn't have done so well. But that's where Value Research comes in. Replicate the farmer's technique, but instead of hunting for good buys in the 'Standard & Poor's Stock Guide', look for them on Value Research Stock Advisor.
It's really quite simple.