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Dad did very well in the stock market, and spent quite a bit of time over the years coaching me on the subject. He was successful in business, serving for many years as Director of Research at a large publicly traded company. Intelligent, quiet and reserved but strong-minded and decisive, he played a good game of bridge, enjoyed much fine wine, and had a long-standing interest in the market. My daughter and I were talking about his investment ideas yesterday, and I thought some of you might enjoy what I can remember of his thinking.
His philosophy focused on buying and holding a few very strong stocks, large well run businesses that could grow 20% (well, almost, you can't always do that) per year - indefinitely. He had a publication with a page for each stock, featuring a graph of their results, and for him the only chart pattern to look for was a long ascending line - revenue, earnings and stock price going up year after year. That was Investing 101, learning to recognize the pattern. He had a pretty clear idea of what companies he liked and bought them when prices were not excessive.
What this boiled down to, investing from the 1950's until the late 1990's, was big pharmaceuticals. He stayed invested almost exclusively in equities even in old age, holding at most 7 or 8 stocks, and defended his sector concentration on the grounds that we have a drug culture, we want to take pills to fix things, the older we get, the more drugs we need, the whole argument from demographics. That was getting in front of long term trends.
When I was 14 or 15, I can remember him telling me about an investment in Marathon Oil. As I recall it, they were building a pipeline somewhere in the Middle East, when this was completed, they were going to have a cost advantage which would eventually result in a good size increase in the price of the stock. There was obviously some geo-political risk involved but he concluded it was manageable and took a large position, winding up with a doubler. It was about doing your homework, weighing the risk vs. the reward, and going in heavy on your best ideas.
Dad would not own any stock that was not listed on the NYSE. He told a story of having invested in a small stock, listed on the Amex, doing his homework and coming up with a clear winner. When he sold it, the price went down just long enough to make a sizable dent in his profit. Presumably whoever made a market in the stock took advantage of the thin trading to ding him on his way out. That was about only playing where you can get a level field.
Another story was about how he was sitting on the back porch, drinking a beer, and decided that because he liked the beer the stock would be a good buy. Regretfully management was in the process of looting the company and his investment became worthless. Any dishonesty or impropriety on the part of management was a clear sell signal, time to promptly unload the entire holding at whatever the current price was. He had actual possession of his stocks, and kept them in a safe at his bank. He adopted this practice after spending several weeks on the phone recovering them from a broker who later went bankrupt.
He stuck with his winners. It was a natural process in growing as an investor, to start with many smaller investments and gradually cull out the losers, ending with a concentrated portfolio containing profitable long-term holdings in consistent performers. One of his most successful long term investments was his wines - he bought the best vintages as they came out and stored them in the cellar, getting very good appreciation over the years as the wine matured. As a scientist, he didn't wax too poetical, but I'm sure he grasped the connection - good investing is like laying down a fine wine, a matter of foresight and patience, planning ahead.
Having worked all his life in R&D, he appreciated its importance in driving growth and profit. He had done some work to develop a thesis which related a company's growth to its R&D budget. As I recall it, he was able to demonstrate that companies that spent at least 7% of their revenues on R&D grew faster than those who spent less. This appreciation of inventiveness was not limited to glamorous new products, but also extended to design and process improvements, the power of efficient systems and accumulated tradecraft, even in boring businesses. There was nothing wrong with a boring business: if it was well run and continued to increase earnings, that was excitement enough.
He monitored his portfolio by means of a small ledger book, making a weekly note of closing prices. I never saw an annual statement in the house: if he read them at all he didn't keep them. He read the WSJ daily, taking his time, and picked up what he needed that way, making mental notes. He didn't pay much attention to his broker, and relied on his own judgment when selecting stocks. He was uncomfortable giving others specific advise on investing, the only time he ever did it was for an elderly aunt. In 1985, or thereabouts, he suggested to her that she put her remaining funds in long term bonds, then yielding extremely high interest rates. Of course, when interest rates declined, her bonds increased in value and she was very pleased. Aside from a case like that, stocks were the best investment.
Trading on margin didn't work. "You can't make money fast enough to pay the interest." He always kept some of his portfolio in cash and didn't worry too much about the return on it, "Just keep it safe at small interest." The point was to have it available when needed.
In the fifties and early sixties he accumulated an art collection, consisting of bronze sculptures of bulls. Some of them were very old, Egyptian and Chinese, but most of them were more recent, some of them by sculptors whose name would seem to ring a bell. He had one of a bull fighting a wolf, but nothing like the bull fighting the bear. Aside from that, he took no interest in art, and I think it was more an expression of his basic outlook - he was bullish: over the long haul he was optimistic about business, the economy, and this country, no small feat for someone raised during the Depression.
Things have changed a lot since his day, the internet and the amount of information available, the speed of communication, the amazing variety of investment options, the profusion of derivatives, etc. In many ways I think it's safer and easier, there is more of a level field out there for the small investor, spreads are narrower, commissions are lower, regulation is stronger, and information is only a mouse click away. But I think a lot of what he told me still applies, sticking with the basics.
Tom
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