A Little Wonderful Advice from Where Are The Customer’s Yachts? by Fred Schwed, Jr., 1940 (pages 180-182)
For no fee at all I am prepared to offer to any wealthy person an investment program which will last a lifetime and
will not only preserve the estate but greatly increase it. Like other great ideas, this one is simple:
When there is a stock-market boom, and everyone is scrambling for common stocks, take all your common stocks
and sell them. Take the proceeds and buy conservative bonds. No doubt the stocks you sold will go higher. Pay no
attention to this—just wait for the depression which will come sooner or later. When this depression—or panic—
becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks. No doubt the stocks
will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as
you live, and you will have the pleasure of dying rich.
A glance at financial history will show that there never was a generation for whom this advice would not have
worked splendidly. But it distresses me to report that I have never enjoyed the social acquaintance of anyone who
managed to do it. It looks as easy as rolling off a log, but it isn’t. The chief difficulties, of course, are
psychological. It requires buying bonds when bonds are generally unpopular, and buying stocks when stocks are
universally detested.
I suspect that there are actually a few people who do something like this, even though I have never had the
pleasure of meeting them. I suspect it because someone must buy the stock that the suckers sell at those awful
prices—a fact usually outside the consciousness of the public and of financial reporters. An experienced
reporter’s poetic account in the paper following a day of terrible panic reads this way:
Large selling was in evidence at the opening bell and gained steadily in volume and violence throughout the
morning session. At noon a rally, dishearteningly brief, took place as a result of short covering. But a new selling
wave soon threw the market into utter chaos, and during the final hour equities were thrown overboard in huge
lots, without regard for price or value.
The public reads the papers, and reading the foregoing, it gets the impression that on that catastrophic day
everyone sold and nobody bought, except that little band of shorts (who most likely didn’t exist). Of course,
there is just no truth in that at all. If on that day the terrific “selling” amounted to seven million, three hundred and
sixty-five thousand shares, the volume of the buying can also be calculated. In this case it was 7,365,000 shares.
CASE STUDY
How Mr. Womack Made a Killing by John Train (1978)
The man never had a loss on balance in 60 years.
His technique 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 S&P Stock Guide and select around 30 stocks that had fallen in price
below $10—solid, profit making, unheard of companies (pecan growers, home furnishings, etc.) and paid
dividends. He would come to Houston and buy a $25,000 “package” of them.
And then, one, two, three or four years later, when the stock market was bubbling and the prophets were talking
about the Dow hitting 1500, he would come to town and sell his whole package. It was as simple as that.
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 seller’s market would come along. He claimed that
he would rather buy stocks under such conditions than pigs because pigs did not pay a dividend. You must feed
pigs.
He took a “farming” approach to the stock market in general. In rice farming, there is a planting season and a
harvesting season, in his stock purchases and sales he strictly observed the seasons.
Mr. Womack never seemed to buy stock at its bottom or sell it at its top. He seemed happy to buy or sell in the
bottom or top range of its fluctuations. He had no regard whatsoever for the cliché’—Never send Good Money
After Bad—when he was buying. For example, when the bottom fell out of the market of 1970, he added another
$25,000 to his previous bargain price positions and made a virtual killing on the whole package.
I suppose that a modern stock market technician could have found a lot of alphas, betas, contrary opinions and
other theories in Mr. Womack’s simple approach to buying and selling stocks. But none I know put the emphasis
on “buy price” that he did.
I realize that many things determine if a stock is a wise buy. But I have learned that during a depressed stock
market, if you can get a cost position in a stock’s bottom price range it will forgive a multitude of misjudgments
later.
During a market rise, you can sell too soon and make a profit, sell at the top and make a very good profit. So, with
so many profit probabilities in your favor, the best cost price possible is worth waiting for.
Knowing this is always comforting during a depressed market, when a “chartist” looks at you with alarm after you
buy on his latest “sell signal.”
In sum, Mr. Womack didn’t make anything complicated out of the stock market. He taught me that you can’t be
buying stocks every day, week or month of the year and make a profit, any more than you could plant rice every
day, week or month and make a crop. He changed my investing lifestyle and I have made a profit ever since.
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If you had been smart or lucky enough to go all-in on the S&P on that day, you'd be up 60 percent
now.
But Buffett's key point is that very few of us are going to be that smart or that lucky. Those waiting
for the perfect moment run a big risk of coming in too late, especially if they're looking for hints
that things are getting better.
The Oracle of Omaha won't make predictions about specific stock market moves, but he does have
one strongly-held prophecy about the future: "The market will move higher, perhaps substantially
so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will
be over."
