A Thousand Miles from Wall Street, Chapter One

From A Thousand Miles from Wall Street: The Commonsense Guide to Picking Stocks, Making Money and Beating the New York Experts, by Tony Gray, with Kurt Greenbaum, Copyright © 1995, Macmillan

The summer closeout sales had begun and I was ready to spruce up my wardrobe a bit, so I flew into Marshall’s at the opening bell on the first day of the sale. I left with a suit, four dress shirts, four golf shirts, four pairs of socks, a windbreaker and a couple of other small accessories. I was practically giddy when I got home, begging my family to guess how much I had spent on this cornucopia of clothing.

Well, the giddiness obviously showed, and my family was well aware that I am basically the cheapest person they knew in the world. They lowballed their guess beyond all recognition: $150. Absurd! Who could walk away from a store with all that clothing for $150?

When I got back to work on Monday morning, I offered my colleagues the same quiz. Unfortunately, they also knew my reputation and came in with another unrealistically low answer. Everyone must have thought it the most ridiculous answer they could muster up. Surely, no one could buy that much for that little. Well, they were right. I got it all for $85.

I liked the suit, but my wife insists I overpaid. Everyone’s a critic.

It’s a story I love to tell because it’s a good example of how I do business. The clothes I bought were the same as they were three months earlier – everything but the price tag. And I didn’t want the clothes bad enough to spend what Marshall’s was asking for them in the first place. That’s really the key, isn’t it? You don’t want it bad enough to pay full price. Put it another way: You’re willing to walk away if the deal doesn’t suit you. But when the sale started and the merchandise went out, I was ready.

See, I like to find a bargain, just like you and everyone else you know. I like to find a $185 suit, which I actually did, but I only want to spend $65 for it – which I also did. I like to do the same thing in the stock market. So would you.

I run $4 billion in a group of pooled pension funds and mutual funds that owns shares in more than a hundred different companies.

While some investors tell you to catch the latest technology wave and ride it to riches, I like to own the stocks everyone else owns. I want companies that make stuff you and I have heard of, products and services we understand: soup, medicine, clothing. I hate computers; their technology changes too fast and I don’t understand them, so why should I invest in them? I don’t even like to use them. Besides, I don’t make any money in technology stocks. I have followed high-tech stocks for 27 years and don’t know them now any better than I did when I started. Mayonnaise, I understand. Retailing, I know. Medicine, I understand. Besides, I get a kick of out talking to a cardiologist about the latest heart drug. I know something about it because I own stock in the company that makes it.

While some investors tell you to grab hold of a stock and hang on for the long ride, I disagree. Everything in my portfolio is for sale, if the price is right. I like to keep my holdings fresh. My portfolio turns over completely every year. I’m not afraid to hang on to a stock if I think it’s cheap and will continue to be a money-maker. I’m not afraid to get rid of it if it’s not. The worst thing you can have is an old stock that hasn’t worked. It might have been a mistake to buy it in the first place, but it’s a bigger mistake to continue holding it if the potential is not there.

I have no heroes in this business. People get misled too often by “professionals.” They get bad advice once and sour on the stock market forever. I have not made those mistakes. I have an investment philosophy – a sound one. It has worked for me my entire professional life. I won’t tell you mine is right for you. In this book, I will tell you about my philosophy and my methodology. I will tell you why it has worked. I will even tell you how you could adapt it to your own needs. But I won’t tell you to use it. That’s up to you.

If I had to sum it up in a phrase, it would be “reality versus perception.” I buy stock in companies with strong growth potential, good products or an improving outlook. But I only want to buy them cheap. Stock prices only go down when someone, for some reason, doesn’t like the stock and sells it. So when someone else perceives a stock as damaged goods, that could be the time to strike. It’s a little like the clothes at Marshall’s; nothing was wrong with them after the prices were slashed, although some fashion snobs might disagreed.

Every stock I buy (or anybody buys) is someone else’s castoff. But I expect these frogs to become princes while I own them. I make my living balancing the reality of a company’s prospects against the perception of other investors. When reality outdistances perception, I come out a winner.

The trick, of course, is knowing when the reality and the perception part company.

When a broker offered 200,000 shares of Procter & Gamble for sale in late November 1991, I didn’t wait around wondering if people had stopped brushing their teeth with Crest toothpaste or washing their laundry with Tide detergent. The perception: Something is wrong with Procter & Gamble because it is falling down the tubes along with the market, which was also falling that day. The reality: Procter & Gamble is a strong company reacting to a glitch in the market. I don’t always own it, but when the price is right, I wouldn’t turn it down. The broker offered it at $80.50 a share. Knowing his client wanted out and thought Procter & Gamble was damaged goods, I offered to pay $79. And I got it – just like the Granada.

Not long after that, the stock was selling for $100 a share. If I sold the stock, I’d make a quick $4.2 million – a return of 26.6 percent. And I might just do that. I’ll get what I can out of the stock and move on. I’ve done it before with Procter & Gamble, when it once made up 3 percent of my portfolio. And I’ll do it again.

Think of it this way: When you walk into a department store and find a $300 suit on sale for $120, what’s the first thing you do? Do you run home and check your closet to see if you have a shirt and tie that will match? Do you check to see if you need that particular color? Of course not. You’re already familiar with your wardrobe. You know what you need. So you jump in and buy the suit.

Same with Procter & Gamble in this case. I have followed the stock for years. I know the stock. I know what makes it rise and fall. In this case, I knew why the price was down – people just weren’t interested in buying that type of stock during that particular period in the economy. So I didn’t have to start from scratch and re-analyze the stock. I bellied up to the bar and bought it. If you want to invest in stocks, you need to know how to make a decision. I make 30 different million-dollar decisions every day.

There’s another more obvious lesson to that story. Actually, it’s more like a reminder of something you already know: If you’re not willing to walk away from the negotiations, you’re not really bargaining. Suppose you’re in a shop in Mexico, where every price is negotiable. If you and the shopkeeper strike a price while you’re still standing in the shop, you probably didn’t wait long enough. You must walk out of the store, head down the street and wait for the shopkeeper to chase you with another offer. Then you know you’ve struck a good price. The idea is the same whether you’re talking about stocks on the trading floor or automobiles on the showroom floor. If someone doesn’t accept my first offer, I might bid up a little, but I’ll never pay more than I think the stock (or the car) is worth – period.

The second lesson is less obvious.

The fact is, my success depends on the failings of other investors. I can’t do my job without them. Unless someone else does something dumb, I won’t look smart. Add to that the timidness, disillusionment, overconfidence, impatience, ignorance and stubbornness of other investors, and you practically have the Seven Deadly Sins of the stock market.

I have always wondered, for example, about the guy on the other end of a trade in October 1987, after the market had fallen 500 points in one day and his 300,000 shares of CPC International had plummeted. As I write this, the market regularly pushes above 3,700, inching toward 4,000. The crash seems almost like ancient history, doesn’t it? But two months before the Oct. 19 crash, that packaged food company had been blazing a trail through the market at $56 a share. And just like Procter & Gamble, the crash hadn’t stopped people from cooking up Knorr Soups to eat with bologna sandwiches they had made with Hellmann’s Real Mayonnaise. So when the offer came in at $28 a share on a stock perceived to be damaged goods, I said to myself, “They can only fire me once,” I bid for it and bought the whole bunch – for $27 a share. Well, you probably wouldn’t be reading this book if the stock had not done well. In six weeks, it went up 20 points. By January 1992, it had tripled.

I’m always glad there are dumb people out there. And, I’m not too proud to say, I’ve been the dumb one often enough to make me humble. You’ll see plenty of examples of that, too.

I want to invest in strong, high growth companies and I want to find their stock at a bargain price. If that stock doesn’t start growing faster than the stock market as a whole – and pretty soon – I start to lose interest. It goes on my doggie stock list. We ask our stocks simple questions: What have you done for me lately? And what can I expect in the next six months?

I’ve been wrong about a number of stocks. Home Depot has swept the nation, selling lumber, garden tools, hardware and home fixtures to would-be do-it-yourselfers and sending the competition into the basement. We knew enough to own it at the outset, but we didn’t evaluate it correctly as its stock price started the climb. We got out too soon, when we thought the price had gotten too high and perception had exceeded reality. By the time we caught on to the mistake, the price was higher than we wanted to spend. It was a dumb move. Maybe we thought another retailer looked better at the time. For every stock, there is an alternative. You just hope you’re right 55 percent of the time. It took years before I found Home Depot again at a price I wanted to pay.

The fact is, you have the same chance of doing well as I do. Despite the fact that I have 600 stock analysts from more than a dozen different brokerage firms at my disposal, despite the fact that I can bid down the price of a stock by virtue of my sizable buying power, your chances of succeeding are just as good as mine. In this business, the person who knows absolutely nothing does as well as the Harvard MBA on average – a scary thought for the Harvard MBA, wouldn’t you say? Maybe your chances are better. You don’t have to report your results to clients. You don’t have to find a buyer when you own a million shares of stock and its price is tumbling.

On the other hand, maybe you’ve never given a thought to the stock market in the first place. Most people have virtually no investment program. They probably spend more time picking out a set of golf clubs than a stock they want to follow. I can’t help you with your golf clubs – I just got back into the game after an 18-year lapse – but I can help with the investment program. That’s what this book is all about. How do I make money in the market? Could you adapt my ideas to your own portfolio? And what does a stock market investor need to keep in mind about the business in general?

The fact is, I’m good at my job and I have a good idea how to make money. I’d better. The pension accounts that invest in my fund, SunBank’s Corporate Equity Fund, and the two mutual funds I manage, have a lot riding on my success. Before I came to SunBank, the Corporate Equity Fund actually lost money during a six-year period in which the Standard & Poor’s 500 stock index doubled. Since I took over that fund in 1981, my fund has beaten that bellwether index every year but two – and it has never had a down year. The pension fund that invested with me at year-end 1980 – and kept it there – increased its original investment 1,150 percent. That’s 21.5 percent a year, compounded.

So I know what I’m talking about. When I speak to investors, they ask about my favorite stocks, my outlook for the future and my views on government fiscal policy – my philosophy. Maybe you have the same questions. Why does my way work? Would it work for you?

Remember: I have no heroes in this business. There are other institutional investors whom I respect and admire, but none whom I would emulate. You must develop and have confidence in your own abilities. Successful people in this business develop their own style and stick to it – they do not constantly try to emulate other styles. I view myself as being self taught. You can be too.

Copyright © 1995, Macmillan

The book is out of print, but Amazon.com offers ways to find it.

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