Chicken little is moving the stock market.
- Sep 22, 2005
- admin
- Investing
I REMEMBER THE DAY LIKE IT WAS YESTERDAY.
It was late Fall 1994.
Orange County had just defaulted on its bonds, and for almost
two months, the markets were getting crushed seemingly each and
every single day (an often forgotten pause in the long bull
market of the 1990’s.)
I had been working on Wall Street for a little over two years.
The old timers at the firm used to laugh at how “easy I had
it” because the market had been going up ever since I started.
Out of respect, I would listen to their tales of woe about some
of the nasty bear markets they had survived.
But in the back of my mind I used to think, “What do these guys
know, anyway?”
(That was back when I had all the answers.)
The reason I’ll never forget that particular Fall day is because
I had a lunch meeting in New Jersey with a new client of mine
whom I had never met before.
But this wasn’t just your “average” client.
This particular client owned a very large private business and
was on the Forbes 400 list.
In addition, he had a well-deserved reputation as a very savvy
stock market investor.
His reputation was such that the day before the meeting, the
boys in the office were referring to him as “Mr. Gekko,” just
to get a rise out of me.
Admittedly, I was nervous.
Adding to my overall anxiety was the fact that two months
earlier, he had purchased a very large block of a stock – on my
recommendation – that had dropped 20 percent in the wake of the
Orange County crisis.
And while I still believed wholeheartedly in the company, it’s
never a good sign when the first stock you recommend to a client
drops 20 percent in one month.
Yes, I had it in my mind that he was going to spend the entire
lunch sounding me out about the “dog” stock Iíd recommended.
Fair enough – sometimes youíve got to eat your own cooking, even
if you don’t like the taste.
On the day of the meeting, I got my brand new black 5-Series BMW
hand-washed and cleaned. I wanted to make sure it went with the
brand new $2,000 suit I had picked up at Barney’s just for the
occasion.
(At least when “Mr. Gekko” pulled up in his limo, he’d appreciate
somebody with a similar sense of class.)
So there I was, a quarter to noon, standing in the parking lot
next to my shiny new car, in my brand new suit, waiting for my
clientís limo to pull up.
As I was waiting, I kept wondering if I should open the
limo door for him. Nah, better let his driver do that. I don’t
want to look too eager. Better keep a strong poker face.
About ten minutes and three cigarettes later, a beat-up blue 1984
Chrysler LeBaron pulled into the parking lot of the
restaurant.
I remember wondering to myself how old the driver must have
been, because I could barely see his head over the steering
wheel.
As the LeBaron slowly struggled to make its way in my
direction, the little old man driving it suddenly – and
quite unexpectedly – smiled at me.
I was dumbfounded.
But as I stood there like a turkey, the LeBaron pulled into the
empty spot next to me.
And suddenly – as if out of thin air – the little old man was
standing right in front of me with his hand out.
“Hi. Are you Dylan?” he asked.
“Um….yes…yes, I am,” I replied.
“I’m Mr. K. It’s nice to finally meet you,” he answered as he
began to walk slowly toward the restaurant.
I was stunned. This was the tycoon who struck fear in the
hearts of businessmen?
I know the stupid look on my face followed us to our table,
because when we sat down, Mr. K asked me if everything was OK.
I responded in the only way a rookie could respond – I asked him
if the car he pulled up in was really his.
“Yes,” he said matter-of-factly, as if the concept of owning
a nice car was something that had never occurred to him.
We spent most of lunch talking and getting to know each other on
a personal level.
It wasn’t until our coffee was being served that he asked me
what I thought about the declining stock market and whether I
thought he should be buying more stocks.
I hesitated. The truth was that I was nervous about the market.
It was going down almost every single day.
And every analyst and newscaster I heard was predicting that
the Orange County default was going to have effects in the bond
markets so devastating that credit was going to dry up and the
stock market would certainly collapse.
He must have seen the fear in my face because he never let me
answer.
What he said to me that day in New Jersey was the best advice
I ever received from ANYBODY regarding a declining stock market.
Here are some excerpts:
1. EXPERIENCED INVESTORS USE FEAR TO THEIR ADVANTAGE. Only in
markets where people are scared can you buy stocks cheap.
2. I own a private company. If I wanted to buy out my biggest
competitor, I would want to pay as little as I could. Investing
in stocks is the same thing. Why would I be upset if I could buy
them cheaper? Shouldn’t I be happy?
3. You should enjoy declining markets. Declining stock prices…
nervous investors…predictions of impending doom. It’s during
times like these that you have to keep your head.
4. SCARED MARKETS ARE THE ONLY KIND OF MARKETS THAT CAN MAKE
SAVVY INVESTORS VERY RICH.
5. The creeping anxiety most investors feel in a bad market
is like a humanís internal “flight or fight” signal. But if you
keep your emotions in check, it could make you a lot of money. Most
people don’t know how to interpret the signal correctly.
I tend to think of Mr. K whenever the bear market rears its ugly
head because I know that he would be happily tap dancing to work
as he waited for the right time to buy the right stock.
You see, men like Mr. K made their fortunes by buying companies
on the cheap and holding them.
And Mr. K. knew that the best time to buy stocks cheapest was
when the market was declining and everybody else was running
scared.
Sure, sometimes its hard to see stocks you own trade lower
every day. But if you companies with strong balance sheets and
smart management, a decline in prices is an opportunity to
buy more.
Yup, to investors like Mr. K, scared markets are almost like money
in the bank.
You just have to be patient, load your guns, and wait for the
breaking point.
We’re getting closer by the day folks.
–By Dylan Jovine