Three Fools
Amen of the Week
“I don’t subscribe much to any of these fancy investing theories… I believe the folks who’ve done the best with Wal-Mart stock are those who have studied the company, who have understood our strengths and our management approach, and who, like me, have just decided to invest with us for the long run… As long as we’re managing our company well, as long as we take care of our people and our customers, keep our eye on those fundamentals, we are going to be successful. Of course, it takes an observing, discerning person to judge those fundamentals for himself. If I were a stockholder of Wal-Mart, or considering becoming one, I’d go into ten Wal-Mart stores and ask the folks working there, 'How do you feel? How’s the company treating you?' Their answers would tell me much of what I need to know.”
- Sam Walton, founder of Wal-Mart Sam Walton, Made in America (1992)
Three Fools
Three fools I’ve met over the years. Each one has appeared, at one time or another, in my bathroom mirror.
Of course, I’ve spotted these fools other places too -- often on TV, sometimes in the faces of people I love and respect. With age, I’ve learned to recognize them even in disguise. That’s important because their faces and names are constantly changing.
Some fools are harmless, or even fun. These are dangerous. They destroy wealth and wreck lives.
Here are their names …
The Extrapolator – This guy believes the past will be the future. Hence, he “knows” that stocks go up 10% per year over the long-term (from any price level). Market declines don’t bother him. He puts in his headphones and zones out, believing he has a God-given right to earn superior returns since he is accepting more risk. This guy is fun to talk to at parties because he’s confident, always in a great mood, and never worried about anything.
The Denier – This guy is no fun at parties - at all. This fool considers himself nobody’s fool. Forget stocks, he reasons. They’re for suckers. The market is too high; the economy is about to nose-dive; the game is rigged. He thus owns no stocks. He’s permanently on the sidelines. This fool masquerades as cautious, yet over time is as reckless and wealth destroying as the others, if not more so.
The Alchemist – The most fun to hang with at parties is by far the Alchemist. He’s just so damn interesting! He’s got it all figured out. Like his close cousin, the Extrapolator, he too is a student of history. Unlike his cousin, however, this fool uses history to time getting in and out of investments. There’s lots of complexity, often leading to lots of activity – lots of buying and selling. This fool does not age well. Nor is he good for his friends’ health. As much fun as he may be, this fool’s friendship comes at a price: higher transaction/friction costs, higher taxes, and higher blood pressure.
It pays to learn to spot these fools - especially when they appear in our own mirrors.
Yours in the Field,
Frank Byrd, CFA
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