John Train wrote several books on investing, as well as columns for The Wall Street Journal, The New York Times and other publications. In the October 2 1978 issue of Forbes Magazine, he recounted a story sent in by a reader about a Mr Womack, a farmer who had never lost money in the stock market “following a technique which was the ultimate in simplicity” yet had resulted in some stocks making “long-term capital gains of 100%, 200% and even 500%”.
“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 the Dow was sure to drop another 200 points, the farmer would select around 30 stocks that had fallen in price below $10 — solid, profitmaking, unheard-of companies (pecan growers, home furnishings, etc) — and paid dividends. He would 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 1,500, he would come to town and sell his whole package. It was as simple as that.”
Womack 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 came along. What’s more, he preferred to buy stocks than pigs under such conditions “because pigs did not pay a dividend and you had to feed pigs”.
“I suppose that a modem 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,” says the reader who sent Train the story. “But none I know put the emphasis on the ‘buy price’ that he did […] He had learnt 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 the next market rise you could then sell too soon and make a profit, sell at the top and make a very good profit, or sell on the way down and still make a profit.
“In sum, Mr Womack didn’t make anything complicated out of the stock market. He knew 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.”
Womack is not the only farmer who has a thing or two to teach investors. “For a long time I studied market trends, business cycles, industrial conditions, reactions, rallies, various causes and effects,” wrote Fred Kelly in his book Why You Win or Lose. “I learnt that it is of no value to know that a stock is comparatively cheap unless one knows also whether it is cheap on the way up or on the way down. The man who buys a stock solely because of its seemingly bargain price is like a farmer with a thermometer but no almanac who thinks a hot day in autumn must be time to plant spring crops. I discovered, also, that stocks are a little like weather. If you’re experiencing the hottest day in years ... it will surely be cooler tomorrow.”
What Buffett says he likes about farming is that if he buys a farm he get an estimate of how much maize it produced, how many soya beans, what he would have to pay the tenant farmer, what the taxes would be, and he could estimate the income that he would receive from that farm. “I didn’t go out and get a quote on it. I didn’t turn on the farm channel every day to see whether it was raining or something that was good for my farm. Instead, I looked to the farm itself as to what it would produce.”
And, like Womack, Buffett would also rather buy shares than a farm. “You have to finance the farmer until the harvest is in the barn. You may show a bookkeeping profit, pay taxes on it, and end up with receivables that you have trouble collecting.”
George Papadopoulos wrote in The Wall Street Journal: “Long-term investors are like farmers who plant seeds with no foreknowledge of the weather during their growing season while knowing full well that whatever happened this year, good or bad, will have no impact on what will happen next year.
“Fortunately, in both markets the good years have tended to outnumber the bad ones, so it makes economic sense for farmers to continue planting seeds each spring and for investors to stay invested in the stock market — and for both to marvel at the mystery rather than run from it.”
If plantings made confidently are repeatedly followed by disappointing harvests, something is wrong with the farmer. Or perhaps with the farm. Likewise, investors should know that for certain companies, and even for some industries, there simply is no good long-term strategy.