Are we having fun yet? I cannot speak for anyone else but I don’t mind this high volatility and down moves at all. The key is that I am looking at the markets like a big supermarket of opportunities and buying the stuff that son sale. This week’s blue light special has been the energy related stocks and I have been a buyer of driller and services companies this week. I have also been scooping up shares of mundane companies that make machine tool and tubular steel products, European food companies and of course small little banks that took a little dip. I have no idea which way the market will go but if we keep going down I will keep buying stocks that fit my safe and cheap profile.

Everyone likes to quote Warren and Ben about making Mr. Market your friend, taking a long term view and not worrying about temporary price movements but there sure is a suspicious odor drifting across Wall Street every time we actually see some selling . I guess my gray hair serves me well but I have bought so many stocks that fell sharply before the tide turned and they eventually doubled or tripled from my original cost. Some of them have stayed down and I took a loss but most recovered in the due course of time and were sold at a profit. Keeping position sizes small so I can buy on a scale helps a lot when prices start collapsing as well. This little bump we have seen past two weeks is not a time to panic but a time to start looking for bargains around the world. Some markets are nearing bear market territory and some sectors like oil services and drilling are in a bear market already. It is something of a Womack moment in the oil patch and parts of Europe.

Of course all the price movement has all the chart and angles guys out with predictions, guesses and projections. I should have taken up a career as a market predictor. “If the market does this it might go higher abut if it doesn’t there is a good chance it will go lower. If you couch a prediction the right way its impossible to be wrong. Of course its pretty much useless advice but it makes for good TV. As you listen to all these forecasts and prognostication in the day ahead keep in mind the world of John Kenneth Galbraith who told us “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know” and “The only function of economic forecasting is to make astrology look respectable.” No matter how certain and confident they may seem market forecasters can’t.

The market will do what it is going to do. It is a much more productive activity for us as investors to react to what it does rather than try to predict what it might do. We have some cheap stocks that have the potential for huge returns over the next few years and lots of cash to take advantage of any new bargains the market may give to us. Personally I would love to see this market move down some more and give me a shot at some of the stocks that are just out of range.

We have talked about Mr. Womack and his habit of only buying when prices were low. Today I want to introduce you to three other investors who have mastered the art of buying and got very, very rich in the stock market. Gerald J. Ford is a Texas born investor who has become a billionaire investing in small banks.Ford looks to buy distressed banks and other financial assets when they are out of favor and available at a very low price. He bought several small Texas banks back in the 1970s and rolled them all up into First United Bank Group and sold them to Norwest in 1994.During the S&L crisis, he bought troubled savings and loans from the government in 1988 and sold them in 1992 for a $900 million profit. He did it again in the California real estate market in the early 1990s and he bought several banks that were eventually sold to Citigroup for profits in excess of $1 billion for Mr. Ford. His approach is simple.

He finds cheap banks that he believes can survive, buys them at a huge discount to their intrinsic value and sells them when they are fully valued. This strategy is easily duplicated by the average investor. The most difficult part of the strategy is that when there is nothing to do, he does nothing. Between 2002 and 2010, Ford didn't buy any banks at all until the financial crisis had pushed bank stocks to very attractive levels.

Andy Beal is a Dallas-based banker who has amassed a fortune of several billion dollars by buying what no one else seems to want and holding the assets for several years.Beal waits for a crisis to develop that severely depresses asset prices and then he steps in and is a buyer. He got his start buying real estate in hard-hit places like Texas in the 1970s, Newark, New Jersey apartment towers in 1981 and sold them when conditions improved for large profits. He bought infrastructure and power bonds after the California blackouts and Enron collapse. He was buying bonds backed by aircraft after September 11, 2001 that were sold a few years later for huge profits when it became clear that the airline industry would not, in fact, collapse. He spent billions buying depressed mortgage and bank assets during the credit crises that have worked out very well for Mr. Beal. His main investment vehicle is his bank (Beal Bank USA) and the returns on equity at the bank would make a hedge fund manager blush with ROEs continually in excess of 20 percent. Like Mr. Ford, when there is nothing to do, he does nothing. With profits from his investments during the credit crisis, Mr. Beal spends a good deal of his time racing his collection of 800 horsepower race cars and waiting for the next crisis to create an opportunity.

Hetty Green was not a nice lady by all accounts but she was a she was a wildly successful value investor . Green took her inheritance of about $5 million and invested very wisely. By the time she died she had accumulated more than $100 million in liquid assets -- and a portfolio of land, property and other assets that were held in different names to avoid taxation. Her tax evasion schemes make it almost impossible to know the total value of her fortune. What is known, however, was when her daughter died in 1951, her half of Hetty's fortune was worth more than $200 million. Green was thought to be the richest woman in the world when she died in 1916. She described the secret of her investment success by saying, “There is no great secret in fortune making. All you do is buy cheap and sell dear, act with thrift and shrewdness and be persistent.” Her investment philosophy was pretty simple, too. She invested conservatively most of the time and held back lots of cash. When markets crashed, she very calmly rushed in to be a buyer. She would then hold until the boom times returned to the market; at which time she would be a seller. She once described her approach to a reporter, saying, “When I see a thing, going cheap because nobody wants it, I buy a lot of it and tuck it away. Then, when the time comes, they have to hunt me up and pay me a good price for my holdings.”

You can try to track the forecasters and prognosticators. I am going to stick with Gerry, Andy and Hetty.

Cheers!

Tim

Song of the week

React Don’t Predict because when it comes to the markets

https://www.youtube.com/watch?v=Fg1meK-IgOM