The Zurich Axioms By Max Gunther
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Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia
Let’s look at the real estate business first. A New Jersey realtor, Janice Shattuck, tells a sad story of opportunity missed because of roots.
A couple in early middle age had lived in the same house for two decades. The twenty-year mortgage was paid off, and now every nickel of the home’s capital value was theirs free and clear. This lump of capital was their biggest asset, as is true of many middle-income people. With their children grown and gone and expenses diminished, they were in a position to put the capital to work in some serious speculation. With luck, they could sail into old age rich.
Janice Shattuck, a personal friend, told them she thought selling their home would be a good idea. The street on which they lived was showing sings of an economic decline. Because of random circumstance, several houses were in disrepair. Two were owned by absentee landlords and rented to groups of young people attending a nearby college – not the best guarantee of efficient home maintenance. The street was beginning to have a tired, shabby look.
Mrs Shattuck was even able to tell her friends she thought she could produce a buyer for them. One of the absentee landlords was thinking about extending his empire and had long had an eye on their house, a big rambling structure well suited to use as a college dormitory. Mrs Shattuck believed he would offer a fair price. She urged her friends to take it while they could get it.
But they couldn’t bring themselves to sell. They had roots here, they explained. This was where they had brought up their family. The big old house was full of memories. They couldn’t bear to think of it in use as a college dorm. Moreover, some of the older neighbors were urging them not to sell. To allow one more house to be converted into a dorm, to move away and leave all the problems with those who remained – this seemed unneighborly and disloyal.
And so Mrs Shattuck’s friend stayed. The neighborhood continued to decline. Other houses were sold to less careful owners – including houses belonging to the very folks who had talked most earnestly about loyalty.
Mrs Shattuck’s friends finally put the house on the market. So far, no buyer has appeared. When one does, the offered price is going to be drastically lower than the could have secured when they were first urged to sell. The longer they have to wait, the lower the price is likely to go.
There are times when you have to choose between roots and money. If you are interested in money – which is presumably why you are studying speculation – it is a mistake to let yourself get too attached to any physical thing in which your capital is invested. Get attached to people, but not to houses or neighborhoods.
Not to companies, either. You never know when it may be wise to sell out. Be sure you don’t let roots impede you.
Frank Henry knew a man who worked as chief engineer of a small manufacturing company. Over the years he had accumulated a big amount of the company’s common and preferred stock. There had been a time when the company was prosperous and the stock price high, but that time had not lasted long. The company was now in serious trouble because of changes in its markets – particularly the arrival of some merciless Japanese competitors.
The general facts of this trouble were public knowledge, and the stock price was sagging badly. The engineer believed, however, that the problems were even worse than anybody guessed. Comparing his company’s products with the Japanese competition, he found a substantial difference in quality. The Japanese products, though priced lower, were superior. The engineer saw no way in which his company’s double disadvantage could be overcome. Sooner or later, he was convinced, the competition would drive the company to its death.
He should have sold out, but roots impeded him.
He harbored confused feelings of loyalty to the little company. These feelings were heightened by a lot of don’t give-up-the-ship speeches by the board chairman and chief executive officer, the major stockholder. The chairman, an incurable optimist, loudly proclaimed the fact that the was continuing to buy more of the stock for his personal portfolio. He believed it was important to do this. Since SEC and stock exchange rules required him to make public the extent of his interest in this company, any sell-off by him would have become known. That would have been hurtful publicity. His theory was that he could generate good publicity by doing the opposite. In buying more stock, he felt, he was demonstrating faith in the company’s viability and future prospects. He was showing loyalty.
The engineer doubted that the chairman’s gesture was having any notable effect. The common and preferred stock prices were leapfrogging past each other in their steady progress downhill. Shareholders’ and employees’ morale was low and falling lower. It was time to get out. But the engineer couldn’t make himself get – and one of the main reasons was the chairman’s gesture of loyalty.
If one investor is a net buyer of a security while another is a net seller, then in effect one is buying from the other. The transactions are, of course, handled through dealers of brokers and specialists on an exchange trading floor, but the effect of matching up a buyer and a seller is the same as though it were a face-to-face deal. The engineer had the uncomfortable awareness, therefore, that when he put his shares up for sale, they would be bought from him by the chairman.
The engineer would end sold out, while the chairman would end with a fat portfolio of a stock that might soon be worthless. It didn’t seem right, somehow.
And so the engineer sat tight. In time, he and the chairman both ended with portfolios of worthless stock.
Many years later, Frank Henry was involved in an unrelated business deal that brought him into brief contact with the former board chairman, now the owner of an expanding chain of stores. The man seemed prosperous and content. He talked happily of some recent stock market successes. He had made some money by selling stocks short in a falling market. He was obviously familiar with the technique of shorting, in which you sell a stock before you own it, hoping the price will fall. If it does fall, you fulfil the sale by buying the stock for less money than you’ve received.
As the former board chairman talked about this, a small but wicket thought began to germinate in Frank Henry’s mind.
He wondered if the chairman had been as optimistic about that troubled little company as he had pretended. Perhaps, Frank Henry surmised, the man had maintained two brokerage accounts, as many big wheeler-dealers do: an openly declared one and a secret one. While loudly and proudly buying the company’s stock in one account, maybe he had been shorting it in the other.
It was just a thought.