A great investor does not only have to know about finance, but must also understand psychology and be good at observation. Legendary speculator Jesse Livermore once told a story of successful investor known by the nickname “Pennsylvania Dutchman” (in Lefèvre, 1923). According to Livermore, the Pennsylvania Dutchman was an “indefatigable Missourian”. He was a great investor who believed in hearing answers with his own ears and seeing things with his own eyes. He valued the information that others gave him, but he would not believe it until it was personally verified by him.
In one episode, the Pennsylvania Dutchman owned some shares of a railway company called Atchison, Topeka and Santa Fe. One day, an inside source told him that a new extravagant president had taken charge of the company, and that he was driving the company into disarray. Worried by this information, he decided to visit the headquarters of the company and talk to the new president himself.
Mr. Reinhart was the new president of the company. When the Dutchman met him, he immediately mentioned the accusations he heard about, and asked for an explanation. The new president denied it, and, with the help of concrete figures, he went on to explain how the company had improved under his leadership. The Dutchman followed up with many questions regarding the current situations of the company, and the president answered every one of them in detail.
After the interview was done, the Dutchman thanked the president and returned home. Without any hesitation, he sold all his shares of Atchison to the market immediately. A few months later, the new president drove the company into a lot of trouble, and the company ended up going into the hands of a receiver.
Years later, the Dutchman was asked, how was he able to sell all his shares before the trouble surfaced? How could he know that Reinhart was lying about the situation of the company? The Dutchman explained:
When Reinhart wanted to write down figures to show him how great the company was doing, he took sheets of letter paper from a pigeonhole in his mahogany roll-top desk. It was fine heavy linen paper with beautifully engraved letterheads in two colours, which was unnecessarily expensive. He would write just a few figures on one sheet, and then he would crumple it up and throw it into the dustbin. Pretty soon he would reach for another sheet of that beautiful notepaper to write some more figures, and after a few figures and behold, another sheet thrown away!
It struck the Dutchman that if the president would waste money without thinking twice, he would very unlikely manage the company in an economical manner. Therefore, he decided to believe the people who told him about the extravagance of the new president, and promptly sold all his shares.
The story did not end here. After the Dutchman liquidated his position in Atchison, he naturally looked for a new company to invest his capital. After some research, he found himself interested in another railway company called Delaware, Lackawanna and Western. Just like he did last time in Atchison, the Dutchman decided to visit the offices of D. L. & W. in order to familiarise himself with the inside operation of the company.
“Old Sam Sloan was the president. His office was the nearest to the entrance and his door was wide open. It was always open. Nobody could walk into the general offices of the D. L. & W. in those days and not see the president of the company seated at his desk. Any man could walk in and do business with him right off, if he had any business to do. The financial reporters used to tell me that they never had to beat about the bush with old Sam Sloan, but would ask their questions and get a straight yes or no from him, no matter what the stock-market exigencies of the other directors might be.
“When I walked in I saw the old man was busy. I thought at first that he was opening his mail, but after I got inside close to the desk I saw what he was doing. I learned afterwards that it was his daily custom to do it. After the mail was sorted and opened, instead of throwing away the empty envelopes he had them gathered up and taken to his office. In his leisure moments he would rip the envelope all around. That gave him two bits of paper, each with one clean blank side. He would pile these up and then he would have them distributed about, to be used in lieu of scratch pads for such figuring as Reinhart had done for me on engraved notepaper. No waste of empty envelopes and no waste of the president's idle moments. Everything utilised.
“It struck me that if that was the kind of man the D. L. & W. had for president, the company was managed economically in all departments. The president would see to that! Of course I knew the company was paying regular dividends and had a good property. I bought all the D. L. & W. stock I could. Since that time the capital stock has been doubled and quadrupled. My annual dividends amount to as much as my original investment.”
Reference:
Lefèvre, E. (1923). Reminiscences of a Stock Operator. New York: George H. Doran Company.
No comments:
Post a Comment