After writing my post on my grandparent’s influence on my investing habits, my Mom clarified on how my grandfather got “into” investing and I thought it was worth a guest post. Lightly edited: how a Depression-era farm boy got into stocks. Largely in my mom’s words…
Your grandfather’s 8th grade teacher, Mr. Woodfin, who was also the “principal” of the two-room school house in Science Hill, Tennessee, taught his tiny class all about the stock market. He made them “buy” stocks and look them up in the newspaper (that came once a week). Your grandfather, in other words, participated in a very early version of the stock market game. This would have been in 1932-ish, so the timing is very odd but that’s what happened. Mr. Woodfin really indoctrinated at least one of his students, because your grandfather referred to him always when asked how he got interested in the stock market. Never underestimate the influence that teachers have!
As for how your grandfather picked stocks, he had two kinds of stocks: the ones he knew about (i.e. AT&T, Coca Cola, Pepsi, Ford, etc.) and the ones he didn’t know anything about (Intel, Microsoft, etc.). He did do a LOT of research but his main point of reference was the P/E ratio. He went to the library (well, he sent his wife, your grandmother) and checked out one of those big S&P stock reference books to do his research (it was navy blue, and I actually bought him one for his very own for Christmas one year). He did tend toward companies whose products he used (all of the above, plus pharmaceuticals, energy, and insurance). But he was also quite interested in the future during his middle age and early retirement years, so the whole computer thing fascinated him and he would ask your dad which companies looked like the ones that would succeed.
With regard to buy-and-hold, it worked well up to a point. He bought Cigna, his usual 100 shares, for a couple of thousand dollars, and we sold it right after his death for about $100,000 (at your – Steve’s – suggestion) in order to lock in some cash for Mother. So that worked well. On the other hand, he bought Ford at $40. He loved Fords, I love Fords. But we all know what happened to Ford. It is coming back, but I doubt Mother will live to see Ford hit $40 again. But he could barely stand to sell anything, partly because he was so sure that he had selected good companies, and good companies will always triumph in the end (right…). And secondly, he hated paying capital gains taxes, so he figured he’d pass them on to his descendants, or give them away to relatives and let them deal with it!
All in all, he did well. If he had been a little more aggressive about selling, he would have done better, but apparently Mr. Woodfin didn’t go that far in his stock market lessons!
The lesson I’ve always taken away from my grandfather was that careful study and disciplined investment meant a return on investment. I don’t know if the paradigm has changed; it’s been rough the last few years. But if you want to assume that the game hasn’t changed that much, invest in good companies, hold, and sell when the time is right. It ‘s a tough strategy to dismiss. It worked for my grandfather – on a “poor man’s” salary, he ended up with – for lack of a better word – financial freedom at the end of his life.