Invest Like Terry Francona - Cabot Wealth Network

Invest Like Terry Francona

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Two days ago in Thursday’s Cabot Wealth Advisory, I got a chance to write a little about Bucyrus,
, which claims to be the world’s bratwurst capital, as well as the home of D. Picking & Co., the only place left in the U.S.that still makes hand-hammered copper pots and tympani.

I’ve never been to Bucyrus, but from what I learned it looks like it would be a nice place to spend a few days, especially if it included disconnecting from the hustle and bustle of the stock market and taking time to understand life in a relatively small community.

Someday I hope to do just that.

In the meantime, I did have a chance this week to connect – in a figurative way – with a smaller, slower community and I didn’t even have to travel to get there.

It all started when my father hired a couple of men to replace the rotten wooden foundation in his “shed.”  It’s a building that in some places would be called a barn, but he has a bigger building that is truly a barn, so this one is the shed.

As part of the preparation for lifting the foundation, the men emptied the shed of its heavier contents, which included four solid fir columns that had lain undisturbed in a back corner for over 40 years.    Two were over 8 feet tall, while the other two were about six feet tall.  Their diameter at the widest point was perhaps a foot.

Lo and behold, on one of the columns was a grouping of small nails, hammered in to spell the following:

G.A. NOV. 10. 1911.

The letter A was actually indecipherable at first, because at some time while being transported, the column had scraped against a sharp object that gouged out all the nails of the A, leaving behind only their holes, and over four decades of dust had pretty much blackened the entire surface.  But close examination left no doubt.

So who was G.A.?  No one in our family had those initials.  And who had stored the columns in the shed?  And why would anyone mark a column with his or her name in such a manner?

Interestingly, the answer came to me early the next morning as I was waking.  That’s the time when the challenges of the previous day have sorted themselves out in my brain, and the answers I’m looking for often present themselves unbidden.

G.A. was actually G.A.S., or Grace Alberta Smith.  She was my grandmother, and she was 21 1/2 years old in November 1911.

A measurement of the column confirmed that the person who hammered the nails in stood about 5 feet tall, just like Grace.  And the fact that my father inherited the shed from his mother in 1986 closed the case … sort of.

But why mark the column at all?  And why omit the S?

If there’s one thing Grace was good at – she was my grandmother, and I knew her well because she lived to be 96 – it was putting her mark on things.  Turn over most any family picture in my parents’ house and you’ll find her familiar script – pencil in the early years and blue Bic ball point pen later – naming the people in the photograph, the place and the time of the picture and more, always followed by her signature and the date.

And she was good at saving things.  In her attic, where I explored as a kid, were picture frames, walking sticks and canes, books, games, coats.  There were boxes of Christmas cards, birthday cards and Valentine cards.  There were even boxes of boxes.  I remember her saying once, by way of explanation, “It doesn’t eat or drink anything; I guess I’ll keep it.”

By trade, Grace was a bookkeeper.  After graduating from SalemHigh School, she attended Boston Universitybefore joining the work force.    She began at the Boston Mutual Life Insurance Company and then moved on to the Boston Securities Company, in both cases “keeping the books.”

Day after day, year after year, she took the train in and out of the city.  She saved her money.  And she bought property, acquiring her first (a little beach house) at the age of 21.  Interestingly, when she asked to withdraw her money from the bank to buy the beach house, the bank officials told her to send her father down so that he could approve of the transfer.  She told the bank people in no uncertain terms that that was her money she had saved over three years and she wanted it now.  And she got it!  At the age of 30 she finally married.

In her whole life, I believe she knew where every dollar came from and where every dollar went, and I know she never wasted one.  She collected her rents, and she became an investor in stocks as well; buy and hold was her style and she did very well in IBM over the years.

And she passed her values on to her three children.

As for the columns, according to my father and his brother who have puzzled it out, they came from the house where Grace grew up, and where she lived until she was 30.  The lack of the S is probably due to the fact that the Smith was understood; after all, the column was on the Smith house.

And how did they come to be stored in the shed?  Sometime in the 50s, the porch was replaced and Grace, true to her lifelong nature, saved the columns, thinking they’d come in handy someday.  Besides, they didn’t eat or drink anything.

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Yesterday I received the following from a long-time subscriber:

“As I followed the Red Sox this post season, along with many others, it occurred to me that Red Sox manager Terry Francona would make a good investor.  When the team was down two games to one against Cleveland, many asked him if he would change his pitching rotation by skipping Tim Wakefieldand bringing back Josh Becket in game 4 and potentially game 7.  Francona refused, saying he would not change his strategy at this point and had faith that in the long run it would work.  Well of course we all know that while the Sox lost game 4, that was the last game they lost and are World Series champions.  This is similar to investing strategy which says do not abandon your system even though you may lose some money because if it is a good system it will work in the long run.


He’s right, of course.  No one stays on top forever.

In fact just this week Paul Goodwin, editor of Cabot China & Emerging Markets Report, showed me a piece of marketing material he kept from his days at Putnam.  (Like my grandmother, he’s a saver of things.)    Putnam at the time, like most mutual fund companies, had large-cap funds, small-cap-funds, growth funds, value funds and international funds.  The beautifully colored display conveyed to mutual fund investors the fact that every strategy was a top performer occasionally, and a bottom performer occasionally, and furthermore, that there was no pattern to their movement.  You never knew who was going to be on top in any one year.  Their suggestion was that you put some of your money in funds representing a wide variety of styles, and then just leave it there.  That wasn’t bad advice.

Today, one investment strategy that’s struggling a bit is the value strategy.  While growth stocks in general have had a great year, and international investments have had a great year, thanks in part to the falling dollar, value investing strategies have lagged.

A trend-follower looks at this data and says, “I’m not jumping on value until it starts working.”

The contrarian, contrarily, says, “I think I’ll take some money out of those sectors that have been so hot this year, reduce my risk a bit, and be an early buyer of value stocks.”

If that appeals to you, here’s a stock to consider.

It’s East West Bancorp (EWBC), a small bank with strong ties to China.  The bank has grown rapidly in recent years, though its growth is slowing now.  But it’s very profitable, with an after-tax profit margin of 19.4% in the latest quarter.

Here’s what Roy Ward, editor of Cabot Benjamin Graham Value Letter wrote about it recently.

“East West is a small company with 70 banking offices in California, one in Texas, and three in China. EWBC provides banking services to individuals and small businesses with a focus toward the Chinese-American community. The bank’s credit quality is exceptional because no sub-prime loans have been made. EWBC has made several small acquisitions recently and is expanding its operations in China.

EWBC’s share price has declined from a high of $42 in June 2007 to the current price of $27 because of the sub-prime loan problems of most U.S.banks. We believe the decline in EWBC’s share price is unjustified and offers an exceptional buying opportunity. The shares are undervalued at 10.2 times current EPS and 1.08 times book value. We believe EWBC’s shares will advance to our Minimum Sell Price of $54.22 within 1 to 2 years.”

Since that was written, the shares have popped up from 27 to 29 on the news of the freeze on foreclosures, and my guess is that a decline toward 27 would offer you a decent buying opportunity … if you have the patience to hold.


Editor’s Note

Every stock recommended by Cabot Benjamin Graham Value Letter has both a Maximum Buy Price and a Minimum Sell Price.  When you buy below a stock’s Maximum Buy Price you ensure yourself a Margin of Safety, and that’s an important part of the Ben Graham value investing system.

To learn East West Bancorp’s Maximum Buy Price, and to get regular updates on it, and other undervalued high-quality stocks, I suggest a no-risk trial subscription to Cabot Benjamin Graham Value Letter.

Since inception in February 2003, its Classic Model has achieved a compound annual return of 22.3% compared to an 8.6% return for the Dow Industrials.

To get started, simply click the link below.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory


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