Archive for April, 2014

Helping others with THEIR numbers

Thursday, April 10th, 2014

Extending my mind  further

Purdue University required every “foreign” student to take a comprehensive exam in the use of the English language. When my department head called me in to congratulate me –the highest percentile ever reached — I didn’t explain my preschool interests, or mention the large book of crossword puzzles a Cornell professor had sent me following his summer fishing visit.

Nor did I mention that I would be staying another full year after the qualifying exams to ensure that every word in my thesis would say exactly what I wanted said. By concentrating, I was investing mostly my mind resource to satisfy my own requirements.

With less attention to financial markets I was getting anxious to extend my “number thinking” and economic understanding — by sharing with down-on-the-farm families. Where would I find such an opportunity? Three years earlier I had been offered just such a position  out in the Saskatchewan prairie , and at the top of the salary range. But I declined after realizing my acceptance at Purdue would better prepare me for the career I was sure I wanted. Now that the deputy minister of Alberta Agriculture knew that Saskatchewan  was moving ahead in such a direction, he flew down to Indiana to offer me the chance to lead an economics extension program. I had to refuse, as I knew there was very little research data available from the farm level. A month later he informed me that a well-known professor at Iowa State was coming to head up research in Farm Management at the University in Edmonton. Would I reconsider ?

Yes, I would !

So the family (now four of us) bundled up in the new VW beetle ($1,790 cash) and made our way to Edmonton — a 2000 mile journey. I found the Department of Agriculture well out in front of what had been happening at the university — in sharp contrast to Indiana where anyone from Purdue received a warm welcome from farmers. After Gordon Ball arrived we worked together to develop an extension program in economics applied to agriculture. However, when it was apparent that the university administration was not  being supportive, Gordon resigned and returned to Iowa, leaving us at the Department  of  Agriculture “empty-handed”. I decided to leave too.

The University of Manitoba was interested in interviewing me, and since both Iowa and Purdue profs were already present, we were easily compatible. Best of all was the ready opportunity to develop a farm business association in a western area of the province, learning from a colleague who had started one to the South of  Winnipeg.

April 1st, 1961   Exactly 3 years after my first successful investment. This marked the beginning of my most totally useful career. It put me in the RIGHT place –at the RIGHT time — for the RIGHT reasons. The kitchen table trade-offs (“teacher-learner, learner-teacher”) would show me how prairie farms operate and I would share my financial management understanding. I came up with a name for this :

“Ackerman’s 5 A’s of Decisions”
* Accounting
* Analysis
* Alternatives
* Assessment
* Action

This one-handed process reaffirmed farm level decisions to “stay-the-course” ensuring viable businesses, and providing for  continuity with the oncoming generation. For me —my most productive half-decade. The questions I always asked apply to any business of any kind anywhere in the world :
* Is this farm big enough ?
* Is it productive enough ?
* Are the costs controlled ?

By analyzing the data from dozens of farms in the same area of the province I could develop appropriate standards and benchmarks. In buying a farm for myself and renting it to neighbours I was seen to be sharing some of the risks and uncertainties. No longer was I viewed as a representative of the “Y’Ought Club”  as the Department of Agriculture was called.

The next decade brought a special one-time opportunity for these farmers fully knowledgeable about their business. Increased prices in the grains and oilseeds they were producing, without a corresponding increase in costs !  They prospered accordingly. In the same decade (1970s) the Canadian banks were de-regulated. They took over the trust companies, funded government spending, and speculated in foreign bonds. This resulted in runaway interest rates, inflation and vast increases in debt at every level of government. Many farmers responded by bidding up the price of land. Large land purchases by European farmers worried about their communist neighbours added to the unwarranted inflation. In my classes I gave assignments asking for calculations justifying 15 to 20 % interest rates. Only those students responding  with “nowhere, no way” got my approval. It was time to sell and retire from farming.

That’s what I did. I went part-time at the university and commuted seasonally  to Nova Scotia to start up tourist businesses, retiring fully from academia four years later.

Some more numbers

Thursday, April 10th, 2014

The year 1959 was the final year of my formal education.

How little I really knew about what I would need to learn !

What I would be drawing on from my pre-school childhood was
just THIS —an easy familiarity with numbers and their meaning.

Here’s how that began :

Not being born in the summer like my brothers, I didn’t begin  school until I was nearly seven. But I was interested in keeping up with the two of them (much easier to do in a one-room schoolhouse). My family had an advantage in that we had a dozen books beside the family bible, and my mother’s sister kept sending magazines and novels. Dad (a subsistence farmer) subscribed to the Family Herald. I could READ before I started school.

My early understanding of numbers and their usefulness came from playing checkers with my uncle. He would often let me win a few times and then he would open up the mail order catalog.

“Jerry, we want to order one of these and two of these. How much money do we need to send ? “

Never mind that my family couldn’t afford to send for any one item; I had to calculate in my head — how much ?

Also , he introduced me to the economics of money : “Which would you rather have, Jerry, a nickel or a dime ? “

When I said “a dime”, he suggested that if I would say “a nickel” — more people would ask me !

When i did get to join my brothers in the mile-and-a-half hike to the one-roomer, I caught up quickly by listening to the next grade’s lessons, completing the eight grades in six years. By then my parents had figured out how to send one brother for more education. He was to board at the nearest high school in a village 12 miles away, and return home on weekends. (the extra $1 wasn’t available.) I joined him two years later and took seriously the opportunity that no one from our tiny community had ever been able to even consider. By graduation my grades were tops.However, Grade XIII was only available at a greater distance and required my brother and I to share the chores on a large dairy farm within walking distance of the school. Our principal there taught the three math courses and I excelled. He even graded out of 100! Not so the other courses where 80 would often be the highest mark in the class. Such numbers are crucial when you want to proceed to college or university. My getting admitted to Cornell would have been impossible without the recommendations by professors that knew me from having me rough-dress and ice their fish while they enjoyed my mother’s cooking. They explained that I was worthy of a tuition scholarship, and that I was as motivated as those New York applicants with much higher marks. Getting admitted and being granted free tuition was the essential first step.What remained was the matter of room and board, books and fees. With the war ending there was no market for the milk from our ten cows. The meager wood supply was running low and the neighbours were giving up and moving out. The few summer tourists had plenty of other lakes to choose from.

My father was well into his seventies.There would be no financial help from home. A guy named Joe, a farm supply salesman from Ithaca New York had bought a rocky piece of land on the North shore of the lake. He kept coming to his modest camp every year to fish and to praise my mother’s cooking. Joe and his wife Ellen made me an offer !  Though they lived 8 miles from the Cornell campus, if I cared for their family of four kids (one a baby) by cleaning , cooking, and washing, Ellen would be able to teach a Home Economics class at a high school in Ithaca. I was to commit 28 hours a week. Here was an offer I couldn’t refuse ! I wasn’t thinking then  that I was investing , but that’s how I’ve come to understand all human endeavours. We get to INVEST our mind, our muscle, and our money …..whatever is available to us. That is how I worked my way through college and how, as my Dad put it “college worked its way through me “. My thumb muscle was my means of transportation. The rest of my body and mind were usefully invested in summer work at the Cornell dairy. ($1 / hour plus milk and ice cream consumed on the job.) The next summer I hitchhiked  across the country and flew to Alaska expecting to find construction work at $2.95 / hour and pay for my junior year’s books and fees. Not that easy !. A shipping strike stopped all construction and I could only find work in a restaurant and the local bus line. By the time the strike ended and construction resumed, most of us “gold brickers” had returned to stateside. I hung in for an extra week of construction work. The overtime pay allowed me to fly to Chicago instead of Seattle, and I hiked to Ithaca just one day late for registration. By living with an uncle and aunt in Rochester, working 40 hours weekly in construction and some evenings in a convenience store, my third summer was both enjoyable and profitable. For my final year I could afford to live on campus, make my meals at the cooperative, and have time to study.

The results were ….well, spectacular in comparison to years two and three. And I was choosing courses I was vitally interested in  –for future work in farm economics. The agricultural college at Guelph welcomed me and I followed up my master’s degree there with a year of helping farmers establish and maintain their business accounts to better understand their very own numbers. I think my uncle would have been proud of his instructive lessons many years before.

April 1st — foolishness ? continued

Friday, April 4th, 2014

With no Plan D in sight  — but still in mind, I turned to my research work.I was studying changes in resource productivities over a 45 year period, using “hard” historic data.

But I kept thinking about Professor E’s challenges and his own “turning point” story :

At a cocktail party, I was approached by a man asking for investment advice, suggesting that as an economist, “I should know what to do.”

“No, we economists study the overall economy, calculate the impact of the various forces that affect supply and demand, and make tentative predictions. We don’t focus on investing one’s money.”

The more I thought about it, the more I agreed with the questioner. I, as an economist, should be prepared to invest my money in the direction I saw the economy heading. So, here’s how I began :

I noted that, at the war’s end, a major supplier to the military was left with a huge inventory of clothing materials. I expected the Wartime Prices Administration to remove all price restrictions.

I borrowed $800 and bought 100 shares. The next year, the company paid me $1200 in dividends. The share price went to $80, but I chickened out at $60.

So, it appeared that I would have to :

* Study the company’s assets and earnings.

* Relate them to the present share price (not a previous price)

* Compare the company to competing companies

* Establish criteria –i.e.,how much earnings, how much assets,  per dollar I invest

* Ignore broker’s advice or comments

* Watch the company closely regarding management decisions, actions

* Aim to be RIGHT for the RIGHT REASONS

Larry Teder shared my quest. He sat in on Professor E’s class and we met in the library. Larry’s situation was quite different from mine. He was in the Naval Reserve,had traveled to the Mediterranean, and was wealthy enough to invest thousands of dollars in any investment idea.

When I asked him about using broker advice he told me that he had kept track of Merrill Lynch’s phone solicitations over a year’s time. Of the 34 “hot buys” only ONE sold for a higher price one year later.

Larry was intrigued by my industry study –the airlines. Yes, he had flown KLM. He appreciated the high quality of service from the world’s oldest carrier. But, how would Pan American, TWA, or American compare as investments ?

Concurrently I studied a different industry in the US transportation sector. AUTOs. For a course in Policy I tried to answer the questions :

“How many car-makers will survive ? This was 1957

“Will the industry switch to smaller vehicles ?

After mentally downgrading the large pile of analysis material that I had submitted, the professor changed his mind. He awarded me the only “A+” in the class, and more importantly, invested in shares of American Motors. This company produced the Rambler, had a fine array of dealerships, and $10 / share cash-in-the-bank. Shares were available for $8. The only other small car (the Lark) was pieced together by Curtiss-Wright from the remnants of the Studebaker–Packard collapse. They had few dealerships, and no funds for a new design.

My professor’s actions were noticed and when GM was revealed as a future entry to the small car market, his colleagues made fun of his investing. He bought more shares. Though I wasn’t told of the outcome, the share price exceeded $90 over the next two years.

Probably it was the A+ that encouraged me to focus on my study of the airline industry. I measured “assets” as shareholder investments, equity or book value. I measured “earnings” as cash flow by adding back the non-cash expenses like depreciation and amortization. I divided each measure by the number of outstanding shares, thereby arriving at the apparent value per share of the most recent rate of earnings. (I noted that dividends wouldn’t be forthcoming unless the earnings persisted.)

Next I divided the data by the prevailing price per share.
AHA ! One airline’s shares offered more value and more earnings per dollar invested than any of the others. That same airline had sold their old planes before the 3-month decline in airline stocks. Now that the CAB (Civil Aeronautics Board had increased fares 6 % and a new route to Florida was tentatively granted, the management was buying more shares.

Time for Plan D

… On April Fools’ Day in 1958 THIS “fool” bought 100 shares of Northwest Airlines at $13.68 /share, borrowing $368.50 to do it. This was after asking a Merrill Lynch broker for his airline suggestions.
He said “Eastern or American”. Nine months and 12 days later, my shares were sold. Proceeds  were $3209.40. dividends of $60 more than covered the interest charge of $10.86. Paying off the broker’s loan of $368.50, I was left with a gain of $1,890.04 —-189 % on my $1000 investment.

Here’s what happened in those nine months:

* Operating revenues increased 15 % for NWA, while industry revenues declined 2 % for the first half of the year.

* New planes (DC-6’s, DC-7’s) were put into use in July.

* Traffic to Alaska increased, earnings improved, the Florida route started.

* Management bought more shares (especially the top executive). As well 3 trust firms bought shares.

* The company offered new convertible preferred shares to existing shareholders –1 for 3 @ $25. The prospectus showed fine cash flow for the first three quarters.

I bought the 34 shares of preferred $850 by borrowing $637.50 from the broker, so my investment was only $212.50. The opening price was $32 and ran to $35 in the first month. By selling 2 months and two days later my receipts of $1288 meant a gain of $434.25 –207 %.

I  was being RIGHT ——-for the RIGHT REASONS.

Next Blog (s)    later relevance of  MONEY Numbers

April 1st — foolishness ?

Tuesday, April 1st, 2014

April 1st  ….a BEST day to initiate !

Especially when you’re not quite sure how it will develop… kind of like Abraham’s going into the wilderness not knowing what was to happen.

April 1st, 2014 : Sharing with the internet world what I have come to analyze, understand, question and suppose about the meaning of  NUMBERS especially MONEY Numbers — that concern most people at least during some of their thoughtful moments.

April 1st, 1961 : The exact beginning of my academic career. Daring to risk sharing my financial understanding with farming families in Manitoba.

April 1st, 1958 : My first investment from MY OWN analysis. One of the best ones I have experienced. Here’s MY story (and I’m sticking to it! )The setting : No, my story doesn’t begin with a dark and stormy night. It began in broad daylight, though I was in the dark and didn’t realize it. There I was in graduate school after a year of academic employment, with debts paid, newly married, soon pregnant, but wondering whether my $1000 or so of savings could earn a financial cushion, were we able to live on the monthly assistantship of $100 for 2 to 3 years.

I was studying economics ,and applied economics as well. Wasn’t there something in applying economic understanding to improve my financial standing in the world ? I believed so..The Wall Street Journal was readily available. There –a free offer listing stocks that had paid quarterly dividends for 25 years.

My Plan A  : I picked one that was quite Canadian, though I wasn’t thinking about that aspect. This company’s 25-cent quarterly dividend would provide a high annual return as the shares were selling for $18, well below the previous high of $29. The company mined copper — an important mineral for both civilian and defense  use—-up in British Columbia at a sound named HOWE. The irony of the name “Howe Sound” escaped me then, but later returned to haunt me. One month after my tiny purchase of 25 shares, the dividend was cut from 25cents to 10 cents. Six months later dividends were discontinued. A deficit was reported for the previous year. Copper prices continued their downward movement. So did the stock price … to $5.75. I sold after a year and 16 days. My loss  — 62 %.

My Plan B : Ten days after beginning my “Howe Sound” investment I sought information from a broker about Consolidated Electronics. This was an established company moving into an exciting industry –the very one I was using to analyze the data for my research. The broker recommended a different company — Sperry Rand. His arguments were that it  *was large, *had built the first Univac computer, *was diversified –their product line included gyroscopes, typewriters, farm machinery and military contracts galore, *was paying a dividend (Consolidated Electronics wasn’t), *was selling below its previous high.

The Fitch Report he had me read projected future growth. So I bought twenty shares for $ 458. Yes, the earnings increased and the 20cent dividend continued. The stock price went to $26 before dropping to $17. When earnings fell to 13cents / quarter, military contracts were “stretched out”, and there was a slow recovery from the recession. As the defense backlog increased the stock rose. I sold — for a total profit, including dividends, of $1.49. A gain of 0.32 % after 21 months and 25 days.  Consolidated Electronics ? Straight UP !

My Plan C : Three months into my first year of investing I did a calculation for my next investment. Chrysler was prospering with a new model, earning $5 a share in the first quarter. I expected their second quarter to be as good. $10 / share earnings on an $80 stock that used  to sell for $100. That explained my reasoning. I bought 6 shares @ $81. Well, I was half right … sort of. Chrysler did earn another $5 a share. Mutual funds were buying and brokers were recommending. A special dividend $1 was paid in November. The shares hit a higher price –$82, before dropping to $44. The dividend was cut to 25 cents in April. The company bought SIMCA and the stock rose above $50. Poor management practices –workers were sabotaging their production — and an uncertain future for all auto production caused me to sell , and accept my loss of 33 % after fifteen months and 4 days.

Plan …..?

It was time to “take stock” (pun intended) in my fledgling investment career. This was especially so, being unable to show any positive results to a conservative, risk adverse spouse. I was reminded that employment prospects were distant and that the family’s future was quite uncertain. How could I assure her ? Hadn’t I done exactly what was expected of a new investor ? Choosing well-established NYSE-listed companies paying dividends and suggested by those persons supposedly “in the know”. She expected me to “throw in the towel” and “leave the ring”.  Plan D ? Forget it !

I asked to sit in on a professor’s class of senior engineering students who were wondering how to analyze and compare the job offers from companies competing for their careers. Professor Erselcuk challenged all the “conventional wisdom” about the stock market. * Don’t diversify — concentrate  choose one egg and study it carefully. * Consider management above all -“3/4 of US business is run by idiots”. *Think of mines as “holes in the ground with liars on top”. *Brokers “know the price of everything, the value of nothing”. PLUS this positive direction :”Look for assets and earnings at discounts” Applying the challenges helped me see where and why I went so wrong.

Howe Sound  — a mine

Sperry Rand  — diversified

Chrysler  — everybody watching — except the management

I had picked well-recognized companies paying dividends and confirmed by other investors whom I supposed to be much more knowledgeable. Assets ? Earnings ? I was only vaguely aware of their importance. By the professor’s standards, I wasn’t doing ANYTHING right. !

NEXT  POSTING — Getting to Plan D