April 1st — foolishness ? continued

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

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