WEB-ONLY COLUMN: Shoot elephants, not squirrels

Tim Mak

A grand total of eight (this isn’t a typo, three zeros are not missing after the number “eight”) members of the KSU community have told me that they’ve read my last column.

And since a couple of them have expressed their confusion over some of the analogies used in that column, I feel that I should explain a little more here.

Graham teaches investors to go for value, and not be misled by price. Shop for stocks like you would groceries, he says, not like when you’re buying clothes, cosmetics or perfumes.

Graham’s disciple, Warren Buffett, takes it one step further, arguing that the world’s greatest of great stocks are very rare, and you should be ready when they make their rare appearance on the investment horizon.

These great stocks selling at low prices, which Buffett calls “big, fat, fast-moving elephants,” can be great companies which are being hit by what Buffett calls “temporary, solvable problems,” or it may also be the case when the entire stock market is depressed, like in stock market crashes and economic recessions.

Bear in mind that in the second case, when prices of stocks across the board are deeply depressed (when all over the world great stocks and bad stocks are holding clearance sales all the same) they are not exactly the same thing. Bad companies selling at high or low prices are still just that: bad companies!

If you value the “return” to your bullets (and to the time and energy you’ve expended to earn those cash), you would genuinely and deeply care whether your bullets bring you rabbits and squirrels (mediocre to bad companies), or big, fat elephants. The latter understandably give you the biggest bang for the buck.

When these great stocks finally sell for prices you deem attractive to buy, the low prices may hang around for several weeks. Which means you don’t necessarily need to be a sharp-shooter like Clint Eastwood, or a fast-drawer in the likes of Wyatt Earp’s trusted friend Doc Holliday. All you need are fully-loaded guns, great patience and the ability to tell elephants from rabbits and squirrels. Unless you regularly miss the barn during practice, you’ll get those elephants, given that you have weeks to aim and shoot at these large targets.

But since elephants don’t crawl like snails, they would be gone after a short appearance. Upon spotting elephants, if you still need to unload your rental properties, for example, it may be too late when you finally get the cash in your hand.

Elephant hunting needs extreme patience for two main reasons. First, your hunting buddies may constantly try to encourage you to do exactly the wrong things: shooting rabbits while waiting for elephants and waiting further when the elephants are already here.

Second, perhaps more forceful of the two, is the fact that cash (bullets) barely provides any return to us while waiting for the elephants. Buffett fully understands this predicament.

He says that it is very painful to be sitting on piles of cash earning almost nothing in interest rates, but it’s still not as painful as doing something stupid with the cash.

Tim Mak is a teaching fellow at the College of Business Administration and a columnist for the Daily Kent Stater. Contact him at [email protected]