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Tim Melvin

Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years as in the financial services and investment industry as a broker, advisor and portfolio manager. He has also...

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Product Performance

Do The Womack - Investing Like A Pig Farmer

Is it possible to invest in a Womackian Fashion over the course of your investing lifetime?

As you may recall, Mr. Womack was the pig farmer introduced by John Train back in a Fortune Magazine article in 1978 who never lost money in the stock market. He simply bought low and sold high, consistently.

He wasn't psychic. Womak waited until all the news was negative and everyone was afraid of stocks. Then he drove into town and bought a bunch of dividend paying stocks that had fallen sharply. If prices continued to fall he'd drive back to the broker's office and buy some more. When all the news was sunshine and rainbows and the proverbial shoe shine boys were trading stock tips, he drove back into town and sold.

See also: Win At Investing: Play Moneyball

Along the way he made a bunch of money and cashed a lot of dividend checks. Is it really possible to invest that way, only buying crashes and meltdowns and avoiding stocks when they hit euphoric highs?

Let's look back over the past thirty years and see what we find. Assuming a man turning 60 today started investing at 30, how would he have fared using the Womack Approach?

His first shot at investing like a pig farmer would have been the crash of 1987 when markets fell by around 25% in a single day. Assuming he bought dividend paying stocks and earned a slight value premium over the market, he would have just about doubled his money by mid-1991 and cashed out his gains. After that he was in cash, tending to his farming duties and the rest of the things that make up a life, and pretty much ignoring the stock market.

In 1994 he would get his next shot at buying on the cheap. The market fell steeply led lower by healthcare and banks stocks. The financial industry was still reeling from the S&L crisis and healthcare was pushed lower as the Clinton administration tried to push their version of healthcare reform. By 1997 the indexes had doubled in value and our investor could head back to the firm with his brokers check in his pocket for huge profits.

In 1998 we had the Asian currency crisis and LTCM blow up that sent stock prices tumbling. Our farmer could have driven back into town and bought some great dividend paying stocks on the cheap. Just two years later and he could have sold them for a 60% or more gain as the internet bubble reached euphoric stages.

He would have then pretty much avoided the markets until 2003 when he would have once again pointed the pickup truck towards town to buy the burst of the bubble. He would have then doubled his money by 2007 when the euphoric nature of the market would again rear its ugly head and give him a reason to head to town and sell, having better than doubled his money.

His broker would not see him again until the first quarter of 2009 when it was clear to all financial market observers that the world was in fact ending once again. Again up through today he would have better than doubled his money and would have to be thinking of selling, as stocks are clearly looking a bit bubbly.

Now during the 30 year period had he started with $25,000 his stock portfolio, assuming no additions and the dividends being spent shamelessly, he would be worth roughly $640,000 now. The historical record shows us that if he had focused on dividend paying stocks that traded at a discount book value he would have likely done much better but we will assume the base case for our purposes.

That's a 30 year compound return of about 11.5% compared to the stock market compound return of 8.50% over the same 30 years. He was only invested about half the time so we can add a few percentage points for interest earned during the off years and of course we still have not accounted for dividends. When you add those factors in you are knocking on the door of twice the rate of return of buy and hold investing in the stock market.

There is a little bit of best case scenario in this picture but it makes the point that you are best waiting to be an aggressive investor until the market gives you a very favorable entry point. Contrary to conventional wisdom, holding cash when markets are trading at high valuations can actually add to your returns. When the markets do take a turn for the worst cash becomes a weapon, not an anchor.

Tags: bear markets pig farmers Womak

Posted in: Education General