As a teen, I read The Guinness Book of World Records cover to cover. Among my strongest impressions was the tale of the "world's greatest miser," who according to was worth millions, but was so cheap that she refused to buy soap and died while having a fit extolling the virtues of skim milk. Yes, that was Hetty Green.
As with many tycoons, Green received a very pleasant head start, inheriting roughly $6 million in 1865. Over the next 50 years, she turned that sum into something under $200 million. Such was Green's Method:
Find Securities with True, Ongoing Value
Her favourites were cash or bonds issued by the U.S. government; corporate debt secured by pledged assets; or real estate that yielded cash, such as hotels, office buildings, or land that had mineral rights. Common stocks were acceptable if she believed that industry – for example, railroads – to be sustainable.
Buy when Others are Selling
Green believed that which boomed would eventually bust, if not literally into bankruptcy, then figuratively in the sense of losing much of its market value and being disliked by most investors. Then she would swoop. "There is no great deal in fortune making, all you do is buy cheap and sell dear," she stated. In that, she presaged Ben Graham's metaphor of Mr. Market, who constantly makes business offers, never at the same terms. Green, like Graham, was willing to wait.
This approach, critically, requires liquidity. It does no good to see a bargain, caused by a market panic, and then be unable to buy it because the only way to raise the cash is to sell other assets into the panic. Worse yet is to be forced to sell such assets by being leveraged, and receiving a margin call. Green would always have cash on hand, ready to supply capital when it was least available and most desired: "When the 1907 crash came, I was one of the very few who really had it. The others had their securities. I had the cash, and they had to come in droves."
Sell When Others are Buying
This is the corollary of the previous point. Although Green is often and justly compared to Warren Buffett, she differed dramatically from Berkshire Hathaway's chief in disdaining buy-and-hold investing. While Buffett famously has stated that his favourite holding period is "forever," whatever Green bought she intended to sell. Ideally, sooner rather than later, because that meant that her investment had appreciated rapidly, not slowly.
Walking the Walk
Those principles, of course, are simpler to write than to do. Green was adept at distinguishing between hopelessly outdated businesses and those investments that were only temporarily impaired. Those who cannot tell the difference cannot emulate Green's approach, because they will net too many fish that die. As for selling high and buying low, we all acknowledge that logic. But who was selling Microsoft at $58 per share in 1999 and buying it a decade later, when it was $15? Few indeed.
So, while Green certainly serves as an investment role model, she is not the easiest of mistresses to emulate. She was unusually subversive, willing to flaunt social norms and to accept the disapproval that befell. Most people cannot be that contrarian. But perhaps we can take a small lesson from her experiences and become a bit braver with our own contrarianism.
Oh, and while we're at it, we'd also better plan on sticking around for a while. Making very big money generally requires year after year of making modestly big money. That is an ability that Green amply demonstrated during her time, and which Buffett has shown during ours.
John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com. While Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.
