Bernard Baruch’s famous statement needs a careful look from the myth busters. The first reaction is: Why would someone buy a summer hat after the season is over? It won’t be useful during the Fall and Winter. It also wastes money for something not needed for six to nine months.
The legendary investor and advisor to Presidents had a purpose behind the comment. First, using language from many decades ago, since few men wear straw hats now, the myth implies that one should buy when there is a sale. The bigger the sale the better. Fall sales on summer clothing amaze shoppers. A quick Internet search shows the following:
- Women’s clothes at The Gap (GPS) (15% to 67% off)
- J Crew (extra 30% off)
- Banana Republic (down 29%)
- Kohl’s (KSS) (70% off selected man’s jackets)
Pretty impressive! Even if you think in terms of using the money for something else, Fall sales offer a far more cost effective way to buy than waiting for next Spring. So far, the myth looks pretty good.
Baruch’s aphorism also ties into supply and demand. Demand for Summer clothing slumps in the Fall. If the supply is large, retailers can’t wait to move the product and make way for Winter clothing, which is coming into demand. Rather than store the material, it is easier and cheaper to sell at a discount. This is also true of year end automobile sales, stocks at the trough of a recession and homes long after the bubble bursts.
For example, according to JP’s Real Estate Charts, the price of a median home in the U.S. in 2006 was approximately $277,000; by 2011, the price had fallen to $174,000. In Tampa, where some houses are for vacation or investment, and not a primary home, the drop is even sharper: $290,000 in 2006 to $138,000 in 2011. The percents are noteworthy: a 37% drop for the mythical average home and 52% for the more likely investment or vacation home. The myth holds its own!
Another easily forgotten truth is buried in Baruch’s adage. Investors know that success derives from: Buy low and sell high. If you think the stock will drift upwards, that is the time to buy. When the stock reaches the top of the hill, sell it and enjoy the profit. Does this sound so commonsensical, it may be a non sequitur? Maybe, but then why do the majority of people think and act in the opposite manner. They buy a stock at its high point. After all, if everybody is talking about how great Apple (AAPL) or Facebook (FB) are, it must be a great investment. However, if the stock price dips, they sell it hoping not to lose money. Note that this is just the opposite of Bernard Baruch’s famous advice.
Facebook roared onto to the public scene at $38 a share. When their earnings projection did not impress, it fell to about $20, including a massive dump by the usually cautious Fidelity Investments. While the future is unpredictable, it is at least inauspicious to dump a stock so quickly and take a substantial loss. The drop in BP’s (BP) stock after the April, 2010 explosion was even more precipitous from $60 (rounded) in April, 2010 to $27 in July. BP is now in the $42 range, regaining much of its value. BP’s current price also reflects industry movement more than the long shadow of the oil spill. As reasonable as these sell offs may appear, Baruch is still right. The myth holds up: Buy low, sell high; do not panic; look for a bargain.
The Straw Hats in the Fall myth also raises a long-standing American belief in working hard, saving money and spending it wisely. The underlying idea is that a person will need Summer clothing next year. Buy it now at a low price and enjoy your good planning next Summer when the price skyrockets.
While the myth is sound, it still takes some wisdom to make this work. For example, off-season vacation travel yields great bargains. How about the Jersey shore in February? How about West Palm Beach in December? The Garden State presents two daunting problems. While there would be bargains in February, many of the vacation activities are closed. Aside from Snooki, the boardwalk would be desolate as well as cold. The water would be fit only for a polar bear (actually, they are at Coney Island). As far as West Palm Beach is concerned, the water would be warm but you would not get the 70% discount you’ll find at Kohl’s. So, you have to pick your opportunities.
The myth also implies that buying with saved money and a frugal disposition tops buying on credit – a condition (or “Situation” on the Jersey Shore) that has exploded in the US. Americans hold more than 392 million Visa (V) debit cards. According to creditcards.com, average credit card debt per household is $15,956 and total U.S. consumer debt stands at $2.5 trillion, as of December 2011.
So, for a change we looked at a myth and found that it is still true. So, we cannot “bust” this myth. It has stood the test of time. Keep reading – another myth will be “busted” [or at least examined] next month. Please comment on this myth and let us know which myths need exposure.
Michael McTague, Ph.D., is Senior Vice President at Able Global Partners, a private equity firm in New York City.