BEST OF JIM COOK

May 1, 2007

THE HUMBLE APPROACH

In 1982 a close friend passed away. He owned a company that sold energy saving products. His family came to me and asked if I’d buy the business from them. After a brief investigation, I paid them $200,000 for the company. After a year, I could see that my acquisition was going nowhere fast. The new company was losing money. I began to worry about the $500,000 inventory loan at the bank that we had assumed.

I put a two-inch ad in the business section of the newspaper offering the business for sale. Right away we had a nibble. Two young guys called and wanted a meeting. They both had newly minted MBAs and, apparently, one of them had just inherited a million dollars. As we discussed the company for sale, I could see they were overconfident and opinionated. Almost immediately they knew more than me. After a few days of investigating, they went for the deal. On the day of closing they gave me $200,000 and, best of all, they went to the bank and wrote out a check that paid off the loan. I was overjoyed.

We had a brief meeting and I gave them some advice on running their new company. They almost sneered in my face. They weren’t interested in learning anything from me. They assured me they knew exactly how to run things. I’d never seen two more arrogant, self-assured individuals. As they went out the door, I could tell they were giggling inside at my stupidity for selling them such a plum. Eleven months later they filed bankruptcy.

Their arrogant pride proved fatal to the business they bought. They failed because their egos were out of control. In fact, they probably never would have bought the business if they weren’t so cocksure. I cite this example to illustrate how easily a lack of humility can ruin you. C. S. Lewis wrote that pride was the greatest sin. Perhaps that’s true, but, without a doubt, pride is the greatest danger in your financial affairs.

We all have some degree of ego. Usually, success in life causes our pride to swell. Financial statements and egos often grow apace. However, too much self-importance inevitably meets with a painful leveling experience. Pride cometh before a fall. This certainly applies to investing where the humble approach works best. One dangerous aspect of a large ego is that the person who has it can’t recognize it in themselves. Only years later do they come to realize they once were overly prideful.

Futures trading in silver offers a classic example of pridefulness. It’s a known fact that 90% of amateurs or small traders lose money in futures. They are up against big trading firms, dealers and banks. Nevertheless, they keep trying. It can only be ego that makes them think they can outsmart the rest of the market. High leverage means they are up against the big boys, on a shoestring. That’s mighty egotistical. One West Coast firm had thousands of margin calls in the most recent silver downturn. Their clients lost a lot of money. Hopefully, they gained enough humility that they won’t try it again.

You are bordering on arrogance when you think you can beat the futures market. Furthermore, you have to be pretty egotistical to think you can pick a few junior silver stocks and hit a home run. The world is full of large egos who are trying to make a big score in stocks. Unfortunately, only one mining company in a hundred that has a silver claim will ever prove out. Other types of silver investments, such as SLV funds, undermine your patience. You think you’re smart enough to time your way to big profits, but premature selling will invariably limit your gains. These funds are too easy to sell, and a small gain inevitably proves too tempting.