How Mr. Womack Made a Killing

I have to start out by saying that the title of this article is plagiarism of the worst sort. It is a direct and complete quote of the title of an article published in Forbes magazine in 1978 by a fellow named John Train. It was subsequently republished in CLASSICS, AN INVESTOR'S ANTHOLOGY and it was there that I first read it many years ago.



Not a lot of real estate investors read stock market books, of course. I've never quite understood why those who invest in stocks tend to shun Real Estate and vice versa but it is so. But I highly recommend stock market literature to those who invest in real estate.



One of the reasons is that the different perspective does us good. One of the keys to success in investing (whether in real estate or stocks) is to avoid the crowd-- to do what others are saying is precisely the wrong thing. And that contrarian principle is best learned by getting a broader perspective, by reading and studying those areas outside our area of expertise so as to get an idea of the broader world.
Anyway I have been thinking about Mr. Womack a great deal over the last few months as people have come to me talking about their need to get out of the Real Estate investing business in one way or another. Just last month a partner in one of my transactions came to me about a condo she bought two years ago at the height of the market. Now, she says, she just wants to walk away without her lender chasing her on the personal guarantee. “Just help me figure out how to get them to take a deed in lieu, Mark, and I will be forever grateful. I don’t even care about the 10% I put down I just don’t want them to take my house.”



Of course my friend is trying hard to make the oldest mistake in the investment business. It is a mistake summed up by the old aphorism, “Buy High and Sell Low”. When the newspaper headlines are full of doom and gloom about how the bottom is falling out and prices are in free fall this is precisely the time to buy-- not sell. My friend the condo owner should be renegotiating her mortgage, structuring a short sale, holding the lender’s feet to the fire about how much of a bath THEY are going to take not running for the doors with only a towel to protect her.



But few people have the intestinal fortitude to buck the crowd. Instead we go along, say that our acquisition plans are on hold until we see some sign of recovery and wait. Next thing we know another bull market has started and we are standing on the sidelines.



Anyway this is precisely the kind of group think that Mr. Womack in the article managed to avoid. Mr. Womack, it turns out, was a pig and rice farmer in Texas. Our young narrator meets him one day at a brokerage office in Houston where one of the brokers advises our narrator to introduce himself and ask for Mr. Womack’s advice because Mr. Womack “has never lost money in the Stock market”. After the shock at Mr. Womack’s appearance (he looked like a farmer in an office full of stock brokers) wears off our hero manages to engage Mr. Womack in conversation on the subject of investing.



It seems Mr. Womack’s strategy was a simple one. He waited until the news was full of doom and gloom about how the market was falling and there was still a long way to the bottom and then he bought about 30 stocks priced low (under $10 per share with good price/earnings ratios). He then sat on those stocks for three or four or more years until the news was full of how the market was booming, setting new records and sure to go much higher and then he would sell out and go to cash with the whole portfolio.



I am particularly fond of this passage which describes Mr. Womack’s track record, ”Mr. Womack never seemed to buy a stock at its bottom or sell it at its top. He seemed happy to buy or sell in the bottom or the top range of its fluctuations.”



And that is precisely why NOW is the time to buy real estate. Is there more fall before we get to the bottom? Maybe. But if one keeps in mind the length of the real estate cycle and invests on a 4 to 10 year time frame then 10 years from now your friends will be congratulating you on your wisdom of buying at the bottom when they were busy trying to get out.



Does that mean you can rush right out and buy anything, pay list price and pay no attention to its location, condition, etc.? No, quite to the contrary. Since you are going to assume that you have to hold this property for 4 or 5 years at least you will want to buy property you can rent in the current market and hold profitably for at least that long. Now is the time to take advantage of other investors fear. It is the time to do short sales, to negotiate hard, to remember that you are the most valuable commodity in the market—a buyer in a market where everybody wants to sell.



All this is made more complicated in this cycle by the fact that this bear market is caused by real estate financing becoming more difficult than usual (just as the bull market of a year ago was caused by financing becoming too easy). So break out the creative investor books, study up on seller financing, remember that the key to a successful short sale is that the bank needs to be upside down so falling prices are your friend. Be grateful that the courthouse steps are again a wasteland. Learn the most important lesson, that the value of a property is determined by what people are willing to pay to USE it, not to own it.



Of course Mr. Womack is not the only one to realize that the key to that killing is to sell when people are buying and buy when they are selling. In addition to Mr. Womack I have been thinking a lot of late about Mark Twain. “Whenever you find yourself on the side of the majority, it is time to reform.”



How Mr. Womack made is killing, of course is that he did the opposite of what the majority does. Right now the majority is running away screaming. This of course means that rather than run with them and get caught in the stampede it is especially important to reform your ways now.