Dear Reader,
I was raised on Wall Street.
Not literally of course.
One of the earliest stories of my childhood was that my father — being a brand new father — would read me — his newborn daughter — The Wall Street Journal as a bedtime story.
Before I was 12, I was explaining the importance of investing early to take advantage of compounding to my friends.
By college, my father was teaching me futures trading and reading technical charts. And when I graduated, I started teaching him options.
Wall Street and the stock market always represented opportunity for me. It held the chance to turn a small investment into something much larger with the right research and insight.
That’s why I’m excited to introduce you to Charles Mizrahi, Banyan Hill’s newest editor and definitely a kindred spirit when it comes to seeking out overlooked gems on Wall Street…
How Did Charles Mizrahi Become a Wall Street Maverick?
Charles is a self-starter, having created three businesses by the age of 12. It almost comes as no surprise that he started on the New York Futures Exchange, before it was a year old when he was only 21. Years later, he went on to create a money management company that perfectly timed the 1987 crash. He was able to have all his clients in cash before stocks plummeted.
Jocelynn: First of all, welcome to Banyan Hill!
Charles: Thanks, Jocelynn. It’s great to be here.
Jocelynn: From our previous chats, I’ve learned that you’ve had a wide and varied career, but most of it has been centered around investing.
Charles: I knew I wanted to be in business. I just knew that I wasn’t going to be a doctor or a lawyer or anything like that. I loved the interaction. I loved the challenge. I loved the whole getup of taking something from nothing and making money out of it.
Jocelynn: And with your drive to be in business and varied experience, I would imagine that it’s come with a number of great lessons.
Charles: Undoubtedly. My earliest lesson in supply and demand came when I started a sticker-selling business. I was nine years old. I heard that if you wrote to the New York Mets, my hometown team, and say that you’re a big fan, you’d get free schedules and/or stickers. So I wrote a quick letter and received three stickers and three schedules.
Around the same time, I noticed a growing underground sticker market in the school. People went from trading stickers to buying and selling stickers. I thought: “Wait, if it works for the New York Mets, why don’t I just send the same letter to every baseball team?”
I spent Sundays from 9:00 in the morning until 9:00 at night, writing the same handwritten letter over and over and sticking it in an envelope. My only expense was a nickel a stamp. I mailed them to every team. Some teams said: “Well, thanks for being a fan.” Other teams not only sent stickers but they also sent little souvenirs.
I started selling the items — making $30 to $40 per week in 1972.
I later expanded to basketball and football. I got addresses from yearbooks — which I bought at games or borrowed from friends — and created a mailing list of all the professional baseball, football and basketball teams.
As teams did better, all of a sudden the prices went higher on certain stickers. And certain teams sent really pretty-looking stuff — like the Montreal Expos used to send a really nice letter “M” that went for more money. If you had something from California, the kids would just pay for whatever it was — because California was so far away. “You see it on the map? Look how far it traveled.” That had an effect on value.
Jocelynn: Ha! That’s some pretty amazing insight for a 9-year-old. Now when you were 21, you rented a seat on the recently launched New York Futures Exchange.
Charles: That was another amazing learning experience for me. It was only $12,500 to rent a seat. The cost of the seat was $10,000 and you needed $2,500 liquid to settle up each night in your brokerage account — your clearinghouse account. I didn’t have the money so I borrowed from my family.
I remember my first trade like it was yesterday. I stared at someone and gave the signal — you know, gave eye contact, nodded my head and did the trade. The trade went against me immediately, and I lost $25. But I made the cardinal mistake, I didn’t have the edge and it costed me.
It was by sheer luck that I made $300 on that day. But I had to admit that I didn’t know what I was doing. I couldn’t quit. I had to persevere.
I happened to be smart enough to realize that I needed help. I searched out the oldest-looking guys around the exchange and tried to get as much advice as I could from them. That’s how I met Roy.
Roy was like 55 or 60. He retired from RCA as an engineer. He wore a checkered jacket and had glasses. He was bald. He had an RCA gold-cross pencil and used to chart on this graph paper. And I had no idea what he was doing.
He was the first one to show me points of resistance as part of technical analysis. Then I found another older guy that I asked: “What’s the best thing I could do here to be a floor trader?” He told me to read Reminiscences of a Stock Operator.
Lo and behold, I started to make money. I started to realize there was a rhyme and reason to this. I started reading as many books as I could on technical analysis.
Within six months, I paid back everyone who had loaned me money.
One of the key lessons I picked up was to figure out who the smartest people in the room are and learn from them, whether it’s the Oracle from Omaha Warren Buffett or a particularly savvy management company that’s adept at acquiring and turning around companies.
Jocelynn: These lessons have certainly shaped your approach to investing. Can you explain your investment philosophy? What are you looking for when it comes to identifying an attractive investment opportunity?
Charles: Most investors see stocks as wiggles on a chart. That’s why many of them lose money. They try to trade the daily noise of the stock market. That is an impossible game to play. I see stocks for what they really are: A fractional ownership of a business. I am an owner of a business that has products or services, managers, customers and employees.
I then ask two questions before even buying one share of stock:
- Is the business financially sound?
- Is the stock trading at an attractive valuation?
I want a business that I can understand, has a solid balance sheet and that generates free cash flow. What good is a business that is growing by leaps and bounds, yet can’t pay its rent or finance its business? I also want to make sure that my risk of permanent capital loss (the business going bankrupt) is close to zero.
I then look at what the business does, how good a job management is doing and what are the business’s competitive advantages.
After getting excited about the prospects of a company, many investors rush out to buy the stock. They don’t give a second thought to the price they are paying.
They never learned that the greatest impact on returns is the price you pay.
It’s no wonder they can’t figure out what went wrong a few years later. Even though the company did amazingly well, the stock price hardly moved. They paid too high a price relative to the worth of the business.
Paying too high a price will produce mediocre returns. An old Wall Street adage says: “A stock bought right is half sold.” If you buy a stock at a discount to the worth of the underlying business, you’ll never have to worry about making a good sale to give you great results.
Like everything in life, price is what you pay — value is what you get.
Jocelynn: Thanks so much for joining me today, Charles. You’ll be discussing more of your investing views with Winning Investor Daily subscribers yourself.
And next week, I know that you have a special article lined up in regards to predictions for 2019 and how to wisely grow your wealth.
Regards,
Jocelynn Smith
Senior Analyst, Banyan Hill Publishing