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December 10, 1998

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Subject: How to handle cold calls
Author: Langame

The "Eyes on the Wise" series was an eyeful. Very apt, it brought back to me the reasons I moved away from the whole brokerage house scene.

When I first had a little money to invest (i.e., had my financial house in order), I asked a colleague who his broker was and if he was happy with him. This broker recommended TeleMex, which promptly tripled. I was ecstatic and thought the guy could do no wrong. His next pick was mediocre. And his last pick, after he moved to a new firm, promptly tanked and is no longer listed (he told me he would take out a second mortgage on his house to get in to this stock). Glad I didn't buy.

But, around the same time, I started receiving numerous cold-calls. As a professional, this comes with the territory. The story I kept hearing over and over again was "We invest like Warren Buffett." Who's that? I wondered. If he's so good, why not go with him? Well, at that time, the stock was a five-figure stock and I couldn't justify the commitment -- but I had done the research, read everything I could get my hands on by him and about him, and decided to save enough to get in on BRK.

"I now have a benchmark for all the cold calls that come in. I understand my own investment style. I know what a good, solid stock is supposed to look like."

Soon, the B-shares came out and I bought all I could afford. The results so far have been great. But the moral here is, I now have a benchmark for all the cold calls that come in. I understand my own investment style. I know what a good, solid stock is supposed to look like.

So, when brokers call I tell them about my style: long term buy-and-hold, seek compounding returns, value investing in good growth companies with strong cash-flow prospects going forward, avoid taxes and expenses. Usually, because the cold-callers are novices, they cannot articulate their own (i.e., their company's or fund's) style. They just want to open an account, so they try to change the subject or persuade you that you're own style is somehow wrongheaded (Foolish?).

If we get beyond this stage, I'll ask about their recommendations. That's when the palaver usually begins. And, because they are pushing a program, most cannot reconcile their recommendations to my own investing style. This, as I understand it, is very close to malpractice in their industry (if such a concept exists!). I ask about historic performance, earnings growth, why so hot?, why right now? Then, of course, the clincher, If this stock is so hot why are you calling me, Joe Schmoe, and offering to let me in on the deal; wouldn't Merrill or Payne or whoever do better if they took their own capital and bought up all the shares themselves for their own account? There is really no answer to this question short of "We want you to follow our recommendations faithfully and, ultimately, let us trade (read "churn") your account for you."

If I'm in a charitable mood, I'll ask what they know about BRK, can they emulate its returns, how does their style differ, etc. Invariably, they become uncomfortable, defensive: "Those returns can't go on forever", "You need to balance out your portfolio, diversify". One of their first priorities is to find out what you are currently doing in the market and then to provide a convincing counterargument to jaw you out of your stock. The answer, of course, is "well, can you show me a historic return of approx. 25% year over year and outperformance of the S&P 500 for decades in the stock you're pushing?" None can. Again, the subject changes -- usually back to the sales script.

"They couldn't talk you into it over the phone, they couldn't sell you right then and there and close the deal. You'll probably never ever hear from that broker again."

Finally, if the broker has some connection or I've enjoyed talking to them or some other reason (e.g., the investment sounds like it could be a good idea, which, of course, it could), I'll say, "okay, send me some research material, the most recent annual reports and statements, and any news that you think appropriate. I'm not going to make a decision over the phone. I want to read, research, and decide for myself." And here's what I've found to be truly astonishing (assuming you've gotten this far), almost none of them will! You've been written off as a prospect. They couldn't talk you into it over the phone, they couldn't sell you right then and there and close the deal. You'll probably never ever hear from that broker again. Even if the stock is a good idea, you'll probably never see any research material on it.

Bottom line: (1) Know yourself and what you're comfortable with -- your investment style. (2) Establish a benchmark you're comfortable with and that you expect any broker to be able to beat (to cover his expense). (3) Do your own research and reading to find stocks that fit your style. and (4) Never, ever buy anything over the phone; if it's good today, it'll still be good next week or even next month (it had better be).

Best,

Jim H.


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