Dec

24

Horse Trading by Ben Green is one book that Martin Shubik recommends as a most important book for investors to read. Prof. Shubik is an internationally recognized sage and scholar, (of game theory, monetary theory, value investing), a friend of Zeckhauser, and has the luxury of being married to a very sagacious and charming wife who is knowledgeable about all aspects of economics in here own right, which she learned at the hearth from her father, (a day trading member of the NYSE for 50 years), as well as being the second most young hearted 80 year old in the world. Because of this I was inclined to take his recommendation with great seriousness, but as a bit of Yale blarney, until I read the book a second and third time, and realize now that he even understated its importance.

It is the one book that you can read that will help you understand once and for all the dynamics of why the market fluctuates so much from minute to minute, day to day, and the following is a composite of the lessons learned in bargaining, deception, marketing, human relations, self awareness, and economics, just from reading a few chapters. Mostly the following is from the chapter “When Big Horses Went Out Of Style” where Green buys and sells 100 horses and mules all across the country from Oklahoma to Southern Texas. There are deceptions galore, flattery of the buyer, every negotiating technique know to man, fake humility, feigned reluctance, ingenuity out of desperation, fights against modern technology in the form of tractors against the value of old fashioned work horses (Buffet would have hated them too), a change of horses in mid-stream, and various other attempts to outsmart him at every stage. Through it all Green shows a deep knowledge and love of his product. By the end of the book I think that you will have a much better appreciation of why the market oscillates during the day and fray, than ever before.

Firstly, Ben Green stays at a fancy hotel where there are fewer mule men to set a proper price when he wishes to sell his mule.

I was just peeping out from under the brim of my Stetson and had my boot crossed over my knee so that everybody could for sure tell I was from way out West.

Also, the anxious seller always pretends that he is short on brains, and that the farthest thing from his mind at the moment is selling. In the documented case he had previously let it be known to the natives at the Hotel that he:

… didn’t know too much about the farming business, and that I’d made my living on a horse about all of my life. But I had a high regard for the people that tilled the soil, and fed the world and provided fiber that made the clothes, and I knew that this type of citizen was the salt of the earth. I also let it be know about what fertile land the Mississippi Valley was and how much of the rest of the world it would feed and clothe. I also dropped in that I knew that the Mississippi Valley was stocked with some of the finest old Southern people in the nation.

One could write a book about the art of flattery. I have often been flattered and never thought the flattery unjustified! I have never found anyone that I have flattered who felt it undeserved either. I do know for sure that I have paid too much and given much too much credence to the propositions of the other side after such a dose as the one above, and Ben Green obviously knew how this worked better than anyone.

Later on he sees a mark:

He walked up in the lobby and stood looking into the dining room, and I could tell for sure that he was off of his home range … I got up and moseyed close to him to get acquainted, because I knew I looked country enough that he would ask me whatever it was that he was trying to find out.

It must might be that he wanted to buy some mules, and the last thing that Ben wants him to know is that he is eager to sell, (The salesman with tremendous urgency to unload bonds or stock is in conference with this). At this point in the story the mark makes a big mistake that is part of almost every big con — He exposes his own willingness to engage in a bit of larceny.

The colonel told me that he hesitated to buy mules at the auction, and he had gotten to town two or three days ahead of the auction day, hoping that he could buy mules without having to go into that crooked old auction and bid against them professional horse traders …

Again, I could write a book about all the pitfalls of this attitude, starting with the fact that the gentlemanly specialists on the NYSE, with their monopolies, rob you for much more than the cutthroat young vigilantes in the NASDAQ where they have to create a conspiracy to hold up the prices. The last chapter of the book would be the many times that I have attempted to buy and sell on the electronic market from 5am to 8am, hoping that I would not have to deal with and bid against them professional stock traders on the NYSE and the crooked old auctions that they run.

Green continues:

I tried not to show any excitement or pleasure in his statement as I explained to him that I had 60 little mules, fat and young and not too big, as I explained to him that I didn’t like auctions either, that I had these pens way back behind the auction barn, and that I had been dreading the thought of letting them professional horse and mule traders steal them from me. … He didn’t know how bad off I was to sell those mules, nor how little I slept that night as I waited for him at 5:30 the next morning … I told him I knew a short cut over to the pens and we wouldn’t have to go through the auction barn, and that he could look at those mules without anybody being the wiser.

Whenever a person with a company to sell tells me that he does not want to shop his product around or provide valid financials for fear that his competitors or the service would get wise to it, I see this as a deception in the making with me definitely going to end up holding the short stick

Again Green continues:

Colonel, there is no use in my trying to rob you, and I don’t believe that you’d try to steal these mules from me. So why don’t you tell me all that you can give me for them per head and represent your own interests. If I can stand it at all I’ll sell them to you, and you wont have any hard feelings if I can’t take the price.

Never set a price after a proposal like this because out of shame and fairness you might open with something so far up the scale that you will end up with nothing at all for your fairness.

Ben my boy, [said the buyer] the amount of $75 a mule is all I can give yuh for ‘em. If yuh can take it, we’ll go call the folks back home, and he then painted a glowing picture of how he wasn’t having to buy them at auction [the mules being worth about 25 a head at auction]. I guess it’s worth something to sell them all in one bunch, and I feel like you’re being fair said I, so I’m going to sell them to you.

Later in the story Ben has traded up to a string of big horses, good for pulling wagons used to carry feed and produce in the farm business, but like the owners of value in the late 1990s, no one seemed to want them, and everyone was interested in these new things called tractors. In those days, there were probably as many horse dealers per capita as car dealers today, and every small town had a few stables.

Those infernal combustion machines called tractors had begun to get kind of plentiful in the plains country and open country in Kansas and Oklahoma. Work stock [the big horses] had gotten cheap [as Value had before the noughties, and before it outperformed tech by some 50 percentage points over the next 6 years]. Every trader had a pen-full of them somewhere around the edge of every little town, and they were hard to sell.

One of Green’s rules is to never show your interest in an owner’s products until you’ve shown him that you have no interest in a million indirect ways. He sidles into a big supper table at the Hotel and after talking down his interest in horses, one of the diners suggests to him “Why don’t you buy some of these horses and take them back to Texas with you, so the people wont get out of work stock there?”

I got down to the lot the next morning way before he did and looked in their mouths to see what their ages were, looked at their feet and legs

A prospective buyer should always know more about the stock he’s considering buying at the rite price than the seller, but by no means should you let the seller know you’re interested by letting him see you looking at it (or asking for a quote).

After I had made him wait I told him that I wasn’t plum of the notion, but it looked like as plentiful as they were, I could buy them farther down the road and closer to home, and wouldn’t have so far to take them.

This is like when the market opens down, but the buyer backs away. If he is going to buy something it is going to be much later in the afternoon, when he does not have as much inventory cost and fluctuation to worry about.

He said he didn’t think there was any use waiting when he had a bunch right here that would sure be good for me to take home, and he would sell them to me where they would make money. I said “well maybe I’d better take a look at your stock. You might have some in there that might do to drive home for a profit”

Effectively the seller says that he has a few good value stocks for sale at good prices, (some dogs of the Dow are offered, perhaps Alcoa or General Motors, but Ben says he’d like to see some stocks with more potential at the price).

I whittled and looked off over the trench. “There’s plenty more horses between here and Texas” I said. He priced another odd horse or two, [the worst of the lot], for $60 to $85. “I guess then, that you are figuring these horse at $60 a round” I said, [Whenever you hear an interval, choose the bound that’s most favorable to you, especially when the seller was trying to sell you the worst for that price and you mean to get the best]. I whittled some more and said “I don’t believe I’ll try to do no business with you. I guess I’d better pack up my rigging and get on down the road. It might be winter afore I get home at the rate I’m going”. Nothing puts the fear of god into a seller more than the idea that you’re going to break off negotiations entirely. Finally, he said he would take $75 a head and let me pick whatever I wanted. I thought about that for a while , kicked my toe around in the manure, went back over toward my horses, and told him I guessed we couldn’t do business.

Ben eventually gets the horses for $75 each but with harness and a wagon thrown in.

I told him it looked like I was cheated again. That’s what I get for poo-pooing when I was away from home in a foreign country, but I guessed I’d just as well go to picking out the horses.

Never let a seller know you are satisfied with the deal or else he might raise the price, change his mind, or tighten the terms. The seller complains that Ben was leaving him with the snides only, but Ben uses the previous bargaining against him.

After all, he had been telling me how good all that bunch was that I was letting him keep, [the ones he had previously picked out for Ben to take, but Ben rejected] and I supposed he would rather have them himself. He hadn’t bothered to mention before that there was anything wrong with them.

Next Ben has to sell what he bought, and he meets a hired man who is a good cook and worker. In one of the passages that saves the book from being just a rotten tale of deception, and places Ben on a higher plain, he buys a restaurant for this man.

Cookie was a man that fate predestined to be of lowly station. But for all this, Cookie was glad to be alive and have any kind of a chance at survival He stood in the presence of men without bitterness or complaint of his lot, saying nothing unkind of his fellow man, and never abused a dumb animal. This breed of man would do for a friend when the trail was rough. You could bet that he would pay back favor or money — and he did many times over. I was always glad that I swapped that team of horses for that team of horses for that bunch of chilly bowls and that cookstove

Later, Ben helps a man out who was stuck in the mud, and the grateful stranger asks him if he could spare the pair of mares that pulled him out. “Well, I had plans for these horses, and I kinder hate to split ‘em up. This is one of the best pullin’ pairs I got” Ben says, (never admit that you are eager to sell, and always help a person out so that he feels gratitude towards you. Often the gratitude you feel towards another man will be the costliest thing you ever had.)

I just thought I’d try him for size. I didn’t know whether he knew anything about the horse market or not, so I told him the mares ought to be worth 300.

Ben makes the sale but takes half the payment in kind, in the form of mules.

I told him it looked to me like he was looking after his interests better than he was mine, but I believe I would swap him just the same.

Ben likes to put a very high price when asked just to test how much the buyer knows about the market, and often the sellers do that in fields like foreign exchange. I will quote the market in vol. — for example, 11.5 bid and 12 asked - because that is only a 0.5 spread in vol. whilst, of course it is a 100% spread in prices, but why not ask. I have used the “Looks like you’re taking care of your interests a lot better than I’m taking care of mine” often in negotiations with my counterparts, and have adopted Ben’s technique of never admitting to being happy with a trade.

In the story, the price of the market continues to rise since Ben bought the horses for 65 a head. Note that he has been trying to sell them for 125. Along the way however he is exposed to much downgrading of the value of his stock.

I heard some more about tractors and how much big horses are. It had got to where it didn’t worry me much, I’d heard so much of it, and then, too I was getting a lot of my money back. I just let smart people advise me, but I didn’t pay it too much mind

Whenever you are trying to sell something, I find that the buyers will advise you of how bad your stock is and how there’s a very big seller in the market ahead of you. A farmer then sees the stock:

I offered to take $100 a piece for them, [having sold many of them already near the middle of the fray at $125 , he is content to take a 25% profit]. He said he was a little short of cash [the buyers are always out to lunch or short of cash], and if I wanted to sell them he’d give $50. I didn’t think that was all the money he had and I didn’t show much interest . He crawled back over the fence and said he guessed he’d better get back to plowing. I had started to drive off [and how hard it must have been to do so], when he turned around and said he would give me $165 a pair and that was all. I told him “I guess that will be all. That’s enough. I’ll just sell them to you”. [A trade that leaves both better off has again be made, and much smiling under the hats must have taken place].

But then Ben finds that the buyer must get the money from his wife. I have had this happen often, the trader wants to make the deal but the boss at headquarters will not say yes, or the price is up on Friday for gold, but when you look for the buyers on Monday, their wives have said no.

I listened to this domestic warfare for about twenty minutes, but he finally came out of the house with a check. It looked to me like I was as good a trader as I thought I was before I heard about those new fangled tractors. I thought I really ought to drive a little harder and get on in before bad weather set in, but still, I didn’t need eight head of big stout horses to feed all winter.

At this time, like all good Southern Traders , Ben finds some good barbecue, and after complimenting the proprietor to death, another customer comes in.

He came up and said his wife was washing and he thought he’d better take some barbecue home for dinner. The keeper turned around to me and said. “There’ll be four of five of them kind of fellers, by here. There’s several different reasons beside washing, but that’s just the one they tell you about.” Never allowing a time to go by without complimenting a prospective buyer, Ben quickly adds, “One reasons is that their wives can’t make barbecue like this.”

After much flattery, the receiver acts as a finder for more buyers.

“There was somebody in here a few days back a talking about needin’ some big horses, something to dig dirt tanks with.” Never appearing too anxious but always willing to help I told him that I’d sell some of my work horses, if it would help a man out, but I’m not hankering to much.

Like many financiers, traders, and the countries that use the brain and other intangible assets to trade rather than the manual labor of their ancestors, the last thing that Ben wants to do is the digging and manual labor, as he can use the mind and human resources to perform so much better, more valuable work.

Ben meets the next customer, I told him I guessed I’d sell some of them but I wouldn’t want to leave myself short. Indeed, that’s the main mistake buyers make, after buying things near what they thought was the bottom, they can suffer through many a fallow spell, and then, as the price advances, they sell too quickly and are left short.

Ben finally meets a very shrewd trader who is not averse to getting the better part of a bargain, and says:

“Well, I don’t know if I’d sell. It depends on what your friend knows about what good horses are worth” … It is always nice to do business with a fellow who knows so much more than me so I said I’d be interested in talking about selling some of my horses if he was really interested in paying what horses like mine were worth. I told him it was an awful nice time of day for me to be getting on down the road, but I appreciated his trying to help, and I would wait a while.

The offer is now at $300 for the horses and mules he bought at 45 and 65 a round. Maybe Ben might just wait around for the chance to sell at a profit.

They said Mr. Cox was a fine man, but he was a good business man, and a good trader, and it could be I was cheated. I told them that wouldn’t be a new experience but I was going to wait a while before I decided that was a fact.

This is a perfect attitude to have after every trade, especially with a dealer, and Ben comes out a winner again, at a 100 to 200% profit. He says “If it hadn’t been the dead of winter, I might have gone back to Kansas for more big work horses.”

This is a long post, and it is Christmas, so I will sign off now with the following conclusion which gives the gist of the story. Ben eventually buys all of the value stock and sells them by hook or crook to friends and deceivers along the way, and buys a restaurant for his friend with the profits, as said above. He is proudest of all the good horses he has sold to people who he has given so much happiness and freedom from toil to, as all good entrepreneurs should be. It is a lesson in the value of entrepreneurs over sanctimonious scoundrels who think that the system does not work, who are always calling for a doomsday economy, more regulations, and higher contributions to the service as the solution to our problems.

Steve Ellison adds:

My favorite is the first chapter, in which a 16-year-old Ben Green trades a horse and $20 for a gypsy’s horse. He quickly finds he has been swindled. His new horse is completely worthless for riding or work. From talking to others, Mr. Green finds that the gypsies have an ongoing con in which they continually trade the horse for $20 boot and a few days later offer to trade the counterparty’s original horse back for even money, keeping the $20. Sure enough, the gypsy comes by, expresses surprise and regret that Mr. Green is not satisfied, and offers to graciously trade Mr. Green’s original horse back for even money. Shrewdly realizing that, as long as he has the horse, he has control of the gypsy’s source of income, Mr. Green declines, saying he intends to train and improve the horse. Other members of the gypsy tribe begin calling, some friendly and some angry, with increasing frequency and urgency. Mr. Green ties the horse’s legs together as it lies in a pasture, telling the alarmed gypsies it is a technique to improve leg strength. Finally the gypsies pay $100 to Mr. Green to reverse the trade.

Other lessons include the value of understanding the motivations of the other party, recognizing whence one’s own power derives, and exploiting that power. In the market, the motivation is to take the players’ chips and feed them to the infrastructure. The market needs the trader’s chips. The trader can exercise power by withholding chips from the market, holding out for favorable terms.


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