The story is from an article I read in the March 8, 2010 copy of BusinessWeek.  When Peter turned 19, Warren gave him roughly $90k worth of Berkshire stock with the understanding that it was unlikely that he would get anything else.  He sold the stock soon after.  If he had kept the stock, today it would be worth about $72 million (that would have been a nice retirement for Peter, eh?).  He didn’t.  But, according to the article, he has no regrets.  And he has an excellent story about what he did with the money.

First, he dropped out of college (Stanford).  He essentially used the money to survive.  He spent money on recording equipment and basically turned his San Francisco apartment into a recording studio.  Then he put an ad in the local paper advertising recording time.

One day he was washing his car when a neighbor asked what he did for a living.  He told him he was a musician.  The neighbor referred him to a relative that was an animator looking for new music.  He followed up on the lead and ended up going to work on a branding project for a brand new TV station.  The station became what we now know as MTV (VIA).  He credits that inheritance as the opportunity to go out and start the life he wanted to have.

I just thought that both of these stories were interesting.  Neither is right or wrong.  Hopefully both people are (were) happy with their choices.  I have to wonder if Peter could have kept a small part of his Berkshire interest.  In the alternative, I have to wonder if that little old lady who died with 7 million worth of stock shouldn’t have liquidated some of it along the way and enjoyed the money.  Just a thought.  Thanks for reading.

PS – My Effective Yield post was featured in a blog carnival over at Mighty Bargain Hunter.  Check it out.

Disclosure:  I own class B shares of Berkshire Hathaway.  No other positions in any of the companies mentioned.

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I was talking to a friend about investing the other day and was questioned when I used the expression “bottom up investors.”  (As an aside, I love to talk about investing.  I try to be very selective about who I do this with – because I get excited, start talking fast, acting manic.  None of us wants anyone to know how crazy we are.  The truth is, most of the people I know aren’t as interested in the topic as I am, so I have to try to keep myself in check.  My wife is the one who suffers – I don’t hold back with her;)  I tried to explain, essentially, what I think it means to be a bottom up investor (not to be confused with a “bottoms up investor” – that is, one who finishes his or her drink before making an important investment decision.  I kid.)

You can basically categorize most investors as either “top-down” or “bottom-up,” (or, perhaps – macro vs. micro).  Top down investors make their decisions after evaluating large economic conditions (macro conditions).  Based on their analysis, they try to identify particular sectors and industries that they believe will do well based on their view of the broader economy.  Only after this step do they move on to individual investment opportunities.  These are the investors you’ll find talking about the business cycle and longer term trends in things like technology.

Bottom up investors, on the other hand, believe that it is easier to be correct about a particular company than about the broader economy.  For this reason, they don’t spend a lot of time forecasting the economy.  Most bottom up investors don’t believe this is a prudent way to spend your time.  There are, after all, so many variables that impact the broader economy – interest rates, commodities prices, inflation, natural disasters, political instability…just to name a few.  Not many people are going to be experts in all of those things, or for that matter, have a working understanding of all those things.

Not only do top-down investors need to be right about their projection – they need to be right before their competitors are.  If you aren’t – prices are going to be bid up to a level that reflects the underlying belief you’d like to make your investment on.

Plus, what happens when top-downers are wrong?  What if they believe that interest rates (or inflation, or anything) is going down and it goes up?  What then?  Is that the time to abandon your investments?  It would probably be time to re-evaluate your analysis and why you were wrong, but what’s your next move?

For bottom-up investors, if you decide that your investment thesis is still accurate, and the price goes down, or macro events surprise us – we can simply buy more of the company that we’ve become knowledgeable about.  If the stock was undervalued at $18 a share, it’s an even better buy at $15 per share – assuming that the underlying information that you based your decision on hasn’t fundamentally changed.

For these reasons, most value investors tend to consider themselves “bottom-up” investors.  Ben Graham, Seth Klarman and Michael Price would all fall into this category.  Of course, the two aren’t necessarily mutually exclusive.  You can be a little of this and a little of that.  That’s how I would classify several famous investors like Peter Lynch, Ken Heebner, Bill Miller, David Einhorn and perhaps even Warren Buffett.  Jim Rogers is an example of someone that I would consider extremely top-down (another famous example would be the Hunt brothers

A word on throwing Buffett into the hybrid category:  I’m pretty sure Buffett would call himself a “bottom-up” investor (Buffett would actually probably think these classifications are a waste of time;).  While many of his investments have been of the bottom-up variety, his (BRK-B’s) most recent (and largest ever) investment involved the purchase of a railroad.  This appears, to me at least, to be more of a top-down investment, for several reasons.  For one, Buffett himself refers to this investment as an “all-in bet on the US economy.”

The question, then, becomes, what exactly is he betting on?  To me, and I’m not going to pretend to know what Buffett is thinking (aside from what he says), this appears to be a bet on two things: (1) long term economic prosperity in the US – which would in turn increase demand for commodities, many of which are primarily shipped by rail (especially coal**), and (2) a long-term bet that the price of oil will remain high, which matters because the already steep advantage that rail has over trucking in terms of energy costs.  The question in this analysis is that if he believes #2, why would he be decreasing positions he currently holds in energy companies (XOM and COP) in order to finance this acquisition?

**Coal itself actually raises another question as well (and I guess this is true of most commodity businesses) because of the regulatory uncertainty surrounding it.  Companies have done their best to brand “clean coal” as something that actually exists – there’s a raging ongoing controversy about whether it does.  This is just a comment – I don’t think Buffett is trying to make a call based on this, he’ll leave that to the lobbyists and marketing gurus.

The other top-down type consideration is what other ways there may be to monetize the actual land along rail lines – with things such as broadband cables and windmills speculative considerations.  Again, I don’t think Buffett is specifically thinking about these considerations – but they exist.

Anyway, those are my long-winded thoughts on the difference between being a top-down and bottom-up investor (aside: do these words need to be hyphenated?).  If you have a different take, feel free to leave it in the comments.  Thanks for reading.

Disclosure: I currently have long positions in BRK-B and COP.  No other positions in any other companies that are discussed.

I consider myself a bottom up investor;)

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I just thought I would share this interview with Jack Bogle, founder of Vanguard.  I’m not sure that I agree with regard to limiting what banks can invest in, but I definitely agree that there should be firm limits with regard to leverage and equity.  Bogle also brings up the fact that the original investment banks were general (as opposed to limited) partnerships, and the partners had unlimited liability for the losses of the partnership.  He uses the expression “skin in the game,” and points out that if the bankers making these trades would have had skin in the game – they would have been much more risk averse with the money involved.

Warren Buffett recently spoke on the issue and had a similar take.  Buffett wants some sort of financial penalty from the CEOs that run these companies (and the market as a whole) into the ground.  I don’t know when or if we’ll see a systemic shift in the way banks or regulated.  As Bogle puts it in the video above – it needs to happen, it’s just a question of whether it happens now or after the next financial catastrophe.  Hopefully it will happen sooner rather than later.  Thanks for reading.

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My friend asked me what I thought of the prediction.  My answer was the same answer I give to anyone that asks me about the short term gyrations of the market: I don’t believe that anyone can accurately and consistently predict what markets will do.  If markets were always rational – perhaps.  If there were only a few variables involved – perhaps (there are actually many variables – political instability, political regulation, the price of commodities, actions of consumers, natural disaster, accounting generosities, inflation/currency valuation, actions taken by the Federal Reserve, unforeseen changes in technology and preferences, private litigation –  the list of variables is infinite).

How should we respond to all these prognosticators?  There are two types of investors that I identify with.  One group is full of people who are investing in low cost index funds with an eye toward retirement.  This strategy should include dollar cost averaging and annual or bi-annual rebalancing of your allocations (rebalancing is a proven way to boost returns).  It should also include sticking to your plan.  Perhaps Simon is right, and the market does fall – how do you call a bottom?  When do you get back in?  Perhaps the market falls like it did until March of 2009, then rockets back up 30%.  Do you buy back in after the 30% increase?  A lot of people who sold at market lows have done that very thing.  That’s the thing about moving in and out of stocks – you might be right once in awhile, but usually you can beat your own gut by being patient and passive.  If you feel compelled to move into cash because of “impending doom,” perhaps your allocation is wrong.  Maybe you need to be a little less invested in stocks and more heavily invested in bonds.  Maybe you don’t have the risk tolerance to be 80 or 90% in stocks.  That’s fine.  Changing your allocation doesn’t have anything to do with trying to time the market – it has everything to do with your appetite for risk and personal preferences.  Trying to time the market is a fool’s errand.

The other type of investor that I identify with are investors who do their own research in individual securities and consider themselves value investors.  To truly be a value investor, to me, means to be a person that analyzes a company and comes up what with what he or she believes to be the fair value of that company.  If the company is significantly undervalued based on that analysis (that is, if the margin of safety is large enough), a value investor will consider investing in the company.  If you’re this type of investor, investing in your convictions – the short term movements of the market shouldn’t matter.  If you’re convinced that $15 share is really worth $20, based on your own diligence and research, and the share price goes down to $10 – you don’t have a problem, you have an opportunity.  The stock is now on sale.  Markets are not always rational.  Value investors tend to capitalize in the times when markets are least rational.  Traders spend their time trying to analyze macro-economic trends.  They are part of the herd.  Value investors spend their time and energy trying not to be part of that herd.  It isn’t always easy, but it can be profitable.

Just for fun, here are the levels the market would need to hit for Simon’s prediction to come true:

When he made the prediction, the market was at the following levels – Dow 10,325.26 and S&P 1,104.49.

10% lower in the next 1-2 months would put us at – 8992.73 and 994.04, respectively.

30-40% sometime next year (from current levels, not from the 10% drop level) would put the Dow at between 6195.16 and 7227.76, and the S&P at between 662.69 and 773.14.

Now there’s a record.  I have no idea whether his prediction will come to pass or it won’t.  Perhaps it will.  If it does, it won’t change any of the opinions I’ve written here.  It won’t convince me that people can predict markets with any accuracy, and it certainly won’t convince me to change my investment approach.  It shouldn’t change yours, either.  Thanks for reading.

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One thing I didn’t mention in my previous post that I started to wish I had when I woke up in bed this morning was a couple of valuation tidbits about Berkshire Hathaway (BRK-B).  On Friday, Whitney Tilson, a money manager that holds a significant portion of his funds portfolio in Berkshire, was on CNBC saying that he believed that Berkshire was worth considerably more than its current market value.  Tilson admitted that Berkshire was not a stock that was going to double in the next year, but was a situation where you could buy something for $0.80 on the $1.

Tilson also correctly predicted before the split that the stock would be added to the S&P 500 and would have a jump on that addition.  I added to my Berkshire position at $69 on that very supposition, and have been rewarded (so far at least) with a quick 15% jump.  He knows this company very well.

Of course, Tilson is just one person attempting to value this company.  Now that we have the benefit of hindsight…analysts expected Berkshire to report earnings of about $2 billion.  Tilson predicted that number to be closer to $4 billion.  Berkshire split the difference and actually reported just over $3 billion.  Tilson predicted that their earnings beat would be a catalyst to drive the stock higher (I’ll be talking about catalysts in a future post).

What does Buffett think of his company’s valuation.  He believes that Berkshire’s stock is worth more than what it’s currently being valued at.  In his own words:

“In our (Burlington Northern) acquisition, the shareholders quite properly evaluated our offer at $100 per share.  The cost to us, however, was somewhat higher since 40% of that $100 was delivered in our shares, which Charlie and I believed to be worth more than their market value.”

He goes on to explain why they used Berkshire stock in the deal even though they believed it was worth more than its market value.  The point is, at least at the time of the deal, Buffett thought that Berkshire was worth more than its market value.  We don’t know how much more.  Clearly, he must not have thought that it was significantly undervalued or he would not have used it in the acquisition.  So take that for what its worth.

One last point from the Whitney Tilson interview:  One of the annoying CNBC interviewers asked, and I paraphrase, “isn’t buying Berkshire the same thing as simply buying an index of the S&P 500 (the broader market)?”  Tilson said that he didn’t think it was.  He believes that Berkshire has a better valuation than the market as a whole, as well as less risk.  The lesser risk is important.  If Berkshire can offer a similar return as the market as a whole but with less risk, then that’s the preferable place to be, right?  I think this issue of risk is due in part to (a) the huge amounts of cash that Berkshire generates and keeps on hand and (b) the extremely low cost (almost free) of capital that Berkshire maintains from all the “float” they generate.  Anyway, I just thought I would be remiss if I didn’t mention anything about Berkshire’s actual position as a stock.  Take it for what it’s worth.  Thanks for reading.

Disclosure:  I own class B shares of Berkshire Hathaway.

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For fellow Buffett fans, reading his annual letters is one of life’s little pleasures.  You get an insight into what he’s thinking and why he thinks it.  The 2009 annual letter went live today on the Berkshire site.  You can access it here.

I won’t try to interpret the letter for you.  The letter itself is written in a very simple and straightforward manner, and I hope you’ll read it for yourself.  They’ll be studying Buffett’s letters in business schools long after he’s gone, with smarter people than me leading the discussions.  There’s a growing sentiment that the letter has lost some of its importance, because Buffett, something of a glutton when it comes to attention, has granted so much media access over the last several years.  I personally feel like he’s almost constantly on CNBC talking about something or another.  I admit to watching every interview, even with my in general disdain for CNBC and it’s vast array of momentum based stock market shows.

With that in mind, here are a few thoughts I had while reading this years letter:

• Berkshire’s insurance companies tend to make underwriting profits.  This is important.  The insurance business is so competitive, and being able to invest float at a profit is so valuable, that many insurance companies underwrite premiums at a loss.  That is, they know they’re losing money on the underwriting at the outset, but are okay with this because they know they can invest the premiums at a greater (hopefully) profit than what they are losing.  In bad years this is a strategy that can clearly backfire – what if you make miscalculations in your underwriting?

• Buffett talked a little bit about the acquisition of Burlington Northern.  In case you don’t know Burlington is a railroad (something, according to his biographies, Buffett has always been enamored with).  Buffett has previously called this acquisition, an “all-in” bet on the US economy.  I think railroads should be able to grow their earnings under 2 sets of circumstances:  (1) Significant economic growth returns, increasing the demand for commodities and therefore shipping, and (2) the price of oil increases, and therefore increases the cost gap between using rail as a means of shipping and it’s main alternative – trucking.  Most prognosticators seem to believe that both these things are likely to occur, mainly driven by increased demand in emerging markets (driven by the chief emerging market – China).

• The point in the bullet above should help all RRs, not just BNI.  Buffett had stakes in 2 other RRs at the time of the BNI purchase, NSC and UNP.  He was forced to sell these because of rules related to the BNI acquisition.

• Buffett is silent on the point of succession in this particular letter, which I find very interesting.  This is, perhaps, the point that shareholders are most interested in.  He did heap praise on pretty much every Berkshire manager.  Leading internal CEO candidates appear to be GEICO CEO Tony Nicely, National Indemnity manager Ajit Jain and NetJets CEO David Sokol (formerly CEO of MidAmerica Energy).  I have been under the impression that Sokol is the leading candidate, mostly because of his involvement in the Constellation Energy deal, which fell through, but still made Berkshire almost $1 billion.  I don’t recall another Berkshire manager having such large involvement in such a large deal, but I’m obviously not privy to the inner workings of the company.

• On a similar note, Buffett has previously indicated that he might bi-furcate the position, with one person acting as CEO (sort of a figure head and overseer of Berkshire’s businesses) while someone else acts as CIO (chief investment officer).  Buffett has also discussed the possibility of having multiple investment managers run separate pools of money.  This is pure speculation on my part, but managers that may be under consideration for this part of the job (though they all have their own interests and may not be interested) might be Seth Klarman of Baupost Group, Eddie Lampert of Sears Holding Company (SHLD), and Ian Cumming of Leucadia (LUK).  You could name any number of managers that have modeled themselves specifically after Buffett as well, including Mohnish Pabrai.  I don’t think there are really any value oriented managers that haven’t been inspired by Buffett in one way or another.  I know who won’t be the new CIO – John Meriwether or any other “quants” that base their strategies on complex trading formulas and computerized strategies.

Buffett has also not changed what has become one of the most famous tenets of his investment strategy, “be fearful when others are greedy, and greedy when others are fearful.”  He reaffirms that idea with this gem (from the ‘09 letter):

“We’ve put a lot of money to work during the chaos of the last 2 years.  It’s been an ideal period for investors:  A climate of fear is their best friend.  Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance.  In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what the business earns in the succeeding decade or two.”

My wife and I are attending the annual meeting in Omaha the first weekend in May.  My father-in-law plans to join us and perhaps one or both of my brothers-in-law.  It should be a good time.  Hopefully he’ll address the succession issue there – though I doubt we’ll get names.  His position has always been, why would I announce a list?  GE announced a list and all the candidates that weren’t chosen left the company.  Buffett’s trying to keep that from happening.  As a shareholder, I hope he does.  Thanks for reading.

Disclosure:  I own Berkshire Hathaway Class B shares.  I also have a position in Norfolk Southern Corporation (NSC).  I don’t directly own shares in any of the other companies mentioned.

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Every company is faced with a question of whether earnings should be returned to investors (who own the company) to be invested as they wish, or re-invested in the company by management.  Benjamin Graham famously believed that a company should leave this choice with the investor, and companies should return a portion of their earnings to investors.  Some companies truly can deploy capital better than the investor may be able to.  In growth industries, some companies hold very large cash positions and grow earnings through acquisitions.

Whatever your feelings on corporate policy, the fact is dividends have represented over 40% of the total stock market return since 1926.  Capitalizing on dividend payments is more than simply selecting stocks paying very high dividends.  In fact, a stock paying an extremely high yield should set off a red flag to an investor.  Unless it’s a company in an industry that requires a certain payout ratio (like a REIT or MLP), a high yield usually means a company whose share price has recently plummeted and will likely have to suspend or reduce its dividend in the very near future.

As an investor, I look for companies paying out a sustainable yield.  A term I’ve seen bandied about recently is the idea of an “effective yield.”  This refers to companies that have a history of increasing their dividend payments as their earnings grow.  Typically, as dividends and earnings grow, share prices increase as well.  The term effective yield refers, specifically, to the fact that if a company has increased it’s dividend and it’s share price has risen, you’re actually earning a much higher yield on your initial investment than simply meets the eye.

For instance, if you had purchased Abbott Laboratories (ABT) in 1983, it was trading at about 2.82 and yielding 2.21%.  If you simply held the stock through the end of 2009, your ABT stock would be worth $53.99 per share and yielding 2.89%.  This would give you an “effective yield” of 55% ($1.56/share) on your initial investment.  This demonstrates the power of investing in companies committed to increasing their dividends.  Hat tip to Dividend Growth Investor for providing this excellent example.

You could do even better if you reinvested all your dividends in the company.  Many companies offer dividend reinvestment programs at no-cost.  If you’re using the capital being returned to you and reinvesting in the company, you’re increasing the dividend payout each time by owning more shares.  The question you’ll have to ask yourself is whether you think you can earn a better return using the capital in another way.  If the answer to that question is “no”, you might want to ask whether you should be invested in that company at all.

Some people criticize thinking about yield in this way, and say no – your yield is 2.89% because you could simply sell your shares and invest in anything else that you choose – including something that has a higher yield.  I understand this argument, and don’t necessarily disagree, but I like thinking about dividend growth in terms of effective yield.  For one, it’s a tax efficient way of holding and thinking about stocks.  You’d have one heck of a long term capital gain if you sold your ABT stock in favor of, say, the higher yielding ConocoPhillips (COP).  If nothing else, effective yield demonstrates that all those companies paying yields between 1-3% can have more value than meets the eye if they are committed to growing their earnings and correspondingly increasing their dividends on the way up.  ”Buy and hold” investing in long-term, stable growth is still a viable strategy, and examples like this illustrate that.

Of course, just because a company has been paying and/or raising its dividend for the last 100 years doesn’t mean they’ll continue to do so over the next 100.  Economic conditions can change.  If you bought, for instance, Bank of America (BAC) before the financial crisis for its yield and history of increasing its dividend, you probably aren’t too happy right now.  The key is to look for companies that not only pay dividends, but have durable competitive advantages and/or good economic prospects.  I’ll be writing about durable competitive advantages sometime in the near future.  Thanks for reading.

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Disclosure - Long HD;)

I know I haven’t blogged in awhile, and realize that this is an odd topic to bring me out of my blogging hibernation.  I actually have dozens of half-written posts and ideas in queue – I just haven’t been able to decide what role I want the blog to play in my life going forward.  I’m pretty confident it’s not going to be a 4-5 post per week blog again anytime soon.  With that said, let’s turn to my muse of the moment, gift cards.

My question is essentially, why are gift cards such a popular gift?  I actually believe I already know the answer to that question.  It’s because people feel like a gift card is a more personalized gift than just giving someone cash.  A gift card says, “I know how much you like to read so I got you this gift card to Barnes and Noble!”  Whereas money says (perhaps), “This is practical and useful to everyone.  I don’t need to know anything about you or put any thought into this.  I knew you’d like it.”

The problem with gift cards, is that they aren’t as valuable as cash, and yet they still cost the full face value that reflects their spending power.  Why aren’t they as valuable as cash?  Because you can only spend them at one place, but you can spend cash anywhere.  They lock you in to having to shop at a specific store.

But wait!  There’s more!

Buying gift cards also erodes value for the receiver (in favor of the company issuing the gift card).  Why?  Because the receiver may not use the gift card right away (or at all).  I don’t have any data on this, but my bet is that some percentage (let’s say 2%) never get used at all.  Even if they do get used, if they don’t get used for months (or years), value is being lost.  Consider the following situation:  You saunter into Barnes and Noble, stroll up in the counter, and request their finest gift card with a value of, say $100.  The assume that the company immediately runs off and invests your $100 in a random investment – let’s say Treasury Inflation Protected Securities (TIPS) paying the inflation rate + 3% (a good deal!).  You give the gift card to Randy Reader for his birthday (which is that night).  Randy is sort of a lazy, shiftless, dolt, and though he loves to read, he’s usually too lazy to get off his butt and go spend his impressive cache of gift cards.  He puts it in his wallet and forgets about it for about a year.  During that year, inflation has occurred at approximately 3%.  Randy goes to spend his gift card, and has no idea that his $100 gift card is actually buying 3% less merchandise than it would have a year ago.  Meanwhile the company sits back with it’s $106 dollars and enjoys 3 extra gallons of milk (2 if you go organic) with the extra money they made as a result of Randy’s 12 month lag.

All of this is on top of the fact that you’re restricted on where you can spend the money, which in itself takes value away.  If you’d have given Randy cash – he probably could have bought his books at a cheaper price on Amazon (most definitely cheaper if he decided to buy ebooks).  Or he could have bought any other thing in the world that can be bought with USD.  Cash helps Randy spend his money based on what he values at that moment.  Plus, Randy could be the one to invest in the TIPS instead of Barnes and Noble – or the stock market.  Whatever he wants.

So right now you’re probably thinking, why does this guy hates gift cards so much?  I don’t.  I just think that they should be sold at a discount to their face value to make them worth purchasing.  Maybe 1% or so.  Of course, this would also lead to more people buying gift cards (for every purchase – for themselves or otherwise).  A whole new market would form.  Derivatives tracking gift card discounts would be created.  Chaos would ensue.  The world would end.  And it will probably never happen.  This is just one fellow’s opinion.

To wrap up, my call to action is this, next time you’re on your way to a wedding and stop at Target to pick up a card and a gift card to shove in it – put a check in it instead.  Randy and his new wife will appreciate it.  Maybe.  Or maybe they’ll tear open the car and cry out, “CASH!?!  I was hoping for a GIFTCARD!”  Thanks for reading.

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I’m sure there are salespeople like this.  Whether or not this is an effective way to sell depends on multiple factors, including (1) What you’re selling, (2) Who you’re selling to and (3) What else, besides money, matters to you with regard to the sale.

Before I go any further, I should loudly admit that I don’t work in sales.  I have, on a small scale.  I used to have an active real estate license, and I worked as a retail manager for a short time in between college and law school.  That doesn’t make me a good sales person.  In fact, by the definition offered in the article I linked to above, I’m most definitely not a good sales person.

To some extent, most jobs in the private sector are sales jobs in some way.  As a lawyer, the only product you sell is your advice.  Lawyers simply sell what they know, just like accountants, consultants and, for the most part, doctors.  If you’re an engineer, you’re creating the underlying product and (hopefully) educating the sales people about what the product does and how it works.  Even though I don’t work directly in sales, I’ve had the opportunity to observe some salespeople that I think are pretty good.  On top of that, I always feel qualified to write about what I feel makes a good salesperson from my viewpoint as a consumer.

Here’s what I think makes someone a good salesperson:

1.  People that are good at building relationships tend to be good at sales.  Why?  Because we tend to prefer to buy things from people we like.  It’s possible to bulldoze your way to a sale.  You might get someone to buy from you with a cutthroat, aggressive sales strategy, but probably only once.  I’m not going to go back to someone who is overly aggressive.  I will go back, again and again, to someone I like.  My wife and I buy our car and home owner’s insurance from a family friend.  I know for a fact we could get cheaper insurance (my wife has checked).  We don’t, and it’s certainly not because they bulldozed their way into our lives and we’re too passive to change.  It’s because we have a relationship with the people involved, and we’d rather preserve that relationship than save a few bucks each month.  That’s effective selling.

2.  People who believe in what they’re selling tend to be good at sales.  Frank, open, honest recommendations based on something a sales person actually believes is an effective way to sell something.  Don’t sell Coke if you drink Pepsi.  Don’t drive a Chevy if you drive a Honda.  Don’t sell pharmaceuticals that you don’t believe actually work.  Sell something you’re convinced works and you won’t need to rely on your acting skills to convince your customers.

3.  Good sales people are knowledgeable about their products.  A good friend of mine spent time in management at Best Buy.  Now he works at a commission based sales job (which he’s great at, btw – he was born to sell).  I remember casually asking him about this or that product in the section of the store he was a manager in.  Even after he didn’t work there anymore, he could still compare the merits of one product to another.  He kept up with the latest features in the latest products, even after he ceased to work there.  You need to know why what you’re selling is better than what the other guy (or gal) is selling (that’s the essential question, isn’t it?).

4.  Good salespeople are good communicators.  When I say good communicators, I don’t mean they’re good at communicating with people that think like them.  I’m excellent at communicating with people who think like I do.  Most people are.  Great communicators are good at gauging what type of person they’re dealing with, and tailoring their communications to that persons needs.  This is a skill that will help you in any walk of life, but I would guess this is usually present in the best sales people.  One of the best communicators I know, in terms of sales, is my uncle (Gene).  You can throw Gene in any situation, and he’ll develop a rapport that isn’t just based on the fact that the other people like him.  People walk away from him, for whatever reason, trusting him.  In the field he works in (consulting), that trust is essential if he’s going to be able to effectively sell his company’s services.  What did I miss?  Thanks for reading.

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