The Way of The Value Investor (Part III Conclusion)

The first rule of making money is, “Don’t lose what you already have.” Keep an age appropriate percentage of your money in a wide variety of relatively safe stable investments. Don’t put too much at risk at one time. This is particularly true after retirement. When you are no longer a part of the workforce, it becomes very difficult to recover from financial disasters. When you are young you can take more risks, but only after you pay off those credit cards and build up an emergency fund. “Safe” includes investment grade bonds, Treasury Bills, Government National Mortgage Association (Ginnie Mae) funds, cash (insured money market funds and the like).

For new readers, your age in bonds, cash, and CD was the old rule of thumb. Hence, at age 30 one would hold 30% in safe investments and have 70% of their holdings in stocks and stock mutual funds. The new rule of thumb is based on the fear of inflation. It recommends your age less 15% in safe holdings. Hence, at age 30 one would hold 15% in safe investments and 85% in stocks. Even the young who are playing with relatively large amounts of time and relatively small amounts of money need to keep some powder dry. When the market tanks, and it will, that money will allow you to purchase once in a decade bargains.

Value stocks with a low beta are all good bets for capital preservation. Beta is a measure of volatility that can be found on quote pages on sites like Google Finance. A beta of 1.00 means a stock is as volatile as the market. Less than 1.00 means it is more likely to be safe and boring. Greater than 1.00 means the stock moves faster than the market, both on the way up and on the way down.

The Price Earnings Growth Ratio, commonly called the PEG ratio, is the PE ratio divided by the company’s growth percentage. Let’s say a company has a PE ratio of 20 and it has been growing at 10% per year and you expect it to continue to grow at that rate. The company has a PEG of 2. The lower the PEG ratio the more likely the stock is a bargain. A PEG ratio of 1.0 is considered neutral.

Peter Lynch, the genius who managed the mighty Magellan Fund during its glory days, put a slightly different spin on this measure. He suggested adding the growth rate to the dividend payout, then dividing the result by the P/E ratio. Hence a stock with a growth rate of 7% plus a dividend of 3% divided by a P/E ratio of 15 would be 0.67. This would be pretty typical in today’s market. Peter Lynch considered under 1.0 poor, 1.5 neutral, and over 2.0 good.

As an engineer and an embittered old cynic, I have a problem with the PEG ratio as well as the more sophisticated number suggested by Peter Lynch. I am very comfortable with interpolation, the art of taking two know points on a graph and estimating the value of an unknown point between the two known points. I am not so happy with extrapolation. A trend is a trend until it is no longer a trend. The line on a graph may be linear up to some point and then take a wicked curve in the opposite direction. When I plug a number into the denominator of the PEG ratio, do I use history and extrapolate, or do I just make a guess after looking into my crystal ball? Neither option appeals to me.

Buy what you love. One of the first and best places to begin your research would be your favorite companies. What companies do you love? My wife loved Yankee Candles. I thought that scented candles were a pretty stupid idea. Any fool with a stove, a pot, some wax, and some scent could make the things. My wife assured me that Yankee Candles were different. When the company went private a couple of years later we came close to a three banger. We almost tripled our investment!

Don’t buy what you don’t understand.

One of the most successful investors of the 20th century, John Templeton observed, “If you don’t understand what you’re investing in – don’t invest!” This advice will save you from an enormous amount of pain. I consider it the prime directive of investment. Yes, you will miss a few opportunities, but sometimes the certainty of not losing money is more important than the chance to make money. The art of investing, unlike the game of baseball allows you to wait for your pitch; you are never out on called strikes in investing. Warren Buffett observed, “The problem when you’re a money manager is that your fans keep yelling, “Swing you bum.”

The Way of The Value Investor (Part II P/E Ratio)

After identifying a righteous sustainable dividend in quality well managed company, look at the Price Earnings Ratio (P/E). This number represents the price of a share of stock divided by the earnings per share. For example if a share of stock costs $50.00 and the earnings per share is $2.50, this stock has a P/E of 20. All things being equal (they never are equal) a lower P/E ratio indicates the possibility of better value. Historically across the market 16.0 seems to be about average. Robert J. Shiller is famous for applying P/E to the entire market. The Shiller P/E index is a pretty good indicator of the future value of an average stock purchased in the market today. Under 16 it will be relatively easy to find bargains. Currently, the Shiller P/E ratio is 19.75, high but not dangerously high. History indicates that if the Shiller P/E ratio goes over 25, the market is heading for a fall. In early 2009 the Shiller P/E index dropped below 15 at such levels a blind monkey can pick winning stocks.

The key to using the P/E ratio is to help locate sustainable high dividends. Over the last 50 years, the number one best single stock you could own has been the cigarette manufacturing company the Altria Group (MO). Because of the fear of law suits, high taxes, and government regulations these stocks have been persistently undervalued. For the same reasons cigarette companies have been generous with their investors. They would rather see their shareholders get their profits than passing the loot to governments and lawyers. History indicates that these fears were somewhat unfounded. Government really doesn’t want to stop smoking. They would lose all that tax revenue. Money lost to the lawyers can be passed on to today’s smokers. Finally, it is a big world out there and American cigarettes are still the gold standard for coughin’ nails. Today MO has a P/E ratio of 14.40. It pays a dividend of 5.17%. Try and find that kind of return on a bond or CD. It has a payout ratio of 80.0. That’s a little scary, but as I mentioned, they are generous with their investors. For the record, I do not own MO. My wife does not wish to be a merchant of death. I respect her wishes. She does own a very small amount of a cigarette company in her managed IRA. However, if you won’t tell her, I won’t tell her. Also, “ethical” investing is impossible if you have anything in mutual funds. There is no telling what you have somewhere in that stew of 200 or more companies.

Patience in investment, as in life, is a virtue. Don’t think in terms of annual or quarterly return on your investment. Look at the long term. Buy cheap and hold. Think like a catfish. Sit on the bottom and wait. Something tasty will show up.

Your brain is wired to sell when your losses are at their greatest and buy when a market is nearing its peak. Your brain is wrong. Lord Nathan Mayer Rothschild (yes, he was one of those Rothschilds) observed, "Buy to the roar of cannon, sell to the sound of trumpets.” It was sound advice during the Napoleonic Wars and it is sound advice today.

The Way of The Value Investor (Part I Dividends)

Personally, I recommend beginning your investment portfolio in a diversified, age appropriate mix of low cost index funds. Normally, this process would start in tax favored retirement accounts such as 401 (k), 403 (b), traditional IRAs, and Roth IRAs. Once you have that foundation in place, consider the way of the value investor. The definitive text on this subject is The Intelligent Investor by Benjamin Graham.

The value investor attempts to buy (and occasionally sell) stocks just as he would make any other purchase, the highest possible quality at the lowest possible price. Almost all products follow an S shaped price performance curve. Consider: You can purchase a car that can go 60 mph for $300. You can purchase a car that can go 100 mph for maybe $6,000 or $7,000. If you want to drive on the Interstate at 160 mph, be prepared to part with over $60,000. If you want a car that is capable of 200 mph, you will need more than $300,000. What is your top speed on that morning commute, 80 mph while passing a truck on the Interstate? How much did you pay for 350 hp under the hood? How often will you actually need to use that kind of power?

Always start with quality. Look for the “wide moat.” How difficult would it be for someone to start a business in competition with the stock under consideration? A wide moat is an economic advantage that is very difficult to overcome. Imagine building a new railroad to compete with the Union Pacific Railroad out in California. That is a wide moat. Coca Cola (KO) is an obvious example. They have the most valuable trade name on the planet. Dasani, Coca Cola’s bottled water, is a popular brand in India, because people trust their products. A wide moat is not limited to large companies. I once met a man who owned a small company that produces specialty products for use in deep oil wells. In his colorful Texas vernacular he informed me patents weren’t worth a damn. His goal is to produce the highest possible quality then sell for a price that is so low, no one will dare compete with his products.

Next, look for a righteous dividend. “Righteous” will vary from industry to industry and will depend on the size and age of the company. Be careful to compare apples to apples and oranges to oranges. Buy things that pay you to own them. Try to avoid wasting money on things that cost to own. This is one of the key principles to building wealth. Consider: A smart phone might cost $500 plus $100 a month. What do you really do with that thing? If you use it as an important tool in running your business, more power to you. If you use it to surf the web and update your facebook page while at work, consider a better way. Verizon (VZ) pays a 4.19% dividend and offers some possibility of future capital gains. At 4.19% without any capital gains a $500 initial purchase of VZ shares plus a $100 a month over ten years will amount to $15,620.58. Can you live with a less expensive phone? Can you invest the difference? Hopefully, dividends will be the number one source of your income in retirement. Studies have shown that over half of your total investment returns will come from dividends.

Yield, the return on your dividend, consists of two parts the price of a share of stock and the dividend per share. If a share of stock costs $50.00 and the dividend is $2.50 per share, the yield is equal to 5%. That money is paid out to you. Every quarter (usually) the company deposits an amount equal to the number of shares you own multiplied by the quarterly dividend into your brokerage account. That money belongs to you. You can take that money off the table if you need the income or you can chose to automatically reinvest that money in more shares of the same stock without any brokerage fees. This is called DRIP (Dividend Re Investment Program) investing. It is a simple potent way to put the power of compound interest to work for you.

There is another component to determining what constitutes a “righteous” dividend. Is it sustainable? If you are lucky enough to buy an undervalued stock paying, let’s say a 3% dividend, and it doubles in price; you are effectively receiving a 6% dividend. The first quarter of 2009 was a perfect opportunity for this kind of bargain hunting. However, bottom fishing is not without its risks. Sometimes that stock is undervalued for good reasons and that juicy dividend is not sustainable. Watch the cash flow. Dividends should not be consuming too much of a company’s profit. The dividend payout ratio is the amount of money distributed to the shareholders divided by total earnings. If a company paid out $1 Billion in dividends from total profits of $4 Billon, the payout ratio would be 25%. Various rules of thumb have been proposed to define a sustainable dividend. If the payout is over 60% you are in a danger zone. Such a stock might be a “value trap.” If you choose to buy such shares, understand the risk. Between 40% and 60% watch not only the number, but the direction of that number over time. If a dividend payout ratio is 50% and climbing that is not a good thing. If it is 50% and falling it is probably a better deal. Under 40% you are probably OK. Again, an acceptable number varies from industry to industry. Be sure to compare a potential investment to its peers.

A good place for the value investor to start his search would be with a list of Dividend Aristocrats. These stocks have increased their dividends every year for at least 25 consecutive years. Once a company makes it on to this list, it is going to try to remain on the list. Even for a company that is not a dividend aristocrat, cutting dividends is a sign of weakness that often results in bloodshed on executive row. These are the stocks you can ALMOST buy and forget. Sometimes they are called widow and orphan stocks. Dividend aristocrats are good candidates for your core equity holdings. Unfortunately nothing is perfect. GE was a dividend aristocrat until it wasn’t. I took a beat down on that one. Various advisors would also include regulated utilities, consumer staples, and other “wide moat” companies as possible candidates for your core equity holdings.

Ugly Debt

There are certain subjects that I shouldn’t have to know about or cover in this blog. I doubt that anyone reading this will ever or has ever been victimized by this blight, but perhaps the day may come when you can help another avoid the trap of payday loans.

Personally, I think payday loans and title loans should be illegal. You see the neon signs on the wrong side of town offering check cashing services, money orders, and loans to the poor, the ignorant, and the desperate, essentially banking services for those without banks. The people operating these businesses claim that they are providing assistance to a community in need of access to basic financial services. They are sucking blood from the poor and from their impoverished communities. The Bible explicitly states that the people who run such businesses are in the Lord’s gun sights.

Proverbs 22: 22, 23

Do not exploit the poor because they are poor and do not crush the needy in court.
For the Lord will take up their case and will exact life for life.

A typical charge for a two week payday loan is $15 per $100 loaned. That works out to an annual percentage rate of 3,686%! Credit cards that charge 23% are generally considered usurious.

The people that are placing themselves under such horrific burdens are generally using the money to cover normal everyday living expenses. They don’t know any better and they do not believe they have any alternatives. However, if they didn’t understand the concepts of budgeting or saving for a rainy day, they will learn the discipline of saving their money, but for the benefit of a predatory lender. Fortunately, in this country there are limits to what these people can do to collect from their victims. In some countries, like India, these kinds of loans can lead to a lifetime of legal slavery.

Title loans are a step up from payday loans. They require that the victim own clear title to a car. Using the vehicle as collateral rather than granting an unsecured loan, the title loan company then offers a loan that can range from $100 for two weeks up to 50% of the Kelly Blue Book value of the car. Interest rates on these loans can range from 36% APR to 400% APR depending on the jurisdiction. Frequently they require a balloon payment at the end of the loan. If the debtor can not make the final payment, no problem, the store front loan company will cheerfully continue to bleed their victim. Really, I don’t think they want the car. They want a debt slave. However, sometimes the victim also loses their car.

Public schools should be teaching the basics of financial literacy. Children, no matter the socio-economic class of their parents, should understand the basics of saving for a goal and the concept of an emergency fund. If you ever have an opportunity to steer someone away from this kind of victimization, go ahead; light a candle in the darkness. If payday loan companies can not be outlawed, they should at least be tightly controlled by state and Federal regulation.

Oh, by the way, just because you have access to the mainstream banking system doesn’t mean that you can not become a victim of predatory lending practices. Check out these numbers from Wikipedia!

$100 bounced check with $54 NSF/merchant fees = 1,409% APR
$100 credit card balance with a $37 late fee = 965% APR
$100 utility bill with $46 late/reconnect fees = 1,203% APR

The Way of the Elf (Technical Analysis)

Poker is not a game of chance. It is a discipline that involves the use of probability theory, logic and psychology; strategic thinking, bluffing, and reading the opponent. Yes, even the best players can’t win if they don’t get the cards, but the same faces seem to have a way of appearing over and over again at final tables of the big tournaments. Although poker is a game popular with millions, very few people will ever earn a living as poker players. To most it will become an occasional distraction. They will lose or make a few bucks playing with their drinking buddies. Even in those games, I expect the winners and losers are pretty much the same people from week to week.

Technical analysis is a method of predicting the movement of stock prices by studying past market data including opening prices, closing prices, daily highs and lows, market volume, as well as historical averages and derivatives calculated from this data using various mathematical formulas.

Let me be honest. I am not a trader. When I buy a stock, I do so with the expectation of keeping it forever. Of course, if a stock gets so high I can’t sleep at night or it drops and doesn’t come back, I will sell it. However, trading is not what I do. There are people who make their living studying and practicing the discipline of technical analysis. In fact, the hedge funds that were at least partly to blame for the crash of 2008, applied the principles of technical analysis to what is termed high frequency trading. They used sophisticated computer programs that analyze real time trading data looking for anomalies that signal large scale movements such as those made by mutual or pension funds. Their computers then execute orders faster than the human players in the market can possibly respond. These programs are the result of decades of research and millions of dollars invested in programming and hardware. They really work; at least most of the time. When they fail, it is spectacular. It isn’t illegal, but don’t think for a minute the little $3,000 technical analysis program running on your PC will ever be able to compete with great investment banks or even the major hedge funds.

Most of the people who attempt to practice technical analysis are frequently called day traders. They are not investors (those who buy for long term gains) or traders (those who buy and sell for short term gains). They are gamblers. They buy and sell on hunches, instinct, and emotion. They tend to end up in bankruptcy court.

If you decide that you want to try your hand at technical analysis, decide in advance how much are you willing to lose in this experiment? Set that amount and no more aside and account for it (including all brokerage fees) in an Excel spread sheet.

Become an expert. Decide what you are going to trade, a particular stock, stocks from a particular area, an individual commodity or something similar. Learn all you can about that stock, its price history and absorb all the fundamental research you can find. Yes, just like all value investors are aware of technical analysis techniques, all traders need to understand the underlying fundamentals of their stock. Consider, Bank of America. Its price is extremely sensitive to public perception, changes in accounting rules, law suits, and major moves by powers like Warren Buffet. Even as you buy and sell on price movements, you still need to understand what is driving these changes.

Once you have decided on an area of specialization, take a few months to play the game with “practice money.” This is good advice for any novice investor who wishes to make their first move from a balanced portfolio of low cost index funds and conservative dividend stocks to more exotic, risky investments like precious metals, technology stocks, small cap pharmaceuticals, covered calls and the like.

Before you make a buy using real money, write down something coherent in your Excel spreadsheet explaining why you are making that buy. Recording your logic for further study is an important part of the learning process. It will help you build your decision making model and then constantly refine it.

Likewise, when you sell a stock, write down why you sold it and study the results.

Successful traders recommend setting price targets and using stop loss orders as a further discipline that will take emotion out of the decision making process. Emotion is always the enemy of successful investing. It will cause you to buy at market peaks and sell at market bottoms, exactly what you should not be doing.

Here is how the process works. At the time you put in your order to buy a stock at market price. Set a stop loss limit. What this limit might be is up to the individual investor. Some people recommend 10% as a maximum acceptable loss in any given trade. The stop loss order will trigger a sale if the price drops to your predetermined number. Do this on the day you purchase the stock and never, ever, for any reason change it to a lower number. If you lose 10%, so be it. Learn from your mistake, take the tax loss, and move on. If your stock goes up in value, reset the stop loss number to reflect that increase. That way you will never lose more than 10% of the current value of your investment.

Some traders take it a step further. They will set a price target on the same day they buy the stock. I remember one author thought that if one of his trades went up by 25%, he should take his winnings and look for a new opportunity.

As you make your trades, always entering them into to your spread sheet calculating the gains or losses, you will watch your starting number (the maximum you are willing to lose) increase or decrease. If you lose all your money, you are obviously not a trader. If the process makes you excessively nervous, you are not a trader. If your stake increases and you find the adrenaline rush of buying and selling is better than sex (just kidding) you are a trader.

Also, remember if any given investment is small, say 1% or 2% of your total portfolio, even a bad loss in that particular stock won’t kill you.

P.S. The title? The practitioners of technical analysis are frequently termed "elves" in the financial press.

Money Questions

I just read an interesting article entitled “Why Warren Buffet and Sam Walton Got Rich, and You Won’t” by John Maxfield. In a nutshell, the most successful people really aren’t all that interested in money. At most it is a way of measuring success. Sort of like a kid playing a video game. Yea, he wants a good score, but mastery of the game is the real driving force.

Warren Buffet is famous for driving around in an old car and still living in a house that cost $40,000 when he bought it decades ago. Sam Walton is quoted as saying, “Money has never meant that much to me, not even in the sense of keeping score.”

It is about the game; not the score.

Richard Russell, author of the Dow Theory Letters, differentiates between rich men and poor men.

“In the investment world the wealthy investor has one major advantage over the little guy, the stock market amateur and the neophyte trader. The advantage that the wealthy investor enjoys is that HE DOESN'T NEED THE MARKETS. I can't begin to tell you what a difference that makes, both in one's mental attitude and in the way one actually handles one's money.”

“The wealthy investor doesn't need the markets, because he already has all the income he needs. He has money coming in via bonds, T-bills, money market funds, stocks and real estate. In other words, the wealthy investor never feels pressured to "make money" in the market.”

“But what about the little guy? This fellow always feels pressured to "make money." And in return he's always pressuring the market to "do something" for him. But sadly, the market isn't interested. When the little guy isn't buying stocks offering 1% or 2% yields, he's off to Las Vegas or Atlantic City trying to beat the house at roulette. Or he's spending 20 bucks a week on lottery tickets, or he's "investing" in some crackpot scheme that his neighbor told him about (in strictest confidence, of course).”

Does money control you or do you control it?

Who is in charge? Do you tell your money where to go and how to behave or does it control you? Many people just spend money without thought or plan until their mandatory monthly expenditures approach or exceed their take home pay. When this happens, the money in your life has just transitioned from under your control to in control of you. Think about it, your money now controls you. You can no longer go and come as you please. You must work to earn money that already has a designated purpose. For all intents and purposes you are a slave.

Proverbs 22:7
The rich rule over the poor, and the borrower is slave to the lender.

There is hope. The goal is freedom. You can gain control of money just as you can gain control of any problem in your life. Finding the solution will take some effort and some time, but the end result is freedom, the ability to live your life as you desire.

Is money your friend or your enemy?

Like it or not, you have a relationship with money. Is it a good relationship? Is it healthy? Does your money encourage and support your goals or is it an impediment to what you truly want to become. As your salary increases over time did access to more money give you an opportunity to indulge your lusts and vices or did it turn you towards freedom and light.

Do you hate money?

Do you think that money is evil; something that is out to destroy you? Is it likely that such a belief would help you or hinder you as you move through this vale of tears? When you sit down at the end of the day to balance your checking account if you use a debit card for everything or at the end of the month if you use a combination of cash and paper checks, what emotion do you feel. We are warned in scripture that the love of money is the root of all evil. However, a hatred of money is no more constructive than an unhealthy love of money. In the end it is only money, a tool that can create good or evil in your life. Learn how to use it in healthy productive pursuits. It will be a blessing. Learn how to give it away. In the end it isn’t yours anyway. You can’t take it with you is an old truth. However, you can leave a legacy of blessings for others that will last long after you go the reward that really matters--in eternity.

Do you fear money?

Put a dollar bill on a table. Look at it. Rub it between your fingers. How does it feel? Does it make a noise when you crumple it up? Does it have a smell? Maybe it kind of smells like your wallet? What is it? Really, money is a measure of energy. You had to expend energy to get that piece of paper, mental energy, emotional energy, time, physical labor are all contained in that little piece of paper. It is a piece of your life. You expended energy. Now you hold in your hand a bit of potential energy. You control it. After you pay your taxes, you get to decide how to use it. There is nothing to fear. It is your money. You are in control. Think about that every time you touch a piece of currency; every time you write a check; every time you swipe the plastic; remind yourself, “This is my money. It is a measure of how I choose to expend the energy of my life.” Watch your fears dissipate, vanishing like mist in sunlight.

Do you lust after money?

Remember that ultimately your treasure is in heaven. Of course we work, not only for the basic necessities of life, but for the pleasures that make life worth living. When you have saved enough money to pay for your midlife crisis car, more power to you; enjoy the fruits of your labor. Just remember you have not been blessed just to see how many possessions and experiences you can accumulate before you die. Share your blessings with others. This isn’t limited to money. In fact money is only the first step in a long journey that ends in a heart that is open to others even when that proves a very costly and painful gift.

A link to a famous short letter on investing by one of the masters, Richard Russell.

Rich Man Poor Man

Marketing (Know Your Enemy)

"Marketing is the process of communicating the value of a product or service to customers, for the purpose of selling that product or service."
Wikipedia

They’re everywhere and they are out to separate you from your money. They are some of the smartest most creative people on the planet, backed by best high technology money can buy, psychologists, statisticians, and sociologists. They are watching you, studying your behavior, and planting their messages deep in your mind.

Outdoor Advertising
Newspaper Advertising
Magazine Advertising
Direct Mail
Radio Advertising
Television Advertising
Internet Banner Ads
Email Advertising
Social Media Advertising

I just read that the total amount of money spent on advertising in 2011 was $464,000,000,000. That is 464 Billion; with a B dollars. This money was spent by flinty eyed, hard nosed businessmen for one reason. It works. Of course they want your undivided attention. They want to tell their story. They do not want you to dump spam emails without opening them, but they do not need your undivided attention. Radio ads are subconsciously delivering their message even as your mind is focused on something else. Certain ads intentionally distract your mind to subconsciously deliver the message. Men, consider beer ads that feature bikini girls jumping around in front of flashing lights. You are not paying attention to the message but it is registering in your brain. Women, whenever you see a strong handsome man holding a baby or playing with a little puppy, someone is coming after your money.

"Data mining (the analysis step of the "Knowledge Discovery in Databases" process, or KDD), an interdisciplinary subfield of computer science, is the computational process of discovering patterns in large data sets involving methods at the intersection of artificial intelligence, machine learning, statistics, and database systems. The overall goal of the data mining process is to extract information from a data set and transform it into an understandable structure for further use. Aside from the raw analysis step, it involves database and data management aspects, data pre-processing, model and inference considerations, interestingness metrics, complexity considerations, post-processing of discovered structures, visualization, and online updating."
Wikipedia

According to a 2009 article from the New York Times entitled “What Does Your Credit Card Company Know About You?” the data mining revolution began back in 2002 at Canadian Tire. One of their executives, J.P. Martin began to analyze every single credit card transaction from the previous year. As he sorted through this data he discovered our purchases were “a window into our souls.” What we bought as well as the brands we bought were in and of themselves very good predictors of our willingness to pay off our debts. Some his discoveries seem pretty funny, “People who bought carbon-monoxide monitors for their homes or those little felt pads that stop chair legs from scratching the floor almost never missed payments. Anyone who purchased a chrome-skull car accessory or a “Mega Thruster Exhaust System” was pretty likely to miss paying his bill eventually.”

Every time you walk into their store, every time you use your credit card, or one of those loyalty cards that hang from your key ring, they are watching you. They have more time and money to study you and modify your behavior than you have to study them. They even have a given this field of study a name, predictive analytics. It is being used by politicians, football coaches, as well as every major retailer in America. The ultimate goal, the brass ring of this discipline is identifying and capturing your mind at key turning points in your life, when you break old patterns and start new patterns. If they lock you into a new pattern, they have you for years. When we are presented with a new challenge, like running a maze for a piece of cheese, our brains are working overtime. We are presented with a trigger, the maze, then we begin an activity, exploring the maze, this results in a reward, cheese. As we are repeatedly exposed to this same pattern, over time we put our brains on autopilot, just living and reliving the activities of everyday life.

“Marketers must shift their focus entirely from “telling and selling” to “listening and learning.” Customers do not want marketing relationships with your company they want service relationships.”
Hans Peter Brondmo

This quote captures the essence of what is called new paradigm sales, a theory that begins with the notion that every person has his own values and goals. These are not the same as your values and goal but they are every bit as valid and valuable to him/her as yours are to you. These techniques require a marketer to listen to the needs the prospective client. Rather than pitching a product, you as the facilitator allow the customer control of the content of the conversation. In this model the sales person controls only the structure of the conversation, allowing the customer the opportunity to discover her own needs through carefully constructed questions that lead the client to a conclusion that makes them believe buying from you is safe. The goal for the new model marketer is not to treat every prospect as a potential sale but to treat every prospect as a potential profitable relationship.

The utilization of social media, such as Facebook or Twitter is still in its infancy but consider how much information is available, personal information. Right now companies are just using banner ads and an occasion “like this” ad in your stream. If you like it, they spam you. Sooner or later, they will get smart and begin to tailor what you see to who you are. Remember, you are the only product that Facebook has to sell to its real customers, the ones who pay the bills. Consider, what if a really smart marketer determined I was interested in investments from data mining my Facebook page. He already knows my age. He could learn from my posts that I am retired. How valuable is that information?

The best marketing organizations already understand retention is the name of the game. This has been called “Thank you” marketing. The casinos in Las Vegas have been living on this for years. Their best customers receive a limousine ride to their local airport where a private jet will whisk them to Las Vegas at no charge. Even when a really small time gambler who worked in my office went on an annual trip with his buddies to a second tier casino in Vegas they upgraded their rooms, gave them money to put in the slot machines, and discount coupons for their meals. Loyalty card programs are beginning to offer coupons that you might actually want to use based on your buying patterns. Say you buy a bag of coffee every two weeks. Right before they think you will be buying your next bag of coffee, you will magically receive a discount coupon for a more expensive brand. As the use of Facebook or Twitter or the “next big thing” become more sophisticated, thank you marketing will become more personal and more important.

This is for churches.

“Suppose one of you has a hundred sheep and loses one of them. Doesn’t he leave the ninety-nine in the open country and go after the lost sheep until he finds it?"
Luke 15:4

Some marketers have even figured out the parable of the lost sheep. Why would the good shepherd leave the ninety and the nine to waste his time on the one? This doesn’t make any sense. Why would Steve Wynn, one of the men who built Las Vegas, celebrate and reward his employees when they engage in this kind of activity. Why would the Internet millionaire, Gary Vaynerchuk, tell stories about giving ridiculous levels of personal service even when it does not make any financial sense? They understand it isn’t about the lost sheep. It is about the ninety and the nine who are talking with their friends in person, on Twitter, or Facebook. How many thousands could ultimately hear your story because, just for a couple of hours, you left the ninety and the nine?

These very smart men know there is another Bible verse that applies the shepherds who understand the parable of the lost sheep.

My sheep hear my voice, and I know them, and they follow me:
John 10: 27