the story of a young cattle rancher · the story of a young cattle rancher by john ferraro 2 the...

T H E S T O R Y O F A

Young Cattle

Rancher

By John Ferraro

TheStoryofaYoungCattleRancherByJohnFerraro

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TheStoryofaYoungCattleRancherAshortstorybyJohnFerraro

Thisstoryisaboutayoungcattlerancherbutinrealityisametaphorforstock

investingandoptiontrading.Ithasbeenwrittenasawaytoexplainsomerather

advancedconceptsinawaythatshouldbeunderstandabletotheaverageperson,

includingchildren.

Itbeginsmanyyearsago;asuccessfulcattlerancherranasuccessfulranchfor

manyyears.Althoughluckyinbusiness,hewasunluckyinfamilyandheandhiswife

hadonlyoneson.Hiswifepassedawayunexpectedly,leavinghimalonewithhisson

tomanagetheranch.Hisson,notinterestedinranching,decided to try his luck and

moved to the city for better opportunity.

Theelderrancherlivedalonglife,butwhenhegrewveryoldandtired,

he decided to sell the ranch. He banked a healthy profit frommany years of

havingasteadyhandoverseeinghislargeherdofcattle.

Eventuallyhediedtoo,andleftaratherlargeinheritanceto

hisonlyson.

Meanwhile,hissonhadn’thadmuchluckgoingoff

inhisowndirection.Hetriedlotsofthingsbutnothing

reallycaughton.

Uponthepassingofhisfatherandreceivinghislarge

inheritance,hedecidedthatmaybehewouldgivecattle

ranchingashot.Hisfatherhadgottenrichdoingit,sohe

thought,"whynotme?"


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Thefirstthinghedecidedonwasthatheneededtobuyalotofcattleatauction.

Hewantedtobuildhisherduptothesizehisfatherhadalwaysmaintained,around800

head.

Soofftotheauctionhewent,heboughtcattlefastandfurious,somehepaid

toomuchfor,somehegotgoodpricesfor,somewereold,somewereyoung,some

wereleanandsomewerefat.

Herepurchased the family'sranchandpackeditwithhis

recentlyboughtcattle.Hesettledinandwentto work

managingtheranch.However,afterafewyearshiscattle

ranchdidn’tdomuchbetterthanbreak-even.

Afterlookingovertheranch’saveragefinancialsforthe

year,hethoughttohimself,

"Howdiddadmanagetomakesuchgoodmoneyat

this,whileI’monlybarely breakingeven?"

Herealizedhehadn’tspentenoughtimewithhisfatherto

learnthebusinessfromsomeonewhoseemedtohave itcompletelyfiguredout.

Itwasatthatpointhewasfilledwithsuddenregret,andthoughttohimself,“Why

didn’tIspendmoretimewithdad,tolearnhowtodothisright?”

Heneededsometimetothinkabouthisnextmoves.

Soheleftthekitchentable,hoppedinhispickuptruckanddroveouttothe

cattlebarn.Ashedroveupthemuddyroadhismindwasturningonthesametwo

questions“Howdidhedoit?Howdidhedoit?WhyamIgettingdifferentresults?”

Lostinthought,helookedupandsawoneofcowsstandinginthemiddleofthe

roadandslammedonthebrakes!ERRR!!!


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Shakenfromalmosthittingoneofhisanimals,helookedatthecowinthe

headlightsofhistruck,chewingitscudandsuddenlyheardhisdad’s

voice.

“Thatoneisagood-for-nothingfatty,eatsallday,ain’tworth

muchatauction.Next!”

Thenitdawnedonhim,like abrightsunriseonacoldwinter

morning.

“Thatcowisa'fatty,'dadwouldNEVERbuythatone,EVER!”

Youseehisfatherwasveryopinionatedabouthislivestock. Hisson

rememberedtheotherrancherscallinghim“theEye”becausehewasso

pickywhenchoosinghisanimals.

“Maybe,”thoughttheson,“Ineedtofigureoutifmy

dad would have bought any of the cattle in my herd!

Maybe I'm not that good at picking cattle...”Heparkedthetruck. He broughtapencilandnotepad

withhimintothepasturewherethecattleherdwasforthe

day.Lookingoutovertheanimals,heimmediatelysawafew

oldones,afewskinnyonesthathisfatherwouldhavenever

boughtatauction.

“I’vegottofigureoutawaytosortoutallthiscattle.”

Sohewrotedownthreecolumnsinthenotepadandcategorizedeachcowbasedon

histhreefactors:


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Afterarigoroussortingprocess,he only found 30 cattle out of the 800(!)that

metallofhiscriteria.

Theywere:

• agooddealatauction,

• younger,

• anddidn’teatasmuch.

Hecalledthemhis"TopTier"groupandkeptthemseparatedfromtherestofthe

maingroup.HethenbegancalculatingtheprofitdifferencefromhisTopTierherdfrom

thelargerherd.

Ashebegan the process ofsortingouthisherd,hegot

anemailfromhisfriendthatthecommoditymarkethadjust

crashed!Inthenextfewweekshewatchedthepriceof

cattlefeedgoupbyafactoroften.Hisfeedcostnowfor

800headwasthreateningtobankrupthim.Someserious

evaluationoftheheardwasnecessaryimmediately.

Thefirstgroupofcattlethatatethemostandgainedlittleweighthadtogofirst.

(Poordebtmanagement)

1 How good a deal he got

on the cattle at auction?

2 How young was the cow?

3 How much did it eat?


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Theoldercattlethathadstoppedgrowingalsopresentedadilemma.WhydoIwant

tocontinuespendingmoneyonhighpricedfeed

whenthecattleweren’tgrowing

anymore?(Poorearningsgrowth)They

hadtogotoo.

Thelastgroup were the cattle hehadoverspent

onatauction. Itdidn’tmakesensetospendmuch

moneyfeedingthemsincehewouldonlybreakeven

onthematslaughter.(Poorvaluation)

Sohedidwhatmadesenseatthetimeandsoldthemtothemeatpackers,all

excepthisTopTiergroupofcattle.Onlythisselectgroupmadesensetocontinueto

feedatthenewhighprices.

Nowhavingreducedhisherddowntoitsmostvaluableassetshebegantowonder

aboutcashflow. Remember he was barely breaking even.Theselectherdhadcost

moneytoacquireandmaintainbuthewasn’tmakinganymoneyuntilhesentthemto

slaughter.Heneededawaytomakemoneywiththeminthemeantime.That’swhen

hedecidedtobreedthem (Dividends)andsellthecalvesonamonthlybasis.(Options)

Theincomefrom breeding &sellingthecalvescoveredhiscostoftheentireherd’s

feed&care.Themoneyleftoverfromthecalfsalesrepaidhimfortheoriginal

purchasecostofthecattle.Sowhenthecattleeventuallywenttoslaughter,hehad

enoughcashflowandreservestobuymoreheadforhisselectherd.

Headingbacktoauction,hehadamuchbetterideaofwhathewaslookingfor.

Suddenly,with a system and rules in place, hebecameaverydisciplinedbuyer.


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Beforeheevenwenttotheauctionheaskedothersuccessfulrancherswhatthey

did,hestudiedin-depthwhatmadeacowprofitable.(Learnthemarketandproducts)

Nowhewasonlypayingthelowestpricesfortheyoungest,leanestcattle.Theother

buyersatauctionwereamazedatthetransformation.Someevenmentioned,"he’sjust

likehisoldmannow."

Withhisnewcattleranchingdiscipline,whichwerehisBigCaps,hedecidedtoapply

thisnewsuccessfulmodeltoSheep(MidCaps)andChickens(SmallCaps).Themonthly

cashinflowfromthewoolandtheeggsnowtooktheranchhisfatherhadbuiltandmade

itevenbigger.Finally, he started figuring out what it took to be a successful rancher.

Sothemoralofthisstoryis:

Lookintoyourpasture(portfolio)andseeifyouhaveany

overpriced,old,gluttonouscattle.Findawaytohave

thatassetproduceregular,monthlyincomeifnotsendittoslaughterandfindabetterreplacement.

Ohandlearningfromyourdadisn’tabadideaeither.

A short story by John Ferraro,

Chief Investment Officer, Longhouse investments


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AbouttheAuthor:

JohnFerraroisanAMLleukemiasurvivoranda

retiredelectricalengineer.Heliveswithhiswifeof36

years,Irene,insunny,SouthernCalifornia.

Hespentover30yearsdesigningradarsystemsfor

theF-15,F-18,F-22,andB-2bomber.Duringhis

careerhealsodesignedinfraredlasertargeting,

satelliteimagingsystems,andmissiletechnologyas

aSeniorScientistatawell-knowndefensecompany.

ThesedaysheisfocusedonWallStreet.AstheChief

InvestmentOfficerofLonghouseInvestments. Currently, John, designs all customer

strategic portfolio plans and reviews them regularly for potential tactical adjustments

with customer investment objectives as his highest priority.Hespecializesinfinding

undervaluedassets,buyinglow,holdinglongtermforequitygrowthandcreating

monthlycashflowsfromhisholdings.HeholdsaSeries65SecuritiesLicensefrom

FINRA.AreyouinterestedinhavingJohnhelpyouunderstandyourinvestments?You

canreachJohnat:[email protected](949)370-3379

today! Want to learn even more? Go to https://www.longhouseinvestments.com/blog

to read more great articles written by John on investing, retirement and other exciting

topics!

This story is courtesy of Longhouse Investments LLC. John Ferraro is an investment adviser representative licensed in CA and

TX. If you are not a resident of the states noted above, all investment-related information in this publication is for informational purposes

only and does not constitute a solicitation or offer to sell securities or investment advisory services over the Internet. Check the background

of this investment professional on FINRA’s BrokerCheck. Securities offered through Interactive Brokers LLC®, Member SIPC, Advisory

services offered through Longhouse Investments LLC℠, 23861 El Toro Rd Suite 701 Lake Forest CA 92630, 949-264-3326.Revised 1-19-2019

the story of a young cattle rancher · the story of a young cattle rancher by john ferraro 2 the...

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