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T H E S T O R Y O F A
Young Cattle
Rancher
By John Ferraro
TheStoryofaYoungCattleRancherByJohnFerraro
1
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?"
TheStoryofaYoungCattleRancherByJohnFerraro
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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!!!
TheStoryofaYoungCattleRancherByJohnFerraro
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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:
TheStoryofaYoungCattleRancherByJohnFerraro
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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?
TheStoryofaYoungCattleRancherByJohnFerraro
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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.
TheStoryofaYoungCattleRancherByJohnFerraro
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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
TheStoryofaYoungCattleRancherByJohnFerraro
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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