The Battle for Investment Survival (Essential Investment Classics)

Gerald M. Loeb

• Publisher: G&D Media
• Year: 2020
• Print ISBN: 9781722502737
• eBook ISBN: 9781722523671
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

WHY DO SOME PEOPLE ALMOST ALWAYS MAKE MONEY IN THE STOCK MARKET WHILE OTHERS LOSE?
WHAT IS THE SECRET TO PRESERVING AND MULTIPLYING YOUR SAVINGS?

The turf is Wall Street, the goal is to preserve your capital at all costs, and to win is to "make a killing without being killed."

This memorable classic, The Battle for Investment Survival, offers a fresh perspective on investing from years past. Investors are treated to a straightforward account of how to profit and how to avoid loss in what could be described as the constant tug-of-war between rising and falling markets.

Gerald Loeb, one of the most astute brokers on Wall Street, believed that most people will benefit by what they save rather than by what they make. After reading this book you will know:

• More about the hazards of preserving capital
• What your investment objectives are and how to go about reaching them
• That investors are successful depending on their abilities, the stakes they possess, the time they give to it, the risks they are willing to take, and the market climate in which they operate
• Ideas, guides, formulas and principles that can than improve results regardless of what an investor might do

GERALD M. LOEB was a founding partner of E.F. Hutton & Co., a renowned Wall Street trader and brokerage firm. His market interpretations were featured prominently in newspapers, magazines, radio and television.

Postscript

The Battle For Investment Survival ends on page 209. This Postscript, consisting of miscellaneous individual articles, lectures, etc., prepared at various times, is added because it is felt that it is a real addition to the book and that they stand better on their own feet than integrated into the previous text.

The statistics have been largely drawn from The Value Line Investment Survey, one of the most useful reference books on leading stocks. Incidentally, this service has the advantage of being loose-leaf and continually kept up to date. The figures have been rounded out and are not intended to be precise. They are, however, correctly indicative of the general situation.

INVESTMENT TRUST INVESTING IS AVERAGE INVESTING

Readers of this collection of articles will end up with one or two points of view concerning investment trust shares. Some will emerge with the thought that investing their own money is too complex. They will turn to investment trusts as the best possible solution to their investment problems. Others who feel they can judge the right times to own common stocks and the right times not to own them, may buy and sell some of the listed trusts, particularly the leverage shares, as good vehicles for their purposes.

There are a very few common stock funds, mostly closed end, and mostly leverage type, which during many periods in the past have quite regularly done better than the averages but even in these cases the results obtainable by owning them only in favorable periods and selling them just before unfavorable periods would be very considerably better than from continuous ownership. It is particularly important to avoid leverage shares regardless of the quality of the management in declining markets.

This is hardly the point. My feeling is that competent investors will never be satisfied beating the averages as it were, by a few small percentage points, even if the funds they bought could do it in eleven years out of eleven. Investment trusts go up and down with the averages and in only extremely rare cases and only for short periods do they go in the reverse direction.

Thus, the investor who truly and substantially wants to do better than drift up and down with the crowd must do his own buying and selling and concentrate on his own selections.

DON’T LOOK FOR MANAGEMENT AT BARGAIN RATES

There are three ways of making money. One is to sell your time. The second is to lend your money. The third is to risk your money.

The investor who buys ordinary common or capital stock makes an equity investment or speculation and is risking his money. He pools it with others in the ownership of a business enterprise for better or worse.

Somebody has to do the work. But I am concerned here with the investors’ interest in management.

Obviously, the investor in a public corporation is in the enviable position of being largely able to go out about his own business or pleasure and enjoy the profits and dividends of others doing the actual work and management for him. It is only necessary for him to buy the right shares at the right time, and later sell them should he be in any way concerned over their future. The investor in a private small corporation or partnership usually contributes both risk capital and management and often acts as salesman and does general labor as well. The public investor, however, must be willing to pay for his absentee ownership.

It seems that lately investors have become more conscious of this fact and have been scrutinizing their corporate management from many angles. Does the management itself own a good sized stake in the business? Is it increasing or decreasing? Did they buy it with their own funds or acquire it on option from the company? Are they doing the best possible job? Are their salaries, bonus plans and pensions fair? It is quite proper that investors do concern themselves with such vital factors bearing on the success of their stock investment.

However, there is a tendency to look with favor on low paid management and with disfavor on the management that seems to get the most liberal financial treatment. This is in my opinion both a short-sighted and incorrect point of view and it is just because so much is written against corporate management and so little for them that I write this.

The important fact for the investor is that his corporations’ compensation policies all the way down the line attract and hold the best men. A company is only as good as the men who run it and work for it and who will rise to manage it in the future.

Today our tax laws are such that old-fashioned savings are out of the picture. Both labor and management need, under modern political philosophies, provision for the future in pensions and other similar plans. Each corporation is in competition not only with other corporations but with private business to attract and hold the best executive manpower. Thus, there can be no rule about it—each case must be judged by the investor not on whether management pay is high or low but from the standpoint of what the company is getting at the price paid. Naturally, the size of the business is a factor, too. But generally, the best is cheapest in the end.

To cite one example, no price was too high to have paid Walter P. Chrysler to go to work for the obscure and failing Maxwell-Chalmers Corporation—and build it up into one of the big three motor makers. No low figure, paid the managements of the smaller independents that at the same time fell by the wayside, could possibly have been a bargain.

The same might be said of management ownership. By and large, it’s preferable to have the managers of a company own a major stake in it. However, it doesn’t follow that the corporations with the highest percentage of ownership management are the most profitable to own by any means. Each one has to be judged on its own merits. If the officers and directors of a company are recent buyers and if they use a high percentage of their own funds, then the situation is most favorable.

The days of secrecy and a smug attitude are over and those in high places who don’t realize it will find that investors will shun their shares and thus cause them to sell at lower price earnings ratios and on a higher yield basis. In time, they will find themselves in even more tangible hot water.

Stockholders’ concern with the selection and compensation of corporate management should therefore be primarily concerned with securing the best possible men to get the most out of the business rather than the cheapest. In most listed corporations the total top management salaries, etc. is at worst a very small percentage of net income; but the mistakes of corporate officers hired purely on a low price basis can be a very high percentage of net income or even eliminate any net income at all.

MIRACLE PLAN INVESTING

In the past few years the literature of Wall Street has been increasingly devoted to building a case for systematic saving using equities as the investment medium, and with the idea that the long-term trend of the market is so inevitably up that averaging on a scale down can only result in an eventual substantial profit. I call it “Miracle Plan Investing” because the promises made appear miraculous as well as fallacious.

From a mathematical point of view there is no question but that the combination of systematic saving and compound interest builds up quite an impressive total in the course of time. Money compounded at 6% doubles itself in 12 years. If, in addition, you add to the capital annually, the growth is actually more impressive. Thus, in the first instance $1 becomes $2 in 12 years. In the second, $1 a year saved regularly and compounded at 6%, becomes almost $17 in 12 years.

These are mathematical calculations. From a practical point of view one is confronted with several problems. One is how to get 6% with safety. Next, there are deductions which are quite substantial, such as income taxes.

When thee plan calls for investment of savings in a single selected common stock further questions arise. It is my contention that none of us know what is going to happen to any stock regardless of quality or history within the next 12 or 15 years. The current literature of the Street mostly includes tabulations suggesting what one might have made in General Motors, duPont, Standard Oil of New Jersey, Eastman Kodak, Westinghouse Electric, or a theoretical group of stocks.

One of these tabulations, for example, considers Westinghouse Electric from 1937 to 1954. According to this, $1,000 invested annually, or $18,000 in all, would show a value at the end of the period of $41,580. The authors calculate the appreciation including dividends at $23,580 or 131% over cost price. This is something like an average of 7% to 8% gain a year.

The fallacy in this line of reasoning is first that it looks backwards and not forwards. For example, Westinghouse sold as high as 42 in 1937 and declined to 15% by 1942. In all these years the fund must have been steadily sinking and would offer very poor results for any one who had to liquidate. It seems to me that the hazards were great, that the plan could be brought to an end prematurely or incompletely. Usually, when stocks are low, they are low because general conditions create a lack of funds for investment. In order to make these tabulations work it is, of course, essential to be a buyer at the low points. This is just sure to be when people are having trouble making both ends meet in their personal budgets. Some of these plans show up very well but they include large amounts of stock bought at the panic levels of 1932. This was a time when people were not paying their rent or their mortgage interest, and when we had enforced moratoriums. It is wholly illogical to suppose that the average person would have the means to keep up his periodic savings.

There is also the matter of faith. It is human nature to feel optimistic and confident when prices go up. When prices go down people begin to question whether they were correct in buying in the first place. For instance, in Westinghouse, earnings in 1946 during the period of this theoretical calculation totaled only 65¢ a share. It would not be hard and only human to feel under the circumstances that it would be wise to stop the plan and cease throwing good money after what looked like bad, even if one had the money in the first place.

These tabulations showing what could have been made always select stocks and periods which work out well. But, for example, back before the 1929 crash an investor looking forward might have selected such blue chips of that day as New York Central, Western Union, Consolidated Edison. All three of these looked fine at the time and would have yielded impressive results in the period ending in 1929. However, in the period following 1929 all of these three issues and a very great many others completely and unfavorably changed their status.

New York Central earned over $16 a share in 1929, paid over $8 and sold above $250. In 1953, 24 years later, it earned $5, paid $1 and sold at an average price of $21. This is typical of what happened to many formerly fashionable stocks. There is absolutely no insurance that it won’t happen in the future to many fashionable blue chips of today.

I very strongly advise anyone, who, against the opinions expressed here, embarks on such a program that they select a listed investment trust for their proposed periodic purchase. If you select a good one, enough shifts will be automatically made in the trust portfolio to gear any investment more or less into the average rise and fall of the market and the great hazards of an unfortunate selection will be eliminated.

The hazard of bad timing and inability to stick with a plan will, of course, still exist.

Literature of the Street is nowadays full of opinions that the stock market is going up because it always has. We are told we might have to wait 10, 20 or even 50 years but we are assured that it is going up, surely as we live that long. Another popular compilation supposes the investment of $1,000 in each of 92 stocks from January 15, 1937 to January 15, 1950. The gain here is theoretically calculated at 12.2% compound interest. This is lumping market profits and dividend payments together. This is sincerely believed by its authors to be an objective test. They have chosen a period when the Dow-Jones Industrial Averages were very close to the same level at the start and finish. And, they have selected the 92 stocks on a mechanical basis of all the shares that traded a million or more shares in 1936. It came to 27 different industries.

However, the whole idea is purely theoretical and completely impractical. Who has $92,000 a year to invest, through good times and bad? Who can reinvest all dividends and pay living costs and taxes out of other funds? Who can stick to the plan through thick and thin when things look blue? Who is going to have such a placid life that no emergencies will occur?

A genuine investor who had perhaps $500 a year to invest would come up against terrific commission and odd lot costs that are not figured in the tabulation above. As in the other tables, income tax is not figured either. No one can buy the “stock market” or the “averages.” They have to select individual stocks.

Aside from the foregoing considerations a completely neglected fact is the changing purchasing power of the dollar over such a long period of time. This occurs in more ways than one. It might just be a plain decrease through inflation or a plain increase through deflation. But it can also be political or influenced by laws. Rationing, for example, limits the value of a dollar. Currency restrictions accomplish the same purpose. Extraordinary large sales taxes, prohibitive tariffs or tiny import quotas all affect purchasing power. It has been aptly said that a bird in a hand is worth two in the bush. Money might be very much more spendable at the time it is saved than at the end of a long 15 or 25 year plan. The value of money changes in an individual and personal way. We spend it one way and enjoy it differently at age 35 than at age 55. All this suggests very careful thought before committing oneself to some inflexible formula on the argument that if you wait long enough, you’ll come out alright. I certainly would not want to decide at the point of departure what I was going to do all the way, come what may. I feel that investing is a very inexact science or no science at all. I think it can only be successfully done by feeling your way along, cutting short losses, concentrating on the profitable situations and certainly, above all, avoid being locked into an inflexible long-term program. Averaging, to me, most of the time means throwing good money after bad. Pyramiding which is just the reverse is far more appealing. It always pays to follow your successes and rarely pays to persist with your reverses.

Back in August 1929 John J. Raskob said “No one can become rich merely by saving. Mere saving is closely akin to the socialist policy of dividing and, likewise, runs up against the same objection that there’s not enough around to save.” I must agree with that view completely. However, surviving has to be done by the use of intelligence, not through expecting miracles.

DOUBLE DIVIDENDS

The Step System

Investment is not an exact science. The best psychologists are usually the best investors; accountants and figure men usually have the most difficult time making book and market values meet. Successful investment is a matter of experience, information and judgment and not a matter of pure fact or pure formula.

It has been my experience that the most successful investor is the one who has most of his money committed on his most successful ideas and the least amount of money on his poorest.

To express it another way, I have always believed in intelligent pyramiding rather than averaging. It is a rare occasion when it pays to throw good money after bad.

The difficulty with these principles is that they can not be applied by automation, but must be consciously ordered by humans who experience various conflicting emotions, greed...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• Foreword
• Acknowledgments
• Introduction
• One: It Requires Knowledge, Experience, and Flair
• Two: Speculative Attitude Essential
• Three: Is there an Ideal Investment?
• Four: Pitfalls for the Inexperienced
• Five: How to Invest for Capital Appreciation
• Six: Speculation vs. Investment
• Seven: Sound Accounting for Investors
• Eight: Why Commitments Should not be Haphazard
• Nine: Some “Don’ts” in Security Programs
• Ten: What to Look for in Corporate Reports
• Eleven: Concerning Financial Information, Good and Bad
• Twelve: What to Buy—and When
• Thirteen: Importance of Correct Timing
• Fourteen: Statistical Analysis, Market Trends, and Public Psychology
• Fifteen: Price Movement and Other Market Action Factors
• Sixteen: Further Technical Observation
• Seventeen: More on Technical Position of Market—its Interpretation and Significance
• Eighteen: Advantages of Switching Stocks
• Nineteen: “Fast Movers” or “Slow Movers”?
• Twenty: Detecting “Good” Buying or “Good” Selling
• Twenty-One: Qualities of the Good Investor or Investment Adviser
• Twenty-Two: Gaining Profits by Taking Losses
• Twenty-Three: You cant Forecast, but you can Make Money
• Twenty-Four: Strategy for Profits
• Twenty-Five: The Ever-Liquid Account
• Twenty-Six: A Realistic Appraisal of Bonds
• Twenty-Seven: Merits of Mining Shares
• Twenty-Eight: Diversification of Investments
• Twenty-Nine: Travel as an Education for Investors
• Thirty: General Thoughts on Speculation
• Thirty-One: Investment and Spending
• Thirty-Two: Investment and Taxation
• Thirty-Three: Investment and Inflation
• Postscript