The Battle for Investment Survival - 4 September 2008
The Battle for Investment Survival (Wiley Investment Classics)Author: Gerald M. Loeb
Rating:
ASIN: 0470110031
Binding: Hardcover
THE PRINCIPLE OF COMPOUND INTEREST shows that, if an investment returns a 5% or even 3% rate per year, then over the years it eventually attains a colossal sum, writes Nathan Lewis for The Daily Reckoning.
Say one million dollars – a decent house these days – invested at a mere 3%, becomes $136 billion in four hundred years. At 5%, it would be $299 trillion.
But this doesn't mean that it is easy to make money. In fact, it demonstrates that making money is hard. I don't know a single example of significant success with this simple strategy, building a family or business's wealth over time. Why not?
Many things can happen in four centuries. One thing that seems to happen, with regularity, is currency devaluation, possibly to the point of worthlessness.
In 1935, a stockbroker named Gerald Loeb wrote a book called The Battle for Investment Survival. It is considered a classic today, and is still in print. The dramatic title might be ascribed to the dramatic period in which it was first published. Disaster-mongering books were popular in the late 1970s as well.
However, in the book (which was revised in the 1950s and 1960s), Loeb makes clear that the "battle" he had in mind was with inflation.
"The greatest threat to successful preservation of capital [is] the varying purchasing power of money," Loeb wrote. People who held their cash at a "safe" 2% or 3% were sure losers in the long-term Battle for Investment Survival, Loeb argued.
Sometimes, cash was a good option. But in the long term, even just to stay even, it was necessary to speculate. The best defense is a strong offense. "Because I am personally completely convinced of the inevitability of loss when attempting to secure a safe income of small return, that I constantly suggest speculation rather than investment [meaning investment-grade bonds] as the policy less apt to show a loss and more apt to show a profit."
The funny thing is, Loeb lived almost his entire life under a Gold Standard. There was a devaluation of the Dollar in 1933, but that was the only one of consequence for most of his adult life. Oddly enough, money did keep its value in those days. It wasn't until the floating currency period started in 1971 that Loeb's worst fears began to be realized. He died in 1974. Maybe his last words were: "I told you so."
Loeb wasn't the only person worrying about keeping up in the Battle for Investment Survival. It is no surprise that government bonds were popular in the 1930s and 1940s, what with Depressions and World Wars and all. In 1949, the 10-year US government bond traded for about 2.0% yield!
That was the peak of the great bond boom. You might even call it a bubble, to the extent that there can be a bubble in government bonds. People then began to come to their senses.
At first, they noticed that stocks were yielding five or six percent in dividends. But, later, they listened to what was being said by their leaders in Washington, and decided that they didn't like the way things were going. Ten-year Treasury yields ended 1967 at 5.7%. They ended 1968 at 6.03%. They ended 1969 at 7.65%.
Bondholders were intensely aware of the risk that inflation – currency devaluation – posed to their capital. Their fears came true in 1971, when, after 182 years on the gold standard, the US Dollar's final link with Gold was severed. The Dollar was floated and devalued. It eventually lost about 90% of its worth during that decade.
After a twenty-six year bull market in bonds, since 1982, we now have 10-year Treasury bond yields again very low, now under 4%. This might have made sense when the Dollar was "as good as gold", as it was in 1949. However, the Dollar has spent the last seven years declining against every possible benchmark: Gold, foreign currencies, a basket of consumer goods, and commodities. The situation that people feared in the 1960s – currency devaluation – has been going on for years now.
Inflation will probably continue until a Paul Volcker-like character appears to put an end to it.
Yet, there is little concern. The government's CPI statistics are widely regarded, by big-name bond gurus like Pimco's Bill Gross for example, as something between an honest mistake and a dishonest one. However, the entire Treasury yield curve is now trading below even this artificially low hurdle. The latest CPI readings show an increase of 5.6% from a year earlier.
Government bondholders today think they are "safe" from market turmoil, but, I argue, they are likely to be certain losers in the Battle for Investment Survival. The only safety today, as Loeb argued, is in speculation. Loeb recommended equities. That might not be such a good idea at the present juncture.
Does Loeb offer an alternative to both bonds and stocks? "In the history of the world we find the record of savings really saved through buying gold, hoarding precious stones, and other forms of 'hard wealth' privately secreted. In the future history of America most of us will, in my opinion, learn this lesson too late," he wrote.
Gold, silver, and other commodities have had a tough couple months. They seem exceedingly risky, compared to the apparent safety of T-bills. For an inexperienced speculator, these wild moves can lead to catastrophic losses. For the experienced speculator, these hard assets are merely tools in the Battle for Investment Survival – perhaps the best tools for the present situation.
Nathan Lewis, 04 Sep '08
By
Rob Ryley "Robert" (Northeast NJ)
This review is from: The Battle for Investment Survival (A Marketplace Book) (Hardcover)
I've read many recently published books on how to profit from the financial markets. Too many of them leave me feeling like I wasted my time and money.I decided to go back to the "classics"--Schabacker, Edwards and Magee, Graham, Hamilton, Rhea, and of course, Gerald Loeb.The more I read these "classics" of investment literature, the more I see the market hasn't fundamentally changed at all. All of those books have taught me something important, but I will always have Loeb's "Battle for Investment Survival" close to the top of my list.
Loeb demonstrates he is fundamentally honest. Unlike most books, that get you to think becomming a millionare through daytrading is easy, Loeb teaches that there is no such thing as "easy money" in the financial markets, nor are there "safe investments" (bonds) as the value of money is constantly depreciating.
He also teaches that there are NO guarantees, and that most people WILL lose money regardless of what they do. I think this is true, but most people cannot face it--even those "efficient market" types who advocate the buy and holding of index funds. (I believe Loeb would be a big fan of Exchange Traded Funds, however)
So, what is one to do in order to preserve purchasing power? His answer: intelligent speculation and the ever-liquid account.
To speculate intelligently, Loeb advises focusing on actively traded stocks--not illiquid "penny stocks" for your SPECULATIVE activities.
Let's be clear--Gerald Loeb is no "buy and hold" advocate. Loeb could be considered an advocate of the "relative strength" approach--before the concept of "relative strength" ever existed.
The moment your stock is failing to deliver superior profits, and you have no fundamental reason to believe its uptrend will continue, he advises you sell and look for another. If you can't find anything interesting, or the market is going down--you stay in cash. For Loeb, you MUST avoid catastrophic losses like those sustained in the crash of '29. A stock that doesn't rise (or fall if you like to short) is a waste to be avoided.
Loeb is not a fan of too much diversification. He thinks it is a crutch that guarantees mediocre performance.
His most important teaching would focus on money management (what we would now call "asset allocation"). Loeb would consider it foolish to allocate a significant (more than 50%) of your capital to stocks. You always need a cushion for those inevitable losses in trading operations.
I've taken Loeb's advice to heart. His advice is even more applicable to options trading.
By keeping a small amount of money in a volatile asset, and ruthlessly cutting losses, you give yourself a chance to match the market or even outperform, but with significantly less risk (volatility), due to the large cash reserves.
Loeb's advice isn't easy to follow. But making money isn't easy. And by following Loeb's advice, I'm quite pleased.
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