There are many famous traders in the investment world, people who made a fortune in the blink of an eye by observing the market and making the right call at the right time. G.M. Loeb is unique among them in that he is the only one who made money on the bull side during the Great Depression, i.e. he made money when the price of a stock increased at the very time when prices utterly crashed. Rather than a one-off coup, he did this by fighting relentlessly every day for those brief moments when the market came back before breaking down again. As a result, the book he published was aptly named The Battle for Investment Survival.
I should warn up front that this book is not the easiest to read; the language is archaic and formal. It was first published in 1935 and unlike Reminiscences of a Stock Operator, did not have the helping hand of a journalist to spruce it up. This makes the first 20 pages difficult to get through, but once you overcome that hurdle the wisdom of the book begins to shine.
Loeb basically argues that the foremost concern of every investor is to preserve capital. One does not get investment returns out of thin air, but as the result of serious effort by either the company or the owner of that investment. Gains come at a price. There are simply not enough good investments for everyone and you need to fight for your share of the pie. This requires you to devote serious time and attention to the market, or else figure out who you can give your money to investment on your behalf (and why).
He argues that worst thing you can do is to simply buy and hold a stock in the hope that it will always go up, which he decries as “Miracle Plan Investing”. You simply cannot rely on any one stock to provide safe and dependable returns as the formerly reliable giants age, grow frail, and fall apart. Moreover, studying corporate financials and fundamentals are useless compared to the price, volume, and the state of the business cycle at any given moment. Even corporate insiders armed with secret knowledge don’t know how to use this information properly when they try to game the market. As a result the only people who really make money are those who can move it from one profitable asset to the next as needed. The long-term traders hold on for far to long and lose too much money in the downturns to make it worthwhile.
G.M. Loeb in his Office
Compared to that, short-term trading is better in nearly every way. Because you are trading more, you gain experience faster and are exposed to more situations. You avoid several psychological temptations that plague many investors because you come to treat stocks like a business transaction as opposed to personal property, and ownership is based on current movement and prices and not some poorly conceived expectation of what the stock is capable of. Even the act of exiting a position is helpful because it allows you reset your mental picture of how the stock should really be valued. If the stock turns against you, you thus recognize it that much faster.
Loeb brings all of these observations together in a system he likes to call “The Ever-Liquid Account.” With this method, most of your money should be in cash except for the rare times you are in the market. When you do enter, you should limit your positions to a total of four, after a trend has been established, and then pyramid into them. By pursuing this method, you avoid larger market risks by only being invested when you are very sure of the outcome. You don’t need to predict where the market will go; you just need to get in early once it starts heading there. As such, you should be profitable immediately after entry as you follow an already established trend. Furthermore, you should pyramid into the position as it moves in your favor and pyramid out as it moves away. The latter helps you overcome any uncertainly you might have in a stock by decreasing your position size and thus your emotional investment. Pursuing the former allows you to concentrate your money on successful bets with profits large enough to counteract being out of the market so long. As Loeb states:
“The intelligent and safe way to handle capital is to concentrate. If things are not clear, do nothing. When something comes up, follow it to the limit… If its not worth following to the limit, its not worth following at all…The greatest safety is putting all your eggs in one basked and watching the basket. You simply cannot afford to be careless or wrong. Hence, you act with much more deliberation.”
And this is just scratching the surface of what the book contains, including discussions around interpreting signals in light of market timing, the usefulness of chart patterns, detecting adverse analyst opinion when they won’t say it publicly, and so on.
One interesting aspect of the book for readers in the FIRE community though is Loeb’s take on money and living the good life. Perhaps he saw some things on Wall Street during the Great Depression, but he has a healthy appreciation that money means different things to people who are 35 versus people who are 55. It seems the nature of the world that young people over-spend and old people under-spend. While a life of hard work and self-denial in youth pays off handsomely, since luxury spending casts a life-long shadow on your investment success, people should also retire young and enjoy their rewards. You can’t take your money with you and the older you get the less happiness it brings. Spending time mastering your investments is hard work, but it can also be the best time you’ve ever spent.
In conclusion, I highly recommend reading this book. The first twenty pages are tough, but once you get used to his language there is much to learn. Making money on the stock market is a battle, but with the ideas and trading strategies in this book the average investor should survive and thrive.