Gerard M. Loeb - The Battle For Investment Survival

Without good historical perspective, you have no basis to know if anything is beyond reasonable to expect.

Serious investors must understand market history.

An earner who earns more than he can spend is automatically an investor.

Storing present purchasing power for use in the future is investing, no matter what form it's put away.

The real objective on investment is fundamentally to store excess current purchasing power for future use.

Diversification is a necessity for the beginner. On the other hand, the really great fortunes were made by concentration. The greater your experience, the greater you capability for running risks, and the greater your ability to chart your course yourself, the less you need to diversify.

Schools and textbooks supply only a good theoretical background.

Knowledge born from actual experience is the answer to why one profits; lack of it is the reason one loses. Knowledge means information and the ability to interpret it marketwise. But, in addition, making money in the market demands a lot of "genius" or "flair." No amount of study or practice can make one successful in the handling of capital if one really is not cut out for it.

There is no such thing as a final answer to security values. A dozen experts will arrive at 12 different conclusions.

Buy only something that is quoted daily and can be bought and sold in an auction market daily.

The greater the volume of trading and the broader the market in a particular security, the closer to a fair price at a given moment that security is likely to be.

There is no line of endeavour in the world where real knowledge will pay you as rich or as quick a monetary reward as Wall Street.

"Investment" is fundamentally an effort to obtain, in addition, a rental from others for the temporary use of capital.

"Speculation" means using the capital in such a manner that its spending power is not only preserved but also increased, through the realisation of profits in the form of dividends, or capital gains or both.

Thus the first step for the individual really trying to secure or preseve capital to detach himself from the crowd.

Personally, I feel that, first, one must learn by experience the basic principles of successful dealing in securities through trading in active listed leaders, and particularly one must acquire the ability to control personal emotions or fear of loss, or greed for a larger profit, etc. which affect most people's decisions and are very costly.

The first thing, therefore, for the average venturer into Wall Street to decide is that it is a step in the right direction to restrict purchases and sales to liquid, listed securities.

For one thing, the cost of buying and selling is reduced. This is a big item and consists not only in the spread between the "bid" for a stock and the "offer" but also commission.

The spread between the "bid" and "offer" varies with the liquidity of securities, but is very close in the really active, listed issues.

The cost of buying some new stock issues at net figures is invariably much higher than the brokerage and spread on old ones, and in many cases is exorbitant. The new publicity given by the SEC to this sort of thing frequently reveals some amazing "underwriting" or "distributing" fees.

There is another source of potential loss and occasionally of potential profit in new offerings and that is the failure to price the issue right.

A very important advantage of the liquid, quoted security is the ability its progress daily. Nothing is a quicker indicator of trouble than special and unusual weakness, and in many over-the-counter issues, or even in the quiet listed ones, trouble will not be discovered until it is too late.

In every line of modern endeavour the value of specialisation is apparent. This holds just as true in the handling of capital. Those who will select and master one medium are far better off than those who must dabble in realty, foreign exchange, commodities, obscure unlisted stocks, foreign bonds, etc.

Cutting out everything except active, seasoned issues, listed on a major stock exchange, obviates hosts of pitfalls.

Therefore, regardless of others, our first rules is to concentrate in active, listed issues.

The next point is to learn to "invest for appreciation."

Every purchase must be considered almost solely on the basis of what it will return in income and appreciation added together and treated as one. Look at it in this light, a thousand dollars invested in a stock with an assured dividend of say $50 a year on the purchase price but not likely to advance more than a point or two in the coming 12 months suggests an expected profit-return of $60 or $70, whereas another issue paying no dividend but likely to double in price would promise a profit-return of $1,000.

It is far better to let cash lie idle than to buy just to "keep invested" or for "income." In fact, it is really vital, and just this one point, in my opinion, represents one of the widest differences between the successful professional and the loss-taking amateur. One often is kept out of a dangerous market by this rule.

The only way to begin is to learn by doing. Here lies the greatest handicap of most investors. They have had no experience. And, unfortunately, most of them go for advice to others who either have had no experience or have had enough to induce them to leave markets alone and concentrate on brokerage or advisory or statistical work.

Years ago, in wondering how one could gain such invaluable market knowledge and yet not pay a prohibitive cost in tuition. I thought of the plan of learning by always maintaining a position not in excess of a hundred shares of an average-priced stock, yet always striving to be long or short the most suitable issue of the moment. This plan takes a minimum of capital. It also results in a minimum of risk, as the beginner is forced to close one commitment before he opens the next. Ordinarily, new investors buy one stock after another, and should the market go down, they lose on the whole position before they realize their inexperience. A purchaser of a single stock under this plan is forced to a decision whether to keep it, take a loss or a profit, or exchange it for another. It is quite different, and many times more valuable in teaching market technique, than the imaginary "paper transactions" in which many tyros indulge. The latter are completely lacking in testing the investors' psychological reactions stemming from such important facots as fear of loss, or greed for more gain. This method also teaches that if there is no one outstanding purchase or sale at the moment, one should strive to be out the picture entirely.

Furthermore, this method tends to stress and teach the paramount importance of timing. It is not enough to buy something cheap if it stays cheap, one must buy it just as it starts to get dearer. One must decide between 100 shares of an average-priced issue, or 50 of a high-priced one, or 200 of a low-priced, or 10 of 10 different issues. In each and every case the advantages and disadvantages will become very clear in a reasonably short time, where no amount would be a satisfactory substitute for experience.

All of this, of course, means that one must devote some time every day to the subject of investment.

One must devote time to investment, and, in doing so, one's surplus savings become, instead of a doubtful asset for the future, in many cases a more powerful factor in increasing one's wealth than the original way of gaining one's living.

All this suggests the question - are we learning to trade for the quick turn or to invest for the long pull? We are investing for appreciation, and the length of time one holds a position has nothing to do with it. I lean towards short turns for many reasons, unless tax considerations rule it out. To begin with, experience is gained much more rapidly that way.

Trades should never be closed unless a good reason is at hand.

My feeling is that an intelligent aimed at doubling one's money at least succeed in retaining one's capital or actually making a good profit with it.

Trying to double your money requires your active presence and a lot of work.

Thus one would logically take larger positions and higher risks while in the low brackets than after one reaches the higher tax levels.

In actually entering the security markets it seems fundamental that one should know why a commitment was opened, what one expected to make, how long it was expected to take, and what one was willing to risk. Personally, I cannot see how one can expect figure the proper size of a position or the time to close it out unless it was first opened with a full understanding of these points.

In my opinion, commitments should not be closed haphazardly or, even worse, allowed to remain open without justification.

A backlog of cash is a great help in meeting emergencies and in freeing one's judgement so that commitments are opened and closed for financial cause and not affected by need, fear, greed, or other human failings which are fatal to profitable security investment. Of course, the possibility of a "margin call" should never even remotely develop in a well-run account.

In another sense, large commitments, meaning thereby a few relatively large blocks of shares, are preferable to a great many small positions. These few large holdings may total only 30 percent of funds available at the moment, in line with the previous paragraph.

However, confining oneself to situations convincing enough to be entered on a relatively large scale is a great help to safety and profit.

A large number of small holdings will be purchased with less care and ordinarily allowed to run into a variety of small losses without full realisation of the eventual total sum lost. Thus over-diversification acts as a poor protection against lack of knowledge.

The basic practical working policy is never to invest unless the possibilities of the chosen stock seem very great. Investing solely for "income," investing merely "to keep capital employed," and investing simply "to hedge against inflation" are all entirely out of the question.

No security of any kind should under an circumstances be bought or retained, under this policy, unless in the investor's well and deeply considered judgment the profit possibilities are large and greatly outweigh the visible risks. And the latter must be counted with detailed care.

When an investment is made, its prospects must be so good that placing a rather large proportion of one's total funds in such a single situation will not seem excessively risky. At the same time, the potential gain must be so large that only a moderate portion of total capital need to be invested to get the desired percentage appreciation on total funds.

Expressing the matter in a different way, this means that once you attain competency, diversification is undesirable. One or two, or at most three or four, securities should be bought. And they should be so well selected, their purchase so expertly times and their profit possibilities so large that it will never be necessary to risk in any of them large proportion of available capital.

Under this policy, only the best is bought at the best possible time. Risks are reduced in two ways - first, by the care used in selection, and second by the maintenance of a large cash reserve. Concentration of investments in a minimum of stocks insures that enough time will be given to the choice of each so that every important detail about them will be known.

This policy involves not only avoiding diversification but also at times holding one's capital uninvested for long periods of time.

It should be recognised also that such opportunities will inevitably be available principally when the majority of buyers of securities refuses, because of fear, to take advantage of low prices. Just as inevitably, the opportunities will not be available when securities are generally popular and eagerly bought. It should be axiomatic that the successful investor will keep his capital idle in times of popular over-investment and over-confidence.

It is true that cash has lost purchasing power in this country but fortunately in our lifetime at a very slow rate compared to the rapid depreciation that can be suffered in a real stock market decline.

It has always seemed to me that if one is to draw profitable conclusions from the published reports of most listed corporations, rather special points of view are requisite. A real specialist in a particular will, of course, see and apply accounting tests which make themselves evident as the examination proceeds, due to his specialized knowledge, that will usually be quite revealing. If he wisely collaborates with a market specialist, a gainful decision will be the result.

However, most lay investors and the usual sources of counsel are rarely so well-informed. This situation, plus the ordinary public habit of accepting headlines as accurate condensed summaries of corporate results, make for a widespread lack of knowledge concerning actual corporate positions. More often than not, majority bids and offers persist for years at levels that are wide of what would be paid or sold were the figures understood.

As a simple workable plan of getting a closer appraisal of real results, I particularly scrutinize companies that cannot show enough cash income to care for plant growth, needed expansion in working capital, dividends, etc., without resort continual new financing. There are a few exceptions, practically always in the very young and rapidly growing concerns - hardly ever, in my opinion, in the large mature businesses. Such situations imply an unprofitable field, poor management, or unwise overdevelopment.

I think a great many corporations have been kept going only by a combination of the leverage created by heavy borrowing or preferred-stock issues and the constant refunding and injection of fresh capital. Assets are acquired and capitalized with other peoples' money, and to what extent or for how long they will continue to be earning assets is a moot question. Surely no ordinary investor or statistician can decide.

Next, I feel statements of inventory companies should be regarded with caution. I refer to companies which handle large quantities of goods that fluctuate sharply in price. They make when prices go up and lose when they go down. Marketwise, for trading periods, shares of inventory companies might be temporarily most attractive. My point is to know why and what you are buying.

High profit margins are frequently an invitation to increased competition, unless the situation is monopolistic for one reason or another. Low fixed assets, especially if combined with ability to do profitable business on small working capital, may be regarded similarly.

Asking stockholders to authorize writing down of fixed assets is a sign of injudicious previous expansion. It is usually a black mark against a company. However, here and there legitimate mistakes are made and writedowns are logical. And, of course, marketwise it usually pays to consider trading purchases if such news is expected. Just be sure not hold so long that recovery breeds further unwise expenditure.

What I look for in a company that regardless of reported profits is somewhere getting enough cash income to take care of the factors mentioned previously, i.e., to amortize debt, increase working capital, maintain or, if profitable, enlarge plant capacity and efficiency, and pay dividends.

If addition to fixed assets can be made during a depression at bargain levels, it might be a good business risk. However, to expand during a boom is fatal unless the anticipated profits after taxes will amortize the extra capacity in the very briefest time, preferably to the normal average old plant valuation.

As an example, a factory producing a million units, valued on the average at a million dollars, with "normal" profits of $100,000 a year, adds capacity for another half-million until production. Boom times make this addition cost a whole million, or twice average valuation.

Likewise, investors, when they occasionally uncovered something accurate and important, rarely sense what to do about it market-wise. It always was and always will be the power to understand and the ability to act that turns information into profits.

It is a lamentable fact that a part of the legitimate facilities of markets is abused by a class of people too indolent to think for themselves, who hope to secure quick and easy profits following someone else's suggestions. In this, as in all else, we get out of things what we put into them, and no more. Hence, the old law of the survival of the fittest tends to eventually eliminate the "free riders."

For practical reasons one necessarily has to make compromises. The factors that make an ideal investment are never all present at the same time. Even if such an opportunity actually did exist, it would be almost impossible for anyone to recognize its existence. Nevertheless, describing such conditions should be helpful. There are times when a majority of them might occur.

In the first place, the general background should be favorable, which means that popular sentiment should be bearish and the securities market well liquidated. Business conditions should be poor, or the general expectation should be that they will become poor.

The security itself should always be either a common stock, or a bond or preferred stock whose position is thought by the investing public at large to be so weak that it sells at low prices and is given low ratings. The company selected should be operating at a deficit, or its earnings should be abnormally low. Or, if earnings are currently satisfactory, the popular expectation must be that they are headed downwards. The stock should be pay no dividends, or the dividend should be lower than normal, or general opinion must lack faith in the continuance of a reasonable dividend.

The price of the stock must reflect a majority view that conditions affecting the company are bad, or soon will be bad, or will continue bad. At the same time, the buyer must hold an opinion contrary to these surface indications, and his opinion must be backed by sound judgment and access to reliable sources of information.

The importance of full consideration of popular sentiment, expectations, and opinion - and their effect on the price of the security - cannot be overstressed. Major buying points often occur without a full scale actual business depression. At such times the fear of a depression exists. Earnings and dividends can be normal, and yet the shares in question may be very attractive if misguided popular fears as to the future drive the price down to a level that might other times represent a period of deficits. And vice versa, the expectation of favorable conditions to come might cause a speculatively high price to be put on shares when actual results of the company's operations are still considerably below normal.

Thus it is the earnings discounted in the price which are the determining factor, and not always the earnings level actually existing at the time of proposed purchase. There is little to be expected market-wise, for instance, in buying shares of a company with a strong growth trend if the current price places a liberal valuation on that growth for several years to come.

It is important to stick to issues which in past times of bullish enthusiasm have had active markets and which can be expected to have active markets again. However, at the time of purchase they must be low-rated and unpopular, with their prices down and discouragement about the prospects quite general.

At long intervals even the highest grade shares become depressed, and then the opportunities are especially great. That happens only once or twice in a business lifetime. The objective is always buy that which the majority thinks is speculative and sell it when the majority believes the quality has reached investment grade. It is in this policy that both safety and profits exist.

Certainly those who want to follow it should buy the strongest and stable companies.

Companies in the consumer class are to be favoured. The products and services sold should not be great public necessities, as the latter become targets for political interferences.

Labor costs should be low, and the ability to finance expansion out of earnings should be present. Also, the actual cash income should be larger than the amount reported as earnings.

However, these considerations are not essential for buyers following the policy described in these chapters. In fact, such ideal investments are not often available at a price discount sufficient to make them attractive.

More often and more profitably the purchase may be made in a company that still has considerable debt and in which ownership by the management may be small. If one can gauge trends correctly, the very reason for the purchase may be that debt will be reduced, perhaps eventually eliminated, and that management, seeing the improvement ahead, will increase its ownership substantially.

Except in cases of panic or near panic prices, the fact that a stock is widely held by investment trusts is not a good reason for buying as such stocks are generally of the high-grade kind difficult to buy cheap. Since the aim is rather to buy an issue which is unpopular, the hope is, on the contrary, that while the investment companies do not hold much or any now, they will later, at a higher price, become interested and add it ot their portfolios. The distinction of being the stock most frequently listed in published institutional holdings simply means not only that the price is probably high rather than low but that there is a large number of potential sellers should the situation take a turn for the worse.

Willingness and ability to hold funds uninvested while awaiting real opportunities is a key to success in the battle for investment survival.

Market valuations of most securities change in a single period of a very few months by an amount equivalent to many years of dividends or interest coupons.

As soon as a security is purchased, the buyer loses the power to avoid a decision. It becomes necessary for him to decide whether to hold or sell.

Another reason why selling at the right time is more difficult than buying is that the development of a frame in which only real bargains are sought carries with it a tendency to lose confidence too early. Periods of overvaluation and public over-confidence are, naturally enough, likely to follow periods of depression, and often do. Likewise, very good business conditions will normally succeed very bad conditions. In such active periods, stocks will sell at excessive valuations, so that their price advances will often outrun the most optimistic expectations of those who bought very early and very low. The latter will begin to feel uncomfortably unsure their position as soon as normal valuations are restored, or when the indications of overvaluation are first to be seen.

But is is sound policy to get out of long positions which begin to prove themselves wrong by declining in price. This is the one automatic proceeding in handling securities, the only proceeding in which no judgment is needed.

Losses must be always be "cut." They must be cut quickly, long before they become of any financial consequence. After the elimination of a stock in this manner, the transaction must be, in a sense, forgotten.

Cutting losses is the one and only rule of the markets that can be taught with the assurance that it is always the correct thing to do. But, as a matter of actual application, it requires a completeness of detachement from human frailties which is very rarely achieved. People like to take profits and don't like to take losses. They also hate to repurchase something at a price higher than they sold it. Human likes and dislikes will wreck any investment program. Only logic, reason, information, and experience can be listend to if failure is to be avoided.

If a doubling of one's investment can be achieved within six months to a year, the investor can then comfortably enter a long period in which cash is held idle (until the next opportunity presents itself) without diminishing final results to anything nearly as poor as the general average - frequently a net loss - which is obtained through continuous full investment.

It is advisable always to keep uninvested reserve funds on hand in order to take advantage of unexpected opportunities.

Perhaps the best way to describe when to sell is to review handling of a committment from its beginning. Belief that a stock is in a buying range justifies a small initial purchase. If the stock declines, it should be sold at a small and quick loss. But if it advances and the indications which supported the original purchase continue favorable, additional purchases can be made at prices which the buyer still considers abnormally low. But once the price has risen into estimated or overvaluation areas, the amount held should be reduced steadily as quotations advance.

In my opinion, the primary factor in securing market profits lies in sensing the general trend. Are we in a deflation or inflation period? If the former. I would hardly bother to analyze most equities.

I have known people to go to the expense of securing a through field report on a company, complete except for proper consideration on market factos, buying the stock because of the report and later losing a fortune in it at a time when a market study would have suggested that all equities should be avoided.

The most important single factor in shaping security markets is public psychology. This is really another reason why I am not in particularly impressed with academic calculations purporting to show what this or that stock should be worth - nowadays involving complicated calculations often worked out on a computer.

Sometimes for years certain popular shares will be persistently overvalued by the public which continues to pay an unreasonable sum in proportion to the theoretical valuation. And likewise, frequently, theoretic undervaluation will persist for years.

One should bend every effort to determine what the tendencies of the public are, right or wrong, and profit from them. I find that even the names of a stock, which obviously has nothing to do with theoretical values, is an important factor in securing or losing public favor. Likewise an unpopular name will greatly decrease the price the public will pay for actually good value.

In short, in my opinion everything of an analytical nature covering specific securities should be persistently linked to past market appraisals and set up for use solely to determine future market possibilities.

The larger the public participation, the more accurate conclusions are apt to be.

Theorists may claim that "stocks are too high" or "too low" based on the individual and varying idea of what people should pay for a given situation at a given time. But the real price of stocks is based on the majority appraisal of the moment.

The point is that it is incorrect to sat that stocks sold too low in 1932 or too high in 1929. They were worth the price, at the time, in both instances - no more, no less.

From a practical point of view it is vital to investment success to banish such ideas and give the proper market valuation to the desire and ability, or lack of desire and ability, on the part of people to bid or offer stocks.

One must realize that investment is the most inexact sort of science. This is especially true because of the important part psychology plays in shaping prices.

My rule for profitable investment is predicated on full recognition of the difficulties involved. Instead of rushing in on some flimsy basis or for that matter on some important, well-planned and carefully checked, and seemingly conclusive single line of though, my advice is to question its correctness by testing the conclusion from all the other available angles and then form a composite opinion.

Experience, of course, is essential in determining whether one can develop the ability to make these paradoxical decisions correctly. To illustrate: During a reaction in a bull market, nine times out of ten the active issue which declines the least will be one that advances the most in the next surge to new high ground. On the other hand, once a market has really turned down into a primary bear swing, issues which seem to show more strength than the average are frequently only postponing an inevitable decline.

It is this kind of judgement that must be applied to the rules, and that is the reason why no hard-and-fast formula.

I generally favor issues selling at high prices per share. They are more apt to be in the rapid-mover stage. They are likely to have a better-grade following.

Occasionally, once in a good many years, normally high-priced stocks can be bought for low prices, as in 1932, 1938, 1946, 1957, 1962, for example. This is so obviously advantageous, if one has the cash at the time.

Sometimes one can buy low-priced stocks of companies that also have small capitalizations, and realize some very amazing profits. However, it should be realized that the possibilities of selecting one of the few that make good, and selecting it at the right time, are quite slight.

Low-priced shares with huge capitalizations are usually quite undesirable.

Accepting losses is the most important single investment device to insure safety of capital.

It is also the action that most people know the least about and that they are least liable to execute.

The most important single thing I learned is that accepting losses promptly is the first key to success.

It's a basic part of successful investing. The other basic part is following up profits. By that, I mean having a greater amount of the stock which proves to be your best selection and giving it the time to advance more.

In my practical experience, the way to successful investment lies much more in learning how to ultilize your best thoughts and minimize your worst.

Aim at a real profit. Reject everything that does not advance generously in price. Keep cash if enough issues with such promise cannot be found or if the investment per issue becomes unwieldy.

Issues that just seem to pay a dividend or look amply priced can usually go down as fast or faster than those that hold the greatest promise for advance. Thus, keep uninvested unless and until a particularly opportune time presents itself.

On the other hand, a buyer who holds regardless of unfavourable news or action can become involunarily locked in his "investment" for years, and often no amount of future waiting can extract him from his predicament.

The greatest care must be taken in buying convertibles, especially if you buy them on credit. The most common mistakes is to look too closely into the size of the premium or the closeness of the conversion price on the bond to the current market for the stock into which it can be converted. I would suggest you look first into the stock for which it can be exchanged. If you are to make a profit, this must go up. You must start by being fundamentally bullish on the equity. Only then can you look into the mathematical factors governing the price of the convertible bond.

This is a chapter for the experienced and the professional. The beginner needs diversification until he learns the ropes.

Some geographical diversification might be justified for large funds.

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 it's not worth following to the limit, it is not worth following at all. My thought, of course, is always start with a large cash of reserve; next, begin in one issue in a small way. If it does not develop, close out and get back to cash. But if it does do what is expected of it, expand your position in this one issue on a scale up. After, but not before, it safely drawn away from your highest purchase price, then you might consider a second issue.

The greatest safety lies in putting all your eggs in one basket and watching the basket. You simply cannot afford to be careless or wrong. Hence, you act with much more deliberation.

I always feel that the less active a stock and the further distant the market, the more potential profit I need to see in it to make it worth buying. If one thinks he sees a potential profit of 100 percent in an active New York Stock Exchange leader, certainly one would have to expect more to go to a regional exchange or over-the-counter of to a foreign market, This is a fundamental and logical principle.

There is further diversification which I've never seen mentioned and which is important to consider. This is diversification as between the position of varying companies in their business cycle or as between their share in their market price cycle. This is a very important consideration because dividing one's funds between three or four different situations which happen all to be in the same sector of their cycle can often be discouraging or dangerous. After all, the final determinant of investment success or failure is market price.

For examples, industries which are in the final stages of a boom with rapidly increasing earnings dividends and possibly split-ups, often offer shares high in price but apparently rapidly going higher. There is a sound justification for an investor who know what he is doing to buy into such a situation, especially for short-term gains, but it would be quite dangerous for him to put all his funds in three or four such situations.

Taken the other way, naturally we all seek deflated and cheap bargains, but very often shares like this will lie on the bottom much longer than we anticipate and if every share own is in this same category, we may do very badly in a relatively good market.

Therefore, establish some emergency connections away from home. Establish a fund or funds away from home as well, both as a "calamity hoard" and as an aid to keeping your foreign interests alive.

Meet the right people. When you come home, keep up your contacts.

One can travel around the U.S.A. and do a little diversification against calamity as well as discover some good investments just on their own results.

Texas is perhaps the best place to visit in the U.S.A. along with Washington, D.C. and always, first of all, New York City. The leaders of Texas are aggressive and looking for capital gains and know all about finding oil, be it in Texas or elsewhere. Washington is the source of information concerning the governmental decisions that affect every investment. New York City is still the center and clearinghouse of everything from everywhere.

Travel is a wonderful education and education is a wonderful hedge these days to those who can capitalise on it.

The most important things any reader of these chapters can learn are likewise that investment and speculation are difficult, not easy; uncertain, not clear-cut; treacherous, not logical. Here, more than anywhere in the world, is the land of illusion. Things are not what they seem. Two and two don't always make four. "Stocks were made to sell." Caveat emptor - "Let the buyer beware."

The purpose of investment is to have funds available at a later date.

Spending casts a shadow to the end of a spender's life.

Each of us has to decide between spending and saving, just as we choose between working and playing. The tendency in early years is to over-spend and in later years to under-spend. The average younger man will do better to think more of the future. The older and more successful man will do better to think of the present. Successful individuals who have found the key to profits sometimes seem to get on a treadmill of grinding out more and more profits, forgetting that as they get older, the span of life and the capacity to enjoy it keeps diminishing.

"Inflation" means an increase in the supply of money or credit so that prices for goods go up. increasing commodity prices and increasing costs of living can also be caused by increasing demand for goods and services or shortages in supply.

"Deflation" means a decrease in the supply of money or credit so that prices for goods go down. Decreasing commodity prices and decreasing costs of living however can also be caused by decreasing demand for good and services or surpluses in supply.

In addition to many other contributing causes of inflation causes of inflation or deflation, a very great factor is the psychological. The fact that people think prices are going to advance or decline, very much contributes to their movement, and the very momentum of the trend itself tends to perpetuate itself.

The total real wealth of a nation cannot be measured in either dollars or prices, but more in unit production and consumption.

Deflation

Taking up the subject of deflation, first of course cash is the easy and perfect hedge if one can recognise the trend in its beginnings.

All security markets stocks and bonds together naturally decline. Stocks decline because both earnings and balance sheet values are reduced by the rising value of money, and also because of liquidation induced by the greater need for money resulting. Bonds decline, because in most cases interest coverage and security behind the principal decrease, but also for reasons of holders or requiring increased liquidity.

An important investment principle to bear in mind is that in times of deflation stock prices invariably drop much more in market value per annum than any dividends the securities in question can conceivably pay.

Thus, keeping liquid (in cash) and living off capital actually results in a small annual net shrinkage in capital value than attempting to secure so-called "income" for this purpose.

Also, eventual profits and often real fortunes are built by buying at the turning points of great depressions. However, unless cash is on hand to buy bargains these opportunities cannot be utilized.

In short, hedging against deflation is simplicity itself and involves nothing further than being long of cash. The difficulty comes in recognizing the oncoming depression before security values are already deflated, and in having the proper objective mental attitude that permits keeping cash "idle" and "living off capital."

A very potent type of deflation is a collapse in the price of a single commodity. This affects securities where the link is obvious. Thus, copper stocks are affected by the price of copper and sugar stocks by the price of sugar, etc.

Inflation

True, at the start, "inflation" is nothing more actually than "recovery" or a "turn for the better," etc. Under such circumstances, the ownership of good equities will result in equally good income and profit. Everything will be low and moving higher. Corporation profits naturally respond to increased demand for goods. Slightly rising prices make for inventory profits and satisfactory profit margins. Costs are still lagging.

Stocks are only good inflation hedges if bought at the right time and at the right price.

Practically all upward business cycles occur with prices rising.

The only special advice I can give is that the better the quality the better the chance to survive if the road grows really rough. The best inflation hedges lies among the best managed companies with the best long-pull outlook for consistent profits and growth.

Are you wise keeping stocks that show you a profit to avoid paying the tax?

All of us hate to take profits and pay the tax involved. If we do we are left with less investable capital for whatever we choose to purchase with the proceeds.

Nevertheless, there are times when it is profitable policy to cash in and pay up to Uncle Sam.

The best reason is if you can recognize extreme overvaluation. It is better to share profits than to have none at all.

Another good reason is if your objective is realized and you feel your stock has reached a final maturity or a plateau of several years' probable duration. Then it is wise to use the lesser amount of proceeds from your sale to reinvest in another direction where you feel things are on the move.

Offset Uncertainty

A good reason, and one not ordinarily given much weight, is to offset future uncertainty by cashing in on some profits by degrees. This way you get an average of variables and imponderables such as errors in judgement, unexpected news, changes in the tax laws, etc.

You may be lucky enough to have a tremendous profit in a stock that still has a bright future and is still reasonably valued. You need some cash but don't want to pay a tax or reduce the size of your investment. The thing to do here is to borrow. This way you can raise money tax-free. The interest you pay is tax-deductible.

Reluctant loss takers

Most investors are reluctant to take a loss. As soon as your stock is sold you are free to stand aside and take an unbiased view of how best to recover. Chances are you will buy some other issue with improved prospects once you are free of your losing stock.

Writing down your cogent reasons for making an investment - what you expect to make, what you expect to risk, the reasons why - should save you many a dollar.

Writing things down before you do them can keep you out of trouble. It can bring you peace of mind after you have made your decision. It also gives you tangible material for reference to evaluate the whys and wherefores of your profits or losses.

Quality not quantity

I have seen many analyses, some involving many pages of information. In practice, quantity doesn't make quality. When all is said and done, there is invariably one ruling reason why a particular security transaction can be expected to show profit.

Writing it down will help you find it. It will help you judge whether it is really as important as your first inclination suggests. Are you buying just because something "acts well"? Is it just a technical reason - a coming increase in earnings or dividend not yet discounted in the market price, a change in management, a promising new product, and expected improvement in the market's valuation of earnings? In any case you will that one factor will almost certainly be more important than all the rest put together.

Writing it down will help you estimate what you expect to make. It is important that this be worthwhile.

Much more difficult

If you know clearly why you bought a stock it will help you to know when to sell it. The major factor which you recognized when you bought a security will either work out or not work out. Once you can say definitely that is has worked or not worked, the security should be sold.

One of the greatest causes of loss in security transactions is to open a commitment for a particular reason, and then fail to close it when the reason proves to be invalid.

When all is aid and done, it is the price of your stock that counts- or whether it is going up or down.

Aside from liquidation or valuation purposes, prices and trends can help you improve your investment record. They are really the best and the simplest "indicators" you can find.

Traffic signals

Either way, price is the widest-swinging and the most sensitive barometer of all.

As a practical matter, it will pay you to look at the lists of "new highs" and "new lows." If a majority of the stocks you own are making new highs you have the right issues for a current move. If they are making new lows it is time to ask your broker or investment adviser why. This policy can often save you money by cutting losses or promoting profitable exchanges.

Check on stocks that make new highs and on quiet stocks that begin to develop plus signs and higher volume. This can help you find new and profitable shares to buy.

One simple way of doing it is to run your finger down the daily stock tables and note the names of the shares that trade more than 10,000 or advance more than a point. If you do this daily you will almost certainly not some developing strength.

Wheat from Chaff

It will be up to you and your broker and adviser to separate the wheat from the chaff.

Despite the hazards, following prices is still the first factor to investment success.

Of all the factors that affect the success of a corporation none exceeds the competence of management.

One of the most popular pieces of advice you hear everywhere in Wall Street is to buy into companies with "good management."

In practice, how do you know?

Ideally, you begin by meeting management.

I think as a practical matter, you have to begin by looking at the record. If a company's earnings are increasing, this is one piece of evidence pointing to good management. However, results must be measured against others in the same industry.

Type of management counts

One aspect of management worth your noting is the extent to which the offers own their own shares. Broadly speaking, it is advantageous for the officers to have a stake in ownership. It makes a difference whether they own stock because they want it or because they are stuck with it.

You should consider whether they acquired it through inheritance, bought it on option, or bought it in the open market. Likewise, where possible, consider the purchase date and the price paid.

Close watch pays off

Of the various ways of making money in securities, I know no better way than through a close watch on management.

Changes I particularly refer to are those where companies have been in difficulty, their stocks depressed, and general dissatisfaction expressed - and where a new management comes in and invariably begins by sweeping out the accounting cobwebs. Everything is marked down or written off so that the new management is not held accountable for the mistakes of the old. Very often dividends which were imprudently paid are cut or passed. Thus an investor at this juncture often gets in at the bottom or the beginning of a new cycle.

Attempting to evaluate management, even though you can't get all the answers, is worth all the effort it entails.

Statistics reveal they are more women stockholders than men. However, many more men than women make investment decisions.

Investment "To learn"

Young men up to age 30 ought to invest in order to learn. If you are in this age bracket you can afford to take greater than normal risks, although usually you may not have much capital for those risks. Yet this can be a testing period to se just how well you are adapted to money-making. You can't risk everything because your mistakes are apt to be frequent and costly, and you have to leave some reserve for a comeback.

The second age period, 30 to 50, is your real money-making time. If you are hoping to make a fortune, this is the period for it. This is the time to borrow and look for leverage and try to get other people's money working for you.

But he concluded by saying that it became very clear that "it takes money to make money."

If you are trying to accumulate money to use in an attempt to make more money, the planning, effort, and denial that go into a budget will help you achieve your aim.

"Must" expenses

I think the pattern that works best is to be frugal while young and build your "working capital." Spend in the prime of life. Pull in your horns again upon retirement. This programs fits your capacity to enjoy and your capacity to afford as closely as most of us can.

"Why did my stock go down?"

I don't think stocks ever go down without a reason. Good investment supervision calls for attempting to find the reason and appraising its importance and longevity.

Find the source

You will want to attempt to find the source of selling: whether it seems to come from institutions, from insiders, from some single source, or is scattered. This will often give you an important clue.

There are going to be times when you cannot determine any visible reasons for a decline. There will be times when some explanation for the fall is available, but the lower price will seem to have taken it into account.

There is no standard answer to such situations. Trends in price, trends in the news, trends in value - all can and do change. Each situation has to be judged on its own, and in relation to your other holdings.

• Have a firm foundation of the strongest and the best common stocks of companies which are moving forward and which have shown an ability to do well under all sorts of conditions.
• Include some reserves as protection against less favourable times.
• Stick steadfastly to your long-term investment plan, not modified by the fears or exuberance of the moment.

The great danger is that you are apt to be very cautious in the early stages and then throw caution to the wind when the market keeps going higher and your original opinion seems to be wrong. It is well remember that most major moves end in what later proves to be considerable over-evaluation. It is just such times that these restraints are most valuable to an investor.

Watch the crowd

To make money in the stock market you have to either be ahead of the crowd or very sure they are going in the same direction for some time to come.

There is no denying the fact for mature companies a cash dividend is desirable and feasible. For young growing companies this is usually not the case.

Case against cash dividends

The case against paying cash dividends has been exceptionally well put to stockholders by Oscar S. Wyatt, Jr., a chairman and president of Coastal States Gas Producing Company. At an annual meeting he stated:

"With respect to the declaration of cash dividends, I would like to point out certain relevant considerations upon which has been based the company's present policy that it will not pay cash dividends in the foreseeable future.

"Firstly, Coastal States is still growing, and we are constantly calling upon outside financial resources. If we pay out cash, we have to make up for it by borrowings and that costs the stockholders an interest expense. The payment of cash dividends at this time could actually have the effect of restricting our growth.

"Secondly, by reinvesting net income back into the business, we realize a comparatively high return.

Borrowing position improved

"Thirdly, by converting earnings to equity, we enlarge our borrowing position. For every dollar reinvested, there is the possibility the we might qualify for as much as another $3 in borrowed funds, subject of course to having the necessary earnings and meeting the requirements and tests of our various indentures. In other words, every dollar that would be taken out of the business in the form of cash dividends might cost the company three times as much in capital funds needed for future growth."

Mr. Wyatt's reasons in his case are thoroughly justified because the Coastal record of investing over the counter has been outstanding. The stock was first publicly traded over the counter at the equivalent of $1.67 per share. It has sold above $40 in 1963. Thus, stockholders have gained handsomely by leaving earnings to compound with the company rather than having a part paid out to them for division between their own use and taxes.

What you will have to consider the most in buying non-dividend-paying stocks is whether the company is in an industry and of a type where management can do more with your money than you can. And of course whether the particular management in question has the ability.

There is one to the effect that the way to make the most profit is "to buy low and sell high." It's a beautiful idea if you can do it. The truth is, no one knows what is low or high.

Two important points

Obviously at some point stocks are geniunely "low" or genuinely "high." You may be successful in knowing what that point is if you keep two things in mind. First, remember that stocks invariably become "undervalued" or "overvalued." They overshoot their logical goals or levels. Next, be sure you feel you have a special reason for expecting a turn or change especially when you are trying to buy low. You surely don't want to own a stock that is cheap enough - but stays cheap. So you must feel that you can see improvement or recovery reasonably soon ahead.

Is there profit for you as an investor in a new product or service? It all depends.

I know many instances where eventually a new business did succeed, but before this occurred, new capital had to be brought in, much time went by, and the original investors either dropped out, were forced out, or their equity was greatly diluted. Promotion costs alone to finance something with no record of earnings are generally excessive, introducing much "water" into the capitalisation.

This is a form of investment that involves the greatest pitfalls and highest risks to the investor.

The odds are greatly improved when this is done by an established pubicly owned company of good reputation dealt in on the New York Stock Exchange. In such a case funds are either available or can be secured at normal costs. A portion of the probable initial operating loss can charged off against earnings. Here we find success as well as failure, but the odds are good. Once in a while an enormous success will result.

New products, new designs, and new services appeal to the imagination. Hence they are sometimes overemphasised by management or brokers.

This is especially true of something exotic or romantic. The first to ask if you are told to buy a stock because of something new is how much contribution to nearby earnings is expected. Very often you will find that it will be an item of expense rather than profit for some years at best. And in other cases you might discover the nearby maximum potential is a very small percentage of the total earnings of a big company.

As in every other investment situation, market action never exactly coincides with realization. The average stock goes up on great expectations. Very often the rise is excessive. It frequently occurs ahead of actualities. Sometimes the whole expectation is never realized. The new product fails to take on or produce a profit.

Traders can benefit from emotional temporary moves. Investors never can.

They are profits to be made in such situations. To succeed you must as a trader be careful not to overstay your market. As an investor you must dig very deep into the facts.

How closely do stock prices follow news releases? As an investor is there an advantage in your moving quickly on news?

Expected news is generally discounted. By the time anticipations become actualities, market prices have generally already reached their objective.

It is the unexpected news, or "bolt from the blue" that poses a much more difficult problem.

A major piece of unexpected news raises three questions: the nature of the news; whether it is good or bad and what is likely to follow; the position of the market.

The position of the market is of paramount importance. An internally strong market will take bad news in its stride. A weak market cannot.

Inflationary hazard

Your best weapons against the forces that tend to clip your fortune are knowledge and experience. Realization of the conditions that exist should lead you to learn more about them. This can be done by reading and talking to those who you feel know more about it than you do.

There at 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.

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 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.

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 no 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 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 built it up into one of the big three motor makers.

The same might be same of management ownership. By and large, it's preferable to have the managers of a company a major stake in it. However, it doesn't follow that the corporations with the highest percentage of ownership management are the most profitable by any means. Each one has to be judged by 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.

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.

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 matter of experience, information, and judgement 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.

How highly do you value your after-office time?

What value do you put on your leisure time? How do you spend it?

"Tex" Thornton, who since 1953 has built up Litton Industries, Inc., from nothing to profits of almost $30 million a year, only a few days ago told his stockholders, "I can't stand useless leisure." Thornton devotes most of his time to business, and this has definitely paid off.

My own observation is that an essential of success is to find what most people label "work" to be really pay. Unless you enjoy your job you will neither succedd at it nor give your employer, if you have one, full value.

Whether you use your after-office free time for more work, for "voluntary idleness," play or relaxation, it is certainly as valuable to you per hour as your normal work week.

You can use it to work overtime. You can use it to work overtime. You can use it to improve your education, for your health, to travel and for many other things.

Plan your leisure time and get the most out of the most important things you work for.

Why Buy Quiz

If you want double dividends, double profits, and half losses, try filling our a quiz sheet on every issue you are considering buying.

1. How much am I investing in this company?
2. How much do I think I can make?
3. How much do I have to risk?
4. How long do I expect to take to reach my goal?

1. If you are a novice, invest 10 percent of your capital, no more, no less, in each venture. If an expert, you do not need my advice. If you don't feel confident enough to invest a sum that is important to you, better look for something else. If you are right, you want a profit big enough to satisfy your aims.
2. The gain you expect to make is the heart of your problem. You must see something ahead that is not reflected in the current price to bring about the expect advance in price. If everybody expects what you expect, there will be no profit.

4. Time is the essence of life.

"When Sell Quiz"

Making a commitment is many times easier than closing one. When you consider buying shares you can avoid a decision altogether, if the situation is in anyway puzzling or not completely to your liking.

It is when you have a profit that the problem intensifies. It is vital to investment success to let profits run - but not melt away.

Assuming the average reader owns several stocks, the question divides itself into two parts. The first is are we in a bull or a bear market? Few of us ever really know until it is too late. For the sake of the record, if you think it is a bear market, just sell your stocks regardless of any other consideration.

Only equities in industries that have had particular troubles, or equities that have become overbought, have been good sales.

Under such bullish circumstances do not sell unless:

1. You see a bear market ahead.
2. You see trouble for a particular company in which you own shares.
3. Time and circumstances have turned up a new and seemingly far better buy than the issue you like least in your list.
4. Your shares stop going up and start going down.

The second part of the question is: Which stock?

A. Do not sell just because you think a stock is "overvalued."

B. If you want to sell some of your stocks and not all, invariably go against your emotional inclinations and sell first the issues with losses, small profits or none at all, the weakest, the most disappointing actors, etc. Always keep your best issues for the last.

In a bear market stocks always go 'way below "under valuation." In a bull market they advance 'way past "over valuation."

An investor should be guided more by trend than price. Stocks make their lows at that time and point when the greatest number of active investors think the worst of them. The actual low or high point in news occurs many months before or after the market low or high. It is the expectation of coming events, rather than the events when they materialize, that moves markets.

Borrow for profit

It makes sense to me to run a risk borrowing for possible gains. It makes no sense borrowing to own a better car or a better house before one's ship has come in or before one knows one's future.

One needs money to make money.

Young people should look for profits, not immediate income. They should look forward to the day when in their later years income on their capital will support them in the style to which they have grown accustomed without the necessity of selling their time.

Career in the Canyons

My idea of a young man most likely to succeed is one who takes a job in Wall Street after eating, sleeping and dreaming everything he could get his hands on on concerning the subject during his school days.

The particular advantage of working in Wall Street is that you make your living in the same business that you invest your savings. If you are good at one, you are apt to be an expert in both. The usual business or professional man sometimes becomes an expert in his own line but rarely or never at investing his savings.

But for those who want more coin of the realm and an amusing vocation, and are willing to work for it. Wall Street pays off double. It is demanding - fascinating - rewarding.

The problem has two separate parts, the question of investment decisions, and the problem of client relationship which vastly affects net results. For example, people who invest money for other have legal and moral responsibilities which often hinder the use of investment practices most likely to succeed.

Anyone in a position of trust who buys his clients a diversified list of the best stocks cannot be assailed, even should they decline in price. Let him try a concentrated position in a low-quality issue and he is almost sure to be criticized. His reasons may be well-founded but that will not affect the decision against him.

Clients generally want to be fully invested and generally prefer the most popular issues of the day without knowledge as to whether these policies will prove the most profitable or involve the least risk.

Securities are not priced solely on balance sheet or earning statement formulas. Investor's psychology plays a very great part in shaping market prices and trends. To make matters even more difficult, consumer psychology also plays a large role in shaping the economics and fundamentals that lie beneath the earnings and dividends. We also have unexpected news and occasionally credit strains to deal with.

You can't sell anything to anybody if you can't sell it first to yourself.

My working hours those early San Francisco days were about 12 hours in the office and my studying time out of the office a minimum of four hours.

One thing is certain: Success takes time. I often worked alone in that office during an entire holiday on projects that I selected for myself.

If you cannot successfully practice what you preach, you might as well throw in the sponge. There is a vast difference between the theoretical and the practical, and this difference can only be bridged by taking your own medicine and seeing if you live through it. That is why I say you can't sell anything to anybody if you can't sell it first to yourself.

Facts, even facts that most people don't know, are not enough to guarantee continuous success in the stock markets. Judgement of what these facts mean and the effect they will have is equally necessary.

Finally, be yourself. The individual is still the most powerful force in the world.

After over forty years in Wall Street I have learned one lesson. Opportunity is always here. Everything is always changing. Things look different to people of different ages.

There are three basic elements that overshadow all others in appraising the worth of a stock.

The one most commonly used is "quality." Certain stocks are always "good," if quality is the only yardstick.

The second most commonly used measure is "price." People look to see whether prices are "high" or "low." None of us, expert and beginner alike, really knows when high is top or low is bottom.

The third, and in my view most important, element in stock appraising, is "trend." When you buy a stock you want to make a profit. You can only do that if it goes up. You can make money if you buy a stock high and it goes higher. You can lose money if you buy a stock cheap and it gets cheaper. "Trend," therefore, is overwhelmingly the most important element in appraising whether you can make a profit from buying a given issue or not. Fortunately, determining the trend is less of a problem than determining the price level.

Invest your money where you can reasonably see anticipated profit ahead. If it develops, accept it. If you have made a mistake, take your loss and make a new purchase where the view ahead seems clearer.

Serious investing should be done only with your surplus money, money left after you have taken care of your basic needs.

One good rule of thumb I've heard is that you should have at least enough backlog to cover your living expenses for at least two months.

Viewed strictly as an investment, however, home buying is ordinarily relatively inefficient. The initial purchase price represents only one part of the total cost. You must follow up by spending for repairs, mortgage interest, taxes, and maintenance.

As one gains experience, and as time goes on, investment results should improve.

Naturally, you should review your investments at least once a year to see if you have any weaklings that need weeding out.

If you do set out on your own, survey all possibilities. Here are five:

1. You should decide in your own mind what your aim is. Are you mainly interested - as most investors are - in getting a stock that will improve in price? If so, you will be interested in the company's future possibilities. Or are you more interested in a stable stock that will be sure to pay you a regular dividend? If it is this, you'll be most interested in financial strength and past performance. How many years has it a paid a dividend without fail?
2. There is some security for the beginner in numbers. You will feel safer if you own stock in 4 or 5 companies, each in a different industry.
3. Choose an industry before you choose a particular company in it, and make sure the industry is essential in American life. Choose an industry that has a future, particularly if you are thinking of a long-term investment.
4. In choosing a specific company, if you are a beginner, pick a leader, whose name is a household word, just as you buy products that have a brand name you have come to trust.
5. Pick a company with vigorous, farsighted management. Look for the company that attracts topflight executives and is striving, through constant engineering and research, to broaden the market for its products and services.

The twelve wealthiest men in Wall Street

To become on of the twelve wealthiest men in Wall Street, you must be born with an exceptional brain. That is the starting point. Without it the other requisites are of little value. This brain must have the courage to accept risks. It must be willing to borrow up to the hilt. It must know the knack of using other people's money. It must figure how to use its financial resources. It must have a cerebral hemisphere devoted to minimizing taxes, and it must want ot be wealthy very, very badly - much more so, perhaps, than it wants to be healthy and happy. A portion of your brain might be gifted enough to figure out how to make a profit but other portions might not be willing to take the risks or to capitalize on the idea. Therefore, it must be obvious now that "total net worth" is not in itself a final measure of "total financial ability."

How growth stocks grow

True growth stocks can grow through growth of earnings and through growth of investor regard. They can also decline through decrease of investor regard. That is why careful analysis and pricing is essential.

Using the minimum amount of caution, one should compare current prices with current earnings and get a current price-earnings ratio. This is the index of current regard. Then decide the rate of growth anticipated for earnings and the same for the price ratio (if any) and project a future market price. Compare this with your projection for the Dow-Jones Averages. If it is substantially greater you may gave a true growth stock.

Growth in market price is the aim.

An interesting example of the past is ALCOA. In 1949, it sold at 11 and its price late in 1955 was 75. This is an increase of 580 percent. Earnings increased 240 percent from $1.10 a share in 1949 to an estimated $3.75 a share. The significant increase however is the earnings multiplier, the price-earnings ratio. ALCOA sold for ten times more than it earned in 1949 but in late 1955 it was selling at twenty times its earnings. If the earnings were priced at the 1949 ratio, the shares would have been selling for 33 3/4 instead of 75. This illustrates the great importance of "investor regard" as a factor in the rate of growth in the price of stocks.

Obsolete stocks

Stock market-wise, it means that every investor should be on the lookout for obsolete stocks in his portfolio. The best way to go about it is systematically. At least every so often, check over the list and sell the stock that shapes up as the least attractive. Replace it either by increasing the position in the stock already owned that then appears to be in the best position or by adding something new which appear to be better than anything already owned.

Investment efficiency

Every commitment in securities involves a risk. It is either for better or for worst, but practically never neutral.

To gain the greatest potential profits with the minimum risk of loss an investor must keep his portfolio alive. If he agrees with the premise of the first paragraph, then an investment program must have the stocks that have the greatest potential for profit. It must not have a residue of issues that failed to live up to initial promises.

In other words, if the investor expects action and doesn't get the action, he should consider liquidating.

Short selling

The proper procedure in selling short should be precisely the reverse of buying for an advance. Technically, a good short sale should be an issue which is overbought - that is another way of saying an issue which is over-popular and has too many buyers. It should be an issue with a large floating supply and a large capitalisation and with very few or no shorts in it. It should be an issue that is in a down-trend, perhaps near its low or making new lows. It should be an issue where lower earnings and lower dividends are anticipated but not discounted.

Most readers of this book will feel that they can go further on their own. What they do and how they go about it will vary a great deal, depending upon many personal factors, such as age, wealth, goal, ability, contacts, and occupation.

I believe that whenever possible the time to run risks is when one is young. It is also the time for testing and appraising one's own abilities. This means taking a job which seems to have a future. It means relatively frugally and renting a home rather than buying one. All one's efforts should be pointed in one direction, which is to build up capital. When I was young I invested on margin and looking back, I am glad I did so. I had a lot to gain and really little to lose. It is time enough to be conservative and safe after your ship has come in and when you have much more to los and less to gain. It is also time to be conservative if you efforts are not successful and that saving rather than building is your obvious course.

There will be the practical question of how to go about it. Those few young readers of this book who are making a career in some form of the investment business will naturally try completely on their own. The majority of readers engaged in different businesses or professions will simply have to make investment an avocation or, on their own, find someone successful to help them.

The type of investor I find in the majority are those who have achieved some degree of success in their own careers and who make the handling of their funds a major avocation. This is seen most often starting at about age 35.

If the first period of an individual's investment life falls between the ages of 21 and 35, this second period runs from 35 to 50. After 50, people are more apt to be on the defensive. However, if they are successful in the manner indicated they will know that the best defence is a good offence.

Another question that I am asked frequently is, "How do I make a killing?" This can be done but it involves a great deal of risk all along the line. To make killing these days one needs to buy the maximum amount of most volatile high leverage shares using the largest amount of credit. This means that if a person is wrong he will lose with the same supercharged speed as he had hoped to gain. In other words, he runs the risk of being "killed" as well as of making a "killing." It is also something that one probably will have to do for himself.

It should be very obvious that the methods outlined are not equally useful to every reader. It has been said that "one man's meat is another man's poison," and this quotation is completely applicable here.

However, every reader should close the book knowing more about the hazards of preserving capital and why the book is entitled, The Battle for Investment Survival. To quote again, "forewarned is forearmed," and a knowledge of true investment objectives and the great difficulty in their achievement is half the battle and of great value in itself.