Friday, September 17, 2010

Happy 75th Anniversary to one of the few MUST READ Investing Books: Gerald M. Loeb's "The Battle for Investment Survival" Chapters 1-3

Following up on yesterday's intro. by moi, Forward by Ken Fisher and Loeb's introduction here are snippets from chapters 1-3 of:

Chapter One
It Requires Knowledge, Experience and Flair
...There is no line of endeavor in the world where real knowledge will pay as rich or as quick a monetary reward as Wall Street.
Chapter Two
Speculative Attitude Essential
People expect too much of investment. They think, incorrectly, that they must always keep their money "working".
...If investing were merely what most people think it is-just buying something for income-fortunes would be extremely easy to establish by simply letting the money compound itself.
"Capital compounded at 6% doubles itself in money value in only twelve years, and at 5% in little more than fourteen years. The fantastic results of this process were illustrated by the late Frank A. Vanderlip in a Saturday Evening Post story of January, 1933. He pointed out that if the rich Medici family in Italy just six hundred years ago has set aside at 5% compound interest an investment fund equal to $100,000, its 1933 value would be $517,100,000,000,000,000 (five hundred and seventeen quadrillions). The original sum could have been represented by a globe of gold about nine inches in diameter, and the final figure would be 46 million times the existing monetary gold stock of the world."

...Threats to preservation of capital: the purchasing power of money, taxation, regimentation (including rationing) war, new investions, political change, revolution weather, and shifts in mass psychology.
Chapter Three
Is there an Ideal Investment?
...The wealth of the world does not increase fast enough to allow payment of compound interest or pyramiding of profits on existing "invested capital". Every so often adjustments are made, partly through bankruptcy and other scaling down of obligations, and partly through currency depreciation.
And it's all as old as the hills.

...By speculate I mean principally to try to forsee these tides.

...attempt conservation of purchasing power through purchase of fixed interest and principal obligations (including cash) only during cycles of deflation, and of equity holdings only in cycles of inflation.

...Savings really "saved" through buying gold, hoarding precious stones and other forms of "hard wealth" privately secreted.
In that last sentence Loeb is talking about saving oneself in periods of social disruption or revolution.

Regarding speculation,I touched on the subject in "Bull Markets; Bear Markets; Secular and Observant".
I did a mash-up af a couple earlier posts, one showed some charts of market history and another did a bit of a discourse on "speculation", linking to Feb. 2, 2009's "Where in the Bear are We":
...One etymology of the word speculation:

c.1374, "contemplation, consideration," from O.Fr. speculation, from L.L. speculationem (nom. speculatio) "contemplation, observation," from L. speculatus, pp. of speculari "observe," from specere "to look at, view" (see scope (1)). Disparaging sense of "mere conjecture" is recorded from 1575. Meaning "buying and selling in search of profit from rise and fall of market value" is recorded from 1774; short form spec is attested from 1794. Speculator in the financial sense is first recorded 1778. Speculate is a 1599 back-formation.
That is not the etymology grandmother taught me. Hers had to do with Italian merchants keeping watchtowers manned to spot sails over the horizon, enabling those who could see furthest to sell off inventory before goods-ladened ships made harbor and crashed the market. More like this etymology at Wictionary:
From Latin speculātus, past participle of speculor (look out), from specula (watchtower), from specio (look at)
Either way, the current market does not lend itself to either contemplation or seeing over the horizon....
I believe Mr. Loeb would agree with Grandmother's definition.
Next Monday, chapters 4-7, "Pitfalls for the Inexperienced", "How to Invest for Capital Appreciation", "Speculation Versus Investment" and "Sound Accounting for Investors".

(That last is more interesting than it might sound. It goes to the heart of being brutally honest with yourself.)