by Gerald M. Loeb
Why Buy Quiz
If you want double dividends, double profits and half losses, try filling out 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?
I believe you have a good buy if you think you can obtain an ultimate gain of one and a half to two times the amount invested in six to eighteen months, by risking no more than 10% to 20% of your investment.
It takes a book to outline how to do it, but here are a few brief ideas to help:
(1) If you are a novice, invest 10% of your capital, no more, no less, in each venture. If an expert, you do not need my advice. Experts invest from 20% to all the law allows. 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 expected advance in price. If everybody expects what you expect, there will be no profit. This is gross oversimplification, but helpful. Following trends is easier than trying to call turns in them. To put it another way, it is more likely to pay off to buy into an advancing situation at a seemingly high price than to attempt to discover when a declining situation will stop declining and turn upward.
(3) I believe in retreating and living to try another day. On high-priced shares you generally will get a run for your money, if you limit losses to 10% of purchase price. On low-priced shares, perhaps 20%. There will be times when you will sell out 10% below cost only to find the stock come back and make good, but this will happen rarely enough, if you know what you are doing. Limiting losses is like paying worthwhile insurance premiums. The novice can limit his losses mathematically. The expert will have his reasons. The fool will let them run.
(4) Time is the essence of life. Taxwise, six months is the current minimum period. It is hard to see too far ahead. Even a 50% gain, if it takes many years to achieve, can become a conventional percentage figured annually.
Try filling out a quiz sheet and you will be surprised at how it will spur your thinking in new and helpful directions.
"The Last Is First"
I was on a two months' vacation and had to double column at a time when I was remote from both the stock ticker and a reference piece of financial data. This pushed n discussion of "how" rather than "what" to do.
Most of us logically think that "first" comes before "last?to the shoemaker-"the last is first."
Likewise, most investors think that the stock which is nearest to the low level range, or which sells for the least number of times earnings, or sells to return the highest income yield, or which sells at lowest figure in relation to its book value, must logically be best buy. To the really successful, experienced and sophisticated, professional speculator "the most expensive is the cheapest."
If you consider a tabulation of a handful of equities in a given group, one can almost blindly buy the seemingly expensive and make a profit provided you are right on them and don't overstay your market.
Understand I do not this as a method of investing. I write about it because do use the reverse of this method, i.e., buying the "cheapest" with necessarily poor overall results.
The basic reason for this seeming paradox is that this always weighing and appraising the shares trade. Ninety-nine times out of a hundred, if one motor stock yields and a second one 7%, there are points of weakness in the second taken into account by all buyers and sellers in the market, but which escape the buyer who feels high yield makes for a bargain.
The next time you think you see a bargain, take it as a red signal to look further and see if you have missed an important weakness. The next time you feel like selling short some super blue-chip yielding 2%, selling at an all-time high and up fifty points on the year, stop and look again. See if these facts are, in reality, green lights reflecting past success that promises even more success in the future.
"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.
But once you own your stocks, the decision as to whether to hold or sell is quite another matter.
You are forced to a yes or no answer, no matter how uncertain or confused you may be. It is like having your car straddling the railway track with the express coming down the line. Neither backing up nor going ahead may appeal as a sure way to avoid getting hit. You are on the tracks and the train is coming, so you must do one or the other. Or, maybe you should abandon the car and jump.
If you have a loss in your stocks, then I think the solution is automatic, provided you decide what to do at the time you buy. I am always in favor of limiting losses. In the case of high priced stocks the limit should be perhaps 10% of the amount invested. In the case of lower-priced shares, the limit should be 20% of the price paid. The beginner can do this as a mathematical rule. The more experienced can temper the plan with a little judgment. 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.
Since 1946 we have been in a market where some stocks have moved up, others marked time and still others declined. Shares and things such as real estate have been in a bull market. Equities have been better than cash. Only equities in industries that have bad particular troubles, or equities that have become overbought, have been good sales. At this writing the same inflation climate seems to prevail. 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.
Not since perhaps 1920 have I been investing in the stock market without knowing that four rules and fifty words will never tell anyone when to sell. They will help if you think them over.
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.
Quiz yourself along these lines before you close your next commitment and I think it will improve your average result.
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