From March to December 2010, I am re-reading and reviewing one timeless investment classic that I own and refer to.

Not to disparage any investment book hot off the presses in 2010 or written in the last 40 years (including my own!) but to be considered a classic the books I am re-reading have stood the test of time. I figure 40 to 125 years should provide a pretty good crucible. I believe these books can teach us more about human nature, investing, and wealth and risk management than anything written before or since. (Of course, if you want to buy my book as well, who am I to discourage you?)

All 10 are still in print, still selling today. Theres a reason. Each offers unique and well-worth-reading insights that will simply make you a more relaxed, more confident, and better investor. These books are being reviewed in the chronological order in which they were published. Here are the links to the two previous reviews:

And now, #3.

The Battle for Investment Survival. by Gerald M. Loeb (1935)

My two previous reviews laid the foundation for investing wisdom by surveying the psychology of crowds in financial matters as well as in many other facets of daily living. With The Battle for Investment Surviva l. we move to our first review of a book specifically published to deal with investing in the securities markets in the United States.

The first two books were well-written and well-organized; The Battle for Investment Survival is not. Thats not to say it isnt worth reading; it is! But its sort of like visiting a farm where the wheat has been cut but not yet threshed or winnowed: you have to slog through a lot of stalks and chaff to find something you can digest. Once you do that, however, youll find it was well worth the work.

The reason why I think this is an important book that deserves to be among the ten investment classics Ive selected is that the time in which Loeb wrote it is very much like our own time. I believe that, to every thing in the stock markets, there is a season. A time to buy and hold and a time when buy and hold will destroy your ability to recover. There are vocal advocates for buy and hold and there are vocal advocates for being willing to be nimble and trade but both biases stem from the type of market in which the proponent spend his or her formative years and neither are appropriate for the other type of market. Let me illustrate:

As I wrote the first time I placed this chart on Seeking Alpha (in an article here about the importance of understanding secular bull and bear markets,)

If a picture is worth a thousand words, this chart is worth a million. Giving credit where credit is due, it was constructed by the estimable Sy Harding, one of the smartest technicians I know and Ive known a few hundred in my career. (See Sy Hardings Street Smart Report, 386-943-4081, well worth the subscription price. You might want to also check out his free daily blog at www.streetsmartpost.com )

What this 110-year chart clearly demonstrates is that secular bull and bear markets typically last a minimum of 10 years and may last as long as 20 years. So if you are an analyst being interviewed on CNBC who cut your teeth on investing in the secular bull between 1982 and 2000, you believe that the current interregnum is an aberration and that buy and hold is still the way to go. It was back then. But, taking the long view, you can see it might really hurt you now.

Thats why The Battle for Investment Survival is worthy of your time today. Mr. Loeb wrote it at a time very similar to our own. Look at the monstrous decline from 1929 to 1933, the V-shaped rebound and then the sideways action of the next 15 years. If you agree with my conclusions from the article I first featured this chart in, you cannot help but be struck by the similar sideways action of every secular bear market of the past 110 years. So forget the gurus telling you that buy and hold will come back. Of course it will come back in the next secular bull market. But if you listen to them now, I believe you could lose a fortune. Why not listen to someone facing the same up and down ratcheting markets that we have faced since 2000 and are likely to face for at least another year or two? If you do that, I believe the wheat that you will find not without a little effort in this tome will be quite wholesome for your portfolio.

Writing with the lessons of the early 1930s uppermost in his mind, Mr. Loeb disabuses the reader right away of the notion that there is easy money to be made. This is work. More fun than digging ditches or picking cotton or laying brick, maybe, but work, nonetheless. He also disabuses us of the cherished belief that there are safe havens or safe investments when markets decline. (He is quick, and correct, to point out that, even in the best of times, bonds lose value because our government needs a steady depreciation of the dollar in order to pay back creditors in ever-less-valuable currency. What a dollar bought in 1965 now takes nearly 7 dollars to buy.

He tells us diversification is not all its cracked up to be. (So did Peter Lynch, who called it de-worse-ification.) Loeb advocates instead fewer stocks to keep track of, but gaining depth or understanding on the ones you do hold. His point, verified by virtually every investor during last years plunge to 6000 on the Dow, is that when people panic they sell everything, so a diversified portfolio will fall just as much as an undiversified one. Moreover, a diversified portfolio will reduce the attention you can pay to individual stocks. And he believes, no matter how solid the company, if its stock goes down, sell it. Better to take more very small losses than one or two devastating ones. Again, the recent experience of The Crash is clearly in evidence in his strategy.

The Battle for Investment Survival is only 153 pages long. The entire rest of the book, another 153 or so pages, consists of articles by Loeb in which he comments on a variety of investing topics, as well as his opinions on the state of the country, proper ice cream sodas and all sorts of other fun, but not necessarily germane, stuff.

Beyond the investing principles I mentioned above, some other takeaways from the first 153 pages include Rule #1 — Buy only something that is quoted daily and can be bought and sold in an auction market. Liquidity is key! If youre going to slowly accumulate 10,000 shares of a $1 stock and expect to sell for $1 in a rapidly-declining market where that is the alleged bid, I have some oceanfront property in Nebraska to sell you. That bid may only be for 1000 shares, or 100. The market-maker will eat you alive as you try to sell an illiquid security. Youd be like the announcer at the airport at the end of the movie Airplane!. announcing Now arriving, Gate 22, uh, 20, um, 18, uh, 17, 16, 15 as you watch your sale go from 1000 at $1 to 3000 at 92 cents to 2000 at 89 cents, and so on. Stick with quality names, well-followed, current in their reporting, and in an auction marketplace.

In addition to avoiding penny stocks, sucker mailings, Internet and e-mail touts, etc. build in-depth knowledge in a limited number of venues that you can stay on top of. Even further, he advises that it is better to stay in cash than to reach for yield. Even the best dividend-payers will often plunge right alongside the most rankly speculative stocks. Why? Because some people are loathe to admit their mistakes, so they sell the positions least down at that moment, but then create a waterfall of selling as everyone else does the same thing.

Mr. Loeb does not fear the word speculation. He uses it quite differently than I would but, once you understand his definitions, his strategy makes sense. To him, speculation simply means to take advantage of a capital gain opportunity with a high probability of reward whereas investing means to seek a slow steady return that is bound to bite you if one thing goes wrong with the company, since your capital gain will likely provide a smaller cushion for error than in those items you bought that moved more.

He and I are in 100% agreement on what he covers in Chapter 9 know your companies and know the industry! Too many investors buy a stock they hear touted and fervently hope it go up — but they have no target in mind in terms of duration to get there, nor any concept or where there is. Loeb implores you to understand why it was opened, what one expected to make, how long it was expected to take. Selling and knowing why and when to sell is more difficult, and perhaps therefore even more important, than buying.

In Chapter 12, youll learn, or more likely be reminded, that the goal is to buy low, not the other way around! (Although the relative momentum crowd would have you believe otherwise.) Forget relative momentum and greater fool claptrap. You should buy when /Sentiment is bearish / Prices are low relative to historical norms / Current business conditions are poor (not good!) / The particular company you are reviewing is out of favor / Dividends are non-existent or at least lower than normal. Buy when the stock is undesirable to others, and sell when the majority believes the quality has reached investment grade.

The Battle for Investment Survival is well worth reading especially for todays investors — but make sure you highlight the places you find the wheat. You dont need to slog through the diversions and confusions more than once! If he was right about the times in which he was writing — and he seems to have been and I am right that this time is similar in direction or, more accurately, lack of direction, then this may be one of the best books you could possibly read to protect what you have and be prepared for the next time buy and hold will make this game a whole lot easier.

Author’s Disclosure : No securities recommended. This review addresses strategy, not tips!

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