#1 Rule of Investing from the Wizard of Wall Street

“The really great fortunes are made by concentration, not diversification.” — Gerald Loeb, “Maxims of Wall Street,” p. 157

Who is quoted the most in “The Maxims of Wall Street”?

Among living legends, the Oracle of Omaha has the gift of wisdom. Warren Buffett is quoted 34 times in the new 7^th edition, and I keep finding new ones for each edition.

But the second most quotable guru may surprise you. No, it’s not Joe Kennedy, Bernard Baruch, Jesse Livermore, Humphrey Neill, J. Paul Getty, Jim Dines, John Templeton, Ben Franklin, or John Maynard Keynes. All of them are quoted profusely.

It’s a man you may not have heard of. He’s Gerald M. Loeb (1899-1974). Known as the “Wizard of Wall Street,” he was one of the founders of the brokerage firm E. F. Hutton. When he spoke, everyone listened. When he wrote his column, everyone read it. He compiled his best columns into a bestseller, “The Battle of Investment Survival,” which was originally published in 1935. It sold over 200,000 copies during the Great Depression.

“The Battle for Investment Survival” has been revised and reprinted many times, the latest by Wiley Books in 2007.

A victim of polio, Loeb became a whiz kid who quickly became one of the most successful stockbrokers in the country, first in San Francisco, then in New York. As his mentor told him, “There’s only one place where people really know anything, and that’s New York.”

He became a partner with the highly respected brokerage firm E. F. Hutton at the age of the age of 30 — in 1929!

He Forecast the 1929 Crash

The year of the crash was 1929. But Loeb was wise for his age. When he saw that the stock market was selling “ridiculously high” and the #1 investment trust (Goldman Sachs Trading Corporation) was artificially boosting its share price, he knew the end was near. “The market had lost all realism.”

He got out — completely. Years later, he confessed, “When I sold out in October 1929, I not only sold every stock I owned, but I sold every stock every single one of my customers owned — and this included all their favorite stocks they had never touched. It included absolutely everything. No pets, no investor stocks, no favorites, nothing held back. I mean we really sold out. We had nothing but cash.”

Loeb sent all his cash over to First National Bank to be put into safe short-term loans. Loeb said, “My idea was that this was so dangerous, that I not only wanted to get out, but I wanted to stay out and make it hard to get back in again.”

Loeb then took the next boat to Europe for a long vacation. It was three weeks later when the Wall Street bubble burst.

‘The Flexible Man’ and Short-term Trader

He learned a very important lesson. Stocks are inherently volatile, and no one can afford to lose 50-90% of their money, especially if they are near retirement.

He decided to become a short-term trader, never trusting stocks in the long run. He always limited his investments to a handful of stocks, never a diversified portfolio, and he became a short-term trader.

“Over diversification is a poor protection against lack of knowledge,” he counseled. (p. 158)

He said, “The truly flexible man in the market is the man who can be foolish at times, bullish at times, bearish at times, borrow money at times, be short at times, the person who can learn to be an expert on gold stocks in one period and some other style of stock in some other period. These men are exceedingly super-rare. But they exist. And they are the men to watch, they are the men to learn from, they are the men who really make money on Wall Street.”

Many of his Wall Street adages are quotes in “The Maxims,” such as:

“My first rule is to buy only something that is quoted daily.” (p. 126)

That way, you can always get out if you want. If you have a choice between investing in private oil wells, or a publicly-traded energy stock, Loeb would recommend the energy stock that is quoted daily. If oil prices plunge, you can still get out.

“Knowing when to sell is the most difficult decision to make in investing.” (p. 169)

“Look at investments coldly, allowing no sentiment to play any part.” (p. 127)

He combined fundamental and technical analysis to find the best stocks to buy. He was always flexible. He declared, “If there’s anything I detest, it’s a mechanistic formula for anything. People should use their heads and go by logic and reason, not hard and fast rules.” (p. 177)

Since Loeb passed away in 1974, more and more investors have shifted toward long-term investing in index funds, following the advice of people like Jeremy Siegel, author of “Stocks for the Long Run” (also quoted many times in “The Maxims”).

But Loeb’s advice is still relevant. Many investors still like to trade stocks. This year, 2020, is a perfect example. Income investing used to work year after year. But since the pandemic hit, the hot sector is now technology and gold.

Be a Better Investor with ‘Maxims’

Every subscriber should have a copy of “The Maxims of Wall Street.” It will keep you alert to the new changes going on.

If you want a copy of the new 7^th edition, order online at www.skousenbooks.com, or call Harold at Ensign Publishing at 1-801-414-1040 (Note: This is a new number.) You’ll be glad you did. The price is only $20 for the first copy and $10 for all additional copies (they make great gifts). If you buy a box of 32 copies, the price is only $300. Quite a few subscribers have bought an entire box and given out copies to their friends.

I know subscribers who have a copy on their nightstand and a good source of wisdom with all of us staying at home during these troubled times.

As Dennis Gartman says, “It’s amazing the wisdom one can gain from just one line in your book. I read it every day.”

I autograph and number each copy.

Good investing, AEIOU,

Mark Skousen

You Nailed It!

My Hat Goes Off to Dr. Larry Arnn

The president of Hillsdale College engineered the only in-person graduation ceremony in the country last weekend in Hillsdale, Michigan. He did it in defiance of the governor of Michigan, who said that it was illegal. Over 2,600 students and family members showed up. The college took all precautions to make the event safe, and they succeeded.

In defense of the First Amendment right to the freedom of peaceful assembly, Larry Arnn stated, “Since 1856, the college has exercised those rights by holding annual commencement exercises — including during the Civil War, World War I, the 1918 Pandemic, the Great Depression and World War II.”

Your editor visiting Larry Arnn in his Hillsdale office last year

It was gutsy for Hillsdale to do its graduation in 1918, and the administration pulled it off again in 2020.

Dr. Arnn has agreed to tell us the whole story at our FreedomFest conference next year. It is not to be missed!

I’ve been a big fan of Hillsdale College and have lectured there many times.

Here is an important lecture that Heather Mac Donald just delivered there. Must read!

https://imprimis.hillsdale.edu/four-months-unprecedented-government-malfeasance/