I’ve written previously about the legendary Gerald Loeb, stockbroker (an occupation I typically have my reservations about) but stock speculator foremost. If you want to learn how to put your money into the market and let it grow strongly while willing to only spend somewhat few or minimal time on your operations, read his two books.
Even in the stock market community, most people don’t know about his second book The Battle for Stock Market Profits (1971), published almost 4 decades after his first, which bears a large amount of gems additionally to his early volume.
Here, I want to briefly outline the value of a concept he describes in his teachings – the idea of the ‘Ever-Liquid Account’. If you only take away two things from his legacy, it should be the application loss-cutting, and the concept of the ever-liquid account.
Rule 1 – Expose your capital to the best stocks already in an uptrend
Expose your capital to the best stocks that move up. That is more or less self-evident. Or is it? You’ll be surprised, but 95% of people (including fund managers) under-perform even the market averages, and most actually lose money over a span of 10 years (if they even make it past a year or two). There are many reasons for that, but a big one is sticking to stocks, which they themselves ‘like’ or have enthusiastic opinions about, through thick and thin.
We’re in it to make profits. Not to invest in companies or the economy. We’re not venture capitalists, nor a charity. Ergo, if we put our hard-earned money into a risky situation at all, it should follow that we only expose it to opportunities that have a meaningful chance of doubling the money we risked within 6 months or so at least.
In simple terms, get into the best stocks, or nothing.
Another point that Loeb makes: “If something is not worth following to the limit, it’s not worth following at all“. Note: ‘limit’ does not suggest buying on margin (at least not per se), but a relatively large position size in the context of the market environment that you’re in.
Rule 2 – Follow up gains when you’re right
One side of the coin of the ‘Ever-Liquid Account’ suggests that if you experience success in a stock (i.e. make profits in it that exceed other stocks and the marekt), you are right – because if you were wrong, you would be losing money, or severely under-performing the market. Being right means making good money, and a corollary of being right is the need to maximize your success given that you are right.
Simply put, this means to force-feed money into stocks that make you good money. If you lose, lose small. If you profit, aim to profit big. Of course, you shouldn’t just buy a stock any time you feel like it or the moment you discover it – find low-risk entry and add-on points to expose gradually more capital the moment you get traction.
Rule 3 – Rotate capital out of the under-performers when you’re wrong
Our main aim in speculation (and yes, 99% of people in the market who believe themselves “investors” are in fact speculators or even gamblers) is to make a profit. Buy something a X$, sell it at Y$, with Y being substantially higher than X, making room for uncertainty and market fluctuations – at least that is the aim.
Most people buy a stock or fund they like for some or other reason (e.g. a “blue-chip” stock, a personal favorite, ETFs, etc.), but then proceed to hold it even if it goes sideways, down-wards, or only slightly up while other stocks in the market stage a roadrunner.
The stock market surrounds itself by lingo that serves as a moat to suggest complexity, difficulty, obscurity, and rationalizes charging hefty sums for products and services. The vast majority of amateurs entering the arena are overwhelmed by the jargon and thousands of variables which, so they are told, are crucial to consider in choosing stocks – but it really needn’t be that complicated. In fact, I always advocate simplicity and common sense.
In this context, ask yourself: Why should you stick with a stock that does not meet your expectations, or much better, does not widely exceed them? As established, we’re all in it to make a profit. If stock A is making 10x the profits that stock B is making (your darling stock), why are you sticking with stock B? The answer is, as often, emotions, ego, and an unwillingness to admit mistakes.
The ‘Liquid’ part in ‘Ever-Liquid Account’ stands for turnover, the other side of the coin: moving capital swiftly out of under-performers – or worse, losers – the moment they become apparent, and into the stocks that vastly out-perform most other stocks and the general market.
You should retreat from losses and slow movers. Drain liquidity rapidly from expectation breakers and re-deploy capital swiftly to what the market rewards. “Such an account bends but never breaks“, Loeb admonishes. In the stock market, the grass isn’t just greener on the other side – green grass tends to get even more juicy, while brown grass tends to get browner by the day.
It’s a bit like evolution – all the resources should and will flow to the genetic setup that is most fit in a certain environment in order for that setup to procreate the most. Nature has figured this out a long time ago.
It’s also what the bible implies with ‘To everyone who has, more will be given, and he will have abundance; but from him who does not have, even what he has will be taken away’. This is how a meritocracy works – you give your money to those that are the most successful, because they have demonstrated before that they can use it to produce the best the most in the shortest amount of time. To those who keep losing money, who slack off, or who are otherwise not in a position or have the skillset to produce value on scale, less and less will be given.
Capital flows in the stock market work the same way – money should be shoveled consistently out of the losers and under-performers and into the winners. That way your money is always at its most productive state.
There’s good stocks, and then there’s all the rest. And ‘good’ means making the most profit in the same amount of time.
Simplicity wins
The bottom line is – in the stock market, it pays to be a gold-digger, a ‘one-night-stander’, a serial dater. Don’t ever get married to your stocks or your opinion. Always seek the most productive state that your money can be in, ruthlessly trimming back under-performing and losing propositions, and lending your efforts, time and capital only to that which can serve the growth of your account. Anything else is secondary.
Wanna learn on how to find the best stocks and how to manage your money between them in detail? Check out my educational content here.
