Fred Schwed had a front-row seat to the Great Crash. He worked at a trading desk of a brokerage house since he left college. A week earlier — on October 24 — was the first moment he realized something was off.

October 24th started out like any normal day…until 11 am. The time is important because that was the deadline for margin calls.

The day before, in the final hour of trading “someone had pulled the plug, and an avalanche of common stock had descended on the reluctant and retreating buyers.” That selling triggered margin calls.

If you borrow money to buy stocks, you must meet certain minimum margin requirements. Falling below the minimum triggers a margin call and sticks you with two choices: add cash to your account or sell stocks.

In the booming market of 1929, how many investors using margin had extra cash lying around? Practically none is my guess. Continue Reading…

Oliver B. Adams grew up a poor kid who worked in a grocery store. He wasn’t a clever kid or imaginative. There was nothing special about him. Nothing, except for his obviousness. Yet, that simple trait led him to the top of the advertising business.

Two of his obvious successes stand out. The first was creating a fancy ad campaign for a bond paper company. Adams rushed over to the paper mill to gather the facts. He got a crash course in how the paper was made: the ingredients (white rags), the type of water used, how it was dried, and even the inspection process.

Then the obvious solution for the ad campaign came to him. Adams’s proposed highlighting all the ingredients: “every bond paper is made with carefully selected rags…pure filtered water… loft-dried…hand-inspected.”

The CEO was dumbfounded. There’s was nothing original about it. Everyone already knew that about bond paper. But Adams quickly explained, “I never knew. The entire agency uses the stuff daily and none of us know. Who are you advertising to? Paper makers or paper users?” Continue Reading…

Edgar Lawrence Smith concludes his classic book with the importance of “Investment Management.” I don’t know how original this concept was in 1924, but investment management is exactly like it sounds. Anyone who’s read a few investing books should recognize the principles Smith lays out since it fits the basic concepts of investment planning today.

Obviously, the big difference between then and now is that most investors are analyzing funds or strategies instead of individual stocks and bonds. And analyzing might be an exaggeration.

Smith’s point falls under the Peter Lynch maxim of “Know what you own” and keep a watchful eye over it.

But first you need a sound plan. He lays out the case for management as an ongoing effort to balance a portfolio between stocks and bonds based on whatever the current environment warrants.

Then he expands into having a plan for the long term (including the next generation), the importance of diversification, and understanding the limits of what’s possible.

Here’s how Smith broke it down: Continue Reading…