“Which solution do you choose? Ridiculously low yield or ridiculously high risk?”

Those penetrating words — from a reader question I received last week — continue to ring in my ears.

My one-word answer: “Neither!”

My 15-minute answer: The new video I just posted to my website on Friday.

My BIG answer: A major free online course I’m developing for everyone who’s thinking about, planning for, or already in retirement.

My new course will tell you how to enjoy your retirement with both relative safety and unusually high returns. It will liberate you from the Faustian low-yield-or-high-risk choices of our time.

But it won’t be ready for a few weeks. So today, as a preamble, I’m going to let someone I loved dearly tell you, in his own words, how he did it.

This author is gone now. But he has left me a great legacy of notes,  audio tapes and video tapes, stacked high in my attic and in our research library.

 

He was my good friend, my great teacher, loyal partner, and, not coincidentally, also my father.

As he tells you his story in his own words, Think about the lessons you can learn. Imagine how you can apply trials, tribulations — and talents — to our times and your money. Then, I will seek to do the same so you can compare your insights to mine.

So you can compare your insights to mine.

How I Found High Return with Low Risk
In America’s Worst Depression of All Time
by J. Irving Weiss (1908-1997)

 

From left to right: J. Irving Weiss, his older brother Abraham (Al) Weiss, and their youngest sibling, Rubin.

 

Many of my friends know me as the only person who saved investors from the Crash of 1929 and then saved them again from the thousands of banks failures that occurred in the years that ensued.

What people may not so well know is the other side of my work — the many years I spent finding value in companies that went on to become some of the greatest winners of the 20th century.

Some people of my generation have fond memories of the family fellowship and sacrifice of the Great Depression, and I do too.

But I also cannot forget the numbers I studied or the suffering they implied. Because in the 1930s, I was tracking the facts and the numbers as they were being released — to figure out what might happen next. I was an investment analyst, and that was my job. So I remember them well.

Years later, economists like Milton Friedman and my young friend Alan Greenspan looked back at those days to decipher what went wrong or why people made and lost money.

Bah! Those guys weren’t there back then. When I first went to Wall Street, Friedman was in junior high and Greenspan was in diapers.

After the crash, I was working with my brother Al at the midtown branch of a small brokerage firm. The stock market had been battered to unheard of lows, but the big spotlight was on banks. People were lining up for their money. Bank failures were spreading like crazy.

 

 

In an attempt to quell rumors of a bank holiday, Governor Lehman of New York pledged that he would never close the banks. In state after state, other officials made similar vows. Then, just a few months later, they turned around and did exactly what they said they would never do. One by one, they closed down the banks in their state. Confidence was shaken still further.

My brother and I decided to track the banking crisis more closely. We figured the money must be going somewhere. But where? Soon we discovered the obvious: If people are taking their money out of the banks, it must show up in the currency in circulation. That was one of the statistics tracked weekly by the Federal Reserve. And it was readily available for the asking.

Currency in circulation is the cash you carry in your pockets. But back then, most of it wasn’t circulating at all. People were taking their money out of the banks and burying it in their back yards or stashing it under the mattress. It was dead money. Currency in circulation became our number one indicator of the banking crisis. Every Friday morning, we got the figures from the newspaper and plotted them on a graph.

It was climbing at a pretty steady clip. Then, the withdrawals accelerated, and the line on our chart began to rise more rapidly. We sensed that the banking crisis was approaching a climactic finish.

President-elect Roosevelt was to be inaugurated in a few weeks. He would have to do something dramatic to stop the cash hemorrhaging from the banks. As inauguration day approached, my brother and I began to speculate that Roosevelt might declare a national bank holiday. But we wanted more than guesswork — we needed solid data.

So on Thursday afternoon, March 2, 1933, two days before FDR was to be inaugurated, we decided not to wait for the next morning’s paper to get the latest from the Fed. Instead, we hopped on the downtown express to the New York Fed’s offices on Liberty Street to get the number in person, as soon as it was released.

The only people waiting in line at the Fed were a few messengers from some banks. No one else was interested in the currency in circulation. When we saw the number, we were shocked. It had surged far beyond anything we had imagined. That was Thursday night. Roosevelt’s inauguration was going to be Saturday morning. We went home, plotted it on our chart, and boy, were we shocked! It was through the roof.

So we immediately set about to map out our buying strategy. I weeded out the companies that met all my criteria: Tremendous value. No debt. Plenty of cash. Dominators of their industry. Reliable history of profits and dividends, even in the worst of times. Top scores on my favorite financial ratios. And a healthy balance among all these factors, because, in my analysis, extra strength in one wasn’t enough to overcome weakness in another.

For each company, I put all this together into a single “score” from 1.0 to 10.0 And then we made our plans to buy all the companies with my highest score.

Then, for the timing we watched the markets, and we watched Roosevelt.

My brother Al said: “This is it! This is the end of the whole stock market decline! Roosevelt is going to have to do something about this. He’s going to have to close the banks.”

I agreed.

Now, most people might think that a bank holiday — the crest of the worst financial crisis in modern history — would be the harbinger of a further stock market decline and a signal to run for the hills. We felt it was exactly the opposite. We believed that it was the government “capitulation” — the belated recognition by Washington that they had lost the battle against the banking crisis. Plus, it was also the first necessary step toward truly resolving it. We saw it as the end of the whole deflation since 1929.

The new President would have no choice but to close the banks, inflate the economy and pump up the stock market. Besides, I can’t stress enough: At these low prices, major blue chips had great value. We had no intention of running for the hills. Our sole purpose was to buy.

The next morning, we went straight to our firm’s main offices downtown. We didn’t stop at the midtown branch. We wanted to get our orders in to the man who talked directly to the floor traders.

We bought everything we could lay our hands on. We bought GM, AT&T, GE, and Sears for pennies on the dollar.

The tape barely moved, it was so dead. No more than 350,000 — 400,000 shares of stock were traded that day. That’s less volume than what typically trades in just one large transaction in modern times. Some people thought it was the eye before the next storm. We didn’t. We just kept right on buying.

The order clerk looked at us as if we were from another world. “How come you guys are buying?” he asked. “You’re the only ones!”

We didn’t tell him. It was none of his business. By the time the day was out, we had bought thousands of shares of stock for ourselves and for our clients, at bargain basement prices. As a matter of fact, they were just about the lowest they had fallen in the entire century.

The next day, Roosevelt was inaugurated. Immediately, he announced that he was closing not only the banks, but also the financial markets. All the stock exchanges were shut down. There was no trading. Everything was frozen. So if you owned stock, it was impossible to sell. If you didn’t own stock, it was impossible to buy.

Investors wondered: “Is this the end?” … “Will the markets ever re-open again?” … “Is there going to be another crash?” Even at such low levels, people were afraid the market could fall a lot further.

But as we approached the end of the banking holiday, sentiment began to change. Confidence in the banking system recovered. Well-heeled investors made plans to start buying some stocks. When the stock market finally reopened, prices jumped up. There was a big gap between the closing prices before the holiday and the opening prices after the holiday. So it was too late to get in at the best prices.

Lucky for us, we got in ahead of time. So we were in great shape. And because we had bought the stocks on margin, our profits were large. Too bad we didn’t hold on for many more years. Instead we sold out for a nice profit.

The First Gold Bugs

The first gold bugs of the twentieth century were people I knew personally — my idol and mentor, Bernard Baruch; my future boss, William Baxter; plus our clients, Thomas Bragg, and Ben Smith.

Bernard Baruch was an advisor to several presidents and is famous for having made a fortune during the crash. William Baxter was the founder of the International Economic Research Bureau. Tom Bragg and Ben Smith were floor traders specializing in gold stocks. I was working for a Wall Street firm at the time, while writing freelance reports on gold, individual companies and commodities for Baxter.

The five of us had been accumulating gold coins in a small way. In those days, very few people were buying the gold pieces. They were being used mostly for gifts and weren’t circulating. But we bought quite a few.

The main reason we liked gold was because its price had been artificially held down at $20.35 an ounce. So the downside risk for us was strictly limited.

But at the time, the average person did not view gold as an investment, as something that might go up or down in value. Instead, most still believed in their cash in banks. Ironically, it was because that cash was backed by gold. In any case, it was assumed that if your money was in a bank, especially a large, well-known bank, the prevailing mood was that it was safe no matter what. That’s why I had such a hard time getting people to pull their money out of their banks.

I had an even harder time persuading them to buy gold, which was ironic because we could buy it so easily — just by walking up to bank tellers and asking for $20 gold pieces. They’d give you as many as you wanted, no questions asked. It was just like asking for $20 bills because all currency notes were exchangeable into gold.

Then we started buying gold shares — this time, investing in bigger amounts. The shares were grossly undervalued and consistently snubbed by most traders. In fact, back in the early 1930s, my boss at our brokerage firm used to laugh at me for buying gold shares. Almost every morning he’d rib me about it.

Gold and gold shares had a bad reputation. Earlier in the century, a bunch of shady characters used to roam the countryside peddling the shares in mining ventures that went belly up. So by the 1930s, most investors gave mining companies a wide berth. But for reasons I’ll explain in a moment, we thought that was about to change.

Besides, we didn’t give a darn about what most people thought or said. We figured we couldn’t go wrong if we concentrated on the biggest companies like Homestake plus a couple of big Canadian companies. We knew we were on the right track because our gold stocks started to move up nicely.

We soon had very respectable paper profits. So some of the boys were itching to get out. With the ‘29 stock market crash still fresh in their minds, you couldn’t blame them for being nervous. One of them alluded to the possibility of “some big selling which could hit at almost any time.” Baruch said he was hanging on. He knew something we didn’t know. But we didn’t find that out until later.

Our immediate question was: “Who’s going to do the selling and how much?” I suggested we get the facts with a survey. I got a hold of the stockholder lists of some of the big mining companies and had our staff call about 400 people at random, asking a simple series of questions — “When did you buy your gold shares?” … “How much do you own?” … “What do you plan to do with them?”

Boy, were we surprised when we saw the results! We rarely got past the first question! About half the stockholders in mining companies didn’t even know they owned the shares. The rest said they had the shares stashed away — in their attic or in a vault somewhere. None of the people had plans to sell the shares.

So I called another meeting and told the boys: “The only big source of selling would have to be from someone right here in this room.” They all breathed a sigh of relief. We held on to our shares and doubled our profits.

 

Bernard Baruch and Irving Weiss

 

Now let me tell you the real reason Bernard Baruch wasn’t selling his gold shares. Gold was leaving the country by the boatload. Baruch was advising FDR at the time and so he was privy to some of the information.

Based on our own logic and the bits and pieces Baruch did talk about, we surmised that the President was going to raise the price of gold anddevalue the dollar. We bought as much as we could, while we still could — gold coins, shares, bullion, you name it.

Then it happened. FDR announced that he was not only raising the price of gold and devaluing the dollar, he was going confiscate gold from the public. He was going to require ordinary people to turn in the gold they owned. We were ready, but we were also stunned. We had no idea FDR was going to be that tough.

The devaluation changed everything. It was the watershed event we were waiting for to help end the deflation. And most investors today have no idea how huge the profits were in gold shares after the devaluation. Homestake, for instance, went from a bottom of $65 per share after the crash to $130 and change in 1931. From there, it doubled again to more than $350 a share by 1933. By the time it peaked in 1936, it had climbed to $540 a share — an astronomical gain of more than $470 per share. That was a 7-fold increase.

In the meantime, the dividends also doubled, redoubled, and doubled again — reaching $56 per share in 1935. Think about it. The dividends earned in one year alone almost paid back the entire purchase price of the stock.

Homestake was not the only one. Dome, another great gold producer, did even better. You could have bought Dome for as little as $6 a share after the crash. But in the next seven years, it paid $16.60 in dividends. The dividends alone were equal to more than 2 1/2 times the cost of the stock. Meanwhile, the price of Dome rose to $61 a share. A person who put $10,000 into Dome could have walked away with more than $100,000 — while nearly everything else remained depressed.

The Best Income Opportunity of My Lifetime

I went to work full time for Bill Baxter to head up his research department and then, later, run his company. We built it into one of the most well-respected, independent stock research firms on Wall Street.

One day before World War II, I went to Bill and I said: “FDR is already helping to fight a war overseas. His hands are full. He’s not going to fight another war at home. Let’s get a study up on utilities. They’re way down and they look like fantastic values.”

We got our staff together and spent a whole year researching the utilities.

I was deeply interested in utilities for the same reason many investors became enamored with them years later: A stable, cash-cow business with nice steady growth. And perhaps best of all, the likelihood of steadily rising dividends on their shares.

After much painstaking effort, we came to the conclusion that it was time to buy.

We bought bonds that were going at 25 cents on the dollar, like Standard Gas and Electric. We bought stocks in Commonwealth and Southern which were going across the tape, on the Big Board, at 10, 15, 16 cents a share.

It was another great buying opportunity: Tremendous value. Extremely low prices. Virtually no buyers around except ourselves.

The big speculators, the ones who had encouraged earlier price run-ups in utilities, were all gone, washed out. The more aggressive managers were also gone. The only ones left operating the utilities were engineers — solid, down-to-earth people who knew the technology and just wanted to provide a good service. It was a great time to buy.

Important Lessons

Martin here again: I’m very curious to know what lessons you take away from Dad’s story. When you get a chance, please do share your thoughts with me.

For me personally, the ones that rise first to the top of my mind are those most directly related to my own work as an investment analyst for the last 45 years …

Lesson #1. Value, value, VALUE! This is what helped make Warren Buffett so successful. But Buffett learned the fundamental secret of value investing from the great teachers that preceded him; and Dad’s experience as a value investor and analyst came even before many of those teachers began their careers.

His (and my) simple prescription: Before spending a dime on a stock, make sure you know how to find true value; or follow the guidance of someone who does.

Lesson #2. Safety, stability and reliability! Hot, flashy stocks … hush-hush tips about companies with secret discoveries and magic potions … all make for tall stories and taller headlines.

But they can also quickly be revealed as fairy tales with nightmarish endings.

Make sure every stock you buy passes tough tests for safety; that are proven survivors even in the worst of times.

Lesson #3. Protection from down markets. Warren Buffett is an investor I admire. But even his Berkshire Hathaway lost over half its value in 2008. So obviously, something very fundamental was — and probably still is — missing from that particular value investing formula.

Whenever the next big decline may come, prepare ahead of time by sticking with the safest stocks … and be ready to implement bear market strategies when you get a confirmation of the market turn.

[Editor’s note: This past Wednesday, Dr. Weiss revealed, for the first time, his proven “bear market warning indicator.” For the video of his presentation, click here.]

Lesson #4. Extremely Selective Investing. Dad not only pored over each company’s balance sheets and income statements with a fine tooth comb, he also developed a systematic scoring system for ranking the best of the best.

He did it manually for a handful of companies, using giant paper spreadsheets. I do it automatically for over 12,000 companies, using extremely smart computer models (most of which my father helped me create before he passed away).

Whether you follow me closely or not, be sure not to veer too far from these principles, all of which are vital for today’s uncertain times.

Good luck and God bless!

Martin

http://www.moneyandmarkets.com/great-conundrum-times-ridiculously-low-yield-ridiculously-high-risk-65994#.VG69JPnF-8o