"L.L.B. Angas - Market Master"

Lawrence Lee Bazley (L.L.B.) Angas was born in February 1893. His interest in finance was not surprising, given the fact that he was born into a family with a banking background.

Angas was educated in both England and France, gaining his Master of Arts degree at Oxford University. He joined the British army at the beginning of World War I and served in France and Italy. He received the Military Cross, and the Croix de Guerre. After the war, and given his distinguished war service record, he was asked to stand for the House of Commons.

Major Angas, drawing on his family's background in the finance industry and his family's work with the poor in the slums of London, decided to spend some time analysing the causes of the business cycle, and the fluctuations in company profits and employment, as they related to the business cycle. In 1925 he decided to demonstrate his theories on the business cycle by forecasting commodity and share prices. He was also engaged in the banking and stock broking industries in London.

In his 1932 Forecast, written at the depths of the Great Depression, he advised his clients:

In September, 1929, the American investing public was borrowing on short term at 15 percent. to buy shares yielding under 3 percent.; now they are able to borrow at 3 percent. And invest in shares of the very highest grade with earnings yields (on last quarter's basis - not on last year's) of 15 percent. to 25 percent. These are clearly panic conditions; conditions like these can never last. (My emphasis).

(Investment for Appreciation, page 348.)

Clearly, Angas' study of business cycles enabled him to give his clients timely advice.

Angas believed that to become a successful investor required a clear picture of:

• A knowledge of the pitfalls to avoid.
• A series of rules.
• A definite trading system that includes rules on how best to treat losses and profits and how to protect oneself against unforeseen contingencies.

In his widely acclaimed book Investment for Appreciation, Angas provides the reader with what he calls the "economic knowledge and mental outlook necessary for success". (Page ix.)

Market Movements

Like Charles Dow, Angas asserted that there were three definite kinds of market movements that occurred simultaneously:

• Major or cyclical, which usually lasted for two or more years.
• Intermediate, which lasted for two or more months.
• Minor, which lasted up to two or more weeks.

Investment Objectives

Angas believed that there were three different types of investors:

1. Those Concerned Mainly With the Preservation of Capital

These people believe that safety can be obtained only by choosing bonds or stocks that have a good record over the previous four or five years.

Angas believed that this investment objective could be self-defeating:

…This policy of buying only those bonds, or common stocks, whose recent record has been exceptionally good, although intended to be ultra-conservative, as a general rule means buying near the top… The quest of safety thus often leads to a heart-breaking series of losses.

(Investment for Appreciation, page 7.)

2. Those Concerned With Obtaining a High Income From Limited Capital

Angas points out that the goal of high income and a large capital appreciation are often incompatible.

3. Those Who Primarily Aim for Capital Appreciation

Angas notes that one must normally sacrifice a higher amount of income from stocks, in favour of substantial capital gain in the future. He believed that in the early stages of a bull market, the three most promising groups for capital appreciation and higher income in the future, are usually:

(i) The industries whose profits fluctuate considerably throughout the course of the business cycle; e.g., the raw material, constructional and luxury industries.(ii) The industries for whose products a huge deferred replacement demand has piled up during the course of depression. (iii) The industries with an especially promising future in the present decade [1930s], such as aircraft, Diesel engines, air-conditioning.

(Investment for Appreciation, pages 8 and 9.)

The Business Cycle

Angas observed that the business cycle lasted from five to eleven years, and has five stages - revival, prosperity, boom and credit crisis, collapse, and depression.

During the revival phase, Angas argued that the consumer goods industries rose first, as companies that make consumer goods are the first to increase their profits. He noted that the share price of companies that produced necessities fluctuated least throughout the business cycle. These included foodstuffs, passenger travel and tobacco.

Stocks in so-called 'representative industries', whose sales fluctuated in line with general business, are next to rise. These include the paper trade, chemicals, the cable and telegraph companies, railways, shipping and the newspaper trade (which depends upon advertisement revenue).

Angas believed that the most profit was to be made by buying stocks that fluctuated the most throughout the cycle. These stocks can be categorized in three groups:

(i) The raw material industries.
(ii) The constructional industries, including machinery, and
(iii) The luxury industries.

(Investment for Appreciation, page 49.)

Specifically, Angas suggested buying the following stocks:

Deferred Replacement Demand Industries

These are industries where demand dies during a downturn and returns strongly after the slump. Examples given by Angas include motors, railway equipment, paint and clothing.

The Ultra Promising Infant Industries

These are industries that "seem to posses the characteristic of super-charged economic pressure behind them". In 1936, he listed: … air-conditioning, the Diesel engine, rayon, aircraft, beer cans, bus companies, television, financing of installment buying, the pre-fabricated house, industrial alcohol, certain metal alloys, the mechanical refrigerator, and so on." (Investment for Appreciation, page 53.)

He adds: "If one can cleverly pick the best companies in these industries, one obtains the chance of exceptional gains". (Investment for Appreciation, page 53.)

(History has shown that the above industries became major growth industries, with some stocks experiencing exceptional growth.)

Rapidly Growing Ancillary Industries

He believed that these industries will supply the new boom industries.

Shares with High Leverage

Angas believed that leveraged companies "suffer particularly in slumps but benefit particularly in booms". (Investment for Appreciation, page 54.)

Industries With a Heavy Proportion of Fixed Overhead Charges

These industries can sell more goods, without a corresponding increase in costs. Examples include hotels and newspapers.

Inflation Stocks

When inflation rises, some industries benefit more than others, such as heavily mortgaged real estate.

Vertical Combines

Vertical combines (companies which produce their own raw materials and finished products) can increase their profits, and hence their share price, after a slump.

Industries to Avoid

Angas warns investors to avoid industries which:

• Have recently boomed (having made abnormal gains).
• Are degressive (due to changes of fashion or the advent of substitute products).

• Politically dangerous (due to changes in government regulations).

When to Sell

He gives six reasons to sell stocks:

• Prospect shares. Sell shares whose price is 30 or more times earnings, and are unlikely to yield 5% or more in the next year.
• The wide movers. Sell shares that fluctuate widely if they have risen much faster than the average.
• Narrow market shares. Illiquid stocks should be sold after they have risen sharply. Otherwise they become difficult to sell. Furthermore, a little selling can cause a large decline.
• Shares bought as short-run, intermediate speculation. Sell shares when the market conditions appear to be dangerous.
• Shares bought on borrowed money.
• Shares that have behaved badly. These are shares that have not shown a normal chart pattern in the previous upswing.

Stop-Loss Orders

Angas argues strongly that: "A rigid system of loss-taking is essential". (Investment for Appreciation, page 95.)

He adds:

Any share, no matter how good it appears to you… can fall 50% either fast or imperceptibly, even if the directors appear both efficient and honourable, and even though everything appears promising and serene on the surface. The first duty of every investor, therefore, is to prevent such a disaster ever happening to himself.

(Investment for Appreciation, page 96.)

Charts

Although Angas took into account cycles and the economics of supply and demand, he nevertheless strongly advocated the use of charts. This was most unusual in 1936!

Angas argued that "graphs tell you when to operate, but not why to operate; and since Timing is often as important as Selection, charts can prove extremely useful."

(Investment for Appreciation, page 104.)

(Angas used trend channels on charts to help him determine the trend and the momentum of the stocks he owned.)

Angas' Personal Experience of Charts

(1) They are valuable in telling you When to buy, and When to sell - both from a cyclical and intermediate point of view. (2) They often "suggest" What to buy, although purchases should not be made unless the trend is favourable from an economic point of view.
(3) They are useful for suggesting the wisest points at which to place selling limits and stop-loss orders.
(4) They often suggest how far a swing may go.
(5) They are much more reliable than economics in Intermediate trading.
(6) They are slightly more reliable than economics in cyclical trading.
(7) The chart reader, however, should not be a fanatic. Charts are merely one aid, out of many, in making decisions. And obviously, not all chart-reading methods (or chart readers) are equally efficient.

(Investment for Appreciation, pages 129 to 130.)

Qualities Required

Angas believed that there were 13 chief qualifications to be a successful investor:

1. A knowledge of the business cycle, both in single industries and in industry as a whole.
2. A knowledge of the economics of the Stock Exchange.
3. A knowledge of the simple mathematics of staking, and of compatible loss- and profit-taking systems.
4. A knowledge of crowd psychology.
5. A good judgement of men (managerial honesty) as well as of investments.
6. Patience, and self-control.
7. Total lack of inordinate optimism, or greed.
8. Willingness to change one's mind, and admit that one was wrong.
9. Willingness to cut losses early.
10. A curious mixture of courage and caution: of scientific theory and speculative technique.
11. Extreme fastidiousness in selecting shares.
12. Ability to adhere to a general plan.
13. The nerve to follow rules which experience and analysis have clearly shown to be sound.

(Investment for Appreciation, page 213).

On the need to follow sell signals without question or hesitation, Angas concluded that "Fear of 'selling at the bottom' is one of the most capital destroying diseases in investment." (Investment for Appreciation, page 248.)

Don'ts

One of Angas' greatest achievements was his list of 'don'ts'. These rules were excellent in 1936 and remain excellent rules today. The more things change, the more they stay the same.

Below is a selection of these rules:

• Do not buy in a hurry. One is almost always sorry the next day.
• Do not buy when you are excited. You have probably caught fever from the crowd.
• If in doubt about buying, wait.
• Have no feelings; only reasons.
• Never regret not having bought.
• Never enter a market without studying its internal technical condition.
• Do not buy a share without looking at its individual graph (a) over the last five years (monthly); (b) over the last 15 weeks (daily or weekly).
• Rarely trust a tipster. You will probably come in at the peak of his boom.
• Beware of abnormally high yields… They may signify dangers known only to directors.
• Do not grab at small profits and cling to your losses.
• Never let a profit of over 15% run into a loss.
• Sell and regret! Expect to be wrong three times out of ten. And always expect to miss best prices.
• Don't be afraid to be out of the Market. To anticipate missing numerous upswings is the correct "state of mind" for the Rational Investor.
• Trust your pessimism; mistrust your optimism. (But expect to feel rather nervous when you buy.)
• If a share fails you, punish it by selling. Don't over-trade, especially at the top (or bottom) of long moves. Stick to small quantities. Be conservative.
• Watch your rubbishy shares more carefully than the Leaders.
• Try to have a cash reserve.
• The wise investor aims to succeed by following the Rules - not the Exceptions. (Although he will always "feel" that somehow things are different this time, he should not give way to these dangerous "feelings".)
• Don't antagonize your broker. Always forgive him.
• Sell when the world is full of hope. Buy when your own nerves are frayed.

• If you cannot follow sound rules continuously, do not speculate.

(Investment for Appreciation, pages 264 to 268.)

Major L.L.B. Angas retired in the mid 1930s in the United States of America. His two addresses at the time when he published Investment for Appreciation were Onslow Gardens in London and The Waldorf-Astoria, Park Avenue, New York, indicating he was highly successful in his business endeavours.

His publications include:

Angas, L.L.B., Investment for Appreciation, Somerset Publishing Co., New York, 1936.

Angas, L.L.B., The Problems of the Foreign Exchanges, Macmillan and Co., London, (date unknown.)

[This article was first published in the Australian Technical Analysts' Association Journal, September/October 2000. It is republished here with the permission of the Association.]

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