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diff --git a/26841-h/26841-h.htm b/26841-h/26841-h.htm new file mode 100644 index 0000000..829b2d8 --- /dev/null +++ b/26841-h/26841-h.htm @@ -0,0 +1,2803 @@ +<!DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Strict//EN" + "http://www.w3.org/TR/xhtml1/DTD/xhtml1-strict.dtd"> + +<html xmlns="http://www.w3.org/1999/xhtml" xml:lang="en" lang="en"> + <head> + <meta http-equiv="Content-Type" content="text/html;charset=iso-8859-1" /> + <meta http-equiv="Content-Style-Type" content="text/css" /> + <title> + The Project Gutenberg eBook of Successful Stock Speculation, by J. J. Butler + </title> + <style type="text/css"> +/*<![CDATA[ XML blockout */ +<!-- + p {margin-top: .75em; text-align: justify; margin-bottom: .75em;} + h1,h2,.p1 {line-height: 1.5;} + h1,.p3 {font-weight: normal;} + hr {width: 65%; margin: 2em auto; clear: both;} + table {margin: 1em auto;} + td {vertical-align: bottom;} + .td1 {font-size: x-large; font-weight: bold; padding-top: 1em; padding-bottom: .5em;} + .td2 {font-size: large; font-weight: bold; padding-bottom: .5em;} + .td3,.td6,.td7 {text-align: right;} + .td4 {padding-right: 4em; padding-left: 1em; font-variant: small-caps;} + .td5,.td4 {text-align: left;} + .td6,.td5 {padding-right: 2em;} + .td7,.td6 {padding-left: 2em;} + .tr1 td {border-top: solid black 1px;} + body {margin-left: 10%; margin-right: 10%;} + .pagenum {position: absolute; right: 1%; font-size: small; font-style: normal; text-align: right; text-indent: 0em;} + .blockquot {margin: 1em 10%;} + .bq2 {margin: 0 20%;} + .center,h1,h2,h3,.td1,.td2,.p1 {text-align: center;} + .footnotes {border: dashed 1px; margin-top: 2em;} + .footnote {margin-left: 10%; margin-right: 10%; font-size: 0.9em;} + .footnote .label {position: absolute; right: 84%; text-align: right;} + .fnanchor {vertical-align: 0.25em; font-size: .8em;} + .trn {border: solid 1px; margin: 3em 15%; padding: 1em; text-align: justify;} + img {border: none;} + a:link,a:visited {text-decoration: none;} + .abv, .blw {font-size: 70%;} + .abv {vertical-align: 0.7ex;} + .blw {vertical-align: -0.3ex;} + .bk2 {margin: .25em auto; width: 17em;} + .bk3 {padding: .5em 0; border-top: solid 1px; border-bottom: solid 1px; text-align: justify;} + .p1 {margin-top: 5em; margin-bottom: 5em;} + .p3 {line-height: 2;} +// --> +/* XML end ]]>*/ + </style> + </head> +<body> + + +<pre> + +Project Gutenberg's Successful Stock Speculation, by John James Butler + +This eBook is for the use of anyone anywhere at no cost and with +almost no restrictions whatsoever. You may copy it, give it away or +re-use it under the terms of the Project Gutenberg License included +with this eBook or online at www.gutenberg.org + + +Title: Successful Stock Speculation + +Author: John James Butler + +Release Date: October 8, 2008 [EBook #26841] + +Language: English + +Character set encoding: ISO-8859-1 + +*** START OF THIS PROJECT GUTENBERG EBOOK SUCCESSFUL STOCK SPECULATION *** + + + + +Produced by Stephen Blundell and the Online Distributed +Proofreading Team at http://www.pgdp.net (This file was +produced from images generously made available by The +Internet Archive/American Libraries.) + + + + + + +</pre> + + +<h1><big>Successful<br /> +Stock Speculation</big></h1> + +<h2><span class="p3"><i><small>By</small></i><br /> +J. J. BUTLER</span></h2> + +<p class="p1"><i>Written April 1922<br /> +Published December 1922</i></p> + +<div class="p3"><p class="center"><i>Published by</i><br /> +NATIONAL BUREAU OF FINANCIAL INFORMATION<br /> +395 Broadway, New York City</p></div> + +<hr /> + +<div class="bk2"> +<p class="center"><i>This Book Is Not Copyrighted</i></p> + +<div class="bk3">We believe the principles expounded +in this book are of immense value +to everyone who buys speculative +securities, and we do not object to +anyone reproducing any part of it, +whether or not we are given credit +for it.</div> + +<p class="center"><small><b>National Bureau of Financial Information</b></small></p></div> + +<hr /> +<h2>CONTENTS</h2> + +<div class='center'> +<table border="0" cellpadding="2" cellspacing="0" summary=""> +<tr><td class="td1" colspan="3"></td></tr> +<tr><td class="td2" colspan="3"></td></tr> +<tr><td class="td3"></td><td class="td4"></td><td class="td3"></td></tr> +<tr><td class="td1" colspan="3">PART 1</td></tr> +<tr><td class="td2" colspan="3">INTRODUCTORY CHAPTERS</td></tr> +<tr><td class="td3"><small>Chapter</small></td><td class="td4"> </td><td class="td3"><small>Page</small></td></tr> +<tr><td class="td3">I.</td><td class="td4">The Purpose of This Book</td><td class="td3"><a href="#Page_7">7</a></td></tr> +<tr><td class="td3">II.</td><td class="td4">What Is Speculation</td><td class="td3"><a href="#Page_9">9</a></td></tr> +<tr><td class="td3">III.</td><td class="td4">Some Terms Explained</td><td class="td3"><a href="#Page_13">13</a></td></tr> +<tr><td class="td3">IV.</td><td class="td4">A Correct Basis for Speculating</td><td class="td3"><a href="#Page_17">17</a></td></tr> +<tr><td class="td1" colspan="3">PART 2</td></tr> +<tr><td class="td2" colspan="3">WHAT AND WHEN TO BUY AND SELL</td></tr> +<tr><td class="td3">V.</td><td class="td4">What Stocks to Buy</td><td class="td3"><a href="#Page_23">23</a></td></tr> +<tr><td class="td3">VI.</td><td class="td4">What Stocks Not to Buy</td><td class="td3"><a href="#Page_25">25</a></td></tr> +<tr><td class="td3">VII.</td><td class="td4">When to Buy Stocks</td><td class="td3"><a href="#Page_29">29</a></td></tr> +<tr><td class="td3">VIII.</td><td class="td4">When Not to Buy Stocks</td><td class="td3"><a href="#Page_33">33</a></td></tr> +<tr><td class="td3">IX.</td><td class="td4">When to Sell Stocks</td><td class="td3"><a href="#Page_35">35</a></td></tr> +<tr><td class="td1" colspan="3">PART 3</td></tr> +<tr><td class="td2" colspan="3">INFLUENCES AFFECTING STOCK PRICES</td></tr> +<tr><td class="td3">X.</td><td class="td4">Movements in Stock Prices</td><td class="td3"><a href="#Page_41">41</a></td></tr> +<tr><td class="td3">XI.</td><td class="td4">Major Movements in Prices</td><td class="td3"><a href="#Page_43">43</a></td></tr> +<tr><td class="td3">XII.</td><td class="td4">The Money Market and Stock Prices</td><td class="td3"><a href="#Page_47">47</a></td></tr> +<tr><td class="td3">XIII.</td><td class="td4">Minor Movements in Prices</td><td class="td3"><a href="#Page_49">49</a></td></tr> +<tr><td class="td3">XIV.</td><td class="td4">Technical Conditions</td><td class="td3"><a href="#Page_51">51</a></td></tr> +<tr><td class="td3">XV.</td><td class="td4">Manipulations</td><td class="td3"><a href="#Page_53">53</a></td></tr> +<tr><td class="td1" colspan="3">PART 4</td></tr> +<tr><td class="td2" colspan="3">TOPICS OF INTEREST TO SPECULATORS</td></tr> +<tr><td class="td3">XVI.</td><td class="td4">Marginal Trading</td><td class="td3"><a href="#Page_61">61</a></td></tr> +<tr><td class="td3">XVII.</td><td class="td4">Short Selling</td><td class="td3"><a href="#Page_65">65</a></td></tr> +<tr><td class="td3">XVIII.</td><td class="td4">Bucket Shops</td><td class="td3"><a href="#Page_69">69</a></td></tr> +<tr><td class="td3">XIX.</td><td class="td4">Choosing a Broker</td><td class="td3"><a href="#Page_71">71</a></td></tr> +<tr><td class="td3">XX.</td><td class="td4">Puts and Calls</td><td class="td3"><a href="#Page_73">73</a></td></tr> +<tr><td class="td3">XXI.</td><td class="td4">Stop Loss Orders</td><td class="td3"><a href="#Page_75">75</a></td></tr> +<tr><td class="td1" colspan="3">PART 5</td></tr> +<tr><td class="td2" colspan="3">CONCLUDING CHAPTERS</td></tr> +<tr><td class="td3">XXII.</td><td class="td4">The Desire to Speculate</td><td class="td3"><a href="#Page_81">81</a></td></tr> +<tr><td class="td3">XXIII.</td><td class="td4">Two Kinds of Traders</td><td class="td3"><a href="#Page_87">87</a></td></tr> +<tr><td class="td3">XXIV.</td><td class="td4">Possibilities of Profit</td><td class="td3"><a href="#Page_91">91</a></td></tr> +<tr><td class="td3">XXV.</td><td class="td4">Market Information</td><td class="td3"><a href="#Page_95">95</a></td></tr> +<tr><td class="td3">XXVI.</td><td class="td4">Successful Speculation</td><td class="td3"><a href="#Page_103">103</a></td></tr> +</table></div> + +<hr /> +<h2><span class="p3"><i>PART ONE</i><br /> +INTRODUCTORY CHAPTERS</span></h2> + +<hr /><p><span class='pagenum'><a name="Page_7" id="Page_7">[7]</a></span></p> +<h2>CHAPTER I.<br /> +THE PURPOSE OF THIS BOOK</h2> + +<p>This book is written for the purpose of +giving our clients some ideas of the fundamental +principles that guide us when we select +stocks for them to buy, but these principles +are valuable to every person who trades +in listed stocks or in any other kind of speculative +stocks.</p> + +<p>First of all, we want you to get a clear +conception of the meaning of the word speculation, +which is explained in the next chapter. +Our purpose is to protect you against +losses as well as to enable you to make profits, +and it is very important that you understand +how to provide for safety in your speculating.</p> + +<p>It is a well known fact that there are tremendous +losses in stock speculation, but we +claim that almost all of these losses would +be avoided if all speculators were guided by +the principles expounded in this book.</p> + +<p>"What" and "When" are two very important +words in stock speculation, and we cannot +urge upon you too strongly to study carefully +<a href="#CHAPTER_V">Chapters V. to IX.</a><span class='pagenum'><a name="Page_8" id="Page_8">[8]</a></span></p> + +<p><a href="#CHAPTER_X">Chapters X. to XV.</a> tell you much about +the influences that affect the prices of stocks, +a knowledge of which should also be a guide +to you in making your selections.</p> + +<p>Perhaps the most important chapter in +the entire book is <a href="#CHAPTER_XXV">XXV.</a>, on Market Information. +A careful reading of this chapter +should convince you that much of the prevailing +information about the stock market +is misleading. That fact alone accounts for +many of the losses in stock speculation.</p> + +<p>It has been our aim to state all facts +briefly. The entire book is not long, and it +will not require much of your time to read +it through carefully. We are sure you will +get many ideas from it that will help you.</p> + +<hr /><p><span class='pagenum'><a name="Page_9" id="Page_9">[9]</a></span></p> +<h2>CHAPTER II.<br /> +WHAT IS SPECULATION?</h2> + +<p>To speculate is to theorize about something +that is uncertain. We can speculate +about anything that is uncertain, but we +use the word "speculation" in this book with +particular reference to the buying and selling +of stocks and bonds for the purpose of making +a profit. When people buy stocks and +bonds for the income they get from them +and the amount of that income is fixed, they +are said to invest and not to speculate. In +nearly all investments there is also an element +of speculation, because the market price +of investments is subject to change. "Investment" +also conveys the idea of holding +for some time whatever you have purchased, +while speculation conveys the idea of selling +for a quick profit rather than holding for +income.</p> + +<p>To the minds of most people, the word +"speculation" conveys the thought of risk, +and many people think it means great risk. +The dictionary gives for one of the meanings +of speculation, "a risky investment for large<span class='pagenum'><a name="Page_10" id="Page_10">[10]</a></span> +profit," but speculation need not necessarily +be risky at all. The author of this book once +used the expression, "stock speculating with +safety," and he was severely criticized by a +certain financial magazine. Evidently the +editor of that magazine thought that "speculating" +and "safety" were contradictory +terms, but the expression is perfectly correct. +Stock speculating with safety is possible.</p> + +<p>Of course, we all know that the word +"safety" is seldom used in an absolute sense. +We frequently read such expressions as: +"The elevators in modern office buildings are +run with safety." "It is possible to cross +the ocean with safety." "You can travel +from New York to San Francisco in a railroad +train with safety." And yet accidents +do occur and people do lose their lives in +elevators, steamships, and railroad trains. +Because serious accidents are comparatively +rare, we use the word "safety."</p> + +<p>In like manner it is possible to purchase +stocks sometimes when it is almost certain +that the purchaser will make a profit, and +that is "stock speculating with safety." When +Liberty Bonds were selling in the 80's, many +people bought them for speculation. They<span class='pagenum'><a name="Page_11" id="Page_11">[11]</a></span> +were not taking any risk, except the slight +risk that the market price might go still +lower before it would go higher, and that +did not involve any risk for those who knew +they could hold them. The fact that the +market prices of Liberty Bonds would advance +was based upon an economic law that +never fails. That law is that when interest +rates go up, the market prices of bonds go +down, and when interest rates go down, the +market prices of bonds go up. When Liberty +Bonds were selling in the 80's, interest rates +were so very high, it was certain that they +would come down. That the market prices +of Liberty Bonds would go up was also certain, +but nobody could tell how much they +would go up in a given time. It was that +element of uncertainty that made them speculative, +and not that there was any doubt +about the fact that the market prices of +them would go up. Buying Liberty Bonds +at that time was speculating with safety. +If you read this book with understanding, +you will know much about speculating with +safety.</p> + +<hr /><p><span class='pagenum'><a name="Page_13" id="Page_13">[13]</a></span></p> +<h2>CHAPTER III.<br /> +SOME TERMS EXPLAINED</h2> + +<p>There are certain terms used in connection +with stock speculation that are very familiar +to those who come in contact with +stock brokers, and yet are not always familiar +to those who do business by mail. Undoubtedly +the majority of our readers are +familiar with these terms, but we give these +definitions for the benefit of the few who +are not familiar with them.</p> + +<p>Trader: A person who buys and sells +stocks is usually referred to as a trader. The +word probably originated when it was customary +to trade one stock for another and +later was used to refer to a person who sold +one stock and bought another. He was a +trader; but the person who buys stocks for +a profit and sells them and takes his profit +when he gets an opportunity, may not be a +trader in the strict sense of the word. However, +for convenience, we use the word +"trader" in this book to refer to any one who +buys or sells stocks.<span class='pagenum'><a name="Page_14" id="Page_14">[14]</a></span></p> + +<p>Speculator: This word refers to a person +who buys stocks for profit, with the expectation +of selling at a higher price, without +reference to the earnings of the stock. He +may sell first, with the expectation of buying +at a lower price, as explained in <a href="#CHAPTER_XVII">Chapter +XVII.</a> on "Short Selling." In many cases +where we use the word "trader," it would +be more correct to use the word "speculator."</p> + +<p>Investor: An investor differs from a speculator +in the fact that he buys stocks or +bonds with the expectation of holding them +for some time for the income to be derived +from them, without reference to their speculative +possibilities. We believe that investors +always should give some consideration to +the speculative possibilities of their purchases. +It frequently is possible to get speculative +profits without increase of risk or +loss of income.</p> + +<p>Bull: One who believes that the market +price of stocks will advance is called a bull. +Of course, it is possible to be a bull in one +stock and a bear in another. The word is +used very frequently with reference to the +market, a bull market meaning a rising +market.<span class='pagenum'><a name="Page_15" id="Page_15">[15]</a></span></p> + +<p>Bear: The opposite of a bull is a bear. +It refers to a person who believes that the +market value of stocks will decline, and a +bear market is a declining market.</p> + +<p>Lambs: "Lambs" refers to that part of +the public that knows so little about stock +speculating that they lose all their money +sooner or later. The bulls and bears get +them going and coming. If the lambs would +read this book carefully, they would discover +reasons why they lose their money.</p> + +<p>Long and Short: Those who <b>own</b> stocks +are said to be long, and those who <b>owe</b> stocks +are said to be short. Short selling is explained +in <a href="#CHAPTER_XVII">Chapter XVII</a>.</p> + +<p>Odd Lot: Stocks on exchanges are sold +in certain lots. On the New York Stock Exchange, +100 shares is a lot; and on the Consolidated +Stock Exchange, 10 shares is a lot. +Less than these amounts is an odd lot. When +you sell an odd lot you usually get <span class="abv">1</span>⁄<span class="blw">8</span> less +than the market price; and when you buy an +odd lot, you usually pay <span class="abv">1</span>⁄<span class="blw">8</span> more than the +market price; that is, <span class="abv">1</span>⁄<span class="blw">8</span> of a dollar on each +share where prices are quoted in dollars.</p> + +<p>Point: It is a common expression to say +that a stock went up or down a point, which<span class='pagenum'><a name="Page_16" id="Page_16">[16]</a></span> +means a dollar in a stock that is quoted in +dollars, but a cent in a stock that is quoted in +cents, as many of the stocks are on the New +York Curb. In cotton quotations, a point is +<span class="abv">1</span>⁄<span class="blw">100</span> part of a cent. For instance, if cotton +is quoted at 18.12, it means 18 cents and +<span class="abv">12</span>⁄<span class="blw">100</span> of a cent per pound, and if it went +up 30 points the quotation would be 18.42.</p> + +<p>Reaction: Every person who has traded +in listed stocks probably is familiar with this +word. It means to act in an opposite direction, +but it is used especially to refer to a +decline in the price of a stock that has been +going up.</p> + +<p>Rally: "Rally" is the opposite of the sense +in which "reaction" usually is used. When +a stock is going down and it turns and goes +up, it is called a rally.</p> + +<p>Commitment: This term is used referring +to a purchase of stock. It is more commonly +used by investment bankers when they +contract to buy an issue, but the term sometimes +is used by traders.</p> + +<p>Floating Supply: The stock of a company +that is in the hands of that part of the public +who is likely to sell, is referred to as floating +supply.</p> + +<hr /><p><span class='pagenum'><a name="Page_17" id="Page_17">[17]</a></span></p> +<h2>CHAPTER IV.<br /> +A CORRECT BASIS FOR SPECULATING</h2> + +<p>We maintain that there is only one basis +upon which successful speculation can be carried +on continually; that is, never to buy a +security unless it is selling at a price below +that which is warranted by assets, earning +power, and prospective future earning power.</p> + +<p>There are many influences that affect the +movements of stock prices, which are referred +to in subsequent chapters. All of these +should be studied and understood, but they +should be used as secondary factors in relation +to the value of the stock in which you +are trading.</p> + +<p>If the market price of any stock is far below +its intrinsic value and there is no reason +why the future should bring about a change +in this value that will decrease it, then you +may be certain that important influences are +working against the market price of the stock +for the time being. In the course of time the +market price will go up towards the real +value. This matter will be more fully explained +in subsequent chapters.<span class='pagenum'><a name="Page_18" id="Page_18">[18]</a></span></p> + +<p>You always should keep in mind the fact +that when you buy a stock at a higher price +than its intrinsic value, you are taking a +risk. The stock may have great future possibilities, +but it is risky to buy stocks when +present assets and earnings do not warrant +their market prices, no matter how attractive +prospective future earnings may appear. +However, the possibilities of profit sometimes +are so great that one is justified in taking +this risk.</p> + +<p>It is our belief that the majority of traders +buy stocks because they are active in the +market and somebody said they were a good +buy, even though the real values may not +be nearly as much as the market prices.</p> + +<p>As an example of this kind of trading, we +want to call your attention to a news item +that appeared in a New York paper. It stated +that on April 1st, some brokers in Detroit, +as an April Fool joke, gave out a tip to buy +A. F. P., meaning April Fool Preferred, but +when asked what it meant, replied "American +Fire Protection." Of course, there was +no such stock, but there was active trading +in it until the joke was discovered. Evidently +it is not necessary to list a stock on<span class='pagenum'><a name="Page_19" id="Page_19">[19]</a></span> +the Detroit Stock Exchange in order to trade +in it.</p> + +<p>This story may or may not be true, but +we believe the statement that people trade +in stocks they do not know anything about +is true. You should be careful not to buy +a stock merely because somebody says it +is a good thing to buy, unless the person +making the statement is in the business of +giving information on stocks, because it may +be only a rumor with no substantial basis. +Of course, if many people act on the rumor, +there will be active trading in the stock, and +it is frequently for that purpose that such +rumors are started.</p> + +<hr /><p><span class='pagenum'><a name="Page_21" id="Page_21">[21]</a></span></p> +<h2><span class="p3"><i>PART TWO</i><br /> +WHAT and WHEN TO BUY and SELL</span></h2> + +<hr /><p><span class='pagenum'><a name="Page_23" id="Page_23">[23]</a></span></p> +<h2><a name="CHAPTER_V" id="CHAPTER_V"></a>CHAPTER V.<br /> +WHAT STOCKS TO BUY</h2> + +<p>In deciding what stocks to buy, it is well +to consider first the classes of stocks, and +then what particular stocks you should buy +in the classes you select. We would first of +all divide all stocks into two classes, those +listed on the New York Stock Exchange and +those not listed on the New York Stock Exchange. +As a rule, it is better to buy stocks +listed on the New York Stock Exchange, although +there are frequent exceptions to this +rule.</p> + +<p>Then, the stocks listed on the New York +Stock Exchange may be divided into classes, +such as railroad stocks, public utility stocks, +motor stocks, tire stocks, oil stocks, copper +stocks, gold stocks, and so forth. At certain +times certain stocks are in a much more favorable +condition than at other times. In +1919, when the industrial stocks were selling +at a very high price, the public utility stocks +and gold stocks were selling low, because it +was impossible to increase incomes in proportion +to the increase in operating costs.<span class='pagenum'><a name="Page_24" id="Page_24">[24]</a></span> +But since the beginning of 1921, the condition +of these two classes of stocks has been +improving and the market has reflected that +improvement.</p> + +<p>At the time of this writing (early in April, +1922) we are recommending the stocks of +only a very few manufacturing companies; +but we are recommending a number (not all) +of the railroad and public utility stocks, and +a few specially selected stocks among the +other classes.</p> + +<p>In every instance, when you make a selection, +you should consider the company's assets, +present earnings, and prospective future +earnings, and then take into consideration +all the influences that affect price movements, +as explained in subsequent chapters.</p> + +<hr /><p><span class='pagenum'><a name="Page_25" id="Page_25">[25]</a></span></p> +<h2>CHAPTER VI.<br /> +WHAT STOCKS NOT TO BUY</h2> + +<p>A great deal more can be said about stocks +you should not buy than about stocks you +should buy, because the list is very much +larger.</p> + +<p>Stocks not listed on the New York Stock +Exchange, as a rule, should not be bought +by a careful speculator, but as stated in the +previous chapter, there are exceptions to that +rule. Billions of dollars have been lost in +the past by buying stocks that have become +worthless. A few years ago a list of defunct +securities was compiled, and it took +two large volumes in which to enumerate +them. New ones have been added to them +every year. Therefore, it is very important +that you should give careful thought to the +subject of what stocks <b>not</b> to buy.</p> + +<p>Nearly all promotion stocks (stocks in new +companies) are a failure. An extremely +small percentage of them are very successful, +and the successful ones are referred to +in the advertising of the new ones; but, on +the basis of average, the chances are you will<span class='pagenum'><a name="Page_26" id="Page_26">[26]</a></span> +lose your money entirely in promotion stocks. +We believe that most of the promotion companies +are started in perfectly good faith, +although some of them are swindles from the +beginning; but no matter how honest and +well meaning the organizers are, the chances +of success are against them. Therefore, we +say that promotion stocks should not be +bought by the ordinary man who is looking +for a good speculation, because his chances +of making a large profit with a minimum +risk are very much better when he buys +stocks listed on the New York Stock Exchange +and uses good judgment in doing so.</p> + +<p>Among the listed stocks there are many +you should not buy. First of all, eliminate +them by classes. Do not buy the classes of +stocks that are selling too high now. You +may say that there are some exceptions in +all classes. That may or may not be so, but +in any event, you have a better chance of +profiting by confining most of your purchases +to the classes of stocks that are in the most +favorable position.</p> + +<p>As a rule, when stocks are first listed, they +sell much higher than they do a short time +afterwards. Of course, that is not always<span class='pagenum'><a name="Page_27" id="Page_27">[27]</a></span> +true. It is more likely to be true when a +stock is listed during a very active market, +when prices are more easily influenced by +publicity. The high price of it is usually +due to the fact that publicity is given to it, +and as soon as the effect of this publicity +wears off, the market price of the stock declines.</p> + +<p>It is a good rule never to buy stocks that +brokers urge you to buy. Your own common +sense ought to tell you that a stock that is +advertised extensively by brokers is likely +to sell up in price while the advertising is +going on and will drop in price just as soon +as the advertising stops.</p> + +<p>Many people notice that and they think +they can profit by buying when the advertising +starts and sell out when they get a good +profit, but the majority of them lose money. +The stock may not respond to the advertising, +or if it does go up, they may wait too long +before selling. Those who do sell and +make 200% or 300% profit in a very short +time are almost sure to lose it all in an effort +to repeat the transaction. Many of those +who read this know it is true from their own +experience.<span class='pagenum'><a name="Page_28" id="Page_28">[28]</a></span></p> + +<p>You should leave such stocks strictly alone. +You may win once or twice, but you are sure +to lose if you keep it up. As a rule stocks +of this kind have very little value and the +brokers who boost them make their own +money from the losses of their foolish followers.</p> + +<hr /><p><span class='pagenum'><a name="Page_29" id="Page_29">[29]</a></span></p> +<h2>CHAPTER VII.<br /> +WHEN TO BUY STOCKS</h2> + +<p>Stocks should be bought when they are +cheap. By being cheap, we mean that the +market price is much less than the intrinsic +value. In <a href="#CHAPTER_X">Chapters X. to XV.</a> we talk about +influences that affect the price movements +of stocks. By studying these carefully you +should be able to decide when stocks generally +are cheap. Of course, not all stocks +are cheap at the same time, but the majority +of listed stocks do go up and down at the +same time, as a rule.</p> + +<p>At the time of this writing (in the early +part of April, 1922) there are a great many +stocks listed on the New York Stock Exchange +that are selling at prices much less +than their intrinsic values, but there are some +stocks that should not be bought now, nor +at any other time. There are some stocks +listed on the New York Stock Exchange now +that perhaps have no intrinsic value and +never will have any. Nevertheless we consider<span class='pagenum'><a name="Page_30" id="Page_30">[30]</a></span> +that right now<a name="FNanchor_1_1" id="FNanchor_1_1"></a><a href="#Footnote_1_1" class="fnanchor">[1]</a> is one of the times for +buying stocks. There are unusual bargains +to be had, although keen discrimination is +necessary in order to be able to pick out the +bargains.</p> + +<p>As a usual thing, it is a good time to buy +stocks when nearly everybody wants to sell +them. When general business conditions are +bad, trading on the stock exchanges very +light, and everybody you meet appears to be +pessimistic, then we advise you to look for +bargains in stocks. The last six months of +1921 was an unusually good time for buying +stocks.</p> + +<p>It is well known that the large interests +accumulate stocks at such times. They buy +only when the stocks are offered at a low +price and try not to buy enough at any one +time to give an appearance of activity in +the market, but they buy continually when +the market is very dull. It seems to be characteristic +of human nature to think that business +conditions are going to continue just +as they are. When business is bad, nearly<span class='pagenum'><a name="Page_31" id="Page_31">[31]</a></span> +everybody thinks business will be bad for a +long time, and when business is good, nearly +everybody thinks business will be good almost +indefinitely. As a matter of fact, conditions +are always changing. It never is possible +for either extremely good times nor for +extremely bad times to continue indefinitely.</p> + +<p>You can buy stocks cheaper when there is +very little demand for them, and you should +arrange your affairs so as to be prepared to +buy at such times.</p> + +<div class="footnotes"><h3>FOOTNOTES:</h3> + +<div class="footnote"><p><a name="Footnote_1_1" id="Footnote_1_1"></a><a href="#FNanchor_1_1"><span class="label">[1]</span></a> In our advisory Letter of April 25, 1922, we advised our +clients to refrain from margin buying for a while, because the +market was advancing too rapidly. Shortly after that there +was a decided reaction in the market.</p></div> +</div> + +<hr /><p><span class='pagenum'><a name="Page_33" id="Page_33">[33]</a></span></p> +<h2>CHAPTER VIII.<br /> +WHEN NOT TO BUY STOCKS</h2> + +<p>There are times when stocks should not +be bought, and that is when nearly all stocks +have advanced beyond their real values. It +is doubtful if there ever is a time when all +stocks have advanced beyond their real values, +but when the great majority of stocks +have so advanced, there is likely to be a general +decline in all stock prices. The stocks +that are not selling too high will decline some +in sympathy with the others. Therefore, +there are times when we advise our clients +not to buy any stocks.</p> + +<p>Some organizations giving advice in regard +to the buying of stocks, advise their clients +to refrain entirely from buying for periods +of a year or longer, but we think it is seldom +advisable to refrain entirely from buying for +any great length of time. There usually are +some good opportunities if you watch carefully +for them. It is our business to watch +for these opportunities and tell our clients +about them.<span class='pagenum'><a name="Page_34" id="Page_34">[34]</a></span></p> + +<p>There are also times when the technical +condition of the market is such that we advise +our clients to refrain from buying for +a while. See <a href="#CHAPTER_XIV">Chapter XIV</a>.</p> + +<hr /><p><span class='pagenum'><a name="Page_35" id="Page_35">[35]</a></span></p> +<h2>CHAPTER IX.<br /> +WHEN TO SELL STOCKS</h2> + +<p>You should sell stocks when the market +price is too high. That is a general rule, but +it is necessary for you to study all the influences +affecting stock prices to be able to +decide more accurately when you should sell +your stocks. We give you, in future chapters, +much more information on judging the +markets.</p> + +<p>Another general rule, is to sell stocks when +nearly everybody is buying them. It is a +well known fact that the great majority of +people buy stocks near the top and sell near +the bottom. Naturally when everybody is +optimistic, stocks will sell up high, but sooner +or later they will come down again, and when +everything looks very promising is a good +time to sell. It is better to lose a little of the +profit that you might have made by holding +on longer than not to be on the safe side. +The man who tries to sell at the top nearly +always loses, because stocks seldom sell as +high as it is predicted they will, or, in other<span class='pagenum'><a name="Page_36" id="Page_36">[36]</a></span> +words, the prediction of higher prices is advanced +more rapidly than the prices.</p> + +<p>We remember reading in 1916, when U. S. +Steel sold up around $136 a share, a prediction +that it was going to sell up to $1000 a +share. Probably many people who read such +news items consider them seriously. Of +course, that was a most exaggerated prediction, +but during the extreme activity of a +bull market, it seems that nearly everybody +is talking in exaggerated terms of optimism. +That is why most traders seldom ever take +their profits in a bull market. They wait +until stock prices start to come down, and +then they are likely to think there will be +rallies, and keep on waiting until they lose +all their profits.</p> + +<p>On the other hand, some people make the +mistake of selling too soon. Just because +your purchase shows a liberal profit is no +reason why you should sell. The stock may +have been very cheap when you bought it. +In 1920, Peoples Gas sold below $30. Those +who bought it then were able to double their +money by the close of 1921, and many sold +out and took their profits. Of course, if they +invested the proceeds in other stocks that<span class='pagenum'><a name="Page_37" id="Page_37">[37]</a></span> +were just starting upward, they may not +have lost anything, but there was no particular +reason for selling Peoples Gas at that +time. The public utilities generally were +coming into their own, and nearly all of them +were regarded by economic students as having +unusual opportunities for profit.</p> + +<p>Then again, it is not always a mistake to +sell a stock in order to get funds to put into +something else that seems more promising, +even though the stock you sell is likely to +go much higher.</p> + +<p>It is very important that you should try +to sell your stocks at the right time. That +is the main thing to keep in mind and it is +better to sell too soon than too late. Don't +be too greedy and hold on for a big profit. +Read <a href="#CHAPTER_XXIV">Chapter XXIV.</a> on the "Possibilities +of Profit."</p> + +<hr /><p><span class='pagenum'><a name="Page_39" id="Page_39">[39]</a></span></p> +<h2><span class="p3"><i>PART THREE</i><br /> +INFLUENCES AFFECTING STOCK PRICES</span></h2> + +<hr /><p><span class='pagenum'><a name="Page_41" id="Page_41">[41]</a></span></p> +<h2><a name="CHAPTER_X" id="CHAPTER_X"></a>CHAPTER X.<br /> +MOVEMENTS IN STOCK PRICES</h2> + +<p>It is due to the fact that stock prices constantly +move up or down that speculation is +possible. Sometimes certain stocks remain +almost at a standstill for a long period of +time, but at least a part of the stocks listed +on the Exchanges move either up or down. +If one always could tell just what way they +were going to move, it would be comparatively +easy to make a fortune within a short +time.</p> + +<p>In the last twenty years, a great deal of +time and money has been spent by statistical +organizations in checking up statistics for +the purpose of ascertaining a definite basis +upon which to predict future movements in +stock prices. Several of these organizations +use very different statistics upon which to +base their conclusions, and yet their conclusions +are very similar. They have proved +beyond any question of doubt that some of +these movements are clearly indicated by +laws that never fail.<span class='pagenum'><a name="Page_42" id="Page_42">[42]</a></span></p> + +<p>We do not attempt in this book to explain +the fundamental statistics upon which the +predictions of business cycles are based, but +in the next five chapters we explain some +of the influences that affect the movements +in stock prices. Read these chapters very +carefully, for your success in stock speculation +will depend very largely upon your +correct prediction of these movements.</p> + +<hr /><p><span class='pagenum'><a name="Page_43" id="Page_43">[43]</a></span></p> +<h2>CHAPTER XI.<br /> +MAJOR MOVEMENTS IN PRICES</h2> + +<p>Stock prices move up and down in cycles. +These are the major movements in prices, +but there may be many minor movements up +and down within the major movements. These +stock price movements nearly always precede +a change in business conditions; that +is, an upward movement in stock prices is +an indication that business conditions are +going to improve, and a downward movement +in stock prices is an indication that +business conditions are going to get worse.</p> + +<p>At the present writing, we are in a period +of improvement. Stock prices began to go +up in August, 1921. The upward movement +has been slow, but gradual. In a period of +seven months, forty representative stocks +show an upward movement of about 20 +points, although business has not shown +much improvement. A steady upward movement +in stock prices is a sure sign that business +conditions are beginning to improve, +even though that improvement is not +noticeable.<span class='pagenum'><a name="Page_44" id="Page_44">[44]</a></span></p> + +<p>These major stock movements are not an +exact duplicate of any previous ones, and it +is impossible to tell how long they will last +or just what course they will take. Certain +influences could change a period of improvement +into a period of prosperity very quickly.</p> + +<p>A period of prosperity is noted for high +prices, high wages, and increasing production +in all lines. Everybody is optimistic. +Most people spend their money freely, and +that makes times better. As prices go up +and business increases, more money is required +in business and interest rates go up. +As a consequence, when interest rates go up, +bond prices go down. During this period, +speculative stocks are selling at their highest +prices; and under the influence of this movement, +many stocks that have no actual value +sell up at high prices. Of course, wise speculators +sell all their stocks during this period.</p> + +<p>Following a period of prosperity comes a +period of decline. The first sign of it usually +is a severe break in the stock market. At +that time general business is running along +at top speed and there is no sign of a let-up, +but this break in the stock market should +be a warning. Most people think the break<span class='pagenum'><a name="Page_45" id="Page_45">[45]</a></span> +is merely a temporary reaction—they may +refer to it as a HEALTHY reaction—and +they start buying stocks again, and put the +market up, but it does not go up as high as +it was before the break occurred. When +stock prices do not rally beyond the prices +at which they were before the break occurred, +it is a sign that the turning point has been +reached and that the bear market has started, +although the majority of people do not realize +this until a long time afterwards.</p> + +<p>Next comes a period of depression, when +we have low prices, low wages, hard times, +tight money, and many commercial failures. +Many people who lost all their money during +the speculation period, become thrifty +and economize during the period of depression, +and start in to save again. Nearly +everybody is pessimistic during this period. +Trading on the Stock Exchange is irregular +and as a rule very light.</p> + +<p>This is the time to get stock bargains, +but the general public as a rule doesn't take +advantage of it. People are scared and think +prices will go still lower. The big interests +accumulate stocks during this period, and +sell them during the period of prosperity.</p> + +<hr /><p><span class='pagenum'><a name="Page_47" id="Page_47">[47]</a></span></p> +<h2>CHAPTER XII.<br /> +THE MONEY MARKET AND STOCK PRICES</h2> + +<p>Perhaps no other one thing influences the +movement of stock prices so much, in a large +way, as money conditions. It is impossible +to have a big bull market without plenty of +money. During a bull market nearly all stocks +are bought on margin, which is explained in +<a href="#CHAPTER_XVI">Chapter XVI</a>. This makes it necessary for +brokers to borrow large sums of money. +When money is tight, it is impossible to get +enough to carry on a large movement in +stocks.</p> + +<p>You will see, therefore, that the Federal +Reserve Bank has it in its power to regulate +the stock market to some extent. In 1919 +speculation was carried very much further +than it should have been, but undoubtedly +it would have been much worse had the +Federal Reserve Bank not raised interest +rates and urged member banks to withdraw +money from Wall Street. While there was<span class='pagenum'><a name="Page_48" id="Page_48">[48]</a></span> +considerable criticism of that action, it certainly +was a good thing for the entire +country.</p> + +<p>In a period of depression, the banks accumulate +money, and there always is an +abundance of money at the beginning of a +bull market. During a period of prosperity +the banks' reserves decrease and their loans +increase. When you see these reserves go +down to a very low point, it is usually time +for you to sell your stocks.</p> + +<hr /><p><span class='pagenum'><a name="Page_49" id="Page_49">[49]</a></span></p> +<h2>CHAPTER XIII.<br /> +MINOR MOVEMENTS IN PRICES</h2> + +<p>Within the major movements of stock +prices, there always are several minor movements, +which are caused by various influences. +One of the important causes is the +technical condition of the market. Another +cause might be called a psychological one. +When stocks are moving up steadily in a +bull market, people closely connected with +the market expect a reaction and watch for +it. The newspapers predict it. Consequently, +there is sufficient let-up in buying to allow +the pressure of selling by the bears to bring +it about. However, the desire to buy during +reactions is so general, many people rush in +to buy and this buying, in addition to the +covering by the shorts, puts the market up +again; and if conditions are favorable for a +bull market, prices will go up much higher +than they were before.</p> + +<p>In like manner, we have rallies in bear +markets. Of course the professional bears +sell during these rallies, with the expectation +of buying later at a cheaper price.<span class='pagenum'><a name="Page_50" id="Page_50">[50]</a></span></p> + +<p>These minor price changes mean more to +the majority of traders than the major movements. +The major movements are so slow +that people get out of patience, and yet those +who are guided only by the major movements +are operating on a much safer basis. We +believe that a greater amount of money can +be made, with a minimum risk, by being +guided principally by the major movements, +while taking advantage of the minor movements +in a minor way. However, stocks do +not move uniformly and there frequently is +an opportunity to buy some particular stock +at a bargain when nearly all stocks are selling +too high. We try to pick out these +opportunities for our clients.</p> + +<p>Reports of earnings by various companies +influence stock prices, as does also the paying +of extra dividends or the passing up of +dividends. A peculiar psychological influence +is noticed when a company declares an extra +dividend. The price of the stock usually goes +up, while as a matter of fact the intrinsic +value of the stock is decreased by the amount +of this dividend; and sometimes it is advisable +to sell a stock shortly after an advance +in its dividend rate.</p> + +<hr /><p><span class='pagenum'><a name="Page_51" id="Page_51">[51]</a></span></p> +<h2><a name="CHAPTER_XIV" id="CHAPTER_XIV"></a>CHAPTER XIV.<br /> +TECHNICAL CONDITIONS</h2> + +<p>Technical conditions refer to the conditions +that usually affect the supply and demand, +such as short interests, floating supply, +and stop loss orders.</p> + +<p>It is sometimes said that supply and demand +must be equal or else there could not +be any sales, but that is not so. There are +always some people who are willing to sell +at some price above the market who will not +sell at the market; and when the demand for +stock is greater than the supply, it goes up +until it is supplied by some of these people +who are holding it at a higher price.</p> + +<p>It works the same way when the supply +is greater than the demand. There are always +some people who will buy at some price +below the market. Therefore, when the supply +is greater than the demand prices must +go down.</p> + +<p>A stock may have an intrinsic value of +$100 a share and yet be selling at $50 a +share, and it can never sell higher than $50<span class='pagenum'><a name="Page_52" id="Page_52">[52]</a></span> +until all stock that is offered at that price +is bought.</p> + +<p>However, you should keep this in mind: if +the real value is $100 a share, sooner or later +the market price will approach that figure. +That is why we so strongly urge our clients +to buy stocks that have actual values, +or at least prospective values far greater +than their market prices, and either to buy +them outright or margin them very heavily, +and then hold them until the prices do go up.</p> + +<p>Of course, when one finds that a mistake +has been made, the sooner one sells and takes +a loss the better.</p> + +<hr /><p><span class='pagenum'><a name="Page_53" id="Page_53">[53]</a></span></p> +<h2>CHAPTER XV.<br /> +MANIPULATIONS</h2> + +<p>Stock prices are influenced largely by manipulation. +Years ago when the volume of +trading on the New York Stock Exchange +was small compared with what it is today, +it was possible to influence the entire market +by manipulation, but it would be very difficult +to do that today. It is only certain +stocks that are manipulated; but if conditions +are favorable, many other stocks may +be influenced by them.</p> + +<p>There are different kinds of manipulation. +One is for the insiders of a company to give +out unfavorable news about their company +if they want the price of the stock to go +down, so that they can buy it in; or to give +out very favorable news if they want the +price to go up, so that they can sell out. +This method is not practiced now to the extent +that it was years ago. Public opinion +is strongly opposed to it, and we believe +business men are acquiring a higher standard +of business ethics. Methods of this kind +are legal but they are morally reprehensible.<span class='pagenum'><a name="Page_54" id="Page_54">[54]</a></span></p> + +<p>Another method of manipulation is the +forming of pools to buy in the stock of a +company and force it up. If the market +price of a stock is far below its real +value, we believe it is justifiable for a pool +to force it up, but the ordinary pool is merely +a scheme to rob the public.</p> + +<p>There are four periods to the operation +of such pools. First is the period of accumulation. +A number of large holders of stock +in a certain company will pool their stock, +all agreeing not to sell except from the pool, +in which all benefit proportionately. Then +they give out bad news about the company. +That is very easy to do, because financial +writers usually accept the news that is given +to them without much investigation, especially +writers on daily papers, because they +have not the time to investigate. Their copy +must be ready in a few hours after they get +the information. See <a href="#CHAPTER_XXV">Chapter XXV.</a> on +"Market Information" for fuller explanation +of the reason why financial news usually is +misleading. The manipulators of stock prices +can have financial news "made to order."</p> + +<p>When the general public reads this news +and sees the stock going down, many of them<span class='pagenum'><a name="Page_55" id="Page_55">[55]</a></span> +get discouraged and sell. It is just the time +they should not sell, but it is a well known +fact that the majority of people do in the +stock market just what they should not do. +The more they sell the more the price goes +down, and the pool operators accumulate the +stock.</p> + +<p>Having secured all the stock they want, +they give out good news and continue to buy +the stock until it starts to go up. The public +reads this favorable news, and seeing the +stock go up, will go into the market and buy, +which puts it up higher. All the time financial +writers are supplying good news about +the stock and the public buys it. After they +have sold all of it, the public may still be +anxious for more, and the pool operators may +go short of the stock. Then they will begin +giving out bad news, so that they can buy +in stock at a lower price to cover their short +interests.</p> + +<p>After that they have very little interest +in the market. If it is declining too fast, +they may support it occasionally by buying +some stock and giving out some favorable +news. That will make the market rally and<span class='pagenum'><a name="Page_56" id="Page_56">[56]</a></span> +they will sell out the newly acquired stock +near the top of the rally.</p> + +<p>Manipulations of this kind appear to be +going on nearly all the time, and there does +not seem to be any limit to the number of +suckers who fall for them. But then, one +can't blame the public when you realize how +thoroughly unreliable is most of the market +information given to them.</p> + +<p>Still another kind of manipulation is "one-man" +manipulation, where one man controls +companies, which are known as "one-man" +companies. Usually the directors of these +companies are friends or employees of his, +and in many instances he has their resignations +in his possession, so that they must do +whatever he wants them to do. Owing to +the strict rules of the New York Stock Exchange, +it is rather difficult for such manipulations +to be carried on there. But there +have been many of them on the New York +Curb. When the Curb was operating on the +street and was not under very much control, +manipulations of this kind were very +frequent.</p> + +<p>As an example, suppose a man of this kind +has a mining company. When he wants the<span class='pagenum'><a name="Page_57" id="Page_57">[57]</a></span> +stock to go up, he sends the stockholders a +great deal of information about the work at +the mine, and perhaps sends them a telegram +when a new vein of rich ore is found. The +stockholders rush in to buy more stock, and +that puts the price up. Then he unloads +stock on them to the extent that they will +buy it.</p> + +<p>In a day or two, the stock may drop back +to less than one half of what it was selling +at. If this "one-man" manipulator wants to +buy any stock, he will give out a little unfavorable +news, and he can get stock at his +own price.</p> + +<p>After that the news is good or bad according +to whether the manipulator wants to buy +or sell, but as a rule he has an abundance of +stock that he wants to sell, and is continually +giving out good news.</p> + +<p>A few years ago there was a man operating +in New York who promoted several companies +and manipulated them in a large way. +He is out of business now, but the same thing +is still done in a smaller way.</p> + +<p>It is our opinion that more money is lost +by the public in manipulated stocks than +in promotion stocks, and we read a great<span class='pagenum'><a name="Page_58" id="Page_58">[58]</a></span> +deal about the enormous losses in them. Promotions +that are failures may be perfectly +legitimate and conducted in the utmost good +faith, but manipulations are nearly always +for the purpose of swindling the public. However, +the lure of them is so great many +people cannot withstand the temptations of +them even after they have been "trimmed" +several times.</p> + +<hr /><p><span class='pagenum'><a name="Page_59" id="Page_59">[59]</a></span></p> +<h2><span class="p3"><i>PART FOUR</i><br /> +TOPICS OF INTEREST TO SPECULATORS</span></h2> + +<hr /><p><span class='pagenum'><a name="Page_61" id="Page_61">[61]</a></span></p> +<h2><a name="CHAPTER_XVI" id="CHAPTER_XVI"></a>CHAPTER XVI.<br /> +MARGINAL TRADING</h2> + +<p>Most people who trade in stocks buy on +margin. The ordinary minimum margin is +about 20% of the purchase price, because +banks usually lend about 80% of the market +value of stocks.</p> + +<p>If you put up 20% of the purchase price +of your stocks with your broker, he has to +pay the other 80%, but he can do that by +borrowing that amount from his bank, and +putting up the stock as security. In this +way brokers are able to handle all the margin +business that comes to them, as long as +money can be borrowed. Of course, there +are some stocks that are not accepted by +banks as collateral for loans, and you should +not expect your broker to sell such stocks +on margin. In fact, if he offers to do so, it +looks as though he were running a bucket +shop. See <a href="#CHAPTER_XVIII">Chapter XVIII</a>.</p> + +<p>Many people think that buying stocks on +margin is gambling and that people should +not do it for that reason, but buying on margin +is done in all lines of business, although it<span class='pagenum'><a name="Page_62" id="Page_62">[62]</a></span> +may not be known under that name. If you +bought stock outright, but borrowed 80% of +the purchase price from your banker to complete +your payment for it and put up the +stock with him as security, you would be +buying on margin just the same.</p> + +<p>In like manner, if you bought a home and +paid 20% with money you had and borrowed +the other 80% of the purchase price, you +would be buying a home on margin. The +principal difference is that when you buy +from a broker on margin, one of the conditions +of his contract is that he has the right +to sell your stock provided the market price +drops down to the amount that you owe on +the stock, whereas if you borrow money on +a home, it is usually for a certain specified +time and the lender cannot sell you out until +that time expires. However, in principle, +there is very little difference between the +two transactions.</p> + +<p>Most margin traders do not put up sufficient +margin. If you put up only the minimum +margin, your broker has the right to +call on you for more margin if the price of +the stock declines at all. Unless you are +fully prepared at all times to put up an<span class='pagenum'><a name="Page_63" id="Page_63">[63]</a></span> +additional margin when called upon, you +should make smaller purchases and put up +a heavy margin when you buy. The amount +of margin depends upon the transaction, but +we advise from 30% to 50%, and at times +we advise not less than 50% margin on any +purchase. In fact there are times when +we advise not to buy stocks on margin at +all.</p> + +<p>Those who wish to be entirely free from +worry should buy stocks when the prices +are very low, pay for them in full, get their +certificates, and put them away in a safe +deposit box. However, when stocks are low +the risk in buying on a liberal margin is +very small, and the possibilities of profit are +so much greater, we do not see any objection +to taking advantage of this method of +trading.</p> + +<hr /><p><span class='pagenum'><a name="Page_65" id="Page_65">[65]</a></span></p> +<h2><a name="CHAPTER_XVII" id="CHAPTER_XVII"></a>CHAPTER XVII.<br /> +SHORT SELLING</h2> + +<p>By short selling, we mean selling a stock +that you do not possess, with the intention +of buying it later. Short selling in general +business is very common, and we think nothing +of it. Manufacturers frequently sell +goods that are not yet made, to be delivered +at some future time. Selling stocks short +is a similar transaction, except that in a majority +of cases delivery of the stock must +be made immediately.</p> + +<p>However, your broker can attend to that +by borrowing the stock. As explained in the +preceding chapter, when the market is active +most of the trading is done on margin. Your +broker buys a stock for you, but as he has +to pay for it in full, it is customary for him +to take it to his bank and borrow money on it. +A bank usually lends about 80% of the market +value, but if some other broker wants to +borrow this stock, he will lend the full value +of it. If that particular stock is very scarce +and hard to get, the lender of the stock may<span class='pagenum'><a name="Page_66" id="Page_66">[66]</a></span> +get the use of the money without any interest.</p> + +<p>Therefore, there is an advantage to the +broker in lending stock, and for that reason +it is nearly always possible for a broker to +arrange delivery of stock for you if you +wish to sell short. When you instruct him +later on to buy the stock for you, he will do +so and deliver it to the broker from whom he +borrowed it, who will return the money he +received for it.</p> + +<p>When you sell stock short and the price +goes up, you will have to pay a higher price +for it. Therefore, to protect himself against +the possibility of losing, your broker demands +a payment from you just the same as you +pay margin when you buy stock.</p> + +<p>Short selling is something that we do not +recommend very much to our clients. We +think it is not advisable to do any short selling +as long as there are good opportunities +to make money by buying; but when all bargains +disappear, as they do sometimes, you +must either sell short or else keep out of the +market entirely. At such times, there may +be many opportunities to make money by +short selling, and we do not consider that<span class='pagenum'><a name="Page_67" id="Page_67">[67]</a></span> +there is any reason why our clients should +not take advantage of them.</p> + +<p>Of course, great care must be exercised +in selling stocks short. You might sell a +stock short because you know the market +price is 100% greater than its real value, +but it is possible for manipulators to force it +up a great deal higher; and if you are not +able to put up sufficient money with your +broker to protect him, he will buy at a high +price and you will lose the money you have +put up with him. In some instances, stocks +are cornered and the short interests are +forced to buy the stocks at prices that represent +enormous losses.</p> + +<p>It is a common thing to read about the +short interests in certain stocks. All stocks +that are sold short must be bought sooner or +later, and when that buying takes place, it +may affect the market very much. Therefore, +if it is known that there is a big short +interest in a certain stock, we should expect +the stock to sell at a higher price; but sometimes +the short interests break the market +and force the price down, especially when +general conditions are in their favor.</p> + +<hr /><p><span class='pagenum'><a name="Page_69" id="Page_69">[69]</a></span></p> +<h2><a name="CHAPTER_XVIII" id="CHAPTER_XVIII"></a>CHAPTER XVIII.<br /> +BUCKET SHOPS</h2> + +<p>There has been so much publicity given +to bucket shops, nearly everybody is familiar +with the term. A broker runs a bucket shop +when he sells stock to his clients on margin +and either never buys the stock for their accounts, +or else sells it immediately after buying +it. The bucket shop simply gets your +money on the supposition that you are more +likely to be wrong than to be right. Of +course, if you take the bucket shop's advice +you surely are likely to be wrong. Bucket +shops get their clients into the very speculative +stocks, where there is likely to be a +great deal of fluctuation in the price of the +stocks, which gives them frequent opportunities +to sell out their clients.</p> + +<p>When the market is going down or when +there are many movements up and down in +the price of stocks, the bucket shops make +money rapidly, but occasionally there is a +long period when the market is working +against the bucket shops, and unless they +have a great deal of money they must fail.<span class='pagenum'><a name="Page_70" id="Page_70">[70]</a></span></p> + +<p>In August, 1921, Stock Exchange stocks +started to go up. The upward movement +was very slow but it was continual. Up to +the time of this writing, there has not been +a three-point reaction, except in a few stocks, +in all of that time. Without a fluctuating +market, the bucket shop has no chance to +clean out its customers. As a consequence, +the bucket shops began to fail in the early +part of 1922, and up to the present writing +(April, 1922) there have been more than fifty +of these failures. However, it is not likely +that all the bucket shops will be put out of +business. The more successful ones are +likely to "weather the storm."</p> + +<p>Many laws have been enacted against bucket +shops, and we believe some way will be +found to get rid of them at some future time; +but we do not expect that to happen soon, +and we warn our readers not to get into their +hands, because if they do not get your money +away from you one way they are likely to +get it some other way. The man who runs +a bucket shop usually has no conscience, and +it certainly is an unfortunate thing for anyone +to get mixed up with such a man.</p> + +<hr /><p><span class='pagenum'><a name="Page_71" id="Page_71">[71]</a></span></p> +<h2>CHAPTER XIX.<br /> +CHOOSING A BROKER</h2> + +<p>It is very important that you choose a +good broker. No matter how careful you are, +it is possible to make a mistake. However, +if you choose a broker who is a member of +the New York Stock Exchange, you have +eliminated a very large percentage of your +chances of getting a wrong broker.</p> + +<p>Occasionally a member of the Stock Exchange +fails and once in a while one is suspended +for running a bucket shop or being +connected with one, but these instances are +very rare compared with the number of brokers +who get into trouble who are not members +of the New York Stock Exchange. The +rules and regulations of the Stock Exchange +protect you to a great extent.</p> + +<p>When you buy stock on margin, you leave +your money in the hands of a broker, and +you should know that he is responsible. No +matter who your broker is, you should get a +report on him. If you are a subscriber to +Bradstreet's or Dun's Agencies, get a report +from them. If you are not a subscriber to<span class='pagenum'><a name="Page_72" id="Page_72">[72]</a></span> +any mercantile agency, you perhaps have a +friend who can get a report for you, or your +bank may get one for you. Banks make a +practice of getting reports of this kind for +their clients. When asked to do so, we send +our clients the names of brokers who are +members of the New York Stock Exchange, +but we prefer not to recommend any broker. +Of course, we cannot guarantee that a broker +is all right. We simply use our best judgment, +but, as we said before, you eliminate +a large percentage of your chances of going +wrong when you trade with a broker who +is a member of the New York Stock Exchange.</p> + +<hr /><p><span class='pagenum'><a name="Page_73" id="Page_73">[73]</a></span></p> +<h2>CHAPTER XX.<br /> +PUTS AND CALLS</h2> + +<p>A "put" is a negotiable contract giving the +holder the privilege to sell a specified number +of shares of a certain stock to the maker +at a fixed price, within a specified time. A +"call" is the exact reverse. It is a negotiable +contract giving the holder the privilege +to buy a specified number of shares of a certain +stock from the maker at a fixed price, +within a specified time. The price fixed in +a put or call is set away from the market +price a certain number of points, depending +upon the stock and the condition of the market. +When the market is steady and not +fluctuating, the price fixed is frequently only +two points away, but in a more active market +it is considerably more.</p> + +<p>For instance, at the present time, U. S. +Steel is selling at about 95, and you can buy +a call on it at 97 or a put at 93. That is by +paying a certain amount, which at present is +$137.50, you can have the privilege of buying +100 shares of U. S. Steel at 97, within +thirty days of the date of the purchase of<span class='pagenum'><a name="Page_74" id="Page_74">[74]</a></span> +your call. If Steel should go up to 101 you +could have your broker buy it at 97 and sell +it at the market, and you would make a +profit of four points, less the cost of your +call and commissions.</p> + +<p>As a method of operating in the stock +market, we do not recommend the buying of +puts and calls. Professional speculators may +be able to use them to advantage sometimes, +but for the outsider, who is not in close touch +with the market, there is nothing about them +to recommend.</p> + +<p>Here is one point: the people who sell puts +and calls fix the terms. If the market is +irregular, they will set the point of buying +or selling far away from the market price. +These people are shrewd traders and they +make the terms in their own favor. It is +generally said that nearly all the buyers of +puts and calls lose, and that is our opinion. +Therefore, we advise you to leave them alone.</p> + +<hr /><p><span class='pagenum'><a name="Page_75" id="Page_75">[75]</a></span></p> +<h2>CHAPTER XXI.<br /> +STOP LOSS ORDERS</h2> + +<p>A "stop-loss" is an order to your broker +to sell you out if the market sells down a +certain number of points. Many speculators +place stop loss orders only two points from +the market price. The idea is that when the +market starts to go down it is likely to continue +going down, and by taking a two-point +loss you may save a much greater loss. It +also can be applied to a short sale, when you +give your broker instructions to buy in the +stock for you if it goes up a certain number +of points.</p> + +<p>We read so much in the financial news +about stop-loss orders or merely stop orders, +which is the same thing, the average reader +is likely to get the idea that it is something +he must use for his own protection, but it +is our opinion that it is something that should +be used very seldom by those who trade along +the broad lines recommended by us. If your +purchases were made in stocks that were +very cheap, you should continue to hold them +in case of a reaction. If you bought them<span class='pagenum'><a name="Page_76" id="Page_76">[76]</a></span> +outright or on a substantial margin, you are +not in danger, and you should look upon your +loss merely as a paper loss. In the great +majority of cases, you will be a great deal +better off to hold on to your stocks than you +would be if you had a stop-loss order.</p> + +<p>A large number of stop-loss orders is a +good thing for the short interests. Let us +take U. S. Steel again, as an example. Suppose +it is selling at 94 and it is believed +that there are a large number of stop-loss +orders at 92. The short interests may sell +the stock heavily and force it down to 92. +Then the brokers with stop-loss orders would +begin to sell; that would force the price down +still lower, and the short interests could buy +in to cover at this lower price.</p> + +<p>Therefore, we believe that stop-loss orders +are a bad thing and, as a rule, do not recommend +them.</p> + +<p>There is one instance where a stop-loss +order can be used to advantage, and that is +near the top of a bull market. It is impossible +to tell when the market has reached the +top. If you sell out too soon, you may lose +a profit of several points. Of course, it is +better to do that than to take a chance of<span class='pagenum'><a name="Page_77" id="Page_77">[77]</a></span> +a large loss. In that case, you might instruct +your broker to place a stop-loss order at two +or more points below the market, and keep +moving it up as the market price moves up. +Then when the reaction does come, he will +sell you out and prevent you from losing a +large part of your profit. That is about the +only instance where we recommend a stop-loss +order, but we do recommend it to our +clients sometimes, although seldom.</p> + +<p>If the stock you own is selling at more +than 100 we would suggest that you make +the stop loss order at least three points from +the market, but for stocks selling below 100, +a two-point stop-loss order might be used. +However, the number of points should be +decided upon in each particular case. In the +special instructions to our clients, we tell +them when we think they can use a stop-loss +order to advantage.</p> + +<hr /><p><span class='pagenum'><a name="Page_79" id="Page_79">[79]</a></span></p> +<h2><span class="p3"><i>PART FIVE</i><br /> +CONCLUDING CHAPTERS</span></h2> + +<hr /><p><span class='pagenum'><a name="Page_81" id="Page_81">[81]</a></span></p> +<h2>CHAPTER XXII.<br /> +THE DESIRE TO SPECULATE</h2> + +<p>It is said that the desire to speculate is +very strong in the American people. That +is why our country has made greater progress +than any other country in the world, because +progress is the result of speculation. We +are not referring merely to stock speculations, +but to the word in its broadest sense. +Every new undertaking is a speculation.</p> + +<p>An inventor speculates on what he is going +to invent. Often such speculations result in +losses, because many inventors, or would-be-inventors, +never accomplish very much. They +spend their money, time, and efforts, and +probably live years in poverty, and then if +the invention is not profitable, they are heavy +losers. Many inventors spend the best years +of their lives in poverty and never succeed. +We hear a great deal about some of those +who do succeed, but very little about those +who fail—those whose speculations were unsuccessful—except +when somebody accuses +them of being crooks because they solicited<span class='pagenum'><a name="Page_82" id="Page_82">[82]</a></span> +money for the promotion of their inventions +and did not succeed.</p> + +<p>It is the same thing with every new business. +It is purely a speculation. It is a common +saying that 95% of commercial undertakings +fail. We do not know that that +statement is correct, but there is no question +but that the number of failures is very great, +which shows the great risk in going into a +new undertaking. It is far greater than the +risk involved in stock speculating when it is +done in accordance with the advice given in +this book.</p> + +<p>Yet, there would be no progress without +speculating of this kind. If those entering +a new business would make a careful study +of the venture before entering it, and would +exercise greater care and judgment in conducting +it, the number of failures would be +very much less. The same thing is true of +stock speculating. The failures in stock speculating +are caused mainly by ignorance and +greediness. Many people who would be satisfied +with a fair return on their money in a +business enterprise, think they ought to make +a 100% profit in a few weeks in stock +speculation.<span class='pagenum'><a name="Page_83" id="Page_83">[83]</a></span></p> + +<p>There is something about stock speculation +that appeals to the greediness and pure +gambling instincts of people. In the chapter +on Manipulation, we have told you how stock +prices are put up and down. Some outsider +accidentally buys one of these stocks just +before the price starts up. In thirty days +he has made several hundred per cent profit. +He does not realize that it was purely accidental +as far as he was concerned, and he +tries to do the same thing again, and loses +all of his profits and probably all of his capital +as well.</p> + +<p>A stock gambler (we use the word "gambler" +to refer to a man who operates ignorantly) +is watching a large number of extremely +speculative stocks and suddenly +notices one that takes a big jump in price. +Then he says to himself, "If I only had +bought that stock on a ten-point margin, I +would have made several hundred per cent +profit." He picks out another stock that +some one tells him is going to do equally +as well. He buys as much of it as he can and +puts up all the money he has as a margin, +but the price doesn't go up. Perhaps the +price goes down and he loses his margin; but,<span class='pagenum'><a name="Page_84" id="Page_84">[84]</a></span> +it may remain almost stationary for a long +period, sometimes for a year or more, and +during all of this time, this man is worrying +for fear he will lose his money. If he does +not lose his money, it is tied up for a long +time where he cannot use it to take advantage +of real opportunities that come his way.</p> + +<p>It does not pay to take big risks. That is +true in stock speculating the same as in any +other undertaking. Most speculators are +keeping their minds all the time on the possibilities +of profit and not thinking about the +possibilities of losing.</p> + +<p>If you want to be successful in stock speculating, +there is one thing you must learn +to do, and that is never to think about the +big profits you might have made if you had +bought such and such a stock, because the +probabilities are you could not have afforded +to take the necessary risk in buying that +stock.</p> + +<p>Of course, after it is all over, it may look +to you as though the buying of that stock +was a sure thing, but the buying of such +stocks is never a sure thing. The risk always +exists. There is an old saying, and we believe +a very true one, that a man who speculates<span class='pagenum'><a name="Page_85" id="Page_85">[85]</a></span> +with the idea of getting rich quickly loses all +his money quickly, but that the man who +speculates with the idea of making a fair +return on his money usually gets rich.</p> + +<p>In our advice to our clients, we seldom +recommend highly speculative stocks, because +we consider the avoidance of loss more +important than the making of profits. You +may object to that statement, because you +speculate to make profits, and not for the +purpose of avoiding losses. Nevertheless, if +you are careful in keeping your losses down +to a minimum, your profits are likely to be +very liberal. Any trader who trades for any +great length of time is likely to make large +profits sometimes, and yet the majority of +them have greater losses than profits. It is +said that more than 80% of all margin traders +lose; but we do not consider that an argument +against trading on margin, because +these losses are mostly due to ignorance, +greediness, and the taking of too great +chances.</p> + +<p>Do not suppress your desire to speculate. +All progress would stop if people did not +speculate. But do not speculate in stocks +nor in anything else without any knowledge<span class='pagenum'><a name="Page_86" id="Page_86">[86]</a></span> +of what you are doing, and try to use as +much good judgment and care as possible in +all of your transactions. If you do not know +what to do, get advice from someone who is +supposed to know and who is not interested +in having you buy or sell. Stock speculating +with safety is possible for those who make +the effort to be guided by correct principles.</p> + +<hr /><p><span class='pagenum'><a name="Page_87" id="Page_87">[87]</a></span></p> +<h2>CHAPTER XXIII.<br /> +TWO KINDS OF TRADERS</h2> + +<p>There are two kinds of stock traders. One +kind nearly always makes a profit, and the +other wins sometimes and loses other times, +but eventually loses all if he does not change +his methods. The first kind buys stocks on +liberal margin or outright and is not worried +when the market goes against him, because +he has good reasons for believing that prices +eventually will go up. If he does have to +take a loss occasionally, it is likely to be +small compared with his profits. The second +kind wants to make a big profit quickly, and +he buys stocks that he thinks are going to +make big gains in the near future, but his +selections are not based upon good judgment.</p> + +<p>We might designate these two traders as +the careful trader and the reckless trader.</p> + +<p>The careful trader tries to get good advice +on the markets and the values of stocks. If +the advice appears to him to be conservative, +he is guided by it; but if the reckless trader +gets advice on stocks, he is not guided by it +if it is of a conservative nature. If he does<span class='pagenum'><a name="Page_88" id="Page_88">[88]</a></span> +take advice, it is likely to be from one of +those unreliable market tipsters who is very +emphatic in his statements about what the +market is going to do. The reckless trader +lets his greed and desire for large and quick +profits influence his judgment.</p> + +<p>Once in a while one of these reckless traders +realizes that he has made a great mistake, +and he wants to change his attitude. +Usually he is holding several stocks that +show a big loss and he does not know what +to do with them. He reasons that they are +selling so low now they surely will sell higher +some time. Perhaps his reasoning is good +and perhaps it is not. The stocks may have +no chance of going up for a very long time, +if at all, but even though they have a good +chance to go up later, it is better for him to +sell them now if he can put the money derived +from the sale into something else that has a +better chance to make a profit.</p> + +<p>Our advice is never to hesitate to sell and +take a loss if you can put the proceeds +from the sale into something better rather +than leave it in the stock in which it is now. +It is not so much a question whether or not +the stock you are holding will go up, as it<span class='pagenum'><a name="Page_89" id="Page_89">[89]</a></span> +is whether or not you would buy that particular +stock if you were just coming into +the market to make a purchase. Of course +there is a loss of commissions when you sell +a stock and buy something else, and for that +reason we sometimes recommend holding a +stock when we would not recommend +buying it.</p> + +<p>If you have been a reckless trader in the +past, the only thing for you to do is to +change your methods and try to become a +careful trader. It is much better to go to +the extreme in carefulness and be satisfied +with very small profits than to take great +risks.</p> + +<hr /><p><span class='pagenum'><a name="Page_91" id="Page_91">[91]</a></span></p> +<h2><a name="CHAPTER_XXIV" id="CHAPTER_XXIV"></a>CHAPTER XXIV.<br /> +POSSIBILITIES OF PROFIT</h2> + +<p>What are the possibilities of profit in stock +speculation? That question is frequently +asked but it is difficult to answer. James R. +Keene is quoted as having said: "Many men +come to Wall Street to get rich; they always +go broke. Others come to Wall Street to operate +intelligently for fair returns; they usually +get rich."</p> + +<p>While it is true that nearly all stock traders +who try to make unusually large profits +in a very short time in stock trading lose, yet +unusual profits can be made if you exercise +good judgment and have patience.</p> + +<p>Roger W. Babson, in his book entitled, +"Business Barometers," speaks of the possibilities +of profit in language that would be +considered greatly exaggerated if used by a +promoter, and yet he is extremely conservative +in his advice to traders. He advises +never to buy on margin, never to sell short, +and staying out of the market entirely, +neither buying or selling, for a great part +of the time. Here is a quotation from his<span class='pagenum'><a name="Page_92" id="Page_92">[92]</a></span> +book, which follows a detailed statement of +an investment of $2,500 over a period of fifty +years:</p> + +<div class="blockquot"><p>"The preceding example shows that $2,500 conservatively +invested in a few standard stocks about +fifty years ago would today amount to over +$1,000,000. These are not only strictly investment +stocks, but are also stocks which have fluctuated +comparatively little in price. This, moreover was +possible by giving orders to buy or sell only once +in every three or four years.</p> + +<p>"If other stocks which were not dividend payers +and which have shown greater fluctuations were +purchased, and advantage had been taken of the +intermediate fluctuations, the $2,500 would have +amounted to much larger figures. By intermediate +movements is not meant the weekly movements +which the ordinary professional operator notes, but +the broader movements extending over many months +and possibly a year or more. Nevertheless, these +broader intermediate movements should not be +noticed by a conservative investor, as it is possible +to correctly diagnose only the movements extending +over longer periods. Many brokers believe that it +is possible to discern also these intermediate movements +of six or eight months; and if so, the following +results would have been possible.</p></div> + +<div class="bq2"><p>"$5,000 invested in 'St. Paul' in 1870 would +amount to over $10,000,000 today.</p> + +<p>"$5,000 invested in 'Union Pacific' in 1870 +would amount to over $15,000,000 today.</p> + +<p>"$5,000 invested in 'Central of New Jersey' +would amount to over $30,000,000 today.</p> + +<p>"$5,000 invested in 'Northern Pacific' would +amount to over $50,000,000 today.</p></div> + +<div class="blockquot"><p>"These figures are not based on the supposition +that the investor was selling at the top of every<span class='pagenum'><a name="Page_93" id="Page_93">[93]</a></span> +rise or buying at the bottom of every decline, but +that the transactions were made at average 'high' +and average 'low' prices based upon the study of +technical conditions."</p></div> + +<p>If such large profits can be made by following +Babson's advice, of course larger +profits can be made by buying on conservative +margin and by selling short when all +the conditions are in favor of it.</p> + +<p>While there are possibilities of making +extremely large profits without taking great +risks, by those who are patient and exercise +good judgment, one should be satisfied with +a small profit, if it is the result of great care, +in an effort to eliminate risk. Of course, you +can afford to take a much greater risk with +a small part of your speculative fund than +you can with all of it. The less money you +have with which to speculate, the more careful +you should be. Some people cannot afford +to speculate at all. They should invest their +funds in good, safe investments, but this +book is written for speculators.</p> + +<p>Careful stock speculation carried on regularly +over a period of years, we believe brings +larger returns than almost anything else, and +in the next chapter we tell you something +about where to get information to guide you.</p> + +<hr /><p><span class='pagenum'><a name="Page_95" id="Page_95">[95]</a></span></p> +<h2><a name="CHAPTER_XXV" id="CHAPTER_XXV"></a>CHAPTER XXV.<br /> +MARKET INFORMATION</h2> + +<p>Where do you get your market information? +Perhaps most people get it from the +daily papers. When you look over the financial +news of one of the leading metropolitan papers +and see how much there is of it, you can +get some idea of the enormous volume of +work necessary to get this matter ready for +the press in a few hours. There is no time to +confirm reports. It is necessary that many +of the articles be written from pure imagination, +based on rumors.</p> + +<p>Weekly and monthly periodicals can be +more accurate in their information, but even +they are not always dependable. Much of +the financial news published comes from +agencies that are not reliable. Read what +Henry Clews says about them:</p> + +<div class="blockquot"><p>"Principally among these caterers are the financial +news agencies and the morning Wall Street news +sheet, both specially devoted to the speculative interests +that centre at the Stock Exchange. The object of +these agencies is a useful one; but the public have a +right to expect that when they subscribe for information +upon which immense transactions may be undertaken, +the utmost caution, scrutiny and fidelity<span class='pagenum'><a name="Page_96" id="Page_96">[96]</a></span> +should be exercised in the procurement and publication +of the news. Anything that falls short of this +is something worse than bad service and bad faith +with subscribers; it is dishonest and mischievous. +And yet it cannot be denied that much of the so-called +news that reaches the public through these +instrumentalities must come under this condemnation. +The 'points,' the 'puffs,' the alarms and the canards, +put out expressly to deceive and mislead, find a wide +circulation through these mediums, with an ease +which admits of no possible justification. How far +these lapses are due to the haste inseparable from the +compilation of news of such a character, how far to +a lack of proper sifting and caution, how far to less +culpable reasons I do not pretend to decide; but +this will be admitted by every observer, that the +circulation of pseudo news is the frequent cause +of incalculable losses. Nor is it alone in the matter +of circulating false information that these news venders +are at fault. The habit of retailing 'points' +in the interest of cliques, the volunteering of advice +as to what people should buy and what they should +sell, the strong speculative bias that runs through +their editorial opinions, these things appear to most +people a revolting abuse of the true functions of +journalism."</p></div> + +<p>Of course, every trader gets market letters +from one or more brokers. These are many +and varied in character. Some of them are +prepared with great care and give reliable +information, but you must remember that +a broker's market letter is published for the +purpose of getting business, and business is +created only by the customers' trading. +Therefore it is to the broker's interest to<span class='pagenum'><a name="Page_97" id="Page_97">[97]</a></span> +have his customers make many trades instead +of a few trades. In his book "Business +Barometers," Roger W. Babson reproduces a +letter written to him by the Manager of the +Customers' Room of a Stock Exchange +House. We consider this letter so important +to all traders, we are taking the liberty to +reproduce it here:</p> + +<div class="blockquot"><p>"Hearing on every hand about the fortunes made +in Wall Street, I decided, upon being graduated from +college, to devote myself to finance. With this end +in view, I secured a position with a first-class New +York Stock Exchange House, finally becoming the +'handshaker' for the firm; that is, 'manager' of the +customers' room. So I had an exceptional opportunity +to size up the stock business. The chief +duties of the manager are to meet customers when +they visit the office, tell them how the market is +acting, the latest news from the news-tickers and +the gossip of the Street. But the real duties are +to get business for the house. Once a most peculiar +man came to the office. He was about forty-five +years of age, dressed in a faded cutaway coat, high-water +trousers, and an East Side low-crown derby +hat. In a high squeaky voice he said that he knew +our Milwaukee House and would like to open an account. +Of course, we were all smiles, for here was +a new 'customer.'</p> + +<p>"One day while in Boston he called us up on the +long-distance telephone to make an inquiry about +the grain market. One of my assistants, desiring to +get a commission out of him, said 'We hear that +Southern Pacific is going up; you had better get +aboard.' He said 'All right; buy me a hundred at +the market.' The stock was bought, but he never +saw daylight on his purchase, for the market declined<span class='pagenum'><a name="Page_98" id="Page_98">[98]</a></span> +steadily afterward and by the time he got +back from Boston it showed a heavy loss. The man +who advised its purchase had no special knowledge +about the stock, but simply took a chance, knowing +that the market had only two ways to go, and it +might go up, in which case, besides making twenty-five +dollars in commissions for the house, he would +be patted on the back for his good judgment. If the +market went down, as it did, he would still make +twenty-five dollars.</p> + +<p>"I venture to say that 99% of the speculations +on the New York Stock Exchange are based on +such so-called 'tips'. The manager has got to get +the business to keep his position and salary, and this +can only be done by 'touting' people into the market. +So he draws on the 'dope' sheets of the professional +tipsters and his own feelings, and gives positive +information to the bleating lamb that the Standard +Oil is putting up St. Paul, or that certain influential +bankers are 'bulling' Union Pacific. The lamb buys +the stock, the broker gets the commission, and then +the lamb worries his heart out as he sees his one-thousand-dollar +margin jumping around in value. +Now it has increased to eleven hundred dollars, then +declined to nine hundred and fifty dollars, then nine +hundred dollars, eight hundred dollars, then back to +eight hundred and fifty dollars and then it takes the +'toboggan' to three hundred dollars upon which the +broker calls for margins, and sells the customer out +if they are not forthcoming, the whole speculation +being based on the manager's 'feeling' that stocks +ought to go up.</p> + +<p>"Men of affairs who will not play poker at home, +and are shocked at the mention of faro and roulette, +which any old-timer will tell you are easier to beat +than the stock market, think they are using business +judgment when they try to make money on stock +market 'tips'. Anyone with common sense can see +that a 10% margin has no more chance in an active +market than a brush dam in a Johnstown flood. One<span class='pagenum'><a name="Page_99" id="Page_99">[99]</a></span> +of the causes for this kind of speculating on a margin +is that a broker's commission is only 12<span class="abv">1</span>⁄<span class="blw">2</span> cents +per share and it does not pay to do small-lot business. +The one-thousand-dollar margin would only +buy ten shares outright and net the broker but $1.25 +for buying and $1.25 for selling, whereas that same +amount as margin on one hundred shares yields the +broker $12.50 each way besides interest on the balance, +the net result being that for any given amount +of money a speculator on 10% margin multiplies his +profits by ten and his losses by ten over those that +would occur were he to buy the stock outright and +take it home. The broker on his side multiplies his +commission by ten over what he would receive were +he to do an investment business."</p></div> + +<p>From the above letter you get an idea of +the attitude of an employee of the average +broker's office. He would not be considered +loyal to his employer if he had a different attitude. +When an attitude like this influences +the broker's market letters, they are not +reliable.</p> + +<p>You may ask whether there is any reliable +information about the market. Yes, there +is. There are several large organizations +that make a study of fundamental statistics +and statistics of different companies and give +information to their subscribers based upon +this knowledge. We believe that is the only +kind of information that is worth very much +to a trader, except the statistical information—the +number of shares sold and the prices at<span class='pagenum'><a name="Page_100" id="Page_100">[100]</a></span> +which they are sold—he gets from his daily +or weekly papers. Some of the principal organizations +of this kind are as follows:</p> + +<div class="blockquot"><p><i>Standard Statistics Company, Inc.<br /> +Babson's Statistical Organization.<br /> +The Brookmire Economic Service.<br /> +Harvard Economic Service.<br /> +Poor's Investment Service.<br /> +Moody's Investors Service.<br /> +Richard D. Wyckoff Analytical Staff.</i></p></div> + +<p>The above are the principal organizations +of this kind. Subscriptions to their service +cost from $85 to $1000 a year. In addition +to these there are a few other organizations +besides our own and individuals giving a +somewhat similar service, but we know of +none that gives such a service at as low a +price as ours.</p> + +<p>You should not confuse the service given +by the above organizations with that given +by many organizations and individuals who +attempt to tell you what the market is going +to do from day to day. In other words, they +give 'tips' on the market. There are a number +who issue daily market letters of this +kind and charge from $10 to $25 a month +for their service, but it is a line of service +that we do not recommend at all, because we +consider that you would be taking a very<span class='pagenum'><a name="Page_101" id="Page_101">[101]</a></span> +great risk if you followed advice of that kind. +You might make enormously large profits +occasionally, but you would also have frequent +losses, and when the losses did come +they might be greater than all the previous +profits. We want you to understand that +that kind of advice is entirely different from +what we are recommending.</p> + +<hr /><p><span class='pagenum'><a name="Page_103" id="Page_103">[103]</a></span></p> +<h2>CHAPTER XXVI.<br /> +SUCCESSFUL SPECULATION</h2> + +<p>Success in stock speculation depends upon +a few things that are very simple.</p> + +<p>If you know what to buy, when to buy, +and when to sell, and will act in accordance +with that knowledge, your success is assured. +You may think it is impossible to know these +things, but it is not so difficult as it is supposed +to be.</p> + +<p>Many people buy stocks at the wrong time, +and most of those who do buy them at the +right time, buy the wrong stocks. Right now +(early in April, 1922) is buying time in the +stock market, and it is possible that this buying +time may continue—with some interruptions—for +another year or two, or even +longer.</p> + +<p>It is more difficult, however, to tell you +WHAT stocks to buy. First of all, we advise +you against buying stocks that are put +up to high prices by manipulation. Of course, +if you get in one of those stocks right and +get out right, your profits are very large, +but you take a great risk, and those who win<span class='pagenum'><a name="Page_104" id="Page_104">[104]</a></span> +once or twice by this method are almost sure +to lose everything sooner or later in an effort +to do the same thing again. Your +chances are not much better than if you +gambled at Monte Carlo. The chances in +buying manipulated stocks are invariably +against the outsider.</p> + +<p>There always is so much publicity about +these very active speculative stocks that the +public is attracted towards them. Newspapers +and brokers' market letters give altogether +too much space to them. Such +stocks sell far too high, and when the break +comes, it brings ruinous losses to many +people.</p> + +<p>On the other hand, by following a conservative +course, you really have a chance to +make large profits with a minimum risk. We +are giving below sixteen stocks that we recommended +in our Advisory Letter of February +14th, 1922, with the approximate prices +of them then and the approximate prices on +March 31st.<a name="FNanchor_2_2" id="FNanchor_2_2"></a><a href="#Footnote_2_2" class="fnanchor">[2]</a> In arriving at these prices, we<span class='pagenum'><a name="Page_105" id="Page_105">[105]</a></span> +took the closing prices on February 13th and +on March 31st, and omitted the fractions. +We recommended only sixteen stocks on that +date, and you will see that every one of them +made substantial gains.</p> + +<div class='center'> +<table border="0" cellpadding="1" cellspacing="0" summary=""> +<tr><td class="center"><small>Stock</small></td><td class="center"><small>Approximate<br />Price<br />Feb. 14, 1922</small></td><td class="center"><small>Approximate<br />Price<br />Mar. 31, 1922</small></td><td class="td3"><small>Profit</small></td></tr> +<tr><td class="td5">C. R. I. & P. pfd (6)</td><td class="td6">75</td><td class="td6">79</td><td class="td7">4</td></tr> +<tr><td class="td5">C. R. I. & P. pfd (7)</td><td class="td6">88</td><td class="td6">93</td><td class="td7">5</td></tr> +<tr><td class="td5">New York Central</td><td class="td6">76</td><td class="td6">88</td><td class="td7">12</td></tr> +<tr><td class="td5">Pacific Gas & Electric</td><td class="td6">64</td><td class="td6">68</td><td class="td7">4</td></tr> +<tr><td class="td5">Consolidated Gas</td><td class="td6">90</td><td class="td6">109</td><td class="td7">19</td></tr> +<tr><td class="td5">American Telephone & Telegraph</td><td class="td6">118</td><td class="td6">121</td><td class="td7">3</td></tr> +<tr><td class="td5">General Motors Deb. (6)</td><td class="td6">70</td><td class="td6">78</td><td class="td7">8</td></tr> +<tr><td class="td5">General Motors Deb. (7)</td><td class="td6">81</td><td class="td6">91</td><td class="td7">10</td></tr> +<tr><td class="td5">U. S. Steel</td><td class="td6">87</td><td class="td6">95</td><td class="td7">8</td></tr> +<tr><td class="td5">Dome Mines</td><td class="td6">23</td><td class="td6">26</td><td class="td7">3</td></tr> +<tr><td class="td5">Laclede Gas</td><td class="td6">50</td><td class="td6">63</td><td class="td7">13</td></tr> +<tr><td class="td5">Missouri Pacific Pfd</td><td class="td6">48</td><td class="td6">54</td><td class="td7">6</td></tr> +<tr><td class="td5">C. R. I. & P. Common</td><td class="td6">33</td><td class="td6">40</td><td class="td7">7</td></tr> +<tr><td class="td5">Am. Smel. & Refining</td><td class="td6">45</td><td class="td6">53</td><td class="td7">8</td></tr> +<tr><td class="td5">Anaconda</td><td class="td6">47</td><td class="td6">51</td><td class="td7">4</td></tr> +<tr><td class="td5">Erie Common</td><td class="td6">10</td><td class="td6">11</td><td class="td7">1</td></tr> +<tr class="tr1"><td class="td5">Total</td><td class="td6">1005</td><td class="td6">1120</td><td class="td7">115</td></tr> +</table></div> + +<p>Let us suppose you bought ten shares of +each of these stocks on February 14th. They +would have cost you $10,050. We recommended +30% margin on the first ten, all of +which were dividend payers; and 50% margin +on the last six, because they were more +speculative and would have been more affected<span class='pagenum'><a name="Page_106" id="Page_106">[106]</a></span> +by a reaction in the market. To buy +ten shares of each on that margin basis +would have required a little less than $3,500, +but let us suppose you put up $3,500. After +allowing for buying and selling commissions +and interest on the balance of $6,550, but +crediting you with dividends paid, your profit +would be about 32% or at the rate of about +250% per annum.</p> + +<p>Of course, we do not claim that by following +the conservative course we advise, +you always will make such large profits, although +you might do just as well as that +if you took advantage of some of the opportunities +so frequently to be found in the market; +but keen discrimination in what you +buy always is necessary. However, let us +suppose you made annual profits of one-fifth +the above amount, or 50%, which is easily +possible without taking the risks that are +usually taken in stock speculating. If you +invested $1000 and made 50% profit per annum, +reinvesting your profit at the same rate +each year for twenty years, you would have +more than THREE MILLION DOLLARS.</p> + +<p>When there is a possibility of making such +enormous profits as that by following careful<span class='pagenum'><a name="Page_107" id="Page_107">[107]</a></span> +methods, surely there is no argument in +favor of taking the extreme risks that people +do take in buying the highly speculative +stocks, the prices of which are put up for +the purpose of unloading them on the public. +Ten of the stocks we selected in the above +list were dividend payers, and while the other +six were not, they were considered worth +much more than their market prices, and +the list as a whole was conceded by conservative +people as a safe one to buy.</p> + +<p>Very frequently we are able to recommend +a list of stocks that we believe will +yield equally large profits, but the stocks you +should buy are not the ones that are the +most active nor the ones that are mentioned +most frequently in the financial news and +brokers' market letters. The stocks that +most people buy are usually the very stocks +that should be left alone. The stocks you +should buy are usually the ones you hear +very little about.</p> + +<p>There is only one SAFE way to speculate, +and that is to be guided by a knowledge of +the fundamental conditions of each stock and +also of the industries they represent. There +are several large organizations giving information<span class='pagenum'><a name="Page_108" id="Page_108">[108]</a></span> +of this kind, and those who have been +guided by the fundamental statistics issued +by them, almost invariably have made money +in stock speculating. The value of that kind +of service has been thoroughly demonstrated +beyond any question. However, a subscription +for the service of most of these organizations +costs more than the average person +can afford to pay. Usually it is anywhere +from $100 to $1,000 a year.</p> + +<p>We are giving a service for the purpose of +guiding our clients to successful speculation +for a fee of only $25 a year, $15 for six +months, or $10 for three months. For this +fee we tell you what stocks to buy, when to +buy, and when to sell. We send you our +recommendations at least twice a month, but +send you additional Advisory Letters and lists +oftener if conditions make it necessary. You +also have the privilege of unlimited personal +correspondence regarding your market problems. +The cost of our Service is very small, +compared with what other reliable organizations +charge.</p> + +<p>Our Service is based on the principles expounded +in this book. We try to select +stocks having the greatest possibilities of<span class='pagenum'><a name="Page_109" id="Page_109">[109]</a></span> +profit with minimum risk, and the sample +of our Service given in this chapter is proof +of our success.</p> + +<p class="center"><b>NATIONAL BUREAU OF FINANCIAL<br /> +INFORMATION</b></p> + +<p class="center"><b>395 Broadway, New York City</b></p> + +<div class="footnotes"><h3>FOOTNOTES:</h3> + +<div class="footnote"><p><a name="Footnote_2_2" id="Footnote_2_2"></a><a href="#FNanchor_2_2"><span class="label">[2]</span></a> We did not advise the sale of these stocks on March 31st, +but the author figured profits to that date because this book +was written shortly after that. If these stocks had been bought +on or about February 14th, on the margin basis suggested by +us, and sold six months later, the profit would have been more +than 60%, or 120% yearly.</p></div> + +</div> + +<div class="trn"><b>Transcriber's Note:</b> +Minor typographical errors have been corrected without note. +Variant spellings have been retained.</div> + + + + + + + +<pre> + + + + + +End of Project Gutenberg's Successful Stock Speculation, by John James Butler + +*** END OF THIS PROJECT GUTENBERG EBOOK SUCCESSFUL STOCK SPECULATION *** + +***** This file should be named 26841-h.htm or 26841-h.zip ***** +This and all associated files of various formats will be found in: + http://www.gutenberg.org/2/6/8/4/26841/ + +Produced by Stephen Blundell and the Online Distributed +Proofreading Team at http://www.pgdp.net (This file was +produced from images generously made available by The +Internet Archive/American Libraries.) + + +Updated editions will replace the previous one--the old editions +will be renamed. + +Creating the works from public domain print editions means that no +one owns a United States copyright in these works, so the Foundation +(and you!) can copy and distribute it in the United States without +permission and without paying copyright royalties. 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