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diff --git a/26841.txt b/26841.txt new file mode 100644 index 0000000..8069607 --- /dev/null +++ b/26841.txt @@ -0,0 +1,2201 @@ +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: ASCII + +*** 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.) + + + + + + + + + + Successful + Stock Speculation + + _By_ + J. J. BUTLER + + + _Written April 1922_ + _Published December 1922_ + + + _Published by_ + NATIONAL BUREAU OF FINANCIAL INFORMATION + 395 Broadway, New York City + + + + + _This Book Is Not Copyrighted_ + + 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. + + National Bureau of Financial Information + + +Transcriber's Note: + + Minor typographical errors have been corrected without note. Variant + spellings have been retained. Bold text has been indicated as + +bold+. + + + + +CONTENTS + + + PART 1 + INTRODUCTORY CHAPTERS + + Chapter Page + I. THE PURPOSE OF THIS BOOK 7 + II. WHAT IS SPECULATION 9 + III. SOME TERMS EXPLAINED 13 + IV. A CORRECT BASIS FOR SPECULATING 17 + + + PART 2 + WHAT AND WHEN TO BUY AND SELL + + V. WHAT STOCKS TO BUY 23 + VI. WHAT STOCKS NOT TO BUY 25 + VII. WHEN TO BUY STOCKS 29 + VIII. WHEN NOT TO BUY STOCKS 33 + IX. WHEN TO SELL STOCKS 35 + + + PART 3 + INFLUENCES AFFECTING STOCK PRICES + + X. MOVEMENTS IN STOCK PRICES 41 + XI. MAJOR MOVEMENTS IN PRICES 43 + XII. THE MONEY MARKET AND STOCK PRICES 47 + XIII. MINOR MOVEMENTS IN PRICES 49 + XIV. TECHNICAL CONDITIONS 51 + XV. MANIPULATIONS 53 + + + PART 4 + TOPICS OF INTEREST TO SPECULATORS + + XVI. MARGINAL TRADING 61 + XVII. SHORT SELLING 65 + XVIII. BUCKET SHOPS 69 + XIX. CHOOSING A BROKER 71 + XX. PUTS AND CALLS 73 + XXI. STOP LOSS ORDERS 75 + + + PART 5 + CONCLUDING CHAPTERS + + XXII. THE DESIRE TO SPECULATE 81 + XXIII. TWO KINDS OF TRADERS 87 + XXIV. POSSIBILITIES OF PROFIT 91 + XXV. MARKET INFORMATION 95 + XXVI. SUCCESSFUL SPECULATION 103 + + + + +_PART ONE_ + +INTRODUCTORY CHAPTERS + + + + +CHAPTER I. + +THE PURPOSE OF THIS BOOK + + +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. + +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. + +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. + +"What" and "When" are two very important words in stock speculation, and +we cannot urge upon you too strongly to study carefully Chapters V. to +IX. + +Chapters X. to XV. 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. + +Perhaps the most important chapter in the entire book is XXV., 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. + +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. + + + + +CHAPTER II. + +WHAT IS SPECULATION? + + +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. + +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 +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. + +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." + +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 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. + + + + +CHAPTER III. + +SOME TERMS EXPLAINED + + +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. + +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. + +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 Chapter XVII. on "Short +Selling." In many cases where we use the word "trader," it would be more +correct to use the word "speculator." + +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. + +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. + +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. + +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. + +Long and Short: Those who +own+ stocks are said to be long, and those +who +owe+ stocks are said to be short. Short selling is explained in +Chapter XVII. + +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 1/8 less than the market price; +and when you buy an odd lot, you usually pay 1/8 more than the market +price; that is, 1/8 of a dollar on each share where prices are quoted in +dollars. + +Point: It is a common expression to say that a stock went up or down a +point, which 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 1/100 part of a +cent. For instance, if cotton is quoted at 18.12, it means 18 cents and +12/100 of a cent per pound, and if it went up 30 points the quotation +would be 18.42. + +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. + +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. + +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. + +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. + + + + +CHAPTER IV. + +A CORRECT BASIS FOR SPECULATING + + +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. + +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. + +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. + +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. + +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. + +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 the Detroit Stock +Exchange in order to trade in it. + +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. + + + + +_PART TWO_ + +WHAT and WHEN TO BUY and SELL + + + + +CHAPTER V. + +WHAT STOCKS TO BUY + + +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. + +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. But since the beginning +of 1921, the condition of these two classes of stocks has been improving +and the market has reflected that improvement. + +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. + +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. + + + + +CHAPTER VI. + +WHAT STOCKS NOT TO BUY + + +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. + +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 +not+ to buy. + +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 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. + +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. + +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 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. + +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. + +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. + +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. + + + + +CHAPTER VII. + +WHEN TO BUY STOCKS + + +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 Chapters +X. to XV. 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. + +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 that right now[1] 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. + +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. + +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 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. + +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. + + +FOOTNOTES: + +[1] 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. + + + + +CHAPTER VIII. + +WHEN NOT TO BUY STOCKS + + +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. + +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. + +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 +Chapter XIV. + + + + +CHAPTER IX. + +WHEN TO SELL STOCKS + + +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. + +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 words, the +prediction of higher prices is advanced more rapidly than the prices. + +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. + +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 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. + +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. + +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 Chapter XXIV. on the "Possibilities of Profit." + + + + +_PART THREE_ + + +INFLUENCES AFFECTING STOCK PRICES + + + + +CHAPTER X. + +MOVEMENTS IN STOCK PRICES + + +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. + +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. + +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. + + + + +CHAPTER XI. + +MAJOR MOVEMENTS IN PRICES + + +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. + +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. + +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. + +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. + +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 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. + +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. + +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. + + + + +CHAPTER XII. + +THE MONEY MARKET AND STOCK PRICES + + +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 Chapter XVI. 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. + +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 considerable criticism of that action, it +certainly was a good thing for the entire country. + +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. + + + + +CHAPTER XIII. + +MINOR MOVEMENTS IN PRICES + + +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. + +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. + +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. + +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. + + + + +CHAPTER XIV. + +TECHNICAL CONDITIONS + + +Technical conditions refer to the conditions that usually affect the +supply and demand, such as short interests, floating supply, and stop +loss orders. + +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. + +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. + +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 until all stock +that is offered at that price is bought. + +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. + +Of course, when one finds that a mistake has been made, the sooner one +sells and takes a loss the better. + + + + +CHAPTER XV. + +MANIPULATIONS + + +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. + +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. + +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. + +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 Chapter XXV. 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." + +When the general public reads this news and sees the stock going down, +many of them 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. + +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. + +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 they will sell out the newly acquired stock near the top of +the rally. + +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. + +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. + +As an example, suppose a man of this kind has a mining company. When he +wants the 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. + +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. + +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. + +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. + +It is our opinion that more money is lost by the public in manipulated +stocks than in promotion stocks, and we read a great 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. + + + + +_PART FOUR_ + +TOPICS OF INTEREST TO SPECULATORS + + + + +CHAPTER XVI. + +MARGINAL TRADING + + +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. + +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 Chapter XVIII. + +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 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. + +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. + +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 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. + +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. + + + + +CHAPTER XVII. + +SHORT SELLING + + +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. + +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 get the use of the money +without any interest. + +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. + +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. + +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 there is any reason why our clients should not take advantage of +them. + +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. + +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. + + + + +CHAPTER XVIII. + +BUCKET SHOPS + + +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. + +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. + +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." + +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. + + + + +CHAPTER XIX. + +CHOOSING A BROKER + + +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. + +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. + +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 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. + + + + +CHAPTER XX. + +PUTS AND CALLS + + +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. + +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 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. + +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. + +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. + + + + +CHAPTER XXI. + +STOP LOSS ORDERS + + +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. + +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 +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. + +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. + +Therefore, we believe that stop-loss orders are a bad thing and, as a +rule, do not recommend them. + +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 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. + +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. + + + + +_PART FIVE_ + +CONCLUDING CHAPTERS + + + + +CHAPTER XXII. + +THE DESIRE TO SPECULATE + + +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. + +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 money for +the promotion of their inventions and did not succeed. + +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. + +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. + +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. + +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, 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. + +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. + +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. + +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 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. + +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. + +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 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. + + + + +CHAPTER XXIII. + +TWO KINDS OF TRADERS + + +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. + +We might designate these two traders as the careful trader and the +reckless trader. + +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 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. + +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. + +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 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. + +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. + + + + +CHAPTER XXIV. + +POSSIBILITIES OF PROFIT + + +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." + +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. + +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 +book, which follows a detailed statement of an investment of $2,500 over +a period of fifty years: + + "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. + + "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. + + "$5,000 invested in 'St. Paul' in 1870 would + amount to over $10,000,000 today. + + "$5,000 invested in 'Union Pacific' in 1870 + would amount to over $15,000,000 today. + + "$5,000 invested in 'Central of New Jersey' + would amount to over $30,000,000 today. + + "$5,000 invested in 'Northern Pacific' would + amount to over $50,000,000 today. + + "These figures are not based on the supposition that the investor + was selling at the top of every 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." + +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. + +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. + +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. + + + + +CHAPTER XXV. + +MARKET INFORMATION + + +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. + +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: + + "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 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." + +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 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: + + "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.' + + "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 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. + + "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. + + "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 of the causes for this kind of speculating on a margin + is that a broker's commission is only 12-1/2 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." + +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. + +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 which they are sold--he gets from his daily or weekly +papers. Some of the principal organizations of this kind are as follows: + + _Standard Statistics Company, Inc. + Babson's Statistical Organization. + The Brookmire Economic Service. + Harvard Economic Service. + Poor's Investment Service. + Moody's Investors Service. + Richard D. Wyckoff Analytical Staff._ + +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. + +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 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. + + + + +CHAPTER XXVI. + +SUCCESSFUL SPECULATION + + +Success in stock speculation depends upon a few things that are very +simple. + +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. + +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. + +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 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. + +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. + +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.[2] In arriving at these prices, we 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. + + Approximate Approximate + Price Price + Stock Feb. 14, 1922 Mar. 31, 1922 Profit + + C. R. I. & P. pfd (6) 75 79 4 + C. R. I. & P. pfd (7) 88 93 5 + New York Central 76 88 12 + Pacific Gas & Electric 64 68 4 + Consolidated Gas 90 109 19 + American Telephone & Telegraph 118 121 3 + General Motors Deb. (6) 70 78 8 + General Motors Deb. (7) 81 91 10 + U. S. Steel 87 95 8 + Dome Mines 23 26 3 + Laclede Gas 50 63 13 + Missouri Pacific Pfd 48 54 6 + C. R. I. & P. Common 33 40 7 + Am. Smel. & Refining 45 53 8 + Anaconda 47 51 4 + Erie Common 10 11 1 + ---- ---- --- + Total 1005 1120 115 + +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 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. + +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. + +When there is a possibility of making such enormous profits as that by +following careful 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. + +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. + +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 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. + +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. + +Our Service is based on the principles expounded in this book. We try to +select stocks having the greatest possibilities of profit with minimum +risk, and the sample of our Service given in this chapter is proof of +our success. + + + NATIONAL BUREAU OF FINANCIAL + INFORMATION + + 395 Broadway, New York City + + +FOOTNOTES: + +[2] 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. + + + + + + +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.txt or 26841.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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