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 ofthe fundamental principles that guide us when we select stocks for themto buy, but these principles are valuable to every person who trades inlisted stocks or in any other kind of speculative stocks. 

First of all, we want you to get a clear conception of the meaning ofthe word speculation, which is explained in the next chapter. Ourpurpose is to protect you against losses as well as to enable you tomake profits, and it is very important that you understand how toprovide for safety in your speculating. 

It is a well known fact that there are tremendous losses in stockspeculation, but we claim that almost all of these losses would beavoided if all speculators were guided by the principles expounded inthis book. 

"What" and "When" are two very important words in stock speculation, andwe cannot urge upon you too strongly to study carefully Chapters V. ToIX. 

Chapters X. To XV. Tell you much about the influences that affect theprices of stocks, a knowledge of which should also be a guide to you inmaking your selections. 

Perhaps the most important chapter in the entire book is XXV. , on MarketInformation. A careful reading of this chapter should convince you thatmuch 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 notlong, and it will not require much of your time to read it throughcarefully. We are sure you will get many ideas from it that will helpyou. 

CHAPTER II. 

WHAT IS SPECULATION?

To speculate is to theorize about something that is uncertain. We canspeculate about anything that is uncertain, but we use the word"speculation" in this book with particular reference to the buying andselling of stocks and bonds for the purpose of making a profit. Whenpeople buy stocks and bonds for the income they get from them and theamount of that income is fixed, they are said to invest and not tospeculate. In nearly all investments there is also an element ofspeculation, because the market price of investments is subject tochange. "Investment" also conveys the idea of holding for some timewhatever you have purchased, while speculation conveys the idea ofselling for a quick profit rather than holding for income. 

To the minds of most people, the word "speculation" conveys the thoughtof risk, and many people think it means great risk. The dictionary givesfor one of the meanings of speculation, "a risky investment for largeprofit, " but speculation need not necessarily be risky at all. Theauthor of this book once used the expression, "stock speculating withsafety, " 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 perfectlycorrect. Stock speculating with safety is possible. 

Of course, we all know that the word "safety" is seldom used in anabsolute sense. We frequently read such expressions as: "The elevatorsin modern office buildings are run with safety. " "It is possible tocross the ocean with safety. " "You can travel from New York to SanFrancisco in a railroad train with safety. " And yet accidents do occurand people do lose their lives in elevators, steamships, and railroadtrains. Because serious accidents are comparatively rare, we use theword "safety. "

In like manner it is possible to purchase stocks sometimes when it isalmost certain that the purchaser will make a profit, and that is "stockspeculating 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 beforeit would go higher, and that did not involve any risk for those who knewthey could hold them. The fact that the market prices of Liberty Bondswould advance was based upon an economic law that never fails. That lawis 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. WhenLiberty Bonds were selling in the 80's, interest rates were so veryhigh, it was certain that they would come down. That the market pricesof Liberty Bonds would go up was also certain, but nobody could tell howmuch they would go up in a given time. It was that element ofuncertainty that made them speculative, and not that there was any doubtabout the fact that the market prices of them would go up. BuyingLiberty Bonds at that time was speculating with safety. If you read thisbook with understanding, you will know much about speculating withsafety. 

CHAPTER III. 

SOME TERMS EXPLAINED

There are certain terms used in connection with stock speculation thatare very familiar to those who come in contact with stock brokers, andyet 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 notfamiliar with them. 

Trader: A person who buys and sells stocks is usually referred to as atrader. The word probably originated when it was customary to trade onestock for another and later was used to refer to a person who sold onestock and bought another. He was a trader; but the person who buysstocks for a profit and sells them and takes his profit when he gets anopportunity, may not be a trader in the strict sense of the word. However, for convenience, we use the word "trader" in this book to referto 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 tothe earnings of the stock. He may sell first, with the expectation ofbuying at a lower price, as explained in Chapter XVII. On "ShortSelling. " In many cases where we use the word "trader, " it would be morecorrect to use the word "speculator. "

Investor: An investor differs from a speculator in the fact that he buysstocks or bonds with the expectation of holding them for some time forthe income to be derived from them, without reference to theirspeculative possibilities. We believe that investors always should givesome consideration to the speculative possibilities of their purchases. It frequently is possible to get speculative profits without increase ofrisk or loss of income. 

Bull: One who believes that the market price of stocks will advance iscalled a bull. Of course, it is possible to be a bull in one stock and abear in another. The word is used very frequently with reference to themarket, a bull market meaning a rising market. 

Bear: The opposite of a bull is a bear. It refers to a person whobelieves that the market value of stocks will decline, and a bear marketis a declining market. 

Lambs: "Lambs" refers to that part of the public that knows so littleabout stock speculating that they lose all their money sooner or later. The bulls and bears get them going and coming. If the lambs would readthis book carefully, they would discover reasons why they lose theirmoney. 

Long and Short: Those who +own+ stocks are said to be long, and thosewho +owe+ stocks are said to be short. Short selling is explained inChapter XVII. 

Odd Lot: Stocks on exchanges are sold in certain lots. On the New YorkStock Exchange, 100 shares is a lot; and on the Consolidated StockExchange, 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 marketprice; that is, 1/8 of a dollar on each share where prices are quoted indollars. 

Point: It is a common expression to say that a stock went up or down apoint, which means a dollar in a stock that is quoted in dollars, but acent in a stock that is quoted in cents, as many of the stocks are onthe New York Curb. In cotton quotations, a point is 1/100 part of acent. For instance, if cotton is quoted at 18. 12, it means 18 cents and12/100 of a cent per pound, and if it went up 30 points the quotationwould be 18. 42. 

Reaction: Every person who has traded in listed stocks probably isfamiliar with this word. It means to act in an opposite direction, butit is used especially to refer to a decline in the price of a stock thathas been going up. 

Rally: "Rally" is the opposite of the sense in which "reaction" usuallyis used. When a stock is going down and it turns and goes up, it iscalled a rally. 

Commitment: This term is used referring to a purchase of stock. It ismore commonly used by investment bankers when they contract to buy anissue, but the term sometimes is used by traders. 

Floating Supply: The stock of a company that is in the hands of thatpart of the public who is likely to sell, is referred to as floatingsupply. 

CHAPTER IV. 

A CORRECT BASIS FOR SPECULATING

We maintain that there is only one basis upon which successfulspeculation can be carried on continually; that is, never to buy asecurity unless it is selling at a price below that which is warrantedby 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 bestudied and understood, but they should be used as secondary factors inrelation to the value of the stock in which you are trading. 

If the market price of any stock is far below its intrinsic value andthere is no reason why the future should bring about a change in thisvalue that will decrease it, then you may be certain that importantinfluences are working against the market price of the stock for thetime being. In the course of time the market price will go up towardsthe real value. This matter will be more fully explained in subsequentchapters. 

You always should keep in mind the fact that when you buy a stock at ahigher price than its intrinsic value, you are taking a risk. The stockmay have great future possibilities, but it is risky to buy stocks whenpresent assets and earnings do not warrant their market prices, nomatter how attractive prospective future earnings may appear. However, the possibilities of profit sometimes are so great that one is justifiedin taking this risk. 

It is our belief that the majority of traders buy stocks because theyare active in the market and somebody said they were a good buy, eventhough 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 toa news item that appeared in a New York paper. It stated that on April1st, some brokers in Detroit, as an April Fool joke, gave out a tip tobuy A. F. P. , meaning April Fool Preferred, but when asked what itmeant, replied "American Fire Protection. " Of course, there was no suchstock, but there was active trading in it until the joke was discovered. Evidently it is not necessary to list a stock on the Detroit StockExchange in order to trade in it. 

This story may or may not be true, but we believe the statement thatpeople trade in stocks they do not know anything about is true. Youshould be careful not to buy a stock merely because somebody says it isa good thing to buy, unless the person making the statement is in thebusiness of giving information on stocks, because it may be only a rumorwith 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 thatpurpose 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 classesof stocks, and then what particular stocks you should buy in the classesyou 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 theNew York Stock Exchange. As a rule, it is better to buy stocks listed onthe New York Stock Exchange, although there are frequent exceptions tothis rule. 

Then, the stocks listed on the New York Stock Exchange may be dividedinto classes, such as railroad stocks, public utility stocks, motorstocks, tire stocks, oil stocks, copper stocks, gold stocks, and soforth. At certain times certain stocks are in a much more favorablecondition than at other times. In 1919, when the industrial stocks wereselling at a very high price, the public utility stocks and gold stockswere selling low, because it was impossible to increase incomes inproportion to the increase in operating costs. But since the beginningof 1921, the condition of these two classes of stocks has been improvingand the market has reflected that improvement. 

At the time of this writing (early in April, 1922) we are recommendingthe stocks of only a very few manufacturing companies; but we arerecommending a number (not all) of the railroad and public utilitystocks, and a few specially selected stocks among the other classes. 

In every instance, when you make a selection, you should consider thecompany's assets, present earnings, and prospective future earnings, andthen take into consideration all the influences that affect pricemovements, 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 aboutstocks you should buy, because the list is very much larger. 

Stocks not listed on the New York Stock Exchange, as a rule, should notbe bought by a careful speculator, but as stated in the previouschapter, there are exceptions to that rule. Billions of dollars havebeen lost in the past by buying stocks that have become worthless. A fewyears ago a list of defunct securities was compiled, and it took twolarge volumes in which to enumerate them. New ones have been added tothem every year. Therefore, it is very important that you should givecareful thought to the subject of what stocks +not+ to buy. 

Nearly all promotion stocks (stocks in new companies) are a failure. Anextremely small percentage of them are very successful, and thesuccessful ones are referred to in the advertising of the new ones; but, on the basis of average, the chances are you will lose your moneyentirely in promotion stocks. We believe that most of the promotioncompanies are started in perfectly good faith, although some of them areswindles from the beginning; but no matter how honest and well meaningthe organizers are, the chances of success are against them. Therefore, we say that promotion stocks should not be bought by the ordinary manwho is looking for a good speculation, because his chances of making alarge profit with a minimum risk are very much better when he buysstocks listed on the New York Stock Exchange and uses good judgment indoing 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 areselling too high now. You may say that there are some exceptions in allclasses. That may or may not be so, but in any event, you have a betterchance of profiting by confining most of your purchases to the classesof stocks that are in the most favorable position. 

As a rule, when stocks are first listed, they sell much higher than theydo a short time afterwards. Of course, that is not always true. It ismore likely to be true when a stock is listed during a very activemarket, when prices are more easily influenced by publicity. The highprice 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 priceof the stock declines. 

It is a good rule never to buy stocks that brokers urge you to buy. Yourown common sense ought to tell you that a stock that is advertisedextensively by brokers is likely to sell up in price while theadvertising is going on and will drop in price just as soon as theadvertising stops. 

Many people notice that and they think they can profit by buying whenthe advertising starts and sell out when they get a good profit, but themajority of them lose money. The stock may not respond to theadvertising, 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 arealmost sure to lose it all in an effort to repeat the transaction. Manyof 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 thiskind have very little value and the brokers who boost them make theirown 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 meanthat the market price is much less than the intrinsic value. In ChaptersX. To XV. We talk about influences that affect the price movements ofstocks. By studying these carefully you should be able to decide whenstocks generally are cheap. Of course, not all stocks are cheap at thesame time, but the majority of listed stocks do go up and down at thesame time, as a rule. 

At the time of this writing (in the early part of April, 1922) there area great many stocks listed on the New York Stock Exchange that areselling at prices much less than their intrinsic values, but there aresome stocks that should not be bought now, nor at any other time. Thereare some stocks listed on the New York Stock Exchange now that perhapshave no intrinsic value and never will have any. Nevertheless weconsider that right now[1] is one of the times for buying stocks. Thereare unusual bargains to be had, although keen discrimination isnecessary in order to be able to pick out the bargains. 

As a usual thing, it is a good time to buy stocks when nearly everybodywants to sell them. When general business conditions are bad, trading onthe stock exchanges very light, and everybody you meet appears to bepessimistic, then we advise you to look for bargains in stocks. The lastsix months of 1921 was an unusually good time for buying stocks. 

It is well known that the large interests accumulate stocks at suchtimes. They buy only when the stocks are offered at a low price and trynot to buy enough at any one time to give an appearance of activity inthe market, but they buy continually when the market is very dull. Itseems to be characteristic of human nature to think that businessconditions are going to continue just as they are. When business is bad, nearly everybody thinks business will be bad for a long time, and whenbusiness is good, nearly everybody thinks business will be good almostindefinitely. As a matter of fact, conditions are always changing. Itnever is possible for either extremely good times nor for extremely badtimes 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 suchtimes. 

FOOTNOTES:

[1] In our advisory Letter of April 25, 1922, we advised our clients torefrain from margin buying for a while, because the market was advancingtoo rapidly. Shortly after that there was a decided reaction in themarket. 

CHAPTER VIII. 

WHEN NOT TO BUY STOCKS

There are times when stocks should not be bought, and that is whennearly all stocks have advanced beyond their real values. It is doubtfulif there ever is a time when all stocks have advanced beyond their realvalues, but when the great majority of stocks have so advanced, there islikely to be a general decline in all stock prices. The stocks that arenot selling too high will decline some in sympathy with the others. Therefore, there are times when we advise our clients not to buy anystocks. 

Some organizations giving advice in regard to the buying of stocks, advise their clients to refrain entirely from buying for periods of ayear or longer, but we think it is seldom advisable to refrain entirelyfrom buying for any great length of time. There usually are some goodopportunities if you watch carefully for them. It is our business towatch for these opportunities and tell our clients about them. 

There are also times when the technical condition of the market is suchthat we advise our clients to refrain from buying for a while. SeeChapter XIV. 

CHAPTER IX. 

WHEN TO SELL STOCKS

You should sell stocks when the market price is too high. That is ageneral rule, but it is necessary for you to study all the influencesaffecting stock prices to be able to decide more accurately when youshould sell your stocks. We give you, in future chapters, much moreinformation on judging the markets. 

Another general rule, is to sell stocks when nearly everybody is buyingthem. It is a well known fact that the great majority of people buystocks near the top and sell near the bottom. Naturally when everybodyis optimistic, stocks will sell up high, but sooner or later they willcome down again, and when everything looks very promising is a good timeto sell. It is better to lose a little of the profit that you might havemade by holding on longer than not to be on the safe side. The man whotries to sell at the top nearly always loses, because stocks seldom sellas high as it is predicted they will, or, in other words, theprediction of higher prices is advanced more rapidly than the prices. 

We remember reading in 1916, when U. S. Steel sold up around $136 ashare, 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 theextreme activity of a bull market, it seems that nearly everybody istalking in exaggerated terms of optimism. That is why most tradersseldom ever take their profits in a bull market. They wait until stockprices start to come down, and then they are likely to think there willbe 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 youshould sell. The stock may have been very cheap when you bought it. In1920, Peoples Gas sold below $30. Those who bought it then were able todouble their money by the close of 1921, and many sold out and tooktheir profits. Of course, if they invested the proceeds in other stocksthat were just starting upward, they may not have lost anything, butthere was no particular reason for selling Peoples Gas at that time. Thepublic utilities generally were coming into their own, and nearly all ofthem were regarded by economic students as having unusual opportunitiesfor profit. 

Then again, it is not always a mistake to sell a stock in order to getfunds to put into something else that seems more promising, even thoughthe stock you sell is likely to go much higher. 

It is very important that you should try to sell your stocks at theright time. That is the main thing to keep in mind and it is better tosell too soon than too late. Don't be too greedy and hold on for a bigprofit. 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 thatspeculation is possible. Sometimes certain stocks remain almost at astandstill for a long period of time, but at least a part of the stockslisted on the Exchanges move either up or down. If one always could telljust what way they were going to move, it would be comparatively easy tomake a fortune within a short time. 

In the last twenty years, a great deal of time and money has been spentby statistical organizations in checking up statistics for the purposeof ascertaining a definite basis upon which to predict future movementsin stock prices. Several of these organizations use very differentstatistics upon which to base their conclusions, and yet theirconclusions are very similar. They have proved beyond any question ofdoubt that some of these movements are clearly indicated by laws thatnever fail. 

We do not attempt in this book to explain the fundamental statisticsupon which the predictions of business cycles are based, but in the nextfive chapters we explain some of the influences that affect themovements in stock prices. Read these chapters very carefully, for yoursuccess in stock speculation will depend very largely upon your correctprediction of these movements. 

CHAPTER XI. 

MAJOR MOVEMENTS IN PRICES

Stock prices move up and down in cycles. These are the major movementsin prices, but there may be many minor movements up and down within themajor movements. These stock price movements nearly always precede achange in business conditions; that is, an upward movement in stockprices is an indication that business conditions are going to improve, and a downward movement in stock prices is an indication that businessconditions are going to get worse. 

At the present writing, we are in a period of improvement. Stock pricesbegan to go up in August, 1921. The upward movement has been slow, butgradual. In a period of seven months, forty representative stocks showan upward movement of about 20 points, although business has not shownmuch improvement. A steady upward movement in stock prices is a suresign that business conditions are beginning to improve, even though thatimprovement is not noticeable. 

These major stock movements are not an exact duplicate of any previousones, and it is impossible to tell how long they will last or just whatcourse they will take. Certain influences could change a period ofimprovement into a period of prosperity very quickly. 

A period of prosperity is noted for high prices, high wages, andincreasing production in all lines. Everybody is optimistic. Most peoplespend their money freely, and that makes times better. As prices go upand business increases, more money is required in business and interestrates go up. As a consequence, when interest rates go up, bond prices godown. During this period, speculative stocks are selling at theirhighest prices; and under the influence of this movement, many stocksthat have no actual value sell up at high prices. Of course, wisespeculators sell all their stocks during this period. 

Following a period of prosperity comes a period of decline. The firstsign of it usually is a severe break in the stock market. At that timegeneral business is running along at top speed and there is no sign of alet-up, but this break in the stock market should be a warning. Mostpeople think the break is merely a temporary reaction--they may referto it as a HEALTHY reaction--and they start buying stocks again, and putthe market up, but it does not go up as high as it was before the breakoccurred. When stock prices do not rally beyond the prices at which theywere before the break occurred, it is a sign that the turning point hasbeen reached and that the bear market has started, although the majorityof 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 wholost all their money during the speculation period, become thrifty andeconomize during the period of depression, and start in to save again. Nearly everybody is pessimistic during this period. Trading on the StockExchange is irregular and as a rule very light. 

This is the time to get stock bargains, but the general public as a ruledoesn't take advantage of it. People are scared and think prices will gostill lower. The big interests accumulate stocks during this period, andsell 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 somuch, in a large way, as money conditions. It is impossible to have abig bull market without plenty of money. During a bull market nearly allstocks are bought on margin, which is explained in Chapter XVI. Thismakes it necessary for brokers to borrow large sums of money. When moneyis tight, it is impossible to get enough to carry on a large movement instocks. 

You will see, therefore, that the Federal Reserve Bank has it in itspower to regulate the stock market to some extent. In 1919 speculationwas carried very much further than it should have been, but undoubtedlyit would have been much worse had the Federal Reserve Bank not raisedinterest rates and urged member banks to withdraw money from WallStreet. While there was considerable criticism of that action, itcertainly was a good thing for the entire country. 

In a period of depression, the banks accumulate money, and there alwaysis an abundance of money at the beginning of a bull market. During aperiod of prosperity the banks' reserves decrease and their loansincrease. When you see these reserves go down to a very low point, it isusually time for you to sell your stocks. 

CHAPTER XIII. 

MINOR MOVEMENTS IN PRICES

Within the major movements of stock prices, there always are severalminor movements, which are caused by various influences. One of theimportant causes is the technical condition of the market. Another causemight be called a psychological one. When stocks are moving up steadilyin a bull market, people closely connected with the market expect areaction and watch for it. The newspapers predict it. Consequently, there is sufficient let-up in buying to allow the pressure of selling bythe bears to bring it about. However, the desire to buy during reactionsis so general, many people rush in to buy and this buying, in additionto the covering by the shorts, puts the market up again; and ifconditions are favorable for a bull market, prices will go up muchhigher than they were before. 

In like manner, we have rallies in bear markets. Of course theprofessional bears sell during these rallies, with the expectation ofbuying later at a cheaper price. 

These minor price changes mean more to the majority of traders than themajor movements. The major movements are so slow that people get out ofpatience, and yet those who are guided only by the major movements areoperating on a much safer basis. We believe that a greater amount ofmoney can be made, with a minimum risk, by being guided principally bythe major movements, while taking advantage of the minor movements in aminor way. However, stocks do not move uniformly and there frequently isan opportunity to buy some particular stock at a bargain when nearly allstocks are selling too high. We try to pick out these opportunities forour clients. 

Reports of earnings by various companies influence stock prices, as doesalso the paying of extra dividends or the passing up of dividends. Apeculiar psychological influence is noticed when a company declares anextra dividend. The price of the stock usually goes up, while as amatter of fact the intrinsic value of the stock is decreased by theamount of this dividend; and sometimes it is advisable to sell a stockshortly after an advance in its dividend rate. 

CHAPTER XIV. 

TECHNICAL CONDITIONS

Technical conditions refer to the conditions that usually affect thesupply and demand, such as short interests, floating supply, and stoploss orders. 

It is sometimes said that supply and demand must be equal or else therecould not be any sales, but that is not so. There are always some peoplewho are willing to sell at some price above the market who will not sellat 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 holdingit at a higher price. 

It works the same way when the supply is greater than the demand. Thereare always some people who will buy at some price below the market. Therefore, when the supply is greater than the demand prices must godown. 

A stock may have an intrinsic value of $100 a share and yet be sellingat $50 a share, and it can never sell higher than $50 until all stockthat is offered at that price is bought. 

However, you should keep this in mind: if the real value is $100 ashare, sooner or later the market price will approach that figure. Thatis why we so strongly urge our clients to buy stocks that have actualvalues, or at least prospective values far greater than their marketprices, and either to buy them outright or margin them very heavily, andthen hold them until the prices do go up. 

Of course, when one finds that a mistake has been made, the sooner onesells and takes a loss the better. 

CHAPTER XV. 

MANIPULATIONS

Stock prices are influenced largely by manipulation. Years ago when thevolume of trading on the New York Stock Exchange was small compared withwhat it is today, it was possible to influence the entire market bymanipulation, but it would be very difficult to do that today. It isonly certain stocks that are manipulated; but if conditions arefavorable, many other stocks may be influenced by them. 

There are different kinds of manipulation. One is for the insiders of acompany to give out unfavorable news about their company if they wantthe price of the stock to go down, so that they can buy it in; or togive out very favorable news if they want the price to go up, so thatthey can sell out. This method is not practiced now to the extent thatit was years ago. Public opinion is strongly opposed to it, and webelieve 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 thestock of a company and force it up. If the market price of a stock isfar below its real value, we believe it is justifiable for a pool toforce 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 theperiod of accumulation. A number of large holders of stock in a certaincompany will pool their stock, all agreeing not to sell except from thepool, in which all benefit proportionately. Then they give out bad newsabout the company. That is very easy to do, because financial writersusually accept the news that is given to them without muchinvestigation, especially writers on daily papers, because they have notthe time to investigate. Their copy must be ready in a few hours afterthey get the information. See Chapter XXV. On "Market Information" forfuller explanation of the reason why financial news usually ismisleading. 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 shouldnot sell, but it is a well known fact that the majority of people do inthe stock market just what they should not do. The more they sell themore the price goes down, and the pool operators accumulate the stock. 

Having secured all the stock they want, they give out good news andcontinue to buy the stock until it starts to go up. The public readsthis favorable news, and seeing the stock go up, will go into the marketand buy, which puts it up higher. All the time financial writers aresupplying good news about the stock and the public buys it. After theyhave sold all of it, the public may still be anxious for more, and thepool operators may go short of the stock. Then they will begin givingout bad news, so that they can buy in stock at a lower price to covertheir short interests. 

After that they have very little interest in the market. If it isdeclining too fast, they may support it occasionally by buying somestock and giving out some favorable news. That will make the marketrally and they will sell out the newly acquired stock near the top ofthe 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 whofall for them. But then, one can't blame the public when you realize howthoroughly unreliable is most of the market information given to them. 

Still another kind of manipulation is "one-man" manipulation, where oneman controls companies, which are known as "one-man" companies. Usuallythe directors of these companies are friends or employees of his, and inmany instances he has their resignations in his possession, so that theymust do whatever he wants them to do. Owing to the strict rules of theNew York Stock Exchange, it is rather difficult for such manipulationsto be carried on there. But there have been many of them on the New YorkCurb. When the Curb was operating on the street and was not under verymuch control, manipulations of this kind were very frequent. 

As an example, suppose a man of this kind has a mining company. When hewants the stock to go up, he sends the stockholders a great deal ofinformation about the work at the mine, and perhaps sends them atelegram when a new vein of rich ore is found. The stockholders rush into buy more stock, and that puts the price up. Then he unloads stock onthem to the extent that they will buy it. 

In a day or two, the stock may drop back to less than one half of whatit 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 hisown price. 

After that the news is good or bad according to whether the manipulatorwants to buy or sell, but as a rule he has an abundance of stock that hewants to sell, and is continually giving out good news. 

A few years ago there was a man operating in New York who promotedseveral companies and manipulated them in a large way. He is out ofbusiness 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 manipulatedstocks than in promotion stocks, and we read a great deal about theenormous losses in them. Promotions that are failures may be perfectlylegitimate and conducted in the utmost good faith, but manipulations arenearly always for the purpose of swindling the public. However, the lureof them is so great many people cannot withstand the temptations of themeven 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 minimummargin is about 20% of the purchase price, because banks usually lendabout 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 amountfrom his bank, and putting up the stock as security. In this way brokersare able to handle all the margin business that comes to them, as longas money can be borrowed. Of course, there are some stocks that are notaccepted by banks as collateral for loans, and you should not expectyour broker to sell such stocks on margin. In fact, if he offers to doso, it looks as though he were running a bucket shop. See Chapter XVIII. 

Many people think that buying stocks on margin is gambling and thatpeople should not do it for that reason, but buying on margin is done inall lines of business, although it may not be known under that name. Ifyou bought stock outright, but borrowed 80% of the purchase price fromyour banker to complete your payment for it and put up the stock withhim 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 andborrowed the other 80% of the purchase price, you would be buying a homeon margin. The principal difference is that when you buy from a brokeron margin, one of the conditions of his contract is that he has theright to sell your stock provided the market price drops down to theamount 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 sellyou out until that time expires. However, in principle, there is verylittle difference between the two transactions. 

Most margin traders do not put up sufficient margin. If you put up onlythe minimum margin, your broker has the right to call on you for moremargin if the price of the stock declines at all. Unless you are fullyprepared at all times to put up an additional margin when called upon, you should make smaller purchases and put up a heavy margin when youbuy. The amount of margin depends upon the transaction, but we advisefrom 30% to 50%, and at times we advise not less than 50% margin on anypurchase. In fact there are times when we advise not to buy stocks onmargin at all. 

Those who wish to be entirely free from worry should buy stocks when theprices are very low, pay for them in full, get their certificates, andput them away in a safe deposit box. However, when stocks are low therisk in buying on a liberal margin is very small, and the possibilitiesof profit are so much greater, we do not see any objection to takingadvantage of this method of trading. 

CHAPTER XVII. 

SHORT SELLING

By short selling, we mean selling a stock that you do not possess, withthe intention of buying it later. Short selling in general business isvery common, and we think nothing of it. Manufacturers frequently sellgoods that are not yet made, to be delivered at some future time. Selling stocks short is a similar transaction, except that in a majorityof cases delivery of the stock must be made immediately. 

However, your broker can attend to that by borrowing the stock. Asexplained in the preceding chapter, when the market is active most ofthe trading is done on margin. Your broker buys a stock for you, but ashe has to pay for it in full, it is customary for him to take it to hisbank and borrow money on it. A bank usually lends about 80% of themarket value, but if some other broker wants to borrow this stock, hewill lend the full value of it. If that particular stock is very scarceand hard to get, the lender of the stock may get the use of the moneywithout any interest. 

Therefore, there is an advantage to the broker in lending stock, and forthat reason it is nearly always possible for a broker to arrangedelivery of stock for you if you wish to sell short. When you instructhim later on to buy the stock for you, he will do so and deliver it tothe broker from whom he borrowed it, who will return the money hereceived for it. 

When you sell stock short and the price goes up, you will have to pay ahigher price for it. Therefore, to protect himself against thepossibility of losing, your broker demands a payment from you just thesame as you pay margin when you buy stock. 

Short selling is something that we do not recommend very much to ourclients. We think it is not advisable to do any short selling as long asthere are good opportunities to make money by buying; but when allbargains disappear, as they do sometimes, you must either sell short orelse keep out of the market entirely. At such times, there may be manyopportunities to make money by short selling, and we do not considerthat there is any reason why our clients should not take advantage ofthem. 

Of course, great care must be exercised in selling stocks short. Youmight sell a stock short because you know the market price is 100%greater than its real value, but it is possible for manipulators toforce it up a great deal higher; and if you are not able to put upsufficient money with your broker to protect him, he will buy at a highprice and you will lose the money you have put up with him. In someinstances, stocks are cornered and the short interests are forced to buythe stocks at prices that represent enormous losses. 

It is a common thing to read about the short interests in certainstocks. 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 acertain stock, we should expect the stock to sell at a higher price; butsometimes 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 everybodyis familiar with the term. A broker runs a bucket shop when he sellsstock to his clients on margin and either never buys the stock for theiraccounts, or else sells it immediately after buying it. The bucket shopsimply gets your money on the supposition that you are more likely to bewrong than to be right. Of course, if you take the bucket shop's adviceyou surely are likely to be wrong. Bucket shops get their clients intothe very speculative stocks, where there is likely to be a great deal offluctuation in the price of the stocks, which gives them frequentopportunities to sell out their clients. 

When the market is going down or when there are many movements up anddown in the price of stocks, the bucket shops make money rapidly, butoccasionally there is a long period when the market is working againstthe bucket shops, and unless they have a great deal of money they mustfail. 

In August, 1921, Stock Exchange stocks started to go up. The upwardmovement was very slow but it was continual. Up to the time of thiswriting, there has not been a three-point reaction, except in a fewstocks, in all of that time. Without a fluctuating market, the bucketshop has no chance to clean out its customers. As a consequence, thebucket shops began to fail in the early part of 1922, and up to thepresent writing (April, 1922) there have been more than fifty of thesefailures. However, it is not likely that all the bucket shops will beput out of business. The more successful ones are likely to "weather thestorm. "

Many laws have been enacted against bucket shops, and we believe someway will be found to get rid of them at some future time; but we do notexpect that to happen soon, and we warn our readers not to get intotheir hands, because if they do not get your money away from you one waythey are likely to get it some other way. The man who runs a bucket shopusually has no conscience, and it certainly is an unfortunate thing foranyone 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 howcareful you are, it is possible to make a mistake. However, if youchoose a broker who is a member of the New York Stock Exchange, you haveeliminated a very large percentage of your chances of getting a wrongbroker. 

Occasionally a member of the Stock Exchange fails and once in a whileone is suspended for running a bucket shop or being connected with one, but these instances are very rare compared with the number of brokerswho 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 greatextent. 

When you buy stock on margin, you leave your money in the hands of abroker, and you should know that he is responsible. No matter who yourbroker is, you should get a report on him. If you are a subscriber toBradstreet's or Dun's Agencies, get a report from them. If you are not asubscriber to any mercantile agency, you perhaps have a friend who canget a report for you, or your bank may get one for you. Banks make apractice of getting reports of this kind for their clients. When askedto do so, we send our clients the names of brokers who are members ofthe 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 useour best judgment, but, as we said before, you eliminate a largepercentage of your chances of going wrong when you trade with a brokerwho 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 sella specified number of shares of a certain stock to the maker at a fixedprice, within a specified time. A "call" is the exact reverse. It is anegotiable contract giving the holder the privilege to buy a specifiednumber 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 awayfrom the market price a certain number of points, depending upon thestock and the condition of the market. When the market is steady and notfluctuating, the price fixed is frequently only two points away, but ina 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 acertain amount, which at present is $137. 50, you can have the privilegeof buying 100 shares of U. S. Steel at 97, within thirty days of thedate of the purchase of your call. If Steel should go up to 101 youcould have your broker buy it at 97 and sell it at the market, and youwould make a profit of four points, less the cost of your call andcommissions. 

As a method of operating in the stock market, we do not recommend thebuying of puts and calls. Professional speculators may be able to usethem to advantage sometimes, but for the outsider, who is not in closetouch with the market, there is nothing about them to recommend. 

Here is one point: the people who sell puts and calls fix the terms. Ifthe market is irregular, they will set the point of buying or sellingfar away from the market price. These people are shrewd traders and theymake the terms in their own favor. It is generally said that nearly allthe 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 marketsells down a certain number of points. Many speculators place stop lossorders only two points from the market price. The idea is that when themarket starts to go down it is likely to continue going down, and bytaking a two-point loss you may save a much greater loss. It also can beapplied to a short sale, when you give your broker instructions to buyin 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 merelystop orders, which is the same thing, the average reader is likely toget 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 veryseldom by those who trade along the broad lines recommended by us. Ifyour purchases were made in stocks that were very cheap, you shouldcontinue to hold them in case of a reaction. If you bought themoutright or on a substantial margin, you are not in danger, and youshould look upon your loss merely as a paper loss. In the great majorityof cases, you will be a great deal better off to hold on to your stocksthan you would be if you had a stop-loss order. 

A large number of stop-loss orders is a good thing for the shortinterests. Let us take U. S. Steel again, as an example. Suppose it isselling at 94 and it is believed that there are a large number ofstop-loss orders at 92. The short interests may sell the stock heavilyand force it down to 92. Then the brokers with stop-loss orders wouldbegin to sell; that would force the price down still lower, and theshort interests could buy in to cover at this lower price. 

Therefore, we believe that stop-loss orders are a bad thing and, as arule, 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 whenthe market has reached the top. If you sell out too soon, you may lose aprofit of several points. Of course, it is better to do that than totake a chance of a large loss. In that case, you might instruct yourbroker to place a stop-loss order at two or more points below themarket, and keep moving it up as the market price moves up. Then whenthe reaction does come, he will sell you out and prevent you from losinga large part of your profit. That is about the only instance where werecommend a stop-loss order, but we do recommend it to our clientssometimes, although seldom. 

If the stock you own is selling at more than 100 we would suggest thatyou make the stop loss order at least three points from the market, butfor stocks selling below 100, a two-point stop-loss order might be used. However, the number of points should be decided upon in each particularcase. In the special instructions to our clients, we tell them when wethink 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 Americanpeople. That is why our country has made greater progress than any othercountry in the world, because progress is the result of speculation. Weare not referring merely to stock speculations, but to the word in itsbroadest sense. Every new undertaking is a speculation. 

An inventor speculates on what he is going to invent. Often suchspeculations result in losses, because many inventors, orwould-be-inventors, never accomplish very much. They spend their money, time, and efforts, and probably live years in poverty, and then if theinvention is not profitable, they are heavy losers. Many inventors spendthe best years of their lives in poverty and never succeed. We hear agreat deal about some of those who do succeed, but very little aboutthose who fail--those whose speculations were unsuccessful--except whensomebody accuses them of being crooks because they solicited money forthe promotion of their inventions and did not succeed. 

It is the same thing with every new business. It is purely aspeculation. It is a common saying that 95% of commercial undertakingsfail. We do not know that that statement is correct, but there is noquestion but that the number of failures is very great, which shows thegreat risk in going into a new undertaking. It is far greater than therisk involved in stock speculating when it is done in accordance withthe advice given in this book. 

Yet, there would be no progress without speculating of this kind. Ifthose entering a new business would make a careful study of the venturebefore entering it, and would exercise greater care and judgment inconducting it, the number of failures would be very much less. The samething is true of stock speculating. The failures in stock speculatingare caused mainly by ignorance and greediness. Many people who would besatisfied with a fair return on their money in a business enterprise, think they ought to make a 100% profit in a few weeks in stockspeculation. 

There is something about stock speculation that appeals to thegreediness and pure gambling instincts of people. In the chapter onManipulation, we have told you how stock prices are put up and down. Some outsider accidentally buys one of these stocks just before theprice starts up. In thirty days he has made several hundred per centprofit. He does not realize that it was purely accidental as far as hewas concerned, and he tries to do the same thing again, and loses all ofhis profits and probably all of his capital as well. 

A stock gambler (we use the word "gambler" to refer to a man whooperates ignorantly) is watching a large number of extremely speculativestocks and suddenly notices one that takes a big jump in price. Then hesays 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 anotherstock that some one tells him is going to do equally as well. He buys asmuch of it as he can and puts up all the money he has as a margin, butthe price doesn't go up. Perhaps the price goes down and he loses hismargin; but, it may remain almost stationary for a long period, sometimes for a year or more, and during all of this time, this man isworrying 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 advantageof real opportunities that come his way. 

It does not pay to take big risks. That is true in stock speculating thesame as in any other undertaking. Most speculators are keeping theirminds all the time on the possibilities of profit and not thinking aboutthe possibilities of losing. 

If you want to be successful in stock speculating, there is one thingyou must learn to do, and that is never to think about the big profitsyou might have made if you had bought such and such a stock, because theprobabilities are you could not have afforded to take the necessary riskin buying that stock. 

Of course, after it is all over, it may look to you as though the buyingof that stock was a sure thing, but the buying of such stocks is never asure thing. The risk always exists. There is an old saying, and webelieve a very true one, that a man who speculates with the idea ofgetting rich quickly loses all his money quickly, but that the man whospeculates with the idea of making a fair return on his money usuallygets rich. 

In our advice to our clients, we seldom recommend highly speculativestocks, because we consider the avoidance of loss more important thanthe making of profits. You may object to that statement, because youspeculate to make profits, and not for the purpose of avoiding losses. Nevertheless, if you are careful in keeping your losses down to aminimum, your profits are likely to be very liberal. Any trader whotrades for any great length of time is likely to make large profitssometimes, and yet the majority of them have greater losses thanprofits. It is said that more than 80% of all margin traders lose; butwe do not consider that an argument against trading on margin, becausethese losses are mostly due to ignorance, greediness, and the taking oftoo great chances. 

Do not suppress your desire to speculate. All progress would stop ifpeople did not speculate. But do not speculate in stocks nor in anythingelse without any knowledge of what you are doing, and try to use asmuch good judgment and care as possible in all of your transactions. Ifyou do not know what to do, get advice from someone who is supposed toknow and who is not interested in having you buy or sell. Stockspeculating with safety is possible for those who make the effort to beguided by correct principles. 

CHAPTER XXIII. 

TWO KINDS OF TRADERS

There are two kinds of stock traders. One kind nearly always makes aprofit, and the other wins sometimes and loses other times, buteventually loses all if he does not change his methods. The first kindbuys stocks on liberal margin or outright and is not worried when themarket goes against him, because he has good reasons for believing thatprices eventually will go up. If he does have to take a lossoccasionally, it is likely to be small compared with his profits. Thesecond kind wants to make a big profit quickly, and he buys stocks thathe thinks are going to make big gains in the near future, but hisselections are not based upon good judgment. 

We might designate these two traders as the careful trader and thereckless trader. 

The careful trader tries to get good advice on the markets and thevalues of stocks. If the advice appears to him to be conservative, he isguided by it; but if the reckless trader gets advice on stocks, he isnot guided by it if it is of a conservative nature. If he does takeadvice, it is likely to be from one of those unreliable market tipsterswho is very emphatic in his statements about what the market is going todo. The reckless trader lets his greed and desire for large and quickprofits influence his judgment. 

Once in a while one of these reckless traders realizes that he has madea great mistake, and he wants to change his attitude. Usually he isholding several stocks that show a big loss and he does not know what todo with them. He reasons that they are selling so low now they surelywill sell higher some time. Perhaps his reasoning is good and perhaps itis 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 isbetter for him to sell them now if he can put the money derived from thesale 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 putthe proceeds from the sale into something better rather than leave it inthe stock in which it is now. It is not so much a question whether ornot the stock you are holding will go up, as it is whether or not youwould buy that particular stock if you were just coming into the marketto make a purchase. Of course there is a loss of commissions when yousell a stock and buy something else, and for that reason we sometimesrecommend holding a stock when we would not recommend buying it. 

If you have been a reckless trader in the past, the only thing for youto do is to change your methods and try to become a careful trader. Itis much better to go to the extreme in carefulness and be satisfied withvery small profits than to take great risks. 

CHAPTER XXIV. 

POSSIBILITIES OF PROFIT

What are the possibilities of profit in stock speculation? That questionis frequently asked but it is difficult to answer. James R. Keene isquoted as having said: "Many men come to Wall Street to get rich; theyalways go broke. Others come to Wall Street to operate intelligently forfair returns; they usually get rich. "

While it is true that nearly all stock traders who try to make unusuallylarge profits in a very short time in stock trading lose, yet unusualprofits can be made if you exercise good judgment and have patience. 

Roger W. Babson, in his book entitled, "Business Barometers, " speaks ofthe possibilities of profit in language that would be considered greatlyexaggerated if used by a promoter, and yet he is extremely conservativein his advice to traders. He advises never to buy on margin, never tosell short, and staying out of the market entirely, neither buying orselling, for a great part of the time. Here is a quotation from hisbook, which follows a detailed statement of an investment of $2, 500 overa 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, ofcourse larger profits can be made by buying on conservative margin andby selling short when all the conditions are in favor of it. 

While there are possibilities of making extremely large profits withouttaking great risks, by those who are patient and exercise good judgment, one should be satisfied with a small profit, if it is the result ofgreat care, in an effort to eliminate risk. Of course, you can afford totake a much greater risk with a small part of your speculative fund thanyou 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 speculateat all. They should invest their funds in good, safe investments, butthis 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 thenext chapter we tell you something about where to get information toguide you. 

CHAPTER XXV. 

MARKET INFORMATION

Where do you get your market information? Perhaps most people get itfrom the daily papers. When you look over the financial news of one ofthe leading metropolitan papers and see how much there is of it, you canget some idea of the enormous volume of work necessary to get thismatter ready for the press in a few hours. There is no time to confirmreports. It is necessary that many of the articles be written from pureimagination, based on rumors. 

Weekly and monthly periodicals can be more accurate in theirinformation, but even they are not always dependable. Much of thefinancial news published comes from agencies that are not reliable. Readwhat 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 withgreat care and give reliable information, but you must remember that abroker's market letter is published for the purpose of getting business, and business is created only by the customers' trading. Therefore it isto the broker's interest to have his customers make many trades insteadof a few trades. In his book "Business Barometers, " Roger W. Babsonreproduces a letter written to him by the Manager of the Customers' Roomof a Stock Exchange House. We consider this letter so important to alltraders, 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 ofthe average broker's office. He would not be considered loyal to hisemployer if he had a different attitude. When an attitude like thisinfluences 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 studyof fundamental statistics and statistics of different companies and giveinformation to their subscribers based upon this knowledge. We believethat is the only kind of information that is worth very much to atrader, except the statistical information--the number of shares soldand the prices at which they are sold--he gets from his daily or weeklypapers. 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 totheir service cost from $85 to $1000 a year. In addition to these thereare a few other organizations besides our own and individuals giving asomewhat similar service, but we know of none that gives such a serviceat as low a price as ours. 

You should not confuse the service given by the above organizations withthat given by many organizations and individuals who attempt to tell youwhat the market is going to do from day to day. In other words, theygive 'tips' on the market. There are a number who issue daily marketletters of this kind and charge from $10 to $25 a month for theirservice, 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 youfollowed advice of that kind. You might make enormously large profitsoccasionally, but you would also have frequent losses, and when thelosses did come they might be greater than all the previous profits. Wewant you to understand that that kind of advice is entirely differentfrom what we are recommending. 

CHAPTER XXVI. 

SUCCESSFUL SPECULATION

Success in stock speculation depends upon a few things that are verysimple. 

If you know what to buy, when to buy, and when to sell, and will act inaccordance with that knowledge, your success is assured. You may thinkit is impossible to know these things, but it is not so difficult as itis supposed to be. 

Many people buy stocks at the wrong time, and most of those who do buythem 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 thisbuying time may continue--with some interruptions--for another year ortwo, or even longer. 

It is more difficult, however, to tell you WHAT stocks to buy. First ofall, we advise you against buying stocks that are put up to high pricesby manipulation. Of course, if you get in one of those stocks right andget 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 loseeverything sooner or later in an effort to do the same thing again. Yourchances are not much better than if you gambled at Monte Carlo. Thechances in buying manipulated stocks are invariably against theoutsider. 

There always is so much publicity about these very active speculativestocks that the public is attracted towards them. Newspapers andbrokers' market letters give altogether too much space to them. Suchstocks sell far too high, and when the break comes, it brings ruinouslosses to many people. 

On the other hand, by following a conservative course, you really have achance to make large profits with a minimum risk. We are giving belowsixteen stocks that we recommended in our Advisory Letter of February14th, 1922, with the approximate prices of them then and the approximateprices on March 31st. [2] In arriving at these prices, we took theclosing prices on February 13th and on March 31st, and omitted thefractions. We recommended only sixteen stocks on that date, and you willsee 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 February14th. They would have cost you $10, 050. We recommended 30% margin on thefirst ten, all of which were dividend payers; and 50% margin on the lastsix, because they were more speculative and would have been moreaffected by a reaction in the market. To buy ten shares of each on thatmargin basis would have required a little less than $3, 500, but let ussuppose you put up $3, 500. After allowing for buying and sellingcommissions and interest on the balance of $6, 550, but crediting youwith dividends paid, your profit would be about 32% or at the rate ofabout 250% per annum. 

Of course, we do not claim that by following the conservative course weadvise, you always will make such large profits, although you might dojust as well as that if you took advantage of some of the opportunitiesso frequently to be found in the market; but keen discrimination in whatyou buy always is necessary. However, let us suppose you made annualprofits of one-fifth the above amount, or 50%, which is easily possiblewithout taking the risks that are usually taken in stock speculating. Ifyou invested $1000 and made 50% profit per annum, reinvesting yourprofit at the same rate each year for twenty years, you would have morethan THREE MILLION DOLLARS. 

When there is a possibility of making such enormous profits as that byfollowing careful methods, surely there is no argument in favor oftaking the extreme risks that people do take in buying the highlyspeculative stocks, the prices of which are put up for the purpose ofunloading them on the public. Ten of the stocks we selected in the abovelist were dividend payers, and while the other six were not, they wereconsidered worth much more than their market prices, and the list as awhole was conceded by conservative people as a safe one to buy. 

Very frequently we are able to recommend a list of stocks that webelieve will yield equally large profits, but the stocks you should buyare not the ones that are the most active nor the ones that arementioned most frequently in the financial news and brokers' marketletters. The stocks that most people buy are usually the very stocksthat should be left alone. The stocks you should buy are usually theones you hear very little about. 

There is only one SAFE way to speculate, and that is to be guided by aknowledge of the fundamental conditions of each stock and also of theindustries they represent. There are several large organizations givinginformation of this kind, and those who have been guided by thefundamental statistics issued by them, almost invariably have made moneyin stock speculating. The value of that kind of service has beenthoroughly demonstrated beyond any question. However, a subscription forthe service of most of these organizations costs more than the averageperson can afford to pay. Usually it is anywhere from $100 to $1, 000 ayear. 

We are giving a service for the purpose of guiding our clients tosuccessful 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 leasttwice a month, but send you additional Advisory Letters and listsoftener if conditions make it necessary. You also have the privilege ofunlimited personal correspondence regarding your market problems. Thecost of our Service is very small, compared with what other reliableorganizations charge. 

Our Service is based on the principles expounded in this book. We try toselect stocks having the greatest possibilities of profit with minimumrisk, and the sample of our Service given in this chapter is proof ofour 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 theauthor figured profits to that date because this book was writtenshortly after that. If these stocks had been bought on or about February14th, on the margin basis suggested by us, and sold six months later, the profit would have been more than 60%, or 120% yearly.