Every buyer or seller of stocks is a free agent to do as he pleases, and if he gets hoodwinked through the stock exchange it is generally because in trying to outwit or undo somebody else he overreaches himself and falls into his own snare. The only percentage against him is what he pays in commissions and taxes on his trades; and the only chances against him are his own blunders in judgment; these, indeed, are likely to prove a sufficient handicap. Every corporation whose securities are listed on the stock exchange is obliged to make a full and comprehensive report to the exchange at least once a year, and these reports can be found in any brokerage office; they are always open to public inspection, and no one need buy any stock or bond without first satisfying himself regarding the nature of the industry, capitalization, earnings, management and other details. Moreover, if at any time a purchaser becomes dissatisfied with his investment and wishes to get his money back or change into something else, there is always a ready market for the stock. It may be more, or it may be less, than he paid for it, but in either case it can be quickly converted into cash.
The investor in stock market securities may equip himself, free of cost, with full information concerning every listed security; what the company’s earnings have been over a period of years, how much stock and how many bonds are outstanding, the highest and lowest prices at which the stock has ever sold, and all such matters in the fullest detail. He therefore enters “the game,” as the stock market is oftentimes called, with his eyes open, and the cards all faced up on the table. But if he deviates from sound principles and resorts to dabbling in stocks that he knows nothing about, except from hearsay among traders and market tipsters, and undertakes to guess the maneuvers of cliques who are manipulating them, he has no one to blame but himself for indulging in such an expensive folly.
BOOKS TEACH WISDOM, BUT EXPERIENCE IS A MORE PRACTICAL INSTRUCTOR
It may be set down as an axiomatic truth that no one can learn the art of making money in the stock market by reading statistics, charts, precedents, theoretical disquisitions and instructions. Of course it is not needful, nor would it be any more practicable than it is necessary, to set forth any fixed rules or maxims governing one’s procedure in any other line of business or any other profession, since no one could use them advantageously without the requisite qualifications, such as adaptability, shrewdness and practice. Hundreds of different combinations of cards are laid out in books of instructions on auction bridge, with explicit directions as to how to bid and play the hands, yet nobody ever heard of a good bridge player being made solely from book instruction. One reason is that there are actually millions of combinations of cards. Also in stock trading there is an indefinite number of needful “don’ts” which the most resourceful person can neither contemplate nor anticipate. Every stock market cycle shatters some precedent; every era produces new phenomena. Everyone who has ever studied a book of instructions on how to play golf knows how impossible it is to take up any golf club and make it perform according to schedule. A firm stance, feet well apart, body under full control, the right knee stiff, the left arm almost rigid as it follows the right in a low backward swing; and most important of all, the eye firmly fixed on the ball, while the club whips through the air, and after lifting the ball, follows on through, carrying both arms forward to their full length, and many other things which I never could do, and cannot now recall; all these directions the would-be player will learn as he knows his A, B, C’s; but in his intense eagerness to swat the ball he disregards most, or all, of the stated essentials, and at the moment of impact, while his club is ploughing up the sod two or three inches behind the ball, his eyes are cast heavenward in fervent anticipation of watching its flight. Likewise the speculator figures his profits long before they materialize. The most important thing in golf, and the hardest thing to learn, is to keep the eye on the ball while in the act of hitting it; and the hardest thing to learn in stock trading is to keep the eye _off_ the market, hold firmly and patiently to good resolutions, _and not try to get rich too quickly_. Both look to be easy, but--
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Reducing the whole problem to its simplest form, the stock exchange is a well-organized and honestly conducted market-place where anyone may sell or buy investment or speculative securities, at whatever price anybody else is willing to pay or accept for them. There is no more mysticism about the exchange itself than there is about a book auction room, or any other auction room where articles of merchandise are offered at an upset price, or auctioned off to the highest bidder. A man who buys stocks or bonds for investment is not gambling with anybody that they will go up or down; he buys them because he wants to invest his money and get interest or dividends on it. If a stock bought at $100 a share, paying seven per cent. annually in dividends, should increase in market value to $150 it is obvious that the rate of interest on the total capital is correspondingly reduced, and that whereas his original $10,000 brought a return of seven per cent., the capital of $15,000 is earning a net return of only four and six tenths per cent. Under such conditions it is oftentimes wise to sell out and reinvest the money in other securities which bring a larger net return; or if stocks in general are too high, put the money in the bank and wait for lower prices. The $5000 gain in capital will surely more than cover interest on the original $10,000 investment during the time one has to wait for good buying opportunities.
This reminds me that some years ago, when Calumet & Hecla Mining stock was selling at $850 a share, on which amount it netted only a small dividend return, I asked a friend (who owned a large amount of the stock) why he didn’t sell it and reinvest in other securities. My argument was that the stock having already declined from $1000 a share, would probably go much lower, considering that the earning capacity of the mine was in all probability as great as it ever would be; therefore the chances were more in favor of a decrease than an increase in earnings and dividends. To all of which he readily assented, but in view of the fact that he had bought the stock at $50 a share it was paying a very high rate of interest on his original investment; and for sentimental reasons he preferred to keep it,--which he did. Such instances are not at all uncommon; nor is it uncommon to hear intelligent business men remark that they know they ought to sell certain investment securities, because the market price has risen out of all proportion to the income yield, but other good securities are all so high that they really don’t know what to put their money in. The chances are probably a hundred to one that if the money were put in the bank and allowed to rest a while at three per cent. interest, it could within a few months be reinvested in the same securities, or other equally good ones, at a net gain of three to five years’ interest, or even more. This is not stock gambling; it is merely business prudence.
WHIMS AND FALLACIES IN SPECULATION
Traders and investors too often become stubbornly insistent on recouping their stock market losses in the same identical securities in which they lost their money. After having lost a large sum of money there is undoubtedly a special gratification in seeing it return by the same channel through which it escaped, but the enjoyment of this peculiar satisfaction is hardly commensurate with the risk that many people run in attaining it. In discussing this point some years ago with a friend who owned a thousand shares of stock in a bankrupt railway company which had cost him $50 a share, and was then selling at $15 a share, with a fifty to one chance that the road would go into receivership, I argued that while the loss of $35,000 was a large and bitter pill to swallow, the chances were that it would not be made smaller or more palatable by the inevitable receivership, and that he might as well salvage what he could from the wreckage of his investment. After all, there were dozens of really _good_ stocks that had declined more than $35 a share; stocks that would eventually “come back” when the market turned about; whereas with his stock there was a probable assessment of $10 to $15 a share staring him in the face, and after paying that, the stock was likely to sell at a figure less than the assessment to be paid, judging by past performance of the stocks of other companies in receivership. The road was tremendously over-bonded, over-capitalized, encumbered with every conceivable sort of debt, and not earning its fixed charges. He vehemently declared,--“No, I’ll be damned if I’ll allow those thieves to do me out of that money; they shall pay it all back, and more with it!” He held tenaciously to his resolution, the road fell into receivership, and a few months later he could have bought the stock in the open market at two dollars a share less than he had paid in on the assessment.
A favorite and amusing pastime with a multitude of traders is to cajole themselves into believing that when some stock they own becomes increasingly active after a considerable advance, the renewed activity is a sure indication that “bankers and insiders” are accumulating it for a still further advance. It is well to remember, however, that bankers and insiders do most of their accumulating before the rise begins, and while the outside public is doing its accumulating the bankers and insiders are quietly supplying the stocks. It is quite clear that if the insiders pursued the same tactics as the public they would soon be relegated to the ranks of the outsiders.
It is a common saying, even among veteran traders, that such and such a stock “is a good buy, but you must watch it closely.” To _watch_ a stock after buying it is about the most foolish thing one can do. To watch it go down is certainly no pleasure, and if it goes up it doesn’t need watching. The time to watch it is before buying. In order to limit one’s loss on a purchase it is a simple matter to put in an “open stop loss” order somewhere under the cost price; and no amount of diligent “watching” will prevent it from going down. On the other hand, to insure one’s profit, if the price goes up, nothing more is required than to put in a “G. T. C.” (good till cancelled), selling order at whatever figure above the cost price the purchaser is willing to accept as his profit.
There is probably no more popular fallacy among traders than the one which presupposes that great “pools” and combinations formed to manipulate certain stocks are either made up of officers and directors of the corporations concerned, or else that such pools base their operations upon valuable inside information from some head official. This may be true in rare instances; but generally speaking the directors and officers of the companies know nothing whatever of the pool operations in their stocks, and when they do know they usually frown on such schemes. Anyone who stops to consider knows that the market prices of the company’s securities are of far less concern to the officials than the matter of conducting their business operations at a profit. If the company’s earnings are good, it is clear that this fact will soon enough manifest itself in the demand for the securities, without any abortive or clandestine efforts; and if the earnings are poor, it would obviously be beneath the dignity of the officials to deceive the public through pool operations or pool affiliations. A more simple plan would be to utilize their “inside information” by quietly selling the stock.
I recall a particular instance, a few years ago, when there were some tremendous pool operations in the common stock of one of America’s largest industrial corporations, and after the stock had been bid up ten or a dozen points it was reported that a “managing director” of the company had assured one of the pool members that it had been tacitly agreed among the directors to declare a fifty per cent. stock dividend at the next board meeting. The public instantly took the bit in its teeth, and inside of a week the stock advanced fifteen points more, which doubtless afforded the clique an auspicious occasion for unloading its holdings, bought at much lower figures. About that time I happened to be in New York, and while lunching one day with the chairman of the board of directors at his club he told me that the matter of a stock dividend had not even been discussed among the directors, and that in his opinion there was no likelihood of any change in the dividend policy for at least a year,--which proved to be true.
PROBLEMS DEFYING PRESENT SOLUTION ARE BETTER DEFERRED TO THE FUTURE
A matter of present and future importance in connection with many investment and speculative stocks, involving as it does questions on which there is a wide diversity of opinion, is the modern practice of increasing the outstanding shares of corporations by splitting them up into fractions, or by declaring liberal stock dividends. Many of the large companies have recently doubled and quadrupled their shares, and some have issued as high as nine new shares for one, on somewhat the same principle as the Government will issue ten one dollar notes in exchange for a ten dollar bill. And in several instances the fractional shares have been split a second, and even a third time. In past years when there were only a few listed securities it was possible for any well informed person in financial circles to tell the par value and the approximate book value of all the leading stocks, but the good old-fashioned methods are no longer in vogue; there are now 1,045 stocks listed on the New York Stock Exchange alone, representing almost every imaginable industry, from steam locomotives to lunch counters, and under the new capital readjustment process it takes a professional statistician to keep up with the changes and determine what stocks are actually worth. But whatever their value may be, it is at least certain that there is not enough money in the world to cash them all in at anywhere near their present market price. Nowadays it is not unusual for industrial companies to have from five to ten million or more shares outstanding. The lately devised and much over-worked practice of splitting stocks up into small fractions, avowedly for the convenience of traders, savors strongly of the old worn-out custom of “baiting” the public with low-priced issues, ranging from $1 a share upward. As long as we are riding on the crest of the wave of prosperity there appears to be no imminent danger in such inflation, but when business slackens, as it always has periodically in the past---- However, the optimists contend that these problems are too far in the future to worry about. Furthermore it is not the design of this article to criticise abuses, or to prognosticate future difficulties that seem likely to grow out of them. It is true that some of the companies, notwithstanding the tremendous increase in their capital structures, have not weakened their resources by increasing their cash disbursements. In 1921 the stock of the Standard Oil Company of New Jersey was paying $5 a year in dividends and selling at $124.50 per share. In 1922 it was boosted up to $250.50 a share on the report that shareholders were to receive four new shares for one. After this split-up was accomplished and the authorized common stock increased to 25,000,000 shares,--not dollars, but _shares_!--more than 20,000,000 of which have been issued, in addition to $200,000,000 of preferred stock, the same conservative dividend policy was continued, and the new stock received, and still receives, only one dollar a share annually in dividends. The market price of the new stock went down to a fraction below $31, whence it afterwards recovered to about $46, at which figure it pays a trifle over 2%, or about one half the net return on U. S. Government bonds; and the only visible change in the stockholder’s position is that if he wishes to sell his stock it costs about five times what it did before; in other words, to buy and sell the equivalent of one hundred shares of the old stock it now costs $154 in commission and tax--more than eighteen months’ income on a hundred shares of the present stock. Possibly there are mathematicians who can figure out some sort of compensating advantage to the stockholder, but I never could.
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To sum up the whole situation in a word, those who would make money speculating in the stock market should first understand that it requires as much caution and business acumen as any other money-making enterprise, plus some knowledge of the psychological handicaps; also plus the rare faculty of maintaining a complete mastery over one’s impulses, emotions and ambitions under the most heroic tests of human endurance. All speculations, and even the most conservative investments, have some slight element of risk; all lines of business are more or less a gamble; marriage is a gamble; political preferment is a gamble; in fact nearly everything in life, including our very existence, is an uncertainty; yet people are not thereby discouraged from entering into any and all of these ventures. Those who look only for certainties have far to search and little to find in this world.
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Transcriber’s Notes:
The one footnote has been moved to the end of its chapter.
Illustrations have been moved to paragraph breaks near related content, except for the frontispiece.
Variations in spelling and hyphenation were retained as they appear in the original publication, except that obvious typographical errors have been corrected.