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The Stock Market

( Originally Published 1939 )

BONG! Bong! Bong! It's three o'clock! Activity stops! The mad whirlpool of frenzied, but yet, organized humanity rapidly disappears through nearby exits. Within five minutes the floor of the New York Stock Exchange is practically deserted.

Two million shares of stock, representing nearly one hundred million dollars, has changed hands in the past five hours.

Throughout the broad expanse of the nation, from crowded cities to the serenity of country villages, from fast moving pull-man cars to ocean liners, the sounding of the gong tells a varied story. It may be a story of joy or tragedy, of hopes or despair, of achievement or futility.

In the foreign capitals, London, Berlin, Paris, Vienna, Bucharest, Budapest, Rome and Moscow, Kings and Premiers, Dicta-tors and Capitalists, eagerly scan the last minute message spelled out on the world's ticker tapes.

To them it may mean the continuance of their governments, the stability of their currencies, the maintenance of armies, the building of navies, the erection of bridges, or a thousand and one activities which keep step in the modern march of progress.

For Wall Street not only reflects the business of our nation, it also reflects the business of the world. You may gather a greater significance of this by visualizing the financial district of New York as a huge telephone exchange, with direct wires running into it from every point of the globe. From near and far away places, from thousands of sources, it collects and disseminates information of every character, as it pertains to business and finance. This information, whether it deals with peace or prosperity, war or pestilence, is hourly reflected in the rise and fall of stock and bond prices.

Wall Street, the world's money mart, is the most abused and misunderstood spot on the face of the earth. Preached about, cursed about, legislated against, it's the creator of fortunes and the destruction of empires. Such is the reputation of the Capital of Finance.

But this seat of finance, as it reflects the ups and downs of the stock market, merely expresses the will of the people as they wish to buy or sell stocks.

All stock markets are merely "market places," derived from the Latin word "mercatus." The idea of a fixed place and time for buyers and sellers to assemble was one of the earliest ideas in the history of civilization. Stock markets, unlike many other markets, however, do not require that buyer and seller meet face to face. The transactions for both parties are carried on through intermediaries known as stockbrokers.

Why have a stock market? is a question which has been pro-pounded by many able men down through the years. The cry has at times taken a popular fancy and millions of words have poured forth from people with garrulous tongues, who seldom take the time to do their own thinking.

Stock markets are an absolute necessity in the American economic scheme. Because of stock markets the thirteen young and struggling states were able to lay the foundation for the greatest and wealthiest empire on earth. Through what other source could they have commanded millions, yes, hundreds of millions of foreign capital, to lay railroads across a continent, and to open new industrial empires? Millions and millions of dollars were attracted to the young country in the first seventy-five years of its independence. Without the medium of stocks and bonds we could have never attracted the money, and, without a stock market, these stocks and bonds could have never been sold.

Thus the Stock Exchange can be truly attributed to having been the mill to which the corn was sent for grinding, and the bounty of its distribution can be measured from Maine to California.

As the country grew, and the people became more prosperous, they found themselves with a surplus. What were they to do with this surplus? Bank it of course! But what was the banker to do with it? Idle money to him is abhorrent. It must be put to work. Where could he put it so that it would be available on demand, and, at the same time, be put to work paying interest?

The answer is obvious. The launching of new enterprises, and the expansion of already established businesses in need of capital. How could he invest your money and his money in these new enterprises? Again the answer is obvious. Only through the medium of stocks and bonds. Once more we must ask the question; how could he be assured of withdrawing your money and his money from the stocks and bonds he invested in, in the event of need or disaster? Only through organized security markets, the obvious answer again rings out; and organized security markets mean stock exchanges—a common meeting ground of both buyer and seller.

It is the purpose of the writer to avoid technicalities as much as possible, hence he asks the reader to visualize, not the isolated instance of one banker employing his ten thousand or hundred thousand of idle money, but the aggregate of billions of dollars throughout the nation, which must be kept constantly at work. But it must do more than merely be kept at work. These billions must be employed under regulated conditions which afford a maximum of security, as compared with any other possible outlet for so great an amount involved.

It is useless to theorize but what some effort would be made to keep these billions at work, and if it were not for organized security markets and stock exchanges what would happen? What could possibly happen except these enormous funds would seek other outlets in the financing of some kind of business expansion. This, in itself, would create a condition of chaos in a community which did not need the expansion. Ruthless competition would be the inevitable result, and one community would develop at the expense of another.

The Stock Exchange is the mart in which those seeking capital from all parts of America, to create new enterprises, build more railroads, finance new inventions, develop new mines, drill more wells, erect new bridges, skyscrapers, apartment houses, and a thousand and one avenues of industry, can come and display their wares. Here they meet the owners of the surplus billions who agree, for a stipulated amount of interest, to purchase their bonds, their preferred stocks, or who, believing in the present and future of the enterprise seeks a participating interest in its basic owner-ship, satisfied in the knowledge that they can sell it at the market price, through the exchange from which it was purchased.

Thus the stock market supplies the missing link between the billions belonging to the American people, and the great empire they have created for themselves. Few realize that the stock market provides the avenue for the function of many great savings banks which pay interest on the people's savings. True it is, that the type of securities they invest in are regulated by law, nevertheless, the stability of the securities and a quick and ready market for them at any and all times is absolutely essential. And so it is with the great life insurance companies. Banks nor others could invest their funds with safety, if it was not for organized security markets. Granting that the enterprises they invested in would be safe without the markets, nevertheless, no enterprise, nor group of banks, would dare tie millions of dollars up without a guarantee of liquidity.

It is almost inconceivable that the country could operate smoothly without the Stock Exchange. Security prices established and quoted throughout the world, not only constitute the basis for determining the amount of taxes owing the government as well as the states by buyers and sellers of securities, but also establishes a basis for determining value in bank loans.

Inasmuch as the majority of wealth of this great country is expressed in the terms of stocks and bonds, it is obvious that such securities involve our credit structure. Knowing that the use of credit is the motive power which finances our trade, our industry and our transportation, it thus becomes more and more apparent as to why it is of vital importance that stock exchanges should exist as a central point where the forces of supply and demand can assert themselves.

It cannot be denied that many evils have existed heretofore in security markets. Pools have often times operated, and the prices of some securities, on and off the exchanges, have been subject to manipulation and control. However, it should be said in fairness to the various exchanges, that while they were the medium through which many of these pools and manipulations were ex-pressed, it has always been against their rules and regulations. The uninformed may find this hard to believe, nevertheless, it is true. The method or modus operandi of pool operations, more often than not, gave the exchanges no legal or moral right to interfere, as can be discerned in a later chapter on pool operations. Prior to such a discussion, however, I think we should first examine some of the fundamentals which underlie the buying and selling of stocks, and the rise and fall of prices.

In this connection, I was once asked to contribute what in my opinion was the one fundamental cause for the public's losses. To this question I replied: "I could coin no better phrase than the six simple little words used by Newton, when in describing the law of gravity, he said `what goes up must come down.' "

The unreasonable bullish tendency of the public defies their belief in such an assertion, and while it is not literally an economic truth, nevertheless, it can be accepted as almost infallible, as it pertain to the average individuals stock market losses.

You often find that irrespective of causes, values, conditions, or any other good logical reason, the public indulges in a veritable buying mania when stocks are not at their logical point of beginning, but have reached the upper levels and are soaring high, high, and higher!

The reasons for this I suppose are numerous, but, fundamentally, I believe it is mob psychology, combined with the fact that the average investor, like the average human being, is inherently constructive. His own business, or his means of earning a livelihood, is a daily contribution towards creative work. He prefers blindly to believe that something is being built up, rather than being torn down, and, for that reason, frequently remains an in-controvertible bull; and while in the throes of a misguided optimism, is particularly susceptible to every piece of bullish propaganda.

No one will deny that our stock markets, like all other markets, have their ups and downs, yet I have never observed any consistent amount of literature which urged the public to sell rather than to buy. Hence we can assume that the average investor's stock market education has been more or less one-sided. He has been constantly hammered with the information that something was going up—never going down.

It is not my purpose to influence any person to take either the long or short side of the market. My mission is to point out, if possible, some of the most common obstacles upon which the uninformed investor stubs his toe, and offer whatever constructive advice I am capable of giving.

I have observed shrewd business men, keen lawyers, skilled physicians, and many others, blindly invest their funds; hoping against hope that they would soon receive double or triple the amount they invested. They had little knowledge of investment or speculation principles but depended entirely upon sources of questionable accuracy to guide them in their efforts.

As I said before, Wall Street is the mirror which reflects the business of the nation and from various parts of the world it collects and disseminates information of every character as it pertains to business and finance. This information is reflected in the rise and fall of prices.

There are thousands of traders throughout the country who hourly watch the ticker tape for such items as interest rates, earnings, mergers, political activities, and other forms of information upon which to base their judgment. The tape reveals to such traders which stocks are the most active throughout the day, but this information is for the day only. Whatever information they can discern from it must be taken advantage of immediately, for the newspapers, shortly after its appearance on the tape, will have published it in full.

There are tape readers who have their pet theories about double bottoms, double tops, lines of resistance, and what influence one stock will have on another, but whatever information they can glean can hardly be of use to the average or amateur investor. To do so he must constantly hug the ticker tape.

In addition to these professionals there are multitudes of others who are in the market daily. A Chicago man may be buying stocks on account of favorable crop forecasts. An exporter or importer may be selling due to unfavourable tariff enactments. Foreign interests are buying our securities for their greater yield of interest and safety. A Pennsylvania capitalist is selling rails and utilities on account of advance information as to earnings or impending legislation. An elderly lady, in Brooklyn, has, for some reason, definitely decided that Compass-Motor will sell at 150 before it sells at 100.

As these widely diversified opinions of wisdom and folly con-verge into Wall Street, they constitute the influences which create supply and demand, which, in turn, determine the rise and fall of prices.

So important it is that we should -have a comprehensive and clear understanding at the start, as to how these prices rise and fall, let us briefly review our elementary economics. We see that "supply" is the amount of anything available, and that "demand" is the amount of anything wanted.

It is obvious that it is only the amount of anything actually supplied and demanded, at a price, which enters into the work of the law of supply and demand, as this law operates to change the price of a thing.

We also find that as a cause of price changes, supply and demand always operate together, never alone. It is a change in their relationship, one to the other, that causes prices to change.

One able economist aptly compares supply and demand to the two blades of a pair of shears; one blade is supply and the other is demand. When the shears are used, who shall say which blade did the work?

We know, however, that in some cases a change of supply, as when a stock is closely held by large interests, may be the prime factor in causing a change in the relationship between supply and demand. In other cases a change in this relationship comes as the result of a change in demand. But in every case it is a change in the relationship of the two that affects prices.

Through the liquidation of a large estate, for instance, 50,000 shares of Compass-Motor might be suddenly thrown upon the market. The price of Compass-Motor would tend to remain the same, however, if, at the same time, the demand for these shares at the current price should increase enough to absorb the increased supply. There must be a change in supply relative to demand, or in demand relative to supply, in order to have a change that affects prices.

The difference of opinions, or the influences which bring about this change, one to the other, may differ as widely as the native costume of the Hottentot girl differs from that of the American flapper. But, underneath we find, in each and every instance, the effect in substance remains the same.

The time you take to study and intelligently examine these influences, which are the ever-changing conditions in industry, will, in that same proportion, enable you to minimize the adverse effects of bad markets, and to multiply the favourable effects of good ones.

It will also enable you to see that while all industries are some-what related, some degree of depression in one line of business might set in, while business in general continues to improve. This improvement might tend to encourage you, when in reality the market might decline on some stock in which you are interested. Therefore, our first step in understanding the stock market is to thoroughly understand that the actual or probable change in business activity, creates a variety of opinions, and these opinions or influences, through their effect upon both supply and demand, not only tend to keep buying and selling in balance, but are solely responsible for the rise and fall of prices.

"Prosperity has gone, industry is idle, countless thousands swell the ranks of the unemployed, and depression casts its shadows everywhere you go. And this can be directly attributable to the BIG interests and Wall Street Manipulators."

Such was the theme I heard expounded before an intelligent audience, following the 1929 debacle, and notwithstanding the absurdity of the charge, nevertheless, I could see that the brilliant speaker was making a profound impression and converting many to this false and fallacious method of reasoning.

It is right, therefore, that we should take issue in every instance with such misinformed speakers. Market crashes are brought about solely by conditions, and not conditions by market crashes.

The missing prosperity, the idle industry, and the unemployment situation of which he spoke, did not find its origin in the stock market crash, but in conditions which caused the stock market to crash.

In other words, this chaotic condition came as the result of various influences at work which finally caused a change in the relationship between supply and demand (the supply, in the crash of 1929, being much greater than the demand), which in turn caused prices to drop.

Let us examine several of the reasons why the supply became so overwhelmingly great in 1929. As our national wealth increased, its ownership was more tangibly defined with the appearance of hundreds of millions of dollars in new issues of stocks and bonds. These issues were gradually absorbed by the public, and when bought on margin or used as collateral for loans, they increased the effective supply of stocks when accounts were "sold out" or loans were called.

Thus when conditions, resulting from a change in major business activity, started in to reflect themselves in the price of stocks, the supply available was considerably more than in previous market crashes.

Some- may argue that while this is true, nevertheless, these stocks represented increased wealth. That I admit, but wealth is only relative; and then again, the position in which much of this increased supply was being held, caused them to sell out of all proportion to conditions existing at the time.

Wherever you find a "buyers" market, in any commodity, you quite naturally find a market where prices have dropped or are dropping. In this instance, the more prices dropped the greater became the supply. The supply became greater because thousands were trading on slim margin, and as account after account was closed, which meant the reselling of the stock, then greater and greater grew the supply.

Thousands of people became panicky and entered their strong boxes for stocks they had accumulated over months and years, and ordered them sold at the market. This meant at whatever price a buyer would offer, and the lower the price, then the greater be-came the supply, as additional margin accounts were closed or collateral stocks were sold to insure the safety of the principal.

With due respect to this condition, however, I would warn you here regarding a simple law of economics which cautions you against assigning any single cause to results, for results come from a combination of causes.

We can find dependable evidence that this crash did not come as the result of people buying stocks or speculating in the market, but was the direct result of various influences at work which caused a major change in business activity. This in turn caused a change in the relationship between supply and demand, which started prices tumbling down.

It is interesting at the moment to turn in retrospection to the hundreds of idle theories which were offered as to the cause of the 1929 disaster, and the subsequent widespread unemployment.

The most dominant note which seems to ring in my ears at the moment is the wailing cry of the mechanical age. It was offered up by individuals, and by many societies; and there also appeared on the news stands any number of publications which carried with them some kind of fancy title relating to Technocracy. Their hue and cry were all the same—that one machine was replacing ten workmen, and, that these workmen, who were entering the roles of our unemployed could not consume the vast production produced by such machines.

The latter part of their cry is truly the keynote in which all depressions find their origin. Production is out of balance, with consumption. However, the Technocrats, and such, committed the common error of assigning a single cause to a specific result.

The high standard of American living completely exonerates our machine age, especially when you contrast it with the pitiful poverty so prevalent in countries which still rely upon the more primitive methods of manufacture.

Long before the advent of the steam engine, the telegraph, and thousands of modern labor-saving devices, we have had major and minor depressions. Beginning with the industrial revolution in England, during the latter half of the eighteenth century, many of them have been duly charted and recorded. America herself has passed through some fifteen major depressions during the past one hundred and twenty years.

Having had major depressions before and after the machine age, what is it then that brings on depressions? What is it that causes stock markets to crash, and many other forms of business chaos? The answer is obvious. Production and consumption are out of balance. This brings about irregularly, major changes in business activity which are known as business cycles.

This cycle starts with the very beginning of a general depression, and continues throughout the falling period—into the beginning of improvement—on through the rising period—into very prosperous times, which ends in a reaction that marks the beginning of another period of depression.

We, of the present day, have observed many such cycles, including the ones of 1893, 1903-04, 1907-08, 1913-14, 1920-21, 1929-33, as well as the present recession. The depth and extent of their duration depends entirely upon the extent to which consumption and production are out of balance.

While prices are falling, purchasers hold off for lower prices, and producers curtail production, thus decreasing production and increasing unemployment. When prices reach bottom, and the spread between production and consumption begin to close, we then enter the improvement period, and, from there on, business activity begins to resume its normal function.

The time may come when it will be possible, through the concerted action on the part of business-men and bankers, to eliminate these major commercial and industrial crises, apart from reactions caused by great natural calamities, such as a complete and general crop failure.

For many years to come, however, we shall in all probability have to reckon with the pronounced ups and downs of major changes in business activity; and while to many people they appear from a blue sky, nevertheless, they give ample warning of their approach.

Let's examine some of the signs which denote their coming. If we acquaint ourselves with the danger signals, and acquire the capacity to recognize them, we will thus better equip ourselves to minimize their effect. But, once again, let's establish the fact, that in every known business cycle, where we found a stock market crash, an investigation will reveal that such a crash was the result of conditions, and not conditions the result of the crash.

Recall now the summer of 1929. You remember there was a growing scarcity of loanable funds; that call money rose as high as twenty percent; that bank reserves were low in relation to loans and deposits; that South America was diverting huge quantities of gold to Europe; that the cost of production in practically every industry was rising faster than corresponding sales; that retail prices were rising faster than wages; that people were wildly speculating; that countless thousands swelled the contagious army who could see no end of good times ahead.

Those were some of the signs which indicated that an approaching change was inevitable. Was it not common sense to reason that sooner or later everything had to stop rising and start going down, just the same as things going down must sooner or later stop going down and start going up? Many were the warnings, issued by able economists, which fell upon ears deafened by artificial prosperity.

It is well known that several brokerage houses tried in vain, during August and September of that year, to induce their customers to sell. Their advice was not only ignored, but, in several instances, ridiculed. Not every house had the ability to foresee this condition, nor the character to pass their observations along, but, those who did, in the majarity of instances, had their trouble for naught.

No doubt you recall the above signs, which indicated with absolute certainty, that a major change in business activity was approaching. If you recall them, do you not now begin to glean a more comprehensive significance in my warning against assigning any single cause to results, for results come from a combination of causes?

Is it not more apparent that it was these same conditions, through their effect upon the law of supply and demand, which caused prices to drop, which, in turn, caused an avalanche of selling, and the market crash?

Who, among us, has not oftentimes used the old saws, "making hay while the sun shines," or, "putting something by for a rainy day?" These are merely the expressions of an economic truth, which teaches us that during good times we must prepare for bad, and that during bad times we must prepare for good.

In preparing against adverse conditions, it is necessary that we read the signs as accurately as possible. While experience and training is usually necessary, some of the signs are obviously easy to read, and available to everyone. Naturally, if stock markets are predicated upon business, and business predicated upon money, then, one of the most important items entering into our calculations, in trying to read the signs, is bank statements.

This is tremendously important, for about ninety percent of all business is credit, and credit means banks. Any and everything which indicates the constant changes in banking situations are of interest to the business world. It is of vital interest, because the influence which banks exert over every line of business endeavor, is obvious. The smooth running, and even the very life, of a business, depends upon a steady and uninterrupted flow of credit; and the profits derived depends largely upon the interest rate that banks ask for money.

Therefore, when you pick up your daily newspaper, and you casually read where a large movement of money has occurred, from one country to another, or from one financial center to another, you may be assured that such information is not casually passed over by men of large affairs.

Such a statement might mean the increase or decrease of loans and deposits, and he knows immediately what to expect. He is guided by the principle, that if deposits are decreasing and loans are on the increase, that credit will probably tighten up and interest rates advance. He also knows that the opposite is true, that is, if deposits are increasing and loans are on the decrease, that credit will become easier and interest rates will decline.

Hence, we can accept it for our purposes, as an economic truth, that the state of deposits and loans reflect general business conditions so accurately, that it is one of the best barometers we can use.

We are all aware that industrial activity, while on the increase in one section of the country, may be on the decline in another, and that such conditions might be reflected in our local or state banks. In considering the stock market, however, we must take the banking system as a whole. How are we to determine the national status?

Thus enters the Federal Reserve System, which includes in its membership approximately one-third of the banks of the nation, and represents over two-thirds of the banking strength.

A statement of their condition is computed every Wednesday night, and released through the daily newspapers throughout the nation every Friday morning. Their report is one of the most complete bank statements issued in the world. Lack of space prevents an attempt to analyze the meaning of the various items appearing on the statement, so we will confine our efforts to the most important items, as they may effect the stock market.

Let us first consider the items listed unter TOTAL BILLS AND SECURITIES. As I said before, when deposits are decreasing and loans are on the increase, credit will probably tighten up, and interest rates will advance. The above item in the weekly Reserve Statement, indicates the total amount of credit which has been extended by all Reserve Banks, in the form of loans and investments.

We will now examine this item in closer detail. The most important features of it, are the total bills discounted, the total bills purchased in the open market, and the total amount of United States Government securities.

The total amount of bills discounted, means the total amount of funds borrowed directly by member banks. When you see the amount of bills discounted, on the decline, it usually means that the member banks are extending less credit and are calling their loans.

Bills purchased in the open market, reflects the various funds obtained indirectly for general credit purposes, while the total amount of United States Government securities, reflects a matter of policy. If the securities purchased are on the increase, it indicates an easier credit condition, and, if they are on the decline, it may be said that firmer money is desired.

The consolidated amount, or total shown, under TOTAL BILLS and SECURITIES, is possibly the best obtainable index published, as to the nation's condition, as it relates to money and to credit. So let's establish this rule; that the higher the total figure each week, the greater becomes the demand for money, and quite naturally, the greater the demand, the less the supply. Thus you see, once more, the working of the infallible law of supply and demand.

Suppose for instance, the total amount revealed shows a declining demand. Then the opposite condition is true, the supply of money increases.

These figures are important, not only because they seem to respond accurately to changing business conditions and interest rates, but are also of value in aiding you to determine the influence that such conditions might exert on the stock market.

For purposes of comparison, the figures for the previous week are shown in adjacent columns, as are the figures for the corresponding week of the previous year. Thus it is not necessary for the investor to consider any seasonal fluctuations, in making his comparisons. One can pretty well determine the condition of the country by a perusal and study of this Reserve statement each Friday morning.

In addition to bank statements, other barometers should be considered. The reader can find them compiled in various news-papers and many excellent business publications. They include building programs, unfilled steel orders, freight car loadings, price levels of industrial and railroad stocks, business failures, retail and wholesale volume of sales, exports and imports, crop estimates, fluctuations in employment, changes in price levels, and others.

If, however, the reader, or investor, is undertaking anything of major importance, I would caution him against the making of inexperienced forecasts, as he can secure such forecasts from many reliable authorities. As he gradually schools himself, with the type of knowledge which underlies the reading of the signs, he will contribute to his affluence, whatever his walk in life.

The professional forecaster uses a series of indexed charts, graphs, etc., and endeavours to determine the future of the market, or of business, by using the guideposts of the past. More often than not, he can make accurate predictions, but the principle obstacle is at what time such predictions will materialize. Statistics may prove, beyond a question of a doubt, that conditions are such, that the market is in for a rise or a fall, but no one can predict accurately when it will occur.

It requires no special abilities for any investor to know when the country is in either a prosperous or depressive period. If his forecasts, in a prosperous period, indicates that the period is about to end, then my advice is to sell. If, on the other hand, the reverse is true, and the country is staggering in the depths of a depression, with indications that the cycle is nearing its end, and a buyer's market is apparent, then buy.

Very few people have the ability to forecast the top, or the bottom, of stock markets, so the best principle for the average investor to follow, is to buy when they are low, and sell when they are high. You won't go broke taking a profit.

I do not believe that an academic discussion of what is known as the technical position, or of market trends, will contribute much to the average investor, but, inasmuch as he is constantly con-fronted with such phrases, in his daily press and financial literature, I feel it should be mentioned.

The technical position of a market can be described as its present condition. That is, in what position stocks are held. Any number of factors enter into this, and while they are of no importance to the average investor, they are vital to the professional trader, who attempts to take advantage of a stocks daily fluctuation.

First, let's consider the up, or the bull side of the market. While no real basic change is reflected in industry, nevertheless, some ticker tape news might lend support to optimism for the future, and the bulls will rush in to buy. That is what they call discounting the news. In other words, they anticipate the event, and act before it happens. Thus you read in the paper that the market had an upward turn, a sharp rally, etc. This condition attracts the followers of the bulls, which is usually the public. As the market continues to rise, an over-bought condition is often created. An over-bought condition means that the buyers have bought on margin, and are holding more stocks than they can keep, if the market should go down.

When such a condition arises, it is spoken of as stock over-hanging the market, and any unfavourable news may cause a flurry of selling. The opposite forces, known as bears, feeling that there was nothing in the business or economic setup to justify the advance the market had taken, also act with the first announcement of unfavourable news. They start in to sell. When this occurs, the market is spoken of as being technically weak.

A strong technical position in the market is the exact opposite. The bears have been discounting what they regard as unfavourable news, and have been selling short. A continuation of this short-selling when there is no real economic justification, is responsible for the expression, the market is over-sold. Thus the bulls start in to buy, and, when prices start to rise again, the bears rush in to cover the stock they have sold short. This, in turn, creates more buying, and during such a period of time the market often advances rapidly.

These technical positions of the market, either strong or weak, can occur in either a long major bull, or major bear movement. During a long major bull movement, that is, when prices are rising over a long period of time, these technical positions can occur, and the fluctuations from time to time are known as secondary movements. With each rally, however, in such a bull movement, the prices go a little higher, just as a football team, on each play, trys to carry the ball a little nearer the goal. When the business cycle has been completed, and the bear movement sets, in the opposite is true. With every succeeding drive downward, the general average falls a little lower, until the cycle has been completed, and it is time for another bull movement.

Such professional operators, more adept at playing the market than they are at economics, use what is known as double-tops and double-bottoms, as the barometers by which to determine whether a major bull movement is about to end, and a major bear movement get under way. A double-top, in their language, is when a market has advanced over a long period of time, under bullish influence, and meets with a strong decline. If the market recovers from this decline and again reaches its former high, and starts to decline again, they regard this as an indication that the long major bull movement has come to an end. The opposite is true in regard to double-bottoms.

The fallacy of the average investor trying to pick the tops and bottoms can best be illustrated by an example:

Doctor Evans, having a surplus in the bank, decides to take a flyer. His broker recommends Compass-Construction at 65. Doctor examines its range for the past two years and finds it from 50 to 80. He reasons that this is a good stock, with ample assets and earnings, certainly with the building boom ahead, it will eventually reach its previous high.

So the Doctor buys 100 shares at 65, and is later rewarded when the building boom comes along. He sells at 90, and the stock continues on to 100. Doctor feels very good over his transaction.

A little later he begins to reproach himself, however, for having sold at 90. Why, he reasons, it would have been easy for me to have deferred buying, until the stock reached its low at 55, and then sold at 100. Instead of making $2,500 on the transaction, I could have just as easily made $4,500. Doctor further reasons that prior to the stock reaching its high of 100, when it reacted from 89 to 75, he should have sold at 89 and bought back at 75. He determines to do better the next time.

Compass-Construction continues to do a good business, which has become accelerated by the building boom. However, there are a lot of unfavourable rumors floating around and there are signs of a bear market. The stock drops back to 80. Doctor is sure it will go back to 75, but at 85, Doctor sees where he should have bought at 80. He instructs his broker to buy 200 shares when the stock reacts to 82. The market drops to 82½ and then slowly creeps back to 90. Doctor is now more or less confused, and , when it quickly advances to 100, he believes that a bull market is under way and jumps in at 102.

At 105, Doctor is confident of 110, and at 110 he is equally confident of 120. A decline back to 105, he diagnoses as a healthy reaction, and picks up another 100 shares.

On the next rally to 108 he things the market is merely getting its second wind. With things flourishing in the building world, it would not surprise him to see it reach 125.

A quick break, however, from 108 to 101, leaves Doctor suffering a loss. He determines to get out on the next rally and puts in a sell order at 107. The market reaches 106 1/2 and then declines to 98. At 95, Doctor decides it would be poor policy to sell after such a break, and certainly there will be another rally soon.

Winter is approaching, however, and building is on the wane. There is no end of bearish news, and it .is rumored the company may pass its dividend. The market still declines and Doctor decides he will not allow his loss to go beyond 90. He puts in a sell order at that figure, which is duly executed within a few days. The market then starts its mysterious behaviour, and Compass Construction again advances to its previous high of 110.

Doctor Evans' operations resulted in a loss of 12 points on his 200 shares purchased at 102, and 15 points on his 100 shares purchased at 105. Thus he not only lost the $2,500 he made on his first transaction, but an additional $1,400 besides.

You will notice that the Doctor, on his first profitable transaction, was satisfied to buy, because he believed the stock was low and was worth the money, but on his subsequent transactions he tried to emulate the skillful practice of a professional trader. He attempted to forecast the top and bottom of the market. By his unwillingness to accept a reasonable profit he has lost a goodly sum of money, even though his judgment was substantially correct as to the swing of the market.

Whether an investor is buying outright, or trading on margin, he would do well to try to avoid the apparent mistakes of the Doctor who was attempting something which he was little qualified to accomplish. It would be equally absurd for the professional stock market operator to walk into Doctor Evans' operating room and attempt even a simple tonsillectomy.

In speaking of margin, it is possible to construe the word as applicable to any commodity, or to anything, which might be purchased on credit. Unlike the purchaser of a house, a car, or a vacant lot, however, the market-player, who uses margin, greatly enhances his chance of loss. The enhancement value or depreciation of a car, a house, or a lot, can be somewhat predetermined over a period of time, but a stock is dependent upon the action of the market. The principle evils, however, of the past, in marginal trading, has been the vaulting ambition to achieve big profits with-out the proper fortification.

On stocks which you purchase on margin, your broker must necessarily supply the difference between the margin you put up, and the purchase price of the stock. He, in turn, borrows this money from his bank, using the stock as collateral, and charges you the interest rate he pays, plus a small service fee for making the loan.

Both the banker and your broker constantly scrutinize such accounts, and when the collateral appears to be in danger you are immediately called on for more margin. Your failure to provide this margin will result in your "sell out," with no chance of recovery, even though the market rallys with an upward swing during the following hour.

Many amateur traders with their judgment warped by bullish news, friendly tips, and visionary profits, seldom consider that margin is the minimum amount of money they can trade on. Hence, they often times invest to the very limit of their resources, and a sudden break in the market catches them without reserves, and leaves them poorer, but often times, unfortunately, not necessarily wiser.

Suppose that Doctor Evans, after having beat the market so easily in his first transaction, reasons along the line that he could have made considerable money if he had extended himself and used marginal trading. True, the margin requirement, since the enactment of the Security Exchange Act is forty percent, nevertheless, the Doctor is well fixed. Let's follow his line of operation throughout, when he enters the market the second time, and see what would have happened.

When the Doctor sold his 100 shares at 90, his account showed $9,000 to his credit. When he decided to go back into the market at 102, he added considerable cash to his account and purchased 500 shares. He then adds additional funds, when he buys 500 shares at 105, thus owning a total of 1,000 shares on margin.

Now follow the same operation throughout to where he concludes his trade at 90. It leaves the Doctor suffering a loss of 12 points on the first 500-share lot, and 15 points on the other 500 shares.

In this example, as in the last, if the Doctor had been satisfied to buy low, as he did in the first transaction, he could have purchased his 1,000 marginal shares at 80, and would have had a profit of $30,000 when the stock reached 110. However, as previously stated, he attempted to forecast the top and the bottom of the market and emerges with a $13,500 loss.

The Doctor enjoyed an obvious advantage over many investors, inasmuch as he had sufficient reserve capital to supply margin on both the 102 and 105 purchase, but nevertheless, due to his inexperience, the system exacted its toll, and he fed the better portion of his yearly income to the grist mill, called margin.

The system itself was not to blame, and, for that matter, seldom is. The fault lies, as I said before, in a vaulting ambition to achieve big profits without the proper fortification. With the Doctor it was not a question of money, but a lack of knowledge.

As has been previously mentioned, the principle causes of the public's losses in the stock market, are their bullish tendency, their lack of knowledge, their inability to judge, and, above all, their inability to sift fact from rumor.

We have seen, that to blindly follow the bullish side of the market is wrong, because, with a major change in business activity, a business cycle sets in which results in a change in price levels. I have pointed out, as comprehensively and briefly as possible, certain signs which were indicative of this change.

With due consideration to all of these, however, it must not be construed that I recommend that the inexperienced trade on the short side of the market. This is a science which taxes the skill of the long-standing professionals, and, for the average investor to start selling short, is as dangerous as a child playing with dynamite. But there are also evils, and many of them, in blindly following the bullish throng, and relying too much upon bullish propaganda.

However, one of the paramount evils mentioned before, was that of buying when stocks are not at their logical point of beginning, but have reached the upper levels and are soaring higher, higher, and higher.

The investor who buys when stocks are at their point of begining has many advantages over his less fortunate brother, who waits until the wide world acclaim their value, and through competitive bidding, catapults them into dizzy heights. If stocks are bought when they are at their low levels, he need only take his profits when they reach their high, and with such a systematic investment program he will find his profits the rule, rather than the exception.

That sounds easy, but how am I to know when stocks are at their points of beginning (for they are there quite often during prosperous, as well as depressive periods) and how am Ito recognize such stocks?

This is one of the problems which underlies successful investment, and while there seems to be no set rule in solving this problem, nevertheless, the investor who carefully considers what part a certain stock and its management promise to play in our busines activity, is one who is on the threshold of profits. This, in itself, is by no means sufficient, inasmuch as the stock of two corporations, engaged in the same line of endeavour, might differ from various causes, both as to safety and earnings, yet, it is the first step towards predetermining the probable action of any specific security.

Having determined that a particular field of endeavour promises a greater reward than some others, the stocks, which represent this particular branch of industry, should be carefully scanned and then analyzed. The necessity of this can be seen in the following comparison of two prominent tobacco stocks, several years ago.

One company, manufacturing cigarettes, increased its earnings per share from $1.67 in 1919, to $7.82 in 1929. At the same time, prior charges (that is bonds, etc.) were reduced in 1932, to where they only amounted to fifteen percent of the gross income, against more than fifty percent in 1919. Cash dividends on the common stock were very generous, and, in addition to nice stock dividends, there was a 4 for 1 split in 1924.

Now take another company in the same line of business. You will find a different picture. Net earnings constantly showed a discouraging decline, and, along with the shrinkage in their net income, prior charges materially increased, so that at the end of 1929 the common stock was in an extremely weak position. In 1919 bond interest and preferred dividends consumed about thirty-three percent of income, and in 1929 the requirements for prior charges had increased to eighty-four percent of income. Cash dividends on common stock were reduced from $12.00 per share to nothing. Many readers may recall the two companies of which I speak.

Thus you see two companies, engaged in the same business, both selling a very popular cigarette, with astounding differences in both values and earnings.

It might be that it is two copper companies which are up for consideration. Granting that their management are equally efficient, the smaller of the two, which might appear superficially the weaker, was in reality the stronger, and afforded better prospects for both earnings and enhancement. This could be possible by the accessibility of their holdings, their low cost of production, and a substantial percentage of other valuable minerals.

So important it is that you select the proper industry, then the company, and then thoroughly analyze the company, I strongly recommended that you review and study the previous chapters on this subject until you have completely mastered them. When the investor accomplishes this, I believe he is well on the highway to profits. Even though markets go against him, if he is in the right industry, and the right company, he need only hang on.

Market information often leads people astray. There are all kinds, good, bad, and indifferent. Good information can be secured, but it is not to be had in the form of tips, rumors or hap-hazard guesses. It is based on facts, and facts alone.

I have known men to study and deliberate for hours over a certain stock and then call someone for their opinion. Nine times out of ten they are influenced by other's opinions, and nine times out of ten such opinions are meaningless.

Unless the information they give you has been recently and specifically compiled, it can have very little value. Such advisers rely on newspaper talk, current gossip, or the manuals of various statistical organizations, which are sometimes twelve months old. All of the organizations which supply manuals can usually furnish up-to-the-minute information; but it cannot be secured during a telephone conversation.

When you consider that there are over 1000 stocks listed for trading on the New York Stock Exchange alone, you can easily recognize the futility of any person, or any firm, supplying worth-while information on the spur of the moment.

I recall radio, back in July, 1927. The first six months of that year were regarded as very unsatisfactory. Inventories had in-creased and earnings were off considerably from 1926. There was plenty of current gossip throughout the Street that it was entirely too high at 52, and should be left alone.

Information you picked here, there and yon, was practically all bearish, and yet, Radio was unquestionably the best buy on the Board. In July 1927, Radio was selling at 52; by December 1st of the same year it had passed 100, and four months later it reached 195, being the sensation of the market, a gain of $143 per share in nine months.

Few stocks have had such sensational rises, nevertheless this one, which the consensus of opinion was against, advanced, not because of bullish activities, but in view of facts which underlay its development and expansion, and justified its forward movement.

The insiders, who shared in this sensation, had no secret information, or any other kind, that was not available to every news-paper, tipster and tipster sheet. That the current gossip was against it, merely proves that they had not examined Radio through common sense channels, as did the more fortunate ones who predetermined its sensational rise.

I reiterate again therefore, that any information to be of value, must be acquired through the acquisition of knowledge, based on definite and basic facts as they relate to conditions surrounding an industry or its allied interests. Through this method, and this method alone, can fact be sifted from rumor, and present the probable values which may be established.

- Many are the millions of dollars which are lost each year through the public buying stocks on misleading information and unfounded rumors, more commonly known as tips.

"Tipsomania" is the best word I can coin to describe the affliction of people who have a mania for whispering stock market tips. Such tipsters seldom take their own medicine, and yet they will chance the wrecking of a lifelong friendship, and jeopardize the life savings of a friend, in order to satisfy their ego.

When you get a tip, it's a safe gamble that thousands of others have received the same information. When such tips make good, you are partly responsible for their having done so, and even then, the odds are often times against you.

Competitive bidding is the factor which forces prices up, up, and up. These prices can be forced upward on some specific stock, irrespective of basic values, if the market becomes flooded with buying orders. Hence you can see one of the smoke screens which some of the unscrupulous employ to either sell their holdings, or as the market goes up, to go short.

They realize that any stock, or stocks, which are artifically forced upward, must eventually return to their normal basic price level. The speculator who acted on an unfounded rumor, obtained through some tipsomaniac, that the stock was going up, may, in many instances, find it true, but, even then, he usually fails to ascertain when it was coming down, and as a consequence finds himself suffering a loss.

You may have received a tip that Mr. Jackson, of the Big Interest, is buying a certain stock. Certainly, he may be buying, but why get excited? He may be buying 5,000 shares in public and selling 25,000 shares in secret. Mr. Jackson is no novice at the game, and the public learns just what he wants them to learn, as it pertains to his activities.

Quite often tips were freely circulated when pool operations were in vogue. The success of pool operations depends to a great extent on their secrecy, and it is absurb for the investor to act on any information purporting to be advance knowledge of such operations. Pools are very cleverly organized and managed, and even though the technical action of a stock indicates an existing pool, nevertheless, unless you are a member of the pool, how could you know at what price the pool intends to buy and at what price they intend selling?

My advice, therefore, is to view all tips with an alarming suspicion. Reliable tips, or advance information, as to a concerted move in a certain stock, is the most valuable commodity any man in Wall Street can possess. Therefore you can see the absurdity of the average tipster possessing such information.

I do not mean to infer that there is no such things as a pre-determined knowledge of the probable action of a certain stock, or a group of stocks. For such action is determined and often determined accurately, but the knowledge of its advance found its birth in basic facts, and not through the channels of the butcher, the baker and the candlestick maker.

The safest method of tip-gathering is to secure information regarding the company, as was discussed in previous chapters. If you follow this plan you should arrive at an unbiased figure as to the relative worth of any stock you may wish to consider.

When you are considering the balance sheets of such companies, however, don't fail to keep their income statements constantly before you. Office buildings without tenants, hotels without guests, railroads without passengers, and steamers without freight, may all represent huge sums of money, as shown on their balance sheets, but they would be of little value without earnings.

Therefore it is of primary importance that you use the economic yard-stick of earnings to measure the true value of assets, because assets are only tangible evidence of equipment of some character, to produce earnings.

I may mention here, also, that to produce earnings does not always require a vast amount of visible assets. Many profitable banks lease their quarters, and numerous other companies may have little or no evidence of large visible assets. Among such companies we could list sales and advertising agencies, jobbers and brokerage houses, and others.

Again I reiterate the investor should master some of the preceeding chapters, which are of the most vital, if not the most vital part of this book, i.e., the selection of the industry, the company in which he wishes to invest, and a detailed analysis of the company he selects.

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