

















                Successful
            Stock Speculation

                   _By_
               J. J. BUTLER


           _Written April 1922_
        _Published December 1922_


              _Published by_
 NATIONAL BUREAU OF FINANCIAL INFORMATION
       395 Broadway, New York City




     _This Book Is Not Copyrighted_

   We believe the principles expounded
   in this book are of immense value
   to everyone who buys speculative
   securities, and we do not object to
   anyone reproducing any part of it,
   whether or not we are given credit
   for it.

 National Bureau of Financial Information


Transcriber's Note:

    Minor typographical errors have been corrected without note. Variant
    spellings have been retained. Bold text has been indicated as
    +bold+.




CONTENTS


                       PART 1
                INTRODUCTORY CHAPTERS

 Chapter                                       Page
      I. THE PURPOSE OF THIS BOOK                 7
     II. WHAT IS SPECULATION                      9
    III. SOME TERMS EXPLAINED                    13
     IV. A CORRECT BASIS FOR SPECULATING         17


                       PART 2
            WHAT AND WHEN TO BUY AND SELL

      V. WHAT STOCKS TO BUY                      23
     VI. WHAT STOCKS NOT TO BUY                  25
    VII. WHEN TO BUY STOCKS                      29
   VIII. WHEN NOT TO BUY STOCKS                  33
     IX. WHEN TO SELL STOCKS                     35


                       PART 3
          INFLUENCES AFFECTING STOCK PRICES

      X. MOVEMENTS IN STOCK PRICES               41
     XI. MAJOR MOVEMENTS IN PRICES               43
    XII. THE MONEY MARKET AND STOCK PRICES       47
   XIII. MINOR MOVEMENTS IN PRICES               49
    XIV. TECHNICAL CONDITIONS                    51
     XV. MANIPULATIONS                           53


                       PART 4
          TOPICS OF INTEREST TO SPECULATORS

    XVI. MARGINAL TRADING                        61
   XVII. SHORT SELLING                           65
  XVIII. BUCKET SHOPS                            69
    XIX. CHOOSING A BROKER                       71
     XX. PUTS AND CALLS                          73
    XXI. STOP LOSS ORDERS                        75


                       PART 5
                 CONCLUDING CHAPTERS

   XXII. THE DESIRE TO SPECULATE                 81
  XXIII. TWO KINDS OF TRADERS                    87
   XXIV. POSSIBILITIES OF PROFIT                 91
    XXV. MARKET INFORMATION                      95
   XXVI. SUCCESSFUL SPECULATION                 103




_PART ONE_

INTRODUCTORY CHAPTERS




CHAPTER I.

THE PURPOSE OF THIS BOOK


This book is written for the purpose of giving our clients some ideas of
the fundamental principles that guide us when we select stocks for them
to buy, but these principles are valuable to every person who trades in
listed stocks or in any other kind of speculative stocks.

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

It is a well known fact that there are tremendous losses in stock
speculation, but we claim that almost all of these losses would be
avoided if all speculators were guided by the principles expounded in
this book.

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

Chapters X. to XV. tell you much about the influences that affect the
prices of stocks, a knowledge of which should also be a guide to you in
making your selections.

Perhaps the most important chapter in the entire book is XXV., on Market
Information. A careful reading of this chapter should convince you that
much of the prevailing information about the stock market is misleading.
That fact alone accounts for many of the losses in stock speculation.

It has been our aim to state all facts briefly. The entire book is not
long, and it will not require much of your time to read it through
carefully. We are sure you will get many ideas from it that will help
you.




CHAPTER II.

WHAT IS SPECULATION?


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

To the minds of most people, the word "speculation" conveys the thought
of risk, and many people think it means great risk. The dictionary gives
for one of the meanings of speculation, "a risky investment for large
profit," but speculation need not necessarily be risky at all. The
author of this book once used the expression, "stock speculating with
safety," and he was severely criticized by a certain financial magazine.
Evidently the editor of that magazine thought that "speculating" and
"safety" were contradictory terms, but the expression is perfectly
correct. Stock speculating with safety is possible.

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

In like manner it is possible to purchase stocks sometimes when it is
almost certain that the purchaser will make a profit, and that is "stock
speculating with safety." When Liberty Bonds were selling in the 80's,
many people bought them for speculation. They were not taking any risk,
except the slight risk that the market price might go still lower before
it would go higher, and that did not involve any risk for those who knew
they could hold them. The fact that the market prices of Liberty Bonds
would advance was based upon an economic law that never fails. That law
is that when interest rates go up, the market prices of bonds go down,
and when interest rates go down, the market prices of bonds go up. When
Liberty Bonds were selling in the 80's, interest rates were so very
high, it was certain that they would come down. That the market prices
of Liberty Bonds would go up was also certain, but nobody could tell how
much they would go up in a given time. It was that element of
uncertainty that made them speculative, and not that there was any doubt
about the fact that the market prices of them would go up. Buying
Liberty Bonds at that time was speculating with safety. If you read this
book with understanding, you will know much about speculating with
safety.




CHAPTER III.

SOME TERMS EXPLAINED


There are certain terms used in connection with stock speculation that
are very familiar to those who come in contact with stock brokers, and
yet are not always familiar to those who do business by mail.
Undoubtedly the majority of our readers are familiar with these terms,
but we give these definitions for the benefit of the few who are not
familiar with them.

Trader: A person who buys and sells stocks is usually referred to as a
trader. The word probably originated when it was customary to trade one
stock for another and later was used to refer to a person who sold one
stock and bought another. He was a trader; but the person who buys
stocks for a profit and sells them and takes his profit when he gets an
opportunity, may not be a trader in the strict sense of the word.
However, for convenience, we use the word "trader" in this book to refer
to any one who buys or sells stocks.

Speculator: This word refers to a person who buys stocks for profit,
with the expectation of selling at a higher price, without reference to
the earnings of the stock. He may sell first, with the expectation of
buying at a lower price, as explained in Chapter XVII. on "Short
Selling." In many cases where we use the word "trader," it would be more
correct to use the word "speculator."

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

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

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

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

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

Odd Lot: Stocks on exchanges are sold in certain lots. On the New York
Stock Exchange, 100 shares is a lot; and on the Consolidated Stock
Exchange, 10 shares is a lot. Less than these amounts is an odd lot.
When you sell an odd lot you usually get 1/8 less than the market price;
and when you buy an odd lot, you usually pay 1/8 more than the market
price; that is, 1/8 of a dollar on each share where prices are quoted in
dollars.

Point: It is a common expression to say that a stock went up or down a
point, which means a dollar in a stock that is quoted in dollars, but a
cent in a stock that is quoted in cents, as many of the stocks are on
the New York Curb. In cotton quotations, a point is 1/100 part of a
cent. For instance, if cotton is quoted at 18.12, it means 18 cents and
12/100 of a cent per pound, and if it went up 30 points the quotation
would be 18.42.

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

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

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

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




CHAPTER IV.

A CORRECT BASIS FOR SPECULATING


We maintain that there is only one basis upon which successful
speculation can be carried on continually; that is, never to buy a
security unless it is selling at a price below that which is warranted
by assets, earning power, and prospective future earning power.

There are many influences that affect the movements of stock prices,
which are referred to in subsequent chapters. All of these should be
studied and understood, but they should be used as secondary factors in
relation to the value of the stock in which you are trading.

If the market price of any stock is far below its intrinsic value and
there is no reason why the future should bring about a change in this
value that will decrease it, then you may be certain that important
influences are working against the market price of the stock for the
time being. In the course of time the market price will go up towards
the real value. This matter will be more fully explained in subsequent
chapters.

You always should keep in mind the fact that when you buy a stock at a
higher price than its intrinsic value, you are taking a risk. The stock
may have great future possibilities, but it is risky to buy stocks when
present assets and earnings do not warrant their market prices, no
matter how attractive prospective future earnings may appear. However,
the possibilities of profit sometimes are so great that one is justified
in taking this risk.

It is our belief that the majority of traders buy stocks because they
are active in the market and somebody said they were a good buy, even
though the real values may not be nearly as much as the market prices.

As an example of this kind of trading, we want to call your attention to
a news item that appeared in a New York paper. It stated that on April
1st, some brokers in Detroit, as an April Fool joke, gave out a tip to
buy A. F. P., meaning April Fool Preferred, but when asked what it
meant, replied "American Fire Protection." Of course, there was no such
stock, but there was active trading in it until the joke was discovered.
Evidently it is not necessary to list a stock on the Detroit Stock
Exchange in order to trade in it.

This story may or may not be true, but we believe the statement that
people trade in stocks they do not know anything about is true. You
should be careful not to buy a stock merely because somebody says it is
a good thing to buy, unless the person making the statement is in the
business of giving information on stocks, because it may be only a rumor
with no substantial basis. Of course, if many people act on the rumor,
there will be active trading in the stock, and it is frequently for that
purpose that such rumors are started.




_PART TWO_

WHAT and WHEN TO BUY and SELL




CHAPTER V.

WHAT STOCKS TO BUY


In deciding what stocks to buy, it is well to consider first the classes
of stocks, and then what particular stocks you should buy in the classes
you select. We would first of all divide all stocks into two classes,
those listed on the New York Stock Exchange and those not listed on the
New York Stock Exchange. As a rule, it is better to buy stocks listed on
the New York Stock Exchange, although there are frequent exceptions to
this rule.

Then, the stocks listed on the New York Stock Exchange may be divided
into classes, such as railroad stocks, public utility stocks, motor
stocks, tire stocks, oil stocks, copper stocks, gold stocks, and so
forth. At certain times certain stocks are in a much more favorable
condition than at other times. In 1919, when the industrial stocks were
selling at a very high price, the public utility stocks and gold stocks
were selling low, because it was impossible to increase incomes in
proportion to the increase in operating costs. But since the beginning
of 1921, the condition of these two classes of stocks has been improving
and the market has reflected that improvement.

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

In every instance, when you make a selection, you should consider the
company's assets, present earnings, and prospective future earnings, and
then take into consideration all the influences that affect price
movements, as explained in subsequent chapters.




CHAPTER VI.

WHAT STOCKS NOT TO BUY


A great deal more can be said about stocks you should not buy than about
stocks you should buy, because the list is very much larger.

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

Nearly all promotion stocks (stocks in new companies) are a failure. An
extremely small percentage of them are very successful, and the
successful ones are referred to in the advertising of the new ones; but,
on the basis of average, the chances are you will lose your money
entirely in promotion stocks. We believe that most of the promotion
companies are started in perfectly good faith, although some of them are
swindles from the beginning; but no matter how honest and well meaning
the organizers are, the chances of success are against them. Therefore,
we say that promotion stocks should not be bought by the ordinary man
who is looking for a good speculation, because his chances of making a
large profit with a minimum risk are very much better when he buys
stocks listed on the New York Stock Exchange and uses good judgment in
doing so.

Among the listed stocks there are many you should not buy. First of all,
eliminate them by classes. Do not buy the classes of stocks that are
selling too high now. You may say that there are some exceptions in all
classes. That may or may not be so, but in any event, you have a better
chance of profiting by confining most of your purchases to the classes
of stocks that are in the most favorable position.

As a rule, when stocks are first listed, they sell much higher than they
do a short time afterwards. Of course, that is not always true. It is
more likely to be true when a stock is listed during a very active
market, when prices are more easily influenced by publicity. The high
price of it is usually due to the fact that publicity is given to it,
and as soon as the effect of this publicity wears off, the market price
of the stock declines.

It is a good rule never to buy stocks that brokers urge you to buy. Your
own common sense ought to tell you that a stock that is advertised
extensively by brokers is likely to sell up in price while the
advertising is going on and will drop in price just as soon as the
advertising stops.

Many people notice that and they think they can profit by buying when
the advertising starts and sell out when they get a good profit, but the
majority of them lose money. The stock may not respond to the
advertising, or if it does go up, they may wait too long before selling.
Those who do sell and make 200% or 300% profit in a very short time are
almost sure to lose it all in an effort to repeat the transaction. Many
of those who read this know it is true from their own experience.

You should leave such stocks strictly alone. You may win once or twice,
but you are sure to lose if you keep it up. As a rule stocks of this
kind have very little value and the brokers who boost them make their
own money from the losses of their foolish followers.




CHAPTER VII.

WHEN TO BUY STOCKS


Stocks should be bought when they are cheap. By being cheap, we mean
that the market price is much less than the intrinsic value. In Chapters
X. to XV. we talk about influences that affect the price movements of
stocks. By studying these carefully you should be able to decide when
stocks generally are cheap. Of course, not all stocks are cheap at the
same time, but the majority of listed stocks do go up and down at the
same time, as a rule.

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

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

It is well known that the large interests accumulate stocks at such
times. They buy only when the stocks are offered at a low price and try
not to buy enough at any one time to give an appearance of activity in
the market, but they buy continually when the market is very dull. It
seems to be characteristic of human nature to think that business
conditions are going to continue just as they are. When business is bad,
nearly everybody thinks business will be bad for a long time, and when
business is good, nearly everybody thinks business will be good almost
indefinitely. As a matter of fact, conditions are always changing. It
never is possible for either extremely good times nor for extremely bad
times to continue indefinitely.

You can buy stocks cheaper when there is very little demand for them,
and you should arrange your affairs so as to be prepared to buy at such
times.


FOOTNOTES:

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




CHAPTER VIII.

WHEN NOT TO BUY STOCKS


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

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

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




CHAPTER IX.

WHEN TO SELL STOCKS


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

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

We remember reading in 1916, when U. S. Steel sold up around $136 a
share, a prediction that it was going to sell up to $1000 a share.
Probably many people who read such news items consider them seriously.
Of course, that was a most exaggerated prediction, but during the
extreme activity of a bull market, it seems that nearly everybody is
talking in exaggerated terms of optimism. That is why most traders
seldom ever take their profits in a bull market. They wait until stock
prices start to come down, and then they are likely to think there will
be rallies, and keep on waiting until they lose all their profits.

On the other hand, some people make the mistake of selling too soon.
Just because your purchase shows a liberal profit is no reason why you
should sell. The stock may have been very cheap when you bought it. In
1920, Peoples Gas sold below $30. Those who bought it then were able to
double their money by the close of 1921, and many sold out and took
their profits. Of course, if they invested the proceeds in other stocks
that were just starting upward, they may not have lost anything, but
there was no particular reason for selling Peoples Gas at that time. The
public utilities generally were coming into their own, and nearly all of
them were regarded by economic students as having unusual opportunities
for profit.

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

It is very important that you should try to sell your stocks at the
right time. That is the main thing to keep in mind and it is better to
sell too soon than too late. Don't be too greedy and hold on for a big
profit. Read Chapter XXIV. on the "Possibilities of Profit."




_PART THREE_


INFLUENCES AFFECTING STOCK PRICES




CHAPTER X.

MOVEMENTS IN STOCK PRICES


It is due to the fact that stock prices constantly move up or down that
speculation is possible. Sometimes certain stocks remain almost at a
standstill for a long period of time, but at least a part of the stocks
listed on the Exchanges move either up or down. If one always could tell
just what way they were going to move, it would be comparatively easy to
make a fortune within a short time.

In the last twenty years, a great deal of time and money has been spent
by statistical organizations in checking up statistics for the purpose
of ascertaining a definite basis upon which to predict future movements
in stock prices. Several of these organizations use very different
statistics upon which to base their conclusions, and yet their
conclusions are very similar. They have proved beyond any question of
doubt that some of these movements are clearly indicated by laws that
never fail.

We do not attempt in this book to explain the fundamental statistics
upon which the predictions of business cycles are based, but in the next
five chapters we explain some of the influences that affect the
movements in stock prices. Read these chapters very carefully, for your
success in stock speculation will depend very largely upon your correct
prediction of these movements.




CHAPTER XI.

MAJOR MOVEMENTS IN PRICES


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

At the present writing, we are in a period of improvement. Stock prices
began to go up in August, 1921. The upward movement has been slow, but
gradual. In a period of seven months, forty representative stocks show
an upward movement of about 20 points, although business has not shown
much improvement. A steady upward movement in stock prices is a sure
sign that business conditions are beginning to improve, even though that
improvement is not noticeable.

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

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

Following a period of prosperity comes a period of decline. The first
sign of it usually is a severe break in the stock market. At that time
general business is running along at top speed and there is no sign of a
let-up, but this break in the stock market should be a warning. Most
people think the break is merely a temporary reaction--they may refer
to it as a HEALTHY reaction--and they start buying stocks again, and put
the market up, but it does not go up as high as it was before the break
occurred. When stock prices do not rally beyond the prices at which they
were before the break occurred, it is a sign that the turning point has
been reached and that the bear market has started, although the majority
of people do not realize this until a long time afterwards.

Next comes a period of depression, when we have low prices, low wages,
hard times, tight money, and many commercial failures. Many people who
lost all their money during the speculation period, become thrifty and
economize during the period of depression, and start in to save again.
Nearly everybody is pessimistic during this period. Trading on the Stock
Exchange is irregular and as a rule very light.

This is the time to get stock bargains, but the general public as a rule
doesn't take advantage of it. People are scared and think prices will go
still lower. The big interests accumulate stocks during this period, and
sell them during the period of prosperity.




CHAPTER XII.

THE MONEY MARKET AND STOCK PRICES


Perhaps no other one thing influences the movement of stock prices so
much, in a large way, as money conditions. It is impossible to have a
big bull market without plenty of money. During a bull market nearly all
stocks are bought on margin, which is explained in Chapter XVI. This
makes it necessary for brokers to borrow large sums of money. When money
is tight, it is impossible to get enough to carry on a large movement in
stocks.

You will see, therefore, that the Federal Reserve Bank has it in its
power to regulate the stock market to some extent. In 1919 speculation
was carried very much further than it should have been, but undoubtedly
it would have been much worse had the Federal Reserve Bank not raised
interest rates and urged member banks to withdraw money from Wall
Street. While there was considerable criticism of that action, it
certainly was a good thing for the entire country.

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




CHAPTER XIII.

MINOR MOVEMENTS IN PRICES


Within the major movements of stock prices, there always are several
minor movements, which are caused by various influences. One of the
important causes is the technical condition of the market. Another cause
might be called a psychological one. When stocks are moving up steadily
in a bull market, people closely connected with the market expect a
reaction and watch for it. The newspapers predict it. Consequently,
there is sufficient let-up in buying to allow the pressure of selling by
the bears to bring it about. However, the desire to buy during reactions
is so general, many people rush in to buy and this buying, in addition
to the covering by the shorts, puts the market up again; and if
conditions are favorable for a bull market, prices will go up much
higher than they were before.

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

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

Reports of earnings by various companies influence stock prices, as does
also the paying of extra dividends or the passing up of dividends. A
peculiar psychological influence is noticed when a company declares an
extra dividend. The price of the stock usually goes up, while as a
matter of fact the intrinsic value of the stock is decreased by the
amount of this dividend; and sometimes it is advisable to sell a stock
shortly after an advance in its dividend rate.




CHAPTER XIV.

TECHNICAL CONDITIONS


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

It is sometimes said that supply and demand must be equal or else there
could not be any sales, but that is not so. There are always some people
who are willing to sell at some price above the market who will not sell
at the market; and when the demand for stock is greater than the supply,
it goes up until it is supplied by some of these people who are holding
it at a higher price.

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

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

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

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




CHAPTER XV.

MANIPULATIONS


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

There are different kinds of manipulation. One is for the insiders of a
company to give out unfavorable news about their company if they want
the price of the stock to go down, so that they can buy it in; or to
give out very favorable news if they want the price to go up, so that
they can sell out. This method is not practiced now to the extent that
it was years ago. Public opinion is strongly opposed to it, and we
believe business men are acquiring a higher standard of business ethics.
Methods of this kind are legal but they are morally reprehensible.

Another method of manipulation is the forming of pools to buy in the
stock of a company and force it up. If the market price of a stock is
far below its real value, we believe it is justifiable for a pool to
force it up, but the ordinary pool is merely a scheme to rob the public.

There are four periods to the operation of such pools. First is the
period of accumulation. A number of large holders of stock in a certain
company will pool their stock, all agreeing not to sell except from the
pool, in which all benefit proportionately. Then they give out bad news
about the company. That is very easy to do, because financial writers
usually accept the news that is given to them without much
investigation, especially writers on daily papers, because they have not
the time to investigate. Their copy must be ready in a few hours after
they get the information. See Chapter XXV. on "Market Information" for
fuller explanation of the reason why financial news usually is
misleading. The manipulators of stock prices can have financial news
"made to order."

When the general public reads this news and sees the stock going down,
many of them get discouraged and sell. It is just the time they should
not sell, but it is a well known fact that the majority of people do in
the stock market just what they should not do. The more they sell the
more the price goes down, and the pool operators accumulate the stock.

Having secured all the stock they want, they give out good news and
continue to buy the stock until it starts to go up. The public reads
this favorable news, and seeing the stock go up, will go into the market
and buy, which puts it up higher. All the time financial writers are
supplying good news about the stock and the public buys it. After they
have sold all of it, the public may still be anxious for more, and the
pool operators may go short of the stock. Then they will begin giving
out bad news, so that they can buy in stock at a lower price to cover
their short interests.

After that they have very little interest in the market. If it is
declining too fast, they may support it occasionally by buying some
stock and giving out some favorable news. That will make the market
rally and they will sell out the newly acquired stock near the top of
the rally.

Manipulations of this kind appear to be going on nearly all the time,
and there does not seem to be any limit to the number of suckers who
fall for them. But then, one can't blame the public when you realize how
thoroughly unreliable is most of the market information given to them.

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

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

In a day or two, the stock may drop back to less than one half of what
it was selling at. If this "one-man" manipulator wants to buy any stock,
he will give out a little unfavorable news, and he can get stock at his
own price.

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

A few years ago there was a man operating in New York who promoted
several companies and manipulated them in a large way. He is out of
business now, but the same thing is still done in a smaller way.

It is our opinion that more money is lost by the public in manipulated
stocks than in promotion stocks, and we read a great deal about the
enormous losses in them. Promotions that are failures may be perfectly
legitimate and conducted in the utmost good faith, but manipulations are
nearly always for the purpose of swindling the public. However, the lure
of them is so great many people cannot withstand the temptations of them
even after they have been "trimmed" several times.




_PART FOUR_

TOPICS OF INTEREST TO SPECULATORS




CHAPTER XVI.

MARGINAL TRADING


Most people who trade in stocks buy on margin. The ordinary minimum
margin is about 20% of the purchase price, because banks usually lend
about 80% of the market value of stocks.

If you put up 20% of the purchase price of your stocks with your broker,
he has to pay the other 80%, but he can do that by borrowing that amount
from his bank, and putting up the stock as security. In this way brokers
are able to handle all the margin business that comes to them, as long
as money can be borrowed. Of course, there are some stocks that are not
accepted by banks as collateral for loans, and you should not expect
your broker to sell such stocks on margin. In fact, if he offers to do
so, it looks as though he were running a bucket shop. See Chapter XVIII.

Many people think that buying stocks on margin is gambling and that
people should not do it for that reason, but buying on margin is done in
all lines of business, although it may not be known under that name. If
you bought stock outright, but borrowed 80% of the purchase price from
your banker to complete your payment for it and put up the stock with
him as security, you would be buying on margin just the same.

In like manner, if you bought a home and paid 20% with money you had and
borrowed the other 80% of the purchase price, you would be buying a home
on margin. The principal difference is that when you buy from a broker
on margin, one of the conditions of his contract is that he has the
right to sell your stock provided the market price drops down to the
amount that you owe on the stock, whereas if you borrow money on a home,
it is usually for a certain specified time and the lender cannot sell
you out until that time expires. However, in principle, there is very
little difference between the two transactions.

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

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




CHAPTER XVII.

SHORT SELLING


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

However, your broker can attend to that by borrowing the stock. As
explained in the preceding chapter, when the market is active most of
the trading is done on margin. Your broker buys a stock for you, but as
he has to pay for it in full, it is customary for him to take it to his
bank and borrow money on it. A bank usually lends about 80% of the
market value, but if some other broker wants to borrow this stock, he
will lend the full value of it. If that particular stock is very scarce
and hard to get, the lender of the stock may get the use of the money
without any interest.

Therefore, there is an advantage to the broker in lending stock, and for
that reason it is nearly always possible for a broker to arrange
delivery of stock for you if you wish to sell short. When you instruct
him later on to buy the stock for you, he will do so and deliver it to
the broker from whom he borrowed it, who will return the money he
received for it.

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

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

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

It is a common thing to read about the short interests in certain
stocks. All stocks that are sold short must be bought sooner or later,
and when that buying takes place, it may affect the market very much.
Therefore, if it is known that there is a big short interest in a
certain stock, we should expect the stock to sell at a higher price; but
sometimes the short interests break the market and force the price down,
especially when general conditions are in their favor.




CHAPTER XVIII.

BUCKET SHOPS


There has been so much publicity given to bucket shops, nearly everybody
is familiar with the term. A broker runs a bucket shop when he sells
stock to his clients on margin and either never buys the stock for their
accounts, or else sells it immediately after buying it. The bucket shop
simply gets your money on the supposition that you are more likely to be
wrong than to be right. Of course, if you take the bucket shop's advice
you surely are likely to be wrong. Bucket shops get their clients into
the very speculative stocks, where there is likely to be a great deal of
fluctuation in the price of the stocks, which gives them frequent
opportunities to sell out their clients.

When the market is going down or when there are many movements up and
down in the price of stocks, the bucket shops make money rapidly, but
occasionally there is a long period when the market is working against
the bucket shops, and unless they have a great deal of money they must
fail.

In August, 1921, Stock Exchange stocks started to go up. The upward
movement was very slow but it was continual. Up to the time of this
writing, there has not been a three-point reaction, except in a few
stocks, in all of that time. Without a fluctuating market, the bucket
shop has no chance to clean out its customers. As a consequence, the
bucket shops began to fail in the early part of 1922, and up to the
present writing (April, 1922) there have been more than fifty of these
failures. However, it is not likely that all the bucket shops will be
put out of business. The more successful ones are likely to "weather the
storm."

Many laws have been enacted against bucket shops, and we believe some
way will be found to get rid of them at some future time; but we do not
expect that to happen soon, and we warn our readers not to get into
their hands, because if they do not get your money away from you one way
they are likely to get it some other way. The man who runs a bucket shop
usually has no conscience, and it certainly is an unfortunate thing for
anyone to get mixed up with such a man.




CHAPTER XIX.

CHOOSING A BROKER


It is very important that you choose a good broker. No matter how
careful you are, it is possible to make a mistake. However, if you
choose a broker who is a member of the New York Stock Exchange, you have
eliminated a very large percentage of your chances of getting a wrong
broker.

Occasionally a member of the Stock Exchange fails and once in a while
one is suspended for running a bucket shop or being connected with one,
but these instances are very rare compared with the number of brokers
who get into trouble who are not members of the New York Stock Exchange.
The rules and regulations of the Stock Exchange protect you to a great
extent.

When you buy stock on margin, you leave your money in the hands of a
broker, and you should know that he is responsible. No matter who your
broker is, you should get a report on him. If you are a subscriber to
Bradstreet's or Dun's Agencies, get a report from them. If you are not a
subscriber to any mercantile agency, you perhaps have a friend who can
get a report for you, or your bank may get one for you. Banks make a
practice of getting reports of this kind for their clients. When asked
to do so, we send our clients the names of brokers who are members of
the New York Stock Exchange, but we prefer not to recommend any broker.
Of course, we cannot guarantee that a broker is all right. We simply use
our best judgment, but, as we said before, you eliminate a large
percentage of your chances of going wrong when you trade with a broker
who is a member of the New York Stock Exchange.




CHAPTER XX.

PUTS AND CALLS


A "put" is a negotiable contract giving the holder the privilege to sell
a specified number of shares of a certain stock to the maker at a fixed
price, within a specified time. A "call" is the exact reverse. It is a
negotiable contract giving the holder the privilege to buy a specified
number of shares of a certain stock from the maker at a fixed price,
within a specified time. The price fixed in a put or call is set away
from the market price a certain number of points, depending upon the
stock and the condition of the market. When the market is steady and not
fluctuating, the price fixed is frequently only two points away, but in
a more active market it is considerably more.

For instance, at the present time, U. S. Steel is selling at about 95,
and you can buy a call on it at 97 or a put at 93. That is by paying a
certain amount, which at present is $137.50, you can have the privilege
of buying 100 shares of U. S. Steel at 97, within thirty days of the
date of the purchase of your call. If Steel should go up to 101 you
could have your broker buy it at 97 and sell it at the market, and you
would make a profit of four points, less the cost of your call and
commissions.

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

Here is one point: the people who sell puts and calls fix the terms. If
the market is irregular, they will set the point of buying or selling
far away from the market price. These people are shrewd traders and they
make the terms in their own favor. It is generally said that nearly all
the buyers of puts and calls lose, and that is our opinion. Therefore,
we advise you to leave them alone.




CHAPTER XXI.

STOP LOSS ORDERS


A "stop-loss" is an order to your broker to sell you out if the market
sells down a certain number of points. Many speculators place stop loss
orders only two points from the market price. The idea is that when the
market starts to go down it is likely to continue going down, and by
taking a two-point loss you may save a much greater loss. It also can be
applied to a short sale, when you give your broker instructions to buy
in the stock for you if it goes up a certain number of points.

We read so much in the financial news about stop-loss orders or merely
stop orders, which is the same thing, the average reader is likely to
get the idea that it is something he must use for his own protection,
but it is our opinion that it is something that should be used very
seldom by those who trade along the broad lines recommended by us. If
your purchases were made in stocks that were very cheap, you should
continue to hold them in case of a reaction. If you bought them
outright or on a substantial margin, you are not in danger, and you
should look upon your loss merely as a paper loss. In the great majority
of cases, you will be a great deal better off to hold on to your stocks
than you would be if you had a stop-loss order.

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

Therefore, we believe that stop-loss orders are a bad thing and, as a
rule, do not recommend them.

There is one instance where a stop-loss order can be used to advantage,
and that is near the top of a bull market. It is impossible to tell when
the market has reached the top. If you sell out too soon, you may lose a
profit of several points. Of course, it is better to do that than to
take a chance of a large loss. In that case, you might instruct your
broker to place a stop-loss order at two or more points below the
market, and keep moving it up as the market price moves up. Then when
the reaction does come, he will sell you out and prevent you from losing
a large part of your profit. That is about the only instance where we
recommend a stop-loss order, but we do recommend it to our clients
sometimes, although seldom.

If the stock you own is selling at more than 100 we would suggest that
you make the stop loss order at least three points from the market, but
for stocks selling below 100, a two-point stop-loss order might be used.
However, the number of points should be decided upon in each particular
case. In the special instructions to our clients, we tell them when we
think they can use a stop-loss order to advantage.




_PART FIVE_

CONCLUDING CHAPTERS




CHAPTER XXII.

THE DESIRE TO SPECULATE


It is said that the desire to speculate is very strong in the American
people. That is why our country has made greater progress than any other
country in the world, because progress is the result of speculation. We
are not referring merely to stock speculations, but to the word in its
broadest sense. Every new undertaking is a speculation.

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

It is the same thing with every new business. It is purely a
speculation. It is a common saying that 95% of commercial undertakings
fail. We do not know that that statement is correct, but there is no
question but that the number of failures is very great, which shows the
great risk in going into a new undertaking. It is far greater than the
risk involved in stock speculating when it is done in accordance with
the advice given in this book.

Yet, there would be no progress without speculating of this kind. If
those entering a new business would make a careful study of the venture
before entering it, and would exercise greater care and judgment in
conducting it, the number of failures would be very much less. The same
thing is true of stock speculating. The failures in stock speculating
are caused mainly by ignorance and greediness. Many people who would be
satisfied with a fair return on their money in a business enterprise,
think they ought to make a 100% profit in a few weeks in stock
speculation.

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

A stock gambler (we use the word "gambler" to refer to a man who
operates ignorantly) is watching a large number of extremely speculative
stocks and suddenly notices one that takes a big jump in price. Then he
says to himself, "If I only had bought that stock on a ten-point margin,
I would have made several hundred per cent profit." He picks out another
stock that some one tells him is going to do equally as well. He buys as
much of it as he can and puts up all the money he has as a margin, but
the price doesn't go up. Perhaps the price goes down and he loses his
margin; but, it may remain almost stationary for a long period,
sometimes for a year or more, and during all of this time, this man is
worrying for fear he will lose his money. If he does not lose his money,
it is tied up for a long time where he cannot use it to take advantage
of real opportunities that come his way.

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

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

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

In our advice to our clients, we seldom recommend highly speculative
stocks, because we consider the avoidance of loss more important than
the making of profits. You may object to that statement, because you
speculate to make profits, and not for the purpose of avoiding losses.
Nevertheless, if you are careful in keeping your losses down to a
minimum, your profits are likely to be very liberal. Any trader who
trades for any great length of time is likely to make large profits
sometimes, and yet the majority of them have greater losses than
profits. It is said that more than 80% of all margin traders lose; but
we do not consider that an argument against trading on margin, because
these losses are mostly due to ignorance, greediness, and the taking of
too great chances.

Do not suppress your desire to speculate. All progress would stop if
people did not speculate. But do not speculate in stocks nor in anything
else without any knowledge of what you are doing, and try to use as
much good judgment and care as possible in all of your transactions. If
you do not know what to do, get advice from someone who is supposed to
know and who is not interested in having you buy or sell. Stock
speculating with safety is possible for those who make the effort to be
guided by correct principles.




CHAPTER XXIII.

TWO KINDS OF TRADERS


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

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

The careful trader tries to get good advice on the markets and the
values of stocks. If the advice appears to him to be conservative, he is
guided by it; but if the reckless trader gets advice on stocks, he is
not guided by it if it is of a conservative nature. If he does take
advice, it is likely to be from one of those unreliable market tipsters
who is very emphatic in his statements about what the market is going to
do. The reckless trader lets his greed and desire for large and quick
profits influence his judgment.

Once in a while one of these reckless traders realizes that he has made
a great mistake, and he wants to change his attitude. Usually he is
holding several stocks that show a big loss and he does not know what to
do with them. He reasons that they are selling so low now they surely
will sell higher some time. Perhaps his reasoning is good and perhaps it
is not. The stocks may have no chance of going up for a very long time,
if at all, but even though they have a good chance to go up later, it is
better for him to sell them now if he can put the money derived from the
sale into something else that has a better chance to make a profit.

Our advice is never to hesitate to sell and take a loss if you can put
the proceeds from the sale into something better rather than leave it in
the stock in which it is now. It is not so much a question whether or
not the stock you are holding will go up, as it is whether or not you
would buy that particular stock if you were just coming into the market
to make a purchase. Of course there is a loss of commissions when you
sell a stock and buy something else, and for that reason we sometimes
recommend holding a stock when we would not recommend buying it.

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




CHAPTER XXIV.

POSSIBILITIES OF PROFIT


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

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

Roger W. Babson, in his book entitled, "Business Barometers," speaks of
the possibilities of profit in language that would be considered greatly
exaggerated if used by a promoter, and yet he is extremely conservative
in his advice to traders. He advises never to buy on margin, never to
sell short, and staying out of the market entirely, neither buying or
selling, for a great part of the time. Here is a quotation from his
book, which follows a detailed statement of an investment of $2,500 over
a period of fifty years:

    "The preceding example shows that $2,500 conservatively invested in
    a few standard stocks about fifty years ago would today amount to
    over $1,000,000. These are not only strictly investment stocks, but
    are also stocks which have fluctuated comparatively little in price.
    This, moreover was possible by giving orders to buy or sell only
    once in every three or four years.

    "If other stocks which were not dividend payers and which have shown
    greater fluctuations were purchased, and advantage had been taken of
    the intermediate fluctuations, the $2,500 would have amounted to
    much larger figures. By intermediate movements is not meant the
    weekly movements which the ordinary professional operator notes, but
    the broader movements extending over many months and possibly a year
    or more. Nevertheless, these broader intermediate movements should
    not be noticed by a conservative investor, as it is possible to
    correctly diagnose only the movements extending over longer periods.
    Many brokers believe that it is possible to discern also these
    intermediate movements of six or eight months; and if so, the
    following results would have been possible.

        "$5,000 invested in 'St. Paul' in 1870 would
          amount to over $10,000,000 today.

        "$5,000 invested in 'Union Pacific' in 1870
          would amount to over $15,000,000 today.

        "$5,000 invested in 'Central of New Jersey'
          would amount to over $30,000,000 today.

        "$5,000 invested in 'Northern Pacific' would
          amount to over $50,000,000 today.

    "These figures are not based on the supposition that the investor
    was selling at the top of every rise or buying at the bottom of
    every decline, but that the transactions were made at average 'high'
    and average 'low' prices based upon the study of technical
    conditions."

If such large profits can be made by following Babson's advice, of
course larger profits can be made by buying on conservative margin and
by selling short when all the conditions are in favor of it.

While there are possibilities of making extremely large profits without
taking great risks, by those who are patient and exercise good judgment,
one should be satisfied with a small profit, if it is the result of
great care, in an effort to eliminate risk. Of course, you can afford to
take a much greater risk with a small part of your speculative fund than
you can with all of it. The less money you have with which to speculate,
the more careful you should be. Some people cannot afford to speculate
at all. They should invest their funds in good, safe investments, but
this book is written for speculators.

Careful stock speculation carried on regularly over a period of years,
we believe brings larger returns than almost anything else, and in the
next chapter we tell you something about where to get information to
guide you.




CHAPTER XXV.

MARKET INFORMATION


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

Weekly and monthly periodicals can be more accurate in their
information, but even they are not always dependable. Much of the
financial news published comes from agencies that are not reliable. Read
what Henry Clews says about them:

    "Principally among these caterers are the financial news agencies
    and the morning Wall Street news sheet, both specially devoted to
    the speculative interests that centre at the Stock Exchange. The
    object of these agencies is a useful one; but the public have a
    right to expect that when they subscribe for information upon which
    immense transactions may be undertaken, the utmost caution, scrutiny
    and fidelity should be exercised in the procurement and publication
    of the news. Anything that falls short of this is something worse
    than bad service and bad faith with subscribers; it is dishonest and
    mischievous. And yet it cannot be denied that much of the so-called
    news that reaches the public through these instrumentalities must
    come under this condemnation. The 'points,' the 'puffs,' the alarms
    and the canards, put out expressly to deceive and mislead, find a
    wide circulation through these mediums, with an ease which admits of
    no possible justification. How far these lapses are due to the haste
    inseparable from the compilation of news of such a character, how
    far to a lack of proper sifting and caution, how far to less
    culpable reasons I do not pretend to decide; but this will be
    admitted by every observer, that the circulation of pseudo news is
    the frequent cause of incalculable losses. Nor is it alone in the
    matter of circulating false information that these news venders are
    at fault. The habit of retailing 'points' in the interest of
    cliques, the volunteering of advice as to what people should buy and
    what they should sell, the strong speculative bias that runs through
    their editorial opinions, these things appear to most people a
    revolting abuse of the true functions of journalism."

Of course, every trader gets market letters from one or more brokers.
These are many and varied in character. Some of them are prepared with
great care and give reliable information, but you must remember that a
broker's market letter is published for the purpose of getting business,
and business is created only by the customers' trading. Therefore it is
to the broker's interest to have his customers make many trades instead
of a few trades. In his book "Business Barometers," Roger W. Babson
reproduces a letter written to him by the Manager of the Customers' Room
of a Stock Exchange House. We consider this letter so important to all
traders, we are taking the liberty to reproduce it here:

    "Hearing on every hand about the fortunes made in Wall Street, I
    decided, upon being graduated from college, to devote myself to
    finance. With this end in view, I secured a position with a
    first-class New York Stock Exchange House, finally becoming the
    'handshaker' for the firm; that is, 'manager' of the customers'
    room. So I had an exceptional opportunity to size up the stock
    business. The chief duties of the manager are to meet customers when
    they visit the office, tell them how the market is acting, the
    latest news from the news-tickers and the gossip of the Street. But
    the real duties are to get business for the house. Once a most
    peculiar man came to the office. He was about forty-five years of
    age, dressed in a faded cutaway coat, high-water trousers, and an
    East Side low-crown derby hat. In a high squeaky voice he said that
    he knew our Milwaukee House and would like to open an account. Of
    course, we were all smiles, for here was a new 'customer.'

    "One day while in Boston he called us up on the long-distance
    telephone to make an inquiry about the grain market. One of my
    assistants, desiring to get a commission out of him, said 'We hear
    that Southern Pacific is going up; you had better get aboard.' He
    said 'All right; buy me a hundred at the market.' The stock was
    bought, but he never saw daylight on his purchase, for the market
    declined steadily afterward and by the time he got back from Boston
    it showed a heavy loss. The man who advised its purchase had no
    special knowledge about the stock, but simply took a chance, knowing
    that the market had only two ways to go, and it might go up, in
    which case, besides making twenty-five dollars in commissions for
    the house, he would be patted on the back for his good judgment. If
    the market went down, as it did, he would still make twenty-five
    dollars.

    "I venture to say that 99% of the speculations on the New York Stock
    Exchange are based on such so-called 'tips'. The manager has got to
    get the business to keep his position and salary, and this can only
    be done by 'touting' people into the market. So he draws on the
    'dope' sheets of the professional tipsters and his own feelings, and
    gives positive information to the bleating lamb that the Standard
    Oil is putting up St. Paul, or that certain influential bankers are
    'bulling' Union Pacific. The lamb buys the stock, the broker gets
    the commission, and then the lamb worries his heart out as he sees
    his one-thousand-dollar margin jumping around in value. Now it has
    increased to eleven hundred dollars, then declined to nine hundred
    and fifty dollars, then nine hundred dollars, eight hundred dollars,
    then back to eight hundred and fifty dollars and then it takes the
    'toboggan' to three hundred dollars upon which the broker calls for
    margins, and sells the customer out if they are not forthcoming, the
    whole speculation being based on the manager's 'feeling' that stocks
    ought to go up.

    "Men of affairs who will not play poker at home, and are shocked at
    the mention of faro and roulette, which any old-timer will tell you
    are easier to beat than the stock market, think they are using
    business judgment when they try to make money on stock market
    'tips'. Anyone with common sense can see that a 10% margin has no
    more chance in an active market than a brush dam in a Johnstown
    flood. One of the causes for this kind of speculating on a margin
    is that a broker's commission is only 12-1/2 cents per share and it
    does not pay to do small-lot business. The one-thousand-dollar
    margin would only buy ten shares outright and net the broker but
    $1.25 for buying and $1.25 for selling, whereas that same amount as
    margin on one hundred shares yields the broker $12.50 each way
    besides interest on the balance, the net result being that for any
    given amount of money a speculator on 10% margin multiplies his
    profits by ten and his losses by ten over those that would occur
    were he to buy the stock outright and take it home. The broker on
    his side multiplies his commission by ten over what he would receive
    were he to do an investment business."

From the above letter you get an idea of the attitude of an employee of
the average broker's office. He would not be considered loyal to his
employer if he had a different attitude. When an attitude like this
influences the broker's market letters, they are not reliable.

You may ask whether there is any reliable information about the market.
Yes, there is. There are several large organizations that make a study
of fundamental statistics and statistics of different companies and give
information to their subscribers based upon this knowledge. We believe
that is the only kind of information that is worth very much to a
trader, except the statistical information--the number of shares sold
and the prices at which they are sold--he gets from his daily or weekly
papers. Some of the principal organizations of this kind are as follows:

    _Standard Statistics Company, Inc.
    Babson's Statistical Organization.
    The Brookmire Economic Service.
    Harvard Economic Service.
    Poor's Investment Service.
    Moody's Investors Service.
    Richard D. Wyckoff Analytical Staff._

The above are the principal organizations of this kind. Subscriptions to
their service cost from $85 to $1000 a year. In addition to these there
are a few other organizations besides our own and individuals giving a
somewhat similar service, but we know of none that gives such a service
at as low a price as ours.

You should not confuse the service given by the above organizations with
that given by many organizations and individuals who attempt to tell you
what the market is going to do from day to day. In other words, they
give 'tips' on the market. There are a number who issue daily market
letters of this kind and charge from $10 to $25 a month for their
service, but it is a line of service that we do not recommend at all,
because we consider that you would be taking a very great risk if you
followed advice of that kind. You might make enormously large profits
occasionally, but you would also have frequent losses, and when the
losses did come they might be greater than all the previous profits. We
want you to understand that that kind of advice is entirely different
from what we are recommending.




CHAPTER XXVI.

SUCCESSFUL SPECULATION


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

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

Many people buy stocks at the wrong time, and most of those who do buy
them at the right time, buy the wrong stocks. Right now (early in April,
1922) is buying time in the stock market, and it is possible that this
buying time may continue--with some interruptions--for another year or
two, or even longer.

It is more difficult, however, to tell you WHAT stocks to buy. First of
all, we advise you against buying stocks that are put up to high prices
by manipulation. Of course, if you get in one of those stocks right and
get out right, your profits are very large, but you take a great risk,
and those who win once or twice by this method are almost sure to lose
everything sooner or later in an effort to do the same thing again. Your
chances are not much better than if you gambled at Monte Carlo. The
chances in buying manipulated stocks are invariably against the
outsider.

There always is so much publicity about these very active speculative
stocks that the public is attracted towards them. Newspapers and
brokers' market letters give altogether too much space to them. Such
stocks sell far too high, and when the break comes, it brings ruinous
losses to many people.

On the other hand, by following a conservative course, you really have a
chance to make large profits with a minimum risk. We are giving below
sixteen stocks that we recommended in our Advisory Letter of February
14th, 1922, with the approximate prices of them then and the approximate
prices on March 31st.[2] In arriving at these prices, we took the
closing prices on February 13th and on March 31st, and omitted the
fractions. We recommended only sixteen stocks on that date, and you will
see that every one of them made substantial gains.

                                 Approximate     Approximate
                                    Price           Price
         Stock                  Feb. 14, 1922   Mar. 31, 1922   Profit

 C. R. I. & P. pfd (6)                75              79           4
 C. R. I. & P. pfd (7)                88              93           5
 New York Central                     76              88          12
 Pacific Gas & Electric               64              68           4
 Consolidated Gas                     90             109          19
 American Telephone & Telegraph      118             121           3
 General Motors Deb. (6)              70              78           8
 General Motors Deb. (7)              81              91          10
 U. S. Steel                          87              95           8
 Dome Mines                           23              26           3
 Laclede Gas                          50              63          13
 Missouri Pacific Pfd                 48              54           6
 C. R. I. & P. Common                 33              40           7
 Am. Smel. & Refining                 45              53           8
 Anaconda                             47              51           4
 Erie Common                          10              11           1
                                    ----            ----         ---
 Total                              1005            1120         115

Let us suppose you bought ten shares of each of these stocks on February
14th. They would have cost you $10,050. We recommended 30% margin on the
first ten, all of which were dividend payers; and 50% margin on the last
six, because they were more speculative and would have been more
affected by a reaction in the market. To buy ten shares of each on that
margin basis would have required a little less than $3,500, but let us
suppose you put up $3,500. After allowing for buying and selling
commissions and interest on the balance of $6,550, but crediting you
with dividends paid, your profit would be about 32% or at the rate of
about 250% per annum.

Of course, we do not claim that by following the conservative course we
advise, you always will make such large profits, although you might do
just as well as that if you took advantage of some of the opportunities
so frequently to be found in the market; but keen discrimination in what
you buy always is necessary. However, let us suppose you made annual
profits of one-fifth the above amount, or 50%, which is easily possible
without taking the risks that are usually taken in stock speculating. If
you invested $1000 and made 50% profit per annum, reinvesting your
profit at the same rate each year for twenty years, you would have more
than THREE MILLION DOLLARS.

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

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

There is only one SAFE way to speculate, and that is to be guided by a
knowledge of the fundamental conditions of each stock and also of the
industries they represent. There are several large organizations giving
information of this kind, and those who have been guided by the
fundamental statistics issued by them, almost invariably have made money
in stock speculating. The value of that kind of service has been
thoroughly demonstrated beyond any question. However, a subscription for
the service of most of these organizations costs more than the average
person can afford to pay. Usually it is anywhere from $100 to $1,000 a
year.

We are giving a service for the purpose of guiding our clients to
successful speculation for a fee of only $25 a year, $15 for six months,
or $10 for three months. For this fee we tell you what stocks to buy,
when to buy, and when to sell. We send you our recommendations at least
twice a month, but send you additional Advisory Letters and lists
oftener if conditions make it necessary. You also have the privilege of
unlimited personal correspondence regarding your market problems. The
cost of our Service is very small, compared with what other reliable
organizations charge.

Our Service is based on the principles expounded in this book. We try to
select stocks having the greatest possibilities of profit with minimum
risk, and the sample of our Service given in this chapter is proof of
our success.


 NATIONAL BUREAU OF FINANCIAL
         INFORMATION

 395 Broadway, New York City


FOOTNOTES:

[2] We did not advise the sale of these stocks on March 31st, but the
author figured profits to that date because this book was written
shortly after that. If these stocks had been bought on or about February
14th, on the margin basis suggested by us, and sold six months later,
the profit would have been more than 60%, or 120% yearly.







