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 toany 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.
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 ofyour 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.
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 themoutright 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 ofa 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.
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 solicitedmoney 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 speculateswith 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 knowledgeof 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.
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 doestake 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 itis 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.
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 hisbook, 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.
"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.
"$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 everyrise 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."
"These figures are not based on the supposition that the investor was selling at the top of everyrise 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.
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 fidelityshould 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."
"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 fidelityshould 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 tohave 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 declinedsteadily 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. Oneof the causes for this kind of speculating on a margin is that a broker's commission is only 121⁄2cents 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."
"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 declinedsteadily 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. Oneof the causes for this kind of speculating on a margin is that a broker's commission is only 121⁄2cents 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 atwhich 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.
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 verygreat 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.
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 winonce 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, wetook 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.
StockApproximatePriceFeb. 14, 1922ApproximatePriceMar. 31, 1922ProfitC. R. I. & P. pfd (6)75794C. R. I. & P. pfd (7)88935New York Central768812Pacific Gas & Electric64684Consolidated Gas9010919American Telephone & Telegraph1181213General Motors Deb. (6)70788General Motors Deb. (7)819110U. S. Steel87958Dome Mines23263Laclede Gas506313Missouri Pacific Pfd48546C. R. I. & P. Common33407Am. Smel. & Refining45538Anaconda47514Erie Common10111Total10051120115
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 affectedby 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 carefulmethods, 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 informationof 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 ofprofit with minimum risk, and the sample of our Service given in this chapter is proof of our success.
NATIONAL BUREAU OF FINANCIALINFORMATION
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.
[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.
[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.
Transcriber's Note:Minor typographical errors have been corrected without note. Variant spellings have been retained.