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Title: Successful Stock Speculation

Author: John James Butler

Release date: October 8, 2008 [eBook #26841]

Language: English

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*** START OF THE PROJECT GUTENBERG EBOOK SUCCESSFUL
STOCK SPECULATION ***

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

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 121⁄2 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.

Transcriber's Note: Minor typographical
errors have been corrected without note. Variant
spellings have been retained.

*** END OF THE PROJECT GUTENBERG EBOOK SUCCESSFUL
STOCK SPECULATION ***

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