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.