A favorite and amusing pastime with a multitude of traders is to cajole themselves into believing that when some stock they own becomes increasingly active after a considerable advance, the renewed activity is a sure indication that “bankers and insiders” are accumulating it for a still further advance. It is well to remember, however, that bankers and insiders do most of their accumulating before the rise begins, and while the outside public is doing its accumulating the bankers and insiders are quietly supplying the stocks. It is quite clear that if the insiders pursued the same tactics as the public they would soon be relegated to the ranks of the outsiders.
It is a common saying, even among veteran traders, that such and such a stock “is a good buy, but you must watch it closely.” To watch a stock after buying it is about the most foolish thing one can do. To watch it go down is certainly no pleasure, and if it goes up it doesn’t need watching. The time to watch it is before buying. In order to limit one’s loss on a purchase it is a simple matter to put in an “open stop loss” order somewhere under the cost price; and no amount of diligent “watching” will prevent it from going down. On the other hand, to insure one’s profit, if the price goes up, nothing more is required than to put in a “G. T. C.” (good till cancelled), selling order at whatever figure above the cost price the purchaser is willing to accept as his profit.
There is probably no more popular fallacy among traders than the one which presupposes that great “pools” and combinations formed to manipulate certain stocks are either made up of officers and directors of the corporations concerned, or else that such pools base their operations upon valuable inside information from some head official. This may be true in rare instances; but generally speaking the directors and officers of the companies know nothing whatever of the pool operations in their stocks, and when they do know they usually frown on such schemes. Anyone who stops to consider knows that the market prices of the company’s securities are of far less concern to the officials than the matter of conducting their business operations at a profit. If the company’s earnings are good, it is clear that this fact will soon enough manifest itself in the demand for the securities, without any abortive or clandestine efforts; and if the earnings are poor, it would obviously be beneath the dignity of the officials to deceive the public through pool operations or pool affiliations. A more simple plan would be to utilize their “inside information” by quietly selling the stock.
I recall a particular instance, a few years ago, when there were some tremendous pool operations in the common stock of one of America’s largest industrial corporations, and after the stock had been bid up ten or a dozen points it was reported that a “managing director” of the company had assured one of the pool members that it had been tacitly agreed among the directors to declare a fifty per cent. stock dividend at the next board meeting. The public instantly took the bit in its teeth, and inside of a week the stock advanced fifteen points more, which doubtless afforded the clique an auspicious occasion for unloading its holdings, bought at much lower figures. About that time I happened to be in New York, and while lunching one day with the chairman of the board of directors at his club he told me that the matter of a stock dividend had not even been discussed among the directors, and that in his opinion there was no likelihood of any change in the dividend policy for at least a year,—which proved to be true.
PROBLEMS DEFYING PRESENT SOLUTION ARE
BETTER DEFERRED TO THE FUTURE
A matter of present and future importance in connection with many investment and speculative stocks, involving as it does questions on which there is a wide diversity of opinion, is the modern practice of increasing the outstanding shares of corporations by splitting them up into fractions, or by declaring liberal stock dividends. Many of the large companies have recently doubled and quadrupled their shares, and some have issued as high as nine new shares for one, on somewhat the same principle as the Government will issue ten one dollar notes in exchange for a ten dollar bill. And in several instances the fractional shares have been split a second, and even a third time. In past years when there were only a few listed securities it was possible for any well informed person in financial circles to tell the par value and the approximate book value of all the leading stocks, but the good old-fashioned methods are no longer in vogue; there are now 1,045 stocks listed on the New York Stock Exchange alone, representing almost every imaginable industry, from steam locomotives to lunch counters, and under the new capital readjustment process it takes a professional statistician to keep up with the changes and determine what stocks are actually worth. But whatever their value may be, it is at least certain that there is not enough money in the world to cash them all in at anywhere near their present market price. Nowadays it is not unusual for industrial companies to have from five to ten million or more shares outstanding. The lately devised and much over-worked practice of splitting stocks up into small fractions, avowedly for the convenience of traders, savors strongly of the old worn-out custom of “baiting” the public with low-priced issues, ranging from $1 a share upward. As long as we are riding on the crest of the wave of prosperity there appears to be no imminent danger in such inflation, but when business slackens, as it always has periodically in the past—— However, the optimists contend that these problems are too far in the future to worry about. Furthermore it is not the design of this article to criticise abuses, or to prognosticate future difficulties that seem likely to grow out of them. It is true that some of the companies, notwithstanding the tremendous increase in their capital structures, have not weakened their resources by increasing their cash disbursements. In 1921 the stock of the Standard Oil Company of New Jersey was paying $5 a year in dividends and selling at $124.50 per share. In 1922 it was boosted up to $250.50 a share on the report that shareholders were to receive four new shares for one. After this split-up was accomplished and the authorized common stock increased to 25,000,000 shares,—not dollars, but shares!—more than 20,000,000 of which have been issued, in addition to $200,000,000 of preferred stock, the same conservative dividend policy was continued, and the new stock received, and still receives, only one dollar a share annually in dividends. The market price of the new stock went down to a fraction below $31, whence it afterwards recovered to about $46, at which figure it pays a trifle over 2%, or about one half the net return on U. S. Government bonds; and the only visible change in the stockholder’s position is that if he wishes to sell his stock it costs about five times what it did before; in other words, to buy and sell the equivalent of one hundred shares of the old stock it now costs $154 in commission and tax—more than eighteen months’ income on a hundred shares of the present stock. Possibly there are mathematicians who can figure out some sort of compensating advantage to the stockholder, but I never could.
To sum up the whole situation in a word, those who would make money speculating in the stock market should first understand that it requires as much caution and business acumen as any other money-making enterprise, plus some knowledge of the psychological handicaps; also plus the rare faculty of maintaining a complete mastery over one’s impulses, emotions and ambitions under the most heroic tests of human endurance. All speculations, and even the most conservative investments, have some slight element of risk; all lines of business are more or less a gamble; marriage is a gamble; political preferment is a gamble; in fact nearly everything in life, including our very existence, is an uncertainty; yet people are not thereby discouraged from entering into any and all of these ventures. Those who look only for certainties have far to search and little to find in this world.
Transcriber’s Notes:
New original cover art included with this eBook is granted to the public domain.