Conclusion
The questions most frequently asked by inexperienced people are as follows:
1—What margins are necessary to reasonable safety?
2—Is it better to study the entire list or make a specialty of one stock?
3—What class of securities is the safest?
4—What may be considered a fair rally or reaction in stock prices under ordinary circumstances?
5—What is the best general method of trading?
Some of these questions have been answered in the preceding chapters, but they will be taken up here in turn and the writer’s views submitted on each head.
1—What margins are necessary to reasonable safety?
There is no unqualified answer to this question. The price of the shares operated in must be considered. All other things being equal, a stock selling at $50 would require only half the margin employed in operating in a security selling at $100. If the $50 stock declines 25 points, it has suffered a quoted loss of half its value. The $100 stock, however, must decline 50 points to suffer an equal loss. This percentage of advance or decline is established with remarkable fidelity in every considerable movement.
If the scale order is employed as a method of accumulating shares, extraordinary marginal provisions must be made, for even as the line acquired increases, the original margin dwindles. The scale order is, or should be, based on the assumption that a temporary decline below the first purchase price is desirable and is necessary to the best results. This fact, however, should never be contorted in such a manner as to instigate purchases at high prices. If the operator who employs the scale order will try to make the first purchase at what he considers a bargain price, or in other words at what he calculates to be the very bottom of a movement, he will surely find that in nine cases out of ten, his own errors or the velocity which frequently carries prices to ridiculously low or high points will enable him to accumulate his line to advantage. The scale order should never be used on its mechanical merits alone, but merely as a method of averaging.
It goes without saying that marginal necessities will be principally gauged by the correctness of the speculator’s general views. It is the writer’s opinion, that if care and intelligence is used in judging values, conditions, and the stages of the market, a margin of 20% will be sufficient in almost all cases. That is to say, 20 points on a stock selling at par and 10 points on a stock selling at 50. It must be distinctly understood, however, that this opinion contemplates purchases at low prices after a decline has occurred; and when both the technical and general conditions warrant purchases.
The late Charles H. Dow fixed the sum of $2,500 as the minimum amount necessary to safe operating in ten share lots, but this sum, or any other for that matter, is an arbitrary estimate. Mr. Dow’s figure was founded on the necessity of averaging and also upon a most laudable caution and conservatism which, however, might at times result in unnecessary restriction of operations at a most favorable period. There are times when $500 might be safely made the basis of trading in certain stocks; there are other times and other stocks where $2,500 would be wholly insufficient.
While no rule of thumb is possible in this regard, it is the writer’s opinion that there is no necessity for being out in calculations more than 20%, provided always that due care has been exercised in basing such calculations.
2—Is it better to study the entire list or make a specialty of one security?
It is better to examine the conditions and prices of all the leading securities. This is the only method by which comparative values may be arrived at. It is frequently the case, particularly after a comprehensive decline or a panic, that certain excellent shares have suffered almost as much as the more questionable securities. At such times, what we want is not only a good bargain but the best bargain obtainable, and this may be secured more readily by a careful comparison of prices, values and income return than by any other method.
Again, in an upward movement stocks generally advance, not homogeneously, but one at a time or in closely related groups. Certain shares may have a reasonable advance while others hang fire. If we have good reason to believe we are on the eve of a great bull movement, the best results may be attained by a process of rotation in trading.
3—What class of securities is the safest?
Railroad stocks are the soundest securities. The danger of competition is not so great; the assets are more tangible and when once the specific influences which are now working against them have been cured or eliminated, as they certainly will be in time, these shares will show a steady improvement both in value and price. At times the very best stock will suffer severely and much pessimistic talk will be heard of receiverships, etc. That is the time to buy. Lord Rothschild once advised a friend to buy French rentes. “But the streets of Paris are running with blood,” replied the recipient of the advice. “That,” responded Rothschild, “is the reason you can buy rentes so cheaply.” The man who purchases the shares of railroads when they are greatly depressed may rest serenely in the consciousness that the future of American railroads is assured and that measures seeking to obstruct progress or prevent fair returns on investments, either in the way of income on money or the natural accretion of values cannot possibly endure.
4—What may be considered a fair rally or reaction in stock prices?
Here again the question of ruling prices of a certain stock are to be considered. Low-priced stocks always move in a narrower range than do higher priced ones. The extent of a probable comparative movement may be gauged by percentages with a fair degree of accuracy. This method of measuring a comparative advance or decline, however, will be frequently disturbed by specific influences bearing on a certain stock or group of stocks.
It is useless to undertake to establish even a rough rule for ordinary movements by a system of averages culled from history. We find that in the course of ten years the rallies and reactions which appeared were so varied in character both as to the extent in points and the duration in days, that a barometrical average founded on such investigation would be empirical. However, the results of this inductive reasoning will be given for what they are worth.
The principal movements for ten years have been as follows:
1.—The Bull Market of 1897 to 1899.
This advance began in April, 1897, and terminated in April, 1899—two years of advancing prices. The average advance in Industrial shares was 38.79 points, or about 100%. Railroads advanced 38.92 points, or about 80%.
The intermediate reactions were as follows:
| Date of Reaction | Extent in Industrials Points | Extent in Rails Points | Duration Days |
|---|---|---|---|
| Sept. 10 to Nov. 8, ’97 | 10.17 | 9.78 | 59 |
| Jan. 7 to Mar. 25, ’98 | 8.67 | 10.43 | 78 |
| Jun. 10 to Jun. 16, ’98 | 2.84 | 2.93 | 7 |
| Aug. 26 to Oct. 19, ’98 | 9.41 | 4.41 | 54 |
| Jan. 30 to Feb. 7, ’99 | 3.07 | 3.38 | 8 |
2.—The Bear Market of 1899-1900.
This decline began May 1st, 1899, and culminated Sept. 24, 1900—17 months. The average gross decline in Industrial shares was 24.32 points, or about 32%, and in Rails, 13.27 points, or about 18%.
Intermediate rallies were as follows:
| Date of Rally | Extent in Industrials Points | Extent in Rails Points | Duration Days |
|---|---|---|---|
| May 31 to Sep. 5, ’99 | 10.10 | 8.17 | 97 |
| Dec. 18, ’99, to Jan. 2, ’00 | 9.86 | 6.38 | 16 |
| Jan. 11 to Feb. 5, ’00 | 5.09 | 4.56 | 26 |
| Mar. 9 to Apr. 6, ’00 | 5.04 | 5.22 | 29 |
| May 15 to June 1, ’00 | 2.76 | 3.42 | 17 |
| June 23 to July 23, ’00 | 5.34 | 4.56 | 31 |
| July 31 to Aug. 15 | 2.10 | 2.31 | 16 |
3.—The Bull Market of 1901.
The advance began Oct. 1, 1900, and culminated Aug. 26, 1901, 11 months. The average advance in Industrial shares was 20.87 points, or about 39%. The average advance in Rails was 37.92 points, or about 51%.
Intermediate reactions were as follows:
| Date of Reaction | Extent in Industrials Points | Extent in Rails Points | Duration Days |
|---|---|---|---|
| Nov. 20 to Dec. 8, ’00 | 5.09 | 1.67 | 19 |
| Dec. 27, ’00, to Jan. 19, ’01 | 6.29 | 4.39 | 24 |
| May 1 to May 9 | 7.55 | 14.49 | 9 |
| June 17 to July 15 | 8.80 | 11.30 | 29 |
| July 29 to Aug 6 | 3.89 | 6.64 | 9 |
4.—The Movement of 1902.
The year 1902 is particularly interesting, as it shows what occurred in the market the year prior to a period of industrial relaxation. This year cannot be called either a bull or bear year, as while railroad stocks advanced and closed the year with net gains, the Industrial stocks suffered material declines. As the declines in Industrial stocks was greater than the advance in Rails, we will arbitrarily designate the year as a bear period and examine the homogeneous movement for rallies, instead of reactions.
From Dec. 12, 1901, to Dec. 15, 1902, Industrial shares declined 5.74 points and rails advanced 3 points.
Intermediate rallies were as follows:
| Date of Rally | Extent in Industrials Points | Extent in Rails Points | Duration Days |
|---|---|---|---|
| Feb. 20 to Mar. 21, ’02 | 2.84 | 3.45 | 30 |
| Apr. 10 to Apr. 24 | 2.49 | 4.91 | 15 |
| May 19 to May 24 | 2.09 | 3.99 | 6 |
| June 24 to July 28 | 3.61 | 7.44 | 35 |
| Aug. 21 to Sept. 19 | 2.44 | 4.05 | 30 |
| Sept. 29 to Oct. 3 | 2.51 | 4.37 | 5 |
| Oct. 11 to Oct. 17 | 2.73 | 4.96 | 7 |
| Nov. 14 to Nov. 21 | 2.32 | 4.80 | 8 |
5.—The Bear Market of 1903.
This decline began Jan. 8, 1903, and culminated Nov. 9th, of the year, 10 months. The average gross decline in Industrial shares was 24.18 points, or about 36½%. The decline in Rails was 32.48 points, or about 27%.
The intermediate rallies were as follows:
| Date of Rally | Extent in Industrials Points | Extent in Rails Points | Duration Days |
|---|---|---|---|
| Jan. 20 to Feb. 16, ’03 | 3.51 | 1.38 | 28 |
| Mar. 10 to Mar. 20 | 1.85 | 3.11 | 11 |
| Apr. 13 to Apr. 30 | 3.77 | 5.07 | 9 |
| June 10 to June 12 | 2.60 | 4.48 | 3 |
| Aug. 8 to Aug. 17 | 6.50 | 8.14 | 10 |
6.—The Bull Market of 1904 and 1905.
The advance began Jan. 6, 1904, and culminated Jan. 22, 1906—a little over two years. The average advance in Industrial shares was 55.93 points, or about 119%. The average advance in Rails was 49.56 points, or about 55%.
The intermediate reactions were as follows:
| Date of Reaction | Extent in Industrials Points | Extent in Rails Points | Duration Days |
|---|---|---|---|
| Jan. 27 to Feb. 24, ’04 | 3.79 | 4.17 | 29 |
| Apr. 7 to May 18 | 2.55 | 4.03 | 42 |
| Dec. 5 to Dec. 12 | 7.46 | 5.93 | 8 |
| Apr. 14, ’05, to May 8, ’05 | 9.23 | 9.81 | 25 |
| May 12 to May 22 | 6.68 | 5.50 | 11 |
| Aug. 23 to Sept. 7 | 4.22 | 4.82 | 16 |
| Nov. 1 to Nov. 13 | 3.31 | 4.74 | 13 |
The year 1906 was a neutral year. Prices for Industrials declined only slightly during the year and average prices of railroad stocks were the same in December as in January. Money could have been made throughout the period, either by sales on rallies, or purchases on declines. As a consideration of a neutral year would add little to this exhibit, it will be omitted.
5.—What is the best general method of trading?
The writer’s reply to this question consists principally of a summing up of points already covered in other portions of this work. It is necessary to study and understand the subject thoroughly, to know values, general conditions, the technical position of shares, and above all things to consult future probabilities rather than past performances. Study of the past has its educational value and this is also true of the present, but the future is the all-important thing. Retrospective speculation is one of the commonest and most flagrant of the numerous errors made by public participators. Get whatever of experience and information you can from history, but speculate on the future.
The man who enters the market with insufficient capital, who expects to get rich quick or who allows success to lead him into excesses and over-speculation will lose. It is as certain as death. He may succeed for a time but not for long.
Operations based on “tips” or “charts” will lead to final disaster. This thing of trying to attribute habits to a market is, in the writer’s opinion, ridiculous. The movements of prices are caused by events. We know that in periods of financial stringency or business depression prices fall, and in periods of inflation and good times prices rise. It is possible to formulate a system founded on repetitions applicable to every game of chance, and laid out on paper, that system will appear infallible. You can find the exponents of machine-made riches in every pool-room and gambling house in the country. They all eventually lose and there is nothing to show that the advocates of charts as a basis for stock trading ever fared any better. Imagine James R. Keene, or J. P. Morgan poring over a chart and operating thereon. Even if the market did have habits, as soon as these habits were recognized and followed by a sufficient number of people, the technical position would be rendered so rotten that the charts would fail from that influence alone. Charts, employed as a convenient method of picturing the past, may have a certain value, but used as a basis for trading they are an evidence of laziness or incapacity, or both. It requires hard work to be successful in any line. Thinking is hard work, study is hard work, research is hard work; and it is infinitely easier to bet on repetitions all nicely laid out in crooked lines on a sheet of paper than to laboriously erect sound deductions; but the difference in the two methods is that one will succeed and the other will fail.
We may also resort to the ultimatum employed by those eminent citizens who punch each other’s noses in a prize-ring, i.e., tell the chart-players to “go and get a reputation.” When they can show even one instance of a fortune accumulated by this method their cause will be greatly strengthened.
In the exception taken to Mr. Dow’s theory of $2,500 being the minimum amount necessary for operations in small lots, nothing could be further from the present writer’s intentions than to recommend transactions on insufficient margin. What is sought is merely the truth. The contention that it is wise to stimulate extreme conservatism will not hold. If the naming of a certain sum far in excess of real needs is praiseworthy, we may expand the matter indefinitely and name $5,000 or even $10,000, as the limit.
But on the other hand, errors on the side of prudence are vastly preferable to errors on the side of rashness. In this as in all other things, the golden mean is the really desirable factor.
As to the best side of the market for operations, it is thought that the long side offers the greatest opportunities. The long side is healthier, it is constructive, and almost all the great fortunes made in the market have been founded on discreet and well-timed purchases. To adhere to this plan, however, frequently requires long periods of non-participation, and speculators are not, as a class, very patient. The man who can so school himself as to await opportunities to purchase good securities at low prices has by far the best of the bargain. Few men can do it.
It is fully realized that a work which defends stock speculation in any degree, will meet with much criticism. Nevertheless, people will speculate and if you are one of those who will—do it right.
It is submitted in concluding this work that if the advice here given is heeded, i. e., to know what you are buying and why; to buy only good properties when prices are depressed; to exercise patience and provide sufficient capital; to eliminate first and forever the idea that correct deductions mean sudden riches; to use brains instead of charts, and common-sense instead of tips; in short, to apply to speculative ventures the same degree of business foresight and understanding as would be employed in any other business, the evils and losses which have always been a part of speculative history, would be diminished if not eliminated.
Footnotes
1 Then 2¾%.
2 Then 3%.
3 United States deposits included, $40,633,400.
4 Reprinted from Moody’s Magazine of August 1906.
5 Reprinted from Moody’s Magazine of May, 1906.
6 Reprinted from Moody’s Magazine of June, 1906.
The illustrations have been moved so that they do not break up paragraphs and so that they are next to the text they illustrate.
Typographical and punctuation errors have been silently corrected.