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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
Transcriber's Note:
Minor typographical errors have been corrected without note. Variant
spellings have been retained. Bold text has been indicated as
+bold+.
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