However, scores of oil, mining and investment companies which do not
use either of these clever catchwords in their corporate titles cannot
be charged with undervaluing the "pulling power" of such phrases; in
their literature this kind of bait is employed with the greatest skill
and plausibility.
One of the most common ways in which this idea is dressed is this:
"We guarantee you, under all conditions and at all times, to get
you, without cost to yourself, the highest market price for your
holdings." This sounds very assuring; it carries with it a protective
and almost paternal atmosphere and seldom fails to inspire in the
trusting investor the feeling that there is a strong hand always ready
to take the investment off his shoulders the moment it threatens to
become a burden.
This particular phrase is especially fortunate and typical, by way of
illustration, for the reason that it couples with the word "guarantee"
another term which is a warm favorite with the word artists of the
get-rich-quick studies. I allude to the phrase, "highest market value."
Wherever either of these clever signals to credulity is displayed the
possible investor should invariably remember these points:
=First--A guarantee is never stronger than the guarantor.=
=Second--A security only has a "market value" in the fair and true
sense of the term where a large demand for it meets a large supply;
there, and there only, exists an active market and a genuine "market
value."=
Let these two propositions (which any reputable banker or broker
will tell you are axiomatic) be considered separately. There is no
virtue in the word "guarantee." If this simple fact could have been
firmly fixed in the minds of the small investors of this country
they would have been saved the loss of millions of dollars since
our present period of wonderful prosperity began. In these days of
highly perfected business organization the process of finding out the
responsibility of any financial or business concern has been reduced
to an exact science and made available to all. Is it reasonable to
suppose, under these conditions, that any company or corporation
which cannot stand on its own feet can get any responsible concern
to guarantee its bonds or other so-called securities? Never! Such a
supposition is absurd on the face of it, and an instance where it has
been done is not, so far as is known, to be found in actual practice.
Dig down under the "guarantee" of the company which asks you to
invest your savings and what do you find? That if you do invest you
and your fellow victims are really your own guarantors; that the
financial strength of the concern is really the money which you and
your associates pour into it; that its only financial life blood comes
from the purses of the small investors, and that when the stream
of vitality from this source begins to dry up, the services of the
financial undertaker are in near and inevitable demand.
Reduced to its last analysis, the blacktype declaration of a
"guarantee" in the literature of the "get-rich-quick" concern simply
means that it has something to sell you. Generally, it is also an
invitation to you to pay in advance for the flowers to adorn your own
financial funeral.
As to the other pet phrase, "highest market value," or market value of
any kind, for that matter, a very few words will suggest the situation:
Excepting where a very large demand meets an insufficient supply in
a free, open and comparatively unmanipulated market, where sales are
regularly made of record and those records command the respect and
confidence of the legitimate financial public, there is no "market
value" save that which is arbitrarily made by the broker. He is the
market; he makes the price by the simple process of "thumbs up" or
"thumbs down."
The man who is on the "sucker" list of a wildcat concern receives an
announcement that "all indications point to the conclusion that next
week the stock of the Honor Bright Company will sell at not less than
five points advance of the present price."
The next week he gets notice that the prediction of an advance
had proved true. If he is unsophisticated enough he receives the
announcement with solemn credulity and credits the author of the
promotion literature with great acumen and shrewd prophetic powers. He
figures up the profits he would have made on the advance and condemns
himself for not heeding the "confidential" advice to "buy quick."
What he does not consider is the fact that he is dealing with a
fictitious market, where the seller simply makes up his mind how much
he will advance the stock in question and then, when the time comes,
marks it up and makes the announcement of the "sharp advance." This
trick is turned not only for the purpose of getting a larger price per
share, but mainly to tickle the cupidity of hesitating investors and
making sales which otherwise could not have been made.
In order to understand how these companies operate, the actual
experience of one victim will serve to explain the whole system.
A country manufacturer, rated at $50,000, read an advertisement in a
financial journal about as follows:
"Capital Supplied--We have the means of furnishing
any amount of capital for any meritorious industrial
proposition. Address Lock Box XX, Chicago."
The manufacturer wrote he wanted to raise $100,000 to increase his
business, and offered to put in all his effects, stock and good will.
He received a letter asking him to come to Chicago and visit the
firm, which, for convenience, shall be described as "Cold Cash & Co."
He did so. Cash received him in an elegant office with open arms.
The manufacturer there re-stated his necessities. The affable broker
informed him his proposition was a fine one, and said he could have
the desired $100,000 within thirty days.
"What would be the broker's fee?" he inquired. Only 5 per cent when
$100,000 was in the hands of the manufacturer. Certainly an alluring
prospect. But how was the money to be raised? The manufacturer was to
incorporate his business for $200,000, and the broker would sell half
of its capital stock at par.
As the delighted "sucker" was about to leave the broker's office
the latter, in the most off-hand manner, said: "Oh, by the way, Mr.
Manufacturer, what arrangements have you made to guarantee your
capital stock?" "Guarantee it? I don't understand you," replied the
victim.
"Bless you!" said the broker, "modern methods demand that all stock be
guaranteed--quite the new order of things. We couldn't sell a share of
stock nowadays unless it was guaranteed."
"Explain!"
"I will. You go to some guarantee company and have them agree to
guarantee the payment of the principal of each share of stock sold
at thirty years. Don't you see that makes your stock as solid as a
government bond?
"The guarantee company takes a certain portion of the proceeds of
the stock, invests it for thirty years. With interest and compound
interest, in 1935 the stock has accumulated its par sum. It is a
beautiful system."