High in Low in
1901-1902 1903
Amalgamated 130 33⅝
Am. Smelter 69 36¾
Am. Sugar 153 107⅛
Anaconda 54¼ 25½
Col. F. & I. 136½ 24
Nat’l Lead 32 10½
Tenn. Coal & I. 76⅝ 25⅞
U. S. Rubber 34 7
U. S. Steel 55 10
U. S. Steel, Pfd. 101⅞ 49¾
------- -------
Average price 84.22 33.01
“It will be observed from the above table that Industrials declined
about 51 points while rails declined about 48 points. But the decline
cannot be figured in points. The higher range of railroad shares must
be considered. A decline of two points in a stock selling at 100 is
only equivalent to a decline of one point in a stock selling at 50.
Therefore, in order to get a correct view of the matter, we must reduce
the decline to percentages. On this basis, railroad stocks lost about
38% of their value, and industrial stocks lost about 60% of their
value.”--From Thomas Gibson’s Market Letter, May 4th, 1907.
_Undigested Securities._
“The new methods and the new projects are going through the test of
fire today, and some of them are being consumed. The tests which weeded
out the badly organized and incompetent of the early stock companies,
which drove to the wall the “wildcat” banks of ante-bellum days, and
which wiped out dividends and stock rights in badly managed railways,
are now being applied to the new forms of organization which have been
the growth of the past decade. But the stronger and better organized
of these new corporations are likely to meet these trials without
disaster, or to modify their methods to conform to the teachings of
experience, until there remains to the financial world a valuable
residuum of new methods for giving flexibility to capital and promoting
its transfer promptly and efficiently from the industries where it is
not needed to those where it will render its highest service.”--From
“Wall Street and the Country,” by Chas. A. Conant.
_How to Compute the Value of Rights._
“Inasmuch as the method of computing the value of rights is slightly
complicated, an illustration may be given. Let us take the instance
of St. Paul again, where the stockholders were allowed to subscribe
to 23% of their holdings to new stock at par. The common stock was at
that time selling a little below $200 per share. Let us take the round
figure, and the operation is as follows:
One hundred shares at $200 per share equals $20,000
Twenty-three shares at $100 equals 2,300
-------
Total cost of 123 shares $22,300
“Average cost, $181 per share.
“Deducting $181 from the market quotation leaves $19, the value of
the rights on each share of St. Paul stock. As a matter of fact, the
selling price was a little below $200, and the highest price of the
rights fell a little below $19 per share.
“In other words the process is simply to take the number of new shares
per hundred shares of the original holding to be subscribed for, and
add the value of these new shares at the subscription price to the cost
of one hundred shares at the market price; then divide the total cost
of both old and new shares by the total number of shares, and deduct
the average price from the market quotations. This gives the selling
value of the rights.”--From “American Railways as Investments,” by Carl
Snyder.
_Barometer of Averages._
“In order to facilitate the examination of properties and their
comparative condition, the following table has been prepared. The
figures were arrived at by averaging the operating expenses, fixed
charges, margin of safety, and dividends of principal properties for
the last fiscal year. The stock prices are based upon the closing
figures of June 6, 1907. The margin of safety shown, is the margin over
common dividends. Results were as follows:
Average operating expenses 69.01%
Average fixed charges 54.70%
Average margin of safety 5.28%
Average dividend common 6.03%
Average price of stock 1.09⅝
“As in all computations of this kind the figures are comparative
and not basic. The fact that one stock is in a much better position
than others does not necessarily mark that stock as a purchase, for
_all_stocks may be too high, and underlying conditions may not warrant
purchases in any quarter. Again, we must always consider the fact
that important elements which cannot be tabulated in figures may be
present. However, the table possesses value as a rough barometer, and
after it has been broadly applied, specific influences may be given
due consideration. If, for example, we find a common stock selling
well below 109⅝, with operating expenses below 69.01; fixed charges
below 54.70; margin of safety above 5.28 and the dividend rate above
6%, we have a remarkable combination of facts favoring the shares and
investigation will be stimulated. The figures vary widely at times in
different corporations and cannot always be considered either bullish
or bearish, as the good or bad features may be already discounted
in the current price of the shares. It may also be found that one
property is going backward gradually while another is improving its
position.--From Thomas Gibson’s Market Letter, June 8th, 1907.
_The Best Method of Trading._
“It may appear that if the market is to sway back and forth, sales
on advances, and purchases on declines would offer the maximum of
opportunity to the shrewd trader. But not so. To illustrate this,
a market movement from high to low prices as shown by a chart is
presented on the following page.
“As simple as this illustration may appear, it is
worthy of most earnest consideration. True, the
upward and downward movements show opportunities
on both sides, but if the _purchaser_ makes a
mistake, as all speculators will, he is hopelessly
involved. If he buys at the wrong point he will
never see daylight during the progress of the
movement. Look at the other side of the matter.
The _seller_ cannot make a mistake. No matter
at what point he sells a profit lies before him. A
little reflection will show what a tremendous
difference exists here.”--From Thomas Gibson’s Market
Letter, Feb. 2nd, 1907.
[Illustration]
_Indications of Crises._
“Preceding Indications.--This preceding period is characterized by
well-defined indications, some of which develop contemporaneously, but
which, so far as they are distinct in time, occur in approximately the
following order:
“1--An increase in prices, first, of special
commodities, then, in a less degree, of commodities
generally, and later of real estate, both improved
and unimproved.
“2--Increased activity of established enterprises,
and the formation of many new ones, especially those
which provide for increased production or improved
methods, such as factories and furnaces, railways
and ships, all requiring the change of circulating to
fixed capital.
“3--An active demand for loans at slightly higher
rates of interest.
“4--The general employment of labor at increasing or
well-sustained wages.
“5--Increasing extravagance in private and public
expenditure.
“6--The development of a mania for speculation,
attended by dishonest methods in business and the
gullibility of many investors.
“7--Lastly, a great expansion of discounts and loans,
and a resulting rise in the rate of interest; also
a material increase in wages, attended by frequent
strikes and by difficulty in obtaining a sufficient
number of laborers to meet the demand.”--From “Crises
and Depression,” by Theodore Burton.
_The Ordinary Swing of Prices During a Cycle of Speculation._
UPWARD SWING.
EXTREME | A long period of backing
HIGHEST. | and filling; public buying, and
100 | inside liquidation.
90 | Excitement and inflation
| 75% of general buying done here.
80 | Good buying all around.
| Public interested.
NORMAL | Opinions mixed. Public beginning
VALUE. | to buy, but professionals
65 | rather bearish.
45 | Insiders still bidding prices up.
| Professionals bearish.
30 | Insiders bidding for stocks,
| public skeptical.
20 | A dull market. Insiders
EXTREME | accept all offerings.
LOWEST. |
DOWNWARD SWING.
EXTREME | A long period of backing
HIGHEST. | and filling; public getting
100 | tired and insiders selling.
90 | Insiders selling. Much bull
| talk, dividend increases, etc.
| Some averaging by people
| who loaded up at the top.
80 | More bull talk. More averaging.
| Insiders still selling.
NORMAL | Many weak accounts forced out.
VALUE. | A temporary halt and probably
65 | a big rally.
45 | Insiders pretty well out.
| The wise speculative element
| consider this the bottom and
| load up.
30 | General blueness and pessimism.
20 | A dull market. Insiders
EXTREME | accept all offerings.
LOWEST. |
--From Thomas Gibson’s Market Letter,
May 11th, 1907.
_The Factor of Safety._
“There remains but one point to which, in view of the conditions
roughly sketched above, the writer would call especial attention.
That is, that the investor should look well, always, to the factor of
safety. Before he puts his money into any road, no matter if it be on
the recommendation of the greatest banker in the United States, let
him consider how far that company is prepared to weather a storm. Few
roads ever prospered under receivership, no matter how honest or how
able. The receivership itself is a handicap. No matter how high the
yield, no investor whose primary regard should be the safety of his
money will put it into a road whose fixed charges, after ample charges
for maintenance, consume much more than 50% of the total net income
available for interest, dividends and improvements--that is, save in
exceptional cases like the New York Central--and until he has satisfied
himself thoroughly that the property is sound.
“For the convenience of those not well acquainted, the following list
of the principal roads is given, with the percentage of total net
income consumed by fixed charges in the highly prosperous fiscal year
of 1905: