It has been the frequent contention of the writer that a chart as a
basis for speculative ventures is ridiculous, but a diagram framed for
the purpose of pointing out certain facts, or inciting the student of
speculative affairs to investigation of causes is a different matter.
No interested person can look at the accompanying chart without being
struck at once with the decline of 1903 following the steady advance
of the preceding years. If this observation incites intelligent
investigations as to the reasons for the reversal, much good may
result. On the other hand, the fallacy of operating on mere mechanical
records of the past is shown by the same diagram. If the chart had
been handed to one of the mechanical traders in 1902 he would have
argued that the average price of each year marked the approximate low
point of each succeeding year. It certainly does look convincing,
but what follows? The infallible system not only fails to work, but
reverses itself, and the average price of 1902 becomes the approximate
high price of 1903 and 1904. At about the time the system player has
gathered enough figures to go on, a change occurs. No intrinsic merit
attaches to any kind of diagram, they being merely convenient forms for
tabulating history.
Some interesting coincidences occur in the chart; most remarkable is
the exactly similar size and position of the circles representing the
years 1901 and 1903. In no instance did the high or low points of any
integral stock correspond in these years, but the total footings were
identical in each case.
The speculator may extract some value from the diagram by observing
that opportunities for profits of forty or fifty points did not
occur during the entire period. The extreme possibilities in any one
year were 33 points, and much less on the average. If the trader had
purchased or sold Composite at an average price, his possibilities of
profit would have been limited to about 15 points in any one year. This
does not accord with accepted theories. The ordinary speculator who
pursues his operations for ten or fifteen points successfully is almost
certain to believe that much more profit lies before him, that he is
only getting started. There is a reason for this; the public trader
takes for his barometer some security which has been conspicuous for
its extended fluctuations; he naturally notices and remembers it to the
exclusion of the rank and file of stocks. For example, every active
participant in speculative affairs knows that Copper had a range of
75 points in a single year, 1901. He bases possibilities too much on
this sort of knowledge without reflecting that Copper was a cardinal
exception, and that in order to participate in such movements he must
throw caution to the winds, and deal in stocks which offer no degree of
safety.
Another point established is the lapse of time required in a
readjustment of values. It took Composite Common seven years to
advance from an average price of 37 to an average price of 105, 68
points. This again falls short of the speculator’s ideas. He expects
to buy a stock at 50 today, and sell it at par six months hence, an
operation which is shown by the movements of a representative stock to
require a period of six years. Again his expectations are founded on
exceptions. The same line of reasoning applies to one case as to the
other. The speculator unconsciously magnifies everything connected with
speculation.
In reviewing the movements of prices from 1896 to 1905, the most
important question is, what caused the reversal of form in 1903? A
complete answer to this question would be highly educational. There
was no panic, nothing faintly resembling one; business suffered some
stagnation, it is true; there was a falling off in the iron and steel
business, but crops were good, and wheat, corn, oats, and cotton
brought good prices in both 1903 and 1904. Serious business depression
was more in anticipation than in realization, but 1904 witnessed no
material recovery in prices. These causes do not fully explain so
radical a change. If conditions had been such as to cause a reduction
of dividends, or a scarcity of money in 1903, the decline would
be explained, but money was plentiful enough, and dividends were
unchanged. The ratio of dividends as compared with prices was also
fairly maintained from 1896 to 1902, and it would appear that prices
should merely stop advancing when dividends became stationary; but
prices did not merely stand still, they went materially backward.
Without pretending to enter into a full discussion of the causes for
the change, one or two points may assist in forming a conclusion. The
steady advance in prices from 1896 to 1902 represented two things--a
recovery from the great depression of 1893, and the natural advances
of property values in a prosperous and growing country. The latter
point is the more important, and as there has been no cessation of the
growth of population or prosperity, other causes for the reversion
must be sought. It is not sufficient to merely say that the recovery
over-leaped itself, for such an event would have plainly mirrored
itself in a reduction in the rate of dividend returns.
Capitalization of railroads in 1903 increased about 14% as compared
with an average increase of 6% in the preceding seven years. Add to
this the tremendous increase in the capitalization of industrial
corporations, and an over-supply of stocks appears as one of the
contributary causes--undigested securities.
Dividend rates were maintained, but were not increased. This
particularly affects the simon pure speculator. Nothing will drive him
into a panic quicker than a decreased dividend, and nothing makes him
so sanguine of higher prices as an increase in the rate of payment. He
is always basing his operations on rumors of higher dividends, and when
one of these rumors fails of verification, it is almost as bad as a
decrease.
And dividends did decrease in one important quarter; United States
Steel, the speculative favorite, capitalized more heavily than a
dozen ordinary corporations, cut its rate from 4 to 3½%, with every
promise of a further reduction. This had a far reaching effect, both on
speculators and small investors.
It is certain that fundamental conditions have more to do in shaping
prices than has speculation, but the speculator helps, and in 1903
he was particularly potent because of the excesses engendered by the
unusual speculative advances of 1901 and 1902. He helped to make the
prices and he helped to break them, so he may be considered a factor in
the reversal.
The small investor helped. He, too, is a dividend man; he seldom looks
at earnings, improvements, or extensions--he wants dividends. United
States Steel was a body blow to him; it not only affected his purse,
but it frightened him.
And it is probable that an army of small investors sold their holdings
for another reason--they discovered that they could make a higher rate
of income in other channels. So long as both dividends and prices
advanced they were satisfied. They were speculating, not investing, but
you cannot convince the ordinary man that buying a stock outright, in
the hope of an advance in price, is speculation pure and simple.
Much of the money diverted from the stock market in 1903 by the class
last mentioned, has never returned to Wall Street. This bears out
the theory that higher rates of interest are being found elsewhere.
Never before has the public refused to enter the stock market during
a period of great prosperity. They are absent now, and furthermore,
they show no intention of returning. Possibly they are wrong. The same
influences which are operating to give them better returns may be
operating to greatly enhance the value of the shares they ignore,--but
the small investors want dividends. Their failure to enter the stock
market would seem to be strong evidence that they are finding other
investment-speculations more attractive than listed shares. If this
is the case, the influences leading to higher interest rates are
already at work, although not clearly discernible. Diversification of
investments would tend to obscure the truth for a time.
But whatever the causes for the stock market relapse of 1903 may have
been, the recovery has been complete. The average prices of 1906 were
the highest on record.
_Cycles of Grain Speculation._[5]
In examining the price movements of wheat and corn for the last ten
years, a gradually advancing trend is apparent. That such would be
the case was a foregone conclusion; we naturally expect to find wheat
and corn in the foremost ranks of a universal movement towards higher
prices. The underlying causes for this general appreciation have
already been extensively and clearly discussed in Moody’s Magazine.
[5] Reprinted from MOODY’S MAGAZINE of May, 1906.
_All Prices Advancing._
The price appreciation of wheat and corn is merely confirmatory of
the theory that all prices are advancing, and that they will continue
to advance until the balance between gold and other commodities is
readjusted.
But there is something else written between the lines of the statistics
of price changes in wheat and corn. The _relative_ advance of the two
cereals is all out of proportion.
This fact leads us to seek for some specific cause operating either to
depress one cereal or enhance the other, irrespective of the influence
already named.
The figures for the last ten years are as follows: