_Cycles of Cotton Speculation._[6]
The accompanying chart, formed on the same plan as the diagram
illustrating the movements of stocks in Moody’s Magazine for May,
develops some interesting features in the movements of Cotton for the
last ten years.
[6] Reprinted from MOODY’S MAGAZINE of June, 1906.
For the benefit of those readers who did not follow the stock chart, it
may be said that each circle represents the fluctuations for a single
year. The bottom rim of the circle rests on the lowest price during the
period, and the top rim on the highest price. The average price is, of
course, established at the axis.
The chart illustrates speculative extremes in cotton, the figures on
which it is based are not the prices of Spot cotton, but extreme high
or low prices for all options. The result, however, would have been
only slightly changed had Spot cotton prices been employed.
The diagram is based on fluctuations of 25 points, or ¼ cent per
pound; the prices shown, therefore, are not exact, but they serve to
illustrate comparative movements with sufficient accuracy. The high
and low figures are not those of a calendar year, but of a fiscal, or
crop year, ending August 31 of the years named; thus the prices for
1896 represent the fluctuations of the season 1896-1897. As production
is necessarily a vital factor in making prices, this method was adopted
to prevent confusion in examining the price effects of lean or abundant
production. The range of prices for the period considered (1896 to 1906
inclusive), was as follows:
Season High Average Low Fluctuation
1896-97 8.50 7.59 6.69 1.81
1897-98 7.50 6.50 5.62 1.88
1898-99 6.73 5.84 4.96 1.77
1899-00 10.00 8.38 6.76 3.24
1900-01 10.60 8.80 7.01 3.59
1901-02 9.67 8.51 7.35 2.32
1902-03 13.75 10.81 7.87 5.88
1903-04 17.46 13.23 9.01 8.45
1904-05 11.15 8.77 6.39 4.76
1905-06 12.54 10.93 9.32 3.22
1906-07 11.30 9.95 8.60 2.70
In the first three years considered we find low prices, and naturally
restricted speculation. The speculative price range for the entire
three year period is only a shade more than 3½ cents per pound. This
was occasioned by two things; first, the general depression following
the panic of 1893, and second, over-production. An examination of the
prices of staples shows that unusually low figures prevailed in 1898
and 1899. Corn, for example, averaged 27 cents in 1897, and 31½ cents
in 1898. Wheat shows high average prices, but the showing is a result
of fictitious speculative figures established by the Leiter deal, and
cannot be considered a fair criterion. It may be added, however, that
wheat sold as low as 64 cents in 1897, and 62 cents in 1898.
The question of over-production will be made apparent by reference to
the following table:
Season Crops in Bales
1896-97 8,714,000
1897-98 11,180,000
1898-99 11,235,000
1899-00 9,439,000
1900-01 10,425,000
1901-02 10,701,000
1902-03 10,758,000
1903-04 10,123,000
1904-05 13,556,000
1905-06 10,697,000
1906-07 13,000,000
Prior to 1897 no crop of over 10,000,000 bales had ever been made;
the two bumper crops, 1897-98 and 1898-99 coming together, naturally
brought about very low prices, particularly as they occurred in a
period of general depression.
In the season next following, 1899-1900, there is a marked falling off
in production, which is again reflected in a higher average price. But
from that time on, we do not find prices and production in such perfect
accord.
It is generally considered now that 10,500,000 bales is a fair crop. In
the four seasons from 1900-01 to 1903-04 inclusive, we raised normal
crops, while prices advanced. It would be manifestly unfair to consider
the year 1903-04 as reflecting with any degree of accuracy the normal
price of cotton, for in that period occurred the disastrous Sully
campaign. Making due allowance for this, however, it may be assumed
that prices would have advanced if no such deal had occurred. This
statement is supported by the fact that the bursting of the bubble did
not put prices below 9 cents at any time.
Now the most important part of the period is reached, the seasons of
1904-05 and 1905-06.
In 1904-05, in the face of an unprecedented crop of 13,600,000 bales,
and in spite of the depressing influence of a speculative debauch in
the previous year, the average price of cotton was 8¾ cents.
Still later, in 1905-06, a crop only a little below normal was raised
and sold at an average price of 10.93.
Eliminating speculative extremes, and the temporary effects of large or
small crops, it appears that the price of cotton is steadily advancing.
This is the principal fact for the speculator to consider.
No one pretends to dispute the fact that the prices of all staple-food
stuffs, metals and other commodities, as well as labor, have advanced
materially in the last ten years. Yet the ordinary speculator ignores
this broad general principle, and seeks specific causes for the
readjustment in cotton prices. And even this research is seldom
conducted intelligently. The investigator attempts to explain higher
cotton prices by pointing to reduction of acreage, diversification of
crops and organizations formed for the purpose of withholding supplies
from the market. He disregards the fact that while these influences
play some small part in the matter, cotton is also seeking a higher
level in common with every commodity that is bought and sold.
The contention is frequently heard that 10,500,000 bales, or even
11,000,000 bales of cotton can no longer be considered an average crop;
that the supply should steadily increase in order to keep pace with
consumptive demand, and that the crop of 1904-05 was therefore small,
and the crop of 1903-04 not so large as it would appear. As this is the
most common of the numerous explanations offered as to the recent high
prices of cotton, it will be briefly discussed.
In order to arrive at a clear view of the ratio of increase in
production, a considerable period must be consulted. The statistics of
crops from year to year, or even from two or three years, will not do.
Let us cover a long period, jumping ten years at a time.
Season Crops in Bales
1860-61 3,849,469
1870-71 4,352,317
1880-81 6,605,750
1890-91 8,652,597
1900-01 10,383,432
This exhibit shows that if a sufficiently long period is consulted,
a steady increase in production is shown; the average production is
also well maintained in the five years from 1901-02 to 1905-06, if the
bumper crop of 1904-05 is distributed over the entire period.
The contention is all right, but its formulators do not take the pains
to ascertain that what they claim _should_ occur, is exactly what _has_
occurred.
The gist of the whole matter is this: regardless of all temporary or
artificial influences, some powerful force, not related to supply and
demand, is shouldering prices steadily upward.
To the speculator this fact recognized, analyzed, and properly applied
should be of incalculable benefit. If he understands _why_ prices
have been advancing, he will be able to determine with facility how
long the influence will probably endure. Instead of being misled, or
rendered over-cautious by obsolete records of the past, he will be able
to calculate from these obsolete records the reasonable expectations
of the future. Temporary changes will, of course, be brought about by
temporary causes. Fundamental values will still be influenced by supply
and demand, but if an independent and submerged force is also at work,
due allowance must be made for its operation.
That such a force _is_ at work is written large between the lines of
compiled statistics; to ignore its existence is an error rank with
mischief. The speculator who does not consult this influence may easily
make the mistake of selling at low prices because they are high by
comparison with prices which obtained a few years ago.
On the other hand, a clear understanding of the matter will enable the
trader to decide with more or less accuracy what now constitutes a low
price for cotton, and what will be the probable price for the future.
_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:
Extent in Extent in
Industrials Rails Duration
Date of Reaction Points Points 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:
Extent in Extent in
Industrials Rails Duration
Date of Rally Points Points 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:
Extent in Extent in
Industrials Rails Duration
Date of Reaction Points Points 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:
Extent in Extent in
Industrials Rails Duration
Date of Rally Points Points 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:
Extent in Extent in
Industrials Rails Duration
Date of Rally Points Points 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:
Extent in Extent in
Industrials Rails Duration
Date of Reaction Points Points 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.