Full text of "The battle for investment survival"

THE BATTLE FOR INVESTMENT SURVIVAL Gerald M.Loeb THE BATTLE FOR INVESTMENT SURVIVAL by Gerald M. Loeb Fraser Publishing Company Burlington, Vermont All rights reserved. No part of this book may be reproduced in any manner whatsoever without written permission of the publisher except in the case of brief quotations to be used in critical articles or reviews. ©1935, 1936, 1937, 1943, 1952, 1953, 1954, 1955, 1956, 1957, 1965 BY G.M. LOEB ORIGINALLY PUBLISHED BY SIMON AND SCHUSTER, INC. 630 FIFTH AVENUE, NEW YORK 20, N.Y. LIBRARY OF CONGRESS CATALOG CARD NUMBER: 57-12506 MANUFACTURED IN THE UNITED STATES OF AMERICA NINETEENTH PRINTING 1988 edition published by Fraser Publishing Company, a division of Fraser Management Associates, Inc. Box 494, Burlington, Vermont 05402 with permission of Simon & Schuster 2nd Printing, 1990 3rd Printing, 1992 4th Printing, 1993 5th Printing, 1995 Acknowledgments Some of the articles contained in the following chapters originally appeared in Barron's, The Commercial and Financial Chronicle, Investor Magazine, Trust and Estates, American magazine, and in the NANA syndicated column, "Wall Street Today." "A Layman Looks at Building" First appeared in the Architectural Fbrum. The chapter "I Don't Sell — People Buy from Me," is from How I Made the Sale That Did the Most for Me, compiled and edited by J.M. Hickerson, Prentice-Hall, Inc., 1951. Library of Congress Catalog Card Number: 88-081705 ISBN: 0-87034-084-0 Cover design by S.L. White Printed in the United States by Braun-Brumfield, Inc. CONTENTS Foreword 7 Introduction 9 1. It Requires Knowledge, Experience and Flair 13 2. Speculative Attitude Essential 17 3. Is There an Ideal Investment? 20 4. Pitfalls for the Inexperienced 23 .5. How to Invest for Capital Appreciation 27 6. Speculation vs. Investment 32 7. Sound Accounting for Investors 35 8. Why Commitments Should Not Be Haphazard 38 9. Some "Don'ts" in Security Programs 41 10. What to Look for in Corporate Reports 44 11. Concerning Financial Information, Good and Bad 49 12. What to Buy — and When 52 13. Importance of Correct Timing 56 14. Statistical Analysis, Market Trends, and Public Psychology 59 15. Price Movement and Other Market Action Factors 63 16. Further Technical Observations 68 17. More on Technical Position cf Market — Its Interpretation and Significance 75 18. Advantages of Switching Stocks 80 19. "Fast Movers" or "Slow Movers"? 83 20. Detecting "Good" Buying or "Good" Selling 86 4 contents 21. Qualities of the Good Investor or Investment Adviser 89 22. Gaining Profits by Taking Losses 91 23. You Can't Forecast, but You Can Make Money 96 24. Strategy for Profits 99 25. The Ever-Liquid Account 106 26. A Realistic Appraisal of Bonds 1 10 27. Merits of Mining Shares 115 28. Diversification of Investments 119 29. Travel as an Education for Investors 122 30. General Thoughts on Speculation 125 31. Investment and Spending 129 32. Investment and Taxation 133 33. Investment and Inflation 146 Postscript 155 34. Case History Examples 156 35. Investment Trust Investing Is Average Investing 168 36. Do Tax Losses Mean Savings? 169 37. Odd-Lot Investors Aren't Always Wrong 171 38. What Women Should Know About Stocks 173 39. Tip to the Investor: Always Write It Down 176 40. What Is Better: Dollars in the Hand — or "in the Bush"? 178 Contents 5 41. Last Wills and Testaments Should Be Carefully Drawn 180 42. Price of Stock Is What Counts 182 43. Careful Investors Look for Signs of Quality Management 184 44. Act Your Age When Investing 186 45. Investors Should Budget for Future Fluctuations 188 46. What to Do About Losses 190 47. Several Fallacies of the Marketplace 192 48. Are You Fast Enough to Switch Capital? 194 49. How a Bull Market Affects Your Investment Thoughts 196 50. Don't Let Tax Questions Cloud Investment Decisions 198 5 1 . Stop Orders Need Careful Evaluation 200 52. Cash Dividends May Slow Growth of Young Company 202 53. Middle Course Helps Buyers to Avoid Market Fallacies 204 54. Wall Street Proverbs Are Often Fallacious 205 55. Investing in New Products 207 56. News and the Market 209 57. A Little Investment Knowledge Is Necessary for Every Citizen 211 58. Don't Look for Management at Bargain Rates 213 CONTENTS 59. Miracle Plan Investing 60. The Step System 61. Double Dividends 62. A Layman Looks at Building 63. Investment Manager's Dilemma 64. I Don't Sell — People Buy from Me 65. Money from Market Letters 66. The Ideal Client 67. Perpetual Profits 68. What Makes a Stock "Good"? 69. A Dollar Today 70. The Leopard Never Changes Its Spots 71. Words for the Beginner 72. More on Tape Reading 73. What's the Value of Watching "Tape"? 74. Importance of Equity Investments 75. Wallflower Stocks 76. More Double Dividends 77. Never Accept Without Checking 78. How to Get the Most Out of Your Investments 216 221 224 233 241 243 259 263 265 267 269 270 275 281 290 292 295 298 313 315 FOREWORD Remember the old saw: "Those who can, do. Those who can't, teach or write success stories." Without for a moment implying that all teachers and authors lack the ability to do the things they teach and write about, the publishers undertook to prove the old adage false by persuading a successful speculator to revise his book in which he tells how he does it. The author is a seasoned stock broker and the material in this book is distilled from over 40 years of experience in Wall Street, plus knowledge gained from study of the ups-and-downs of thousands of brokerage accounts. But, he is not an ivory- tower theorist. He has tested his accumulated knowledge in the hot forge of the market place with millions of dollars of cold cash. His findings are now available to the readers of this book. Until the stock market debacle of 1929, security-holders were inclined to accord their invested capital — the life-blood of their economic existence — less attention than they gave to their automobile or teeth. "Once a good investment, always a good investment" seemed to be their attitude. But Mr. Loeb sets forth the inescapable investment doctrine that eternal vigilance is the price of success and bluntly states that an "ideal investment is totally non-existent." In substance, this book is "hard-boiled," realistic, at times unorthodox. It promises no short cuts to wealth; neither does it take the "sour grapes" attitude that Wall Street is a snare and delusion. Rather it is a succinct, straight-forward, uncompro- mising revelation of stock market technique and philosophy by one who has been successful enough to make his views worth recording. INTRODUCTION The publication of this up-to-date and enlarged edition of The Battle for Investment Survival is due to two factors — the steady demand for the first hardcover edition, which has sold over 200,000 copies, and the highly complimentary comments made by various readers of that edition. The contents of the hardcover book, which was last updated in 1957, are included here, practically without change. Here and there, as in the case of the 1964 tax revision, text changes have been made. Basi- cally, the philosophy of the book has withstood the test of time. Some of the chapters were written in 1935 and checked in 1943 and 1957 and again now in 1965; they are still as valid as when they were written. This edition, however, contains considerable additional ma- terial. A reader of one of my earlier discussions asked — "Have you ever tried out the ideas outlined in your book?" My reply was to the effect that the ideas were tried out first, and the book written afterward. Any earner who earns more than he can spend is automati- cally an investor. It doesn't matter in the slightest whether he wants to be or not, or even whether he realizes that he is invest- ing. Storing present purchasing power for use in the future is investing, no matter in what form it's put away. Some popular and common forms include money itself, government bonds, savings bank deposits, real estate, commodities, securities of all types, diamonds and where and when it's legal, gold. The real objective of investment is fundamentally to store excess current purchasing power for future use. A man lays brick all day and earns $48. Perhaps in time he saves $48 and invests it for the future. Some day he may want someone else to 10 INTRODUCTION build a house for him, and he would like to hire a bricklayer at that time to do a day's work for the $48 he saved. That at least is the ideal situation. In real life, it works a little differently. The value of money fluctuates. In later years, it surely will not cost exactly $48 to hire a bricklayer for a day. It may cost less, but most likely it will cost more. Thus, just keeping the $48 will not always do. Since this book was first written the cost of labor has been constantly rising. In fact, attempting to offset inflation, the rising cost of living or the depreciation of the dollar, however it is labeled, has become the number one investment consideration. The average individual will pay storage and insurance for putting away things he wants to keep for the future. But when it comes to putting away savings he not only does not expect to pay, but also he wants others to pay him either interest or dividends for the use of his savings. If he feels as well that there are risks involved of not getting it all back, then he wants to be paid a profit besides, either in the form of a higher rate of income or a potential capital gain. Altogether, of course, he expects too much and aims at too little. All the above boils down to the necessity of measuring the return from investments in purchasing power rather than dol- lars. You must get back a sufficient number of additional dollars to make up for lost purchasing power if prices are rising, and a high enough percentage of your original dollars if prices are falling. I put it this way because usually there is some profit from investments in times of rising prices (but rarely enough), and generally there are losses in times of falling prices, and usually too many. When I started investing about 1921, it seemed a peaceful enough occupation. By 1943, I started calling it a "battle," though a lot of people might have used that term much earlier, during 1929 to 1932. In 1957 it seemed a "war." The hazards are still increasing. The person who studies a problem from every angle and Introduction 1 1 defines the risks, aims and possibilities correctly before he starts is more than halfway to his goal. Believe it or not, some people almost always make money in the stock market. Admittedly, they are few and far between. It is my belief that most of those who succeed do so within one of the patterns described in this book. What success investors eventually have is governed by their abilities, the stakes they possess, the time they give to it, the risks they are willing to take and the market climate in which they operate. I am certain that; depending upon the degree and the proficiency with which they are applied, the experiences, ideas, guides, formulas and prin- ciples outlined here can do no less than improve the readers' investment results regardless of what they might do. As we said before, almost everything written in earlier edi- tions for this collection of discussions still is valid. However, I am adding some new ideas which have been tested and found equally valid, and some discussions of the more complex influ- ences that dominate investing today. Readers of previous editions keep calling attention to what they felt was an inconsistency on the major premise of diversifi- cation. There is no inconsistency. Diversification is a necessity for the beginner. On the other hand, the really great fortunes were made by concentration. The greater your experience, the greater your capability for running risks, and the greater your ability to chart your course yourself, the less you need to di- versify. Gerald M. Loeb Summer, 1965 ♦ 1 ♦ IT REQUIRES KNOWLEDGE, EXPERIENCE, AND FLAIR Nothing is more difficult, I truly believe, than consistently and fairly profiting in Wall Street. I know of nothing harder to learn. Schools and textbooks supply only a good theoretical background. Individuals, partnerships and closed corporations have scored great successes for themselves in the handling of money in the stock market, but, as far as I know, none with a record of uniform success is available to the general public. Into this field the outsider turns for quick and easy profit, or a high income, or a haven of safety. On the average, he gives it less thought than most of his activities, and he is usually care- less as to whom he consults or through whom he deals. Fre- quently he fails to distinguish between results obtained by chance and those secured through knowledge. Often he is "sold" something instead of buying it on his own decision, and often he is the victim of sharp practice. Knowledge born from actual experience is the answer to why one profits; lack of it is the reason one loses. Knowledge means information and the ability to interpret it marketwise. But, in addition, making money in the market demands a lot of "gen- ius" or "flair." No amount of study or practice can make one successful in the handling of capital if one really is not cut out for it. The engineering student attends a school and is taught certain rules regarding stresses and strains. In later life these rules al- ways apply. True, there may be several answers to a given problem, and one man may solve it quicker or in a more in- genious way than another, but an answer based on sound prin- ciples always holds. There is no such thing as a final answer to security values. A dozen experts will arrive at 12 different conclusions. It often 14 THE BATTLE FOR INVESTMENT SURVIVAL happens that a few moments later each would alter his verdict if given a chance to reconsider because of a changed condition. Market values are fixed only in part by balance sheets and income statements; much more by the hopes and fears of hu- manity; by greed, ambition, acts of God, invention, financial stress and strain, weather, discovery, fashion and numberless other causes impossible to be listed without omission. Even the price of a stock at a given moment is a potent influence in fixing its subsequent market value. Thus a low figure might frighten holders into selling, deter prospective pur- chasers or attract bargainseekers. A high figure has equally varying effects on subsequent quotations. Where is the institution or individual who can guarantee suc- cessful investment? How many can stand on their records? Who can show a worthwhile return over a sufficiently long and varied number of years in a high proportion of investments with pur- chasing power maintained and reliable liquidating values always growing? There are those who will step forward and claim the distinction, but, as in the case of perpetual motion, something will always be missing. This, then, is the problem which the "Man on the Street," often far from a success in his own field, thinks he easily can solve. A few minutes in a broker's office, a visit from a bond salesman, a small fee to an "advisory service," and he is buying something, or letting someone sell him something. If he makes a "profit" on his first transaction, he probably thinks himself a smart man or is certain Wall Street is simple. Naturally he wants more. If he loses, he loses so quickly that he is sure he can recover equally fast. He usually knows next to nothing about this broker or dealer or adviser. How long have they been in business? What do their balance sheets look like? What are their records? He has only the sketchiest knowledge, if any at all, of the thousand and one ways they might cause him to lose his money. Any way one looks at it, nothing is more difficult than suc- ceeding in Wall Street, yet nothing is attempted by such poorly equipped people or is considered as easy. // Requires Knowledge, Experience and Flair 15 This being the case, what can we do about it? What is the bright side, if such a gloomy picture has a bright side? What are the virtues of Wall Street? Is the subject worth studying at all? The principal virtues of Wall Street are its continuous quota- tions and the comparatively satisfactory liquidity of selected securities. There is no alternative form of investment, such as, for example, real estate, which can give the "Man on the Street" the ease and low cost of purchase and sale, the ready and fre- quent appraisal, the high liquidity and the protection from fraud possessed by the active security dealt in an auction market. Therefore, by all means, don't pass up Wall Street; but try to make the best of it; realize its pitfalls; don't expect the impos- sible. There are some rules that hold, and my first is to buy only something that is quoted daily and can be bought and sold in an auction market daily. The greater the volume of trading and the broader the market in a particular security, the closer to a fair price at a given moment that security is likely to be. Then, too, there is a great value in knowing whether one is making or losing. There is a great value in being able to realize the profit or cut short the loss. There is the greatest protection in all the world in the ability to shift capital quickly and at small cost. Money has been made in securities that are not regularly quoted. Money has been made in securities that at the start, at any rate, couldn't be resold. But my object is to point out how the greatest risks and pitfalls of the stock market can be elimi- nated, and, in my opinion, if the average man avoids securities for which there is no ready market, he saves himself from a host of dangers with which he probably cannot cope. It is more difficult for the dealer to charge a false price for an actively quoted security. It is more difficult for him to obtain an ab- normal fee or margin of profit. It is more difficult to hide from a client a subsequent loss or at least delay its discovery. Without in any way minimizing the hazards, I regard the listed markets as the best field for the attempted enhancement or preservation of surplus funds. Therefore, the more one learns 16 THE BATTLE FOR INVESTMENT SURVIVAL about them, the more chance he has to preserve something. It is like anything else in life. Only a few amass fortunes. Only a few become really competent professional men or achieve real suc- cess in any line of endeavor. The great majority go about their daily lives performing their daily tasks, including the humblest, in far from an ideal manner. It remains for each of us to strive to do better, and this applies to investment just as it applies to anything else. The extent to which one realizes one's distance from perfection is the real measure of how successful one may become in Wall Street. It is the realization of the danger that is important. "Fools rush in," and in Wall Street that is fatal. There is no line of endeavor in the world where real knowl- edge will pay as rich or as quick a monetary reward as Wall Street. SPECULATIVE ATTITUDE ESSENTIAL People expect too much of investment. They think, incor- rectly, that they must always keep their money "working." If investment were merely what most people think it is — just buying something for income — fortunes would be extremely easy to establish by simply letting the money compound it- self. Capital compounded at 6% doubles itself in money value in only twelve years, and at 5% in little more than fourteen years. The fantastic results of this process were illustrated by the late Frank A. Vanderlip in a Saturday Evening Post story of Janu- ary, 1933. He pointed out that if the rich Medici family in Italy just six hundred years ago had set aside at 5% compound inter- est an investment fund equal to $100,000, its 1933 value would be $517,100,000,000,000,000 (five hundred and seventeen quadrillions). The original sum could have been represented by a globe of gold about nine inches in diameter, and the final figure would be 46 million times the existing monetary gold stock of the world. Investment is far more complicated than just getting money value back with interest or at a profit. When the prices of things one buys are going down, the principal danger of loss is select- ing a bad risk or paying too much for it. If we were sure prices would fall, cash itself would become an ideal investment. But when we fear prices will rise, then the problem becomes not merely increased, but multiplied. Mr. Vanderlip illustrated this point in a dramatic way, too. He showed that if an investor had placed $1,000 in a savings bank in 1900 and had allowed it to accumulate at compound interest, he would have had $2,000 in 1920. However, according to Mr. Vanderlip's calculations, the investor would have had to add from his pocket another 18 THE BATTLE FOR INVESTMENT SURVIVAL $ 1 ,000 in order to buy exactly as many goods as he could have purchased during 1900 with the original $1,000 deposit. That is the greatest threat to successful preservation of capi- tal — the varying purchasing power of money. There are many other threats, such as taxation, regimentation (including ration- ing), war, new inventions, political changes and revolutions. The weather and shifts in mass psychology both have very great effect. No, the hope of the average investor cannot in practice be realized. The preservation of capital should be looked upon as something that normally costs a price. It should not be regarded as merely incidental to a rental or profit. Indeed, should some super-solvent agency agree to preserve the buying power of capital for a substantial length of time at a stated fee per annum, informed people would embrace the plan enthusiastically if they felt there was any real possibility of the agency staying solvent. The number of individuals possessed of the necessary flair for combatting the obstacles to successful investment and possessed of the necessary drive to cultivate this ability through education, experience and the right connections is comparable to the pro- portion similarly successful in other fields requiring a like background. Really top-flight investors are no more frequent, proportionately, than capable Army generals, Navy admirals, doctors, scientists, lawyers, artists, composers and musicians. Some individuals can invest and speculate sufficiently better than the average to show an overall profit. Many who lose only a por- tion of their spending power are, in fact, doing better than most. The purpose of this and subsequent chapters is to help the hardheaded few to make profits, which cannot be done without the acceptance of the foregoing logic as the first step. A very clear definition of the investor's objective is equally necessary. To achieve success, one must set the investment goal very high. Not only that but the goal must also be a speculative one, for only there lies safety — paradoxical as that many seem. The buyer must not merely seek the repayment at some future time of the dollar capital invested. Nor can he concern himself Speculative Attitude Essential 19 excessively with income, in whatever form it may be obtained as an incident of ownership while the investment is held. The program must be aimed at obtaining a sufficient profit to offset the average losses sustained in all investment, the inevi- table personal errors of judgment, the effects of currency de- preciation and taxation, and the unexpected necessity of having sometimes to close out an investment earlier than originally planned. Definitions make dry reading, but it is essential that we have a clear conception of the financial terms which are so often loosely used and which are basic to our present subject. In the first place, we are limiting our concern in these discussions to the proper handling of capital in the form of securities or cash. The problem of preservation of capital is that of storing for future use today's excess spending power, in such a way that it can be reconverted to usable funds at any time without an overall loss. "Investment" is fundamentally an effort to obtain, in addi- tion, a rental from others for the temporary use of capital. "Speculation" means using the capital in such a manner that its spending power is not only preserved but also increased, through the realization of profits in the form of dividends, or capital gains or both. Successful investment is a battle for financial survival. ♦ 3 ♦ IS THERE AN IDEAL INVESTMENT? Discarding all theory I think the average "investor" is look- ing for a permanent medium to place a given number of dollars where it will return a reasonable income, and the original num- ber of dollars will always be quickly obtainable in case of desire or need. This might be termed the standard or goal of orthodox investing. It is not to be found today, at least as far as I know, because all the possible investment mediums fail in one or more particulars. Unfortunately, even if such an "ideal" permanent investment medium were to be had, it would fall short in another and most important particular. That other factor is, of course, the ability to get income and principal repaid in units of the same purchas- ing power as originally invested. There is nothing unreasonable in this desire. Please note, the only demand is to return what is invested plus the rental of profits secured from its use. It is not like buying a "gold clause" bond with a check on a bank and demanding repayment in the actual gold. The layman will usu- ally argue that "a dollar is a dollar," but despite this he will at a later date see the point if the shoe happens to pinch. At least as far as my experience goes, this totally ideal "investment" is as totally non-existent. It is not hard to see why it should be merely a theoretical formula. Nothing is safe; nothing is sure in any field of life. Specifically the wealth of the world does not increase fast enough to allow payment of compound interest or pyramiding of profits on existing "invested capital." Every so often adjust- ments are made partly through bankruptcies and other scaling down of obligations and partly through currency depreciation . And it's all as old as the hills. In my opinion, all this is natural and normal, though I regret Is There an Ideal Investment? 21 the impossible representation of complete safety and security held out by channels dealing in all types of "investments" in- cluding not only securities but also to an even greater extent "insurance," "real estate," "savings and loan," etc. For years the tide has been swinging back and forth, and as the advantage has swung too far towards the debtor class, a cry for "deflation," usually popularly noted in objection to the "high cost of living," has generally grown until something was done about it, and then as the edge went to the creditor, "infla- tion" or, in other words, general complaint as to commodity prices being too low and money too scarce, dominated the pub- lic mind. Thus it logically follows that in order to attempt even to approximate our definition of what the public really thinks it is getting when it buys a ''safe investment," it is necessary to "speculate." By speculate I mean principally to try to foresee these tides and, from an elementary standpoint, to attempt conservation of purchasing power through purchase or retention of fixed interest and principal obligations (including "cash" — a form of govern- ment promise to pay) only during cycles of deflation, and vari- ous forms of equity holdings only in cycles of inflation. Thus it is really necessary at the start to admit and expect that the great majority are not going to be able successfully to invest or speculate, or whatever one calls their handling of their capital, any more than the majority succeed in the first place in securing their proportion of existing wealth or, for that matter, of existing happiness. Successful preservation of capital must also overcome the increasing handicaps imposed by modern popular and socialistic governments, supposedly to help the masses. Obviously, our ideas will sound wrong to most people. Any investment policy followed by all naturally defeats itself. Thus the first step for the individual really trying to secure or preserve capital is to detach himself from the crowd. It is necessary to think in individualistic terms. One has to consider what seems best for one's own preservation. The 22 THE BATTLE FOR INVESTMENT SURVIVAL masses always have, individually, an average of next to nothing per capita, contrasted to the minority of successful individuals. Thus they are always trying to wrest away the possessions of the few for what they believe their own advantage. It is surprising how much they can appropriate without much resistance. But after a while the industrious and the thrifty finally are worn down, and they begin to turn for protection to imagined "anti- social" devices. In the history of the world we find the record of savings really saved through buying gold, hoarding precious stones, and other forms of "hard wealth" privately secreted. In the future history of America most of us will, in my opinion, learn this lesson too late. Currently this is a personal matter for each individual to decide and execute for himself without consultation. Curiously, it is those of slight wealth who need this sort of protection rather than those of great means, who can really suffer large depreciation without really feeling the loss. And it is usually the latter who are best fitted to cope with the problem. As to capital not so hoarded or employed in regular business channels but available for "investment" in the popular sense, the outstanding requirement is the specialized understanding that will discern trends correctly and analyze values essential to the constant shifting of funds necessary to success. If not able to do this, one must have at least the insight to select honest and capable expert guidance. Such guidance is rare, but it can be found. Yet, rare as it is, even fewer have the psychological ability to recognize it or the confidence to follow it through. ♦ 4 ♦ PITFALLS FOR THE INEXPERIENCED Before anyone starts to dispute the suggestions to be enlarged on here let us understand that this is directed at the average inexperienced investor or speculator. One must confine one's first efforts at cooking to boiling eggs; one does not begin with Baked Alaska, no matter how fine a dessert the latter may be when properly prepared. Likewise, variously experienced occa- sional readers of these discussions will recall profits made in types of security ventures outside our field of the active, listed market. There are many ways of making money which we are temporarily eliminating. Personally, I feel that, first, one must learn by experience the basic principles of successful dealing in securities through trad- ing in active listed leaders, and particularly one must acquire the ability to control personal emotions or fear of loss, or greed for a larger profit, etc., which affect most people's decisions and are very costly. Later, one can desert the chosen field I pre- scribe (if one must — most will stay in it exclusively) and spe- cialize in some other branch. The idea, however, that an aver- age individual can dabble successfully in a variety of bank and insurance stocks, new issues, obscure counter securities and all the other fashions that come and go, is, of course, too absurd. Yet most people try it about in proportion to their lack of expertness. The less expert, the wider their activities. The first thing, therefore, for the average venturer into Wall Street to decide is that it is a step in the right direction to restrict purchases and sales to liquid, listed securities. For one thing, the cost of buying and selling is reduced. This is a big item and consists not only in the spread between the "bid" for a stock and the "offer" but also commission. On brokerage orders, which are the kind that this policy practically 24 THE BATTLE FOR INVESTMENT SURVIVAL dictates, the commissions are visible, fixed and small. The spread between the "bid" and "offer" varies with the liquidity of securities, but is very close in the really active, listed issues. The cost of buying some new stock issues at net figures is invariably much higher than the brokerage and spread on old ones, and in many cases is exorbitant. The new publicity given by the SEC to this sort of thing frequently reveals some amazing "underwriting" or "distributing" fees. Unless the dealers have been able to secure a property from its original owners at a bargain, the security in order to show the retail buyer a profit, must first cover the inflated offering cost. There is another source of potential loss and occasionally of potential profit in new offerings, and that is the failure to price the issue right. Here, again, I think the occasional underpricing one runs into is so rare, and when it does occur allotments are so small, that it is best for most to avoid this field altogether. The host of untried ventures, of overpriced issues, of fraudulent promotions that will be automatically cast aside by such a policy of avoidance will repay many times over the few g(5od things one might be allowed to buy in small amounts. In a way, so-called secondary distributions, special offerings, etc., are also difficult for the inexperienced as compared to liquid active listed issues bought on a commission basis. Sec- ondary distributions are sales made off the exchanges on a net basis by a sales staff working against a block of bonds or stock on an owned outright or "best efforts" basis. Usually, the stock exchange price is used as a basis for confirming the net trade. Occasionally, registration is involved. The stock exchange price can be "stabilized" where SEC permission is granted to facili- tate the distribution. This may seem a little technical for the layman, which is exactly the reason why he should be informed about it, or confine his operations to the listed, active leaders which are not ordinarily subject to distribution. A third way of distributing securities is to place over-the- counter issues at net prices which consist of an "asked" price, plus a commission, all lumped into one. It must be self-evident that the costs of doing business in this Pitfalls for the Inexperienced 25 manner and the lack of knowing just what is going on are something to be avoided by the average person. But there is another angle, and that is the almost universal tendency to sell people what the dealer has under option, or can get at a conces- sion, or what is actually owned for his own account, rather than to sell something that fits the client's need. In other words, it is better to buy things than have them sold to you (though, unfor- tunately, nearly everything is sold to the consumer), and better to deal with someone who is unbiased if you are going to de- pend on his advice. The Buick salesman is not going to tell you a Chevrolet will fit your needs just as well at a lower figure, and neither is a dealer with a "profit" in one security going to sug- gest the purchase of some other in which he makes nothing or at best a minor commission. A very important advantage of the liquid, quoted security is the ability to follow its progress daily. Nothing is a quicker indicator of trouble than special and unusual weakness, and in many over-the-counter issues, or even in the quiet listed ones, trouble will not be discovered until it is too late. In the latter cases, quotes may be at hand in papers or only "offers" given, but, in any event, no running record of sales and sales volume is available to give one a chance to realize something is wrong. Under our present system dealers and their salesmen will continue to do a big business. Part of their clientele, especially those interested in bonds, will be institutions whose representa- tives are professionals and can meet them on equal terms and in a legitimate way. Part will be those who have had early success in the handling of funds and have graduated to a broader field. Part will be shrewd professionals or well-posted capitalists who can pick and choose and get real bargains before the price of popularity is added. This, however, is another source of occa- sional profit I advise leaving to the professional risk-taker. In every line of modern endeavor the value of specialization is apparent. This holds just as true in the handling of capital. Those who will select and master one medium are far better off than those who must dabble in realty, foreign exchange, com- modities, obscure unlisted stocks, foreign bonds, etc. 26 THE BATTLE FOR INVESTMENT SURVIVAL Cutting out everything except active, seasoned issues, listed on a major Stock Exchange, obviates hosts of pitfalls. I know that some will ask how a small and new industry can be financed if everyone follows such a policy? What will happen to the small dealers all over the country, and their staffs? My answer is nothing at all, for the reason that only an infinitesimal following will be won exclusively to the active, listed leaders. Those who are successful in the listed leaders thereby will learn the general principles of successful investment. Many sub- sequently will turn to specialize in a sideline. For example, one might study convertible bonds, and really know what he is about. There will always be institutions with staffs equipped to survey new projects and supply capital at a proper cost where success seems reasonable. Our concern is simply to point out means for the preservation of capital. Only a few will follow these thoughts, and even fewer will succeed with them in practice. If enough were to turn to a policy of "leaders only," that of itself would bring its own cor- rection. The favored stocks might advance beyond all reason and thus check the movement. The less-favored issues might decline or fail to advance and thus create a spread that would send bargain hunters buying. The demand for "leaders" might cause an increase in the supply through mergers, etc. There is no need for anyone to get disturbed over some of the principles laid down in this collection of articles. Therefore, regardless of others, our first rule is to concentrate in active, listed issues. Above all, avoid the promoter, the "penny share," the new stock with a glamour or romance title and certainly the gratui- tous ministrations of the "boiler room" operator and "sucker list" mailings. ♦ 5 ♦ HOW TO INVEST FOR CAPITAL APPRECIATION Having decided to invest only in the more active, listed issues for the start at least, the next point is to learn to "invest for appreciation." Every purchase must be considered almost solely on the basis of what it will return in income and appreciation added together and treated as one. Looked at in this light, a thousand dollars invested in a stock with an assured dividend of say $50 a year on the purchase price but not likely to advance more than a point or two in the coming 12 months suggests an expected profit-return of $60 or $70, whereas another issue paying no dividend but likely to double in price would promise a profit-return of $1,000. It is absolutely futile to try to get results except by buying into anticipated large gains. It is far better to let cash lie idle than to buy just to "keep invested" or for "income." In fact, it is really vital, and just this one point, in my opinion, repre- sents one of the widest differences between the successful pro- fessional and the loss-taking amateur. One often is kept out of a dangerous market by this rule. Obviously, the possibilities of decline must also be carefully weighed and the largest positions taken when it seems as if the odds are in one's favor. Actual income needed for living expenses need cause no problem as withdrawals at predetermined percentages can safely be made against one's purchases. At times it may happen that enough "income" exists to cover one's needs. At other times the debit will be against realized or unrealized appreciation. Occasionally it will be against capital. Even so, in my view it is usually much safer than buying for "income." The only way to begin is to learn by doing. Here lies the greatest handicap of most investors. They have had no experi- ence. And, unfortunately, most of them go for advice to others 28 THE BATTLE FOR INVESTMENT SURVIVAL who either have had no experience or have had enough to in- duce them to leave markets alone and concentrate on brokerage or advisory or statistical work. Experience, as I see it, means every sort in every kind of market. Hence the purchase of one issue and its successful or unsuccessful retention over a period of years proves nothing. Years ago, in wondering how one could gain such invaluable market knowledge and yet not pay a prohibitive cost in tuition, I thought of the plan of learning by always maintaining a posi- tion not in excess of a hundred shares of an average-priced stock, yet always striving to be long or short the most suitable issue of the moment. This plan takes a minimum of capital. It also results in a minimum of risk, as the beginner is forced to close one commitment before he opens the next. Ordinarily, new investors buy one stock after another, and should the mar- ket go down, they lose on the whole position before they realize their inexperience. A purchaser of a single stock under this plan is forced to a decision whether to keep it, take a loss or a profit, or exchange it for another. It is quite different, and many times more valuable in teaching market technique, than the imaginary "paper transactions" in which many tyros indulge. The latter are completely lacking in testing the investors' psy- chological reactions stemming from such important factors as fear of loss, or greed for more gain. This method also teaches that if there is no one outstanding purchase or sale at the moment, one should strive to be out of the picture entirely. This means frequent swapping, and I guarantee that in no time at all most people who think these discussions too pessi- mistic as to the difficulties involved will change their minds. Furthermore, this method tends to stress and teach the para- mount importance of timing. It is not enough to buy something cheap if it stays cheap. One must buy it just as it starts to get dearer. One must decide between 100 shares of an average- priced issue, or 50 of a high-priced one, or 200 of a low-priced, or 10 of 10 different issues. In each and every case the advan- tages and disadvantages will become very clear in a reasonably short time, where no amount of reading would be a satisfactory substitute for experience. How to Invest for Capital Appreciation 29 All this, of course, means that one must devote some time every day to the subject of investment. Nothing is more logical, yet nothing more surprising to most people. They must devote months to earn a net savable profit, after living and running expenses and taxes, and then in a few moments often toss a large part of it to the winds because they look on investing very much as buying seats for a theater. One must devote time to investment, and, in doing so, one's surplus savings become, instead of a doubtful asset for the future, in many cases a more powerful factor in increasing one's wealth than the original way of gaining one's living. This initial experience fund should be quite small, preferably not over 10% of one's assets; $5,000 is a useful amount, and in no event need it exceed that figure. This period of learning by trial and error is obviously going to take time. In the mean- while, it is going to take some self-control to let the balance of one's funds lie idle. It may even prove costly if we happen to be in a period of rapidly depreciating purchasing power for money. But it is not as apt to prove so costly as experimenting with one's total funds. A 10% ratio would seem to limit or exclude a large number of readers. This will not prove to be the case in practice, because there always will be some venturesome people who will take the risks that are necessary to achieve greater success. Probably in most cases they will feel that at least they have had a chance, which should give them a good deal of satisfaction. There is the question also whether many of the readers of these memos are going to find the time to trade at all. Naturally it is going to take time daily from one's business. However, as pointed out before, in many cases one will earn far more with the time applied to keeping what he has made or increasing it than by 100% devotion to his regular occupation. In any event, if a person is sure he cannot take the time or "interfere" with his regular pursuits (if conserving one's surplus is "interfer- ing"), then he must delegate the whole thing rather than dabble at it. A reading of these chapters should be helpful in making up one's mind whether to handle one's own affairs or turn them over to a professional, and if the latter, what to look for in a 30 THE BATTLE FOR INVESTMENT SURVIVAL professional adviser. Another point is that, after experimenting with trading, many may convince themselves that they are not cut out for it and that they are better off devoting all their time to their own particular business. I think a great deal has been gained if one determines that once and for all, because, in my view, one should devote either a generous amount of time, or no time at all. Halfway measures are impossible. All this suggests the question — are we learning to trade for the quick turn or to invest for the long pull? We are investing for appreciation, and the length of time one holds a position has nothing to do with it. I lean towards rather short turns for many reasons, unless tax considerations rule it out. To begin with, experience is gained much more rapidly that way. Short-term investing once mastered has very much more the elements of dependable business than the windfalls or calamities of the long pull. One simply can't continue to buy and sell successfully without being "good." Without a succession of varying trades one can never be sure of one's ability and conse- quent safety. There is much more peace of mind in frequent turns. One can take a fresh view often. Long worrying declines, without apparent reason until near the bottom, are avoided. There are many other advantages. The majority, perhaps, claim that there is much more peace of mind in the long pull but if my observation of thousands of accounts since 1921 means any- thing, this is a popular fallacy. By "short-term," however, I do not mean to imply one must close a trade quickly just because one is thinking of the short term. Trades should never be closed unless a good reason is at hand. But many "long-pull" traders ignore a sign of a change of trend because they feel it is temporary. Often they are right but eventually they are wrong, and usually at great cost. The short- term method requires the closing of the trade for a reason, and if later the situation changes, then one can re-establish the posi- tion. It sometimes can be done at a profit, and sometimes only at a loss in which case one has in effect paid for insurance. Once in a while the long-pull buyer stumbles on some good thing and imagines himself a great speculator. More often than How to Invest for Capital Appreciation 31 not he later gets a rude awakening, though occasionally he is fortunate enough to retain what he has. However, the long-pull position has its uses, and in these days taxes often compel it. However, opening the trade must be done on what I might term short-turn principles. There is noth- ing I am going to write here that applies exclusively to any policy. Some of the best long-pull buys grew out of a continuing series of bullish short-term indications. Some of the really vital last-chance selling points first look like minor temporary tops. ♦ 6 ♦ SPECULATION VS. INVESTMENT How much return can one make in the stock market? Trying to get a stated "income" from dividends, interest or both of 3% , 4% or 5%, or whatever it is, really amuses me because of the simplicity of the point of view displayed. Yet it is, by all odds, the more or less general point of view adopted by the ma- jority — customer and customer's man, bond buyer and sales- man, almost anyone in and out of the business. There is no doubt that the average individual, seeing this point of view accepted without question, moves with the masses and adds his acceptance to the rest. Actually here, as in many other phases of life, the majority is decidedly wrong. In fact, the individual who does his own thinking must learn to question most mass movements of majority point of view, for they are usually wrong. It is for these reasons, and especially because I am personally completely convinced of the inevitability of loss when attempt- ing to secure a safe income of small return, that I constantly suggest speculation rather than investment as the policy less apt to show a loss and more apt to show a profit. My feeling is that an intelligent program aimed at doubling one's money might at least succeed in retaining one's capital or actually making a good profit with it. Any aim less than this is doomed to failure. Of course, a lot depends on how much capital one is seeking to double. It is naturally easier to handle reasonable sums of money than great accumulations of capital. This discussion is not directed at possessors of the latter. As to the former, if one is lucky enough to possess a sum that is unwieldy because of large size, the important thing to do is to employ only that portion of one's capital that one docs feci he can "double." It is Speculation vs. Investment 33 better to leave the rest sterile than to risk it pointlessly until one feels one is competent enough to increase one's investment in the market. As an example, I should think most people not trained to Wall Street, but having professional practice or a liberal salary plus several hundred thousand dollars capital, are hardly justi- fied in employing more than $100,000 in the market in an average sort of year. Why risk the rest? If you can make $25,000 to $50,000 in a year in the process of attempting to double $100,000, that is more than enough from any point of view. If one loses, then surely it is better to lose on part of one's capital than on all. If you try to get 6% on your several hundred thousand or on that part not employed in speculation, you al- most surely will lose, sooner or later. The amounts cited are merely to lend concreteness to an example. The actual amount is really a personal matter, and the thought here is to stimulate consideration along these lines rather than to lay down a limit of $100,000 as a speculative fund. Some people can safely handle far more. Some people are happy only if they handle more. Others are worried by, or are incompetent to handle, as much as $100,000. Those that haven't even the $100,000 to start with are in the majority, and here, especially, I advise laying plans to double your money. You can be far from achieving your goal and still make a great deal, but if you start to get a mere income, the slightest miscalculation puts you in the red. Many of you might worry about the risk inflation can bring to the unused part of your capital. The risk is real. It is undoubt- edly less than the risks of market speculation until such time as you really know what you are about. It may seem strange at the same time to write about losing funds one is trying to save and making 25% to 50% on funds one is trying to double. Actually a little reflection will show it is not so illogical as it sounds. How many have direct knowledge of individuals who were consistent money-makers while they were actively after profits, but who lost all or a large part of what they had when they decided they had enough? 34 THE BATTLE FOR INVESTMENT SURVIVAL In a sense there is no direct comparison. Trying to invest for 6% is like trying to retire. You are the "absentee" creditor or part owner as the case might be. You sit back and stop thinking, letting the money work by itself. Trying to double your money requires your active presence and a lot of work. ♦ 7 ♦ SOUND ACCOUNTING FOR INVESTORS Perhaps the primary consideration in seeking to preserve the purchasing power of that portion of one's capital allotted to securities is to clear up once and for all what I regard as the popular fallacies referring to "income." In my opinion, the only sound plan is periodically to value the account at the "market" (which would of course automati- cally include any interest coupons or dividends, etc., collected since the last valuation as well as a reserve for taxes) and pay out to oneself either a predetermined regular fixed percentage, such as \Vi% of the equity in the account quarterly, or a varying amount dictated by personal requirements. Taking the suggested figure of 1 Vi % per quarter as an average standard, this sum probably at times would be covered by the actual "income" of the account, and at other times this rate would not be reached. However, to me this is not even worth bothering to determine. What one does want to watch is whether the peri- odical valuation of the account shows a gain in excess of this percentage. This gain might occur in several ways. For instance, the account might be fully invested at 6% and the capital values remain unchanged. Or the investment "income" might run 3% plus a gain of 3% on an annual basis in capital values. Or there might be wholly non-dividend-paying securities which have ad- vanced on an annual basis of 6% in market quotation. However, whether it's a gain or loss or unchanged, I see no reason why the 6% annual {\Vi% a quarter) rate on the equity should not logically be paid out. It works in a sort of automatic way to increase the amount paid out as the account prospers and decrease it at other times. Thus, on a $100,000 equity the payment would be of course $6,000. If a year later the equity was $150,000, the payment at that time would rise to $9,000, 36 THE BATTLE FOR INVESTMENT SURVIVAL or if the equity had decreased to $50,000, the payment would run only $3,000. The amount paid out simply would be debited against the account, decreasing the cash, or, in some cases, secured by the sale of a portion of capital assets and rarely by increasing a margin debt. The advantages of this plan are many. To begin with there is the elimination of the self-deception involved in the old "in- come" idea. A man buys a 6% bond at par. A year later it is selling, for purposes of this example, at 70. He has received his 6% income, but actually the transaction stands as funds in- vested, $1,000; interest received, $60; market value of princi- pal, only $700; net loss, $240. Against this compare simply holding $1,000 if a safe 6% investment does not seem available at the time, and paying out of principal $60, leaving $940 cash at the end of a year, or a net loss of only $60. Or compare buying into some attractive speculative situation yielding noth- ing but advancing say 50% in a year. The latter would work out as $1,500 market value at the end of the year less $90 paid out in lieu of "income," leaving a net remainder of $1,410. Naturally I realize the speculation may have turned out a loss instead of profit. But we have to assume that the account is going to be run intelligently. I don't think any account can in truth be run properly if income is a prime requisite. Running it in the manner suggested here eliminates artificial handicaps and, as will be seen later, opens the path to at least immeasurably greater average chances of success. Incidentally, the method of periodical market valuation here advised is essential to the proper handling of trust accounts, etc. If a trustee keeps securi- ties on a "cost" basis, the tendency is to avoid taking losses where inevitable mistakes occur. But if everything is kept marked to "market," the beneficiary is constantly informed of the true picture and the trustee is not so hesitant to make switches. Accounting of individual investors must be sound in considering results achieved, and 1 advocate simply figuring the changes in the equity from month to month and setting up round-figures reserves right along against approximate taxes due if the account were liquidated at the valuation figures. This Sound Accounting for Investors 37 tends to prevent overtrading; it prevents over-estimates of profits; it prevents hesitation about the sale of any issue because of taxes and has many other advantages. In addition, a running tax reserve on both realized and un- realized profits and losses also has to be kept, and the chief value of this is in figuring tax switches towards the end of the year. This also brings out the smaller net profits after taxes that succeeding trades can net as the realized profits for a given year begin to run up into high tax brackets. As every trade should be considered on the basis of how much one expects to gain against how much one is willing to risk, this is vital information. Thus one would logically take larger positions and higher risks while in the low brackets than after one reaches the higher tax levels. 8 WHY COMMITMENTS SHOULD NOT BE HAPHAZARD In actually entering the security markets it seems funda- mental that one should know why a commitment was opened, what one expected to make, how long it was expected to take, and what one was willing to risk. Personally, I cannot see how one can expect to figure the proper size of a position or the time to close it out unless it was first opened with a full understand- ing of these points. In my opinion, commitments should not be closed hap- hazardly or, even worse, allowed to remain open without justifi- cation. For example, one might be convinced that a quick move was in prospect for a particular leader. This being the case, the stock is bought for a quick move, and if the move fails to develop in the anticipated direction quickly, the stock should be sold. When it was bought, no thought was given to its value other than as a medium for a quick trade; hence, it should not be held later as an "involuntary investment." On the other hand, one might buy into a situation expecting an increase in the dividend in say two months. In my opinion, trading weak- ness in such a stock does not call for liquidation unless one is convinced that either the anticipated dividend increase will not occur or that a generally changed speculative picture will alter one's appraisal of what the higher dividend might mean market- wise. In considering a commitment a clear idea should be had of the levels at which one expects to close it out either at a profit or at a loss. Obviously, if one anticipates making only a very small amount, one's chances of being successful are rather small. Also it is really impracticable to risk less than a point or two which, with commissions and tax, is rather high to set against an expected point or two gain. Obviously one's judg- Why Commitments Should Not Be Haphazard 39 ment has to be nearly 100% perfect under such conditions. But if it is a trade on which one figures to risk say three points to make a theoretical 30, then one can obviously be very over- optimistic and still do well. Readers are thinking that that kind of trade rarely exists. The fact is it rarely does, which is a good reason for seeking it out and not overdoing things in the in- terim. I suggest that at the start the size of commitments in one sense be kept small — that is, the relationship of funds employed to total capital. One should strive for a long profit on a small commitment; in other words, there is much more logic in trying for ten points profit on 100 shares of a particular stock than for one point on 1,000 shares of the same stock. A backlog of cash is a great help in meeting emergencies and in freeing one's judgment so that commitments are opened and closed for finan- cial cause and not affected by need, fear, greed, or other human failings which are fatal to profitable security investment. Of course, the possibility of a "margin call" should never even remotely develop in a well-run account. Except in special circumstances, such as where young people with insufficient capital feel they are capable of trying to move ahead quickly, I do not and never could see much necessity for margins or other forms of borrowing. If one's security invest- ments are managed efficiently, small relative percentage invest- ments will bring large returns, and the necessity for over-specu- lation with its many handicaps will not occur. On the other hand, if inefficient trading requires heavy investments for re- sults, eventual losses will wipe out early gains. I am naturally aware of what I previously have written elsewhere about the occasional advantages of borrowing during inflation, etc., but in both cases I am thinking relatively. Thus a given situation might at times call for borrowing, but I feel rather sure that I would always counsel a good deal smaller debit than the popular mar- gin percentages at the time. In another sense, large commitments, meaning thereby a few relatively large blocks of shares, are preferable to a great many small positions. These few large holdings may total only 30% of 40 THE BATTLE FOR INVESTMENT SURVIVAL funds available at the moment, in line with the previous para- graph. However, confining oneself to situations convincing enough to be entered on a relatively large scale is a great help to safety and profit. One must know far more about it to enter the position in the first place, and one will retreat from a mistake much quicker if failure to retreat means an important loss. A large number of small holdings will be purchased with less care and ordinarily allowed to run into a variety of small losses with- out full realization of the eventual total sum lost. Thus over- diversification acts as a poor protection against lack of knowl- edge. ♦ 9 ♦ SOME "DON'TS" IN SECURITY PROGRAMS Readers should not expect to obtain here an infallible for- mula for the preservation of capital in spite of the obstacles cited in previous chapters — the changing purchasing power of money, politics, war, public sentiment and the vicissitudes of individual securities. The contention that investment is a battle for financial survival would disprove itself if the difficulties could be explained away so easily. The object of these discussions is to influence the investment thinking of readers in the direction of improving the results they may expect to attain. This is an attainable and worthwhile aim. We have already sketched the fundamental necessity of hav- ing a thorough understanding of the difficulties and of keeping the objectives clearly in mind. The basic practical working policy is never to invest unless the possibilities of the chosen stock seem very great. Investing solely for "income," investing merely "to keep capital em- ployed," and investing simply "to hedge against inflation" are all entirely out of the question. No security of any kind should under any circumstances be bought or retained, under this policy, unless in the investor's well and deeply considered judgment the profit possibilities are large and greatly outweigh the visible risks. And the latter must be counted with detailed care. When an investment is made, its prospects must be so good that placing a rather large proportion of one's total funds in such a single situation will not seem excessively risky. At the same time, the potential gain must be so large that only a mod- erate portion of total capital need be invested to get the desired percentage appreciation on total funds. 42 THE BATTLE FOR INVESTMENT SURVIVAL Expressing the matter in a different way, this means that once you attain competency, diversification is undesirable. One or two, or at most three or four, securities should be bought. And they should be so well selected, their purchase so expertly timed and their profit possibilities so large that it will never be neces- sary to risk in any of them a large proportion of available capital. Under this policy, only the best is bought at the best possible time. Risks are reduced in two ways — first, by the care used in selection, and second, by the maintenance of a large cash re- serve. Concentration of investments in a minimum of stocks insures that enough time will be given to the choice of each so that every important detail about them will be known. This policy involves not only avoiding diversification but also at times holding one's capital uninvested for long periods of time. The bargains which must be sought to raise investment performance out of the average class, in which net losses occur, into the exclusive class of those who make and keep profits are not available except occasionally. It should be recognized also that such opportunities will inevitably be available principally when the majority of buyers of securities refuses, because of fear, to take advantage of low prices. Just as inevitably, the opportunities will not be available when securities are generally popular and eagerly bought. It should be axiomatic that the successful investor will keep his capital idle in times of popular over-investment and over-confidence. He will be sorely tried at times when profits and income are seemingly easy to procure. Any program which involves complete investment of all capi- tal at all times is not apt to be the most successful one. It should always pay in both dollars and cents and peace of mind not to be overcommitted. Unpredictable news developments can change the complexion of things without warning. It is true that cash has lost purchasing power in this country but fortunately in our lifetime at a very slow rate compared to the rapid depreciation that can be suffered in a real stock mar- ket decline. Buying on margin does not come into this discussion at all, as Some "Don'ts" in Security Programs 43 it is mainly the concern of traders in the strictest sense of that term. Another concept essential to success in the battle for invest- ment survival is that the investor must learn to think in terms of ultimate rather than current results. It is impossible to obtain 100% of the theoretical gain in each major movement of an individual stock or of stocks as a group. Efforts to do so, in- evitably lead to failure of the entire investment program. It is a real achievement if through judicious investment at intermittent times a satisfactory average profit over good years and bad is actually gained. This whole thesis, which may at first sight seem extremely speculative, will in actual practice prove many times more con- servative and safer than the policy followed by most inves- tors. ♦ 10 ♦ WHAT TO LOOK FOR IN CORPORATE REPORTS It has always seemed to me that if one is to draw profitable conclusions from the published reports of most listed corpora- tions, rather special points of view are a requisite. A real spe- cialist in a particular industry will, of course, see and apply accounting tests which make themselves evident as the examina- tion proceeds, due to his specialized knowledge, that will usu- ally be quite revealing. If he wisely collaborates with a market specialist, a gainful decision will be the result. However, most lay investors and the usual sources of counsel are rarely so well-informed. This situation, plus the ordinary public habit of accepting headlines as accurate condensed sum- maries of corporate results, makes for a widespread lack of knowledge concerning actual corporate positions. More often than not, majority bids and offers persist for years at levels that are wide of what would be paid or sold were the figures under- stood. As a simple workable plan of getting a closer appraisal of real results (from this one angle — other influences may seem together of greater weight marketwise and cancel out the bear- ish accounting impression). I particularly scrutinize companies that cannot show enough cash income to care for plant growth, needed expansion in working capital, dividends, etc., without resort to continual new financing. There are a few exceptions, practically always in the very young and rapidly growing con- cerns — hardly ever, in my opinion, in the large mature busi- nesses. Such situations imply an unprofitable field, poor manage- ment, or unwise overdevelopment. 1 think a great many corporations have been kept going only by a combination of the leverage created by heavy borrowing or What to Look for in Corporate Reports 45 preferred-stock issues and the constant refunding and injection of fresh capital. Assets are acquired and capitalized with othei peoples' money, and to what extent or for how long they will continue to be earning assets is a moot question. Surely no ordinary investor or statistician can decide. Next, I feel statements of inventory companies should be re- garded with caution. I refer to companies which handle large quantities of goods that fluctuate sharply in price. Many such concerns go through all the motions of being in business, adver- tising, maintaining sales staffs, and all the rest, and never really make an actual trading or manufacturing profit. They make when prices go up and lose when they go down. It would work for a reduction of overhead simply to close up and speculate frankly in their particular commodity. Marketwise, for trading periods, shares of inventory companies might be temporarily most attractive. My point is to know why and what you are buying. There are, however, a few corporations in which inven- tories play a big part that do keep books conservatively. High profit margins are frequently an invitation to increased competition, unless the situation is monopolistic for one reason or another. Low fixed assets, especially if combined with ability to do profitable business on small working capital, may be re- garded similarly. Asking stockholders to authorize writing down of fixed assets is a sign of injudicious previous expansion. It is usually a black mark against a company. However, here and there legitimate mistakes are made and writedowns are logical. And, of course, marketwise it usually pays to consider trading purchases if such news is expected. Just be sure not to hold so long that recovery breeds further unwise expenditure. What I look for is a company that regardless of reported profits is somewhere getting enough cash income to take care of the factors mentioned previously, i. e., to amortize debt, in- crease working capital, maintain or, if profitable, enlarge plant capacity and efficiency, and pay dividends. They exist, and in no small number, as a study of comparative balance sheets will show. I would seek actual trading or manufacturing profits, 46 THE BATTLE FOR INVESTMENT SURVIVAL though in some cases realized inventory gains mean something when they are more than luck and go hand in hand with the ordinary business results. As I see it, the tendency in this country has been to overreach for new business, and usually at the wrong time. If addition to fixed assets can be made during a depression at bargain levels, it might be a good business risk. However, to expand during a boom is fatal unless the anticipated profits after taxes will amortize the extra capacity in the very briefest time, preferably to the normal average old plant valuation. As an example, a factory producing a million units, valued on the average at a million dollars, with "normal" profits of $100,000 a year, adds capacity for another half-million unit production. Boom times make this addition cost a whole million, or twice average valua- tion. As I see it, the wrong way is to build the addition and then also to mark up the value of old buildings in the property ac- count to reproduction cost. Right way, build only if the boom permits a profit the first year — net after taxes in addition to "normal" profit — sufficient to write off the extra boom-time cost of $500,000 of the new addition. The latter might have to be shut down a few years later. The rising cost of facilities with obsolescence limited by the tax laws to a percentage of the original cost may result in a large overstatement of earning power and a shortage of cash in what on the surface appear to be prosperous enterprises. A few conservative, far-seeing managements as a result set up addi- tional depreciation reserves on which tax is paid. This is the exception rather than the rule but should be considered by the investor as part of his own analysis. "Cash flow," which is the professional term for in-pocket — out-of-pocket bookkeeping is one revealing way of looking at things. In this connection, an increasing number of companies are including tables in their annual reports showing the source and disposition of all funds received and disbursed during the year. Among such companies arc giants like Standard Oil of New What to Look for in Corporate Reports 47 Jersey, Gulf Oil Corporation, International Paper, and Sinclair Oil, to mention a few. International Paper calls its summary "Consolidated Sum- mary of Financial Operations — Detail of Decrease in Net Working Capital." Gulf Oil labels its tabulation as "Employ- ment of Funds." Perhaps the most illuminating of all is that supplied by Standard Oil of New Jersey which is given as a six- year summary of changes in consolidated working capital. We are reproducing, on this page and the next, two years of the six-year summary for Jersey to illustrate its great value. We will also reproduce the Sinclair table for 1963 as another good example. The figures of both companies are presented in an exemplary manner in every particular. However, where there is a tendency to obscure or confuse the situation a complete "source and disposition of funds" table simplifies the efforts of the investor to get at the bottom of things. Unfortunately, it is just the company that is trying to create a misleading impression that is certain to leave these figures out of its shareowner reports. The listing agreements between the New York Stock Ex- change and the companies whose shares are granted trading privileges might very well be expanded to cover this point. The same might be said of Securities and Exchange Commission requirements. Standard Oil of New Jersey Two-Year Summary of Changes in Consolidated Working Capital (Millions of dollars) 1963 1962 ADDITIONS Net income accruing to Jersey shareholders ... $1,019 $ 841 Net income accruing to minority interests 47 39 Depreciations, depletion, and retirements 584 586 Sales of properties and equipment 74 36 Nonrecurring gain on Ethyl investment 75 Total additions $1,724 $1,577 48 THE BATTLE FOR INVESTMENT SURVIVAL DEDUCTIONS Additions to properties and equipment $ 886 $1,062 Cash dividends to Jersey shareholders 592 538 Cash dividends to minority interests 31 26 Net change in long-term debt 15 (13) Cost of shares reacquired, less proceeds from shares sold 35 (4) Other— net 69 (3) Total deductions $1,628 $1,606 Net increase or (decrease) in working capital . . $ 96 $ (29) Sinclair Oil — 1963 sources of funds: Millions Consolidated net income $178.1 Sale of 4.60% debentures 1 36.9 Disposal of Texas Pacific Coal & Oil stock 76.3 Sale of Capital Assets 8.1 $399.4 disposition of funds: Capital additions $149.2 Dividends 29.8 Long-term debt (due after one year) 46.2 Purchase of Corporation's own stock 1.9 Reduction in carved-out oil payments 14.4 U.S. Government and other short term securities .... 89.6 Other miscellaneous net 5.5 $336.6 Increase in working capital 62.8 $399.4 ♦ 11 ♦ CONCERNING FINANCIAL INFORMATION, GOOD AND BAD The average security buyer usually decides on a stock com- mitment because of an impressive analysis of a situation, or as a result of noting a certain convincing price action or because of some form of "information." There are very few, however, who can discriminate between sources of valuable and sources of misleading information. Pur- veyors of the latter may be stupid or may have an axe to grind. If the information itself is correct, the vital and difficult market significance is generally not understood. In fact, the latter situ- ation is so nearly universally true, that the wider spread of information fostered by the Securities & Exchange Commission and the New York Stock Exchange will not in most cases make anything more than the most minute difference in attempting to curb supposed advantages of "insiders" and put them on a more nearly equal footing with security buyers and sellers at large. Actually, as I look back upon it, most insiders never knew enough really to profit from their "advance" news unless it was something completely outstanding. Likewise, investors, when they occasionally uncovered something accurate and important, rarely sensed what to do about it marketwise. It always was and always will be the power to understand and the ability to act that turns information into profits. Incidentally, the Interstate Commerce Commission has re- quired publication of voluminous data on railroads which has not resulted in saving the public generally, much, if any, money. Thus, while getting honest, unbiased information is naturally essential, it is useless without either personal interpretative ability or access to one who has this faculty. For example, I have known directors of a company to vote in secret a surprise 50 THE BATTLE FOR INVESTMENT SURVIVAL dividend and to hold completely divergent opinions as to the ensuing market reception of their action. Much has been done to curb dishonest information. The find- ings of the special study of the security markets made by the Securities & Exchange Commission in 1964 may furnish the layman with some cautionary thoughts in certain directions. However, it is in several volumes and requires concentrated reading. Despite all this, it will always be difficult to check the spread of irresponsible suggestions and inaccurate rumors. It is a lamentable fact that a part of the legitimate facilities of markets is abused by a class of people too indolent to think for themselves, who hope to secure quick and easy profits following someone else's suggestions. In this, as in all else, we get out of things what we put into them, and no more. Hence, the old law of the survival of the fittest tends to eventually eliminate the "free riders." However, there is a difference between this type and the sincere seeker of help in finance, who shows by his demeanor the seriousness of his purpose and his desire to pay for this help, not necessarily in a dollar fee, but by faith in his adviser's integrity, courage to follow his judgment, and loyalty when the inevitable mistakes occur. In a contact between the latter and a real source of expert opinion or interpretation of information, either secured through special research or through so-called "inside" sources, it should first be realized that, while I feel it possible to find expert ad- visers who can give good counsel on how to profit in the mar- ket, in my opinion it is absolutely impossible to secure equally worthwhile opinions on pre-determined lists of individual se- curities. It is vital to know the superiority of volunteered opin- ion as compared with answers to queries. If one stops to think, it is one thing to guide someone to a profit on one's own ground, picking the time and medium. It is entirely another to have at hand worthwhile information or opinion on any and every se- curity requested at any and every time. Therefore, I feel that any source ready instantly to pass on everything and anything should be regarded with skepticism. A worthwhile source of good information will, in my experi- Concerning Financial Information, Good and Bad 51 ence, never continue passing it on to anyone who keeps coming back for further advices, either on accepting losses, averaging or taking profits, pyramiding, etc., unless, of course, the relation- ship is very close. Personally, if the tax situation allows it, I think much is to be gained by going for advice armed only with cash and not with a portfolio of old pets or involuntary remnants of former ill- starred commitments. ♦ 12 ♦ WHAT TO BUY— AND WHEN When and under what conditions should an investment actu- ally be made by one who follows the theory of buying only securities which seem to have great potentialities for profit? In the preceding chapters it was pointed out that this system in- volves remaining completely uninvested for long periods. For practical reasons one necessarily has to make compro- mises. The factors that make an ideal investment are never all present at the same time. Even if such an opportunity actually did exist, it would be almost impossible for anyone to recognize its existence. Nevertheless, describing such conditions should be helpful. There are times when a majority of them might occur. In the first place, the general background should be favorable, which means that popular sentiment should be bearish and the securities market well liquidated. Business conditions should be poor, or the general expectation should be that they will become poor. The security itself should always be either a common stock, or a bond or preferred stock whose position is thought by the investing public at large to be so weak that it sells at low prices and is given generally low ratings. The company selected should be operating at a deficit, or its earnings should be abnormally low. Or, if earnings are currently satisfactory, the popular ex- pectation must be that they are headed downwards. The stock should be paying no dividends, or the dividend should be lower than normal, or general opinion must lack faith in the continu- ance of a reasonable dividend. The price of the stock must reflect a majority view that condi- tions affecting the company arc bad, or soon will be bad. or will continue bad. At the same time, the buyer must hold an opinion contrary to these surface indications, and his opinion must be What to Buy — and When 53 backed by sound judgment and access to reliable sources of information. The importance of full consideration of popular sentiment, expectations and opinion — and their effect on the price of the security — cannot be overstressed. Major buying points often occur without a full scale actual business depression. At such times the fear of a depression exists. Earnings and dividends can be normal, and yet the shares in question may be very attractive if misguided popular fears as to the future drive the price down to a level that might at other times represent a period of deficits. And vice versa, the expectation of favorable conditions to come might cause a speculatively high price to be put on shares when actual results of the company's operations are still considerably below normal. Thus it is the earnings discounted in the price which are the determining factor, and not always the earnings level actually existing at the time of proposed purchase. There is little to be expected marketwise, for instance, in buying the shares of a company with a strong growth trend if the current price places a liberal valuation on that growth for several years to come. It is important to stick to issues which in past times of bullish enthusiasm have had active markets and which can be expected to have active markets again. However, at the time of purchase they must be low-rated and unpopular, with their prices down and discouragement about their prospects quite general. At long intervals even the highest grade shares become de- pressed, and then the opportunities are especially great. That happens only once or twice in a business lifetime. The objective is always buy that which the majority thinks is speculative and sell it when the majority believes the quality has reached invest- ment grade. It is in this policy that both safety and profits exist. As price is the all-important consideration, the type of corpora- tion and its characteristics are of relatively minor consequences. The complete opposite of the thoughts expressed above is the theory held by people who wish to invest surplus cash as soon as it becomes available — that is, who desire to make invest- ments at regular monthly or quarterly intervals. I never did 54 THE BATTLE FOR INVESTMENT SURVIVAL approve of this point of view. Certainly those who want to follow it should buy the strongest and most stable companies. Companies in the consumer class are much to be favored. The products or services sold should not be great public necessities, as the latter become targets for political interference. Labor costs should be low, and the ability to finance expansion out of earnings should be present. Also, the actual cash income should be larger than the amount reported as earnings. However, these considerations are not essential for buyers following the policy described in these chapters. In fact, such ideal investments are not often available at a price discount sufficient to make them attractive. More often and more profit- ably the purchase may be made in a company that still has considerable debt and in which ownership by the management may be small. If one can gauge trends correctly, the very reason for the purchase may be that debt will be reduced, perhaps eventually eliminated, and that management, seeing the im- provement ahead, will increase its ownership substantially. Except in cases of panic or near panic prices, the fact that a stock is widely held by investment trusts is not a good reason for buying, as such stocks are generally of the high-grade kind difficult to buy cheap. Since the aim is rather to buy an issue which is unpopular, the hope is, on the contrary, that while the investment companies do not hold much or any now, they will later, at a higher price, become interested and add it to their portfolios. The distinction of being the stock most frequently listed in published institutional holdings simply means not only that the price is probably high rather than low but also that there is a large number of potential sellers should the situation take a turn for the worse. Willingness and ability to hold funds uninvested while awaiting real opportunities is a key to success in the battle for investment survival. Market valuations of most securities change in a single period of a very few months by an amount equivalent to many years of dividends or interest coupons. Therefore such changes in value are much more worth while seeking than is straight investment return. What to Buy — and When 55 I said at the start of this chapter that the theoretical idea is rarely encountered in practice. Nor is it readily recognized. I feel that the simple equation of weighing what you think are the possibilities for profit vs. the risks for loss is really the soundest way to go about it. ♦ 13 ♦ IMPORTANCE OF CORRECT TIMING As soon as a security is purchased, the buyer loses the power to avoid a decision. It becomes necessary for him to decide whether to hold or sell. As an inexorable consequence, the per- centage of correct conclusions must be lowered. Therefore, in- telligent investors expect to make a great many more errors in closing transactions than in opening them. When nothing but cash is held, no decision need be made at all unless conditions are completely satisfactory. Either a suit- able opportunity may be present, so that a purchase can sen- sibly be made, or the pros and cons may be so balanced that nothing is done. The worst that can happen if the latter decision is reached is that an opportunity will be missed through caution, which is an inconsequential misadventure. Other opportunities always come in due time, and if one's attitude towards speculation and in- vestment is shaped along the lines described in these chapters, nothing will be lost in either eventual profits or peace of mind. Another reason why selling at the right time is more difficult than buying is that the development of a frame of mind in which only real bargains are sought carries with it a tendency to lose confidence too early. Periods of overvaluation and public over- confidence are, naturally enough, likely to follow periods of depression, and often do. Likewise, very good general business conditions will normally succeed very bad conditions. In such active periods, stocks will sell at excessive valuations, so that their price advances will often outrun the most optimistic expec- tations of those who bought very early and very low. The latter will begin to feel uncomfortably unsure of their position as soon as normal valuations arc restored, or when the indications of overvaluation are first to be seen. Importance of Correct Timing 57 For these reasons, the background for intelligent liquidation cannot be described simply as a reversal of the factors that make for a real buying opportunity. Such would be more nearly the case if we were discussing the proper time to make short sales. But what we are concerned with here is not initiating a position but unwinding one already held. Scores of stocks are unsatisfactory long holdings without being clear-cut short sales. Other situations may make it necessary to consider selling. The favorable developments which were expected when the se- curity was bought may fall short of original anticipations. Or the holder may face a loss if he sells. In this one instance it is possible to state a mechanical rule to be followed. Naturally the exercise of good sense and logic and the possession of accurate information, rather than adherence to any formula or system, constitute the basis of all successful investment. But it is sound policy to get out of long positions which begin to prove themselves wrong by declining in price. This is the one automatic proceeding in handling securities, the only proceeding in which no judgment is needed. Losses must always be "cut." They must be cut quickly, long before they become of any financial consequence. After the elimination of a stock in this manner, the transaction must be, in a sense, forgotten. It must be left out of future consideration so completely that there is no sentimental bar to reinstating the position at higher level, either very soon or at any later date, if the purchase again seems strongly advisable. Cutting losses is the one and only rule of the markets that can be taught with the assurance that it is always the correct thing to do. As a matter of arithmetic, any grammar school boy can learn the formula. But, as a matter of actual application, it requires a completeness of detachment from human frailties which is very rarely achieved. People like to take profits and don't like to take losses. They also hate to repurchase some- thing at a price higher than they sold it. Human likes and dis- likes will wreck any investment program. Only logic, reason, information and experience can be listened to if failure is .to be avoided. 58 THE BATTLE FOR INVESTMENT SURVIVAL Little of a definite nature can be outlined as the proper pro- cedure when the question is whether or not to take profits. A sound practice is to realize a 100% gain with at least part of a large commitment. Such a profit is equivalent to dividends for sixteen years on a straight 6% basis, not compounded and with- out adjustment for taxes. If a doubling of one's investment can be achieved within six months to a year, the investor can then comfortably enter a long period in which cash is held idle (until the next opportunity presents itself) without diminishing final results to anything nearly as poor as the general average — fre- quently a net loss — which is obtained through continuous full investment. It is advisable always to keep uninvested reserve funds on hand in order to take advantage of unexpected opportunities. The need for buying power in such cases may in itself be a factor dictating the sale of securities already held. Perhaps the best way to describe when to sell is to review handling of a commitment from its beginning. Belief that a stock is in a buying range justifies a small initial purchase. If the stock declines, it should be sold at a small and quick loss. But if it advances and the indications which supported the original purchase continue favorable, additional purchases can be made at prices which the buyer still considers abnormally low. But once the price has risen into estimated normal or overvaluation areas, the amount held should be reduced steadily as quotations advance. This is as near as it is possible to come in describing proper selling policies. ♦ 14 ♦ STATISTICAL ANALYSIS, MARKET TRENDS, AND PUBLIC PSYCHOLOGY There is room for much improvement in the average run of statistical analysis attempting to appraise the value of a particu- lar issue. Most of the time the figures considered are not, in my opinion, the useful and vital ones at all, and generally the whole method of approach is academic and theoretical neglecting fun- damental trends which are far more important than statistics on individual issues. In my opinion, the primary factor in securing market profits lies in sensing the general trend. Are we in a deflation or infla- tion period? If the former, I would hardly bother to analyze most equities. I have known people to go to the expense of securing a thorough field report on a company, complete except for proper consideration of market factors, buying the stock because of the report and later losing a fortune in it at a time when a market study would have suggested that all equities should be avoided. And I have seen individuals make a great deal of money buying, without much study of individual issues, the leading stocks under circumstances that suggested a fall in money and a rise in shares. Thus effort should be concentrated first on deciding the trend and next in seeking out the most responsive stocks. I certainly feel that it is more feasible to try to follow profit- ably a trend upwards or downwards than to attempt to deter- mine the price level. I do not think anyone really knows when a particular security is "cheap" or "dear" in the sense that cheap- ness would occur around a real market bottom and dearness around a real top. For example, shares have a habit of some- times seeming dear in the early stages of an advance, and later at far higher levels new and unexpected developments often make them seem cheap again. There is no rule about it. 60 THE BATTLE FOR INVESTMENT SURVIVAL I have seen stocks make bottoms when they seemed so cheap that one actually mistrusted one's intelligence, and I have seen bottoms reached at times that suggested to the majority that the shares in question were actually a good short sale. The reverse is true for bull-market tops. The money that has been lost "feel- ing" for the bottom or top never has been generally appreciated. The totals, if they could be known, must be staggering. Natu- rally we are concerned only with factors influencing security prices that are open to successful interpretation. It would be satisfying always to buy on the bottom and sell on the top, but as we do not know how to determine the bottoms and tops and would lose too much trying to guess, then of course it is only logical to turn our attention to those profitable methods we might actually learn to follow. The most important single factor in shaping security markets is public psychology. This is really another reason why I am not particularly impressed with academic calculations purporting to show what this or that stock should be worth — nowadays in- volving complicated calculations often worked out on a com- puter. Personal knowledge of what is ahead in the way of de- velopments in the next six months to a year and a half, and due regard to market factors always count a great deal more. I feel that the psychology which leads people to pay forty times net (to use that yardstick for an example) for a stock under one set of conditions and refuse to buy the same shares under another set of conditions at ten times is such a powerful and vital price- changing factor that it can overshadow actual earnings trends as an influence on stock prices. For instance, increases in earnings are often more than offset marketwise by decreases in the public regard for a stock in the interim. To put it another way, fre- quently the market might temporarily appraise anticipated earn- ings at say twenty times estimates, but later the actual net will be capitalized marketwise at a lesser ratio — and vice versa. The same considerations rule as between different stocks at the same time. Thus we may have a fashion in vending machine or photographic shares which will carry them much higher at a given time in relation to assets, earnings, dividends, and future Statistical Analysis, Market Trends, and Public Psychology 61 prospects than other groups. Later, when they are out of fashion, these yardsticks may actually figure out to greater ad- vantage, but the public mind is on something else. Sometimes for years certain popular shares will be persistently overvalued by the public, which continues to pay an unreasonable sum in proportion to the theoretical valuation. And likewise, fre- quently, theoretic undervaluation will persist for years. It does not help one's account to feel sure one is short theoretically overvalued stocks that are currently rising or long those theo- retically undervalued but actually sinking in price. One should bend every effort to determine what the tenden- cies of the public are, right or wrong, and profit from them. I find that even the name of a stock, which obviously has nothing to do with theoretical values, is an important factor in securing or losing public favor. I am certain in my own mind that certain bull speculations of 1929 would have been impossible under different names, and likewise an unpopular name will greatly decrease the price the public will pay for actually good value. In line with these thoughts, such individual research as is done in analyzing stocks should be highly practical and defi- nitely linked to the market. I am personally interested mainly in analysis that sets out to determine primarily whether the sum total of all market factors will tend to lead one to expect higher or lower market prices. I would not make such an obvious statement if I did not daily come across analytical work done without the slightest regard for this real fundamental reason for its existence. In taking up individual security analysis one naturally is going to attempt to forecast the trend of profits or dividends, but unless this is done in connection with former market ap- praisals of past earning power and previous yields, under vary- ing conditions, the practical value which can be drawn from the figures is greatly decreased. It means little to estimate earnings of a given company at say $1 a share without a background of past price-earnings ratios under varying conditions, to use as a partial guide in estimating how far the present market might go 62 THE BATTLE FOR INVESTMENT SURVIVAL in discounting this anticipated net. The same is true of yields. It is helpful to calculate the total of the redemption value of prior securities and the market value of the equity for purposes of comparison with such figures as sales. In short, in my opinion everything of an analytical nature covering specific securities should be persistently linked to past market appraisals and set up for use solely to determine future market possibilities. ♦ 15 ♦ PRICE MOVEMENT AND OTHER MARKET ACTION FACTORS Of all the factors that go to make up a well-rounded opin- ion on the general market trend and, more especially, the indi- vidual 