Successful Stock Speculation Part 5

It does not pay to take big risks. That is true in stock speculating the same as in any other undertaking. Most speculators are keeping their minds all the time on the possibilities of profit and not thinking about the possibilities of losing.

If you want to be successful in stock speculating, there is one thing you must learn to do, and that is never to think about the big profits you might have made if you had bought such and such a stock, because the probabilities are you could not have afforded to take the necessary risk in buying that stock.

Of course, after it is all over, it may look to you as though the buying of that stock was a sure thing, but the buying of such stocks is never a sure thing. The risk always exists. There is an old saying, and we believe a very true one, that a man who speculates with the idea of getting rich quickly loses all his money quickly, but that the man who speculates with the idea of making a fair return on his money usually gets rich.

In our advice to our clients, we seldom recommend highly speculative stocks, because we consider the avoidance of loss more important than the making of profits. You may object to that statement, because you speculate to make profits, and not for the purpose of avoiding losses.

Nevertheless, if you are careful in keeping your losses down to a minimum, your profits are likely to be very liberal. Any trader who trades for any great length of time is likely to make large profits sometimes, and yet the majority of them have greater losses than profits. It is said that more than 80% of all margin traders lose; but we do not consider that an argument against trading on margin, because these losses are mostly due to ignorance, greediness, and the taking of too great chances.

Do not suppress your desire to speculate. All progress would stop if people did not speculate. But do not speculate in stocks nor in anything else without any knowledge of what you are doing, and try to use as much good judgment and care as possible in all of your transactions. If you do not know what to do, get advice from someone who is supposed to know and who is not interested in having you buy or sell. Stock speculating with safety is possible for those who make the effort to be guided by correct principles.

CHAPTER XXIII.

TWO KINDS OF TRADERS

There are two kinds of stock traders. One kind nearly always makes a profit, and the other wins sometimes and loses other times, but eventually loses all if he does not change his methods. The first kind buys stocks on liberal margin or outright and is not worried when the market goes against him, because he has good reasons for believing that prices eventually will go up. If he does have to take a loss occasionally, it is likely to be small compared with his profits. The second kind wants to make a big profit quickly, and he buys stocks that he thinks are going to make big gains in the near future, but his selections are not based upon good judgment.

We might designate these two traders as the careful trader and the reckless trader.

The careful trader tries to get good advice on the markets and the values of stocks. If the advice appears to him to be conservative, he is guided by it; but if the reckless trader gets advice on stocks, he is not guided by it if it is of a conservative nature. If he does take advice, it is likely to be from one of those unreliable market tipsters who is very emphatic in his statements about what the market is going to do. The reckless trader lets his greed and desire for large and quick profits influence his judgment.

Once in a while one of these reckless traders realizes that he has made a great mistake, and he wants to change his att.i.tude. Usually he is holding several stocks that show a big loss and he does not know what to do with them. He reasons that they are selling so low now they surely will sell higher some time. Perhaps his reasoning is good and perhaps it is not. The stocks may have no chance of going up for a very long time, if at all, but even though they have a good chance to go up later, it is better for him to sell them now if he can put the money derived from the sale into something else that has a better chance to make a profit.

Our advice is never to hesitate to sell and take a loss if you can put the proceeds from the sale into something better rather than leave it in the stock in which it is now. It is not so much a question whether or not the stock you are holding will go up, as it is whether or not you would buy that particular stock if you were just coming into the market to make a purchase. Of course there is a loss of commissions when you sell a stock and buy something else, and for that reason we sometimes recommend holding a stock when we would not recommend buying it.

If you have been a reckless trader in the past, the only thing for you to do is to change your methods and try to become a careful trader. It is much better to go to the extreme in carefulness and be satisfied with very small profits than to take great risks.

CHAPTER XXIV.

POSSIBILITIES OF PROFIT

What are the possibilities of profit in stock speculation? That question is frequently asked but it is difficult to answer. James R. Keene is quoted as having said: "Many men come to Wall Street to get rich; they always go broke. Others come to Wall Street to operate intelligently for fair returns; they usually get rich."

While it is true that nearly all stock traders who try to make unusually large profits in a very short time in stock trading lose, yet unusual profits can be made if you exercise good judgment and have patience.

Roger W. Babson, in his book ent.i.tled, "Business Barometers," speaks of the possibilities of profit in language that would be considered greatly exaggerated if used by a promoter, and yet he is extremely conservative in his advice to traders. He advises never to buy on margin, never to sell short, and staying out of the market entirely, neither buying or selling, for a great part of the time. Here is a quotation from his book, which follows a detailed statement of an investment of $2,500 over a period of fifty years:

"The preceding example shows that $2,500 conservatively invested in a few standard stocks about fifty years ago would today amount to over $1,000,000. These are not only strictly investment stocks, but are also stocks which have fluctuated comparatively little in price.

This, moreover was possible by giving orders to buy or sell only once in every three or four years.

"If other stocks which were not dividend payers and which have shown greater fluctuations were purchased, and advantage had been taken of the intermediate fluctuations, the $2,500 would have amounted to much larger figures. By intermediate movements is not meant the weekly movements which the ordinary professional operator notes, but the broader movements extending over many months and possibly a year or more. Nevertheless, these broader intermediate movements should not be noticed by a conservative investor, as it is possible to correctly diagnose only the movements extending over longer periods.

Many brokers believe that it is possible to discern also these intermediate movements of six or eight months; and if so, the following results would have been possible.

"$5,000 invested in 'St. Paul' in 1870 would amount to over $10,000,000 today.

"$5,000 invested in 'Union Pacific' in 1870 would amount to over $15,000,000 today.

"$5,000 invested in 'Central of New Jersey'

would amount to over $30,000,000 today.

"$5,000 invested in 'Northern Pacific' would amount to over $50,000,000 today.

"These figures are not based on the supposition that the investor was selling at the top of every rise or buying at the bottom of every decline, but that the transactions were made at average 'high'

and average 'low' prices based upon the study of technical conditions."

If such large profits can be made by following Babson's advice, of course larger profits can be made by buying on conservative margin and by selling short when all the conditions are in favor of it.

While there are possibilities of making extremely large profits without taking great risks, by those who are patient and exercise good judgment, one should be satisfied with a small profit, if it is the result of great care, in an effort to eliminate risk. Of course, you can afford to take a much greater risk with a small part of your speculative fund than you can with all of it. The less money you have with which to speculate, the more careful you should be. Some people cannot afford to speculate at all. They should invest their funds in good, safe investments, but this book is written for speculators.

Careful stock speculation carried on regularly over a period of years, we believe brings larger returns than almost anything else, and in the next chapter we tell you something about where to get information to guide you.

CHAPTER XXV.

MARKET INFORMATION

Where do you get your market information? Perhaps most people get it from the daily papers. When you look over the financial news of one of the leading metropolitan papers and see how much there is of it, you can get some idea of the enormous volume of work necessary to get this matter ready for the press in a few hours. There is no time to confirm reports. It is necessary that many of the articles be written from pure imagination, based on rumors.

Weekly and monthly periodicals can be more accurate in their information, but even they are not always dependable. Much of the financial news published comes from agencies that are not reliable. Read what Henry Clews says about them:

"Princ.i.p.ally among these caterers are the financial news agencies and the morning Wall Street news sheet, both specially devoted to the speculative interests that centre at the Stock Exchange. The object of these agencies is a useful one; but the public have a right to expect that when they subscribe for information upon which immense transactions may be undertaken, the utmost caution, scrutiny and fidelity should be exercised in the procurement and publication of the news. Anything that falls short of this is something worse than bad service and bad faith with subscribers; it is dishonest and mischievous. And yet it cannot be denied that much of the so-called news that reaches the public through these instrumentalities must come under this condemnation. The 'points,' the 'puffs,' the alarms and the canards, put out expressly to deceive and mislead, find a wide circulation through these mediums, with an ease which admits of no possible justification. How far these lapses are due to the haste inseparable from the compilation of news of such a character, how far to a lack of proper sifting and caution, how far to less culpable reasons I do not pretend to decide; but this will be admitted by every observer, that the circulation of pseudo news is the frequent cause of incalculable losses. Nor is it alone in the matter of circulating false information that these news venders are at fault. The habit of retailing 'points' in the interest of cliques, the volunteering of advice as to what people should buy and what they should sell, the strong speculative bias that runs through their editorial opinions, these things appear to most people a revolting abuse of the true functions of journalism."

Of course, every trader gets market letters from one or more brokers.

These are many and varied in character. Some of them are prepared with great care and give reliable information, but you must remember that a broker's market letter is published for the purpose of getting business, and business is created only by the customers' trading. Therefore it is to the broker's interest to have his customers make many trades instead of a few trades. In his book "Business Barometers," Roger W. Babson reproduces a letter written to him by the Manager of the Customers' Room of a Stock Exchange House. We consider this letter so important to all traders, we are taking the liberty to reproduce it here:

"Hearing on every hand about the fortunes made in Wall Street, I decided, upon being graduated from college, to devote myself to finance. With this end in view, I secured a position with a first-cla.s.s New York Stock Exchange House, finally becoming the 'handshaker' for the firm; that is, 'manager' of the customers'

room. So I had an exceptional opportunity to size up the stock business. The chief duties of the manager are to meet customers when they visit the office, tell them how the market is acting, the latest news from the news-tickers and the gossip of the Street. But the real duties are to get business for the house. Once a most peculiar man came to the office. He was about forty-five years of age, dressed in a faded cutaway coat, high-water trousers, and an East Side low-crown derby hat. In a high squeaky voice he said that he knew our Milwaukee House and would like to open an account. Of course, we were all smiles, for here was a new 'customer.'

"One day while in Boston he called us up on the long-distance telephone to make an inquiry about the grain market. One of my a.s.sistants, desiring to get a commission out of him, said 'We hear that Southern Pacific is going up; you had better get aboard.' He said 'All right; buy me a hundred at the market.' The stock was bought, but he never saw daylight on his purchase, for the market declined steadily afterward and by the time he got back from Boston it showed a heavy loss. The man who advised its purchase had no special knowledge about the stock, but simply took a chance, knowing that the market had only two ways to go, and it might go up, in which case, besides making twenty-five dollars in commissions for the house, he would be patted on the back for his good judgment. If the market went down, as it did, he would still make twenty-five dollars.

"I venture to say that 99% of the speculations on the New York Stock Exchange are based on such so-called 'tips'. The manager has got to get the business to keep his position and salary, and this can only be done by 'touting' people into the market. So he draws on the 'dope' sheets of the professional tipsters and his own feelings, and gives positive information to the bleating lamb that the Standard Oil is putting up St. Paul, or that certain influential bankers are 'bulling' Union Pacific. The lamb buys the stock, the broker gets the commission, and then the lamb worries his heart out as he sees his one-thousand-dollar margin jumping around in value. Now it has increased to eleven hundred dollars, then declined to nine hundred and fifty dollars, then nine hundred dollars, eight hundred dollars, then back to eight hundred and fifty dollars and then it takes the 'toboggan' to three hundred dollars upon which the broker calls for margins, and sells the customer out if they are not forthcoming, the whole speculation being based on the manager's 'feeling' that stocks ought to go up.

"Men of affairs who will not play poker at home, and are shocked at the mention of faro and roulette, which any old-timer will tell you are easier to beat than the stock market, think they are using business judgment when they try to make money on stock market 'tips'. Anyone with common sense can see that a 10% margin has no more chance in an active market than a brush dam in a Johnstown flood. One of the causes for this kind of speculating on a margin is that a broker's commission is only 12-1/2 cents per share and it does not pay to do small-lot business. The one-thousand-dollar margin would only buy ten shares outright and net the broker but $1.25 for buying and $1.25 for selling, whereas that same amount as margin on one hundred shares yields the broker $12.50 each way besides interest on the balance, the net result being that for any given amount of money a speculator on 10% margin multiplies his profits by ten and his losses by ten over those that would occur were he to buy the stock outright and take it home. The broker on his side multiplies his commission by ten over what he would receive were he to do an investment business."

From the above letter you get an idea of the att.i.tude of an employee of the average broker's office. He would not be considered loyal to his employer if he had a different att.i.tude. When an att.i.tude like this influences the broker's market letters, they are not reliable.

You may ask whether there is any reliable information about the market.

Yes, there is. There are several large organizations that make a study of fundamental statistics and statistics of different companies and give information to their subscribers based upon this knowledge. We believe that is the only kind of information that is worth very much to a trader, except the statistical information--the number of shares sold and the prices at which they are sold--he gets from his daily or weekly papers. Some of the princ.i.p.al organizations of this kind are as follows: