John James Butler

“ 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. ”

“ To speculate is to theorize about something that is uncertain. We can speculate about anything that is uncertain, but we use the word "speculation" in this book with particular reference to the buying and selling of stocks and bonds for the purpose of making a profit. When people buy stocks and bonds for the income they get from them and the amount of that income is fixed, they are said to invest and not to speculate. In nearly all investments there is also an element of speculation, because the market price of investments is subject to change. ”

“ Of course, that was a most exaggerated prediction, but during the extreme activity of a bull market, it seems that nearly everybody is talking in exaggerated terms of optimism. That is why most traders seldom ever take their profits in a bull market. They wait until stock prices start to come down, and then they are likely to think there will be rallies, and keep on waiting until they lose all their profits.
On the other hand, some people make the mistake of selling too soon. Just because your purchase shows a liberal profit is no reason why you should sell. ”

“ 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. ”

“ You always should keep in mind the fact that when you buy a stock at a higher price than its intrinsic value, you are taking a risk. The stock may have great future possibilities, but it is risky to buy stocks when present assets and earnings do not warrant their market prices, no matter how attractive prospective future earnings may appear. However, the possibilities of profit sometimes are so great that one is justified in taking this risk. ”

“ But then, one can't blame the public when you realize how thoroughly unreliable is most of the market information given to them.
Still another kind of manipulation is "one-man" manipulation, where one man controls companies, which are known as "one-man" companies. Usually the directors of these companies are friends or employees of his, and in many instances he has their resignations in his possession, so that they must do whatever he wants them to do. Owing to the strict rules of the New York Stock Exchange, it is rather difficult for such manipulations to be carried on there. ”

“ When you sell stock short and the price goes up, you will have to pay a higher price for it. Therefore, to protect himself against the possibility of losing, your broker demands a payment from you just the same as you pay margin when you buy stock.
Short selling is something that we do not recommend very much to our clients. We think it is not advisable to do any short selling as long as there are good opportunities to make money by buying; but when all bargains disappear, as they do sometimes, you must either sell short or else keep out of the market entirely. ”

“ 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 [85] 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. ”

“ A stock gambler (we use the word "gambler" to refer to a man who operates ignorantly) is watching a large number of extremely speculative stocks and suddenly notices one that takes a big jump in price. Then he says to himself, "If I only had bought that stock on a ten-point margin, I would have made several hundred per cent profit." He picks out another stock that some one tells him is going to do equally as well. He buys as much of it as he can and puts up all the money he has as a margin, but the price doesn't go up. Perhaps the price goes down and he loses his margin ”

“ It is a good rule never to buy stocks that brokers urge you to buy. Your own common sense ought to tell you that a stock that is advertised extensively by brokers is likely to sell up in price while the advertising is going on and will drop in price just as soon as the advertising stops.
Many people notice that and they think they can profit by buying when the advertising starts and sell out when they get a good profit, but the majority of them lose money. The stock may not respond to the advertising, or if it does go up, they may wait too long before selling. ”

“ A broker runs a bucket shop when he sells stock to his clients on margin and either never buys the stock for their accounts, or else sells it immediately after buying it. The bucket shop simply gets your money on the supposition that you are more likely to be wrong than to be right. Of course, if you take the bucket shop's advice you surely are likely to be wrong. Bucket shops get their clients into the very speculative stocks, where there is likely to be a great deal of fluctuation in the price of the stocks, which gives them frequent opportunities to sell out their clients. ”

“ Most people who trade in stocks buy on margin. The ordinary minimum margin is about 20% of the purchase price, because banks usually lend about 80% of the market value of stocks.
If you put up 20% of the purchase price of your stocks with your broker, he has to pay the other 80%, but he can do that by borrowing that amount from his bank, and putting up the stock as security. In this way brokers are able to handle all the margin business that comes to them, as long as money can be borrowed. ”

“ It is a common thing to read about the short interests in certain stocks. All stocks that are sold short must be bought sooner or later, and when that buying takes place, it may affect the market very much. Therefore, if it is known that there is a big short interest in a certain stock, we should expect the stock to sell at a higher price; but sometimes the short interests break the market and force the price down, especially when general conditions are in their favor. ”

“ It is said that the desire to speculate is very strong in the American people. That is why our country has made greater progress than any other country in the world, because progress is the result of speculation. We are not referring merely to stock speculations, but to the word in its broadest sense. Every new undertaking is a speculation. ”

“ It is just the time they should not sell, but it is a well known fact that the majority of people do in the stock market just what they should not do. The more they sell the more the price goes down, and the pool operators accumulate the stock.
Having secured all the stock they want, they give out good news and continue to buy the stock until it starts to go up. The public reads this favorable news, and seeing the stock go up, will go into the market and buy, which puts it up higher. All the time financial writers are supplying good news about the stock and the public buys it. ”

“ By short selling, we mean selling a stock that you do not possess, with the intention of buying it later. Short selling in general business is very common, and we think nothing of it. Manufacturers frequently sell goods that are not yet made, to be delivered at some future time. Selling stocks short is a similar transaction, except that in a majority of cases delivery of the stock must be made immediately.
However, your broker can attend to that by borrowing the stock. As explained in the preceding chapter, when the market is active most of the trading is done on margin. ”

“ 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. ”

“ A "stop-loss" is an order to your broker to sell you out if the market sells down a certain number of points. Many speculators place stop loss orders only two points from the market price. The idea is that when the market starts to go down it is likely to continue going down, and by taking a two-point loss you may save a much greater loss. It also can be applied to a short sale, when you give your broker instructions to buy in the stock for you if it goes up a certain number of points. ”

“ 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. ”

“ There are always some people who are willing to sell at some price above the market who will not sell at the market; and when the demand for stock is greater than the supply, it goes up until it is supplied by some of these people who are holding it at a higher price. ”

“ If the market price of any stock is far below its intrinsic value and there is no reason why the future should bring about a change in this value that will decrease it, then you may be certain that important influences are working against the market price of the stock for the time being. In the course of time the market price will go up towards the real value. ”

“ When stock prices do not rally beyond the prices at which they were before the break occurred, it is a sign that the turning point has been reached and that the bear market has started, although the majority of people do not realize this until a long time afterwards. ”

“ The chances in buying manipulated stocks are invariably against the outsider.
There always is so much publicity about these very active speculative stocks that the public is attracted towards them. Newspapers and brokers' market letters give altogether too much space to them. Such stocks sell far too high, and when the break comes, it brings ruinous losses to many people.
On the other hand, by following a conservative course, you really have a chance to make large profits with a minimum risk. ”

“ The same thing is true of stock speculating. The failures in stock speculating are caused mainly by ignorance and greediness. Many people who would be satisfied with a fair return on their money in a business enterprise, think they ought to make a 100% profit in a few weeks in stock speculation. [83]
There is something about stock speculation that appeals to the greediness and pure gambling instincts of people. In the chapter on Manipulation, we have told you how stock prices are put up and down. Some outsider accidentally buys one of these stocks just before the price starts up. ”

“ THE MONEY MARKET AND STOCK PRICES
Perhaps no other one thing influences the movement of stock prices so much, in a large way, as money conditions. It is impossible to have a big bull market without plenty of money. During a bull market nearly all stocks are bought on margin, which is explained in Chapter XVI. This makes it necessary for brokers to borrow large sums of money. When money is tight, it is impossible to get enough to carry on a large movement in stocks. ”

“ The stocks that most people buy are usually the very stocks that should be left alone. The stocks you should buy are usually the ones you hear very little about.
There is only one SAFE way to speculate, and that is to be guided by a knowledge of the fundamental conditions of each stock and also of the industries they represent. There are several large organizations giving information [108] of this kind, and those who have been guided by the fundamental statistics issued by them, almost invariably have made money in stock speculating. ”

“ However, stocks do not move uniformly and there frequently is an opportunity to buy some particular stock at a bargain when nearly all stocks are selling too high. We try to pick out these opportunities for our clients.
Reports of earnings by various companies influence stock prices, as does also the paying of extra dividends or the passing up of dividends. A peculiar psychological influence is noticed when a company declares an extra dividend. The price of the stock usually goes up, while as a matter of fact the intrinsic value of the stock is decreased by the amount of this dividend ”

“ You should be careful not to buy a stock merely because somebody says it is a good thing to buy, unless the person making the statement is in the business of giving information on stocks, because it may be only a rumor with no substantial basis. Of course, if many people act on the rumor, there will be active trading in the stock, and it is frequently for that purpose that such rumors are started. ”

“ It is very important that you choose a good broker. No matter how careful you are, it is possible to make a mistake. However, if you choose a broker who is a member of the New York Stock Exchange, you have eliminated a very large percentage of your chances of getting a wrong broker. ”