Part 9

The contention is frequently heard that 10,500,000 bales, or even 11,000,000 bales of cotton can no longer be considered an average crop; that the supply should steadily increase in order to keep pace with consumptive demand, and that the crop of 1904-05 was therefore small, and the crop of 1903-04 not so large as it would appear. As this is the most common of the numerous explanations offered as to the recent high prices of cotton, it will be briefly discussed.

In order to arrive at a clear view of the ratio of increase in production, a considerable period must be consulted. The statistics of crops from year to year, or even from two or three years, will not do. Let us cover a long period, jumping ten years at a time.

Season Crops in Bales 1860-61 3,849,469 1870-71 4,352,317 1880-81 6,605,750 1890-91 8,652,597 1900-01 10,383,432

This exhibit shows that if a sufficiently long period is consulted, a steady increase in production is shown; the average production is also well maintained in the five years from 1901-02 to 1905-06, if the bumper crop of 1904-05 is distributed over the entire period.

The contention is all right, but its formulators do not take the pains to ascertain that what they claim _should_ occur, is exactly what _has_ occurred.

The gist of the whole matter is this: regardless of all temporary or artificial influences, some powerful force, not related to supply and demand, is shouldering prices steadily upward.

To the speculator this fact recognized, analyzed, and properly applied should be of incalculable benefit. If he understands _why_ prices have been advancing, he will be able to determine with facility how long the influence will probably endure. Instead of being misled, or rendered over-cautious by obsolete records of the past, he will be able to calculate from these obsolete records the reasonable expectations of the future. Temporary changes will, of course, be brought about by temporary causes. Fundamental values will still be influenced by supply and demand, but if an independent and submerged force is also at work, due allowance must be made for its operation.

That such a force _is_ at work is written large between the lines of compiled statistics; to ignore its existence is an error rank with mischief. The speculator who does not consult this influence may easily make the mistake of selling at low prices because they are high by comparison with prices which obtained a few years ago.

On the other hand, a clear understanding of the matter will enable the trader to decide with more or less accuracy what now constitutes a low price for cotton, and what will be the probable price for the future.

_Conclusion._

The questions most frequently asked by inexperienced people are as follows:

1--What margins are necessary to reasonable safety? 2--Is it better to study the entire list or make a specialty of one stock? 3--What class of securities is the safest? 4--What may be considered a fair rally or reaction in stock prices under ordinary circumstances? 5--What is the best general method of trading?

Some of these questions have been answered in the preceding chapters, but they will be taken up here in turn and the writer’s views submitted on each head.

1--What margins are necessary to reasonable safety?

There is no unqualified answer to this question. The price of the shares operated in must be considered. All other things being equal, a stock selling at $50 would require only half the margin employed in operating in a security selling at $100. If the $50 stock declines 25 points, it has suffered a quoted loss of half its value. The $100 stock, however, must decline 50 points to suffer an equal loss. This percentage of advance or decline is established with remarkable fidelity in every considerable movement.

If the scale order is employed as a method of accumulating shares, extraordinary marginal provisions must be made, for even as the line acquired increases, the original margin dwindles. The scale order is, or should be, based on the assumption that a temporary decline below the first purchase price is desirable and is necessary to the best results. This fact, however, should never be contorted in such a manner as to instigate purchases at high prices. If the operator who employs the scale order will try to make the first purchase at what he considers a bargain price, or in other words at what he calculates to be the very bottom of a movement, he will surely find that in nine cases out of ten, his own errors or the velocity which frequently carries prices to ridiculously low or high points will enable him to accumulate his line to advantage. The scale order should never be used on its mechanical merits alone, but merely as a method of averaging.

It goes without saying that marginal necessities will be principally gauged by the correctness of the speculator’s general views. It is the writer’s opinion, that if care and intelligence is used in judging values, conditions, and the stages of the market, a margin of 20% will be sufficient in almost all cases. That is to say, 20 points on a stock selling at par and 10 points on a stock selling at 50. It must be distinctly understood, however, that this opinion contemplates purchases at low prices after a decline has occurred; and when both the technical and general conditions warrant purchases.

The late Charles H. Dow fixed the sum of $2,500 as the minimum amount necessary to safe operating in ten share lots, but this sum, or any other for that matter, is an arbitrary estimate. Mr. Dow’s figure was founded on the necessity of averaging and also upon a most laudable caution and conservatism which, however, might at times result in unnecessary restriction of operations at a most favorable period. There are times when $500 might be safely made the basis of trading in certain stocks; there are other times and other stocks where $2,500 would be wholly insufficient.

While no rule of thumb is possible in this regard, it is the writer’s opinion that there is no necessity for being out in calculations more than 20%, provided always that due care has been exercised in basing such calculations.

2--Is it better to study the entire list or make a specialty of one security?

It is better to examine the conditions and prices of all the leading securities. This is the only method by which _comparative_ values may be arrived at. It is frequently the case, particularly after a comprehensive decline or a panic, that certain excellent shares have suffered almost as much as the more questionable securities. At such times, what we want is not only a good bargain but the best bargain obtainable, and this may be secured more readily by a careful comparison of prices, values and income return than by any other method.

Again, in an upward movement stocks generally advance, not homogeneously, but one at a time or in closely related groups. Certain shares may have a reasonable advance while others hang fire. If we have good reason to believe we are on the eve of a great bull movement, the best results may be attained by a process of rotation in trading.

3--What class of securities is the safest?

Railroad stocks are the soundest securities. The danger of competition is not so great; the assets are more tangible and when once the specific influences which are now working against them have been cured or eliminated, as they certainly will be in time, these shares will show a steady improvement both in value and price. At times the very best stock will suffer severely and much pessimistic talk will be heard of receiverships, etc. That is the time to buy. Lord Rothschild once advised a friend to buy French rentes. “But the streets of Paris are running with blood,” replied the recipient of the advice. “That,” responded Rothschild, “is the reason you can buy rentes so cheaply.” The man who purchases the shares of railroads when they are greatly depressed may rest serenely in the consciousness that the future of American railroads is assured and that measures seeking to obstruct progress or prevent fair returns on investments, either in the way of income on money or the natural accretion of values cannot possibly endure.

4--What may be considered a fair rally or reaction in stock prices?

Here again the question of ruling prices of a certain stock are to be considered. Low-priced stocks always move in a narrower range than do higher priced ones. The extent of a probable comparative movement may be gauged by percentages with a fair degree of accuracy. This method of measuring a comparative advance or decline, however, will be frequently disturbed by specific influences bearing on a certain stock or group of stocks.

It is useless to undertake to establish even a rough rule for ordinary movements by a system of averages culled from history. We find that in the course of ten years the rallies and reactions which appeared were so varied in character both as to the extent in points and the duration in days, that a barometrical average founded on such investigation would be empirical. However, the results of this inductive reasoning will be given for what they are worth.

The principal movements for ten years have been as follows:

_1.--The Bull Market of 1897 to 1899._

This advance began in April, 1897, and terminated in April, 1899--two years of advancing prices. The average advance in Industrial shares was 38.79 points, or about 100%. Railroads advanced 38.92 points, or about 80%.

The intermediate reactions were as follows:

Extent in Extent in Industrials Rails Duration Date of Reaction Points Points Days Sept. 10 to Nov. 8, ’97 10.17 9.78 59 Jan. 7 to Mar. 25, ’98 8.67 10.43 78 Jun. 10 to Jun. 16, ’98 2.84 2.93 7 Aug. 26 to Oct. 19, ’98 9.41 4.41 54 Jan. 30 to Feb. 7, ’99 3.07 3.38 8

_2.--The Bear Market of 1899-1900._

This decline began May 1st, 1899, and culminated Sept. 24, 1900--17 months. The average gross decline in Industrial shares was 24.32 points, or about 32%, and in Rails, 13.27 points, or about 18%.

Intermediate rallies were as follows:

Extent in Extent in Industrials Rails Duration Date of Rally Points Points Days May 31 to Sep. 5, ’99 10.10 8.17 97 Dec. 18, ’99, to Jan. 2, ’00 9.86 6.38 16 Jan. 11 to Feb. 5, ’00 5.09 4.56 26 Mar. 9 to Apr. 6, ’00 5.04 5.22 29 May 15 to June 1, ’00 2.76 3.42 17 June 23 to July 23, ’00 5.34 4.56 31 July 31 to Aug. 15 2.10 2.31 16

_3.--The Bull Market of 1901._

The advance began Oct. 1, 1900, and culminated Aug. 26, 1901, 11 months. The average advance in Industrial shares was 20.87 points, or about 39%. The average advance in Rails was 37.92 points, or about 51%.

Intermediate reactions were as follows:

Extent in Extent in Industrials Rails Duration Date of Reaction Points Points Days Nov. 20 to Dec. 8, ’00 5.09 1.67 19 Dec. 27, ’00, to Jan. 19, ’01 6.29 4.39 24 May 1 to May 9 7.55 14.49 9 June 17 to July 15 8.80 11.30 29 July 29 to Aug 6 3.89 6.64 9

_4.--The Movement of 1902._

The year 1902 is particularly interesting, as it shows what occurred in the market the year prior to a period of industrial relaxation. This year cannot be called either a bull or bear year, as while railroad stocks advanced and closed the year with net gains, the Industrial stocks suffered material declines. As the declines in Industrial stocks was greater than the advance in Rails, we will arbitrarily designate the year as a bear period and examine the homogeneous movement for rallies, instead of reactions.

From Dec. 12, 1901, to Dec. 15, 1902, Industrial shares declined 5.74 points and rails advanced 3 points.

Intermediate rallies were as follows:

Extent in Extent in Industrials Rails Duration Date of Rally Points Points Days Feb. 20 to Mar. 21, ’02 2.84 3.45 30 Apr. 10 to Apr. 24 2.49 4.91 15 May 19 to May 24 2.09 3.99 6 June 24 to July 28 3.61 7.44 35 Aug. 21 to Sept. 19 2.44 4.05 30 Sept. 29 to Oct. 3 2.51 4.37 5 Oct. 11 to Oct. 17 2.73 4.96 7 Nov. 14 to Nov. 21 2.32 4.80 8

_5.--The Bear Market of 1903._

This decline began Jan. 8, 1903, and culminated Nov. 9th, of the year, 10 months. The average gross decline in Industrial shares was 24.18 points, or about 36½%. The decline in Rails was 32.48 points, or about 27%.

The intermediate rallies were as follows:

Extent in Extent in Industrials Rails Duration Date of Rally Points Points Days Jan. 20 to Feb. 16, ’03 3.51 1.38 28 Mar. 10 to Mar. 20 1.85 3.11 11 Apr. 13 to Apr. 30 3.77 5.07 9 June 10 to June 12 2.60 4.48 3 Aug. 8 to Aug. 17 6.50 8.14 10

_6.--The Bull Market of 1904 and 1905._

The advance began Jan. 6, 1904, and culminated Jan. 22, 1906--a little over two years. The average advance in Industrial shares was 55.93 points, or about 119%. The average advance in Rails was 49.56 points, or about 55%.

The intermediate reactions were as follows:

Extent in Extent in Industrials Rails Duration Date of Reaction Points Points Days Jan. 27 to Feb. 24, ’04 3.79 4.17 29 Apr. 7 to May 18 2.55 4.03 42 Dec. 5 to Dec. 12 7.46 5.93 8 Apr. 14, ’05, to May 8, ’05 9.23 9.81 25 May 12 to May 22 6.68 5.50 11 Aug. 23 to Sept. 7 4.22 4.82 16 Nov. 1 to Nov. 13 3.31 4.74 13

The year 1906 was a neutral year. Prices for Industrials declined only slightly during the year and average prices of railroad stocks were the same in December as in January. Money could have been made throughout the period, either by sales on rallies, or purchases on declines. As a consideration of a neutral year would add little to this exhibit, it will be omitted.

5.--What is the best general method of trading?

The writer’s reply to this question consists principally of a summing up of points already covered in other portions of this work. It is necessary to study and understand the subject thoroughly, to know values, general conditions, the technical position of shares, and above all things to consult future probabilities rather than past performances. Study of the past has its educational value and this is also true of the present, but the future is the all-important thing. Retrospective speculation is one of the commonest and most flagrant of the numerous errors made by public participators. Get whatever of experience and information you can from history, but _speculate_ on the _future_.

The man who enters the market with insufficient capital, who expects to get rich quick or who allows success to lead him into excesses and over-speculation will lose. It is as certain as death. He may succeed for a time but not for long.

Operations based on “tips” or “charts” will lead to final disaster. This thing of trying to attribute habits to a market is, in the writer’s opinion, ridiculous. The movements of prices are caused by events. We know that in periods of financial stringency or business depression prices fall, and in periods of inflation and good times prices rise. It is possible to formulate a system founded on repetitions applicable to every game of chance, and laid out on paper, that system will appear infallible. You can find the exponents of machine-made riches in every pool-room and gambling house in the country. They all eventually lose and there is nothing to show that the advocates of charts as a basis for stock trading ever fared any better. Imagine James R. Keene, or J. P. Morgan poring over a chart and operating thereon. Even if the market did have habits, as soon as these habits were recognized and followed by a sufficient number of people, the technical position would be rendered so rotten that the charts would fail from that influence alone. Charts, employed as a convenient method of picturing the past, may have a certain value, but used as a basis for trading they are an evidence of laziness or incapacity, or both. It requires hard work to be successful in any line. Thinking is hard work, study is hard work, research is hard work; and it is infinitely easier to bet on repetitions all nicely laid out in crooked lines on a sheet of paper than to laboriously erect sound deductions; but the difference in the two methods is that one will succeed and the other will fail.

We may also resort to the ultimatum employed by those eminent citizens who punch each other’s noses in a prize-ring, i.e., tell the chart-players to “go and get a reputation.” When they can show even one instance of a fortune accumulated by this method their cause will be greatly strengthened.

In the exception taken to Mr. Dow’s theory of $2,500 being the minimum amount necessary for operations in small lots, nothing could be further from the present writer’s intentions than to recommend transactions on insufficient margin. What is sought is merely the truth. The contention that it is wise to stimulate extreme conservatism will not hold. If the naming of a certain sum far in excess of real needs is praiseworthy, we may expand the matter indefinitely and name $5,000 or even $10,000, as the limit.

But on the other hand, errors on the side of prudence are vastly preferable to errors on the side of rashness. In this as in all other things, the golden mean is the really desirable factor.

As to the best side of the market for operations, it is thought that the long side offers the greatest opportunities. The long side is healthier, it is constructive, and almost all the great fortunes made in the market have been founded on discreet and well-timed purchases. To adhere to this plan, however, frequently requires long periods of non-participation, and speculators are not, as a class, very patient. The man who can so school himself as to await opportunities to purchase good securities at low prices has by far the best of the bargain. Few men can do it.

It is fully realized that a work which defends stock speculation in any degree, will meet with much criticism. Nevertheless, people _will_ speculate and if you are one of those who will--do it right.

It is submitted in concluding this work that if the advice here given is heeded, i.e., to know _what_ you are buying and _why_; to buy only _good_ properties when prices are depressed; to exercise patience and provide sufficient capital; to eliminate first and forever the idea that correct deductions mean sudden riches; to use brains instead of charts, and common-sense instead of tips; in short, to apply to speculative ventures the same degree of business foresight and understanding as would be employed in any other business, the evils and losses which have always been a part of speculative history, would be diminished if not eliminated.

BIBLIOGRAPHY.

The books named on the following pages have been chosen as the nucleus of a reference library particularly adapted to the needs of the speculator. These works have been selected because of their clearness, soundness and simplicity. There are many other excellent works bearing directly or indirectly on the subject but these latter will be suggested as the student progresses and it has been thought best not to name a large number of books, which might result in confusion as to the character of the subject matter. The possessor of the works named will find that he has a very compact, comprehensive and inexpensive little library, both from an informative and statistical standpoint.

A B C Series. (The Wall Street Library.)

This collection of six small volumes will be found useful to the student. The subjects are arranged as follows:

Vol. 1--A B C of Wall Street. By S. A. Nelson. Vol. 2--Anatomy of a Railroad Report. By Thomas F. Woodlock. Vol. 3--A B C of Banks and Banking. By Geo. M. Coffin. Vol. 4--A B C of Stock Speculation. By S. A. Nelson. Vol. 5--A B C of Options and Arbitrages. By S. A. Nelson. Vol. 6--Theory of Stock Exchange Speculation.

The volumes can be procured singly at $1.00 per volume ($1.10 delivered) or in set of six at $5.00 per set. Volume five is not so necessary to the speculator as the other five named.

THE INVESTORS’ LIBRARY.

This series of five practical handbooks will be found to cover the several fields of stock, bond and security investments. The books are arranged as follows:

Art of Wall Street Investing. By John Moody. Mr. Moody possesses the gift of saying things with clearness and directness, and while this work is addressed rather to investors than speculators, the two branches are so closely allied that what is of educational value to the investor cannot but assist the speculator. The book is No. 1 of the Investors’ Library but is sold separately at $1.00; delivered, $1.10.

The Pitfalls of Speculation. By Thomas Gibson. Price, $1.00; delivered, $1.10.

The Investors’ Primer. By John Moody. A thoroughly practical description and explanation of the methods and rules followed by bankers and brokers in judging and dealing in securities. Price, $1.50; delivered, $1.62.

Mining Investments and How to Judge Them. By Francis C. Nicholas. This book is No. 5 of the Investors’ Library and is an essential to the investor in mining shares. The price is $1.00; delivered, $1.10.

These four books, with The Cycles of Speculation, constituting the Investors’ Library are supplied in a box and sent to any address in the United States, Canada or Mexico for $5.00, delivered.

American Railways as Investments. By Carl Snyder. This is the simplest and most accurate book of its kind. It is recommended to the student of values as indispensable. The matter contained is not only comprehensive in scope but is stripped of the technicalities and involved verbiage which confuses us in most works of this character. The price is $3.20; delivered, $3.52.

Copper Handbook. Compiled by Horace J. Stevens. This volume is indispensable to the operator who handles Copper stocks, either listed or unlisted. It contains a history and frank expression of opinion of even the very small corporations. The book also gives a practical and scientific history of production, manufacture and distribution of the metal. It is the best work of its kind. The price is $5.00 in cloth; $7.50 in full morocco, delivered.

Corporation Finance. By Thomas L. Greene. This work deals with the methods employed by Corporations in managing their finances. It is clearly and simply written. The price is $1.25; delivered, $1.35.

Cotton. By Charles A. Burkett and Clarence H. Poe. This is about the only work which covers in a practical way the cultivation, marketing and manufacture of cotton. Price, $2.00; delivered, $2.20.

Earning Power of Railroads. By Floyd W. Mundy. This little volume is published annually and is a handy guide to Earnings, Capitalization, Mileage, etc. Price, $2.00; delivered, $2.12.

Essays in Finance. By Robert Giffen. This work is clear and readable. It presents in a colloquial style many valuable facts and suggestions. Price, $3.50; delivered, $3.73.

Financial Crises. By Theodore E. Burton. This is a very valuable and necessary work to the student of price changes. It should be in every speculator’s library. Price, $1.40; delivered, $1.52.