I BRIGHTON 4 \'.j .V < \ '‘?;r p’l‘ vl’ f ’/*f ^\h^\o.z FRO THE PUBLIClfl^Mfev fiPTHP ■ *^. r y OF THE CITY OF BOSTON % urn** rma r-Ty^-'gi i ■ *»/. *» t- v*b-< - y «-i Mfih Business Fundamentals How to Become a Successful Business Man By Roger W. Babson NO LONGER THE PROPERTY OF SOSTOft PUBLIC uBRSiW : ‘■w B. C. Forbes Publishing Company 120 Fifth Avenue New York C Copyright, 1923, By Babson Institute First Printing, February, 1933 Second Printing, April, 1923 Third Printing, August, 1933 Fourth Printing, September, 1923 THE PLIMPTON PSESS NOIWOOD'UASS'D * S * A ROGER W. BABSON AND HIS WORK T HE proof of the pudding is in the eating of it. In bygone years I used to be asked more often than I am asked now, u Is Babson sound? ” The pith of my reply invariably was and is that had not Babson been sound he could not have suc¬ ceeded, starting with nothing but his brains, in building up a bigger and bigger business and a wider and wider reputation each succeeding year. * a W hen you think of oil, you immediately think of Rockefeller. When you think of the telephone, you immediately think of Bell. When you think of the automobile, you immediately think of Ford. When you think of electricity, you immediately think of Edison. When business men think of business statistics today, they immediately think of Roger W. Babson. It might be said with little exaggeration that he founded a new science. Until Babson, the trained engineer from the Massachusetts Institute of Tech¬ nology, applied his mind to them, business statistics were rather unrelated things. To the unopened eyes of those days they pointed nowhere in particu¬ lar. ft iv P.OGER W. BABSON AND HIS WORK Babson, the pioneer, took hold of them, gathered more of them than had ever been gathered before, studied them through and through, looked into their heart — and even their soul — and found that, like ancient hieroglyphics, they were capable of yielding valuable enlightenment to those who fitted themselves to understand them. With greater research came greater experience, greater skill, greater ability to analyze their mean¬ ing, their message, their portent. Today Roger W. Babson is concededly sui generis — in a class by himself. He has created a unique monument. More, his research and writings have contributed invaluably to the progress and prosperity of Ameri¬ can business and the American people. And, not least, Roger W. Babson has discovered, and unabashedly proclaimed, that, through all the apparently tangled skein of material statistics there run laws as immutable and unchangeable as the Almighty, laws that can no more be departed from with impunity than the Golden Rule. This book acquaints you with these laws and points the way to following them successfully. B. C. Forbes TABLE OF CONTENTS CHAPTER I PAGE The Use of Statistics f. >• .. »• i« ; [.. k, i Comparative and fundamental statistics — what they reveal — relative importance to business men — sources — turning statistics to profit in business and investment. CHAPTER II Fundamentals and What They Foretell ... io General trend of economic conditions — methods of opera¬ tion mark success — twelve fundamental subjects and their significance — the two great fundamentals of business. CHAPTER III Making Figures Talk . . . .. . . . .. 37 Advantage of picture or chart over words — methods of charting various data — bar, u pie,” picture, line and ratio or percentage charts — what they reveal. CHAPTER IV Forecasting Business Conditions ...... 52 The cause of business cycles — application of Newton’s law of action and reaction — how fundamentals become barom¬ eters instead of thermometers — forecasting with the Bab- sonchart — the typical cycle. v VI CONTENTS CHAPTER V The Seesaw of Supply and Demand , . „ . , . Three important phases of the exchange of commodities — the fluctuating price equation — a definite procedure iq buying and selling — agricultural and industrial commod¬ ities and their price factors — analyzing commodity statistics. CHAPTER VI Scientific Purchasing Forecasting price trend — group commodities — finding authentic sources — price history of ten staple commodities — service and profits. CHAPTER VII Managing Men, and Economic Law . . * , . Two distinct problems — law of action and reaction in the field of human relations — changing attitude of labor — frequency of strikes — growth of unionization — where employee and employer make mistakes — labor’s “ say.” CHAPTER VIII Solving the Production Problem. Production 25 per cent, short of our needs — a new phase of business with prices on descending scale — piloting labor through falling wages — keeping workers informed — gen¬ uine profit sharing and mutual faith. CHAPTER IX Methods of Marketing . . , .. Lack of adjustment between production and distribution — selling on the foundation of “facts first” — Babson’s “ Merchandising Analysis.” CONTENTS Vll PAGE CHAPTER X Selling a City . K M ». K City a unit for consumer’s goods — fitting plans to local conditions — two questions about a locality — population statistics, purchasing power, and prophecy — charting and forecasting a city’s business activity — merchandising to meet the times. CHAPTER XI Selling an Industry .., . . „ Meeting changing conditions in the industries — selling scientifically — annual purchases of all industries — influ¬ ence of business cycle — special conditions affecting a given industry — reducing margin of error in business judgment. CHAPTER XII Trend of Business 168 Standardization and proper distribution — chain and self- help stores — developing efficiency of buyers — trade asso¬ ciations — business counselors. CHAPTER XIII Financial Independence *77 Life experience of average man — lack of financial in¬ struction — need of systematic saving — budgets for various incomes — employing the surplus. CHAPTER XIV Investing Your Income. Enjoying two incomes — fundamental principles by which 185 to select investments — bonds the typical investment — the major bond cycle — margin of safety — diversification — “ averaging ” — distinguishing between speculating and investing — financial independence at fifty. Vlll CONTENTS PACB CHAPTER XV Successful Speculation .... ,. t . ,. ... . 204 Intelligent speculating not gambling — three phases of stock market—how the long-swing speculator operates — mistakes of average speculator — pitfalls to avoid — how to buy and when — profit possibilities. CHAPTER XVI Business Problems . *.* . . . . i. .« . r. r.i c*i ««» f.i i. 220 Analyzing the reasons for failures — basing constructive plans thereon — labor conditions, past, present, and future — buying commodities — going with the market — na¬ tional distribution — the passing of salt fish — retail mer¬ chandising— interpreting needs and desires. CHAPTER XVII Investment Problems.. 239 Money harder to conserve than to accumulate — invest¬ ments continually growing better or worse — five rules — bond classifications — studying and capitalizing funda¬ mental conditions and the business cycle. CHAPTER XVIII Conclusion .... ,. ,. . 251 Natural advantages not essential to prosperity — the cycle of family wealth — fortunes lost by failure to understand fundamentals of business — wheel of opportunity con¬ stantly revolving — the “ Six I’s of Success.” INTRODUCTION S OME twenty years ago, on a summer afternoon, Professor George F. Swain and I sat in the tower-room of my cottage in Gloucester, Massa¬ chusetts, poring over a number of charts. We had been doing the same thing off and on ever since I graduated from the Massachusetts Institute of Technology, in 1898. For five years I had been obsessed with the idea that people were suffering tremendous loss and much needless misery due to economic causes. At Technology I had found physics, chemistry, and other sciences reduced to an exact basis 5 so that one could tell ahead of time what would happen if he did certain things. In fact, it was worked out so that one could decide upon a desirable result and then mix the ingredients that would produce that result. School was on a sound, scientific basis; but, when we got into the business world and faced the major problem of making a living, everything seemed to be on a catch-as-catch-can basis. The economists had set forth a few rules, to be sure, but when a man faced the personal problem of making a living, either in working for some one else or for himself, he had to fall back on instinct. IX X INTRODUCTION My search for information on what makes a suc¬ cessful business man brought out just one new idea. I found that for five thousand years business men had been succeeding by guess. Young men by the millions had started in with a common ambition to succeed. A small fraction of them learned, quite by accident, the combination that would work in their own particular calling. They succeeded and prospered. The others struggled, groped, wore themselves out, and died. The following genera¬ tion— the rich man’s son and the poor man’s son — started in exactly where their fathers had started, as far as any real knowledge was concerned. And each succeeding generation was forced to start at the bottom without any of the knowledge or experi¬ ence gained by those who had experimented and struggled for hundreds of years before. This profitless repetition showed the need for some sort of organized knowledge on the most im¬ portant of all businesses — that of making a living. Hence, I kept at work on the problem. But, to get back to our story — Professor Swain and I were studying those charts on wages, prices, bank clearings, and numerous business matters for long periods of years. We were trying to ac¬ count, on that particular afternoon, for a sort of wave motion that seemed to run through each of them. Quite suddenly one of us said, cc I wonder if Sir Isaac Newton’s law of action and reaction has any- INTRODUCTION XI thing to do with this economic wave motion.” The idea seemed plausible. As a result, I went to Eng¬ land and visited Cambridge, Newton’s home to.wn, studying his early books and writings in an effort to learn something of his discoveries and the possi¬ bility of their application to the problem. After spending several months among his books and notes, I ran across the following in “ Sir Isaac Newton’s Philosophical Discoveries,” published by McLaurin, in 1748: “ The establishing of the equality of action and reaction, even in those powers which seem to sur¬ pass mechanism and to be more immediately de¬ rived from Him, seems to be an indicator that those powers, while they derive their efficacy from Him, are, however, in a certain degree, circumscribed and regulated in their operations by mechanidal principles.” That settled it. I went to work in earnest, and within a year had reduced the various facts in busi¬ ness to a single chart. This chart illustrated New¬ ton’s law as it applies to business, and also made it possible to forecast the various features of business progress — the seasons of prosperity, decline, de¬ pression, and improvement — with remarkable ac¬ curacy. The law has since been applied to hundreds of factors, involving almost every phase of the business world. It has been applied to the stock market to solve the enigma of fluctuation, and it has been J INTRODUCTION « • Xll worked out in forecasting the trend of human relations. The tiny business started in an old attic in Welles¬ ley, Massachusetts, to make and market these fore¬ casts for the guidance of business men and investors, has grown during the last twenty years into a world-wide organization, with a staff of over 300 economists, statisticians, and assistants. Its operating revenue exceeds $2,000,000 annually, and its re¬ ports are subscribed to by America’s leading execu¬ tives and investors. This material success is gratifying, of course, but I am interested in it primarily as proof of the sound¬ ness of a principle. It is much more gratifying to know that the idea with which I struggled twenty years ago has gradually been accepted by the busi¬ ness and financial world. Hence, activity in both fields is rapidly coming out of the tangled guess¬ work and is taking shape as an exact science which deals with facts, formulas, and certain results. Through all this experiment, I have found that there are only a few laws that are really funda¬ mental. With these in mind, a man can approach almost any industrial or commercial problem, the administration of almost any business or the solution of almost any financial difficulty. Therefore, a man’s possibilities of success are limited only by his skill in the application of the principles. I shall try to set forth these few fundamentals of success, and I hope that they may make vour INTRODUCTION Xlll effort to succeed more fruitful, that they may save you from unnecessary loss and grief. These fundamentals apply to every one at some stage of his career. Every man who succeeds em¬ ploys them, consciously or unconsciously, whether he knows it or not. And it is safe to say that you will “ get there quicker if you kno,w where you are going.” Let me also add that since our organization has grown to such large proportions there are many connected with it to-day who know more about some special lines of investigation than I can ever hope to know. Some of these men have helped in prepar¬ ing portions of this book. They are: Leroy D. Peavey, C. N. Stone, H. N. McGill, G. E. Macll- wain, C. W. Wallour, M. L. Morse, H. C. Bald¬ win, P. S. Sweetser, O. W. Hill, and S. L. Sholley. R. W. B. Wellesley Hills, Mass. October i, 1922. BUSINESS FUNDAMENTALS Chapter I / THE USE OF STATISTICS S TATISTICS, as far as we are concerned, will be understood to represent concentrated infor¬ mation reduced to the exact basis of figures. This gives us a tremendous field. Since, however, we are interested only in the statistics which affect busi¬ ness and investments, we will discard the rest and concentrate on this particular branch. These figures are divided into two distinct classes — comparative statistics and fundamental statistics. Comparative statistics, such as would concern the merchant, for instance, relate to weight, quality, age, and method of manufacture of the merchandise in which he deals, together with such trade figures as are published in trade journals. Under this heading are also grouped the figures that appear on the mer¬ chant’s books — the figures that represent the in¬ side condition of his particular business. From the investor’s point of view, comparative statistics in¬ clude all particulars concerning the bonded debt, earnings, gross business, and financial condition of a given property. They reflect inside conditions. 2 ’ BUSINESS FUNDAMENTALS These figures are very necessary to bankers and in¬ vestors for comparing similar securities of different companies and different securities of the same com¬ pany. Fundamental statistics, on the other hand, reveal the broad general situation that affects every one. These underlying conditions, such as prices, money, wages, etc., are of tremendous importance because they affect a man’s business fundamentally . They govern the purchasing power of his customers, the price and supply of the raw materials he uses, and the living conditions of the workers in his plant. The importance of comparative statistics is gen¬ erally accepted and understood. Hence, business men now freely spend much money for bookkeepers, accountants, and office assistants to record the nec- cessary data. Nearly every business compiles them to a certain extent, and most concerns employ from io to 50 per cent, of their office forces on this work. Few business men, on the other hand, make any systematic effort to collect data and study funda¬ mental statistics. Those who have taken pains to do so are conspicuous in their own business com¬ munity for their unusual prosperity and what their friends call “ good luck.” The reason is this: fundamental statistics are more important to the business man than those reflected in the figures on his own books y for fundamental conditions have more to do with his successX f A recent investigation by Professor David Friday, THE USE OF STATISTICS 3 then in the Economics Department of the University of Michigan, now head of the State School of Agri¬ culture, revealed the more or less astonishing fact that the largest portion of business profits and losses results from changes in fundamental conditions. A more recent investigation made by my associates, covering over 400 concerns representing the twenty- six leading branches of industry, revealed that 57 per cent, of business profit is the result of changes in fundamental conditions, while but 43 per cent, is the result of competitive efficiency. The absolute necessity of keeping records and compiling comparative statistics within the individual business is already recognized and has been adopted in general practice. We will, therefore, hencefor¬ ward confine ourselves almost exclusively to a dis¬ cussion of fundamental statistics and possibilities of profit, both in the business field and in the invest¬ ment markets. All financial history has consisted of distinct phases, and, although of different duration, each phase has consisted of four periods ; namely, (1) a period of prosperity, (2) a period of decline, (3) a period of depression, (4) a period of improvement. These always follow one another in the same se¬ quence and cause a constant change of surface condi¬ tions with which one must reckon. / Theoretically, there should be a state where everybody is busy, and nobody overtrades; where the cost of living is reasonable, and the wage earner 4 ’ BUSINESS FUNDAMENTALS has a chance to save for old age and to establish a higher standard of comfort. As it is, however, con¬ ditions are constantly changing; prices are going up or coming down; the wage that .will afford a com¬ fortable living to-day will hardly pay the rent next year; orders come in bunches, so that the manu¬ facturer is either worked to death trying to get the goods out or is rushing around feverishly to get enough orders to keep his plant running. The average business man, the victim of these circum¬ stances, is going it blind and is bound to lose. Common sense dictates that, as long as conditions keef changing and are hound to continue to do so, the first stef is that of defense . The business man must have up-to-the-minute facts on current conditions in every part of his field of activity. He must know just how things stand; so that his decision may apply to the situation as it is. For this purpose he must use fundamental statistics. Such statistics must be collected from many sources. The government departments at Washington are especially helpful, supplying much valuable data on conditions at regular intervals. Special commissions, from time to time, investigate fundamental conditions in one field or another and and issue enlightening reports. Then there are the special libraries, public libraries, questionnaires, per¬ sonal correspondence, trade publications, trade asso¬ ciation reports, clipping bureaus, surveys and special reports in the field. THE USE OF STATISTICS / The constant changes in fundamental conditions, which harass and befuddle the average business man, offer a remarkable opportunity for profit, provided one can tell what the next change will be and when it will take place. These two factors will be dis¬ cussed in succeeding chapters; but, before we close this discussion of statistics and their possibilities, let us consider the dollar-and-cents value of the time spent in studying them. The amount of money that can be made by the study of such statistics is limited only by the origi¬ nal capital and the number of years the study is /continued. Comparative statistics treat of comparative condi¬ tions and are used for selecting securities and com¬ modities that are absolutely safe and that have the greatest prospect of increase in market value under fixed market conditions. Fundamental statistics treat of underlying conditions and are employed for determining these general market conditions and whether or not it is wise to purchase, or to sell, or to do neither. Investors use these data to guide them in purchasing securities only when they are low, holding them for from two to four years until they are high, and then selling them and depositing the proceeds in a bank. They leave the money on deposit for from two to four years, until the same securities again sell low, when they withdraw the money and again purchase the same or other high- grade securities, j 6 I BUSINESS FUNDAMENTALS Many such investors double their money every few years, with practically no risk and with very little trouble. By a study of these fundamental statistics some individuals with little risk and with¬ out any marginal purchases, but by purchasing out¬ right high-grade, dividend-paying securities, have turned an investment of $5000 into $200,000 in about twenty years. When one realizes the mean¬ ing of this — that an investment of $25,000 grows automatically to $1,000,000 within twenty years — the value of fundamental statistics is apparent. If one is not strictly an investor and is willing, under a broker’s guidance, to take advantage also of certain intermediate movements which come once or twice a year, greater profits are sometimes ob¬ tained. But, of course, this latter method involves risk. Such operations are not based on statistics. Many brokers urge customers to take advantage of declines, recommending short selling in periods of great activity and prosperity and also purchasing on margin during periods of depression. But short selling and margin purchasing involve other ele¬ ments of risk, and the investor taking such risks becomes a gambler . If marginal purchases are undertaken, the mar¬ gins should be large — from 30 to 40 per cent. Moreover, instead of selling short, the investor may buy “ puts ” for three months, or, if possible, for a longer time. These puts often allow the holder to make nearly as much profit as if he had sold the I THE USE OF STATISTICS 7 stock short. And the loss he may sustain is limited to the price of the puts. The point, however, that this book would empha¬ size is that a knowledge of fundamental conditions will enable the business man to materially increase his profits of any business without the risks involved in ordinary speculation. The same information will enable the investor to multiply an original invest¬ ment of a thousand dollars to a very sizable estate in sound securities with very little risk and with¬ out marginal purchases or short sales. The requi¬ sites are a constant study of comparative and funda¬ mental statistics and sufficient self-control to act only in accordance with what those statistics clearly indicate and to listen neither to the optimism nor pessimism supplied by the daily papers and by the many individuals who are always giving free advice. The above principles apply to bonds as truly as to stocks, and should be studied by the investors who purchase only bonds, as well as those who pur¬ chase stocks. Although bonds do not fluctuate so widely as stocks and for this reason do not present so great an opportunity for profit, yet the minimum interest yield of good bonds is absolutely fixed, which is not true of even the most conservative stocks. Bonds are especially recommended to per¬ sons dependent upon the income derived from their investments. Furthermore, the writer is inclined to advise that all persons should, always have a 'portion 8 BUSINESS FUNDAMENTALS of their principal on deposit in a bank y or in high- grade bonds , short-term notes y or commercial paper . Merchants who never buy or sell securities use these data with equal profit. Fundamental statis¬ tics clearly show the merchant when to buy and in¬ crease his stock of goods, and when to cut prices and reduce his stock. They also enable the merchant to forecast money conditions in order that he may intelligently decide whether to borrow to allow cus¬ tomers further credit, or to reduce his loans and the indebtedness of his customers. Moreover, at all times, these figures show the merchant the con¬ dition of business throughout the country; so that he knows whether the growth or contraction of his business is proportional to that of competitors. f^Upon careful thought, it must be admitted that the fortunes of American merchant princes must have been created by a knowledge of these facts, rather than simply selling to the trade at a nom¬ inal profit. Therefore, the proper use of funda¬ mental statistics not only insures a merchant against losses, but should also be as profitable to him as to the investor, enabling him to double and triple his capital every few years. Such ideas of the value of statistics should, therefore, be especially inter¬ esting to the small merchant with capital of, say, only $10,000. For there is no reason why, with fundamental statistics as an aid, his capital should not automatically increase to $250,000 within twenty years. THE USE OF STATISTICS 9 Not only do students of fundamental statistics make large fortunes for themselves and their fol¬ lowers, but such students are the very best patriots a country can produce. The true patriot is he who studies fundamental statistics and who acts in ac¬ cordance with what they teach, buying very heavily during the days of panic and great depression. The real traitor to-day is he who urges on or follows the crowd during a period of over-expansion, and then locks up his money and refuses to extend aid during the dark days when banks are failing, railroads are becoming bankrupt, and the wheels of industry are stopping. Therefore, every additional person who enters into this work will aid in making the next period of over-expansion less riotous and the next depression less severe. V Chapter II FUNDAMENTALS AND WHAT THEY FORETELL X I HAVE already defined comparative and funda- • mental statistics. A study of the latter reveals the exact condition of the country at any given time, and also — by application of the law of action and reaction — the trend of business. The business man may study hundreds of pages of data and spend vast quantities of time and money in business, but if he does not have the fundamental facts he is like a small boat on the ocean when the storm comes. It is necessary, of course, to go into exhaustive re¬ search on matters pertaining to one’s line of busi¬ ness. Only those who are doing this in the most thorough manner have made a success. But this study alone is not sufficient; men who have pursued this policy have become very wealthy, only to lose everything in a few months simply because they did not know fundamentals. They did not know that their own business was dependent upon the general trend of economic conditions. When the funda¬ mentals changed — fundamentals which were sure to affect all business — they did not know it and were caught napping. I have often seen an entire business, the result of the accumulation of years, IO FUNDAMENTALS, WHAT THEY FORETELL II collapse like a house of cards. Some years ago I made an investigation of one hundred leading industries to see if they had any special secret of success. I soon found that there was no particular group which had a distinct advan¬ tage over the other groups. Nor was heredity, en¬ vironment, education, or any other such helpful factor sufficient to make the great difference between failure and success. It is true that certain funda¬ mentals of character were necessary, but I became convinced that character alone was not enough. It was evident that the outstanding factor which marked the success of these great captains of industry was their methods of operation. Not content with having a large group of engi¬ neers and . experts continually investigating along the lines of their respective industries, they also had statistical departments which continually laid before them the trends of all the leading trade indicators. By such investigation they could at all times be rea¬ sonably sure of the direction in which business as a whole was traveling. Unlike their competitors, they refused to “ guess.” They studied the fundamental statistics of the coun¬ try. They believed what Colonel Ayres, vice-presi¬ dent of the Cleveland Trust Company, has stated so pertinently to the business men of the country: “ The most important single piece of business informa¬ tion that the man of affairs can have is that which tells him at what stage of the changing course of business he is at any given time.” 12 BUSINESS FUNDAMENTALS There are a large number of subjects which should be studied in order to gauge the situation correctly, but the sifting process of years has re¬ duced the number which are of practical and definite use for the business man. In selecting these, the following characteristics are necessary: (i) com¬ prehensive and authoritative figures on the desired subject must be obtainable $ (2) the figures must extend over a sufficient number of years to show the business trend. This process of selection has given us about twenty-five or thirty subjects on which reliable data for the study of business trends in the United States can be obtained. A fundamental subject is one which shows, to some degree, the underlying conditions of the coun¬ try. The keenest and most successful merchants and investors have for years studied such subjects, thereby eliminating losses and making very large profits, as the business seasons have rolled around. Some years ago I was on a trip to England inter¬ viewing the great merchants and other successful business men of that famous trading country. I discussed with them at length the comparative data and current positions of leading corporations. “ This is all very well and quite essential,” said they at last, “ but what we want and what the mer¬ cantile world wants is to know how the United States is headed. We buy your railroads, your mines and your industrials — everything is booming. We turn our backs for a moment, and everything has FUNDAMENTALS, WHAT THEY FORETELL 1 3 plunged into a cataclysm. If you will study the fun¬ damentals over there as we study them here, you can perform a most wonderful service.” That set me thinking} I began an investigation of the available information and after months of re¬ search selected and arranged the statistics on certain important subjects, the number of which has gradu¬ ally been enlarged. For convenience, these funda¬ mental subjects may be grouped under twelve headings, as follows: /. New Construction and Real Estate: i . This will easily be recognized as one of the lead¬ ing indicators of the country’s progress. The build¬ ing industry represents an annual outlay of over $3,000,000,000! Consider residential building, for example: about 100,000 residences are needed an¬ nually. The home is the first unit of society and is a foundation stone in the welfare of the people. Hence, construction of dwelling houses and accom¬ panying real estate operations are of vital impor¬ tance. When business is booming, when everybody is employed and there is plenty of money in circu¬ lation, the tendency is for families to spread out, thus creating a greater demand for homes. When business gets dull and depression overtakes us, the reverse is true} consolidation of families is the rule and a surplus of houses results. The rental situation is closely related to this sub¬ ject. The more business expands and the higher 14 BUSINESS FUNDAMENTALS rentals go, the greater is the tendency toward the building and owning of homes by the people. This was most markedly shown during the period of high prices near the close of the European War. Factory and similar construction involves about $300,000,000 annually and is very intimately con¬ nected with the country’s mercantile progress. As civic standards are raised, municipal, state and other government building, as well as institutional proj¬ ects, absorbs a vast amount of capital. Of late, there has been a studied tendency, and rightly so, to do as much as possible of this sort of construction during periods of depression in order to give em¬ ployment to those who would otherwise be out of work. Real estate operations, including certain agricul¬ tural developments, involve millions of dollars every year and form the basis of one of the greatest of the country’s industries. Under the above cap¬ tion may also be grouped railroad construction, highway building, and the construction of water¬ ways. For years new railroad construction was one of the important items of activity — especially from 1850 to 1890. The great West was being devel¬ oped, trunk lines pushed their way across to the Pacific Coast, and a network of railroads traversed the states in all directions. Of late years other construction statistics have vied with railroad figures for the place of first im¬ portance, but the vast terminals and track develop- FUNDAMENTALS, WHAT THEY FORETELL 1 5 ments are still a very large item. And, since the advent of the automobile and motor truck, highway construction has also become a very important matter. That is why the various construction proj¬ ects are something which must be watched with the greatest care by the business man. Closely allied with such studies are the data on the output of the steel companies; cement, brick and lumber produc¬ tion; and similar statistics. II. Bank Clearings and Check Transactions: Bank clearings are one of the very best indicators of the real condition of business. The broad signifi¬ cance of bank clearings is revealed by the total for 1920 of $450,000,000,000. They furnish probably the best single trend indicator available; although we cannot rely on any one subject without risk of failure. In every large city and in many smaller ones there is a clearing house where bank represen¬ tatives meet every,day to exchange checks drawn on one another and settle balances. Records of these transactions have for years been most carefully studied. Inasmuch as in New York City the stock and bond business is of such large volume, it is best to study two distinct sets of clearing figures: (i) clearings excluding New York City; (2) total clearings of the country. With the advent of the Federal Reserve System, more comprehensive figures were obtainable. In August, 1916, the Federal Reserve Board extended clearings 1 6 BUSINESS FUNDAMENTALS facilities to many outlying districts. Most of these banks now report directly to the Federal Reserve Board the checks drawn each week. This gives a record of u Check Transactions ” — much more complete than the “ Clearings ” method. Every bill you pay by check is thus reported to the Federal Reserve System. As a very large vol¬ ume of our business is paid for by check, you can see at once what a valuable index of business activity this record is. Of course, these figures do not show the actual amount of goods which change hands, as the size of the checks is affected by price variations. Ordinarily, price changes do not radically affect this record, but at times, especially during a great war, commodity prices reach such abnormal levels that the variation is very marked. During these abnormal periods, then, commodity and security price levels must be very carefully noted when one is studying this barometer of busi¬ ness. Remember they represent the total amount of business done by the nation, just as “gross sales” represent the total amount of business done by a company; and this is what the whole nation figures on — the dollar value of business transactions. III. Business Failures: Failures, both in number and amount, are a good barometer of trade conditions. By ascertaining each month the average number of concerns in business and the number that have failed, the percentage of Statistical Tables FUNDAMENTALS, WHAT THEY FORETELL ^ ^ VI 8 8 8 8 8 8 8 ©5 gft888 88 I 8 BUSINESS FUNDAMENTALS failures may also be determined. Contrary to the ordinary impression, it is too few failures, rather than too many, that foretell disaster and panic. For instance, the records show that in 1912 and 1913 everything was running along quietly and smoothly. Nobody was scared, and failures were at a minimum, but in 1914 we ran rapidly into a crisis. The failure of the great house of Claflin & Com¬ pany which shocked the business world really marked the bottom of this depression. The same was true in the post-war period. In 1918 and 1919 people felt secure when failure lia¬ bilities were only $ 100,000,000 — almost the lowest on record — contrasted with a high of $700,000,- OOO. But how dismayed were these same unthink¬ ing people in the awful business decline of 1920 which came within a few months > time! Since then, not only have hundreds of our large business houses been wiped out, but thousands of others have been crippled and carried along under great stress by the banks. At such times inventories which appear ample dissolve to nothing when price-cutting and panic develop. Each depression has its own peculiar type of busi¬ ness mortality. In 1907 large banks, especially those of New York City, went by the board; 1903 was a so-called “rich man’s panic”; 1884 was marked by many railroad failures; and some of the earlier crises were accompanied by gigantic real estate cataclysms. FUNDAMENTALS, WHAT THEY FORETELL 1 9 After such a storm of failures the air is cleared and the way is opened for sounder conditions. The time to be frightened is before the storm comes, when failures are very few in number. The accompanying chart shows the close relation between failures and commodity prices. Greatest caution is required when prices are high and failures are fewest. At such times optimism rules, and only the wise ones begin to clean up doubtful accounts and prepare for trouble. The forehanded credit man can collect money and still keep his friends. But, if he waits until the storm breaks, he not only cannot make collections but loses his friends as he presses for payment. IV. Labor Conditions: The labor situation will be recognized at once by careful students as a vital factor in the life of the country. Approximately 40 per cent, of the total population of the United States are engaged in in¬ dustry of one sort or another. Wages, unionization, strikes and similar developments are of the utmost importance. Even the increasing prevalence of ma¬ chine methods does not eliminate this subject from our calculations 5 as the business of the country in¬ creases, the human element becomes more and more important. There was a time when the comparatively few employers knew their employees intimately. Later, the restless, selfish, money-making age resulted in IMP, ,.1880, , , 1885 Ifl90 18,9,5 , TOO , 1905 I FUNDAMENTALS, WHAT THEY FORETELL 21 employers’ forgetting that labor is something more than a “ commodity.” But recent years have marked the beginning of a reaction from such short¬ sighted philosophy. Moreover, the standard of living is rising in civilized countries, and nowhere more than in the United States. In reality, the human relation, es¬ pecially in American business, is the most critical of any. If suitable figures could be obtained, we would see it in startling relief. It is to be deplored that more data on this subject are not obtainable. One of the best sources has heretofore been a tabulation of immigration and emigration statistics. When steamers are packed with immigrants from foreign shores, this suggests excellent business conditions in the United States and high prices for labor. This, however, like everythng else, can be overdone, and too large arrival figures foretell a depression. Conversely, when departures are large in number and when immigrant traffic is small, it is a good sign that United States business can get no worse. The tide generally turns upward when this condi¬ tion prevails. For years these arrivals and departures have been carefully tabulated by the Government. Prior to the World War annual immigrant arrivals averaged around 1,000,000. At times legislative influences have prevailed, tending to restrict or increase immi¬ gration in accordance with the trend of feeling throughout the country. During the World War, 22 BUSINESS FUNDAMENTALS for instance, there were severe restrictions here, as well as drastic regulations in Europe, which prac¬ tically stopped the flow of labor to this country. Later, restrictive measures were enacted for the purpose of keeping out undesirable radicals and other agitators. During such periods as the fore¬ going, statistics on immigration do not adequately represent the real business situation. ^ As a substitute, it would be very desirable if suffi¬ cient figures could be obtained regarding employ¬ ment and wage scales for the country as a whole, and for individual localities. Already some pro¬ gressive work has been done by such states as New York and Massachusetts, but there is room for great improvement. Of course, there are the Govern¬ ment census figures for the intermediate five-year period, but in order to be of sufficient use to the business man such data must be more frequent. Eventually further figures from labor unions, states, municipalities, etc., may be available. For this reason, considerable attention is now being given to figures showing the “ Percentage of Labor Em¬ ployed ” and “ Pay Rolls in Manufacturing Estab¬ lishments ” in the state of New York. Strike figures, if obtainable, would be an excellent indicator. The Government for a term of years kept a partial record which was very valuable, not¬ withstanding its meagerness. This record showed a sympathetic movement with the changes in business from a period of depression to over-expansion, FUNDAMENTALS, WHAT THEY FORETELL 23 and vice versa. Such figures are no longer being tabulated by the Government, but my organization has been for some years uniformly tabulating a cer¬ tain proportion of strike statistics. Such tables will become increasingly important. V. Money Conditions: This includes banking figures, reports of the Comptroller of the Currency, money in circulation per capita, etc. Since money is used in all trade, it is one of the most sensitive indicators. All the items in the bank statement are worth watching; but the subject in which I am most interested is bank loans. It is of the highest importance to know how much business concerns and individuals are borrowing. During times of over-expansion the majority not only spend all they make, but utilize all the credit they can command. During such periods an inordi¬ nate gain in bank loans causes temporary business activity, but a decided fundamental weakness. Con¬ versely, in times of depression, the very best sign is to see bank loans being reduced. This means that the u spree ” is over and people are getting back to sanity again. Two sources of loan statistics are readily available. One is the “ loan and discount ” item reported each week by the leading member banks of the Federal Reserve System, a reliable measure of the increase or decrease in the total borrowings of the whole country. The second is the report of “ bills dis- 24 BUSINESS FUNDAMENTALS counted” by the twelve Federal Reserve banks. When a local bank is unable to supply its customers with loans, it may rediscount certain of the notes it holds with its Federal Reserve bank. In a gen¬ eral way, the item, “ bills discounted,” indicates the extent to which the member banks have had to call upon the reserve banks for assistance. In judging the banking situation, we must take into account the supply of money, or credit, which the banks have, as well as the demand for it. The rental price of money (interest rates), like the rent of anything else, is governed by the law of supply and demand. The supply of money is best shown by the ratio of the banks 5 reserves to their liabilities. Since inauguration of the Federal Reserve Sys¬ tem, bank reserves are held chiefly by the Federal Reserve banks. If it were not for the effect’ of gold imports, perhaps it would be necessary to watch only the supply of money, or reserves, in the banks. Heavy imports of gold, however, may temporarily inflate reserves without offering a safe basis for credit extension. Any increase in what is called the a reserve ratio, 55 therefore, is always carefully ana¬ lyzed by the student of fundamentals. V7 . Foreign Trade: The principal divisions of this subject are exports and imports of merchandise, and the balance of trade. Foreign trade statistics of any country rep¬ resent the, business done with the outside world. FUNDAMENTALS, WHAT THEY FORETELL 25 The existence of many countries now practically de¬ pends on their trade with other nations. Great Brit¬ ain, for instance, is essentially a foreign trading country. The United States is in a different position 5 we are a younger, and a growing nation, with land and resources sufficient to make us more or less, self- contained. But we are beginning to emerge from this provincial attitude, and our future will be dif¬ ferent in this respect. The foreign trade of a country bears the same relation to the nation as a whole, as the income and expense of an individual bears to the financial con¬ dition of that individual. One who for any length of time spends more money than he receives is sure eventually to have trouble. This is the difficulty which confronts Europe. Likewise it presents a problem for America. Our exports are to some extent a seasonal propo¬ sition. Cotton, grain, and other crop shipments to Europe every fall reach substantial proportions. Copper, iron, and other raw material exports, as well as manufactured items, also swell the total. While exports are only a small proportion of domestic ac¬ tivity, in boom times they do represent the top layer of our total trade, which layer is desirable for suc¬ cessful business. « On the other side of the ledger are goods brought into the country from foreign shores. These are known as imports. Generally speaking, no country can sell goods without buying, unless it is a great 26 BUSINESS FUNDAMENTALS creditor nation to which the rest of the world must pay interest. There must be an interchange of goods and the up-to-date trading countries expect to import as well as export in order to keep the balance of trade properly adjusted. Large exports during the coming years will be favorable to business only when they are equalled or exceeded by our imports. A heavy excess of ex¬ ports cannot in the long run be considered a good condition. Therefore, in interpreting foreign trade statistics, it is essential that imports and exports be considered together. Strange as it may seem, an in¬ crease in imports is fundamentally a favorable sign for the future. A proportionate increase in imports and exports indicates improving business, while a decrease in both indicates decline. VII. Gold Movements and Money Rates: This subject really includes gold exports and im¬ ports, domestic and foreign exchange, domestic and foreign money rates, etc. Gold is the basis of exchange for all leading countries. It starts from the mines and is passed through its leading distribu¬ tion centers to those who pay the highest price for it. After distribution, it flows from one part of the world to another, according to supply and demand. The balance of gold imports or exports is gov¬ erned primarily by our foreign trade and is an indicator of the country’s credit position. Of course, gold may be artificially imported by the banks. FUNDAMENTALS, WHAT THEY FORETELL 27 They have even been able to postpone panics tem¬ porarily by such methods. Ordinarily, however, money, like water, seeks its own level. That is to say, if money rates are low in the United States but high in Europe, gold will gradually be shipped to the high bidders in Europe. As this movement continues, foreign rates will ease and United States money rates will strengthen. It is for such reasons that keen students continually study gold move¬ ments, money rates, and exchange. Practically all business is carried on by a utiliza¬ tion of credit 5 borrowing for either a short or longer time is necessary. The rates for loans — money rates — vary according to the demand and supply of credit, and money rate statistics are ex¬ ceedingly valuable. A period of over-expansion is generally marked by high money rates at home and in leading foreign countries, and during the progress of great wars the whole machinery on which these subjects hinge may be thrown out of gear. During the World War extensive European pur¬ chases in the United States produced a net balance of more than $1,500,000,000 gold in this country. After the war we had more than a third of all the monetary gold in the world; while many other countries had not a sufficient supply to serve as a basis for their monetary systems. Of course, such countries must eventually return to a gold basis or completely change their monetary standards. To get these countries back to a proper gold basis the 28 BUSINESS FUNDAMENTALS United States would necessarily have to release a large amount of the gold received during the war. In such a case, heavy exports of gold from the United States might not be a bad sign, indicating, perhaps, a general world recovery. VIII. Commodity Prices: There is no more interesting and possibly no more valuable subject than commodity prices. Everybody is interested in the rise and fall of prices of the articles with which we deal in everyday life. Merchants and manufacturers turn immediately to the daily papers to see the live stock, grain, metal and other commodity quotations. Commodity prices are perhaps the most sensitive barometer we have, with the exception of the security markets. They are really the nerve center of business and fluctuate more violently than most other subjects. This was clearly illustrated in the precipitate de¬ cline which began in the middle of 1920, and, to¬ gether with other factors, resulted in the failure of thousands of business concerns. The wholesale price index of the Department of Labor declined from the high point of 247 in May, 1920, to the low point of 140 in 1921 —a drop of 43 per cent. The Babson commodity index also declined with startling rapidity. Rising prices mean increasing profits and lead to wer-expansion. Such declines as the one just men¬ tioned mean ruin. As commodities go up, it is an FUNDAMENTALS, WHAT THEY FORETELL 29 easy matter for the business man to buy a stock of goods and make a profit. He cannot help making money. Toward the peak of the price advance and on the downward side he is in exactly the reverse position, but he may always be prepared if he stud¬ ies fundamental statistics. Not only do business men study the various com¬ bined commodity price indexes, which show the general trend, but they also give close attention to the various groups. All groups do not often move in complete unison. There are raw materials, man¬ ufactured materials, cotton, grains and other crop commodities, iron, copper, and similar groups. Each has a definite relation to the business trend. Very closely related with this subject is the matter of world gold production. When gold is mined at the rate of $1,000,000 a day it is evident that these figures must be watched to see the effect of this supply on the inflation of prices. This is because gold is our measure of value. Our whole business system is built around a structure of values. That is why commodity prices, which represent these values, must be watched with great care. All busi¬ ness contracts are based on prices. The greatest calamities which business men have suffered have come from misjudgment of the trend of this funda¬ mental barometer. 30 BUSINESS FUNDAMENTALS IX. Investment Statistics: The investment markets portray the attempts of millions of people — foreign as well as domestic — to acquire ,what seems to them the best investments and to forecast in the most practical way the business tendencies of the country. In the most practical way, I say, because they back their judgment with their money! Thus the big exchanges of the world carry on dealings aggregating billions of dollars a day, not to mention a very heavy volume of trading in outside markets. Most buyers and sellers of securities endeavor to anticipate price changes, and leading bankers and brokers have statisticians con¬ tinually studying fundamental statistics for that very purpose. Some go so far as to say, “ If I know what the New York stock market is doing, I need no other business indicator.” Other merchants and manufac¬ turers say they desire to know nothing whatever concerning stock quotations. Of course, neither view is correct, but my experience of many years proves conclusively that this subject must be included as a business barometer. The two divisions to be tabulated are (i) price quotations, and (2) volume of transactions. Both bond and stock prices are quoted on the New York Stock Exchange. These classes are essentially different, and statistics of both groups must be care¬ fully kept separate. Sometimes weeks will elapse FUNDAMENTALS, WHAT THEY FORETELL 3 1 without much change in prices. At other times there will be violent movements up or down, em¬ bracing the whole list, or only limited sections, as the case may be. Day-to-day movements have prac¬ tically no value for the student of fundamentals, but the trend over the months and years is a very good barometer. Short movements have little value because prices can to a certain extent be manipulated by powerful “ pools.” But no manipulator can in¬ definitely buck the longer trend of fundamental conditions. In fact, such interests keep this trend carefully in mind. Price quotations and volume of transactions should be studied together. The volume is very large toward the culmination of bull movements, and again on the down-side when liquidation is well under way. When the volume is smallest, prices are low, and nobody is interested in stocks, the wise ones are accumulating bargains. As in commodities, the various groups should be watched. Railroad quotations were for more than fifty years the most important section of the market, both in bonds and stocks. Of late years industrials have come to the front, and during the World War they were leaders in activity. Coppers have always been a leading group and public utilities often at¬ tract general speculative interest. In connection with investment statistics we must not overlook such subjects as new securities, new incorporations, etc., but these will be discussed later. 32 BUSINESS FUNDAMENTALS X. Crop Conditions > and Other Production Figures: The United States has always been extremely rich in natural resources. Its minerals, its grain, and its cotton are in demand all over the world $ and nearly one-half its population are farmers. Hence, the great importance of this group of ba¬ rometers. Vast areas in the great West are de¬ pendent for their buying power on the success or failure of agricultural pursuits, and our lives would be vastly changed if it were not for the .wonderful productiveness of our rich country. When we think that grain, cotton, iron and steel to the value of several hundred million dollars each are exported to foreign shores in a year, the impor¬ tance of this subject is evident. Many industries are absolutely dependent on the crops, and aj large group of commodity prices are directly affected thereby. The railroads are particularly affected by crop condi¬ tions. The crop outlook through the growing season is followed with the greatest interest, and in this the whole country is aided by the Government, which collects the necessary data and makes very depend¬ able forecasts at intervals throughout the growing season. We produce 40 per cent, or more of the world’s iron ore, copper, and coal. Hence, one should fol¬ low with utmost regularity blast furnace statistics, unfilled tonnage reports of the United States Steel Corporation, copper and coal production. FUNDAMENTALS, WHAT THEY FORETELL 33 XI. Railroad and Industrial Profits: Railroad earnings really serve as a double barom¬ eter of business. The gross earnings act as a good indicator of the general business activity. Just as bank clearings represent the total volume of pur¬ chases made in the United States, so do railroad earnings indicate manufacturing and agricultural activity. Most of the goods bought must be trans¬ ported by the roads. In every period of business depression gross railroad earnings decline, and when conditions improve they are among the first barome¬ ters to advance. In 1914, at the depth of the de¬ pression, gross railroad earnings were only $12,300 per mile, although some of this was due to increased rates. In 1920, there were $26,600 per mile, more than twice as large. Net railroad earnings, while very important, serve a different purpose as a ba¬ rometer; they reflect more directly the financial con¬ dition of the railroads themselves. Prices of rail securities are directly dependent upon railroad earnings — in fact, the markets dis¬ count to a certain extent these reports. As most investments are either directly or indirectly depend¬ ent on railroads, railroad earnings are of great im¬ portance to the investor. Moreover, they are one group of corporations which regularly report their earnings each month. Since only a few other cor¬ porations report so frequently, this is of great ad¬ vantage to the statistician. 34 BUSINESS FUNDAMENTALS Because of the lack of frequent reports, it is much harder for the student to get a line on the progress of industrial projects. Yearly operating figures are generally available, but as far as monthly statistics are concerned, we are largely limited to a record of industrial dividend payments. These in¬ dicate some measure of the prosperity of the manu¬ facturing business of the country. In connection with the railroads, it may be mentioned that freight car statistics have for years been a barometer. Idle car figures are obtainable each week, and freight car loadings by the various groups are often utilized. XII. Social and Religious Factors: Although this subject comes last on our list, it might be considered, if suitable figures could be found, by far the most valuable and important one of all. For true religion is fundamental to our whole business structure; business depressions are a direct result of extravagance, recklessness, waste, greed, and irreligion, which develop during the so-called boom times. During periods of depression, we re¬ pent our wasteful methods, we seek to perform true service in order to get the proper remuneration, and again place reliance on the true values in life. The political factor should perhaps also be in¬ cluded under this heading. Certainly, there is a relation which holds between politics and the busi¬ ness conditions. I am continually beset by people FUNDAMENTALS, WHAT THEY FORETELL 35 who ask me if the political outlook does not sug¬ gest certain changes in business. At times this may be true, but a study of fundamentals shows that the trend of political factors is more an effect of the other business fundamentals than a cause. One thing is sure — the rotation of business seasons has often put a political party in power or caused its overthrow. Under this head should also be tabulated statistics on general confidence. I have in mind new securi¬ ties issued, new incorporations, etc. When confi¬ dence is created and we are working toward better business these figures show startling increases. Dur¬ ing periods of decline and depression the reverse is true. Such figures as above stated, however, are but a meagre measure of this most fundamental group of indicators. A stream can rise no higher than its source; and the prosperity of a country is absolutely dependent upon its moral and social conditions. Rome and the other rich ancient nations fell when 5 per cent, of the people held 95 per cent, of the wealth, lived in extravagance and sin, and oppressed the other 95 per cent, of the people. It is an unanswerable argu¬ ment that the statistics of new members of the nation’s leading churches show great gains when the country is in a depression, and declines when the country, in the midst of a boom period, is throwing away money and burning the candle at both ends! Never forget that the progress of the country de- BUSINESS FUNDAMENTALS 36 pends upon the vision of its people. u Where there is no vision the people (and business) perish.” It has been said that there never has been a panic which was not caused by disregarding either the Ten Commandments or the multiplication table, the two great fundamentals of business. I dislike unduly to emphasize this fact for fear of being thought hypocritical. Nevertheless, over twenty years of study of business conditions shows this to be absolutely true. Moreover, it is evident that the multiplication table is only a tool of the Ten Com¬ mandments. Hence, when studying fundamental conditions, give more thought to the Ten Commandments — look first and last at the attitude and purpose of the people. When a nation is in a period in which the great majority are seeking only pleasure and doing as little work as possible, then one may easily foretell disaster and unemployment. When a change for the better has come over the nation and men are again honest and industrious, it is safe to foretell prosperity and progress. Chapter III MAKING FIGURES TALK HERE is no sense in collecting and compiling X statistics unless they are to give some valu¬ able information about one’s present relative loca¬ tion and the direction in which one is headed. It naturally follows that they should be reduced to a form that will give this information quickly and truthfully. Most people are “ eye-minded; ” that is, the eye is quicker than the ear, if we may paraphrase the old-fashioned sleight-of-hand performer. When you read a page, it is the ear that is really working. Consciously or unconsciously, the printed letters, seen by the eye, are formed into a word which is spoken in the mind if not spoken audibly. Hearing the word, the brain connects it with an image and the subject is understood. In the case of a picture, the process is much simpler. The eye registers every detail at a glance and the image is received by the brain without any translation whatever. That is why it is quite impossible for the average person to carry six or seven figures in the mind at the same time and perceive the relative value and position of each. If they can be made into a picture, however, 37 38 BUSINESS FUNDAMENTALS the same mind will read the results through the eye immediately. Incidentally, the concept will remain in the memory much longer than any explanation of the same idea through the printed word. It is evident, therefore, that to be of value and to serve their purpose most statistics must be re¬ duced to pictures. These charts, as we call them, were once the exclusive property of engineers, archi¬ tects, and technically trained men who learned to use them in, connection with plans and specifications for the presentation of more or less involved ideas to non-technical minds. Of late, how’ever, they have come into their own in the business world. Hence, an understanding of charts is a very neces¬ sary part of one’s business education. It is impor¬ tant to be able to understand a chart 5 otherwise, the greatest value of all useful statistics is largely lost. It is also vital that one be able to make simple charts to illustrate one’s own ideas and to demonstrate them easily and quickly to others. There are only half a dozen forms which can be used to illustrate almost any data or information. Since each of these has its own particular use, the results are liable to be disastrous if they are not kept in their proper place. To begin with the simplest problem, suppose we want to make a chart illustrating the relation be¬ tween the volume of business done by two compet¬ ing manufacturers. Let’s say, for instance, that A’s sales are $200,000 and B’s sales are $400,000. Simple Bar Chart — Single Comparison MAKING FIGURES TALK ; ' . o *> ^ s o o o O f 3 o o o o ? o- - ■■■■ m g M to * £ O °l o' O o ° 6 ° * P»» o © 1. Iff 0 ) o 1*1 1 40 BUSINESS FUNDAMENTALS This comparison can best be illustrated by what is known as a vertical bar chart. Simply draw a horizontal line across the paper as a base. A ver¬ tical line near the left-hand edge of the sheet will then serve as a measure or scale. In this case, you might decide that an inch represents $100,000 in sales. Ifl this is the case, a point on the vertical line, one inch above the base line, marks $100,000j a point two inches above, $ 200,000; and so on. When the scale is completed, we have one point two inches above the base line and another point four inches above the base line. Let these points locate the tops of two vertical bars, about one quarter of an inch wide, which run from the base line to these levels. They may be made as wide as you like, sometimes taking the form of a rectangular block so that they can be seen more easily from a distance. The point to bear in mind is that a barred chart compares the length of the two lines and not their width. By labeling these two vertical bars A and B, you have a picture that will be quickly and easily understood by almost any one. It tells imme¬ diately that B’s business is double that of A. If it is desired to compare the volume of these two concerns for more than one year, you’ll simply date your first vertical bars 1921, for instance, and by moving over to the right on the same chart, you can make another pair of bars in exactly the same manner, which will tell the story for 1922. You now have a picture which not only compares MAKING FIGURES TALK 41 the two concerns for a given year, but each of them with its own previous year, and also their relative position for both years. If you are going to chart several years and want to get the picture into a rela¬ tively small space for easy and quick comparison, you may make the bars for each year very close together and distinguish them by filling one in solid black and leaving the other open, or by shading it with cross lines or dots or some other distinguishing feature. Every chart, by the way, should carry an explanation which indicates clearly what each of these bars represents. If one wishes to go a step further and show, for instance, what portion of these goods .were sold at retail and what portion at wholesale, the vertical bar representing A’s total business for the given year might be divided into two parts — a lower part which might be filled in solid black, and an upper part which might be shaded or left open, one part representing retail, the other wholesale trade. The total volume would still be just the same as com¬ pared with B’s, but the picture would give one addi¬ tional fact. Wherever it is desirable to compare two vol¬ umes or express a single relationship between two facts, it is best to use either the vertical bar or the horizontal bar chart. The latter is exactly the same as the former, excepting that the base line is a ver¬ tical line at the left-hand side of the page. This horizontal chart is ordinarily used when de- BUSINESS FUNDAMENTALS Simple Bar Chart Divided to Show Proportion MAKING FIGURES TALK 43 siring to split the .whole into several parts. If we have analyzed the sales, for instance, and want to picture the total and show what part of the $400,- OOO represents cost of raw material, manufacturing expense, sales expense, etc., we construct a horizontal bar and divide it into portions which represent the various factors. For instance, if the bar is four inches long and the cost of the manufactured goods represents 50 per cent, of the total selling price, we divide the bar into halves and the two inches to the left are filled in black and labeled u Manu¬ facturing Expense.” If the sales expense amounts to 30 per cent, and the profits 20 per cent., we divide the remaining portion of the bar into fifths. Three fifths are shaded in one way and are labeled “ Sales Expense,” and the remaining two fifths rep¬ resent the profit. This method of presentation will make percentages and fractions immediately intelli¬ gible to almost any one. No multiplication, divi¬ sion, subtraction or addition is necessary to see just what portion of the total is represented by each factor. The so-called “ pie chart,” or circle divided into sectors, is very often used to illustrate this division or breaking up of a whole into a number of parts. While more common than the bar chart, it is not ordinarily so good, because it is much more difficult to divide the circle into segments that will repre¬ sent the fractions to be pictured. For this same reason it is also subject to a possible misinterpreta- BUSINESS FUNDAMENTALS 1 44 tion, because it is rather difficult to compare various areas and be sure of judging them correctly. If in a hurry, don’t try to make a pie chart. You can make a bar chart in about one-fifth the time. If you do want to use the circle for purely decorative purposes, it is best to add the percentages or frac¬ tions to the chart. Write them in on the various AGE-35 Age 35, io Wealthy, io Well Off, 75 Self Supporting, 5 Have Died pieces of the pie, so that the reader has a check on his first impression. Another form of charting that has been used for decorative effect more than anything else consists of various sized pictures of the thing that the figures represent. For instance, in comparing the sizes of armies, it is often the practice to draw pictures of various sized soldiers. A big soldier is supposed to represent the biggest army and a little soldier MAKING FIGURES TALK 45 represents the smallest army. Big barrels of flour represent a large crop, while smaller barrels of flour represent a smaller crop. This method, of course, has the distinct advantage of picturing the thing represented 3 so that a reader need hardly bother with the explanation. One difficulty is that these same pictures are liable to misrepresent 3 for, if one army is larger than the other army, one sol¬ dier must be larger. If one army is twice as large as the other3 one soldier should be twice as large as the other 3 but when he is twice as large, he is, of course, broader and he looks at least four times as large as his little brother. People are liable to come to conclusions which are entirely wrong from such pictures, because they judge by area rather than by height. This difficulty in presenting picture charts can be overcome by using smaller units 5 instead of making two soldiers, make two rows of smaller figures in uniform. The first with ten men, for instance, all the same size, may represent the larger army; the second, with five men, the same size as the first, may represent the smaller army. You still have the figure of the soldier, and there is no possible chance for making a mistake in reading the charts, for it is seen at a glance that the first army is twice the size of the second. These three forms of charts will enable one to picture any given situation clearly and truthfully3 so that the facts will be readily grasped and a clear BUSINESS FUNDAMENTALS 46 impression will remain. If, however, we wish to go beyond the present or given situation and find out which way we are headed and where we are going, it is necessary to change our form and employ the line graph. If we want to compare the volume of sales over a period of years with the cost over the same years, we start by laying out the base line and the vertical scale exactly as we would for a bar chart. It is customary to measure off the years on the base or horizontal line and the variable factors of volume on the vertical line. We then locate our points for total sales and cost for each year, exactly as we would if we were making up a bar chart, but instead of drawing the bars from the base line to these points, we simply connect all the points representing sales with a single line. If the bars had been drawn in, this line would connect the tops of them. The line for cost is determined in the same way by draw¬ ing a line from the left-hand side of the sheet to the first cost point, then to the next cost point, then to the third, and so on. When we have finished, we have two wiggly lines which show the direction that sales and cost took each year and which also show whether cost and sales were going up at the same time or whether one was practically stationary while the other was increasing or decreasing. If the lines run close together, or cross each other, at any point in the chart, it is advisable to make one a solid line and the other a broken or dashed line MAKING FIGURES TALK 47 or in some way to distinguish it. Colors are very effective if they can be used without inconvenience. In this case, a blue line might represent the total sales and a red line costs. Such distinguishing marks make it much easier to follow the lines on a chart. Almost any number of the latest factors can be pictured on the same chart if each is distinguished clearly from the others. It is very important, however, that you bear clearly in mind that this form of chart is a line chart, that it gives present location and volume. It tells whether the factor pictured is increasing or decreasing, but it does not show the rate of increase or decrease. This last point will be clear when you see the difference between the chart just described and what is known as a ratio chart. In the ratio or percentage chart, the horizontal scale — the years — is determined exactly as in the bar chart and the line chart. The vertical scale, however, is quite different. Instead of being com¬ posed of equal units representing an equal given in¬ crease in volume, it is arranged so that equal units represent equal increases in percentage. In the line chart we scaled one inch representing $100,000, two inches representing $200,000, three inches repre¬ senting $300,000, and four inches representing $400,000. A ratio chart is arranged so that these equal distances represent an increase of 100 per cent. On the ratio chart, the first point on the vertical scale would represent $100,000. The inch from BUSINESS FUNDAMENTALS Line Chart — Shows Location and Volume MAKING FIGURES TALK 49 there to the next point represents ioo per cent, in¬ crease $ so our second point is $200,000. The next inch represents 100 per cent, increase $ so our next point is $400,000, instead of $300,000. The fourth inch doubles it once more and is $800,000. The fifth inch should be labeled $1,600,000 and so on. Once the scale is determined, the charting is done exactly as on the line chart. You can get ratio or logarithmic charting paper which makes it quite as easy to chart this way as the older way. The ratio chart has a further advantage in that two unrelated factors about the same business, or about different businesses, for that matter, can be charted on the same piece of paper. You can chart the sales in dollars as shown on the left-hand scale that we just laid out. You can also lay out an en¬ tirely different scale of, let us say, number of em¬ ployees, down the right-hand side of the sheet. You can then chart the sales and the number of em¬ ployees on the same piece of paper and can compare them directly, because both have been reduced to the common factor of percentage of increase or de¬ crease. When the two lines approach one another, it means that your sales per employee are decreasing. Whenever they get farther apart, it means that sales per employee are increasing. The big thing to remember is that if you want to show the rate of growth or percentage of in¬ crease or decrease, you must use the ratio chart in¬ stead of the line chart. 50 BUSINESS FUNDAMENTALS The last form of chart to consider for ordinary commercial use is the colored map in which a given territory is divided into various sections, colored or Vonthljr value of Building remit* in 103 AHQgLBS.OAl. 1914 1918 1916 191? 1918 1919 1980 1981 "1988 1983 Ratio or Logarithmic Chart MAKING FIGURES TALK 51 shaded to represent conditions for direct comparison with other sections shown on the same map. This form is very efficient when the problem involves a given section of the country, and it can be used with great effect to record conditions of the sales field. You now have a method of charting for almost any conceivable set of data. As we continue our study of the fundamentals, we will use several charts in order that you' may become thoroughly familiar with them. You will find that they will be of tremendous help, both in your own study, and in your effort to communicate your ideas to others. Make a picture wherever possible; it is interesting and much more effective than a lengthy explanation. Chapter IV FORECASTING BUSINESS CONDITIONS F OR many years men scouted the existence of definite trends in business. There were several reasons. One was because statistical records had never been sufficiently developed to illustrate accu¬ rately the movements. The chief difficulty, how¬ ever, was that no satisfactory explanation of the cause of business trends had been found. Exhaus¬ tive inquiries were conducted into the causes of panics and depressions which created such disaster. Little progress was made, however, until the people began to realize that the seed of fames is sown during the periods of over-expansion which precede them . Panics and depressions are merely the reaction from over-expansion, extravagance, and other ex¬ cesses which develop during the times of so-called prosperity. This discovery opened up an entirely new line of thought. It was nothing but the application to business of Sir Isaac Newton’s law of action and reaction. This is one of the most fundamental laws of the universe, underlying all the sciences, from astronomy to chemistry. It usually has been taught to young people in connection with the study 52 FORECASTING BUSINESS CONDITIONS S3 of physics, under a chapter relating to mechanics. Almost every one has endeavored to lift a rock by the use of a crowbar. To do this he has placed one end of the crowbar under an edge of the rock which he is attempting to raise, and then, a few inches from that end of the crowbar .which is underneath the rock, he has put a small stone which he uses as a fulcrum. A person who could not raise this load one-thousandth of an inch by straight lifting is able to raise it several inches by pressing down on the far end of the crowbar. Of course, crowbars were used to raise stones when the pyramids were being built in Egypt, centuries before Sir Isaac Newton was bom; but Newton was the first man to discover that the distance on the crowbar from the fulcrum to the operator’s hand multiplied by the force used by the operator equals the distance from the fulcrum to the stone multiplied by the weight of the stone. As soon as Sir Isaac Newton published these facts, a scientific reason existed for the ordinary balance scales and scores of other instruments which were then in use and which have since been developed. This law is the basis of the steam engine, the electric dynamo, water-power installation, and every other power machine. All calculation of forces and all formulas relating to them derived tfpir conception from this law of action and reaction, f If there is one thing that science teaches, it is that this law of action and reaction cannot be elimi¬ nated. We may dread it and attempt to ignore it, 1 54 BUSINESS FUNDAMENTALS but it is always in operation in thousands of diversi¬ fied ways. Whether making a balloon ascension or raising our feet in walking, we are working in ac¬ cordance with law of action and reaction. The study of hygiene is comparatively in the same stage in which that of mechanics was a couple of centuries ago. As a matter of history, only in recent years have fundamental laws been scientifi¬ cally applied to the study of the human body. In¬ stead of grasping the fact that the same laws apply to men as to commodities, physicians used to doctor with different methods and various drugs, hoping to hit something that would perform a cure. With the knowledge that men are simply machines there has come a great change, and doctors have learned that to do good work they themselves must be good mechanics. Physicians now recognize Newton’s law of action and reaction in its relation to sleep, breathing, eat¬ ing, exercise, etc. For instance, every man has a certain normal line of sleep; that is, he requires a certain amount of sleep, which varies with different individuals at different ages, but .which for a given individual at a given age, is a constant factor. For all a man varies from this normal line of required sleep in one direction he must compensate by varying a corresponding amount the other side of the line. Whenever a man performs an abnormal amount of labor, causing him to lose sleep, it then becomes necessary for him to rest and make up a corre- FORECASTING BUSINESS CONDITIONS $5 sponding amount. If he attempts to ignore the law of action and reaction and continues his excesses, he becomes ill, and is forced to go to bed and make up his required amount of rest. This law of action and reaction applies in the same way to man’s breathing, eating, and exercising. Not only are certain physicians making progress to-day through the use of Newton’s law, but psy¬ chologists as well are employing it in their experi¬ ments. It is a fact well known to students of New¬ ton’s investigations that the great scientist found this law to apply, not only to mechanical and astro¬ nomical phenomena, but also to affairs more re¬ motely removed from such sciences. The student of McLaurin’s famous treatise, “ Sir Isaac New¬ ton’s Philosophical Discoveries,” will find that Newton believed that the voluntary actions of men en masse are subject to the law of action and re¬ action. By applying Newton’s law, the various business subjects which I have previously described as funda¬ mentals become barometers of business, instead of mere thermometers . Take, for example, the subject of business failures. When reports show a small number of failures, it is said that the credit situation is very favorable. Viewed in this way, failures are only a thermometer of business. Applying the law of action and reaction, we know that an unusu¬ ally small number of failures means that the ordinary process of “ weeding out the weaklings ” BUSINESS FUNDAMENTALS 56 is not taking place and that later the number of failures will run as high above the average line as they previously were below. Used in this way, the failure statistics become a barometer of business and are invaluable to the business executive in plan¬ ning his policy of credit extension, /j C Likewise, an excessively large volume of bank clearings indicates exceptional activity at the time. If one used them as a thermometer, he would feel justified in building a new factory and in laying in heavy stocks of merchandise. Applying Newton’s law, the executive knows that excessive activ¬ ity indicates that business is at the peak of the cycle. Instead of extending his plant, he builds up a good balance of ready cash in the bank, reduces his stock of materials, and prepares for the break which must follow. In the same way each of these business subjects has its own significance. While no one subject can be relied upon at all times, the majority are always reliable. The best plan, therefore, is to combine a representative number of barometric subjects into a single index the same) as you would combine the prices of a group of commodities to form a com¬ modity price index. It is well to correct the original figures in order to eliminate the effect of seasonal fluctuations. Aside from allowing for usual seasonal movements in the subjects and reducing them to a common denominator, however, no other modifica¬ tion is necessary or desirable. ri&JMi > 73 ' ' (Jf bo o t*. '• .. l)fS r ; / BRIGHTON BRANCH / BUSINESS VALUE INDEX This Week 139 (Preliminary) For the Month of July 135 (Final) Commodity Price Scale Stock • Scale * Bond Yield Scale (Inverted! Copyrighted. All Rights Strictly Reserved and Protected 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 Babsonchart of American Business Conditions (Showing Business in Terms of Dollars) EXPLANATION — — The solid red line is a record of important rallies and declines of 40 stocks. The red scale figures under 1920 refer to this line. - - -The dotted red line is a record of the aver¬ age yield of twenty active bonds. The red figures under 1911 (with scale inverted) refer to this line. -The dotted black line Is a record of the average wholesale price of 20 commodities excluding food¬ stuffs. The figures under 1913 refer to this line. ★ Stars mark last quotations before going to press. 1917 1918 November 27, 1923 1922 1923 Com. 164 -*70 Stocks 84 . Explanation of the Babsonchart The large shaded areas are formed by com¬ bining and plotting the Statistical Sheet figures. The subjects used are New Building, Crops, Check Transactions, Immigration, Total Foreign Trade, Money Rates (adjusted scales), Failures, Commodity Prices, Railroad Earnings, Stock Prices. An index of Canadian business conditions is also included. These subjects combined give a Babsonchart of busi¬ ness in America. When Interstate Commerce reports for all United States railroads became available, January, 1909, this record was sub¬ stituted in place of the earnings of ten repre¬ sentative roads which had been used previous to that time. Revised scales were also intro¬ duced for monetary figures August, 1912. Bank Clearings were used from 1904 to 1918,inclusive; Check Transactions for a selected list of cities then were substituted. The line X-Y represents the country’snet gain or growth. Based on the economic theory that “action and reaction are equal” when the two factors of time and intensity are multiplied to form an area, the sums of the areas above and below said line X-Y must, over sufficiently long periods of time, be equal, provided enough sub¬ jects are included, properly weighed and com¬ bined. It will be seen that each area is divided into halves by a narrow white line. This is to em¬ phasize the fact that the first halves of Areas A, C and E are really reactions from the extrava¬ gance, inefficiency and corruption which existed during the latter half of the preceding “over-expansion” area. Contrariwise, the first halves of Areas B, D and F are really based upon the economy, industry and righteousness developed during the hard times justpreceding. An area may temporarily be interrupted and develop in two or more parts. Never¬ theless, the total of an area of depression must finally be equal to the total of the pre¬ ceding area of over-expansion before another prolonged period of expansion can take place. When the area is divided into two or more parts the stock market has two or more dis¬ tinct movements, and clients may be justified in taking advantage of them. The high points of the stock market have come in the early part of the over-expansion areas and the low points have come about the beginning of the depression areas, although in 1914 the war held prices of both stocks and bonds down longer than usual. Low money rates and high bond prices have usually come about the end of the depression areas and high money rates and low bond prices at about the end of the over-expansion areas. Further details as to how the Babsonchart is com¬ piled and the X-Y Line located will be sent to any one on application. Questions are always welcomed. • -»■«* •* i- * . ■ * - - 1 ■ * . . _ FORECASTING BUSINESS CONDITIONS $7 The chart opposite shows the result of combining and charting twelve barometric subjects. The sub¬ jects used are new buildings, crops, check transac¬ tions, immigration, total foreign trade and money (adjusted scales), failures, commodity prices, rail¬ road earnings, stock prices. An index of Canadian business conditions is also included. These subjects combined make the Babsonchart of Business for i America. When Interstate Commerce Commission reports for all United States railroads became avail¬ able, in January, 1909, this record was substituted in place of the earnings of ten representative roads which had been used previous to that time. Revised scales were also introduced for monetary figures, in August, 1912. Bank clearings were used from 1904 to 1918, inclusive, after which check transac¬ tions were substituted therefor. The line X-Y represents the country’s net gain or growth. Based on the economic theory that action and reaction are equal when the two factors of time and intensity are multiplied to form an area, the sums of the areas above and below said line X-Y must, over sufficiently long periods of time, be equal, provided enough subjects are in¬ cluded, properly weighted and combined. It will be seen that each area is divided into halves by a narrow white line. This is to empha¬ size the fact that the first halves of areas A, C, and E are really reactions from the extravagance, in¬ efficiency and corruption which existed during the BUSINESS FUNDAMENTALS 58 latter half of the preceding “ over-expansion * area. Contrariwise, the first halves of areas B, D, and F are really based upon the economy, industry and righteousness developed during the hard times just preceding. The high points of the stock market have come in the early part of the over-expansion areas, and the low points have come about the beginning of the depression areas; although in 1914 the war held prices of both stocks and bonds down longer than usual. Low money rates and high bond prices have usually come about the end of the depression areas, and high money rates and low bond prices at about the end of the over-expansion areas. The slope of the line X-Y, the country’s check transactions, must always be estimated for the cur¬ rent year and is thus shown as a horizontal line, dotted and undetermined. After the close of any year, however, we know better what its slope should be and then indicate it by a solid black line. Here we have a picture of American business from 1904 until the present time. It shows exactly where we are and where we are going. It tells when to buy and when to sell. The succeeding periods of the business phase and the succeeding developments are evident. And, since each of these consists of 2, regular succession of steps, one can, by following this chart, forecast coming conditions in almost every field of business activity with remarkable accuracy. FORECASTING BUSINESS CONDITIONS 59 The accompanying business dial pictures the twelve steps of the typical phase. Beginning at the top we have a period of prosperity, with high money rates and increasing real estate prices. As prosper¬ ity increases wages mount and producing costs rise. Too much money leads to dissipation and ineffici¬ ency, which are reflected in every one from the president of the business to the chap who sweeps out the shops at night. Inefficiency and increase in costs naturally force prices up, and when commod¬ ity prices rise interest rates go with them and bond prices go down. Inefficiency then develops into downright dis¬ honesty. Business becomes demoralized. The de¬ cline is under way, public confidence disappears, pessimism is the vogue, and stock prices tumble. As dishonesty becomes more general there follow the cancellation of contracts, petty thefts and sabotage. Increased unemployment naturally aggravates this, and the crime wave follows. When public confidence is shaken the purse strings tighten, business falls off, and forced sales break prices. Once they are on the toboggan, commodi¬ ties drop almost overnight. By this time business is thoroughly disorganized and hard times are upon us in earnest. Ambition and initiative have been discouraged by a series of reverses; many business men are flat on their backs, figuratively speaking, and are making no effort to get up. Shops and factories are closed. Bread 6o BUSINESS FUNDAMENTALS lines are in evidence. The political party in power is doomed for defeat at the next election. As unemployment continues we experience a phe¬ nomenon best described as the consolidation of homes. The young folks who branched out for Babson Business Dial PROSPERITY MICH MONEY RATES INFLATED REAL ESTATE PRICES ACTIVITY IN ALL LINES GENERAL EMPLOYMENT HIGH WAGES PRODUCING COSTS GENERAL BUYING RESUMED INCREASING COMMODITY PRICES INEFFICIENCY LOW BOND PRICES RELIGIOUS INTEREST .RICH STOCK PRICES DISHONESTY LOW STOCK PRICES CRSATFR MICH BOND PRICES CRIME WAVE LOW COMMODITY PRICES INCREASING LOW LABOR COSTS COT&OLIDATtON OF ROMES LOW REAL ESTATE PRICES themselves and set up their own establishments dur¬ ing the period of over-expansion now move back and t€ double-up ” with their parents to save rent. This naturally reduces the number of dwellings occupied and cuts down tremendously the demand FORECASTING business CONDITIONS 6 1 for improved real estate, and declining real estate prices follow. About this time those who are lucky enough to have jobs appreciate them and go to work with a vengeance. Recent reverses have taught a lesson, and thrift takes the place of extravagance. Now, just as soon as 51 per cent, of the people begin to produce more than they consume, we build up a reserve power and fundamental conditions begin to reflect improvement. Increased activity means that a man does more work for a day’s pay than he did during the rush times. Wages in many cases have been reduced. The two combine for a lower labor cost. The manufacturer is then able to reduce his prices to the legitimate consumer and on the new basis can get a certain amount of business. Because consumption of goods has been cut down and money is being saved we rapidly build up a surplus which forms the basis for a period of improvement. We here begin to see a justification for the old adage, “We take our troubles to the Lord, but run to the Devil with our happiness.” The dishonesty of the period of decline has given way to a quick¬ ened religious interest. Hard work is good for every one’s soul, and most persons are too busy holding their jobs to get into much trouble. As stocks go down, we find that the dollar will buy more. Lack of activity lessens the demand for money and interest rates decline automatically. Bond prices rise. The student of fundamentals 6 2 BUSINESS FUNDAMENTALS who bought bonds during the period of decline is rewarded for his foresight and courage. As industry and thrift continue, the signs of im¬ provement become more evident. Stock prices strengthen materially in anticipation of the resump¬ tion of industrial profits. Again the student of fundamental conditions who bought his list of stocks when those who knew no better were pessimistic and afraid to buy is rewarded for his foresight. - - As improvement progresses, prices become stabil¬ ized at their new level, and the general public be¬ gins to buy again. Business activity returns to a satisfactory basis, almost every one is employed, and prices gradually strengthen under increased demand. During the period of prosperity, rabid speculation sets in in earnest. Profits are large, and every one is expanding. There is a great demand for money. High interest rates result and general expansion de¬ mands more room. Real estate prices, for resi¬ dential property as well as for business sites, ad¬ vance. The stock market goes on a spree of spec¬ ulation. Wage workers wear silk shirts. Every one seems to forget the lessons learned during the last period of depression. To get something for nothing seems to be the fashion. We begin to spend more and produce less. Right here we prick the bubble and go down on the toboggan into another period of decline. The possibilities for profit for the average busi- FORECASTING BUSINESS CONDITIONS 63 ness man and investor are evident. He not only has an opportunity to protect himself against the changes .which ordinarily wipe out over half one’s profit, but by knowing coming conditions, he can lay his plans so as to profit to an amazing degree. This will be described in detail in succeeding chapters. I have said at the beginning of this chapter that some students have always doubted the u cycle” theory of business. If they mean by “ cycle ” that four years of wild boom must be followed by four years of depression, three years of depression must be followed by three years of over-expansion, etc., etc., I agree with them. I will go even further. I do not believe that we need to have these tremendous fluctuations at all. We could have continuous well¬ being and real prosperity along the X-Y Line of the country’s growth if we would but be temperate and sane. The law of Action-Reaction, however, is absolute, and as long as we insist on over-doing and over- expanding we must expect an equivalent area of re¬ action below the X-Y Line. So long as business continues in its present habits we shall have these wave movements, and so long as we do have them it is fatal to ignore them. Moreover, every one who studies these changes and looks ahead, does just that much toward eliminating such disastrous fluctuations. Chapter V THE SEESAW OF SUPPLY AND DEMAND \\ 7*E are now ready to apply fundamental prin- V V ciples to the operation of the various depart¬ ments of a business, that efficiency and profit may be increased. Moreover, the successful business ex¬ ecutive must apply such principles if he is to succeed. Competition will be extremely keen during the next few years and the advantage will be with the man who can produce quality goods at a relatively low price. Since it will be fatal to pay too much for raw material, we may as well start with a discussion of scientific purchasing. The law of supply and de¬ mand will put thousands of men out of business before igqo. It will also make sizable fortunes for thousands of others who thoroughly understand its operation and take advantage of the perfectly legit¬ imate opportunity that it affords. In the early ages, before trading was ever prac¬ ticed, families were practically self-sustaining. They built their own homes, made their own clothing, and produced their own food. As civilization pro¬ gressed, the separation of interests and production 64 THE SEESAW OF SUPPLY AND DEMAND 65 of food, clothing, and materials caused specializa¬ tion, which in turn necessitated the exchange of goods. At first no medium of exchange existed. For example, wheat was exchanged for cotton 5 lumber was exchanged for iron. This was known as barter and was practised until more convenient forms were introduced as mediums of exchange. All sorts of products have been used as mediums of exchange. In the early days of this country, tobacco, the leading product, was used in business transactions. Wampum, a shell found on the At¬ lantic Coast, once served as a medium. The white shell designated a certain value, while the black shell, being more scarce, held a higher value. Later, gold and silver, due to their scarcity and natural adaptability, were gradually adopted by the leading countries of the world. The exchange of commodities involves three im¬ portant phases: (1) value5 (2) pricej and (3) money. It is not necessary to discuss here these subjects in measure, yet the correct meaning of value and price is imperative for understanding the characteristics of commodity prices. The value of a commodity is determined by its ability to exchange for others. That is, if one ton of coal exchanges for several tons of iron, its value is relatively high. On the other hand, if several bushels of corn are required in exchange for one bushel of wheat, the value of the corn is low. There cannot be a general rise in the value of commodities, for advances in 66 BUSINESS FUNDAMENTALS some are counteracted by declines in the value of others. The price of a commodity is determined by the amount of money it will command in any given period. In an era of prosperity, prices tend to rise and naturally more money is required to complete a purchase. The Babson Commodity Index in the over-expansion period of early 1920 reached a peak of 298. In a period of decline and depression the trend of prices is inevitably downward and less money is involved in the buying and selling of commodities. The commodity index figure in the depression of 1921 reached the low ebb of 139. Under these conditions it is obvious that when prices are high the value of money is low — it takes more money to purchase goods. When prices are low the value of money is high, as it takes smaller amounts to purchase more commodities. It is generally understood that the price of a commodity depends primarily upon supply and de¬ mand. This fundamental law expressed simply is: first, that an increase in supply in excess of the amount being consumed is bound sooner or later to cause a decreasing price; second, a reduction in sup¬ ply greater than the rate of consumption lays the foundation for an upward tendency in price. On this basis it is entirely possible theoretically to as¬ certain the equilibrium price level. That is, the medial line that would exist when the amopnt of goods offered in the market equals the amount be- THE SEESAW OF SUPPLY AND DEMAND 67 ing consumed. Practically, however, in modern business an equilibrium price level cannot be main¬ tained. Prices are constantly above or below a theo¬ retical equilibrium price line, acting in sympathy with the increasing or diminishing rate of production and consumption. If the price trend is downward, each successive decline brings more buyers into the market, result¬ ing in a gradually increasing rate of consumption. Ultimately the point is reached where consumption has expanded to a level that exceeds the amount being produced. Ordinarily, prices then turn up¬ ward, and during the climb, consumption, little by little, tends to diminish. Thus, the equation of sup¬ ply and demand fluctuates back and forth. The price of a commodity should be based upon the cost of production, but it does not necessarily follow that the cost of production always deter¬ mines the selling price. The price equals either the cost plus profit, or cost minus loss. In early 1920, wool, silk, and cotton showed a marked profit, based on producing costs. Yet, by the fall of 1920, these commodities were radically under the level that represented the cost of production. The price of a commodity is governed chiefly by the equation of supply and demand. Demand in¬ volves, first, the utility of a commodity, which when measured is the amount of money a person is will¬ ing to give for it; second, the possibility of sub¬ stitution or the consumption of another commodity. 68 BUSINESS FUNDAMENTALS i cheaper and equally satisfactory; and, third, ability and willingness to buy commodities. Supply con¬ sists of the volume of output of commodities to cope with the factors involved in demand. The great problem in business is to regulate sup¬ ply to the probable demand. It is by a successful anticipation of future demand that the individual is permitted to build a permanently safe industrial or commercial structure. In the normal course of events, there are three problems that must be solved, at least with moderate accuracy, to insure a fair profit. First, the prospective demand six months, a year, or two years hence 5 second, the probable supply during the same period 5 and, third, the logical cost of production and selling price justified by the changes in supply and demand. Demand, like the flow of a river, is not standardized. Some¬ times it is highj again, it is low. It varies according to fundamental conditions and fluctuations in prices. High prices encourage curtailed demand 5 low prices stimulate increased demand. For example, during the war period, 1914-1918, consumption was maintained at a greater pace than production. Consequently, prices were constantly rising; but by early 1920 the rate of commodity production ex¬ ceeded the rate of absorption, and prices could then turn only one way — downward. Human nature also enters into the question of demand. When prices rise people often rush to market to protect future needs before a further BUSINESS FUNDAMENTALS 70 price advance occurs. A hysterical buying move¬ ment is brought about in this manner — it becomes a sellers’ market. When the tendency is downward buyers assume an indifferent attitude, negotiating only as stock is needed — it’s a buyers’ market. Supply, like demand, is an unknown factor. If prices rise, certain buying policies immediately be¬ come effective. Some build up heavy inventories with the idea of liquidating at a higher price level j others buy sparingly in anticipation of a decline. It is such factors as these that increase the uncertainty of the supply and demand volume. In addition, elements such as producing capacity, transportation, labor, strikes, and floods, are factors that directly affect supply and demand. All of the uncertainty in buying and selling cannot be overcome, yet there is a definite procedure that every merchant and manufacturer can follow which in the long run will net the highest average profit possible. It has been already pointed out that business does not run a smooth course. The volume and value of business inevitably move in phases. As far back as the records of Babson’s Statistical Organization are available — even before the Civil War — we note the four periods in business phase: (1) over-expansion, (2) decline, (3) depression, and (4) improvement. These movements have con¬ stantly materialized since the advent of trading. We are to-day in one of these stages. As time goes on we shall step to a new era, but that period and THE SEESAW OF SUPPLY AND DEMAND 7 1 time will be followed by another fundamental change. The same fundamental principle 5 namely, that underlying conditions govern the trend of business, is also true of commodity prices. One business barometer, such as crops, bank clearings, or inter¬ national trade, cannot be taken as a criterion for the- commodity market as a whole. Commodities must be directly associated with the composite trend of business as represented by the Babsonchart or grouped barometers. The first step in a scientific analysis of a com¬ modity is to determine ,where we are in the economic trend of business. Our position must be either in the beginning, the middle, or at the end of a period of prosperity, decline, depression, or improvement. This being found, an adequate foundation exists on which succeeding forms of analysis can be con¬ structed. This is the one fundamental feature that the business man has long overlooked. While individual barometers cannot be taken as a criterion, all are important as they directly or in¬ directly affect the commodity market. In a later chapter the relationship of individual barometers to business conditions is outlined in detail. A reac¬ tion in the trend of an individual barometer is a warning that definite changes are not far distant . In the main, all barometers are important. Yet, the principal individual barometers which should be watched with constant care in connection with com- BUSINESS FUNDAMENTALS 7 2 modities, are failures, labor, foreign trade, trans¬ portation conditions, crops, and the money market. In relation to commodities, barometers must be con¬ sidered individually as well as collectively. Commodities are divided into two definite groups: one, agricultural; the other, industrial. The price of agricultural commodities under normal conditions responds to two elements, seasonal and fundamental. This group is dependent chiefly upon fluctuations in supply, primarily because the output of agricul¬ tural products after a certain stage is not governed by human efforts. A certain acreage is planted, so much is abandoned, and the yield per acre and the final output depend almost entirely upon seasonal developments. At the end of the season a certain amount has been produced. This may be large or small, but one point is certain; namely, the volume cannot be increased or decreased until another sea¬ son. Therefore, the average price trend for the season depends largely upon fluctuations in supply. Agricultural products also adhere to seasonal tend¬ encies, usually reaching the low point during the early part of the crop season when market receipts are heaviest. While these characteristics prevail, fundamental conditions are really the governing factor, for crop prices in addition inevitably follow the long swings of business. The price of industrial commodities depends largely upon fluctuations in demand. Production, unlike agricultural products, can be increased or de- THE SEESAW OF SUPPLY AND DEMAND 73 creased at will. If the price of lumber, steel, or copper advances to a profitable level, production is usually stimulated, particularly by higher cost pro¬ ducers. Industrial commodities as a whole do not respond to seasonal tendencies but follow in close relationship to the trend of business over a period of years. Commodity prices are seldom stabilized unless by Government intervention. Prices are con¬ stantly responding to seasonal tendencies, war con¬ ditions, panics, and major fundamental changes in conjunction with business. A survey of commodity prices over an extensive period indicates two important characteristics. From 1900 to 1922 this country has experienced four pe¬ riods of over-expansion and four periods of depres¬ sion. The periods of prosperous times materialized in 1901, 1906, 1910, and 1916 to early 1920. The periods of depression covered 1904, 1908, 1914, and 1920 and succeeding years. It is interesting to compare the trend of prices with the trend of busi¬ ness during the four periods completed since the first of this century. Four complete commodity price phases stand out prominently in sympathy with the business trend. The economic price pendulum is con¬ stantly swinging and will ever accompany the trend of business upward and downward. These major price trends cover a period as limited as three years, while during an era of artificial conditions such as materialized from 1915 to 1920, the time limit ex¬ tended to seven years. It should be borne in mind « 74 BUSINESS FUNDAMENTALS that during the upward and downward movements, commodity prices do not run a smooth course. Ir¬ regularity and substantial reactions are constantly developing, reflecting current conditions. The movements of three to seven years supple¬ ment a longer phase which covers a period of twenty-five to thirty years. Since the American Revolution three of these phases have materialized. The low points were reached in 1783, 1848, 1898, and the peaks in 1809, 1865, 1920. The accom¬ panying chart illustrates this tendency. It is inter¬ esting to note that the Napoleonic, Civil, and World Wars mark the high points in the longer phases, and that the lows, in the first two cases, were not reached until twenty to thirty years later. From the foregoing it is evident that commodity prices have characteristic trends. Prices have been considered in composite form as represented by the leading indexes, but this does not mean that commod¬ ity prices constantly bear the same price relationship to each other 5 all commodities do not turn upward or downward in price simultaneously. Each com¬ modity, whether it is iron, steel, butter, or wheat, covers its own individual price trend. It is practic¬ ally impossible to find in any stage of business a per¬ fect alignment of prices. Some are high and others low. The individual commodity trend moves ahead of business, in harmony with business, or follows a retarded tendency. Moreover, these trends are constantly changing. In one period a certain group Long Swing of Commodity Prices— 1782-1921 BUSINESS FUNDAMENTALS 76 may precipitate the price movement, while again it may assume an inactive attitude. Briefly, we have found (1) that agricultural products are dependent on output, following dis¬ tinct seasonal tendencies, also adhering to the under¬ lying long-swing trend of business; (2) that • industrial prices tend to ignore seasonal tendencies, reacting in sympathy with the volume of business; (3) that commodity prices follow developments of three to seven years’ duration; (4) that there are longer phases covering a period of twenty-five to thirty-five years; and (5) that each commodity has an individual trend. Thus far the first three steps of commodity anal¬ ysis have been mentioned. First, the location of business by a composite of business barometers; sec¬ ond, an analysis of individual barometers; and. third, an analysis of price. Now the statistical position must be considered. The statistical field that fol¬ lows a commodity step by step from the mine, forest, or field, to the finished product is tremendous, sometimes involving as many as thirty to forty sep¬ arate phases. This compiling appears to be an enormous task, yet it is entirely possible in this busi¬ ness era to obtain authentic statistical facts on the important commodities in the world. As an illustration, take the agricultural product, wheat. First, we must know the United States acreage year after year, the yield per acre and the production derived. Next we consider the average Commodity Indices—1909-1922 THE SEESAW OF SUPPLY AND DEMAND JJ I 78 BUSINESS FUNDAMENTALS price to the producer, the total farm value, and the average price at the primary markets of distribution. Then there is the question of stocks, it being possible to follow the increasing or diminishing tendency monthly, in conjunction with the rate of consumption. It is then necessary to cover the volume of imports and exports and the carryover at the end of the crop year. Following this the addition of world condi¬ tions, covering production, consumption, and stocks, provides a complete statistical arrangement for any one interested in those factors that directly or in¬ directly affect the price. The eleven principal features that make up an in¬ dustrial analysis are as follows: (1) Production — domestic (2) Production — foreign (a) monthly (b) yearly (3) Consumption, domestic (4) Consumption, foreign (5) Stocks on hand domestic (a) warehouses (b) mills ( c ) storage (6) Stocks on, hand, foreign (7) Market movements (a) shipments (b) deliveries (8) Visible supply (9) Imports (10) Exports (11) Price THE SEESAW OF SUPPLY AND DEMAND 79 The four principal factors in industrial commod¬ ity statistics are (i) production, (2) domestic out¬ put, (3) volume of foreign trade, and (4) relative position of the consuming outlets. These must al¬ ways be considered, but the safest policy and the policy that will produce maximum results is an ex¬ tensive analysis of each detailed phase. The final point in the study of commodity prices is individual comparative statistics. A word regard¬ ing its application. In April, 1920, this statement appeared in Babson’s Reports: Steel is not so strong as certain conditions seem to indi¬ cate. Premiums are gradually being reduced. For several months, as clients know, excessive premiums) have been demanded. This materialized despite the fact that pro¬ duction during the winter months increased. Moreover, the output during the first quarter of this year has not only exceeded last year’s volume but it is the largest since 1916 when record levels were reached. True, the United States Steel Corporation’s statement of unfilled tonnage still indicates a shortage. Practically, however, there has not been such a great shortage at the primary producing centers. Unfavorable transportation conditions have made deliveries retarded and in many cases almost impossible. The price advance in steel is hardly due entirely to the increased cost of production. The keynote to the ab¬ normal situation is unquestionably curtailed deliveries. The outlook, however, is much more favorable. Also, the rate of production, despite increased capacity, is close to maximum with good prospects of being maintained. Trans¬ portation is gradually, improving. In a word, we feel that premiums will disappear more rapidly from now on. 8o BUSINESS FUNDAMENTALS The outstanding question naturally is, what was the scientific method of analysis covering funda¬ mental commodity statistics that justified this con¬ clusion? Note the application of the previously discussed method: (1) Babsonchart or grouped fundamentals. The Babsonchart in early 1920 showed conclusively that the period of post-war inflation had entirely spent itself. The financial, commercial, and industrial field had expanded to a stage where the foundation could not uphold the artificial structure. A read¬ justment was inevitable. Such a procedure was en¬ tirely substantiated by prevailing conditions, but was entirely in conjunction with the infallible law of action and reaction. (2) A study of Individual barometers that di¬ rectly and indirectly affect commodities. These showed us that not only was the trend of business about to turn downward, but that individual barom¬ eters were not favorable to a steel situation pegged at the early 1920 level. Labor was adequate; the money market was tending downward; failures were increasing; transportation conditions were on the mend; foreign trade was diminishing. In fact, individual barometers favored the bear side of the question by a marked margin. (3) A study of price relationship. Steel prices in early 1920 were ranging over 100 per cent, of pre-war, a plane that could not exist under the pro¬ spective contraction of economic conditions and the THE SEESAW OF SUPPLY AND DEMAND 8 1 prospective readjustment in labor, fuel, raw ma¬ terials, overhead, and transportation. Moreover, competition due to the artificial expansion during the war period was beginning. (4) A study of the statistical 'position from initial production to ultimate consumption . A resume in¬ dicates that production was being maintained in excess of the war level; that stocks in many sections were accumulating despite the fact that unfilled tonnage showed an increase. Our exports were di¬ minishing and imports increasing, reflecting the status of steel in the other world markets. Our producing capacity was much greater than our abil¬ ity to consume and export. Four months later steel had declined 35 per cent. Chapter VI SCIENTIFIC PURCHASING H AVING the fundamental principles which govern price thoroughly in mind, we will now go about forecasting price trend which will enable us to buy our supply of material at or near the bottom of the market, and to avoid being caught with a heavy inventory when fundamental condi¬ tions indicate a market decline. First, it is necessary to collect proper information and have it in form for convenient analysis. Hence, the use of tables of figures is very satisfactory. For example, in the case of cotton, annual figures can be taken for several decades back, covering yearly acreage, production per acre, total production, aver¬ age farm price per pound, farm value, average price at primary markets, both from the standpoint of the calendar and crop years, imports and exports, world production, stocks on hand, carry-over, and con¬ sumption. Such a schedule computed on a yearly basis lays a sound foundation to determine in what direction the future price is going. The yearly form of tabulation, however, is really the smallest part of the statistical comparison of commodities. Monthly figures are very necessary. 82 SCIENTIFIC PURCHASING 83 In this modern period of statistical information on commodities it is known at the end of each month what the volume of production, imports, or exports has been. Therefore, the entire statistical situation is revised to note the potential effect of these de¬ velopments. It is possible to determine whether there is a decreasing scarcity, or a burdensome sup¬ ply j whether the statistical position justifies an up¬ ward price level, or a revision to a lower plane. Price records are particularly important. It is of little value to know that the price of steel is $40 a ton, if it cannot be compared with a price in a period of prosperity or a period of depression, or even a price trend ten, twenty, or thirty years previous. A careful record of commodity prices daily, monthly, and yearly, should adequately cover the question of price. It is difficult for the average business man to pic¬ ture a true story from a mass of figures. Hence, the importance of graphic presentation of commod¬ ity prices cannot be too strongly emphasized. At a glance it can be readily ascertained whether a com¬ modity is high or low, compared with a former pe¬ riod and also with a normal average. We have also found that the study of commodity prices in log¬ arithmic chart form is helpful in the study of group commodities. Group commodities are those espec¬ ially related to each other such as brick, cement, and glass, when considering building materials, or cotton, wool, and silk, when studying textiles. Under nor- BUSINESS FUNDAMENTALS 84 mal conditions a definite ratio exists. In a period of rapidly changing conditions the differential is usually strained. This is a warning that either one commodity has gone up too rapidly or it has not gone up in proportion with existing conditions. A growing discrepancy is a warning that a more com¬ prehensive and careful study of the commodities involved is necessary. It is simple enough to mention what factors and forms should be taken into consideration in com¬ modity analysis. The chief difficulty confronting business men is to distinguish authentic sources and figures. Statistical data now form an important spoke in the wheel of business. Consequently, from all sections of the globe, statistical reports and opinions are being received. All are important, for they enable the business man to feel the pulse of every market. Yet, in the final analysis, only the true, unbiased facts must be considered. Therefore, authentic sources alone should be considered. In the case of agricultural products, farm papers and periodicals, private sources, grain and agricultural associations, and Government reports from the Cen¬ sus Bureau, the Department of Commerce and Agri¬ culture are at the disposal of any one interested. The facts and figures vary violently. None of the reports are 100 per cent, accurate, but it is generally recognized by the student of agricultural conditions that the most reliable and authentic statistics are received from the Government bureaus. The Bu- SCIENTIFIC PURCHASING 8 5 reau of Agriculture maintains records on the pro¬ duction and distribution of foodstuffs which run back to the development of the West. Each month this bureau issues “ Weather, Crops, and Markets,” which contains a wealth of information concerning production, both estimated and actual, yield per acre, weather conditions, market developments, and a di¬ agnosis of certain commodities. During each sea¬ son of the year the farmer and* consumer of agri¬ cultural products are in a position to look into the future as regards the crop situation. By December harvesting returns are complete and the final figures for the year are issued. In assimilating the industrial commodity statis¬ tics, we again have trade papers and periodicals, pri¬ vate sources, business associations, and the various Government bureaus. All have their place in the business field. But the most authentic information is received direct from Government bureaus and the growing industrial associations. The Government bureaus to-day have adopted the policy long prac¬ tised in agricultural products. A few years ago it was difficult to determine the current rate of output of such commodities as petroleum, lumber, or ce¬ ment. Now almost at the end of each month the volume of production, consumption, stocks, imports, and exports, prices, and other factors are known. The bureaus of labor, commerce, agriculture, cen¬ sus, interior, and the Federal Reserve Bank, offer a complete source for practically all information PRICES OF TEN STAPLE COMMODITIES Average Wholesale Price from 1860-1921 BUSINESS FUNDAMENTALS 8 6 Coffee lb. N. Y. O lO U)U1 t^OO M W)H N VOt© fO VI N CN lO M CN 1+ M »/> 0 C-» vovO M<5 H 1 /) to N CCO CN O *0 '+00 00 M 1-- fO'O *000 00 v© (*)« O O' »0 M O' O too MOW Natoto lo CN O' O' O O' 0"0 »o t>. MMMMCNMMMMM MMOOmOOMMM Pork bbl. N. Y. Hfcl OO'+OOOOOOO O O O O >0 O to vo vo vo QO^ioO^OOOt' OOfOioOOOvoOO voOOO+ivoti.O'cot- OO+iMiotNWOOco O M VOOO 'too 1 + 1 + O 1 + O too OO +tON NH to O' O ■+■ O © CO CN i+t© CO N«HHtftOtONf)t1 COMMMCNCNCNMMM MCNMCNMMMCNMM Rubber lb. N. Y. H|t1 •-** H+1 rtfr* VO loco O O O >0 N ft O O N + VOOO 1+00 O' H HO N t^O « HOO + lo VO 1+00 CO CN OOOOO O O VO VO VO 1 + VO OO t"00 O O' lOvO t- t>» t-» MM H H M Copper lb. N. Y. MONN lOiON VO CO CN MD 00 O M COCO CN CO O Vo S O' OO PI OO OO CN tN CO tN M M VO V© VOO 1+MHVO OO O CO N T+ N tl H H)SOl + IOtO+ M1+ VO 00 N (1 H 0"0 00 M 00 ©"© CO O M COO CO N Ct « O+tOON N tt MNtOttNttNHHH CNMMMMMMMMM «> Iron ton Birm. o O C* Tt* 0 * CO tJ-00 10 M CO 00 rfO'O'fOO'W NM CO M w O w CO00 w OOO o wo CS o 6 N H V) H OO ^ H N Tt-00 O' O'00 tN o to vo 0"0 VO 1+ O' O CO VOOO N O tONOO NH OO VO VO tN O' t^OO Ooo N Nt*5'+0>tO >0 to V+ tl O N C* to + + 1 +tO NVOlOtOtOtOtOtO ■+'t'ttOtOtOCOtO« to W 49 Sugar lb. N. Y. 22 VO 1 * _|® M CN t^vo OMMCOt^M o O to to to to CO N 00 O' CO l^n|0OH|00®H ■<*oH«H«h*i* 5 h VO M CO CO to t© VON OOO 00 N COO SION O M 00 OOO M i+ to M O vovo VO cocotNMOOOO O00 O O OOO 'O'O'O'O t» C-~ OOmmcncnmmmm hmmmmmmmOO OOOOOOOOOO Cotton lb. N. Y. MOM CO O VO M 00 lo O 1+ vovO 00 tN tN 1 + M cOvO 00 00 VOOO M CO VO O tN t'.'O 00 00 vO VO VO if lOvO t'-'O VO 10 10 + 10 + M H H W H M 49 Wheat bu. Chic. NOoOO H + 0 0(00 O O Cn 'O O to vo co i+ i+ O O N NO i+o? oO + h coco P^ co pc >o Oi t <5 O «5 O *•»© Tt P^© VO PC *>.© © wwwwwwwOOO PC © © O' PC pc M 00 CO CO PC 'tOO vo CO fOH lOMOO CO VO VO VO P^OO OO'O'O ts OOOOOOOOOO PC W CO <0 VO Tt CO 00 PC 't pc vo VO CO O' CO Tt o 00 N O O' O P- OhhhOOOOOm vO PC O' PC vO W O • • CO ■H(P« CO N VO piOvciOpmoOO^ OOO t^OO O 0 © t^vO tOPl'O O W nnhoO tO V© O O 00 VO 00 Moot OM NCOifllOO « CMO OO NOO P(00 lOOKJ Vo VO CO ^ VO H 0 Ok 0* O M M M 0< M M M MM VOOOOOOOO 0 N»OM MMMMMMCSMMO* Tt O' O' pc PC 00 to w 00 pc PCWWPCPCWPCttlO 00 so CO 0 N VO© w O' O © CO CO Pr O' PC P^OO 00 O' O w O'OO w O' tooo O'OO P~CO © w O NNVOOM VO© cOP-TtOOPC pc O' pi Tt co 00 CO N vo ^ CN COCS » O' O' P^ 00 00 00 00 w OOO OO P* w OO O O co t (O « cp © Tt o w PC CO Tt to© p"00 o> O' O' O O' O O' O' O O O' ooooooeoooooooooooco wwwwwwwwww W H PC PC PC PC W 8 o pc co Tt to© pr.00 O' O w PC co Tt to© P-.00 O' O w OOOOOOOOO wwwwwwwwww PC PC O'O'O'O'O'O'O'O'O'O' O'O'O'O'O'O'O'O'O'O' O'O' wwwwwwwwww wwwwwwwwww ww I 88 BUSINESS FUNDAMENTALS from the first stages of industrial commodity pro¬ duction to consumption. We have found in our studies that each commod¬ ity follows a leading distributing center. For ex¬ ample, the leading hide and leather as well as wool market is Boston; sugar and coffee, New York 5 grain and live stock, Chicago. Therefore, it is the best policy in compiling commodity prices to cover quotations in the leading markets. There are hun¬ dreds of periodicals, each specializing in one or a group of commodities. These adequately cover the question of price and current market conditions. The table on pages 86 and 87 shows the range of ten staple commodities, with market and average monthly price, i860 to 1921: As an illustration of the possible profit that can be made simply by the purchase and sale of com¬ modities in connection with the study of funda¬ mental and comparative statistics and price, the following example is submitted: Starting with a capital of little over $50,000, ten industrial com¬ modities were selected for purchase, first in i860. They were bought and sold again at intervals of from three to seven years, according to indications given by statistics. The original proportion of the different articles was kept the same and the interest added to the principal on deposit in the interval be¬ tween selling and buying was reckoned at 4 per cent. Since all commodities are not affected alike by the same conditions, slight losses in certain cases were SCIENTIFIC PURCHASING 89 allowed to occur. The resulting accumulation of profit showed that in about sixty years $54,000 be¬ comes about $2,000,000. By working a similar problem with a single commodity the maximum profit of buying at the lo,w point and selling at the high point would show the same tendency of profit. Thus, if $50,000 were invested in iron in i860, it would have equalled to-day nearly $3,000,000. This clearly demonstrates that even the great mer¬ cantile fortunes have been acquired by the same laws and acts that give opportunity of profit to the stock buyer and investor. To secure such a profit, however, one must not make profit his great object in life. Profits, like happiness, must come through rendering service. The man who starts out deliberately to get happi¬ ness rarely finds it. Happiness is the reaction which comes from doing things for others; profits come in the same way. Very seldom does a man make even a financial success when he deliberately starts out to get rich. The great captains of industry are men who have never tried to get rich. They are men who were tremendously interested in their work, who went to it as to a game, who tried to pro¬ duce or sell a better product than any one else or make the same product cheaper, and then automati¬ cally become millionaires. I am not now preaching or speaking by hearsay. Most of America’s great industrial leaders, manufacturers, and merchants are known to me personally. Many of them are BUSINESS FUNDAMENTALS i 90 personal friends. I know their aims and ambitions as well as their struggles and disappointments. They have become rich by making their aim, not profits but service . This fact is of great importance to the young man in business. We hear too much about profits, price, and pleasures j too little about service, sound¬ ness, and sacrifices. Yet, these are the things which have made America build cities, stretch the railroads across the prairies, fell the forests, bridge the rivers, and develop the mines. Some of these things were done simply for profits, but the great work was done by men and women who cared not especially for the profit but for the love of doing things. I am writing this at the Tavern, an attractive hotel at the entrance of Gloucester. As I look from my window I see boys building sand houses upon the beach. Other boys are rolling on the sand or splash¬ ing in the, water. Is there any doubt as to which of the boys will grow up to be successful men? Yet, these boys are not making these sand houses for profit. They simply love to construct and develop. It is the same instinct in grown-ups that makes great captains of industry. Profits, large salaries, and riches come, not by seeking, but by doing. Men and women who supply efficiently and cheaply the things which the world needs and when the world needs them, cannot help but prosper. But, of course, to know what the world needs and when it needs it, you must study fundamentals. Chapter VII MANAGING MEN AND ECONOMIC LAW HERE are very few one-man businesses. In 1 this day of specialization men find that they do one thing or one group of things better than another thing or group. The logical outcome is to hire some one who is especially adapted or who can be trained to help out in these other activities. If your business is successful it becomes necessary to hire more and more people to help carry on its vari¬ ous activities. Very soon you are facing some very human problems in getting along with these people and in helping them to get along with one another. This matter of managing men is one of the most important in all business. Fundamentally, it di¬ vides itself into two distinct problems. First, the management of the men with whom we have per¬ sonal contact j second, the management of workers and groups with whom we have no personal ac¬ quaintance, but who are represented by a committee or union representative. The answer is the same in both cases. There is no other place in the entire fabric of the commercial world where the law of action and reaction works out any more surely than 92 BUSINESS FUNDAMENTALS in the more or less indefinite field of human relation. “ As in mechanics and economics , so in human re- lationsy every action is followed by an equal re¬ action” 1 In the first field where the executive has personal contact the law is generally recognized. A man may not be conscious that he is employing it, but his very personal contact and experience in working with a man will lead him to apply it unconsciously. Very few initial rules are necessary in, this particular field. Give a man a chance to work, give him all the responsibility that he can carry, and then let him work alone to sink or swim on his own resources. If he has the right stuff in him he will go to work with a vengeance and will develop very rapidly into an exceptionally able man. If he hasn’t the right sort of material in him he never will make an ex¬ ecutive anyway, and the sooner it is found out the better. In the matter of compensation I have always found that it pays to give men a financial interest in their job. Wherever it is possible put a man on a basis such that he shares a part of the result of his particular work. He will work harder than it is possible for him to work on a fixed basis, and both employee and executive will make more money than they would on any other plan. The problem of dealing with men with whom you* do not come in direct contact is a much more difficult one because of the misunderstandings that MANAGING MEN AND ECONOMIC LAW 93 are bound to arise through dealing in a roundabout way. Before I undertake the task of outlining a solution I am going to trace briefly the path of the capital-labor puzzle through a typical movement. The attitude of labor all over the United States changes radically as we go from prosperity to de¬ pression, or vice versa. When jobs are many and men are scarce, labor assumes a more or less arro¬ gant air. When we say “ more or less,” we mean that the greater the urgency of the labor market, the more powerful labor becomes. During the phe¬ nomenal period of the World War we saw this fact illustrated to the extreme. Never before in the history of the United States has labor had such an advantage in the market as it had during those years. Four million men were withdrawn from the pro¬ ductive forces of the country and put into our army and navy. Other millions were engaged in supply¬ ing these forces .with sustenance and war material. The balance were left with the ordinary production work of the country on their hands. Furthermore, immigration was suspended and the ever-fresh sup¬ ply of cheap labor was thus cut off. / In consequence the workers had the advantage all on their side. They were for the most part loyal and intent on serving their country. But the ur¬ gency created by mounting living costs, coupled with the power that conditions gave them, resulted in a nation-wide move on the part of labor to better its conditions. 94 BUSINESS FUNDAMENTALS The outstanding symptom of this development is the frequency of strikes. I give here a chart of strikes in the United States from 1915 down to nearly the present time. All through the war and during the period of post-war prosperity, as you see, the strike curve was far out of normal. Labor was using its economic power and employers were gen¬ erally unable successfully to cope with this power. The majority of the strikes were successful. The period beginning in 1921 shows the slow penetration of Labor’s mind with the fact that con¬ ditions had changed and that the tactics of the war years could no longer be followed. Labor lost its tendency to strike at the slightest provocation. J During the war period, wages on the average were doubled. In some cases, as for example in cotton textiles, they were nearly trebled. On the whole, however, they ran along about equal to the increases in the cost of living. Some of the workers did not receive increases anything like the increases in the cost of living. Others made gains in excess of such increases. During this period the attitude of the employer was generally that of prac¬ tical acquiescence. True, many employers fought the increases asked for; but in the main employers realized that the advantage was on the side of labor and that all the employer could do was to limit and not block the evident tendency. With the beginning of the depression a change came. The employers realized it first. Stung by BUSINESS FUNDAMENTALS 96 the straits through which they had gone during the preceding four years, they organized to get even for what they had all suffered. It is fair to say that the attitude of labor during the war is balanced, if not over-balanced, by the attitude of the em¬ ployer in the years of depression. This is an exact illustration of the law of action and reaction. Labor, by its arrogance during the war, piled up for itself this reaction on the part of the employer. Or, if you wish to put it the other way, the employer, be¬ cause of what he had suffered during the war, came to the front with a determination born of his ex¬ periences when labor was on top. I Labor has been very slow to realize this. When the crash began to spread over business and when men were laid off and wages began to drop, labor leaders like Mr. Gompers raised a cry that all of this was a deliberate attempt on the part of em- \ ployers to punish and deflate labor. An examina¬ tion of the Babsonchart and a scrutiny of the list of business failures during the past two years is suffi¬ cient refutation of this charge. No one has suffered more than employers have during this depression. Both workers and employers were caught in the swing of forces bigger than themselves. Neither was to blame; each had to suffer, j (j { At last, however, labor has in most cases realized the truth. Strikes have subsided and efficiency has mounted. The entire attitude of labpr has changed, and the employer is the master of the situation. In MANAGING MEN AND ECONOMIC LAW 97 this position he is taking, very generally, an atti¬ tude comparable to that which labor assumed during the war. Now this is nothing out of the ordinary. It is bigger than anything we have ever had before, because of the artificial stimulation of the war. The swing back and forth between labor and employer is, however, what always happens as we go from over-expansion to depression, or from depression to over-expansion. ; < One can see this in another ,way by examining the history of the unions and the growth of union¬ ization. This is brought out by the Babsonchart with the membership of the American Federation of Labor plotted against it. Now, we undoubtedly have a set disposition on the part of labor to get together in unions of one sort and another. This tendency is on the increase and we shall, therefore, expect to see a steady growth in unionization, comparable to the growth of the country and to the increase in business activ¬ ity. Indeed, we should expect this tendency some¬ what to exceed these two items. This chart also shows that, aside from the ten¬ dency to unionization, which runs through the period, there is a very close following of the X-Y line throughout the entire period in the membership list of the Federation. There have been times when the membership has mounted even in times of depression. Its latest position on the chart, however, compares very closely with BUSINESS FUNDAMENTALS 98 that of the X-Y line, if we compare each with its position at the beginning of the cycle. X . II 220000 1 8 fil 240,000 'O >-• ■ 2=5.000 V. )0 C\j *260000 IWM $ 111 270.000 41 Y £ §1126 0,000 i |§1 260.000 i B 265 00(5 Tfc. 4 IBS 270.000 \ £> 00 i lllfc 548,000 ^ 8 P787000! \ O 0 *-* 11.025.000® % S?2 s 8 ^ sSjsri S 8 KL ° ° g ° 8 s T 8 t!.539.00b#|^^P -* So ° ^ “1 Ilsewoor^^M “1 p«^Spli§ »- 1 « 8 >-» Ik« 2 «oo..^^^m r r~ »-• »-• »—* 11,770000 V }T-:- >—* cu ■u ►-* cn |2072j000^ ^2371,000^^^^^^^^*^ ►—* 0 . ►-* -j 00 *—* vO rvj O Cvj >—• r-» -< These two illustrations are sufficient to show that, when we come to the relations of capital and labor, or of employers and employees, we find ourselves dealing with a vibratory movement. Back and forth MANAGING MEN AND ECONOMIC LAW 99 the pendulum swings; from one side to the other the tide of battle ebbs and flows. It is not that either labor or capital wish it to be so. This great movement is no deliberate frame-up on either side. In fact, each side, if it could have its way, would wish to be delivered from these relentless forces which alternately deflate and inflate one another. The real fact is that each side is caught in the meshes of this great economic law. If they could but remember it at the right time, they might save themselves a lot of trouble. But when either side happens to find itself in possession of the ball, it plays the game as if there was nothing different coming. The great problem before each side is to learn the law, to believe in it, and to act with refer¬ ence to it; so that the grind of the law may no longer bring wretchedness and suffering. Let there be no mistake here. Employer and employee have some diverse interests. They are each buyers and sellers in a competitive market. One wants a high price; the other a cheap com¬ modity. This separateness in interests will always exist, so long as the present social order stands. No beliefs, whether of the law of action and reaction, or of any other sort, will rid the employers and employees of the fundamental conflict which re¬ sults from this diversity of interests. On the other hand, labor and employers have so many things in common that they can learn, if they will, to work in recognition of this law, and in this 100 BUSINESS FUNDAMENTALS way they can save themselves from much 1 of the trouble which otherwise comes to them. For a broken law always means that the breaker, or some innocent person whom he involves with him, will suffer the penalty. The worker must learn to give an honest day’s work. Without this an honest day’s pay does not benefit him. No one can take out of a job more than he puts into it without hurting himself. This kind of action is hurting millions of workers right now. The higher cost of everything a working man buys is accounted for, in part, by the fact that he and thousands of his fellows took out of their job more than they put in. If every dollar of wages got a dollar of work, other things being equal, the dol¬ lar would continue to buy a dollar’s worth of stuff. The employee makes his biggest mistake when he thinks that in doing less than a day y s work he is hmrting the boss . Maybe he is; but he is in the long run hurting himself and every other worker more than he is hurting the boss. It is a strange fact that this entirely wholesome doctrine seems to be better understood by the rad¬ ical Amalgamated Clothing Workers than it is by the old-fashioned American working men, who make up some of the other labor bodies. Start in to have a house built, or rebuilt, if you want to see how little the average building trade worker appre¬ ciates this fact. It has never dawned upon him that the reason he has to pay such high rent for his MANAGING MEN AND ECONOMIC LAW IOI house is to be traced back, largely, to the fact that, when you hire him to build one for you, he does half a day’s work instead of a whole one. Such workers need to go to Mr. Sidney Hillman, of the Amalgamated Clothing Workers, and hear him tell his own people, that anything which injures their industry directly injures them. But the employees are not the only people who need to learn the truth of the law. The employers also need it. Perhaps they need it even more than the employees. The outstanding mistake of the em¬ ployer is his failure to realize that he is dealing with human material. He must realize that the men and women who work for him are men and women, and that they are to be treated as such. He has intelli¬ gence to deal with, even though it is in many cases rudimentary, and that intelligence will react to his attitudes, just as surely as will the intelligence of his customers and of his business associates. The distressing thing about the law of action and reaction, when applied to human industrial rela¬ tions, is that it is hard to chart. It is seen only as we see its results. If the law came up and hit us in the face every time we break it, as does the law of gravitation, we’d not forget it. But the penalty or reaction is so long delayed, in many cases, that we forget the law altogether. The result is that many of the ills which now afflict industry on its human side are the delayed penalties for the law breaking of men dead and gone. 102 BUSINESS FUNDAMENTALS This industrial relationship is no place for any kind of charity. What ought to come about is a realization that the relation between employer and employee is fundamentally a business relationship. This is in consequence of the fact that we have in¬ telligence to deal with. Just as fast as intelligence grows, comes a resentment over any hint of charity, or talking down. The more our men know, the more they demand that they be treated as men. One thing seems to be emerging from the con¬ flict between employer and employee, and that is labor’s growing insistence on a right to a say, on equal terms, regarding the things that directly con¬ cern it in the industrial relation. The employer who does not realize this is going to run against it ever more forcibly in the years right ahead. The wage worker can no longer, in the mass, be treated as a dependent or as a child. He must be treated as a man and be granted a man’s right to his own say about things. More will be said about this in the next chapter. At present we wish to call atten¬ tion to the fact that this is the real meaning of the trade union movement; it is labor’s effort to get itself into a position where it can have its say. Employers must recognize this tendency and grant this right. Somehow, in some way, the wage worker of to-day and tomorrow will find expres¬ sion. It may be in the union; it may be in the shop committee, it may be in some other way. But some¬ how he is going to be consulted and to take up his MANAGING MEN AND ECONOMIC LAW 103 duties, not because the boss says so, but because he has himself voluntarily agreed to the terms and conditions of those duties. We have seen during the years since 1918 a large growth of the shop committee movement. There are nearly a thousand of these committees in operation in the United States. In too many cases the move¬ ment is a device on the part of the employer to get rid of the trade union. Whatever the conditions, however, the shop committee will function success¬ fully just so far as it is an honest effort on the part of the employer to give his employees a chance to become vocal. Any employer who tries' a shop com¬ mittee, with the idea that he will be able thereby to put something over on his employees which he could not otherwise get past their intelligence, is doomed to be disappointed. The shop committees which are doing the best work to-day are those which give the largest amount of determination to the workers. This is natural. What you put in you take out. If you sow the expectation of respon¬ sibility , you will get the acceptance of it. If, on the other hand, one uses any sort of human machinery to drug, dope, bamboozle employees, he will find that they ignore him when his back is turned and he will be quite fortunate if they are as considerate as that. These two things, then, wait upon a realization of the working of the law: a general willingness to give a day’s work for a day’s pay, and a willing- 104 BUSINESS FUNDAMENTALS ness to give to employees the part of men and women, rather than to regard them as cogs on the wheel. To a great degree these two go hand in hand and must come about simultaneously. They mean a new deal in most of our shops. It rather seems as if the first move would have to be made by the employer. In that case much depends on the employer’s genuine conviction of the whole¬ someness of ,what he is trying to do and his deter¬ mination to play the game square. The man who is not ready for this had better keep his club — for he will have use for it. The employer, however, who is ready to ex¬ tend honest co-operation to his employees and who is willing to go wherever that leads him, can count on getting that back again from his employees. The law will work. It will work anyway. What we get out of it depends on what we put into it. Chapter VIII SOLVING THE PRODUCTION PROBLEM B EYOND doubt the great problem of civiliza¬ tion is the problem of production. Our work¬ men are, on the whole, the most efficient in the world. Save possibly pre-war Germany, no nation has gone so far as we have in machine methods and quantity production. Still, the total production of the United States per year, according to the best figures obtainable, is about $60,000,000,000, and if this sum were divided equally among the popula¬ tion, the sum received by each would not be suffi¬ cient to support the people of the United States in health, comfort, and decency. The $60,000,000,000 is, of course, not evenly distributed. Some few at the top get very much more than others at the bottom. In consequence, thousands farther down the line get very much less than their proportional share and are, by that much, further still from the standard set for decent and efficient living. This faulty distribution only com¬ plicates still more a problem that is inherent in the situation. Even if we had perfect and equal distribution — 10 6 BUSINESS FUNDAMENTALS if we had Socialism or Communism or any of the “ isms ” that propose to make a paradise for us — we would still be confronted with the basic fact that ,we are 2 5 per cent, short of enough to go around. We need at least $80,000,000,000 annual produc¬ tion to give to each individual the required standard of life, even if the distribution were equable and proportional. The great problem of civilization in the United States is then: How shall we add 25 per cent, to our annual production? There are several avenues of approach to this question. One is that suggested by the report of Mr. Hoover’s committee on waste in industry. This committee says that at least 50 per cent, of waste exists in even our best managed industries. The report goes on to apportion this waste among the different factors in the producing machine. A large part of the waste is frankly charged up to faults of management. The answer to the problem, according to the committee, is to give the efficiency engineer a chance to eliminate the waste that could be taken care of by improved engineering methods. I have no fault to find with the suggestions of this report, but for our present purposes we wish to come at this problem from a different angle. There is no doubt that we are face to face with a problem more complicated than that of mere engi¬ neering. The engineers could do much for us, if they had a chance, and their remedy is one of the remedies that should be prescribed to meet the needs SOLVING THE PRODUCTION PROBLEM 107 of the case. Deeper than this is the fact that we must love to produce. Production has never been the basic motive of business 3 at most it has been but secondary. The main motive has been, not production, but profits. Our industries are not organized for production; they are organized for profit making. The wide and fundamental gap between the two is indicated in that stimulating book of the late Henry L. Gantt, published shortly after his death, entitled “ Organizing for Work.” If we are going to solve this problem of production, we must raise up a race of producers — we must organize industry to that end. Some new convolutions must be developed in the human brain. The ideals of life must be reformed. If our forecasts are correct, we are starting now upon a new phase of business in the United States. Ever since 1893 we have been travelling with a ris¬ ing market. Everything has been going up. Prices, wages, living costs — everything concerned with the maintenance of life and of business activity has been slowly and continuously rising for nearly thirty years. Under such a condition appropriate laws and methods of doing business grow up. Practically all of the men who are active in business' to-day have never had any experience with business under any other conditions than those of a rising market. All the rules they know by experience are the rules which fit such conditions. 108 BUSINESS FUNDAMENTALS With the beginning of 1920 this country may have started upon what may be a twenty-five-year period to be marked by directly opposite conditions. Everything, broadly speaking, may go down. Prices, wages, costs of living — all the main factors — may be on a descending scale for the next twenty to thirty years. It is fundamental to business success in the years right ahead that business men, workers — everybody — get hold of this basic change in the situation and learn to do business under it. Most of all, it is needful to keep this great fact in mind. We shall have, from time to time, as we go on, periods like the summer of 1922 when the trend of prices will seem to be upward. We must not be deceived by such transitory symptoms, which are but eddies in the main stream, while still the broad movement is the downward one to which we have referred. Labor and labor management are going to be fundamentally different while this condition lasts 1. from what they have been in the experience of the men who are now managing our businesses. The main objective in labor management for the past thirty years has been to successfully and wisely re¬ sist excessive increases in wages. That period has gone. For the next twenty-five years the main job in labor management may be that of successfully 'piloting labor through a period of falling wages. This is not a call for promiscuous and excessive wage cuts. The words used above have been care- SOLVING THE PRODUCTION PROBLEM IO 9 fully chosen. Still, it remains that the man who gets business and who makes money for the next twenty-five years will be the man who succeeds in giving unusual quality at the lowest price. The entire problem of successful merchandising re¬ volves around that one fact. Therefore, among the foremost items of successful manufacturing is to be that of reducing labor costs, and a good part of that must come through a gradual, wise, and successful lowering of wage rates. Labor is going to react to this fact. It is reacting to it now. As was stated in the preceding chapter, labor was very slow in getting hold of the fact that the situation had changed. The shopmen’s railroad strike of the summer of 1922 was an illustration of the common reaction of labor to the new conditions. Heretofore we have had to deal with a labor force that was militant, aggressive, triumphant. During the next few years we are going to deal with a labor force that is sullen, resentful, and dogged. The weapon of such labor is sabotage l Our labor troubles of the past have been bad enough, but they do not for a moment measure up in perplexity to those that we are going? to have. The man who goes on strike for more pay is difficult, but he is not nearly as bad to deal with as the man who throws a monkey wrench into the machine. That is the kind of a worker that is liable to be produced in the business phase which we are now entering. If what we have written above is correct, the most no BUSINESS FUNDAMENTALS important thing for employers to do in the years right ahead is to change labor management to con¬ form to the new conditions. At the bottom of this new attitude of labor is ignorance of the real conditions. Wherever ig¬ norance exists the thing to do is to turn on the light. If your employees knew as much about your prob¬ lems as you do y their reaction to them would be the same as your own . You, in your office, do what you can to inform yourself about business con¬ ditions. You read all the reports available. You receive information through your business asso¬ ciation and, full of this knowledge, you go before your employees to ask for a reduction in wages or for some new conditions which will cheapen unit production costs. But your employees are utterly destitute of the knowledge which has brought you to your conclusions. All that they see in your pro¬ posal is reduced wages, lower standards of living, and a plan, hatched up by a hostile employer, to take advantage of them. Consequently, they resist. What seems axiomatic to you, seems to them like injustice. If they had your background, they would feel as you feel. The answer is: Give them the information! We feel that this suggestion is the one big thing that we have to say to our employer clients at this time. All of the material which the Babson Statis¬ tical Organization furnishes to its clients on funda- SOLVING THE PRODUCTION PROBLEM III mental business conditions and upon industrial prob¬ lems, must be reshaped for presentation to your employees. They must be enabled to look at things through the same eyes as yourself. For example, take the Babsonchart. It is a pic¬ ture of business conditions, presenting in graphic form what you are contending with in the general business situation. Use such a chart with your em¬ ployees. We base all, of our business forecasts upon this chart. You should use this chart or some other to pass these things along to your employees. Have these charts copied on a large scale or put upon a lantern slide, and kept up-to-date. Then you, or your employment manager, must regularly and fre¬ quently explain what the charts mean to the em¬ ployees. Simple language with much repetition and almost infinite patience will be required 5 but it will be worth while. In similar fashion, the particular problems of your own industry must be presented. What is the nature of the competition you have to meet? How many plants are in competition with you? Where are they? What advantages do they possess over you, if any, in making or marketing their prod¬ uct? What is the total producing power of the country in your industry? What is the probable consuming power? All of the material can be graphically presented, like the Babsonchart, and ex¬ plained in detail to employees. Likewise, take up the prices of your product. 4 112 BUSINESS FUNDAMENTALS What happened to them during the war? What has happened since? What is going to happen? Where must your prices be — what course must they take — in order for you to get business and keep the plant running? Take up the question of [wages. What has been the course of wages in the country as a whole during the war and since? What has been the course of wages in your plant? How does this compare with the course of wages as a whole and with the course of wages in your com¬ petitor’s plants? What about the cost of living? The United States Bureau of Labor Statistics prepares regular reports on this subject. Have your employees seen them? Do they realize what these reports mean? Perhaps they do not believe that these reports are true. If that is the case, the thing for you to do is to have your employees join you in preparing local cost-of-living reports which they will accept as true. So on all down the line. It may even be that you will find it to your advantage to go so far as to acquaint your employees with the profits, or losses, that you are making. Workers quite generally think that the boss is making a pile of money. For this reason, they do not accept at full value any pleas for ,wage reduction or increased efficiency that he may make. The balance sheet is the answer. Others have done it. Why not you? At any rate you can show them the unit production cost record. SOLVING THE PRODUCTION PROBLEM II 3 And if you can find a way to compare your own figures with those of your competitors, you will do well. Some of our industries which have effective associations have this material available. I hope that genuine 'profit sharing has a great future ahead of it in the phase just begun. Notice that I say genuine profit sharing. Much of the prejudice against profit sharing comes from the fact that it has seldom been tried. There are only eight or ten real profit-sharing plants in the country. Profit sharing, to be genuine, must give to the em¬ ployees a percentage, announced in advance, of the profits of the concern. Obviously, the percentage will fluctuate up or down with the profits. Obvi¬ ously also, the profits must be known. In our office we post the record each month and every employee knows twelve times a year what the firm is doing in the way of profits and exactly how much money has been transferred to the profit-sharing account. Have in mind what you are doing, or trying to do, with labor in this present stage of business. You are asking your employees to work with you . That is fundamentally different from asking them to work for you . If they are to work with you, it is but natural and reasonable that they have some of the same incentives that you yourself have. To say that the logic of profit sharing is loss sharing is aside from the point. Your employees are not working on, the same margin as yourself. Even with profit sharing, they will not be rich. What 114 BUSINESS FUNDAMENTALS among them is spread over a large number, with you is divided up, in most cases among a few. Still, it should be remembered that there are cases of long standing and conspicuous success, where the em¬ ployees have joined loss sharing with profit sharing. It merely shows what can be done when the spirit is right. By the time you have gone the distance which we have thus far indicated, you will come to the place where the dreaded efficiency system, which labor usually hates like poison, with its stop watch and time studies and speeding-up program, can be put in, with the entire consent of the employees and with every chance of success. Thus, what Mr. Hoover’s committee on waste has called to our at¬ tention can be made available under the right con¬ ditions. These things have all been done; done under the old conditions. They are not theoretical fancy. The present calls for them. They are the way of salvation and success in the times that we are now passing through. The man who undertakes a movement like this must be a man of real faith. He must have faith in human nature, as he finds it among his employees. He must have faith in the wisdom of the plan. And he must be prepared to go the whole distance. It is idle to start upon a plan like this and stop half¬ way. All of the cards must be laid on the table. Absolute candor and frankness are needed to-day in dealing with labor. Only thus will the reaction BRIGHTON BRANCH SOLVING THE PRODUCTION PROBLEM II 5 be genuine and hearty. Our men are ready to work with us, just as soon as and to the extent that they find us ready to work with them. If we want ser¬ vants, we can have them by being taskmasters. If, on the other hand, we want partners, we must be prepared to treat our employees as partners. We cannot combine the two conceptions. It is servants or partners. Which we have will depend upon ourselves. It is my conviction that servants cannot do the work that the world needs in the next twenty-five years. That extra 25 per cent, of pro¬ duction cannot be got out of slaves. Only free men, working gladly and with hearty co-operation, can give us the output that we need. Chapter IX METHODS OF MARKETING S OMETHING is wrong with the usual method of doing business: results prove it. Do you realize that losses from failures equal — or exceed — losses from fires? Losses by fire for ten years were $2,492,428,170. For this same period losses from business failures were $2,904,100,000. What is the trouble? In my opinion it is due in large part to the excessive booms and the resulting disastrous panics 5 in other words, to these same fluctuations of business caused by lack of adjustment between production and distribution. We have made tremendous strides in production, but we have lagged far behind in distribution. If you compare production to the automobile, then distribution may be typified by the ox-cart. Do you realize what we have accomplished in production? In the making of boots and shoes, work which formerly by hand methods required nine hours requires but one by machinery. In the manufacture of laundry soap, work formerly re¬ quiring twenty hours now takes but one. Even greater savings occur with other articles. In mak- 116 METHODS OF MARKETING 117 mg hammers or plows, where formerly about thirty-two hours were required, we now need but one hour. In the case of certain machine parts which can now be made in one hour the time re¬ quired by hand methods was over 4,000 hours. The general average for all articles is about 250 to one. In other words, where by hand methods 250 hours of labor were required to produce a certain product, but one hour is now needed. Compare this extraordinary advance in the effi¬ ciency of production with the corresponding devel¬ opment in distribution. It is absurd even to suggest that efficiency of distribution has been increased in anything like the ratio of 250 to one. In fact, from many standpoints, it may be questioned whether we have made any advance at all in distribution. I have at hand certain preliminary figures suggesting that there are various kinds of merchandise which cost more to market than to make. On a dollar article, for example, the cost to make may be ex¬ pected to be 40 cents, and the cost to distribute, 60 cents. I have no doubt that even greater discrep¬ ancies might be found. What steps can we take to bring distribution and production more into align¬ ment and correct adjustment? If we can find even a partial answer to this, we shall do much toward reducing the wild fluctuations of the business cycle. We should bring to bear upon the problem of distribution the same scientific approach which has been so successfully applied to production. Selling 11 8 BUSINESS FUNDAMENTALS has been largely a matter of guesswork, but we must place it squarely upon the foundation of facts first. As a concrete and specific example of what I mean by facts first, see the analysis at the close of this chapter. It is by no means complete, but it is sug¬ gested as a starting point. I should like to see every reader apply this analysis to his own business, or to work out a similar analysis. After you have applied it certain facts will emerge. You will discover that you are selling or should sell primarily on the basis of industry. If you are making motor trucks, for example, you will find that your customers divide themselves into cer¬ tain industrial groups, such as the iron and steel industry, the lumber industry, and so on through the dozen or more classifications of manufacturers and producers. If this is the way in which your business naturally aligns itself, then your distribu¬ tion should be primarily based upon the study of industries. In another chapter this question of sell¬ ing by industries has been considered at greater length. In many instances, however, a business cannot well be classified by industry. For example, if you are selling food products, clothing, musical instru¬ ments, and other articles of final consumption, you will find that the more practical classification is by localities. Therefore, a separate chapter is devoted to this alternate problem of selling a city. During the past two years I have studied and METHODS OF MARKETING 119 analyzed both the plans and the results of several hundred sales and advertising campaigns—^cam¬ paigns that succeeded and campaigns that failed. Detailed study of the latter indicates that at least 80 per cent, of those that fail do so, not because of a faulty plan or poor execution, but because they were builded upon a foundation of assumption, guesswork, or half truth instead of on sound fact. Millions in money and thousands of hours in earnest effort have been spent in a futile effort to sell mouth organs to deaf men. As a small contribution to better business, I have prepared a standard merchandising analysis. We hope that it will help to eliminate this greatest cause of failure in marketing. It is simple and ele¬ mental. If time and money permit, we advise a much more extensive survey. In any case, however, an hour or two spent in examining your problem on the fifty points outlined will help to clarify it in your own mind and will tend to eliminate 50 per cent, of the chance for failure or half-hearted suc¬ cess. It is the most valuable hour you can put in on any sales or advertising problem. Remember, facts first — get the facts, or the facts will get you. 120 BUSINESS FUNDAMENTALS BABSON MERCHANDISING ANALYSIS Economic Factors Prospect f 1. Who is your prospect? What is his or her position in the social and business world? Get as definite a description as you can of the man or woman you must sell. 2. How large is your market? Total number of prospects? Rate of growth or number of new prospects available each year? 3. Where are these prospects located? How many in each section of the country? Division by states if possible. Are the majority located in large cities, small towns, of rural and farming communities? 4. What is the prospect’s relative prosperity? Income compared with a year ago? Relative position of the industry upon which he is dependent? In which month of the year is he most prosperous? 5. What portion of the market is already sold? How many of the possible prospects already buy from you regularly? What portion buy occasionally? How many do not buy at all? Competition 6. What is being used now in place of your product or service? List competing articles or services. METHODS OF MARKETING 121 7. Advantages of competition? List both apparent and real advantages of the competing articles or services. 8. Advantages over competition? List the advantages of your product or service over that of your competitor. Distribution 9. Cost of product or service. {a) Cost of raw materials. $■ (b) Cost of labor and overhead cost . . $ (*:) Total manufacturing cost . $ (d) Selling cost . $ (e) Profit . $■ (/) Selling price . $ (g) Retail price . $■ Tabulation of the costs where possible is very helpful. If labor and overhead cost, for instance, is much greater than the cost of the material, the price can in most cases be cut materially by volume production. In this case, it may be well to set low prices in order to get that volume. If material costs make up the largest portion of your manu¬ facturing cost, volume is relatively unimportant, except in in¬ dustries offering large discounts for quantity purchases of raw materials. If your selling cost is larger than your total manufacturing cost, your price may be too high to be efficient. Be sure that a lower price would not sell enough more goods to increase the net profits, before you continue with a program that must overcome unusually high sales resistance. Is your selling price determined by arriving at the manu¬ facturing cost and adding all the traffic will bear, or is it de¬ cided by going to your market and finding out what the public wants to pay for your product? Neither of these processes 122 BUSINESS FUNDAMENTALS are entirely satisfactory. You should approach the problem from both points of view and set a price somewhere between the two extremes. Be sure that the margin between your sell¬ ing price and the retail price is not too wide. 10. What is your plan of distribution? Which of the following factors do you employ in your scheme of distribution? (a) Mill agents or selling agents ( b) Wholesalers (c) Jobbers (d) Retailers (e) Consumers 11. What are the avenues of distribution? Do you sell through branch offices, salesmen, direct by mail, or agents, exclusive or non-exclusive? 12 What are your terms to the customer? What discounts do you offer for cash? What is your credit policy? Do your discounts for quantity help in selling, or do they tend to overload your customer? How about dating? What is your policy regarding return goods? What guarantees are you willing to make and stand back of? Psychological Factors 13. What are your fundamental appeals? Consider the following possible appeals and number in the order of importance in relation to your particular product or service: (a) Profit (b) Utility (c) Curiosity (d) Caution ( e ) Pride METHODS OF MARKETING 123 14. Is your product known or unknown? Is your prospect familiar with it or a similar article or service? Does he already appreciate the need for it, or must he be educated to use it? 15. Is your product considered by the prospect as a luxury or essential? 16. Is your product or service of personal nature or for busi¬ ness use? 17. Have you the good will of the public? Is your firm or product known or unknown? Favorably or unfavorably known? 18. What is the present attitude of the prospect toward your product or service? List all objections encountered in a sale. List the points most easily understood, and those which require a more detailed explanation. List any misapprehension of the public regarding your product or service. 19. Exactly what must the campaign accomplish? If the product or service is known, and has features which are easily grasped by the public mind, a compar¬ atively simple campaign should achieve the desired result. If, however, a good deal of educational work is necessary, a more extended plan will be required. Lay out a rough plan of the campaign that will be necessary. Cofy Factors (For the preparation of both advertising and sales canvass) 20. What one point must the message convey? No advertisement is large enough to contain two ideas. To insure unity, ask yourself what action is desired, and keep that definite idea in mind throughout the preparation of the advertisement or sales canvass. I I 124 BUSINESS FUNDAMENTALS 21. Do the headline and illustration insure attention? Will your copy be seen when competing with half a hundred other messages for the attention of your prospect? Will your salesman’s introduction insure a hearing for him? 1 22. Does the opening paragraph clinch interest? Be sure that the message is presented from the pros¬ pect’s point of view. Make certain that his advantage is emphasized rather than your own. 23. Does the message create a real desire to own or use the product or service advertised? Desire is a feeling and is not a product of cold logic. Make your message breathe and live with illustration and description of the prospect enjoying the use of your merchandise. 24. Does the close outline clearly the action desired and urge to act quickly? Be sure that you tell a man exactly what you want him to do, and make it easy for him to do it. 25. Does your copy carry a distinctive mark or style that will tie it up with your other efforts? The accumulating effect of several different appeals is a tremendous force. Be sure that your messages are distinctive enough so that the prospect realizes that your product is the same product that he was reading about last month — that this is the machine, the equipment or service that he had already decided to buy. 26. Could the name of any other make or maker be substi¬ tuted for your own? If it can, your advertisement is completely worthless, except that it may do a certain amount of educational work for the good of the whole industry. You are advertising for the benefit of your competitor as well as yourself. METHODS OF MARKETING 12 $ 27. Is it completely free from meaningless slogans, insignifi¬ cant trademarks, and useless words? These examples of literary deadwood not only take up valuable and expensive space and make the message’s work long and hard to read, but they actually befog and confuse the mind of the reader, so that he is left with a very indistinct impression of what you are trying to tell him. Write as though it cost a dollar a word. 28. Does the copy ring true? When completed read your copy. Does it sound as if it were in earnest? Does it make empty claims or does it offer evidence and proof? If it offers no proof, it will convince no one. Will the product fulfill the promise? If not, improve the product. Display Factors — Sample Cases 29. Can the prospect see it? In making up the salesmen’s sample cases, it is well to remember that the eye is much quicker than the ear. Samples that the prospect can look at, handle, or work are better than the most eloquent description ever written. If you cannot put your samples in the sales¬ man’s hands, be sure that he is provided with sample charts and photographs that will tell the story. Publications 30. What is the circulation? Where is it located geographically? What per cent, of the readers aro prospects? Cost per page, per thousand for reaching prospects? Magazines offer a splendid medium for educational work, where the percentage of prospects is large enough to make them worth while. 126 BUSINESS FUNDAMENTALS 31. Trade publications. If you are interested in reaching a certain line of busi¬ ness, trade publications offer a circulation without waste. The cost in this case should be compared with the problem of a direct mail campaign to cover the same field. 32. Newspapers. The largest and most inexpensive circulation in the United States, offering an unusual opportunity to culti¬ vate certain localities. Positions in the various sections of the paper offer still further chances to appeal to a definite class. Percentage of prospects should again decide the practicability of this medium. 33. A poster display. Outdoor bulletins and street car cards offer valuable space if your product is of general use. 34. Direct mail. By selection of a mailing list this medium can be used without any waste circulation. It should be the back¬ bone of any campaign which is to concentrate on a limited number of prospects, and should be used in conjunction with regular publication advertising in the follow up and cultivation of interested prospects. The duplicated letter offers the most elastic and prac¬ tical form where there is no need of detailed descrip¬ tion. In the more elaborate presentations the details should be covered in a printed folder or booklet which accompanies the letter. Whenever possible illustrate the product and show it in use. The possibilities for variety in direct mail material are almost unlimited. Handled intelligently, it offers unusual possibilities for efficient marketing. 35. Dealers’ helps. Window display. Counter stands.. METHODS OF MARKETING 1 27 Samples and other forms of advertising, which can be placed in the dealer’s store, or presented to the public through him are of tremendous effect, and ordinarily the cost is little more than the actual preparation of the material itself. The space used is donated by the dealer, and the final’ advantage is that the appeal is made where the goods are easily accesible and can be procured with¬ out delay. 36. Miscellaneous. There are a score of more or less minor classifications in the medium field, including novelties, exhibitions, demonstrations, and displays, and other particular forms which are adopted to serve in a limited field. These should be considered as accessory and auxiliary forces and should not be depended upon to carry the heavy end of the sales message. Physical Form 37. Type. It is well to stick to a few of the better-known type faces. Fancy types are hard to read. Small type spaced out is better than large type jammed together. Getj your emphasis by the use of italics and small caps, rather than by trying to mix several of these fam¬ ilies of type into a single layout. 38. Illustration. Make the picture mean something. Make it emphasize a single point. Make it help sell. Explain the pur¬ pose of the advertisement, and a good commercial artist will know what form of handling will best serve your purpose. Money spent for effective illustration is well invested. 39. Color. In preparing printed matter the limited use of color has 128 BUSINESS FUNDAMENTALS a very constructive force. It is better to use too little than too much. Don’t slap it on with a trowel. 40. Paper. Paper should be selected for the work it is to do, not by the price per pound. Each of the several grades has a purpose. If you are not familiar with the different papers, get a good printer and let him select the right sheet for your particular case. Note — Wherever possible it is imperative that the campaign be tested on a limited field of prospects before it is adopted. The observance of this rule in conjunction with a careful survey will practically eliminate the chance of failure. Chapter X SELLING A CITY I F your products are consumer’s goods, that is, bought by the general public rather than any par¬ ticular group or industry, it is safe to say that your marketing plan should be built for the city as a unit. If you are in the retail business, obviously you must operate on this unit; but if you are doing a national business you can readily increase your sales effi¬ ciency by following the same plan. Conditions are not alike in any two cities at one time, and sales possibilities in adjoining localities may differ by as wide a margin as 50 to 60 per cent. It is ridiculous, therefore, to assume that the cam¬ paign designed to sell the country as a whole will be 100 per cent, productive in each of these various communities under all of these different circum¬ stances. It is safe to say that sales can be increased 10 to 30 per cent, on every dollar you spend in ad¬ vertising and sales effort, if you will take the trouble to study each city and fit your plans to local conditions, whatever they may be. Here are a few of the things that decide the dif¬ ference between success and failure, between profit and loss: 129 130 BUSINESS FUNDAMENTALS St. Louis, for example. How many salesmen should you put into St. Louis? Can you adequately cover this city with two men, or three, or four, or a dozen, or how many? Should these men be trav¬ eling salesmen or resident salesmen? If a resident, should they have desk-room only or a well-equipped sales office? Or — another thought — can your products be adequately distributed in St. Louis by mail? Going to the other extreme, how about a warehouse in connection with the sales office? How about dealers — their number, their volume of busi¬ ness, their probable sales of your particular prod¬ uct? Again, is St. Louis the kind of a city you can count upon for a long pull and profitably spend years in developing, or is it more like a mining camp or oil town — fit only to be plucked quickly while the plucking is good? Is the present a favorable time to approach the St. Louis market or will it be more responsive at a later date? These are typical questions applying to any city or state and occurring constantly in an active sales department. The credit department has a similar set of questions. Should credit in St. Louis be ex¬ tended liberally, guardedly, or practically not at all? Should collection efforts be mild, medium, or drastic? Of course, it all depends on the local out¬ look. Your credit and collection policies depend on whether St. Louis is on the eve of profound de¬ pression or about to enjoy a record-breaking pros¬ perity. Then comes the advertising department SELLING A CITY 131 with its own particular questions. How much news¬ paper advertising and other forms of publicity will St. Louis repay? Or if a local campaign has already been run and recorded, is the score good, bad, or indifferent? There are always two questions about a locality: first, the question of those who are contemplating the field as prospective territory 5 second, the ques¬ tion of those already located therein and desiring to check up past records or formulate future policies of advertising, selling, credit granting, and collect¬ ing. Both questions depend upon a precise knowl¬ edge of the local situation and outlook. Many busi¬ ness concerns iwill not take the trouble to get this knowledge. They are governed as the old-fash¬ ioned, one-cylinder gasoline engine was governed — by the “ hit or miss ” method. This will not be admitted by some sales managers, advertising men, and credit men, who claim they are operating, not by luck and chance, but by intuition. Intuition is a wonderful thing — when it works. I have a great respect for it — when it works. But it doesn’t always work. Intuition is what prompts a hen to sit on china eggs as optimistically as on the real article. Intuition is what tempts the setter pup to point at the parrot cage. Intuition is what leads many business men into the embrace of the receiver. In his book, “ The Friendly Arctic,” Stefansson makes this significant remark: 132 BUSINESS FUNDAMENTALS When I am lost in a storm, or when I am in doubt of any kind I frequently find that my feelings, or so-called “ instincts,” are in conflict with deliberate reason, and I have invariably found that the “ instincts ” are unreliable. I may have the strongest feeling, which almost amounts to a conviction, that my camp lies in a certain direction, for example, when a careful review of circumstances shows that it really ought to lie in another. If “ hunch ” is a treacherous guide in polar ex¬ ploration it is even more so in dealing with the complex problems of business. Those who realize the need for definite data as the footings of success usually turn first to popula¬ tion statistics. Population statistics are always better than nothing. But they have certain radical de¬ fects ; they are always out-of-date. During the war boom, when you wanted to know the population of Bridgeport the latest figures were for 1910 — four years before the war started. If later you wanted to find out whether Bridgeport lost population when the boom subsided, the latest figures were for 1920 — near the peak of the boom. Another weakness in population figures is their arbitrary character. Rarely do the political boun¬ daries of a city coincide with its true economic or business boundaries. Take Boston, for example. Politically, Boston includes Roxbury but not Brook¬ line, Dorchester but not Newton, Charlestown but not Chelsea. Or compare San Francisco with Los Angeles. The political boundaries of San Francisco SELLING A CITY 133 are narrowly drawn and its population is proportion¬ ately small. But the political boundaries of Los Angeles are widely drawn and its population is pro¬ portionately large. You will appreciate the absurd¬ ity of accepting population figures as a measure of a city’s business magnitude, by noting the following fact: For most of the leading cities the business area or trading area has a population anywhere from 2 to 100 per cent, greater than the population of the city proper, or the political area. Assume, however, that you have obtained cor¬ rected or true population figures. You are still far from a measurement of the locality’s real purchas¬ ing power. Purchasing power cannot be judged by population alone. To the census enumerator, all people look alike. He makes his count upon the principle so well expressed by Robert Burns in his famous line — iC A man’s a man for a’ that.” The successful seller of merchandise cannot fol¬ low so poetical a vision. A man may be a man and still not be a prospective customer. The decisive factor is purchasing power. A man who is spending $2 offers double the market offered by the man who is spending $1. In a business sense , the important thing is not people but pocketbooks . We now come to the central problem of all dis¬ tribution; namely, the forecast of purchasing power. 134 BUSINESS FUNDAMENTALS The statistical highways and byways are strewn with* wrecks of formulas which have been devised for the appraisal of purchasing power. Such a formula is as easy as rolling off a log — and has about as much commercial value. You start with population, then you deduct negro population — forget the fact that when a negro is in funds, as thousands of them are in a period of high-priced cotton, he is one of the most generous customers known to scientific merchandising. However, a sordid and mercenary point of this kind is distasteful to the formula hound. Something must be done with the negro; so deduct him. Some authorities favor deducting also whites of foreign or mixed parentage between assigned age limits or resident in specified localities. By this time the formula hound is really warmed up and hitting on all twelve cylinders. He squares the number of radio outfits located in the city, ex¬ tracts the cube root of local a hooch ” mills — of foreign or mixed parentage — divides the quotient by the remainder plus three times the mayor’s salary. Now all this statistical “ jazz ” is great stuff to show the visiting delegates to the annual convention of mouth organ manufacturers, but for real service it doesn’t mean much. From a business standpoint any measurement of a city’s sales possibilities must answer two tests: (i) it must be simple; (2) it must be up-to-date, preferably more than up-to-date—• a forecast. SELLING A CITY 135 Simplicity and prophecy, these are the cardinal virtues of any attempt to appraise a city’s capacity as a market for your products. The problem has never been stated more succinctly than in the fol¬ lowing letter in which an automobile manufacturer lays down the A B C of territorial appraisal: I want to get a more practical method of sizing up a city than by hunch and hope. I want to control distribu¬ tion by actual figures the same as I control production. Now if these figures are to be of real service to us they must meet certain specifications. Here are the specifi¬ cations: The figures must be real rather than some theoretical abstraction; we want actual, specific, and concrete data that our men can understand. The figures must be more than historical. We want, not only a record of the past, but also a guide to the future. At the outset of this discussion it was noted that any measurement of a territory’s business activity or purchasing power must be capable of extension into the future. This is manifestly the crucial point of the entire program. It is the outlook rather than the situation which interests the business man. The historian is interested in the past, the newspaper is interested in the present, but the business man is interested in the future. For example, in such a time as the early part of 1920, New England was booming — no question about it. cc Present condi¬ tions ” really were excellent. Business men who re¬ garded only present conditions, made heavy com- I 36 BUSINESS FUNDAMENTALS mitments based thereon. But business men who re¬ garded the future saw trouble ahead and put their houses in order. Again, in the latter part of the same year, when the slump in the Northeast had created a general attitude of gloom and apprehension, many business men thought that the Pacific Coast was destined for immediate reaction. Those who specialized on the future, however, were not pessimistic because they knew that the Pacific Coast is slow to participate in a depression just as it is slow to participate in pros¬ perity. It is one of those sections which “ lag,” using this word in a technical sense. Scores of illustrations could be cited to show that a city’s pres¬ ent status gives no clue to what local policies should be followed. These are indicated only by a forecast. Attempting to forecast the short swings of the stock market — the day-to-day or week-to-week movements — is rank speculation. Reputable eco¬ nomists and statisticians do not countenance such forecasts. The same applies to gambling in the cot¬ ton and grain markets, a common practice in some localities. Buying 1 securities or commodities for actual needs, however, is perfectly legitimate. So also is the process of hedging used by millers and others to insure' a definite margin of profit on orders for future delivery. Forecasting the business activ¬ ity that will prevail in a city in a given period 60 to 90 days in the future, is likewise both legitimate and necessary. SELLING A CITY 137 Such a forecast is exactly what all successful ex¬ ecutives should make in order to determine what shall be the output for the year, to schedule pro¬ duction, to take advantage of long-range buying, to stabilize labor forces, to facilitate financial plans, and to make selling and advertising plans. A dis¬ tributor is necessarily forced to set some sort of quota. This quota should be an index of the terri¬ tory’s real possibilities and not an arbitrary measure of past performance. A forecast of this kind is a necessary and legitimate business risk. For several years the more alert and far-sighted executives have been keenly interested in picking localities which have the most favorable outlook. In a general way these executives have been able to foresee the trend of business in their various terri¬ tories. Recently, however, there have been devel¬ oped more definite methods, and fairly precise fore¬ casts of local business conditions can be made several months in advance. It seems at first thought a most difficult undertaking, but the same could have been said of any other step in science. Moreover, with a growing fund of data on leading cities the well- organized statistical department should be in a better position to make these local forecasts than is the general executive whose attention is demanded by countless other activities. In preparing such forecasts it is imperative to make the most thorough analysis possible of condi¬ tions affecting the local outlook in each city. Find BUSINESS FUNDAMENTALS 138 out what has been the trend of local business during recent years, during recent months, or even during the past week. In other words, determine the pres¬ ent position of the city in the economic trend. From studies extended back over a period of years, you can ascertain what the normal seasonal tendencies of business are in each city from month to month. Finally you can list the basic industries or factors that determine the prosperity or purchas¬ ing power of the city, and the relative order of their importance. It is a question of foreseeing the future of the raw materials and manufactured prod¬ ucts upon which local prosperity depends — modi¬ fied by seasonal and secular trends. Charts “ A ” and “ B ” suggest some of the ma¬ terial used in making a forecast for the city of Atlanta. Chart €C A 99 shows the movement of business in Atlanta during the post-war boom, the subsequent reaction, and the later trend. The study of the sales figures of a large number of organizations as well as the official figures of retail and wholesale trade indicate that this chart is an extremely pre¬ cise indicator. Chart “ B 99 shows the increase or decline in busi¬ ness that should take place from one month to the next in an average year. This chart of seasonal tendencies is made from a study of figures covering a period of ten years. (Practically no change is made in such a chart by taking a twenty-year period SELLING A CITY 139 MONTHLY VOLUME OP BUSINESS IN Soale ATLANTA. G A. instead of a ten-year period.) Here are the factors determining the purchasing power of Atlanta: cotton goods, 30 per cent, of all 140 BUSINESS FUNDAMENTALS manufactured products 5 cottonseed products, 6 per cent. ; fertilizer, 5 per cent. 5 printing and publish¬ ing* 3 Per cent.; clothing, 3 per cent.; all other industries, 53 per cent.; cotton, 41 per cent, of all crops; corn, 31 per cent.; hay, 6 per cent.; all other SELLING A CITY 141 crops, 22 per cent. Next in importance are mining and quarrying, and lumbering in nearby territory. The above lists indicates that local industries are somewhat more important than agriculture. Of the industries, cotton manufacturing is far in the lead and is the one that should receive the greatest con¬ sideration. Of the crops, cotton and corn are the only ones we need consider. In using these charts to make a forecast, u A ” would be brought up to date and projected two months into the future, according to the seasonal tendencies brought out by Chart “ B.” In an aver¬ age year this is the path that business would follow, and if this line alone were used to make a forecast, the results, would not often be far astray. In actual practice, however, it is best to change the slope of this line according as the average outlook for local raw materials and finished products is for a seasonal movement more or less pronounced than usual. If, for example, the seasonal tendency is upward during the period under consideration but the readjustment process is just gathering momentum, the projected line would be inclined less sharply or might even be bent forward. This, of course, depends upon the city and the position of its industries. In a city like New York, movements are very gradual and even a general period of readjustment does not result in a radical change in the trend of the business line. On the other hand, a city that is closely associated with agriculture, usually has 142 BUSINESS FUNDAMENTALS very pronounced seasonal movements. In the latter case, forecasts made when the influence of the busi¬ ness is depressing the price of farm products should allow for only a minor “ seasonal rise.” The situation differs for each city under consid¬ eration and a record of what has taken place in the past is absolutely essential. Of course, such a record is not completely comprehensive; neither is the forecast infallible. It has been abundantly dem¬ onstrated, however, that off-hand estimates w T hich do not take into consideration the position of a city in the economic cycle, seasonal tendencies, and the outlook for basic industries, may carry one far astray. The proof of the pudding is in the eating. Chart 793 Railroad repair shops. 547,828,694 Tobacco manufactures . 48 3,567,7 54 Stone, clay and glass products. 408,570,822 Liquors and beverages .. . . 222,776,314 Miscellaneous industries. . . 2,867,666,969 > Total $ 37 , 376 , 380,283 156 BUSINESS FUNDAMENTALS When examining the industrial market with a view to deciding upon a selling field, attention should be paid to two very desirable features of a marketj namely, (1) breadth, and (2) seasonal uniformity. The broader the field, the less likeli¬ hood there is of losses due to the troubles that af¬ flict single industries from time to time, such as overproduction and strikes. The concern with only one customer is not in so secure a position as the concern with one hundred, notwithstanding that the one concern may be buying fully as much as the entire hundred. There is more safety in a diversi¬ fied market. And the market that holds up well in all seasons is obviously a more profitable one than a one or two-season market. In the former case, manufacturing is done much more efficiently, both producing and selling organizations are more stable, and less business risk is involved in the handling of inventories. The thing to do, therefore, is to study the sea¬ sonal habits of the various industries and determine the time of year in which each usually encounters its season of greatest manufacturing activity. (See accompanying chart.) By timing sales and ad¬ vertising campaigns to anticipate manufacturers’ seasonal requirements for equipment, materials, and supplies in selected industries, it is possible to main¬ tain a fairly uniform market throughout every sea¬ son of the year. It may be that in order to carry out this plan of SELLING AN INDUSTRIES AUTOMOBILE... BOOT & SHOE. BRICK_ CANNING_ CEMENT.. CLOTHING (MEN’S)._ CONFECTIONERY.. COTTON GOODS_ ELECTRICAL EQUIPMENT... FERTILIZER_ FOUNDRY....___ FUR GOODS_ JEWELRY_ PAINT & VARNISH._ * PAPER_ PHONOGRAPH_ SILK GOODS_ TIRE_ TOY.... WOOLEN GOODS____ 158 BUSINESS FUNDAMENTALS a year-around market, it will be necessary to handle more than one product. For example, the seller of wire screens required for building purposes largely in the spring and summer should take on some line that is associated with the heating and ventilating of industrial buildings £nd business quarters in the winter. The first step, then, in determining what indus¬ tries form a possible market for your product is to examine the activities of the various industries in the light of the possible ways in which your article or commodity can reasonably be expected to be used. This will necessitate a clear understanding of the merits of your own product and a knowledge of the nature of the activity of the various industries. In order to acquire a knowledge of the nature of the activity of the various industries, information must be secured showing the kind of products being produced and the layout of plant and equipment used to manufacture and sell them. The size of the various concerns in any industry should be ascer¬ tained and the quantities of materials, supplies, and equipment required by each estimated. A study of the above kind will frequently reveal a number of hitherto unsuspected customers among the industries. However, whether you sell to one industry or many, whether you sell direct to the manufacturer or to his employees, you should be in possession of the facts concerning present conditions and the future outlook in each. SELLING AN INDUSTRY 159 Hqw will you go about analyzing the purchasing power of your customers? Which ones will be the most active and the readiest buyers? Will all con¬ cerns in any one industry be equally good customers? How long will the prosperous concerns continue active? All these questions will arise constantly. You can answer them by keeping in touch with fun¬ damental business conditions and by watching the special factors which are peculiar to the various individual industries. In the first place, all industries are influenced by the varying phases of business. As already stated in a previous chapter, industrial history has always consisted of distinct phases and although of different duration, each phase has consisted of four periods; namely, (1) a period of over-expansion, (2) a period of decline, (3) a period of depression, and (4) a period of improvement. These periods follow one another by reason of the natural reaction of eco¬ nomic conditions. The idea that reckless expansion can ever become an actual fact and not be followed by a business depression is a fallacy. All that is borrowed must be repaid, and as long as business insists upon over-drawing its account, we must expect the consequent reaction. In order to study fundamental business condi¬ tions, statistics regarding bank clearings, business failures, building permits, commodity prices, pro¬ duction of basic raw materials, employment, foreign trade, money rates, etc. must be collected and corre- 1 60 BUSINESS FUNDAMENTALS lated. These statistics will indicate when general business is in a prosperous condition and when it is in a depressed condition. They will also tell when it is time to expect a long swing improvement in business, and conversely, when to expect a long swing decline. It is improbable for the manufacturing activity of all the industries to vary exactly in unison with general business as indicated by statistics of funda¬ mental barometers. Most industries either lag be¬ hind or precede the general movement. Changes in the business cycle do not cause the same degree of change in the manufacturing activity of every industry. Special factors peculiar to each industry are responsible for this lack of complete uniformity. Between the turning point in a period of de¬ pression and the turning point in a period of pros¬ perity, when demand is improving, prices rising faster than costs, profits good, failures declining and many new concerns entering business, the manu¬ facturing activity of most industries is usually strong. On the other hand, between the turning point in a period of prosperity and the turning point in a period of depression, when demand is declin¬ ing, prices receding below the cost of production, losses mounting, and failures increasing, most of the industries are forced to adopt a policy of curtail¬ ment and purchase very little. It is very important, therefore, to study and watch the changing phases of business independently of the various conditions CM CM o> INDEX 130 120 110 100 • 90 80 in \c CM cs 1- 3 Q Z -1 -1 b O CM o> J OS '< ' '1. ** < ff > 1919 s wi IjJ Q OS — CO U 3 a * “ t r*J 1 . f > 1 1918 GO t * Z o iu ““ os 5 < s < U. J 2 r" * bi ^ S " H 2 DC i j 1917 * IVITY IN CO CTIVITY A v __ A > / 7 3 b. 1916 ** 5 « < L v » - 1915 * s'/r <<> 2 o c o CO cv 1 b V 110 100 90 80 i 62 BUSINESS FUNDAMENTALS which are peculiar to any one industry. Do not, however, ignore the special conditions affecting any given industry. We must look care¬ fully into the demand it is receiving for its product, both in the domestic market and from abroad. We must examine carefully statistics showing the way in which supply is changing due to variations in producing activity, in the rate of importation, and in the amount of stocks held for sale. We must be especially careful to study the way in which the cost of production is changing and the factors re¬ sponsible for such changes. The price of the in¬ dustry’s product and the various factors that will tend either to increase or decrease it must be looked into. In the case of any particular concern, the competition that concern is meeting with will be a factor in its sales. All of these economic conditions change frequently and bring about changes in the purchasing activity of the industry. We must also consider certain other factors which usually have an influence on the outlook for an in¬ dustry, namely, the labor situation, the transpor¬ tation situation, money conditions, the crops, the tariff, and the trend of legislation. In making a study of the probable purchasing activity of an industry, the particular thing we must watch is the way in which the above factors affect the rate of manufacturing in the various establish¬ ments. The more active manufacturing is, the more materials, equipment, and supplies will be needed. SELLING AN INDUSTRY 163 Sometimes a manufacturing establishment will con¬ tinue to manufacture when profits are practically zero. Nevertheless, even then it will need to buy raw materials and supplies if it wishes to avoid shut¬ ting down. Hence, the point we have to consider is how to anticipate changes in manufacturing activity. As a preliminary step, it will be well to obtain an over-all idea of the industry. The first ques¬ tions that naturally arise have to do with the use¬ fulness of the industry’s products and the reasons for the establishment of the industry in its present centers. The age of the industry, and the rate of its past growth, also its relative importance com¬ pared .with other industries should be ascertained. In this connection, we should recognize and give due weight to the fact that the permanency of the industry will depend on the continued usefulness of its product and its continued ability to combine the necessary elements of production and distribution. The usefulness of carriages and wagons is beginning to wane due to the advent of the automobile. The manufacture of wooden automobile wheels is giving way to the manufacture of steel wheels because of increasing difficulty in obtaining hickory. Let us consider first how changes in the demand for your customer’s product will cause changes in his desire or ability to purchase the thing you wish to sell him. When his demand is good and he is actively producing, he will buy raw materials, sup¬ plies, and equipment of various kinds. Conversely, 164 BUSINESS FUNDAMENTALS when his demand declines, he will curtail produc¬ tion and will be less likely to buy. If he happens to be in the jewelry industry, for example, you will find that the number of people who desire to buy jewelry is much greater during periods of pros¬ perity than during periods of depression because the purchasing power of the public is generally stronger when times are good than when times are hard. In general, the higher the price of jewelry advances, the harder it will be to sell it because there will be fewer people with the necessary pur¬ chasing power. Conversely, the lower the price of jewelry declines, the more people there will be in a position to buy it. Hence, the purchasing activity of any industry will, all other things remaining con¬ stant, rise and fall with increases and decreases in the demand for its product. Another important item to inquire into is your customer’s cost of production. Inasmuch as the cost of production plays an important part in de¬ termining the profits of an industry, the various fac¬ tors entering into it must be examined with great care in order to determine whether total costs will increase or decrease during the period under study. Prices also are important for practically the same reason, as we have seen. Prices respond to changes in basic business conditions differently, however, in the case of industries where free competition is the rule than they do in the case of industries more or less under the control of some strong interest con- SELLING AN INDUSTRY l6$ . stituting a monopoly. If competition is present, prices will freely respond to changes in the business trend and to changes in the average price of all commodities. If, however, the industry is a prac¬ tical monopoly, prices may be held under such com¬ plete control that changes in the business trend and in the price of other commodities may find very little reflection in the price of the industry’s product. We must not forget that the labor situation may affect future producing activity, not only through wage changes, but also through troubles resulting in strikes and boycotts. Therefore, the character of the labor used in the industry, the extent to which it is organized, the nature of any existing agree¬ ments, and the general relations of employers and employees should be ascertained. The probability of labor troubles in other industries, especially fuel and transportation, should be estimated. The condition of the money market should be determined with the idea of forming a judgment as to the future course of money rates. Increasing money rates mean increased interest charges and cost of working capital, while a decrease in money rates means the contrary. The probability of tariff changes should be considered. Increased tariff rates on the product of the industry will tend to curtail imports and enable domestic manufacturers to maintain prices on a higher basis than if the importation of the product were unrestricted by import duties. 1 66 BUSINESS FUNDAMENTALS The crop situation has a bearing on the future activity of most industries, because the farmer buys approximately 30 per cent, of all the manufactured products produced. When good crops are market¬ able at profitable prices, farmers buy freely, and there is generally a good demand for most manu¬ factured goods. When crops are poor and prices are low compared with the prices of the things the farmer buys, he curtails his purchasing, and the effect is immediately felt in the manufacturing in¬ dustries. Hence, the outlook for crops and the price of farm products are important items to determine. An eye should also be kept on the progress of legislation at Washington. This may take the form of tariff or price-fixing discussions, or matters relat¬ ing to the labor situation. Despite the slogan of less government in business, we must recognize that there will always be considerable government in business. By following the above general rules you will be able to obtain a fairly good opinion as to the prob¬ able purchasing attitude of your customers in each industry. Having obtained a knowledge of conditions, present and future, or the industries to which you wish to sell, you are in a position to plan your sales iand advertising campaigns to fit your customer’s needs. You have time to prepare for increased ac¬ tivity and can be on hand with the goods when they SELLING AN INDUSTRY 167 are needed. If your sales field embraces more than one line of activity, you can shift as conditions change to keep your efforts concentrated on your best market. When the outlook is unfavorable and an industry is to go through a temporary decline, your studies will warn you in time. Your credit department has an opportunity to get cleaned up before things get too tight, and your sales manager can avoid waste of time and money on a barren field. And by selling as described above, you can base your decision on a full and complete knowledge of conditions as they are and will exist, you will avoid risk, worry, and loss — in fact, make the most of every opportunity. It is hardly necessary to add that it will enable you to reduce the margin of error in your business judgment score to a negligible fraction, thereby materially increasing both your sales and your net profit. I Chapter XII THE TREND OF BUSINESS TANDARDIZATION and proper distribution are America’s great business needs. During the last twenty years or more, efficiency in manufactur¬ ing processes has been the outstanding development in the business world. Anything that would in¬ crease the efficiency of workers has been eagerly seized upon. Variations in methods of payment have been tried. These range all the way from the making of detailed studies of the time required to complete each separate operation in a manufacturing process to methods of profit-sharing whereby the worker earns, not only his pay, but also a share in the total profits of the company. Most careful scrutiny has been exercised in reducing the time required to do an operation, workers being in¬ structed how to hold their hands, how to stand, how many motions to make, for example, in putting the soles on a pair of shoes. In the up-to-date plant to-day, some form of all these various efficiency- promoting schemes may be found. The efficiency so noticeable in production is, how¬ ever, almost completely lacking in distribution. From the time a finished product leaves the manu- 168 Mi THE TREND OF BUSINESS 1 69 facturer’s hand to the time it reaches the ultimate consumer, the manufacturer’s selling price has, in a great majority of cases, been doubled and tripled, on account of the cost of passing it through a num¬ ber of intermediate hands, and the profits which each middleman feels to be his due. For example, a cotton shirtwaist was recently bought in a Chicago clothing store for $6.95. It was taken to a jewelry store, weighed, and found to tip the scales at six ounces. Its six ounces at an average price for cotton would cost approximately 10 cents. One reason for the spread between the cost of the raw material and the price of the finished product is without question the fact that women all want different shirtwaists. There is lack of stand¬ ardization. Sugar and a drop of peppermint make peppermints selling for 50 cents a pound — yet in New York sugar sells at an average price around 5 cents a pound. This is another case where efficiency in manufacture is overwhelmed by inefficiency in distribution. You may say that the retailer is making an enor¬ mous profit on these articles. The probabilities are that the stores do not make even a fair profit, dur¬ ing many phases of the business cycle, nor does the maker or distributor. The trouble lies in the system. That the system can be changed is evident when we consider the match industry. Our lowest monetary unit, the cent, will purchase a box of matches. Matches at a cent a box represent efficiency both in 170 BUSINESS FUNDAMENTALS production and marketing. American manufacturers are competing, at a cent a box, with the Swedish and Japanese match makers. The match represents the value of standardiza¬ tion in manufacture and distribution. Machinery and system both in the shop and in the market result in the cent-a-box match. There is the wood in the match and in the box. There is the chemical com¬ pound in the match and on two sides of the box — the safety kind. There is some printing also. Tak¬ ing the match and its container, the manufacturer, the jobber, the distributor, and the retailer, we have an operation which makes us wonder that we get matches for a cent a box. There is an efficient system back of the match. During the coming twenty years, the present in¬ efficiency or lack of proper marketing methods will tend to be eliminated. Just as concentrated atten¬ tion toward the goal of manufacturing efficiency has brought results during the past, so will concen¬ trated attention toward standardization and efficient distribution bring results during the coming years. In the working out of this simplification we shall witness a continued development of chain stores. They are having a tremendous run to-day. They are springing up like weeds in every community. Local merchants are beginning to become panic stricken. They fear that the chain store is to swal¬ low up everything. Grocers, druggists, and clothiers are especially troubled. Altogether there are over THE TREND OF BUSINESS I 7 I a million small merchants in America who are vi¬ tally affected by this development. There is no sign of slackening in it for several years to come. The chain store gives the public what it wants and prospers for that reason. If the local merchant will adopt the same up-to-date methods of economical merchandising, he need have nothing to fear from chain store competition. However, the chain store will encounter the same obstacle that has interfered with efficiency and service on the railroads and in manufacture in our various industries; namely, labor unionization. Chain stores will have their troubles just as the railroads and manufacturers have had theirs. The unionization of labor has tended to raise the cost of doing business in both transportation and manufac¬ turing lines. The employees of chain stores have not as yet become unionized. They are hard work¬ ers and give full service for the wages they receive. The day will come when they will be unionized. Clerks, truck drivers, and buyers will organize and become as independent as the typical plumber is to-day. That day will mean the end of the phe¬ nomenal progress which chain stores are achieving. Then the chain store sales will drop off, operating expenses will increase, and they will have to adopt a more modern form of merchandising or give way to a new order. Distributors by chain store methods should realize that labor is the weak spot in their armor. 172 BUSINESS FUNDAMENTALS Closely allied with the future of the chain store is the future of the self-help store. This is not a new idea. In the self-help store, the customer enters at one door, proceeds along a definitely planned path around the counters, and thence out an exit door. He is expected, during the course of this passage, to help himself to the goods he desires and pay for them just before leaving at the exit. The self-help system eliminates labor difficulty to a con¬ siderable extent and enables a store to give excellent service at low cost. The saving compared with the ordinary cost of serving a customer in the average retail shop is large. The self-help idea is applicable to all kinds of stores — book stores, drug stores, grocery stores, five and ten-cent stores, and such like. It is true that the average merchant cannot get the advantage of collective buying unless he himself joins a chain. Any merchant, however, can install a self-help sys¬ tem of selling independently. This, of course, means more than reorganizing the fixtures of his store. He must change his entire attitude. The self-help stores, for instance, are very dependent upon advertising; much more so than are the chain stores and local merchants. The latter must adver¬ tise more than ever when he adopts the self-help system. If the local merchant continues as at present, he will be eliminated from American business to make way for more modern machinery of distribution. THE TREND OF BUSINESS 173 The self-help store is a step along the line men¬ tioned in the previous part of this chapter wherein efficiency in distribution was pointed out to be the goal toward which business men would strive during I the coming years. The self-help idea is analogous to the pay-as-you enter street car. The idea is one that will be devel¬ oped in a great many ways and, in so far as the dis¬ tribution of goods is concerned, it may be expected to be developed enormously during coming years. This does not mean, of course, that high-grade stores, catering to people who wish to telephone their orders and have their goods delivered, are going out of business. These stores have been de¬ veloped to a great degree and will continue to func¬ tion and serve the people who wish that kind of service. The big development will be in connection with the self-help idea. During the course of the coming years more stress will be laid on developing the efficiency of buyers in contrast to the efficiency of salesmen. Heretofore, salesmanship has been the outstanding point in transactions involving the exchange of goods. Huge salaries have been paid to exception¬ ally good salesmen. While buyers have been in some cases well paid, generally speaking they have not been on such a high basis as salesmen. Salesmen are frequently placed on a commission basis and are spurred on by all kinds of inducements to in¬ crease their sales. Buyers but infrequently have I 74 . BUSINESS FUNDAMENTALS any reward coming to them as a result of efficiency in buying, over and beyond their salaries. Yet a moment’s thought will show that the buyer is just as important in any transaction as the seller. Buyers are not always enabled to sit back and wait for the seller to come to them. They must frequently go into the market and cover their needs at whatever prices they can obtain. This is especially true in the case of manufacturers whose producing activities must be maintained. Frequently, there is a situation wherein all but one or two of the materials necessary to continue pro¬ duction are available. It is then necessary to obtain the missing materials immediately in order not to block operations. An efficient buyer under such cir¬ cumstances may be able to save his concern consider¬ able money by intelligent work. Generally speaking, therefore, we look for more emphasis to be laid on efficient buying during the coming years than has been the case heretofore. One reason for the exist¬ ence of the present high-priced salesman is the in¬ efficiency of the present buyer. There will probably be increased demand for trade association activity. In many competitive lines, individual manufacturers are finding that, in¬ stead of competition being the life of trade, it is frequently its death. Individual producers are given to proceeding in the dark because they do not know what other manufacturers in their line are doing. They have no way of knowing how the THE TREND OF BUSINESS 175 supply of their product compares with the demand for it. They cannot adjust their producing activity to the conditions of the market. As a result, there are frequently periods of serious over-production and, conversely, periods in which stocks are very light and the better informed manufacturers reap a harvest because others have sized up the situation incorrectly. The gathering of manufacturers and jobbers into trade associations keeps the various manufacturers informed regarding the activities of their industry, the best methods of producing and selling their product, and the general business policies that should be followed from time to time in the man¬ agement of their concerns. In other words, by mak¬ ing greater use of trade associations, the future will be a period of greater co-operation among manu¬ facturers and jobbers than it has been heretofore when cut-throat competition was largely the rule. Along with the formation of trade associations in various lines of industry and business, there will naturally arise an increasing demand for statistics covering production, sales, prices, costs, etc. These will become available because it will be by means of them that an association will keep its members informed of conditions in its own and related lines. / Another development that is in prospect is the business counselor or commissioner. For the same reason that certain cities have done away with may¬ ors and boards of aldermen and placed their affairs I 76 BUSINESS FUNDAMENTALS in the hands of a business administrator on a salary basis, the various industries will place their affairs in the hands of a commissioner who will so organ¬ ize the affairs of the industry as to bring the great¬ est amount of profit to the concerns in that industry. The commissioner now at the head of the moving picture industry is an example of this probability. The appointment of a federal judge as high com¬ missioner of baseball is another example. The coming twenty years should see a resumption of the constructive activities of so-called “ captains ” of industry. The meaning will be clear when we consider that the period of 1880 to 1900 was a pe¬ riod in which great fortunes were established by industries conceived and developed by men who started comparatively poor and unknown and finally emerged as leaders in the business world. They were really captains of industry and their wealth might be termed constructive wealth. During the period between 1900 and 1920, however, the out¬ standing figures in the business and financial world were speculators. Roosevelt characterized their wealth as predatory wealth, in contrast to construc¬ tive wealth. Of course, there were a few outstand¬ ing exceptions in the last twenty years but the ma¬ jority of the prominent figures were speculators. During the coming twenty years, however, business men of the type of Carnegie and Hill will again come to the fore. The foundation of their indus¬ tries will be service and efficiency . ) Chapter XIII FINANCIAL INDEPENDENCE A FEW years ago an investigation and study was made of the financial experience of the average man. 1 It shows his position at various ages and reveals a condition that demands a remedy. If we begin with one hundred average men we find them entering the business world between the ages of sixteen and twenty-four, depending on how much time they spend in school. The ten years between twenty and thirty should really be charged to education. During this period a job should be worth what it teaches and not what it pays. It is safe to assume that any money earned over and above the amount necessary to pay living expenses is spent along educational lines. Correspondence courses, night classes, and good books constitute a most profitable investment at this particular point in a man’s career. We can assume then that our average individual reaches thirty with a reasonable 1 The figures in this survey have been questioned because they do not check exactly with the mortality tables of the great life insurance companies. A thorough investigation, however, dis¬ closes the fact that the estimates on financial conditions are reliable. They are an underestimate of the facts rather than an overestimate. 177 BUSINESS FUNDAMENTALS I78 education and some valuable experience in at least one line of work. At thirty-five we begin to see a decided change. Five out of our hundred men have died y ten out of the hundred have become wealthy y ten more are In good circumstances and are considered well-to-do y forty are In moderate circumstances y are earning a AGE-35 AGE-45 Age 35, 10 wealthy, 10 well off, 75 self-supporting, 5 have died. Age 45, 4 wealthy, 65 self-supporting, 15 non-supporting, 16 have died. living for themselves and families — they seem to be getting on. The remaining thirty-five have shown no improvement In their condition . They are holding their jobs and earning the salary of the average man ten years their junior. At forty-five eleven more have died — sixteen in all. But four of the hundred that started twenty- five vears before are wealthy. These are four of FINANCIAL INDEPENDENCE 179 the ten who were wealthy at thirty-five 7 the other six have lost their money. The ten who were in good circumstances at thirty- five are now classified with the sixty-five who are still working and are self-supporting but who have no resources outside of their regular salary or wage. Fifteen men out of our hundred are no longer self- AGE-55 AGE-65 Age 55, 1 wealthy, 3 well off, 46 self-supporting, 30 non¬ supporting, 20 have died. Age 65, 1 wealthy, 3 well off, 6 self-supporting, 54 non-support¬ ing') 36 have died.* supporting owing to illness, accident, or other cir¬ cumstance. A few of them are still earning some¬ thing, but not enough to support themselves. At fifty-five but eighty of our men remain — twenty have died. One of the four who was wealthy at forty-five has become very rich. Two of the four are still in good circumstances, but the other has lost everything. One of the sixty-five l80 BUSINESS FUNDAMENTALS who was working and depended upon his salary at the age of forty-five, has become wealthy. This gives us three in good circumstances at the age of fifty-five. Forty-six are still working for their liv¬ ing without any accumulation. Thirty are more or less dependent upon their children, their relations, or upon charity for support. At sixty-five we witness the last act of the trag¬ edy. Thirty-six of our hundred representative American men are dead, one is still rich, three are wealthy, six are still at work and self-supporting, fifty-four, or over half of them, are dependent upon children or relations and charity. The real tragedy of this deplorable situation, however, is revealed by the fact that ninety of these hundred men made enough money between thirty and fifty to keep themselves and their families in comparative luxury for the rest of their lives. Analysis shows that our school system is partly to blame. The average man spends eight years in grammar school and then may add four years in high school. A few continue and add four more in college or university. All of this time is spent in learning things which may be helpful in the making of money. Not one-half hour is spent in teaching the student what to do with the money after he gets it; and there is very little sense in spending the best part of one’s life in working hard to get a few dollars if those dollars do not earn for you after you get them. FINANCIAL INDEPENDENCE 1 8 1 Coming out of school, the average American boy goes to work with a vengeance. He is ambitious, he works hard, he learns rapidly, and is soon able to produce more than he actually needs for his own living expenses. Sooner or later he finds himself with a few dollars to spare, a few dollars that are available for investments. In nine cases out of ten he either lets this money around where it earns nothing for him or u invests ” it in some promotion — oil well, gold mine, egg preservers, paper milk bottle, or wireless telephone wire — it makes little difference which. He loses it all. And so it goes, for the next twenty-five or thirty years he makes much money, saves some of it quite by accident, and loses by far the larger portion of what he saves. If you are to avoid this same tragic experience, you must employ fundamental principles in the handling of your surplus funds exactly as you do in the conduct of your business. If you will take the trouble to study and follow the few principles out¬ lined in the remainder of this chapter and in the next two, you will have a definite and scientific plan that will carry you to financial independence exactly as any well-marked highway will carry you to the city and its terminus. Obviously, we must first have a fund before we can do any investing. In most cases that fund must be accumulated by saving a part of the money that is earned. Right here the average man makes his first mistake 5 he does not save systematically and 182 BUSINESS FUNDAMENTALS therefore saves about one-half to one-tenth as much as he should. If he tried to run his business in the way he finances his home — without any definite plan— he would end in bankruptcy inside of a year. Home expenses should be budgeted. In¬ telligent planning in advance will enable you to live just as well as you do now and with much less expense. It is almost an axiom that there is more fun in saving than in reckless spending. We shall solve the saving problem by employing this very prin¬ ciple. Saving is no trick at all when you have learned how to “ spend money at your bank.” You will never get anywhere if you try to save “ what is left,” but if you will make up your mind to a defi¬ nite amount that can be put into the bank each month and then put it there, first thing, before you pay the rent or anything else, you will find your bank account growing at a very satisfactory rate. The following table, which was made up from the Manning budget and subsequent study made by my associates gives you an outline average for va¬ rious sized incomes. Please bear in mind that the expenditures noted are maximum and that the sav¬ ings noted are minimum. You will probably be able to make a better showing than the figure indicated. Insure for protection only. I personally do not recommend endowment policies and others with semi-investment as well as the protective features. FINANCIAL INDEPENDENCE (nAb K tj H H H O O O Ca O Ca to o —r Ca 4->- G> G) n> O O O O O O in o ii O "o u O ii 8 0000000000000 ooooooooooooo bbbbbbbbbbbcbb oooooooooooooo hd TO Ht v- TO P P n o 3 TO K> tO t 4 t 4 O'O' O'—T M to Ca on CO to OnG> 00 CO h 40. On h On On Q4N h OOCa O O 00 to O O to 8 £ p 5 V) Oi 4 i to 0 00 CO 00*4 ON ONCa Ca Ca O O Ca OOCa OCaOOCaOCaO OOOOOOOOOOOOOO OOOOOOOOOOOOOO o o o- tOtOMWMMMIH Ca O M Cn Oo to w h O M ONCa Ca 4 ^. O O Ca O Gt Ca Ca O O O O ni Oln boooboboooobob oooooooooooooo CA) tr TO TO •1 M M M M W m S Oi U to O 00-4 O OA Co G) Co to CaOCaCaOOCaOOOCa 004 ^ O -4 oobboooboobboo oooooooooooooo o o r+- p - TO CO Cot 4 MtHMi-lr-l O Ca —r Ca to hi 00-4 Cn-P Co Co to OOCaOCaOOcaOOi-iCaOO\ OOOOOOOOOOOOnOG) OOOOOOOOOOO-JOCo 3 3 p 3. O .’O a c*P 2 3 P nro TO <-+ u ’ p TO o> r+ £3 B S o {£. p. *-• rr- 01 I~ CO 4 ^totototototototototototoi-i toCoCaCotoMtoCa 4 ^»HtoOOO 4 » Ca O On 4 ^ to m O 4 n -J Cj On O to TO i_h TO “ 3 TO O'-tN Co to to w H H O Ca -4 Oo O -P Co to 004 ^ -P Co to to OOCaCoMOtoCa-OODHOCaO OOOG>OOcaOCa —40000 OOOCoOOOOOcaOOOO 2 01 cl i 3 Q g p 2-g- p p TO • 1 -P CO tO tO M H M MCoCaOONtooOO OP Co Co to to OnCo O CO ONCa 4 ^CotOMCoOCaO O Co O Co O' O m Co Ca On Co O O O —4 Co O Co -I O -4 Co O—JCo O O O W to g P p TO < O t ft o 3 £ O P* g to B. co CaCaCaCaPPPGi to m m hi m PPOOOOO to ooo O'Ca P O OOOOCaOOoOOcaCaPOO 8 ►d 3 TO tO M M M to oo to O OOCa p to m to Ca o ca 4 * to -4 to 0-4 OOCa ^ Co O O O O w Ca Ca Ca —4 Ca MCaCaU - .O OOOOOOOOOtoOOOO OOP—4QOOOOcaQ o 5 3 M O T3 0 TO to to W M -4 h ca to >0 Oca Co to O OQCaOO hi to hO OCa p to 000000000-4 04 1 to p OOOOOOOPOCaOOOO 8 ogoooboboboob ooooooooooooo "2 p 2 p to p 1-1 p p TO co p-p p p g i-t TO 0**0 2 tT 1 cT CPP w To H p * p o TYPICAL BUDGETS FOR VARIOUS INCOMES For an Average American Family — Two Adults and Two Children BUSINESS FUNDAMENTALS 184 Buy pure protection with your insurance fund. The remainder, or your surplus, must next be di¬ vided into two distinct funds — one an investment fund and the second a speculative fund. The investment fund is to be placed in securities that will bring in a regular income each year. The speculative fund is to be used to purchase certain se¬ curities which you expect to sell later at a profit. Broadly speakingy the investment fund should be used in the purchase of stable bonds, the speculative fund for your common stocks. If your income i9 $5000 or under, it is possible that all your savings for some time should be used as an investment fund. Speculation should be attempted only by a man who does not need the additional income and can afford to wait from a year to three years for his profits. Chapter XIV INVESTING YOUR INCOME T HE moment your savings account has reached the $1,000 mark you are ready to begin en¬ joying two incomes, one from your work and one from your investments. You are ready to start the selection of bonds that will provide you with a steady and comfortable in¬ come during your declining years. If you are pur¬ chasing in any quantity it may be well to deal through a regular broker. Select one who is well known, of excellent reputation and a member of one of the large stock exchanges. For smaller purchases, deal through some conservative and reliable bond house or place your order directly with your own banker who will purchase for* you any bonds you may want. What then are the fundamental principles by which to select your investments? First, security. Since you are lending capital to obtain income, you should be satisfied both that there is property in form that cannot be dissipated or transferred without record, and that your money is to be ap¬ plied in some way that is reproductive. That is, it I8 S 186 BUSINESS FUNDAMENTALS does not satisfy you, as an investor, when you know that the borrowed money is going only to pay cur¬ rent bills or bank loans, or make good losses that have impaired capital beyond retrieve. The security afforded by mortgage is a matter of degree, expressed under general headings such as: First Mortgage, Refunding, or First & Refunding Mortgage, General, or General & Refunding, Collateral, or First Lien & Collateral. Except as the term u first mortgage ” is used by itself, it may imply much or little in regard to security. The matter must be examined in each case. I have recommended recently a first and re¬ funding bond which has a first mortgage on a new part of the property that I would rather take than any under the original mortgage. The term u general mortgage ” has largely sup¬ planted the earlier and franker admission of sec¬ ond or third mortgage. The word “ collateral,” whether by itself or as first lien and collateral, puts you on notice imme¬ diately for further inquiry. Where the collateral deposited as security for your bonds is wholly stocks, your position has slight advantage over direct stock ownership. Convertible bonds may, or may not, have an in¬ terest in mortgages on the property. The better convertible issues, of which the number is limited, INVESTING YOUR INCOME 1 87 serve a very satisfactory purpose at certain phases in the market when they can be bought practically on their investment basis. The term “ debenture ” signifies an issue without mortgage, that is, a note. In event of any difficulty this stands no better than bank loans and other bills payable. It has become the custom to surround de¬ bentures with certain restrictive covenants which have had varying degrees of success. Usually, however, if a waiver of rights is necessary, to save a financial life, it is possible to obtain the required consents. Second, marketability . It is not indispensable that your bond be listed on one of the stock exchanges, but this is of great assistance in keeping track of your investment. It is necessary that the issue you hold be of sufficient volume and importance to have an established level of buying and selling among dealers at some of the important centers. The existence of such a market in absence of listing is especially notable in the case of municipal bonds. One has no trouble in learning instantly the value of obligations of any of our larger cities. Contrary to the impression of some persons, the lower you go in the grade of bond, the more essential it is to have quick and ready market¬ ability. The danger is that, even should you have warning of impending change in the condition of the property, you could find no means of selling an unknown issue. 18 8 BUSINESS FUNDAMENTALS Third, yield. Income, of course, implies that there must be con¬ fidence in earning power. The term yield, as used in the buying and selling of bonds, is one of the difficult things for the average person to compre¬ hend. It combines two factors. There is first the annual return which is the percentage of income re¬ turned upon cost of the investment, as for instance $40 a year on $800 invested gives 5 per cent, an¬ nual return. There is the second factor that, at the end, say, of ten years, the bond matures to pay $1,000, which is $200 more than you put in. The true value of this amount, received at the end of the time, for each year while you are waiting, is determined by logarithmic reckoning. As a matter of fact, in this example, while annual return is 5 per cent., yield is figured 6.80 per cent. It is not necessary that a man expect to live, or hold the bond, to its maturity date in order to get the benefit of yield. All bond transactions are made on the basis of yield. No mere price basis could make easy reckoning of the varying maturity dates and coupon rates. Consequently, if a man buys to-day and sells two years from now on the same yield basis, he collects his due proportion of the increase in principal. Fourth, ethical factors. Besides the three items, generally identified with bonds, there is another group of considerations that seems to me as important as any. There certainly are INVESTING YOUR INCOME 1 89 good and bad businesses. The process of the years is unmistakably working to a higher moral tone in our business affairs. Neglect of this was costly to some holders of distillery and brewery securities. Fair treatment of the public, of employees, of those who supply raw materials and those who dis¬ tribute the manufactured product, on the part of an industry, augurs a much more prosperous future than any u public-be-damned ” attitude. There is discoverable a fundamental trend in any given group. For example, the chart of total sales per year, compared with gross earnings per year, of certain large power companies shows a very steady trend to a decreasing unit price for the output sold. Where this has been accomplished without a com¬ pensating drop in net, it shows increased efficiency. This is one of the best grounds for confidence. As many of you know, in relation to railroads, the “ operating ratio ” is studied from month to month as revealing the story of improved or de¬ clining fortunes. In the industrial field generally, it is not to be denied that a rather disturbing problem is presented by the tendency to increasing overhead. There are many examples to indicate that there is distinctly a limit to efficiency in large organizations. Bonds, because of their standard denominations and ready negotiability, have become the typical in¬ vestment. There is a bond market, just as there is a market for the commodities which sustain life or BUSINESS FUNDAMENTALS 190 clothe or house us and for the stock certificates which represent a share in the supply of them. These commodities tend to a price movement directly with the business trend, being worth more in “ good times ” and less in a bad times ” in accordance with the effective demand — that is, the ability of the public to gratify its desires. Bonds, however, are contracts for fixed payments in money. They are sold highest when, because of restricted business, current funds command lowest interest rates. On the other hand, a steady decline in bond prices fol¬ lows high interest rates due to a shortage of money for financing. Over-expansion is a sure sign of the coming of depression. Let me state a concrete example. There are many bonds selling to-day at prices higher than since 1917. But after 1917 there followed three years of the sharpest drop the bond market had seen since the Civil War. Should you, therefore, sell bonds now? Turn to your statistics of business and study fundamental conditions. In 1917 we were in the early stage of the greatest area of inflation — or “ good times ” — ever recorded. This was closed in 1920, just when bonds sold lowest. Shall you, then, sell your long-term bonds dur¬ ing the next “ boom ” ? What has been said thus far has had reference to the business trend. There is still a further factor to consider on bonds — the long-swing trend of inter¬ est rates. This, too, bears out the law of action and INVESTING YOUR INCOME I9I reaction. From each peak, in our experience, rep¬ resented by an investment level of 7 to 8 per cent., there has been a general trend downward for twenty to twenty-five years, to half the rate or less, fol¬ lowed by an upward trend for a nearly equal period to the next peak. What the cause may be — whether the slower movement of fixed capital than commodities, or the wastes of great wars with which interest peaks coincide $ or whether the old maxim “ shirtsleeves to shirtsleeves in three generations ” is expressive of wastefulness and moral breakdown that underlie both wars and interest rates, I’ll not here attempt to say. But the fact is a fundamental for investors. It is responsible for what is some¬ times called the major bond cycle. In 1920, we closed such a cycle with the yield on investment issues at a high point not recorded since 1878. What has happened since 1920 indicates that we are now in a new phase. Both on current money rates and bond yields we are retracing, almost step by step, the old chart of reconstruction days. We are doing this despite factors in the situation that are dissimilar, such as our change from a debtor and borrowing, to a creditor and lending nation. A reason for the turn in bond yields at the level of 1878 is, doubtless, the fact that we escaped the fiat money basis of 1873 because we had such an im¬ proved credit position. From the present status of the bond market, I expect to see 3^ per cent., or less, as the standard investment return before any one 192 BUSINESS FUNDAMENTALS ■n INVESTING YOUR INCOME 193 can buy on a 7 per cent, basis bonds of the high grade obtainable within the last twenty months. The relation of the shorter business phase and the major trend in money rates is that of the ocean waves and the tides. No navigator is safe without reckoning them. He is the skillful mariner who knows how to take advantage of both. Before he will venture from port the sailor judges his craft for seaworthiness. Storms will come. He must, at times, be working against wind and wave and tide as well. He bases his judgment on statistics. Ton¬ nage, draught, beam, and engine power are consid¬ ered in the light of conditions at sea experienced over a term of years. What will do for one voyage will not do for another. Above all, he invariably demands a “ margin of safety.” Very similar prin¬ ciples apply in the use of statistics for the testing of bonds. Certain requirements laid down by law, the ac¬ cumulation of years, restrict the investment of sav- 194 BUSINESS FUNDAMENTALS ings bank and trust funds in the several states. The law assumes a high degree of inertia about these funds. Purchases are made by vote of a committee whose opinion, once formed, is not easily reversed. It not infrequently happens that the bonds are held to maturity. Under such circumstances security is the prime essential. Interest return and yield can be accorded only secondary consideration. For ex¬ ample, Massachusetts savings banks in 1922 bought first mortgage bonds to yield 4.75 to 4.80 per cent., for thirty years, while private investors were finding selections fully satisfactory for them yielding 6 per cent, or better. Next in order comes a large investment group classed as conservative bonds, satisfactory for the bulk of corporation or private investment funds. These, aside from governments or municipals, all are issues secured by mortgage, .with ample equity, on the property of railroad, utility, or industrial corporations that can show a satisfactory business record. It rarely is possible to admit to such lists a wholly new issue. Preference is given to bonds which have been outstanding for a term of years so that they have “ seasoned.” Furthermore, such is¬ sues can be examined for their record of marketabil¬ ity, or resale value. All other bonds which are worth considering for investment come under the general designation of business men’s! issues. There is a wide difference in merit. A certain percentage selected from such INVESTING YOUR INCOME 1 95 a list may be taken in connection with the proper amount of conservative issues for any person’s own funds. The more issues over which this part of a fund is distributed and the more restrained one is in selecting the higher yields, the larger percentage of his fund may be so employed. The investor must watch the effect of changing business condi¬ tions and be willing to sell on notice. The element which accounts for any one of these bonds continuing to sell apparently out of line with the general market may be either — (a) Lack of first grade security in its claim against property. This factor, offset by a long record of ample earnings and the faithful payment of interest, may still make it attractive for some buyers. (, b ) Weak earnings record, where the security is a first claim on property of great value, present or prospective. In this situation, the buyer may sometimes be warranted in taking a bond even despite the possibility of a receivership. Usually, in this case, no advantage is lost by waiting until the worst has actually happened. The best business man’s purchase is a bond that has come through a drastic reorganization. I do not know of a better way to put what I wish you to understand than to say that a business man’s bond is the sort of investment into which, though you might BUSINESS FUNDAMENTALS I96 put your own money and have peaceful nights, you certainly could not put your mother-in-law’s money and expect to have peace. Diversification is one of the fundamental prin¬ ciples of investment that never may be ignored. No matter how strong the security, or how attractive, one never should deviate from the policy of distributing his funds over a list rather than concentrating in one or a few issues. Distribution is best accomplished by adopting a regular unit of purchase, say one, three, or five bonds. The law of averages thus is applied to any element of risk. No benefit is gained by “ averaging ” the price of your holdings. This leads to doubling up in those things which have proved your poorest selections rather than the best. Neither is it good policy to buy two or more differ¬ ent issues in the same company. I am often asked by some of my clients to advise for them a list of what they term speculative bonds. In most cases the speculative element is the only certainty about it. Putting this in the form' of a bond or note is only a sugar coating which serves to induce the purchaser to stake more of his capital and start his risk from a higher price level than he would consider if offered stock. There are, occa¬ sionally, speculative possibilities in defaulted bonds, either government obligations, direct or guaranteed, or such corporation issues as have some real assets behind them. But it is much easier, with any ordi¬ nary amount of capital, to distribute your risk by the INVESTING YOUR INCOME 1 97 purchase of common stocks of sound corporations enjoying a listed regular market. Again I say, it is fundamental to success to dis¬ tinguish clearly between the commitments you make for speculative profit and the funds you invest for income . If you make the right choice of bonds and buy them at the right periods you will have, from time to time, a very substantial increase in your prin¬ cipal. But when you begin to pay more heed to this increase than to the security of income, you have started on the road to paying simply a high price for a poor speculation. The financing of proposed construction, especially for a new concern, is extra hazardous. It should not be considered unless by one of means sufficient to back up his original commitment in case estimates go wrong. Too often the best laid plans fail on some miscalculation. This was the condition re¬ vealed in the ten-word telegraphic report of one engineer’s investigation: “ Fine dam by mill-site — no mill by dam-site.” I have before me the facts of a very re¬ cent case where conditions leading to a receiv¬ ership were most puzzling. The location, industry and market seemed excellent. Construction and equipment were rated the best. Operations, for a period of months, showed a margin over cost, but disappointingly small as com¬ pared with capital charges. A bondholders’ protec¬ tive committee has discovered that the plant never I 98 BUSINESS FUNDAMENTALS was equipped to run the entire process upon which estimates were based. Lack of $150,000 to com¬ plete equipment, after many millions had been spent, throttled operations. The backers of the enterprise had twice been to the banks and investors to sell bonds and apparently dared not test out confidence by returning with an admission that the estimates had been again exceeded. It is in order, here, to comment on a totally dif¬ ferent type of security, in favor with some investors — preferred stocks. I earnestly indorse the state¬ ment of one of Boston’s best known investment bankers that cc preferred stocks are a very much overrated type of security.” Preferred stocks are not, as some have been misled to believe, the equiv¬ alent of bonds without maturity. They cannot, le¬ gally, set up any obligation except for income, if earned, or assets in liquidation, after all debts y in¬ cluding bonds and notes, have been paid. Restric¬ tions, sinking funds, and other frills are waived invariably when need arises, as the last two years have shown. The preferred stockholder is rather in the position of a silent partner, limited as to share in profits and without voice, under ordinary condi¬ tions, in management. I do not mean that no pre¬ ferred stocks are admissible holdings. I do mean that a selection entirely, or in large part, of pre¬ ferred stocks is not an investment list. Bear in mind that, whereas you can buy the preferreds rela¬ tively low at each dip in the stock market, every INVESTING YOUR INCOME 199 three to five years, the opportunity to select bonds for a 6 per cent, income is not likely to return in your active lifetime. The preferreds are popular in a few states where old tax laws lay a heavy burden on the conscientious owner of bonds. These states are well-known and names of investors living therein are eagerly sought for what the Street calls “ sucker lists.” To the victims of the “ tax-exempt preferred ” promoters my advice is that you get together and demand re¬ formation of your tax laws. Having determined what to buy, there is then presented for the investor the question when to buy it, and when to sell. Let me put it by example. A man who sold out his business, retiring with $100,000 in 1901, used the very best judgment and selected issues like Lake Shore 3^’s, Illinois Central 3^’s, and General Electric 3^’s all around ioi. At that time he was content with $3500 a year for his living. From that day to the present, there never has been the slightest question about the security of the issues in which he invested. Nevertheless, in 1920 his principal had shrunk to $60,000 and with his income he could buy only a $1,750 living. Another man, starting the same way, read the signs of the money market and in 1912 began to make exchanges out of his old bonds, keeping up with the increase of return to a 5 per cent., and then 6 per cent, basis. In 1913 to 1917, he accomplished complete switching over into short-term notes with 200 BUSINESS FUNDAMENTALS the high-coupon rates. As a result, he maintained his capital fund at $100,000 and arrived in 1920 with an income of $7,000. Then, following the reversal trend of money conditions, he immediately changed his holdings into old 4 and 5 per cent, bonds, selling at great discounts, which would give him, for an average of twenty years, an income of $7,000 a year. That man to-day has more than double the buying power of the other. His prin¬ cipal, instead of being around $100,000, could be marketed for $120,000. It is these advantages which are obtained by careful study of the invest¬ ment situation. FINANCIAL INDEPENDENCE AT FIFTY The road to financial independence lies open for any one who will save systematically and invest in¬ telligently. Not before in my lifetime have I been able to speak with such absolute assurance of the long-pull outlook for investments. Not again in your lifetime will you find a point quite so favorable at which to start to accumulate for future years. Be¬ cause of our position to-day in reference to the ma¬ jor bond cycle, conditions are working to enhance the value of whatever you put aside. As a definite suggestion let us take the men or women of thirty, to-day, who can put aside, say $50 a month or $600 a year with the idea of building up an estate that will take care of them in their declin- INVESTING YOUR INCOME 201 mg years. Assume that they buy sound conservative bonds on a 5 per cent, average yield, they arrive at the age of fifty with a sizable estate and a comfort¬ able income. If the interest on these bonds is added to the principal during these twenty years the total will amount to over $20,000. As a matter of fact it is perfectly possible, with the benefit of a study of fundamental conditions, to get an average return of better than 5 per cent., say 6 per cent., as an average yield, on such a fund. But we will figure on the 5 per cent, basis. Because of the present reconstructive phase of the bond market, the appreciation in principal, due to falling interest rates during the next twenty years, is practically certain. This factor of appreciation has already reached 20 per cent, on sums invested less than two years ago. To be very conservative the benefit to the bond owner spread over the next twenty years will average at least 1 per cent, a year increase in principal. You would have, there¬ fore, approximately $25,000 in your investment fund at the age of fifty; this would be paying you a little over $100 a month income. If you have other outside income at that time and can afford to let your investment fund lie for ten years more without adding any additional savings to it, you will arrive at sixty years of age with an estate of between $40,000 and $50,000, and a monthly income of around $200. If you are younger than thirty and can start this 202 BUSINESS FUNDAMENTALS plan earlier — say at twenty-five — the benefits will be correspondingly greater. Should you feel that $200 a month is not suffi¬ cient income at sixty, simply use $5o a month as your unit of saving for each unit of income and save a corresponding amount. One hundred dollars a month will provide an income of $200 a month at fifty or $400 at sixty. Lest you think that I am suggesting a plan wholly theoretical, the preceding chart of the reconstructive phase of the bond market will make plain the fundamental reason for my assertion. Among the recollections of my boyhood, the out¬ standing impression is that many men down in Gloucester retired from active business life at what would now seem an early age. Some of you can recall how in those days there were plenty of men from fifty to sixty who seemed to live in relative luxury on their incomes. These were the men, as far as I know the circumstances, who took their accumulation of money and put it into investments back in 1878, just at the beginning of the last up¬ swing or reconstructive phase in the bond cycle. Yields of 7 per cent, were frequent in those days and incomes were much smaller than would be ade¬ quate now. Twenty-five thousand dollars was suffi¬ cient and fifty thousand was a fortune. The younger men of this generation have an op¬ portunity to-day which will not be had again for some thirty to fifty years. You can start your in- INVESTING YOUR INCOME 203 vestment fund with the certain knowledge that you will have increasing bond prices, which will add to every dollar you save, as well as compound interest which alone would double your fund every dozen years. Work out a plan that suits your particular circumstances and begin building that “ other in¬ come ” to-day. I F possible, I should like to clear up the more or less popular conception that speculation is gam¬ bling and that the man who buys and sells specula¬ tive stocks is a gambler. This, of course, is not true if the man who is speculating is doing so intelligently. In this case it is not only a perfectly legitimate and profitable pursuit, but it renders a service to the entire business community. In this conception doubt was due to the fact that the speculative market does offer an opportunity for the blind guesser who buys and sells on tips and hunches. He, of course, is gambling exactly as if he were betting on a horse race, and he doesn’t last long unless he has unusually large resources. The majority of the men who are buy¬ ing and selling speculative stocks to-day are oper¬ ating on a more intelligent basis. The stock market itself presents three distinct phases. In its movement it can be compared with an ocean. The day-to-day fluctuations which move prices of stocks up or down a fraction of a point are similar to the ripples $ they come and go with the breezes, 204 SUCCESSFUL SPECULATION 205 are logically manipulated and artificial, and cannot be foreseen in any way. The day-to-day trader who tries to get in and get out with a few dollars ahead is doomed to disappointment. The market is rigged against him. As soon as he and a number of his fellows have bought, the price is pushed down, and when they have been scared out it goes up again. The second phase of the market comprises the intermediate movement of a few points in one di¬ rection or the other which extends over several days or several weeks. They are very similar to the waves of the ocean and cannot be forecasted any more accurately than can the day-to-day movement. In most cases they are manipulated, tips are circulated, the stock is pushed up artificially, the general public seeing it rise buys in at the top, then the insiders pull the string, the stock goes down, the public gets scared and sells out, and the insiders have cleaned up. Rather than try to play the day- to-day movement or the week-to-week and inter¬ mediate phases of the market, you had better try Monte Carlo. In spite of the fact that the “ house ” there is fixed so that you have a handicap of 2 per cent, you still have a much greater chance for your money than you have in the speculative market. The broad movements of the market, however, are governed by the same fundamental laws which govern and cause business cycles. Over a period of years the whole market rises and falls with almost clock-like regularity* What is, more,, these periods 4 20 6 BUSINESS FUNDAMENTALS can be forecasted with remarkable accuracy. If you have but the patience to operate in accordance with them on what has come to be known as the long- swing method you can buy in, at or near the bottom, hold until the whole market has risen perhaps fifty points, and sell out at or near the top. By keeping your funds liquid on the down-swing you avoid the loss sustained by those ,who are not operating in accordance with fundamental conditions. You have your cash ready to buy in again at the bottom of the cycle. This makes it not only a certain and greater profit than that of the average day-to-day trader, but in following it you are also of distinct service to the business world. To begin with, the period of accu¬ mulation, the first stage of the speculative long swing, invariably comes during a period of business depression. Surface conditions in business are nat¬ urally and invariably discouraging, industrial profits are small, and the prices of industrial stocks are very low. The average man is pessimistic and would not buy if he had anything left to buy with. The long-swing speculator comes into the market at this time with cash in hand and he buys his stocks at a ridiculously low figure. In lending his support at this critical time he also tends to stem the tide of the depression and to lend a certain amount of confidence to a badly disorganized and discouraged business world. The average speculator who is inclined to worship Long Swing Buying and Selling Points 208 BUSINESS FUNDAMENTALS the “ here and now ” theory has seen these same stocks come down from a high level. In fact, he has probably lost money on them all the way down. Business in general is wavering and hesitant, indus¬ trial profits are very small, if there are any at all. He cannot be convinced that is the time to buy. The man who has courage and a knowledge of funda¬ mental conditions, however, is not deterred by these surface conditions 5 he buys his stocks and trims his lamp for the feast that is to follow. Following this period of accumulation comes the phase of rising prices. Even before business improvement is definitely indicated in actual in¬ dustrial earnings, the stock market hears rumors of increased activity and increased profit. As stock prices rise, the long-swing speculator begins to pile up larger paper profits and the stocks keep on rising. There is a temptation to sell, but fundamental con¬ ditions indicate that the top has not been reached. In the meantime, the discouraged outsider begins to sit up and take notice, if he watches the stocks rise. Later on in this period, after they have risen to a point where they are no longer in the strictly bar¬ gain class, this same average speculator can’t stand it any longer, and he buys in possibly twenty-five points higher than the level at which the long-swing speculator purchased his holdings. As the general public comes into the market and business conditions begin to improve we travel the trend up into the period of expansion. Another dis- SUCCESSFUL SPECULATION 2C>9 play of courage is here called for. The long-pull speculator has arrived at the time when he must sell his holdings, now showing good profits, and get his capital into liquid form. He must do this in spite of coming business, rapidly spreading prosperity, strong and active stock and commodity markets, and a rampant enthusiasm on every hand. These times are really distinctly unfavorable 3 they are the danger signal which tells the coming of another period of depression. They mean that prosperity having ar¬ rived has been overdone as usual, that a period of depression will follow, and that it will be overdone. The long-swing speculator, therefore, sells his stocks at top prices and puts his money in the bank. He has made from 25 per cent, to over 100 per cent, on his money. The average speculator in the meantime has made some money during the last half of the rise. With such evidence of prosperity, however, he can¬ not be convinced that it is time to sell. He believes that things are going to keep right on going up, hence he continues to add to his holdings, and when the break comes, indicating the beginning of a pe¬ riod of declining prices, he is completely wiped out or is forced to carry a list of high-priced stocks over a period of three to five years down through the period of decline until he gets into another period of prosperity, when he may be able to sell them for what they cost him. Ordinarily he will carry them all the way down and then sell them out at the 210 BUSINESS FUNDAMENTALS bottom, unless he has absorbed some wisdom in the meantime. Returning now to our long-pull operator we may- say that with the cultivation and exercise of the two qualities—courage to buy and to sell, and patience to hold — and with the lesson learned that the market discounts the future, the present being a faulty basis for speculation, the mastery of a few simple rules is all that is necessary to turn out the successful speculator. First and foremost, one should remember that in every major movement of the market there are nu¬ merous minor phases. These positively should be ignored. They are without significance, have their basis in surface and not fundamental conditions and the attempt to follow them consistently is likely to be as injurious to one’s financial operations as the dope habit to one’s character. Trying to ride up and down with every rally and decline in the stock market will destroy every conviction based on sound fundamental principles one might have held at the beginning. These rallies and declines, as we have just said, have their basis in surface conditions, tem¬ porary developments of momentary importance only, contrasting with the long-pull or major move¬ ments that are controlled by the fundamentals. Surface conditions are usually a reflection of the “ here and now ” which we have referred to hereto¬ fore. They indicate the action of current develop¬ ments, such as the publication by some company of SUCCESSFUL speculation 211 t a good or a poor report, political doings, crop news, and other happenings o£ the day. The technical position of the market itself has much to do with these temporary rallies and de¬ clines. By“ technical position ” I mean the volume of stocks held on the long or short side by the u pub¬ lic.” If there has been a period of rising prices, during which much bullish propaganda has been circulated and pools or stock syndicates have dis¬ posed of their holdings, there may be a succession of bear attacks or short selling for the purpose of de¬ pressing prices and influencing the public mind to sell, which is not a very hard task. On the other hand, if the market has been declining for a few days or longer, conditions may be ripe for a rally, and with the aid of a little bullish propaganda the weak short interest is run in and prices recover half or perhaps all they have lost in the preceding period of decline. Anyone who can: definitely tell what form such movements will assume and when they will break out would have child’s play in explaining the theory of relativity and the fourth dimension to a kindergarten class. The best safeguard against the influence of the short swing is, having once adopted a position in accordance with the funda¬ mentals, to forget the market entirely. Another pitfall of which one must beware is the partial payment or margin method of trading. It would, of course, be wrong to assume that all mar¬ gin traders lose money. It is undeniably true, how- 212 BUSINESS FUNDAMENTALS ever, that a liberal majority of the speculators who come to grief do so because they had been holding their stocks with some stranger’s money. The weak¬ ness of the margin method is contained in this one fact — that by operating with borrowed capital de¬ pendent position is necessarily assumed. Holding stocks with one’s own capital, on the other hand, permits maintenance of a strictly independent posi¬ tion. Independence, furthermore, is an excellent tonic for one’s peace of mind, a state which few margin traders ever enter. To take up another phase of this subject, margin trading may be said to lead to over-trading. This practice is, in simple language, biting off more than one can chew. Consider the case of a man ,who puts up $10,000 as a margin to buy a list of stocks. The market begins to appreciate and soon shows him a paper profit of, say, $2,000. The next step is the employment of this $2,000 to buy more stocks, since it is so easy for this man to make money in stocks. It is not long, however, before the inevitable shake¬ out or short-swing reaction occurs, brought on by some passing development, turning the $2,000 sur¬ plus into a $2,000 deficit. Whereupon to satisfy his broker’s call for margin it becomes necessary to sell the additional stocks he bought and as well some of the original commitments, all, very likely, at a loss, since margin calls never come when stocks are going up. This is not the invariable practice, for some have the courage to forego u pyramiding ” SUCCESSFUL SPECULATION 213 or the use of paper profits as margin, but it is com¬ mon enough to warrant the conservative operator in shunning altogether the method that so many others have tried and found wanting. The practice of selling stocks short is still another example of how not to do it. This method seems just about as plausible and is fully as unreliable as margin trading. The theory is that, if one can make money by buying stocks and holding them during the course of a bull market, or period of rising prices, why isn’t it just as possible to profit by reason of a decline in stock prices, or a bear market, through the medium of short sales, or selling what one does not own? Admittedly this theory sounds attractive, but, among others, it has one very glaring weakness. It fails to take account of one’s inability to deter¬ mine just when the bear market is to begin. A sale just a little too soon may mean the loss of a fortune. One may consistently ask why this is so. The answer is not hard to give. The end of every bull market or distribution pe¬ riod is featured by wild manipulation. Prices of individual stocks are whirled up to dizzy heights. Not infrequently the stocks of least merit and poor¬ est industrial position are shot up as high as the others in this manipulative orgy. Hence, the fail¬ ure to anticipate correctly the end of the period by even so short a margin as a week or two may mean that one has a short position on stocks at levels 50 or 100 points lower. The average temperament can- 214 BUSINESS FUNDAMENTALS not stand such a strain as this; so the common result is a rush to cover at or not far from the peak. In a short-sale transaction, moreover, one’s potential losses are unlimited, while in a long transaction one can never lose more than the number of points one paid for holdings. By and large, short selling is hazardous business and even the man with unlimited nerve and substantial purse frequently is caught. Others would do well to confine their speculation to outright commitments on the long side. So much for the pitfalls, short-swing speculation, margin trading, and short selling. Now, is it all that one needs, to have a knowledge of fundamental conditions and their relation to the stock market as well as to be aware of the weak¬ nesses in the fabric of speculation? Not entirely so. Before we can turn out our product, the successful speculator, we must emphasize the need of knowing how to buy stocks as w r ell as when . This seems too elementary, one will say. All that is needed is to make up one’s mind to buy and then give one’s order to the broker to be executed. True, but much depends upon how one apportions funds among the different stocks. First, let us say that it is necessary to hold a con¬ siderable number of different stocks and different classes of stocks in speculating for a long pull. The reason for this is that while fundamental conditions exercise their influence on the movements of the market as a whole, none can say which particular SUCCESSFUL SPECULATION 21 $ stocks or class of stocks will participate most or least in the upward trend. For all stocks do not move alike by any means. The solution of the problem is found in the arrangement of purchases in such a way as to include as many as possible different issues and different groups of issues. By this method one is placed in the position of profiting by the average movement of the entire list. It .would, of course, be very gratifying if one could single out a special stock or special classes of stocks as more likely to share in the upward move¬ ment than others. This, however, cannot be accom¬ plished any more readily than by accurate analysis of the short-swing movements of the market. Concen¬ trating one’s attention and capital on a single issue is speculation on the basis of guesswork. And if one is willing to go into the market on such a basis, it would be better by far to place one’s affairs in the hands of trustees and go into seclusion. The wise and conservative policy is to a spread out all over the board,” making only one reservation. This one reservation is the selection of seasoned rather than unseasoned issues and groups. Every expansion period witnesses the formation of a multitude of new companies and the launching of new industries. Some manage to stay on for a few years or longer and others quickly give up the ghost. It is best to shun them all until they can be placed in the class of well-seasoned companies or lines of business of known record of accomplish- 21 6 BUSINESS FUNDAMENTALS ment. With this one reservation, however, as many different stocks and different groups that are in a sound position as one’s capital will permit should be incorporated in one’s list. To be sure, you may pick one or two bad ones, but the small amount involved will have little effect on the final result. Better a holding of twenty-five stocks with one disappoint¬ ment than the singling out of two stocks with the risk that one-half of your entire investment be lost. Assuming that one has mastered these few simple rules and successfully shunned the traps that are set for the unwary, of which I have described the most common, what are the possibilities of profit in long pull speculation? Various phases differ, of course, and no hard and fast rule can be designated. It is a wholly conservative statement to make, how¬ ever, that an average of 20 per cent, each year is reasonable to expect when the final results of the period are recapitulated. POSSIBILITIES OF PROFIT IN CONSERVATIVE LISTED STOCKS Suppose $2500 had been invested in 1861, in ten representative stocks, and they had been bought and sold again, every three or four years, what would have been the history of the $2500? To what would it have amounted to-day? In detail the answer would be as follows: Start¬ ing in 1861 with an original capital of $2500, the SUCCESSFUL SPECULATION 21 J dividends for three and one-half years at 5 per cent, amount to $705. Assume that we invest the $2500 in the leading stocks of 1861 at their average low price of 62, and hold the stocks until the average price reaches 160 in 1865, when we sell for 6,448, which, together with the interest above mentioned, makes a total of $7,153. We leave this amount on deposit in a bank for two years at 4 per cent., so that we have $7,737 to invest in 1867 when the average again falls to 100. We believe that with this introduction the table is self-explan¬ atory. In the accompanying table 5 per cent, is allowed as an average dividend on the stocks held and 4 per cent, an average interest on bank deposits or the highest grade commercial paper. The average prices at which the purchases and sales are executed are the “ averages ” at the beginning of each of the paragraphs above on general stock prices. The preceding example shows that $2500 con¬ servatively invested in a few standard stocks about fifty years ago would to-day amount to over $1,- 000,000. These are not only strictly investment stocks, but are also stocks which have fluctuated com¬ paratively little in price. This, moreover, was pos¬ sible 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 pur¬ chased, and advantage had been taken of the inter- 218 BUSINESS FUNDAMENTALS Original Principal invested @ 62 1861 $2,500 Dividends 35 yrs. @ 5% to 1865 705 Princ. bought @ 62 in 1861, sold @ 160 1865 6,448 Total Princ. & Dividends 1865 7,153 Comp. Int. @ 4% 2 yrs. Princ. & Int. to 1867 7,737 Invested @ 100 in 1867 Dividends 2 yrs. @ 5% to Princ. bought @ 100 in 1867 sold @ 144 1869 773 11,131 Total Princ. & Div. @5% 1869 11,904 Comp. Int. @ 4% 4 yrs. Princ. & Int. 1873 13,926 Invested @ 75 in 1873 Dividends 1 yr. @ 5% to 1874 928 Princ. bought @ 75 in 1873 sold @ 100 Total of Princ. & Dividends @ 5% to 1874 1874 18,560 19,488 Comp. Int. @ 4% yrs. Princ. & Int. 1877 22,360 Invested @ 55 in 1877 Dividends 4 yrs. @ 5% to 1881 8,130 Princ. bought @ 55 in 1877 sold @ 134 Total Princ. & Dividends @5% 1881 1881 54,471 62,601 Comp. Int. @4% 3? yrs. (June) 1881 Princ. & Int. to Jan. 1885 71,825 Invested @ 86 in 1885 Dividends 4 yrs. 9 mos. @ 5% to Sept. 1889 19,836 Princ. bought @ 86 in 1885 sold @ 136 1889 113,587 Total of Princ. & Div. @5% 1889 133,423 Comp. Int. @ 4% 1 yr. 10 mos. to July 31,1891 Princ. & Int. 1891 143,385 Invested @ 115 in 1891 Dividends 1 yr. @ 5% to 1892 6,235 Princ. bought @ 115 in 1891 sold @ 135 in 1892 168,345 Total of Princ. & Div. @ 5 % 1892 174,580 Comp. Int. @ 4% 4 yrs. Princ. & Int. to 1896 204,234 Invested @ 100 in 1896 Dividends 6 yrs. @ 5 % to 1902 61,269 Princ. bought: 100 in 1896 sold @ 190 1902 388,037 449,306 Total Princ. & Dividends @5% 1902 Comp. Int. @4% 1 yr. Princ. & Int. to Oct. 1903 467,278 Invested @ 146 in 1903 Dividends 2 yrs. 3 mos. @ 5% to 1906 36,005 Princ. bought @ 146 in 1903 sold @ 205 during Jan. 1906 656,102 Total of Princ. & Div. @5% 1906 692,107 Comp. Int. @4% 1 yr. 9 mos. to Nov. 1907 Princ. & Int. 1907 741,384 Invested @ 119 in 1907 Div. 1 yr. 8 mos. @ 5% to Aug. 1909 5 i, 9 i 6 Princ. bought @ 119 in 1907 sold @ 190 in Aug. 1909 1,183,719 Total Princ. & Divs. @5% through Aug. 1909 1 , 235,635 Comp. Int.: 4% 5 yrs. 3 mos. to Dec. 1914 Princ. & Int. 1914 1,518,372 Invested @ 128.3 in Dec. 1914 Divs. 1 yr. @ 5% to Jan. 1916 59,172 Princ. bought @ 128.3 in *0*4 sold @ 146.6 in January 1916 1,734,937 Total Princ. & Div. @5% thru Jan. 1916 1,794,110 Comp. Int. @ 4% 11 Mos. to December 1918 65,780 Princ. & Int. in Dec. 1917 1,869,890 Invested @ 90 in Dec. 1917 Divs. 2 yrs. 6 mos. @ 5% to June 1920 353,i8i SUCCESSFUL SPECULATION 219 mediate fluctuations, the $2500 would have mounted to much larger figures. By intermediate movements is not meant the weekly movements which the ordi¬ nary professional operator notes, but the broader movements extending over many months and pos¬ sibly a year or more. Nevertheless, these broader intermediate movements should not be noticed by a conservative investor, as it is possible correctly to 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 to-day. $5,000 invested in Union Pacific in 1870 would amount to over $15,000,000 to-day. $5,000 invested in Central of New Jersey would amount to over $30,000,000 to-day. $5,000 invested in Northern Pacific ,would amount to over $50,000,000 to-day. 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 u low ” prices based upon the study of tech¬ nical conditions. Chapter XVI BUSINESS PROBLEMS I F you will look over the community in .which you were born it will be found to have this general history: families rise and fall5 industries change and the city or village must either go ahead or go backward. Nothing stands still in this world. Everything is a question of comparison. Unless there is progress there is deterioration $ in fact, there must be a certain amount of progress to offset the inevitable depreciation. Therefore, one does not need to study fundamental conditions simply for the purpose of increasing his business. A knowledge of fundamentals is needed for purposes other than mere money making. A man must know funda¬ mentals in order to exist and to hold his present position in the march of progress. Therefore, in these final chapters let me review briefly the various features already taken up in this book. Let us ana¬ lyze in a general way the reason for failures, and from these reasons draw constructive plans for our own work. Labor Conditions: The study of declining businesses shows that a misunderstanding of the labor problem is an impor- 220 BUSINESS PROBLEMS 221 tant factor in causing men to lose their businesses. This applies both to the old generation and to the new generation. The old generation was brought up on the “ master and servant ” principle. The old families drew a broad black line between em¬ ployer and employee. So long as they had what they called u faithful workers ” — workers without courage and ambition — they were happy and pros¬ perous. They understood handling these docile employees who looked up to their employers intent only upon carrying out their orders. These were the kind of workers they had in the “ good old days ” — workers who seldom asked for more pay, who were satisfied with their condition, and who were content with the industrial system of their day. Without doubt the old industrial system had many good features. In those days men and women were willing to do what they could do best, and manual labor was looked upon as honorable. People expected to work and enjoyed work. Producing and creating ( was a pleasure. They did not work long hours because they were forced to do so, but because they enjoyed the work and preferred it to staying at home, which was often the only alterna¬ tive. In this way conditions have changed for the worse. It is very unfortunate that to-day work is looked upon by so many as something to be avoided. Furthermore, the prevalent custom of doing as little as possible in a day is a basic reason for high prices and generally unsettled conditions. In many ways 222 BUSINESS FUNDAMENTALS employers are justified in wishing that the “ good old days ” and the good old labor conditions were back. The employers of those days, however, did make a mistake in resisting instead of recognizing the changed conditions, especially as it was not a new thing to have changed conditions. There has been a constant change in the relation of employer and em¬ ployee since the days of feudalism and slavery. A constant evolution has been going on during the past thousand years, and there has been just as much change during the past generations as during previ¬ ous generations. This change will continue. Why should it stop suddenly with our generation? The employers who have recognized. this change and have adapted themselves to it have continued in business. Most of those who have bucked the change have fallen by the wayside. That the read¬ ers of this book may recognize that these changes are inevitable is my earnest desire. Let us not be just as disgusted with the next generation as the old generation was disgusted with us. As we attempted to start where our parents left off, so our children will attempt to start where we leave off. As we struggle to better our conditions, so our employees may likewise struggle to get away from us and be independent. Of course, in such action they take distinct risks, as 95 per cent, of those starting new businesses fail. But their pur¬ pose in so attempting is good, and we should not blame them for it. BUSINESS PROBLEMS 223 During the past twenty years we have seen labor unions develop to an amazing extent. These are often repulsive to those who have built up a business without being hampered by labor leaders. But the labor union is as inevitable as the income tax. When labor unions are universal all will be affected alike, and no one concern .will be worse off than are its competitors. The next generation will take labor unions for granted, but they will have new prob¬ lems with which to contend. Socialism, I. W. W.’- ism, Bolshevism, or some other kind of “ ism ” will disconcert the young business men of twenty years hence. (The important point for us to realize is that there will always be something for us to con¬ tend with along labor lines. The labor problem always has existed and always will be with us. Moreover,, I would not give much for a people who were not striving to better themselves, even though they may be doing it along uneconomic lines. This does not mean that you should become ac¬ tively interested in the labor movement, or try experiments in profit-sharing, shop committee man¬ agement, or in any other untested ideas. It is just as foolish to attempt to lead the procession as it is to drag behind. The industrial system of the next generation may be some one of these systems which we now discuss or it may be something entirely dif¬ ferent. No one knows to-day what will be the solu¬ tion of the industrial problem, or what industrial system will be the next one adopted. My desire 224 BUSINESS FUNDAMENTALS simply is that you recognize that the same business cycle which we have been considering applies to labor and the relation between employers and wage porkers. This labor movement is continually in progress. The successful business man will adapt himself to these changes and. attempt neither to lead them nor to resist them. In other places in this book reference has been made to two different movements in progress at the same time. There are the long-swing or great tidal movements, the short-swing or the wave move¬ ments. These two sets of movements apply to labor problems as to all others. There is the long-swing, covering a period of twenty to thirty years, and there are the shorter periods synchronizing with the Babsonchart. I have no fears as to the ultimate out¬ come of the struggle between employers and wage workers. Gradually those who have money will learn to give up, and those who have no money will learn to wake up. Employers will learn the lesson the radicals are trying to teach, and the wage work¬ ers will learn the lessons the employers are trying to teach. Those who have money will learn that their safety and prosperity depend upon others also being well off. Those who have not will learn that righteousness, industry, and thrift are the basis of all prosperity, and that we can all have more only as we produce more. Before that time comes, how¬ ever, there will probably be more trouble and distress. BUSINESS PROBLEMS 22 5 We refuse to learn except by experience and there Is no reason why our employees should be different and wiser. Therefore, the present uneconomic labor conditions may be carried further and further until they bring about a catastrophe. Labor may continue its methods of uneconomic production and avoiding work until it has forced the world into an industrial chaos. Then, however, labor will come to its senses, and of itself start out on a new tack to increase production and render service. Then .will follow a great era of prosperity for all interests and groups. This will continue until another gen¬ eration which has not known of the vicissitudes of its ancestors comes into being. They will start out on some new “ ism,” attempting some still more radical experiment, and again there will be trouble. The next thousand years will probably see more progress than the last thousand years, but there will be, as in the past, ups and downs as the business cy¬ cles develop. The man, however, who knows funda¬ mentals, and the principles underlying these business cycles, knows the period that he is in and the period that is to come, and can thus save himself from the troubles resultant from these industrial upheavals. Yes, more than this, he can capitalize them and profit by them if he only will. • . .. r Buying Commodities: Another feature which has broken many previ¬ ously successful business men has been an attempt 226 BUSINESS FUNDAMENTALS by them to monopolize* certain trade in their village, city, or country. An analysis of business men shows that most of ( them do not deliberately set out to make money. They enjoy their business as we en¬ joy a game 5 and they fight in it as our ancestors fought for fish and fowl. Consequently, when such men accumulate money enough and a business which should satisfy them, they are no more contented than when they started. They love the game so much that they keep on playing and playing. Not being satisfied with their success, they try to swamp competitors, take on new lines, and start in new fields. In many cases this brings disaster. Many of the large business failures have been due to an attempt to create monopolies, or to control the prices of certain raw materials or products. This has almost always proved a mistake. Never in the history of the world has a 'permanent monopoly been established. Corners have lasted only a short time. Much more money has been lost by attempting to control markets than has ever been made by that process. As you go forth into business may your motto be a Live and let live.” Don’t try to do all the business in your community or in your line. Never attempt to crush competitors. There is enough business for all. Business makes business. Our prosperity ultimately depends upon the other fellow’s being prosperous also. In order for us to sell goods the other fellow must be able to buy. Let us help him prosper. BUSINESS PROBLEMS 227 Instead of trying to make) money by cornering the market, our great opportunity will be in traveling with the market. Most of the successful merchants are those who have studied fundamental conditions and have known when to buy. These men have not attempted to stop the ebb and flow of the tide, but rather have planned their merchandising to take ad¬ vantage of the ebb and flow. This means that they have bought intelligently; they have studied and been guided by fundamental conditions. Either consciously or unconsciously they have watched the business cycles and planned their merchandising campaigns in accordance therewith. It is an old saying that anything well bought is half sold. Certainly the greatest losses in business have come from over-buying, or from loading up at the wrong time in a business development. In a previous chapter I have showed that a few failures are a dangerous sign and many failures are a favorable sign, as far as future business is con¬ cerned. One chief reason for this is that people become very optimistic during a period of over-ex¬ pansion. Having been caught .with a shortage of goods, they determine never again to be so caught, and buy very heavily believing that the period of over-expansion will continue indefinitely. Having seen prices rise over long periods, they believe they will continue to rise; so they buy freely irrespective of prices. When the period of decline starts and the depression follows, such persons are caught with 228 BUSINESS FUNDAMENTALS a great stock of goods purchased at high prices. Study fundamental conditions in connection with your buying. The four periods of a business cycle apply equally as well to the prices of the things which you must buy as to the conditions of business itself. If the commodities in which you deal are now too low, you can be absolutely sure that some day they will be too high. If they are now too high in price, you can be absolutely sure that some day they will be too low again. The long-range price trend over a long period may be upward or downward, but the shorter trend is continuing in operation just the same. It is the movements due to these shorter trends — rather than the twenty- year trends — which interest men in active busi¬ ness. Hence, the great importance of studying funda¬ mental conditions when buying raw materials, man¬ ufactured products, and commodities in general. Instead of having this trend work against you and cause you losses the thing to do is to capitalize it and profit by it. The course of prices is much like a stream of water; one can row with it, or one can row against it. The ordinary man starting in busi¬ ness is like a farmer building a water wheel on a mill river. His success depends upon the way he sets the wheel. The important thing is to set the wheel so that the running stream will make it turn. The important thing in business is to use and profit by these business trends instead of ignoring them. BUSINESS PROBLEMS 229 As great losses are brought about by refusing to recognize fundamentals, so great profits are possible through the study of fundamentals. This is espe¬ cially true in connection with the purchase of raw material, merchandise, and commodities in general. National Distribution: I recently visited a city which has been famous for its manufacture of one product. Nearly all the factories are engaged in the manufacture of this- product, and almost the entire income of the people depends on its sale. Owing to changed conditions this sale has been greatly hampered in recent years. Out of some twenty large concerns only one is pros¬ perous to-day. The prosperity of this one concern is due to its selling methods. Its owner alone of all the manufacturers of the city recognized that they could no longer depend upon jobbers for the sale of their products. He alone insisted that the product must be sold direct to the consumer by mail. Against the advice of the older firms in the city, this young man burnt his bridges by severing his connections with the jobbers, and started to form a direct personal connection with consumers all over the country. The first effect of any such change is naturally depressing. He lost much trade in the early days. He got the ill will of the jobbers and they in turn passed this ill will on to the retailers. The banks withdrew their credit, and for two or three years 230 BUSINESS FUNDAMENTALS the situation looked bad. This man, however, was a student of fundamental conditions. He had stud¬ ied the industry and the sales possibilities as an engineer would study a contour map. Without prejudice one ,way or the other, he had come to the conclusion that fundamental conditions in the mar¬ ket had changed. He found that the goods were now being purchased by a different class of people than those who were formerly the buyers, and for a different reason. He believed that the retailers no longer had the same incentive to push these spe¬ cial goods that they formerly had; but would natu¬ rally push a competing line that would sell more easily. Hence, he stuck to his proposition to sell direct by mail. Suddenly the tide turned in his favor. Orders came in at a tremendous rate. Suc¬ cess justified his study and conclusions. To-day his plant is running full time while most of the other plants in that city are shut down. And to-day he has the one successful business in that community, and is the one man there who is making money. Yet I should not be surprised if in the next cycle he is superseded by some other firm. He is now getting on in years. Although he was the first man in his city to adopt national advertising and direct selling by mail, yet he is using the same original methods with which he started twenty-five years ago. Although he was the first to take an advanced step, yet he has been satisfied with this one step forward and has not taken a second or a third. He BUSINESS PROBLEMS 231 fails to recognize that conditions are continually changing, and are changing as much to-day as they changed in the years gone by. Twenty-five years ago he recognized changing situations and adapted himself to them. To-day, however, he is failing to recognize that further changes are still in progress. He is now as stubborn as were the other manufac¬ turers twenty-five years ago. He cannot see the light of the future any more than they could see it in their day and generation. Recognize fundamentals in connection with the selling of goods. Remember that evolution is con¬ tinually in progress in connection with the natures and desires of men and women. The cities and communities where your goods could best be sold a few years ago may have the least need of them to¬ day. Yet there are many fertile fields where your products to-day are very much wanted. Hunt up these fertile fields. Business is always good some¬ where. The business cycle is continually in progress but it travels gradually across the country north and south or east and west. The sun rises and sets once in every twenty-four hours, but it rises at different times in different places. When we in New England are eating our breakfast, the people in California are having their soundest sleep. When we in the East are going to bed, the people in the West are busy at work. It is the same with business. Although business revolves like the earth on its axis and every section has its day and BUSINESS FUNDAMENTALS 232 night, yet the sun of prosperity is always shining somewhere. The student of fundamental condi¬ tions will always know where that bright spot is and there he will be selling his wares. The selling of goods is very much bound up with the tastes, customs, and fashions of the people. These likewise are changing constantly in accordance with definite economic laws. We criticize women as being the slaves of taste, custom, and fashion, but can they help it? If they cannot help it, it is due to the fact that taste, custom, and fashion are gov¬ erned by fundamental laws. If this is so,it is entirely possible to forecast the changes. This is being done to-day by many manufacturers and merchants. The study of past history and the relation between cause and elfect is teaching these men to forecast tastes, customs, and fashions of a year, or even five years hence. When I was a boy there was a great demand for salt fish. I clearly remember how my father always had a whole salt fish hung by the tail in the back entry. About so often Mother would go out and cutj a piece off, and we would have what is known as a salt fish dinner. Those were great din¬ ners consisting of codfish, potatoes, beets, and a gravy made sometimes of cream and eggs and other times of pork. Then followed a period when people refused to buy whole fish, and insisted on buying it cut up and “ boned ”5 that is, with the bones re¬ moved. People still bought cod dried and salted, BUSINESS PROBLEMS 233 but they wanted it packed neatly in a little box. The fishing firms who were the first to recognize the change in this demand made a great deal of money. But those who said “ A whole codfish is good enough for me and I guess it is good enough for anybody,” went to the wall. Note, however, that the change in people’s taste would not stop with the desire for “ boned ” codfish. Mackerel came into the market and was very pop¬ ular. A great demand developed for salt mackerel. Instead of being dried like cod and haddock, the mackerel were pickled by packing them in buckets with salt and water. These buckets were shipped all over the country. The man in the West who had been brought up as a boy in the East could take one of these salt mackerel from the pickle and have a broiled fish that reminded him of his boyhood days. So the demand for salt mackerel increased. Those firms that went into the mackerel business made a lot of money while those who stuck to the cod and haddock trade did not. However, after people became more prosperous they were no longer satisfied with salt mackerel. They wanted fresh mackerel and fresh halibut. Thus the fresh fish industry came to be developed. Fresh fish is to-day sent in refrigerator cars from the coasts to all parts of the country. You can get as fine fresh mackerel in Chicago, St. Louis, or Denver as in Gloucester, Mass., or Portland, Maine. Many firms that are now in the fresh fish business are making money, 234 BUSINESS FUNDAMENTALS but those who refused to recognize the change in conditions are having very dull business. We find still another change in fish fashions. Re¬ cently I visited the plant of the largest fish concern in America. Only one department was at work full capacity. Upon asking the reason that this one de¬ partment was busy and not the others, the reply came, “ Because this is the i Ready-to-Fry y depart¬ ment.” I went over to the building to see what was being done and there I found them cooking fish and potatoes, mixing them together and canning them. Each can contained sufficient to make six fish balls. This is the stage at which the fish business is to-day. While my father was satisfied with a whole cod tied by the tail, hanging on the back porch, my young people will buy fish only when it is cooked and mixed with potatoes, ready for immediate use. We well might stop and talk on the laziness of the growing generation and insist that as codfish and salt mackerel were good enough for us they should be good enough for the generations to come. But we shall never make business successes by arguing along these lines. If we are to make a success in business, we should recognize these changing condi¬ tions and capitalize them instead of ignoring them. If you are not successful in your selling to-day, it is probably due to the fact that you do not recognize the business cycle in your sales, and that you do not take advantage of the changes in territories, indus¬ tries, tastes, customs and fashions. BUSINESS PROBLEMS 235 Retail Merchandising: What has been said thus far applies mainly to national distributors who are interested in selling the country as a whole. When it comes to the re¬ tailer in a given city the problem is more intricate and the need of studying fundamentals is even greater. I say this because the national distributor has such a wide territory that the law of averages works largely in his favor. This is not so true with the retailer, who is dependent upon a given commu¬ nity and a limited area for his market. A retailer, especially in a city with diversified interests, should study industries in connection with his merchan¬ dising. Moreover, a retailer — in a city like Brock¬ ton dependent upon shoes, or Havana dependent upon sugar, Memphis dependent upon cotton, or some of our western cities dependent upon agricul¬ ture, lumber, or mining — who is dependent for his trade on the prosperity of some one industry should give much attention to the study of industries. Some industry is always prosperous. Even when business is poorest a merchant in New York, Chicago, or Philadelphia, or any large city can do good busi¬ ness by studying the industries of his city. In all large cities some one industry is always prosperous, and often several industries are prosperous. There are over 300 common lines of activity in this country, most of which are to be found in every city. There never is a time but that 10 per cent, of them are 236 BUSINESS FUNDAMENTALS doing well and 5 per cent, of them are relatively prosperous. And 5 per cent, of 300 is fifteen. The able retailer will always seek out these fifteen or more industries and will purchase the goods that the people engaged in them will want and will buy. Many merchants fail because they buy only goods which they themselves like, or .which they think other people should buy. These are narrow¬ minded small merchants. The greatest merchants absolutely ignore their own tastes, wishes and prej¬ udices. They do not attempt to determine } but rather to interpret the needs and desires of their customers. Nothing will help so much in this work of interpreting future demands as a study of indus¬ tries, always watching for the industry which is over-expanding and the industry which is about to be prosperous. All industries go through their own phases, but the phases do not necessarily coincide. I have in mind four industries each one of which is traveling through a movement. Each one of these indus¬ tries in the course of eight years enjoys over-expan¬ sion, decline, depression, and improvement. But as I look over these industries to-day I find that each one of them is now in a different period. One industry is very prosperous, another is in a depres¬ sion, the third is in a period of decline, and the fourth is in a period of improvement. A student of fundamentals recognizes these changes and these facts. One who is interested in business trends BUSINESS PROBLEMS 237 is keen enough to know that every industry has a phase of its own. Hence, he studies industries, es¬ pecially the industries of his own customers. He is not content to know simply the elementary prin¬ ciples of merchandising. He delves into the great fundamental forces controlling the business of his city. He is able to forecast when each will be pros¬ perous and when each will be depressed. He pur¬ chases goods to suit that industry which will next be prosperous, and he advertises to solicit the trade of those who are employed in that industry. In this way he wastes no ammunition. He always has on hand the goods which are wanted, and his trade is constantly increasing. Men are naturally ambitious. You, the readers of this book, are ambitious, for otherwise you would not bother to buy and study it. As men become successful, however, there is a tendency for them to rest on their oars. Having once carefully studied their business they are prone to think that they know all about it, forgetting that changes are con¬ stantly in progress. They are content to know their own industry, but do not take the pains to study other industries upon which their customers are abso¬ lutely dependent for the money with which to buy. Hence, a merchant becomes rusty as he gets older and his position in his community is gradually filled by younger men who understand the needs of the new generation. It is especially important that we older men keep 238 BUSINESS FUNDAMENTALS up with the younger. We should associate with them and learn their wants and desires. It is espe¬ cially important that we keep in touch with the new industries which have come into being since we were young. When I was a boy there was no automobile industry, no moving picture, industry, and almost no electrical industry, although most readers of this book will take these industries for granted, assum¬ ing that they always existed. Remember that they are new and that other industries are developing all the time. Keep acquainted with the progress and growth of all new activities. Don’t brand them merely as fads, but recognize them and capitalize them. Chapter XVII INVESTMENT PROBLEMS F EW people fully realize the losses which are encountered by business men in connection with their investments. Many who were successful in business and retired wealthy have since lost a large portion of their fortunes through carelessness and ignorance in connection with the investment of their money. This applies not only to those who have retired or inherited money, but also to the active business man of to-day. Most business men will spend months in making a few thousand dollars which they will a invest ” in a few minutes. It is said that the average business man gives less time to the selection of an investment from a bond cir¬ cular than he gives to the selection of a lunch from a menu card. Business men should give even more time and study to the investment of money than to the mak¬ ing of it, as money is harder to conserve than to ac¬ cumulate. And the business man and those who have inherited money should give great thought to fundamentals. It is absolutely essential, in connec¬ tion with the safe and profitable investment of funds, to understand the business cycle and to know what period we are in at any given time. You 239 240 BUSINESS FUNDAMENTALS say, “ John Jones has made a lot of money through investments and he knows nothing about funda¬ mentals.” That may be true, but the reason that John Jones has made a lot of money in connection with his investments is because he happened to in¬ vest at the right time. Moreover, the chances are that unless John Jones soon becomes a student of fundamentals he will some day invest at the wrong time, and he will lose a good part of what he has already made. The fact that the rich families of fifty years ago are to-day mostly extinct as to wealth and position does not mean that they failed in business. Many of these made successes in business and retired leav¬ ing fortunes to their families. Through un¬ wise investments or failure to change their invest¬ ments at the right time these fortunes have been lost, and the families are now stranded. In many instances the parents or grandparents invested in what was the best for their day. They bought New Haven Railroad at 200 a share, and Boston & Maine at a corresponding figure. These were looked upon as the most conservative investments of that time, and for many years they were justly so classified. To-day the estates with these interests are perhaps bankrupt. New Haven, Boston & Maine, and many of the other high-class investments of that day have gone by the board, ceased paying dividends, and in most cases have been reorganized. The fault was not in buying these investments INVESTMENT PROBLEMS 2^1 i but in indefinitely holding them . The law of action and reaction applies to investments as it applies to families, commodities, and industries. The best in¬ vestments of our father’s day are mostly poor in¬ vestments to-day. The best investments of to-day will probably be poor investments for our children to bank upon. The business cycle is continually in progress. Those who recognize fundamentals and study fundamentals can prosper in connection with their investments, while those who ignore funda¬ mentals are sure to lose. No investments stand still. Every investment is continually growing better or growing worse . They have their length of life the same as individuals. One might say, they are born, they grow up, they mature, and they die. During their early years their mortality is very great, but those which exist a cer¬ tain length of time mature, only to die ultimately. A student of investments does not buy securities of an industry until that industry is sufficiently estab¬ lished so that it will surely grow up; but later when it is matured, he sells. Many families have held on too long and lost all. The most popular investments to-day probably will all pass over yonder. Yds — there is even reason to believe that some day the best of to-day will go the way of the best of a generation ago. Telephones will always be used, as are the railways and the trolleys, but as an investment the cream will some day be gone. Water powers form a most pop- 242 BUSINESS FUNDAMENTALS ular field of investment to-day. At the moment I would rather buy water power stocks than almost any other kind of stocks, but some day this industry will be overdone — or the public will step in and seize it — and the value of water power securities will depreciate. A student of fundamentals changes his investments according to the changes of the busi¬ ness trend. He not only knows when to buy but he also knows what to buy. Only by having such knowledge can he avoid the pitfalls and profit by the changes in business conditions. Don’t take flyers. Avoid gambling. Shun tips of all kinds. Remember that the only way to make money in the stock market is by rendering service, and the only way to render service is to store up money when it is plentiful and then use it when it is scarce. This means that in a period of prosperity it is better to buy nothing at all but let your money accumulate until it is needed. Follow the process of the ice man, who cuts and stores ice in the winter when it is a nuisance, knowing that before the year is over people will be crying for it. Hence, I say, when business is good, speculation rampant, and everybody is making money in the stock market, keep out of the market. Be content to let your money accumulate, because the day will come again when that money will be in great demand. Prosperity usually develops into a period of over¬ expansion, which is followed by a decline and de¬ pression. When this time arrives prices tumble, INVESTMENT PROBLEMS 243 brokers fail, and panic rules on the stock exchanges. If you are a student of fundamental conditions you will know when this period has arrived, and that it is the time to buy. Then take the money .which you have been accumulating and keeping in liquid form during prosperous times and use it for the purchase of securities. By so doing you can step into the breach when you are most needed, and enable your money to perform a real service. When you begin to buy you help stop the panic and help to keep others from failing. For performing this service you will receive a handsome profit. You will re¬ ceive good interest on your investment and be able to sell at perhaps double the original cost. Following every panic comes a period of depres¬ sion when money again becomes plentiful, and se¬ curities again rise in value. Soon an improvement comes when stocks and bonds soar in price and everybody is talking prosperity. During this period the securities which you bought become very valu- Every day prices are rising and your profits icreasing. Strangely, as prices rise, more people ne interested in the stock market and it is easier it people to buy. Only students of fundamental conditions have the courage to buy during panics, b\x( during prosperous times the reverse is true. Al¬ most every one wants to buy during a period of ex¬ pansion, and the higher the prices the more anxious they are to get aboard. This is the time when the student of fundamentals sells. Sell everything at 244 BUSINESS FUNDAMENTALS such a time. Get your money into liquid form and get ready for the next depression. The average investor is like the farmer who might insist on planting his crops in the fall just because there happen to be a few warm days in October. The average investor is like one trying to sell straw hats at the North Pole, or warming pans at the Equator. The average investor is the shortest-sighted and the most foolish man the world has produced. Men succeed in business but fail when it comes to the investment of their profits. Men work hard for wages and then lose them all on some oil or mining scheme. Families save and sacrifice only to see their savings lost through some a attractive ” investment. I am interested in helping you, my readers, in adapting yourselves to all forms of changing busi¬ ness conditions. I want you to recognize the business trend in connection with your labor problems, buy¬ ing problems, selling problems, and the study of industries in particular. But I am not so worried about your success in business as I am about your success in investing the money which you accumu¬ late. Again, I say, it is easier to make money than it is to kee'p itl The dangers which beset you outside your business are far greater than the dangers which face you within your business, especially during your years of struggle. Hence, I am anxious that you study fundamentals in connection with the pur¬ chase and sale of securities, and in connection with all forms of investment. INVESTMENT PROBLEMS 245 Briefly this means five things: (1) When purchasing, select a bro^d list. Don’t put all your eggs into one basket. And neither should you use baskets that you know have holes in them just for the sake of having more than one. Select only securities which you know to be good, but don’t depend upon any one. Always keep your funds invested in at least twenty different com¬ panies, and eight or ten different industries. (2) Buy stocks during panics. This will mean that you are buying when other people are not buy¬ ing. You will buy during the dark days when your friends think that business is going to the bow-wows. Remember that when you buy something for noth¬ ing, it is usually worth what it costs. When you do what everybody else is doing, you generally lose money. Hence, buy stocks during times of panic or depression. The rest of: the time be content to study fundamental conditions, statistics, and charts, preparing for the opportunities which will some day be yours. (3) Pay outright for everything you buy. Don’t buy on margin. Keep away from studying the tape. You may have to borrow money for your regular business, but don’t borrow any money for the pur¬ chase of securities. Only the man who is free from debt knows what it really means to be healthy and happy. You may have to get into debt at some time in the purchase of goods, but unless you are a dealer in securities never get into debt for the purchase or 246 BUSINESS FUNDAMENTALS sale of securities. That means buy outright and never sell short . (4) When the period of prosperity comes, sell all and liquidate your holdings. Get your money into cash and keep your cash in liquid form. Many know when to buy but fail to know when to sell. It sometimes takes more courage to sell during a period of prosperity than to buy during a period of depression. A student of fundamental conditions knows when to do both. The man who watches the business trend will know when to buy and when to sell. When it comes to the purchase of bonds, four additional rules are worthy of study. (5) When making permanent investments for security and yield, bonds are most desirable. Differ¬ ent groups of bonds, however, may be purchased for different purposes. The following classifications may be observed: Busmess Men’s Bonds: These are the bonds which yield the most and consequently have the least security. Business men, however, who will confine their purchases to junior liens of reorganized companies will secure a maximum of yield without much risk. The St. Louis-San Francisco Railway Company, prior lien 5’s, due 1950, and Missouri Pacific Company refunding 4’s, due 1975, are illus¬ trations of business men’s b6nds. Both of these properties have been reorganized and these junior issues were put out at the time of reorganization. Statistics show that 80 per cent, of the corporations INVESTMENT PROBLEMS 247 offering securities have reorganized once y but that only 20 per cent, have reorganized twice . Therefore, one greatly reduces his liability of loss by purchasing bonds of a company which has been reorganized, especially when paying high yields. Investment Bonds: These securities should either be first mortgage bonds recommended by high- grade bond houses, or else should be underlying liens of reorganized properties. The Chicago, Rock Island & Pacific Railroad Company refunding 4’s, due 1934, are an illustration of such a bond. This bond went through the reorganization without being disturbed. As stated above, one greatly reduces his liability to loss by purchasing securities of reorgan¬ ized companies j but this liability is still further re¬ duced by buying securities which have been through the reorganization undisturbed. Many such issues are listed on the New York Stock Exchange. Unless one buys investment bonds from a high-grade estab¬ lished bond house, it is wise to confine one’s hold¬ ings to listed underlying liens of properties which have been once reorganized. This advice especially should be heeded by women and those who must carefully conserve their principal. Bonds for Churches y Libraries , Hospitals y and other Philanthropic Institutions: When buying for others one is subject to criticism. Therefore, it is advisable to purchase for others only securities which stand well in the popular mind. Although bonds of reorganized companies are usually intrin- 248 BUSINESS FUNDAMENTALS sically better, still they are not so recognized by people in general. Therefore, when investing the funds of some quasi-public institution it is well to confine one’s purchasing to the bonds of what are considered the highest-grade corporations. Bonds of the Pennsylvania Railroad Company, the New York Central Railroad Company, or the Northern Pacific Railway Company are illustrations of such invest¬ ments. It is true that these properties may some day suffer the fate which befell the Boston & Maine Rail¬ road Company and the New York, New Haven & Hartford Railroad Company, which also stood very high at one time. Nevertheless, when purchasing for others it is well to be governed by the general opinion rather than stake the funds of other people solely on one’s own personal opinion. Bonds for Trust Funds: When purchasing as a guardian or trustee under appointment by the court, one should be even more careful. None of the three classes of bonds above mentioned are entirely satis¬ factory for the investments of such trust funds. In certain states, such as Massachusetts, Connecticut, and New York, definite securities have been legal¬ ized. Court rulings in other states show the char¬ acter of bonds available for such purposes. Bonds which are legal for the savings banks of the states are usually legal investments for trustees. As an illustration of such bonds may be mentioned United States Government Liberty bonds, state bonds, and municipal bonds of the more conservative cities. INVESTMENT PROBLEMS 249 Certain railroad bonds are also legal in some states for such purposes. Certain mortgage bonds of some railroads which have consecutively paid dividends of a certain amount on their capital stock for a cer¬ tain length of time are included in such lists by some states. Business is guided by fundamental laws the same as are the movements of the planets and the chang¬ ing of the seasons. A man may make a meagre liv¬ ing through industry and thrift without regard for these great fundamental laws of business. Millions of men are born, live, and die, without ever hearing of business phases. If, however, you are to become more than a drudge, if you are to have the joy of being a factor in production and distribution, you must not be content with merely working and sav¬ ing. You must study and capitalize fundamentals. I know of a family that for years lived on the Hudson River by some rapids. Generation after generation looked out on those rapids but they did no more than look. They drudged and saved, try¬ ing to make wheat and potatoes grow on the hillside bordering the river. Finally a young man of the fourth generation came back from an eastern col¬ lege imbued with a desire to use those rapids for the development of power. His family laughed at him. They said that the rapids had always been there and always would be there, and any dam that he could erect would be washed away. He learned through mechanics that the same laws govern both BUSINESS FUNDAMENTALS 2 SO the stream and the stability of dams. He believed that he could depend upon those laws, not only to get the power, but also to build a dam that the river would not .wash away. At last he convinced others of his project, and it was finally developed. He was not only made wealthy but he was able to supply light and power to the whole vicinity, mak¬ ing the homes more cheerful and the work of the housewife easier. The same opportunities exist for you to-day. There may be no undeveloped water powers, un¬ felled forests, or undiscovered mines in your vicin¬ ity, but the law of gravitation applies everywhere, and the law of the business trends applies every¬ where. The time will come, generations distant, when this Law of Action-Reaction will be so univer¬ sally used that the present fluctuations will be largely eliminated. When every one knows about business trends and applies that knowledge there will be but little opportunity for you to capitalize it and render service by its use. Rut until that time comes a great opportunity for service and profit exists in the study of fundamental conditions and business trends. Chapter XVIII CONCLUSION T HIS final chapter is being written in the city where I was born and brought up. The first twenty-two years of my life were spent here, and I have often been back to it in recent years. Its people are a fine sturdy race, accustomed to struggles, yet hospitable and optimistic. It was a fine place in which to bring up a lad. Every boy was trained to work and save, as there were very few natural resources. Nature provided only rocks, bushes, and the opportunity to catch fish from the ocean which pounds the shore. Most cities are surrounded by fertile fields, verdant forests or rich mines 3 but my home was favored with none of these natural re¬ sources. Every dollar that its people earned came from hard labor either on rocky hillside farms, or on the ocean where many men went never to come back. These difficulties, however, made men strong and independent. Yet wealth was made even under these trying circumstances. There were many rich families on the Cape during my boyhood days 3 in fact, there have always been rich families there. One of the earliest lessons impressed upon me ,was that natural resources are a small factor in determining the 251 252 BUSINESS FUNDAMENTALS wealth of a people or a family. The spirit and thrift of a city are much greater factors in making prosperity than are natural resources. The latter are worthless unless the people are imbued with a desire to create, and save, and study funda¬ mentals. Those who have this desire can succeed even though they lack the natural advantages. Hence, my people accepted the rocky shores and turned them into quarries; they erected dams be¬ tween the hills and made ice ponds; they went out on the briny deep and caught mackerel, haddock, cod, and Georges halibut. As a result men became rich in the granite business, in the ice business, and in the fish business. Industries and banks grew up in the city. Good stores catered to the merchandising wants of the community. Yes, Gloucester was busy in those days with a population of about 25,000. It is a fine city to-day and in some respects it is more active, since its industries are more varied because manufacturing is gradually developing. Every visit to that city has taught me some lessons, and the past week has been no exception. It is the thoughts that have come to me during recent visits which I desire in this last chapter to pass on to you readers. One of the most sobering thoughts is that practi¬ cally all of the rich families of my boyhood days have since lost their money. The city then had its aristocracy, the same as Boston, Philadelphia, or Baltimore. It still has its well-to-do families, but CONCLUSION 253 they are of an entirely different group. Most of the beautiful homes of my boyhood days have been sold for boarding houses or for commercial pur¬ poses. In some cases the old folks have died and only the children survive; but in many cases the father or the mother is still living. Some of the family still live in the same old house, but the blinds are broken, the fence is tumbling down, tall grass and weeds are growing in what was once a beautiful garden, and the appearance of the place most graphically tells of the family tragedy. This morning I have been up and down Main Street, Middle Street, and Prospect Street, looking up those places that I so revered in boyhood days. Men who had great businesses ,when I was a boy, with ships sailing all over the world, have broken down physically and financially. Their wives and daughters at home are doing their own work and struggling to make both ends meet. These men cannot blame the city for their change in circumstances. If, to-day, no one had money in Gloucester it might be blamed on the rocks, bushes, cold winters, or treacherous sea. The fact is, however, that while these old families have been gradually tottering and disintegrating, other fami¬ lies that were unknown in my boyhood days have been gradually coming to the front. There is more wealth to-day in my birthplace than there ever was, but it is possessed by a new set of people. The rich boy who had the ponies and lived in the big house on the 254 BUSINESS FUNDAMENTALS hill is now struggling with a little business or work¬ ing for a meagre wage to keep his wife and family going. The poor boy of forty years ago, who used to sell papers and come to school barefooted, is carrying on the business of to-day. In fact, a large part of the business is being carried on to-day by Jews, Greeks, Portuguese, and other immigrants who had never seen this country when I was a youngster. What does this mean to you, my readers? Whether you are rich or poor, it should mean much. If you are in good circumstances, it means that — unless you carefully heed fundamentals — the probabilities are that you will die poor. If your wife and children are able now to have all the things they want, it means that — unless you be¬ ware — probably they will some day have to strug¬ gle for the bare necessities of life. On the other hand, if you are in humble circumstances but are industrious, thrifty, and a student of fundamental business conditions, you and they may enjoy great prosperity in years to come. This does not mean that all rich men will die poor, or that all poor men will die rich. It does mean that the families now on top must struggle to keep from going to the bot - tom y and the families at the bottom may easily rise to the top . It means that it is more difficult to con¬ serve a business after it is created than it is to create it; and that it is more difficult to retain a fortune , than to accumulate one . CONCLUSION 255 What broke these rich families and caused their businesses to go to pieces? The answer is very- simple. It is that these men knew the fishing busi¬ ness, the granite business, the ice business or were good merchants j but they failed to understand the fundamentals of business. They were industrious and thrifty only. When they happened to be work¬ ing with a favorable tide of the business trend, they were prosperous and made a lot of money. But knowing nothing of such fundamentals, they failed to recognize the new conditions when the tide turned. They knew nothing about the four great periods of the business phase, and they never knew in which period they were. Consequently, when the tide of business turned, instead of changing their old methods and adopting new methods for the new phase of business, they continued in the same old way. Some went through the bank¬ ruptcy court, some merely assigned in favor of their creditors, and others simply petered out. With very few exceptions the business of every one of them is gone to-day. In some cases the business is being carried on by others, but in many cases the old wharves are not used, the old quarries are idle, and the farms are being cut up for the summer visitors. Old concerns when failing often have so much indebtedness that the once bare-footed boy can bet¬ ter afford to build a new wharf, open a new quarry, or start a new business for himself and by himself, than to take over the old wreck with its mortgages and indebtedness. 256 BUSINESS FUNDAMENTALS I • .1 . » . I ( History' continually repeats itself. Statistics clearly show that almost all successful businesses have been started either in a cellar or in a garret. Very few successful businessses of to-day started under auspicious circumstances. Very few have built on the ruins of other businesses. The great busi¬ nesses of to-day started yesterday in the most hum¬ ble way; and the great businesses of tomorrow are to-day being operated in cellars and garrets. We look down upon the Greek fruit dealer, the Italian contractor, and the Jew tailor; but let me say that these Greeks, Italians, and Jews may be the great business men of the next generation. Unless very careful, we and our children will be working for them. They are very likely to be the bank presi¬ dents of our great cities, the owners of our large department stores and the captains of industry in I95 °* The wheel of opportunity is constantly revolving. It is very easy for those who are now on the top to be swept off when a change takes place in the great fundamental tide of business. It is a comparatively easy thing for those who happened to get onto the wheel at the right point of the business trend to make money owing to a change in the tide over which they have no control. These men, if they are industrious and honest, cannot help being suc¬ cessful for ten or twenty years. However, for a man to get on the wheel and stay on the wheel through the periods of over-expansion, decline, de- 1 CONCLUSION pression, and improvement is a great task that very few have the foresight and patience to accomplish. The reason is that business men do not understand fundamental conditions. Many of them do not know about business trends 5 others fail to recognize their effect upon them; and very few are willing to change their methods when the change comes in fundamental conditions. Mind you, I do not say that these trend move¬ ments must continue indefinitely or that these waves during the coming years need be as severe as they are at present. Business could get along without them just as an individual can get along without being sick if he will govern himself in accordance with the basic laws of health. Dissipation, however, is always followed by its headache and recuperation period, and as long as business continues to go on recurring sprees of over¬ inflation, we must expect the inevitable and equiva¬ lent reaction of deflation and hard times. You can¬ not ignore the law of Action and Reaction any more than you can ignore the law of gravitation. ^ Of course in some cases property has been dissi¬ pated by heedless children. In a few instances cer¬ tain catastrophes have taken place for which the owners were not to blame. In 90 per cent, of the cases, however, the successful families of the last generation would still control the business interests of their city, if they had only known fundamentals and changed their methods when fundamental con- BUSINESS FUNDAMENTALS 258 ditions changed. The truth is that they uncon¬ sciously rode to success with the tide, and when the tide went out they were left stranded on the beach .) Hence, I appeal to the business men of to-day to avoid these pitfalls into which our predecessors have fallen. Business disasters are no more necessary than are cholera or smallpox scourges. There is no need of business failures. To have new families succeed it is not necessary for old families to fail. Business opportunities in America have not yet been scratched. Greater opportunities exist in every com¬ munity. The old families of the past generation should still be successful and have even greater businesses to-day than they ever had. At the same time there are opportunities for other families also to climb up the ladder and be successful. There never was a time when there were so many opportunities for those who have the “ Six Ps of Success namely, Integrity, Industry, Intelligence, Initiative, Intensity, and Inspiration. Date Due ~ ■ err OCT 30’57 ^oy ?^’ c ? DEC -Z '51 0cr2s ^ MAR 2 ( 1983 / BOSTON COLLEGE || 3 £ 031 0126 ' 345 r . X '-K ■, -l *■ . •'; • l' •,'*> , *.H, ,-■• . - ■:.• ,(i -7 - 4 ' .-••••• . ’ ; B V— j BOSTON COLLEGE LIBRARY SCHOOL OF BUSINESS ADMIN. CHESTNUT HILL, MASS. Books may be kept for two weeks and may be renewed for the same period, unless reserved. Two cents a day is charged for each book kept overtime. If you cannot find what you want, ask the Librarian who will be glad to help you. The borrower is responsible for books drawn on his card and for all fines accruing on the same.