OfarttcU Initteraitg ffiibrarg 
 
 Jitlfara, ^tm lartt 
 
 BOUGHT WITH THE INCOME OF THE 
 
 SAGE ENDOWMENT FUND 
 
 THE GIFT OF 
 
 HENRY W. SAGE 
 
 1891 
 
Cornell University Library 
 arV13144 
 
 How I trade and invest in stoclcs and bon 
 
 3 1924 031 269 552 
 olin,anx 
 
Cornell University 
 Library 
 
 The original of tliis book is in 
 tine Cornell University Library. 
 
 There are no known copyright restrictions in 
 the United States on the use of the text. 
 
 http://www.archive.org/details/cu31924031269552 
 
How I Trade and Invest 
 In Stocks and Bonds 
 
rv 
 
 ID 
 
 Richard D. Wvckoff 
 
 "We succeed in proportion to the amount of 
 
 energy and enterprise we use in going after 
 
 results" 
 
How I Trade and Invest 
 
 In Stocks and Bonds 
 
 Being Some Methods Evolved and Adopted 
 
 During My Thirty-three Years 
 
 Experience in Wall Street 
 
 By 
 RICHARD D. WYCKOFF 
 
 Editor, Th0 Magamu of Wall Street 
 
 ILLUSTRATED 
 
 NEW YORK 
 
 THE MAGAZINE OF WALL STREET 
 
 1925 
 
Copyright," 1926,' by 
 
 tHB MAGAZINE OF WALL STREET 
 
 Fifth Edition 
 
TO MY WIFE 
 
 Whose unfailing covirage, co-operation 
 
 and belief in me has enabled me to 
 
 attain some of my ideals 
 
CONTENTS 
 
 PAQE 
 
 Chapter I — ^My First Lessons in Investing 
 
 AND Trading 15 
 
 How and Where I Started — Lessons Learned from 
 Observing the Methods of Others — ^The Striking Les- 
 son of the McKinley Boom — ^The Factors Causing 
 Price Changes 
 
 Chapter II — ^Profitable Experiences in the 
 Brokerage and Publishing Fields ... 33 
 
 I Go Into the Brokerage Business — Three Conclus- 
 ions Reached from the Study of Trading Methods — i 
 Why the Average Trader Fails — ^The Founding of 
 The Magazine of Wall Street in the Panic of 1907 — ' 
 Do Graphs (Charts) Help!— The Secret of My 
 Earliest Successes — A Profitable Discovery about 
 Price Movements in Individual Stocks — How I 
 Guarded Against Serious Losses — The Story of a 
 $20,000 Profit in U. S. Steel— What a Man Must 
 Know and Be to Become a Successful Trader — Six 
 Kules I Have Found Helpful 
 
 Chapter III — ^Wht I Buy Certain Stocks and 
 Bonds 51 
 
 Harriman's Principle, and Wliy I Adopted It — 
 Equipment Trust Bonds as Prime Investment Med- 
 iums — ^How I learned to Find Bargains in Short- 
 Term Notes — ^What Convinced Me that Bonds Were 
 "Too Low" in December, 1919 — Making the Maxi- 
 mum Profit Out of Bank Stocks 
 
 Chapter IV — ^Unearthing Profit Opportuni- 
 ties 65 
 
 What I learned to Look for before Buying a Bond 
 — Income Return vs. Intrinsic Worth, Which? — 
 Opportunities that Investors Overlook — "Good 
 Enough for My Subscribers Is Good Enough for 
 
CONTENTS 
 
 FAOS 
 
 Mel"— (W!hy I Bought D. L. & W. in 1919— Are 
 'High-Friced Stocks Good Investment Mediums? 
 
 Chapter V — Some Experiences in Mining 
 Stocks 75 
 
 Never Get Married to a Security! — ^Why So Many 
 Mining Ventures Fail — How I Check Up on Mining 
 Engineers — Questions I Ask Before Putting Money 
 into a Mining Enterprise — ^Why I Did not Take a 
 $55,000 Profit 
 
 Chapter VI — The Fundamentals op Success- 
 
 puii Investing 89 
 
 Wliat the Rockefellers Buy — B-ow to Analyze the 
 Long Trend of Prices — ^Why I Established the 
 "Trade Tendencies Department" in The Magazine of 
 Wall Street — The Earmarks of a Desirable Invest- 
 ment — Studying the Price-Action of Individual 
 Stocks — How Pools Operate — ^How to Determine the 
 "Technical Position" of the Stock Market— Its Vast 
 Significance 
 
 Chapter VII — ^The Story op a Little Odd-Lot 103 
 
 Where I First Heard of the Possibilities in Amer- 
 ican Graphophone Stock — ^How I Checked Up My In- 
 formation—The Forty Shares I Got "For Nothing" 
 — ^What I Did While the Stock Was Advancing from 
 $135 to $500— What I Waited for Before Selling Out 
 
 Chapter VIII — The Rules I Follow in Trad- 
 ing AND Investing 115 
 
 What Success in Wall Street Means — Informal 
 Glimpses of Morgan, Keene and Harriman — Advice 
 from One of the Cleverest Traders I Ever Knew — 
 Some of the Rules of Trading Followed by Jesse L. 
 Livermore — ^How I Get the Best Results — Can an 
 Out-of -Towner Succeed in Wall Street t 
 
 Chapter IX — ^Forecasting Future Develop- 
 ments 125 
 
 Why I Have Put Money in the Better-Grade Oil 
 Securities — The World's Dwindling Oil Resources- 
 How New Uses for Oil May Affect Demand 
 
CONTENTS 
 
 PAGE 
 
 Chapteb X — The Truth About "Avebaging 
 Down" 133 
 
 Why Averaging Puzzles So Many Investors — ^How 
 I Averaged Out of a Disappointing Purchase — Pit- 
 falls All Traders Might Avoid But Which Most In- 
 vestors Don't — ^Are You Putting In or Taking Out? 
 
 Chapter XI — Some Definite Conclusions as 
 TO Foresight and Judgment 141 
 
 Is an Intensive Study of Investing Worth While! 
 — ^What Unsuccessful Traders Should Do — ^How to 
 Make the Most from Your Capital — The Essence of 
 Successful Speculation — Whose Judgment Is Best? 
 — Capitalizing Your Mistakes 
 
 Chapter XII' — Safeguarding Your Capital . 159 
 
 Things to Know Before Making a Commitment — 
 What Wall Street Needs— The Type of Trader Who 
 Succeeds — Studying the Public's Mistakes — Finding 
 Your True Position 
 
 Chapter XIII — How Millions Are Lost in 
 
 WlALL Street 171 
 
 What I Have Found to Be the Most Intelligent 
 Use of Money — Should a Broker Give Advice to His 
 Customers?— What Wall Street Needs— How I De- 
 cide What Not to Buy — ^Why so Many Investors 
 Buy U. S. Steel — ^Training One's Judgment as to 
 When to Buy— Why You Should Try to Buy at 
 Least Ten Different Securities 
 
 Chapter XIV — The Importance of Knowing 
 Who Owns a Stock 183 
 
 How to Recognize Manipulation — ^The Big Thing 
 to know Ahout Securities — ^How Railroad Securities 
 Are Held — Ferreting Out Opportunities that Have 
 Been Overlooked — ^Making an Exact Science of In- 
 vesting 
 
FOREWORD 
 
 During the last thirty-three years I have been 
 a persistent student of the security markets. 
 As a member of several Stock Exchange firms, 
 as a bond dealer, trader and investor, I have 
 come into active contact with many thousands 
 of those who are executing orders and handling 
 markets, as well as those who deal in such mar- 
 kets, namely traders and investors. 
 
 For the past fifteen years I have edited and 
 published The Magazine of Wall Street^, which 
 at this writing has the largest circulation of 
 any financial publication in the world. 
 
 These experiences have given me an oppor- 
 tunity to study not only the stock and bond 
 markets, but all those related thereto, and have 
 enabled me to observe the forces which influence 
 these markets and the human elements which 
 contribute so largely to their activity and wide 
 fluctuations. 
 
 Out of this experience I have evolved or 
 adopted or formulated certain methods of trad- 
 
FOEEWOED 
 
 ing and investing, and some of these I have 
 collected and presented in the pages which fol- 
 low. 
 
 My purpose in preparing this book has hjeen 
 two-fold. Primarily, I have in mind the thou- 
 sands of new investors who find the securities 
 market a vast, technical machine, too complex 
 to be understood by many. It has been my ef- 
 fort to do away with this impression — to em- 
 phasize the fact that, in Wall Street as any- 
 where else, the chief essential is common sense, 
 coupled with study and practical experience. 
 I have attempted to outline the requirements 
 for success in this field in a way that will be 
 understandable to all. 
 
 Furthermore, as I learned in preparing my 
 first book, "Studies in Tape Beading," it is 
 of great personal advantage for me to write 
 out and thus clarify and crystallize in my own 
 mind the principles upon which I endeavor to 
 operate. And so, from both standpoints it 
 seemed to me well worth while to arrange my 
 impressions in methodical and coherent order. 
 
 iJ^ICHABD D. WyOKOFP. 
 
 Great Neck, L. I. 
 MarchI, 1922. 
 
Thold that a man who is long- 
 ■*■ headed, who foresees and 
 judges accwrately, has an ad- 
 vantage over his neighbor^ and 
 it is not accounted immoral for 
 him to use that advantage be- 
 cause he is individually better 
 fitted for the business; and it 
 inheres in him by a law of na- 
 ture, that he has a right to the 
 whole of himself legitimately 
 applied. If one man, or twenty 
 men, looking at the state of the 
 nation here, at the crops, at the 
 possible contingencies and risks 
 of climate, at the conditions of 
 Europe; in other words, taking 
 all the elements that belong to 
 the world into consideration, 
 be sagacious enough to proph- 
 esy the best course of action, I 
 don't see why it is not legiti- 
 mate. 
 
 Henry Ward Beecher. 
 
 iU 
 
How I Trade and Invest 
 in Stocks and Bonds 
 
 FIRST LESSONS 
 
 AT the suggestion of my first employer in 
 Wall Street, I began the study of railroad 
 and other corporation statistics about the time 
 my trousers were being lengthened from knee to 
 ankle and I was receiving the munificent sum 
 of $20 per month. This was in 1888. 
 
 With numerous interruptions my studies con- 
 tinued until 1897, when I began to put them into 
 practice by purchasing one share of St. Louis 
 & San Francisco common^ at $4 per share. At 
 that time some of the other leading stocks were 
 selling at the following prices : Union Pacific 
 4-, Southern Pacific 14, Norfolk & Western 9, 
 Atchison 9, Northern Pacific 11. Reading 17. 
 To put it mildly, prices were very low. Many 
 roads were just emerging from, or were still 
 
 15 
 
16 HOW I TRADE AND INVEST 
 
 in, receivership, and Irish dividends were the 
 rule. 
 
 As I saved a little money I began to buy more 
 one share lots and finally I became such a 
 pest in this respect that the Stock Exchange 
 firm which I "favored'* with my orders said 
 they didn't care for the business, whereupon I 
 decided to buy more shares, of fewer varieties. 
 
 This is the way most people begin their 
 operations — ^by purchasing outright, believing 
 that they are safe. It is true they are safe in 
 the possession of their certificates once they 
 have them in their safe deposit boxes, but in 
 no other respect. They are not safe against 
 fluctuations or shrinkages in value or earning 
 power. Nevertheless, if their securities are 
 well selected, and bought at the right time, the 
 chances are strongly in favor of their making 
 money. 
 
 It was my practice about that time to sit 
 up nights, read the financial papers, and study 
 probably future values of securities, and when 
 I didn't have money enough to buy, I would 
 make my selections just the same and write 
 my imaginary purchases in a book with rea- 
 sons alongside why they should ultimately be 
 
FIRST LESSONS 17 
 
 worth more money. Two of these I still re- 
 tain in my memory, viz., Chicago, Burlington 
 & Quincy at 57, and Edison Electric Ulnmina- 
 ting of New York, at 101. 
 
 I mention these incidents because they illus- 
 trate a very good way for anyone to begin to 
 learn the business of trading and investing in 
 securities. Just as in any other line it is prac- 
 tice that makes perfect, and most of the fatali- 
 ties in Wall Street can be traced to lack of 
 practice. Tou don't have to risk real 
 money when you are learning, and I always 
 advocate two or three years — ^not two or three 
 months, mind you — of this kind of study and 
 paper practice when one is seriously consider- 
 ing participation in this greatest of all games. 
 
 But study and practice are the two things 
 farthest removed from the minds of the ma- 
 jority. Everyone knows that people who en- 
 gage in speculation for the first time do not 
 want to bother with such details. The aver- 
 age man who comes to Wall Street comes to 
 speculate, although he may pay in full for his 
 purchases. All he asks is to be told "some- 
 ithing good." That is not speculation, it is 
 gambling; for speculation, to quote Thomas 
 
18 HOW I TBADE AND INVEST 
 
 F. Woodlock, "involves the use of intelligent 
 foresight." Most people use neither foresight 
 nor intelligence. 
 
 It might seem to the reader a long while to 
 wait, hut in my case I did not begin to invest 
 until eight years after I started to study, and 
 I did not commence trading for six years after 
 that, so it may be admitted that I went to 
 school and got a foundation knowledge which 
 has been of inestimable value. 
 
 In connection with my one share purchases 
 I found that although I had correctly figured 
 financial conditions and earning power of the 
 companies whose securities I held, their prices 
 would often fluctuate widely as a result of gen- 
 eral market conditions. In other words, a stock 
 might go down, although everything in the way 
 of intrinsic value and future possibilities 
 pointed upward; so I made up my mind that 
 there were other factors to be considered and 
 found that these were principally three, viz., 
 manipulation, technical conditions and trend of 
 the market. 
 
 In order to study the market closely I identi- 
 fied myself with a leading New York Stock 
 Exchange house which did a big business for 
 
FIRST LESSONS 19 
 
 some prominent operators, and there I learned 
 how necessary it is to observe the proposition, 
 not from the standpoint of the outsider who is 
 endeavoring to anticipate the fluctuations from 
 what he sees on the surface, but from the stand- 
 point of the insider who is a factor in influ- 
 encing prices. 
 
 Investigation proved that many of those who 
 were thus able to affect prices often made the 
 same mistakes as small traders, only their er- 
 rors ran into big money, which, however, was 
 not out of the proportion to <their profits. 
 Tears before, in my clerical capacity in the 
 brokerage business, I had noticed tendencies 
 among small traders which I now found magni- 
 fied many diameters in the case of large op- 
 erators. 
 
 In the study of technical conditions, which 
 was my next step, I found that the most impor- 
 tant factor was the trend of the market and 
 that the overbought or oversold condition of 
 the market had the most to do with the imme- 
 diate direction of the next swing. 
 
 No doubt the principles which will be found 
 in my book, "Studies in Tape Reading/' were 
 rattling around in my head for a long time be- 
 
20 HOW I TRADE AND INVEST 
 
 fore I wrote them out, and as I did this they 
 clarified and crystallized. "When I realized 
 this, I began to put them into practice by trad- 
 ing in ten share lots, although I had operated 
 in a much larger way some years before. It 
 seemed to me that, with the right principles and 
 a sufficient amount of practice, I could gradu- 
 ally build up my trading on a strong founda- 
 tion that would not lead to flash-in-the-pan 
 results but to a steady increase in speculative 
 ability and consequent profits. 
 
 Being in the brokerage business, my imme- 
 diate object was to make more money for my 
 clients, because I realized that this was the 
 only way in which they would become perma- 
 nent and successful clients. My ultimate ob- 
 ject, however, was to get out of the brokerage 
 business and devote my time to the security 
 markets, and it is a satisfaction to say that I 
 arrived at that point some years ago. 
 
 Unlike many who operate in order that they 
 may make money with which to enlarge their 
 market operatijons, I am more interested in 
 realizing profits so that I may have more money 
 to invest. Just as its staff writers, through 
 the columns of The Magazine of Wall Street, 
 
FIRST LESSONS 21 
 
 advocate that the business man take his sur- 
 plus and invest it in sound securities, so I 
 make a business of trading and invest the 
 profits which result. In a word, I trade so 
 that I may invest. 
 
 But let us go back a little and note some of 
 the points which came to me while I was study- 
 ing the subject in an objective way: 
 
 The market operations which were carried 
 on in the office of my first employers were not 
 significant because it was a small firm and 
 did not have many customers. The head of 
 the firm traded a little and made some money, 
 because he seemed to understand what he was 
 doing. Most of the customers, on the other 
 hand, neither understood nor made money. 
 Once in a while some one would come in and 
 plunge around, pay a lot of commissions, and 
 then go away disgusted with the business. 
 Traders of this sort should have been disgusted 
 with themselvies. The majority seemed to look 
 upon it as a sport or an adventure in which 
 they hoped to prove that their judgment and 
 ability were better than those of all who 
 they knew had failed. 
 
 Nearly everyone seemed to be just guessing. 
 
22 HOW I TRADE AND INVEST 
 
 One man certainly carried off ■the palm at the 
 business of buying at the top and selling at 
 the bottom. Another told me how he had taken 
 one little Reading 3rd Income Bond, worth 
 about $300, and by pyramiding on the rise in 
 Reading during former years had run up an 
 equity of something 'over '$250|,000. But at 
 this particular time he was down to a shoe- 
 string again. 
 
 We had one old fellow who bought nothing but 
 the very highest grade railroad bonds, and only 
 when they were very low. Collecting these and 
 clipping coupons was a mania with him and 
 in order to indulge his mania he economized 
 to the point of using a piece of plain manila 
 twine to hold his eye glasses. He and other 
 out-and-out investors were the most satisfac- 
 tory cHents because they 'kept coming around 
 year after year, while those who speculated 
 disappeared one after the other. As for the 
 latter, I noticed a very marked tendency to 
 accept a small profit and stand for a big loss. 
 
 About that time I heard of a prominent 
 Brooklyn man who after several attempts at 
 speculation said to himself, "I know the secret 
 of this game — these traders are all taking small 
 
FIRST LESSONS 23 
 
 profits and big losses. I will open a bucket 
 shop and when they do this they wiU force me 
 to take small losses and big profits." He did. 
 And in a short while he bought a couple of 
 hotels and was rated as a millionaire. No 
 doubt he mistrusted his own ability to trade as 
 the others were doing and followed strictly this 
 profitable principle (the bucket shop proprietor 
 may have two different kinds of principles 
 although they are spelled the same way), but 
 he knew if he got into the business he would 
 be obliged by the very ignorance of his chents, 
 to make more money than he lost. 
 
 Turning again to my brokerage office, I must 
 say that impressions derived there were not 
 conducive to speculation, but showed the 
 marked advantages of shrewd investing. 
 
 The next firm with which I became identi- 
 fied was one which had private wires, branch 
 offices and a considerable number of clients, 
 large and small. Some of them were big 
 traders and a few were very successful. Here 
 I really began to learn something from observa- 
 tion of their methods. The one who impressed 
 me most strongly was a high official of the 
 telegraph company from which we leased some 
 
24 HOW I TRADE AND INVEST 
 
 of our wires. He stuck out from tlie rest be- 
 cause of his fixed policy of cutting his losses 
 short (here was that same principle bobbing 
 up again). He never gave an order unless 
 it was accompanied by a two-point stop. He 
 dealt in the most active and widely fluctua- 
 ting issues on both sides of the market. Un- 
 like many of the customers who were "fluent 
 losers" he was the only man whom I remem- 
 ber as being persistently successful. He would 
 usually trade in two-hundred share lots at 
 a time and generally managed to get a little 
 larger profit than the two points and commis- 
 sion which he risked. i. 
 
 While I was with that firm the pasoic of 1893 
 occurred. General Electric declined from 114 
 to 20, and American Cordage crashed down 
 from 140 to reorganization levels. This ex- 
 perience showed me what risks people ran who 
 made speculative commitments without limiting 
 their possible losses or watching them closely 
 and getting out when they found they were 
 wrong. The market for these and other stocks 
 simply melted away, there being few buyers 
 and many compulsory sellers. I had seen these 
 things before in the Baring panic of 1890 but 
 
FIRST LESSONS 25 
 
 they did not make the same impression on me 
 because I had not come into such close contact 
 with those who were making speculative com- 
 mitments of considerable size. 
 
 A few years later I secured a position with 
 a large, ambitious and growing New York 
 Stock Exchange house which had private wires, 
 branch offices and correspondents all over the 
 country. Its long list of customers and its im- 
 portant connections made it develop rapidly 
 into one of the biggest houses in the Street. 
 Here I was able to obtain a still broader view 
 of the markets, for the concern did a big cotton 
 and grain, as well as stock and bond, business. 
 Many of their people made considerable money. 
 A few made spectacular profits in la short 
 while, but I observed that their sudden wealth 
 led to over-extension and big losses because 
 they evidently did not have the same judgment 
 where larger amounts were involved. This 
 was another point in favor of the slowly build- 
 ing up process. 
 
 The big wire houses in Boston, Philadelphia 
 and Chicago poured their business over our 
 wires, but not knowing the operations of their 
 individual customers, I could only judge by the 
 
26 HOW I TRADE AND INVEST 
 
 composite that was presented to me through 
 having everything come in the name of the 
 house. Two kinds of operations were evidently- 
 going on. One was a large inflow of 
 buying and selling orders, evidently aris- 
 ing from those who were endeavoring to 
 anticipate the immediate fluctuations. The re- 
 sult of these was indicated in a corresponding 
 inflow of money to margin such transactions 
 and take care of the losses which resulted in 
 the net, proving that the traders in other cities 
 were no different from those I had met here; 
 that is, that they were more or loss imprac- 
 ticed and inefficient at the business. 
 
 The other kind of dealings impressed me the 
 most. They consisted of a steady line of or- 
 ders to purchase securities like Atchison Gen- 
 eral Mortgage 4s, and Incomes, Norfolk & 
 Western preferred. Union Pacific preferred, 
 and the better grade of stocks and bonds in 
 companies just emerging from receivership. 
 These were bought in very large quantities 
 and shipped away, principally to the West. 
 Evidently there were some people in that great 
 railroad center, Chicago, and in its tributaries, 
 who were familiar with the railroad business, 
 
FIEST LESSONS 27 
 
 and who saw possibilities in the future for such 
 stocks and bonds in spite of a disastrous past. 
 
 In the hull market which begem with Mc- 
 Kinley's first election in 1896, and ran for sev- 
 eral years, these Union Pacifies, Readings, Ai- 
 chisons and others which had been through re- 
 ceivership, reorganization and assessment, mul- 
 tiplied many times in value and furnished the 
 most striking lesson I had received so far. 
 
 It was plain that the most successful class 
 of our clients was the faj"-sighted investors 
 who held, or were often able to pick up, stocks 
 like Beading and others at less than the amount 
 of the cash assessment that had been paid in. 
 For these assessments they were usually given 
 preferred stocks, and when the market prices 
 of the latter eventually rose to around par, they 
 had their assessment money back and either a 
 recovery of their former losses or a big profit on 
 the common stocks which they had acquired at 
 the low figures. 
 
 I had a good many lessons in speculation 
 during my four years with that firm. It be- 
 ing a bull period there were numerous instances 
 of the development of small accounts into big 
 ones. Governor Flower was the bull leader at 
 
28 HOW I TBADE AND INVEST 
 
 the time and some of his stocks went from 
 small to big figures. He had a large follow- 
 ing, was perfectly honest with it and made a 
 great deal of money for the public until the 
 day he ate too many radishes at his fishii^ 
 club in Eiverhead, Long Island, and passed 
 away. Next morning most of those who had 
 made money on the bull side and had loaded 
 up with many times what they started with 
 lost the bulk of it at the opening. 
 
 One of my fellow clerks gave an illustration 
 of what could be done with a little money. 
 Starting with a small quantity of stock he 
 pyramided until he realized the sum of $3,000, 
 which looked very large to a thirty-doUar-a- 
 week clerk. I found that he was not basing his 
 judgment on the news, but on a study of the 
 fluctuations. His spedialties were American 
 Sugar and Brooklyn Rapid Transit. Out of 
 his profits he bought a home for himself, pay- 
 ing his three thousand dollars down, ' * so they 
 couldn't get it away frajm him." He kept 
 charts of the market and studied them intelli- 
 gently, just as many other people then known 
 as "chart fiends," were doing. 
 
 To keep charts in those days was looked upon 
 
FIRST LESSONS 29 
 
 as making one fit for the squirrels. In and 
 out of many brokerage oflSces there hustled 
 ■wild-eyed individuals with charts under their 
 arms, who would hold forth at length on double 
 tops and bottoms and show you just where 
 and how and why the "big fellows" were do- 
 ing this or that with their favorite stocks. 
 Yet none of them seemed to have much money. 
 Possibly it was because they followed a strict 
 set of rules and did not use much intelligence. 
 It seems that the charts told them exactly 
 what to do ! 
 
 Successful students of the market were few 
 but there were some ; and I began to get a line 
 on their methods of reasoning. I was surprised 
 to find that the market itself did give frequent 
 evidence of its future course and began to in- 
 vestigate along those lines. It did not inter- 
 fere with my study of intrinsic value and earn- 
 ing power but rather supplemented it, for I 
 often found that statistics and the action of the 
 market would aU point in the same direction. 
 
 So far as manipulation was concerned, it ap- 
 peared to have one of three objects : Mak- 
 ing the public buy, sell or keep out. And I 
 judged that the manipulators were endeavoring 
 
30 HOW I TEADE AND INVEST 
 
 to do the opposite. The market at that time 
 consisted of a comparatively few stocks, al- 
 though they were increasing. The dominant 
 trading factor was James R. Keene. The 
 Rockefeller party was active in some of its 
 stocks. Morgan had not yet "sprung" the 
 Steel Trust, Gates and Harriman were just 
 coming over the horizon, and the Gould sun 
 was about setting. It was a market which 
 could be easily stung by a group of new power- 
 ful interests working in harmony, but while 
 public participation and volume of trading'was 
 large, it was not to be compared with the mar- 
 kets of today in the number of participants 
 or the large number of stocks dealt in. 
 
 Having secured a new angle on the market 
 I began myself to try to judge it from its own 
 action, principally with regard to the general 
 trend. Dow's theory of price movement made 
 a considerable impression on me. I understood 
 clearly his theory that there were three dis- 
 tinct market movements going on simultane- 
 ously— (1) the long trend extending over a per- 
 iod of years ; (2) the thirty to sixty day swings ; 
 (3) the small swings running from one to sev- 
 
FIRST LESSONS 31 
 
 eral days. The value of these suggestions ap- 
 peared to be great when properly applied. 
 
 I thirsted for stock market and investment 
 knowledge but much to my regret there were 
 very few people who could assist me and very 
 little printed matter which was of any value 
 whatever. So I had to dig it out for myself, 
 the best I could. It was a slow process or 
 else I was not bright enough to absorb it 
 quickly, but I made progress, as I will show in 
 succeeding chapters. 
 
Makers of U. S Steel History 
 
 Four of the chief figures in the organization and administra- 
 tion of U. S. Steel Corporation whose shares have long 
 been among the most popular investment mediums. 
 
II 
 
 PROFITABLE EXPEEIENCES 
 
 HAVING accumulated enough money to go 
 into business for myself, I resigned from 
 the big wire house and began to deal in unlisted 
 securities. Later on, with some associates, I 
 formed a New York Stock Exchange firm, be- 
 came the mana^ng partner and for a number 
 of years continued in the stock brokerage busi- 
 ness. This put me in intimate touch with the 
 operations of customers, and a number of other 
 large operators. 
 
 I had not watched these traders for long be- 
 fore I reached three definite conclusions as to 
 trading methods. They were as follows : 
 
 (1) The majority of those who were bujdng 
 and selling securities were almost totally ig- 
 norant of the business. 
 
 (2) They were mentally lazy. They showed 
 no desire to increase their knowledge of the sub- 
 ject, but anybody who gave them tips or so- 
 
 33 
 
34 HOW I TEADE AND INVEST 
 
 called "information" held the greatest attrac- 
 tion for them. 
 
 (3) Very little educational literature was ob- 
 tainable, even if the trading element had been 
 inclined to devote thought and study to self 
 preparation. 
 
 It was astounding to see how men, shrewd, 
 careful and successful in their own business, 
 would come down to the Street and throw catt- 
 tion to the winds when they undertook to deal 
 m stocks or bonds. 
 
 I had reached a point where I was a fair 
 judge of the market ; and I did my level best to 
 aid them. As time went on, I did manage to 
 help many people make considerable money; 
 but I found that most of them wanted to lean 
 — ^not to learn. They just drifted along, guided 
 by hope of profit and pursued by fear of loss. 
 
 The clientele with which I came into contact 
 during those years gave me a clear idea of the 
 psychology of the average trader and investor, 
 and I found that as a rule his viewpoint of 
 the market was very much warped ; that he did, 
 most of the time, the opposite of what the large 
 and experienced operator would do, because 
 he judged by the surface conditions of the mar- 
 
PEOFITABLE EXPEBIENCES 35 
 
 ket and not by the highly important technical 
 conditions. A clear understanding of these 
 technical conditions, I saw, was most vital to 
 anyone who expected to operate successfully. 
 And so it came about that for a considerable 
 time I devoted most of my thought and atten- 
 
 ft 
 
 tion to the investment side of securities rather 
 than the speculative. 
 
 After founding, during the panic of 1907, 
 The Magazine of Wall Street, then known as 
 The Ticker, I began to receive numerous in- 
 quiries from people who were anxious to learn 
 more about the swings of the market, and I 
 also received contributions of articles from 
 those who had studied these subjects. Another 
 kind of communication contained a description 
 of methods more or less mechanical on which 
 the (Writers desired opinions. At that time 
 there was a wide interest in the search for a 
 method of operating which would do away with 
 fallible human judgment. And while this 
 seemed to be a species lof Taiabow-chasing, 
 there is no doubt that I was able to learn much 
 from a study of the different kinds of recorded 
 market actions. Some of the points which I 
 had acquired through the examination of num- 
 
36 HOW I TEADE AND INVEST 
 
 erous ideas submitted and some other points 
 which I studied out for myself greatly aided me 
 in judging the market. 
 
 The reason for this is that all graphs, charts, 
 diagrams, etc., which form pictures of the move- 
 ments of individual stocks or groups of securi- 
 ties, are but the concrete history of the impres- 
 sion of many minds upon the market. And my 
 object in studying along this line was not to 
 follow these indications blindly, but to see what 
 kind of mental operations caused them. By 
 thus reasoning out the good and bad points in 
 the psychology of the public I hoped to get at 
 the true method of operating. 
 
 So right here I would like to say a good 
 word for all forms of graphs which are apt to 
 be greatly abused and misused by people who 
 have never taken the trouble to investigate 
 their value. There is scarcely a business or 
 profession today that does not employ graphs 
 as indicators of conditions, operations, etc., in 
 thousands of different forms. What, therefore, 
 could be more logical than to adopt graphs as a 
 means of seeing and clarifying such a complex 
 proposition as the security market? 
 
 As time went on, my publication oiS5ce became 
 
PROFITABLE EXPERIENCES 37 
 
 the center of interest to a great number of 
 people who had tackled this problem from var- 
 ious angles, and in the examination of their 
 ideas and by the adoption of good and the elim- 
 ination of the bad points, I gradually formed a 
 fairly clear idea as to how a permanent success 
 might be established by one willing to devote 
 his time and attention to the matter, making 
 all else secondary. As demand arose from many 
 quarters for information on the subject of judg- 
 ing the market from its own action, I decided to 
 make a specialty of this subject, study it out 
 and write about it as I went along. The out- 
 come of this was the book, "Studies in Tape 
 Reading," which has since been reprinted in 
 many editions. And the principles therein 
 stated have not changed through all the vicis- 
 situdes of the market during the dozen years 
 which have elapsed since the book first appeared 
 in serial form in The Magazine of Wall Street. 
 Many people will say it is one thing to write 
 about a difficult proposition like the security 
 market, and quite einother to put your ideas into 
 practical operation, that is, to make money out 
 of them. Suffice it to say that, since I wrote 
 that book, I have made a very considerable 
 
38 HOW I TRADE AND INVEST 
 
 amount of money for myself and in the aggre- 
 gate millions of dollars for my subscribers by 
 applying the methods therein set forth, viz., 
 judging from the future course of the market 
 and of individual securities by their own ac- 
 tion. And I expect to keep on making, each 
 year, much more money than I spend, because 
 the principles in that book are absolutely sound 
 and practicable, as proven by the dollars de- 
 rived from the market thereby. 
 
 In "Studies in Tape Reading" I suggested 
 trading for daily profits with the object of 
 making a fractional profit over losses, expenses, 
 commissions, etc., on the average, per day. But 
 eventually I found that I could get much better 
 results by operating for the five, ten and twenty 
 point swings. Furthermore, I learned that to 
 operate in the latter way was to lessen the nerv- 
 ous strain occasioned by watching the tape every 
 minute of the day and carrying all the quota- 
 tions of the leading active stocks and their 
 previous action in my head. 
 
 I found that the real money was to be made 
 in the important swings running thirty to sixty 
 days on the average, in which accumulation or 
 distribution was clearly marked while the move- 
 
PROFITABLE EXPERIENCES 39 
 
 ment was in its preparatory stages. Experi- 
 ence showed that every well planned and well 
 executed campaign in the market had three 
 stages : 
 
 First, in the case of an upward movement, 
 the accumulation would appear and this might 
 run several weeks or months. 
 
 Next, would be the marking up stage, where 
 the stock was forced upward by either bullish 
 news or aggressive buying until it reached the 
 level where distribution could take place. 
 
 The third stage was that of distribution. 
 
 Operations for the decline would be the op- 
 posite of this cycle. 
 
 Very often I found a stock that was being 
 marked up would be driven far beyond the 
 point where a substantial and satisfactory profit 
 could be realized, but as large operators work 
 on an average buying and selling price rather 
 than on a definite figure, in such cases their dis- 
 tribution would take them on the way down. 
 For instance, if a stock was accumulated within 
 a range of from 50 to 60 and the objective aver- 
 age selling point was 80, the issue might be 
 driven up to par and then sold on the way 
 back to 70, so that 80 or better would be 
 
40 HOW I TRADE AND INVEST 
 
 the average price received for what was sold. 
 
 These points are explained so that the reader 
 may get an idea of how I worked out my prob- 
 lems, my object being to find out or reason out 
 what the large operator did and how he did it ; 
 then I could operate in the same way, and prob- 
 ably with greater success. I soajo the great ad- 
 vantage that lay in operating with the mental 
 attitude of the professional trader instead of the 
 attitude of the vmsophisticated outsider. 
 
 As previously stated, I first tested out my 
 theory by dealing in fractional lots of stocks. 
 My progress was often halted by unexpected 
 changes in the market, my own tendency to get 
 away from my principles, new developments 
 which caused me to revise many details, and 
 lastly, the necessity for a long series of trans- 
 actions which would give me a background of 
 experience in this particular way of dealing. 
 
 Before I was really successful, I had to prac- 
 tically rebuild my own trading character. One 
 of my greatest difficulties was impatience. Be- 
 ing of an active disposition I could not sit still 
 long enough to allow a big profit to accumulate. 
 In certain periods the brokers made more in 
 commissions than I made in profits. At other 
 
PEOFITABLE EXPERIENCES 41 
 
 times I allowed myself to be influenced by other 
 considerations rather than the action of the 
 market. But finally I overcame most of these 
 faults and began to reap a real benefit from all 
 the thought and self -training I had put into my 
 work. 
 
 Without going into aU the many details con- 
 nected with judging the market, which with long 
 practice resolved themselves into a sort of in- 
 tuition, as explained in "Studies in Tape Bead- 
 ing," it is enough to say that I have since been 
 successful in anticipating what were apparently 
 the turning points in the ten to twenty 
 point swings in the market. And as every 
 one with a knowledge of the market will under- 
 stand, success in this line consists in having a 
 greater aggregate profit over the year than the 
 total amount of losses, including commissions, 
 tax and interest charges. 
 
 I realize that people in general hold to the 
 illusion that any man who can make money in 
 the stock market should make it by the million. 
 The public seems to think that once you know 
 how to tap the money reservoir all you have to 
 do is let it run. No fallacy could be more mis- 
 leading. 
 
42 HOW I TEADE AND INVEST 
 
 It is true that a few large traders make spec- 
 tacular profits at times. But their losses are 
 usually in proportion, and these you never hear 
 of. Those who make millions risk millions — 
 often all they have on a single operation. And 
 they frequently go broke — a condition which I 
 never have experienced in the stock market, 
 simply because I have never allowed myself to 
 get into a vulnerable position. I have withstood 
 several panics without serious losses. 
 
 Making a whole lot of money all at once is not 
 my trading objective. I use a comparatively 
 small amount of money in trading — ^not over 
 five or ten per cent, of my loose capital — ^be- 
 cause I have no desire to spread myself out too 
 thin, or operate in sudh a way that any unex- 
 pected event will cripple me. I know that there 
 are a number of people who look upon profits 
 as a means of enlarging their market opera- 
 tions. My method is to pull down the profits 
 and invest them in safe income-paying securi- 
 ties, preferably those which have an oppor- 
 tunity to enhance in value. 
 
 There is a much greater satisfaction in opera- 
 ting with a small amount of money for various 
 reasons : It makes you more careful, because, 
 
PEOFITABLE EXPERIENCES 43 
 
 having set yourself to the task of realizing a 
 large profit on a limited amount of operating 
 capital, you plan your moves shrewdly and do 
 not take risks such as you would if operating 
 with more money. In the next place you feel 
 that you are risking very little to make consid- 
 erable. There is vastly more satisfaction in 
 making $10,000 on a $5,000 capital than in mak- 
 ing the same amount where $25,000 is employed. 
 The operations which have been the most 
 gratifying to me are those in which I h^ve 
 taken, at various times, $3,000 and put it into an 
 account in a broker's office where I could get the 
 right kind of service at a time I expected a move 
 of twelve or fifteen points in a certain security. 
 One of my favorite stocks in this respect has al- 
 ways been U. SL Steel with which I have probably 
 had greater success than any other issue. A 
 few years ago, when I was very busUy engaged 
 and could not watch the market all day, I used 
 to wait for U. S. Steel to get into position where 
 I expected such a sharp upward or downward 
 move and then I would buy (or sell) 300 shares, 
 placing a three point stop order for protection. 
 Every two points up I would buy another hun- 
 dred shares, protecting each additional lot with 
 
44 HOW I TRADE AND INVEST 
 
 a three-point stop. After the stock had risen 
 ahout ten points I would discontinue buying. 
 By that time I would have 800 shares. I would 
 take my profit on a further advance or raise the 
 stop order so that I was sure to have at least 
 several thousand dollars profit. 
 
 In the particular year that I mentioned above, 
 I did very little trading except for three such 
 campaigns in U. S. Steel, where not more than 
 $3,000 original margin was used in each cam- 
 paign, but from which my net profit was about 
 $20,000. This is what I call "good trading" 
 because it was done with very limited risk and 
 the profits were large in proportion to the 
 original amount. After the first campaign, the 
 profits were suflBcient to supply the capital for 
 the second and third operations. 
 
 Now this is not intended to convey that I, or 
 anyone else, can continue to trade indefinitely 
 with uninterrupted success. It merely illus- 
 trates one method of operating which has the 
 advantages described. It always reminds me 
 of a war-^ship which, instead of turning its 
 broadside to the enemy, shows oilly its bow and 
 thus makes much less of a target. Quite a num- 
 ber of men in Wall Street operate in this way. 
 
PROFITABLE EXPERIENCES 45 
 
 You don't hear about them, because they don't 
 happen to be publishing magazines or writing 
 books. As an old friend of mine told me a few 
 days ago, speaking of a former member of a 
 New York Stock Exchange firm: 
 
 "He is the most successful speculator I ever 
 met. He wiU watch a stock carefully and when 
 he judges by its action that it is ready for an 
 important move, he will buy perhaps 500 shares. 
 If it goes in his direction he will buy additional 
 lots every point up, but if it should decline two 
 or three points after he has bought it, he will 
 throw it out immediately on the ground that his 
 first judgment was wrong. He has made so 
 much money now that he takes up, and pays 
 for, ten-thousand-share lots of stock, which in 
 itself is evidence of what he has accomplished." 
 
 Before I go any further, let me say that not 
 every man is adapted to trading in stocks. In 
 fact, very few are fitted for the work if it is un- 
 dertaken as an art, a business, a profession, 
 or whatever else you wish to call it. One rea- 
 son is that most men have a commercial train- 
 ing, and this unfits them for dealing actively in 
 securities. One of the worst traders 1 ever 
 knew was a man who was highly successful. 
 
tt6 HOW I TRADE AND INVEST 
 
 in fact, had made a fortune, in real estate. His 
 method was to buy lots on the fringe of the city 
 and sell them out whenever he secured a sub- 
 stantial profit. He applied this method to the 
 stock market. The result was that he bought 
 in all kinds of markets, and very often had to 
 carry securities for months or years before he 
 could get out. He did not realize that the ten- 
 dency might change its course several times a 
 year, and there are cross currents and counter 
 currents which must be allowed for, which are 
 not present in real estate. 
 
 The merchant who buys his goods wholesale, 
 knowing that there is an established market 
 which will yield him perhaps a ten per cent, 
 profit after overhead and selling expenses, is 
 also handicapped when he comes to Wall Street. 
 One reason is that he is accustomed to buying 
 before he sells, whereas a man who is trading in 
 securities should he able, ready a/n,d willing to 
 sell short with as great facility as if buying for 
 long account. The merchant is familiar with 
 the market in his own field. He judges that 
 market by the supply and demand, and his pur- 
 chases are made accordingly ; but in Wall Street 
 he does not study supply and demand because it 
 
PROFITABLE EXPERIENCES 47 
 
 is a very technical subject and requires close at- 
 tention for a number of years before one can 
 master it. Even then, the best and most ex- 
 perienced traders have their bad times and their 
 unfortunate seasons when the character of the 
 market becomes too puzzling or for some reason 
 their judgment is not up to par. 
 
 The manufacturer sells short when he takes 
 orders for goods he has nat yet manufactured. 
 He sees orders for these goods piling up and 
 thereupon covers his short transactions by pur- 
 chasing the raw material and eventually manu- 
 facturing and delivering the finished goods ; but 
 when he enters the business of buying and sell- 
 ing securities, selling short is the last thing he 
 wants to do. 
 
 From this it will be seen that special training 
 is necessary if one is to avoid joining the ranks 
 of those who have met the enemy and have been 
 defeated. 
 
 Bear in mind that I am referring to the busi- 
 ness of active trading and not to the business 
 of investing successfully, which is an entirely 
 different proposition, as will be described later. 
 
 Some of the principles which I have found 
 to be advantageous in trading are as follows : 
 
48 HOW I TRADE AND INVEST 
 
 The Main Faotok Is the Tbend. If you 
 work in harmony with the trend of the market, 
 your- chances for success are three or four times 
 what they would be if you buck the trend. That 
 is, if you buy in a bull market, the trend will, 
 under ordinary circumstances, give you a 
 profit; but if the trend of the market is down- 
 ward, and you take a long position, the only way 
 you can get out is on the incidental rally. This 
 brief statement covers the point about as Well 
 as could be done in many chapters. 
 
 Risk Should Almost Invaelublt Be Limited. 
 Not only the experience of those whose trading I 
 have observed but my own experience proves 
 that whenever one departs from this general 
 principle he is inviting serious losses. The best 
 way to limit your risk is to form a habit of 
 placing two- or three-point stops behind any 
 trade which is made for the purpose of deriving 
 a profit from the fluctuations. Harriman con- 
 tended three-eights of a point, or one point, was 
 enough; but of course he was originally a trader 
 on the floor of the Stock Exchange. The most 
 successful traders have followed this rule and 
 its importance cannot be overestimated. 
 
PEOFITABLE EXPERIENCES 49 
 
 Anticipated Pbofits Should Be at Least 
 Three ob Four Times the Amount of the Eisk.. 
 It must be expected that a percentage of your 
 transactions will show a loss. The trader 
 should aim to have sirch large profits on his 
 successful trades that the losses and other ex- 
 penses will still leave him something to the 
 good. Profits can often be protected by mov- 
 ing stop orders up or by selling one-half of the 
 commitment in order to mark down the cost of 
 the r^naining half. Many articles on this sub- 
 ject have appeared in past volumes of The Mag- 
 asine of Wcdl Street. 
 
 One Should Be Able to Deal Freely on 
 Both Sides op the Market. Any one who is 
 unable to do this had better become an investot 
 instead of a trader, buying in panics or on big 
 declines such securities as appear to be selling 
 below their intrinsic value. 
 
 Dealings Should Be in the Active Stocks. 
 In order to make a profit, a stock must move. 
 A great deal of money and many opportunities 
 are lost by traders who keep themselves tied 
 up in stocks which are sluggish in their action. 
 In a commercial line you would not carry goods 
 
50 HOW I TRADE AND INVEST 
 
 on your shelves indefinitely-^you would keep 
 your stock moving. In trading, keep on moving 
 stocks ! 
 
 You Should Either Make a Business of 
 Trading or Else Not Try to Be a Trader. 
 You cannot be successful at trading any more 
 than you can be at mining, manufacturing, doc- 
 toring or anything else, unless you are trained 
 for it. And by "training" I do not mean an 
 occasional dab. Incidentally, unless you are 
 peculiarly adapted to the business you had bet- 
 ter become an intelligent investor instead of an 
 unintelligent trader. 
 
E. H. Harriman 
 
 One of his principles was "I am not interested in ten per cent. 
 I want sometliing that will arow." 
 
m 
 
 WHY I BUT CERTAIN STOCKS AND BONDS 
 
 THEEE is an old adage, "It is easier to 
 make money than to keep it." I not only 
 aim to make money, but to keep it and make it 
 grow. 
 
 The latter is often the biggest problem of all. 
 It involves something like defensive trench war- 
 fare. There is your back line of solid invest- 
 ments, bought principally for income and what- 
 ever increase in principal may result. In front 
 of these is your second line of defense against 
 poverty and old age, consisting of securities 
 bought for income and profit. Out in front is 
 your line of speculative securities which you 
 handle so as to gain further ground, without 
 losing your hold on your second and third line 
 of defenses. 
 
 In choosing the better grade of securities I 
 give serious consideration to such especially ad- 
 vantageous issues as equipment notes. These 
 
 61 
 
52 HOW I TRADE AND INVEST 
 
 are known as a "pawn broker's security" be- 
 cause they are generally issued to secure a pur- 
 chase of locomotives and cars on which a pay- 
 ment of ten or twenty per cent, is made by a 
 railroad company. The balance of the obliga- 
 tion is paid off in annual instalments covering 
 ten, fifteen or twenty years. As the obliga- 
 tion is thus annually reduced, the security for 
 the remaining equipment grows 'larger and 
 larger each year, in proportion to the indebted- 
 ness, so that toward the end of the equipment 
 trust period the amount of the security in the 
 shape of rolling stock increases to many hun- 
 dred per cent, of the amount remaining to be 
 paid. Equipment trusts are, therefore, to be re- 
 garded as prime investment mediums. 
 
 lu spite of the many difficulties surrounding 
 the construction and development of American 
 railroads, I believe there ig scarcely an in- 
 stance where equipment bonds have been de- 
 faulted upon. Such issues are therefore well 
 adapted to the final protection of one's invest- 
 ment stronghold. 
 
 Another line of income-bearing securities 
 which I frequently favor may be found in the 
 numerous issues of short term notes^ which are 
 
CERTAIN STOCKS AND BONDS 53 
 
 excellent mediums for funds that are being put 
 aside for specific purposes, and which will be 
 required on a definite date. I find that their 
 yield is often more liberal than one would ex- 
 pect, considering the character of the compa- 
 nies issuing these notes and the yield of their 
 other securities. Due to the vagaries of the in- 
 vestment market, I have often picked up bar- 
 gains in notes, especially those which were con- 
 vertible into other securities. But one must 
 be very careful in the selection of these, as any 
 question as to a company being able to meet its 
 obligations wiU come to the surface as the time 
 approaches for the maturity of its short term 
 notes. 
 
 When it comes to safe bond investments, I gen- 
 erally favor properties whose promise to pay is 
 absolutely sound, but whose security is beyond 
 question, and if possible I like, in addition, large 
 equities such as treasury assets, as in the case 
 of Union Pacific, oil lands, and other subsidiaries 
 as in the case of Southern Pacific, holdings in 
 affiliated railroad systems, as in the Pennsyl- 
 vania Eailroad treasury, etc. 
 
 My object in making money in securities is to 
 have more money to invest. When I make 
 
54 HOW I TRADE AND INVEST 
 
 money in the market, I don't look upon it is a 
 means of trading in a larger way, but I con- 
 sider the income that money will produce — ^not 
 only the immediate income, but what in addi- 
 tion might be yielded from the increase in the 
 principal if the original money is properly in- 
 vested. 
 
 Long ago, for the most part, I adopted Harri- 
 man's principle which was: "I am not inter- 
 ested in 10 per cent. I want something that will 
 grow." And so, in selecting securities, I try 
 in the main to pick out those which have not 
 small but great possibilities. 
 
 There are various kinds of investors. Some 
 want the highest grade bonds even though ther 
 income return is small. Others want preferred 
 stocks which yield from 6% to 8 per cent, and 
 which, unlike bonds, never come due, and pay 
 their dividends indefinitely, if properly selected! 
 Next come those investors who are willing to 
 buy the best class of common stocks in an en- 
 deavor not only to secure dividends but to see 
 their principal enhance in value, and are satis- 
 fied with a moderate profit. 
 
 With the major part of my available funds, I 
 
CEETAIN STOCKS AND BONDS 55 
 
 invest in a somewhat different way, realizing 
 that the number of years in which a man may 
 operate successfully is limited. I want to put 
 as much money as I can into investment chan- 
 nels where it will grow rapidly so that I can 
 put the increment to work again on the same 
 basis. 
 
 Being close to the seat of operations in the 
 financial district I see too many opportunities 
 for profitable investment and increase in prin- 
 cipal to allow any substantial amount of money 
 to remain idle. While I always have a certain 
 amount of money in high grade investments, I 
 have not reached the age or the stage where 
 I think more of income than of increase in prin- 
 cipal value. As I grow older, no doubt the pro- 
 portion of securities bought for income will in- 
 crease, but at age 46, as the insurance company 
 ies say, I consider that, in my particular case, it 
 is too early for me to develop into a chronic 
 coupon clipper. 
 
 High grade securities and coupons are, how- 
 ever, the proper medium for the majority of 
 those who read this book — emphatically for 
 those who are not experts in distinguishing 
 
56 HOW I TRADE AND INVEST 
 
 real investments and real opportunities. They 
 should remain in the income-only stage, so far 
 as most of their funds are concerned. 
 
 While there are seasons particularly advan- 
 tageous for certain operations in the security 
 market, and while these seasons may often seem 
 a long time in coming, one has only to look up 
 the record of the fluctuations in high grade 
 bonds to know that once in a great while they 
 are on the bargain counter. December, 1919, 
 was one of those times, and I was not blind 
 to the fact. It is seldom, indeed, that one can 
 secure the old line, railway bonds, safe beyond 
 question, at such prices as were obtainable then, 
 and with such a long term of years to maturity. 
 In the belief that my investor readers may be 
 interested in knowing what factors convinced 
 me that bonds were "too low" at that time, I 
 append an analysis of the financial situation 
 as I then wrote it, and which was published in 
 the columns of The Magazine of Wall Street. 
 
 "While it is always time to buy securities for 
 income only, when they can be had at a rate sat- 
 isfactory to the buyer, this appears to be a time 
 of times, and unless another world catacylsm 
 should occur, a duplicate of this situation may 
 
CERTAIN STOCKS AND BONDS 57 
 
 not be seen for another ten or twenty years. 
 
 "In former years the railroads were ahont 
 the only mediums for safe bond investments; 
 but we today have a large variety of industrial 
 and other kinds of mortgages which afford 
 equal if not greater safety, and in many cases a 
 larger net return. 
 
 ** These are times when a man is justified in 
 loading up with these high grade securities, that 
 is, buying twice as many as he wants to keep 
 permanently. This he can readily do by pur- 
 chasing and paying for only half of the quan- 
 tity he buys, carrying the securities in his bank, 
 and gradually paying off the balance out Of in- 
 come. It matters not whether this income 
 arises from these investments or from his busi- 
 ness or other outside sources. Any bank with 
 which you have dealt with will be glad to ex- 
 tend this accommodation; in fact, it will in- 
 crease the bank's respect for your judgment. 
 
 "The present time (December, 1919) affords 
 a rare opportunity. Such an operation should 
 yield not only a substantial profit on the extra 
 quantity which you now purchase, but this profit 
 applied to the reduction of the cost of the bal- 
 ance of the bonds which you now acquire will 
 
58 HOW I TRADE AND INVEST 
 
 so enhance the net income from the entire op- 
 eration that the opportunity should by no 
 means be overlooked, 
 
 "Never before have high grade bonds, legal 
 for savings banks in New York State, sold so 
 low as late in 1919. A glance over the list 
 shows that many leading issues are selling at 
 from ten to twenty-five points below their high 
 figures of two years ago. Take old line invest- 
 ments like Union Pacific 1st 4s, having twenty- 
 seven years to run, netting about 5.25% ; South- 
 ern Pacific Eef. 4s of 1955, netting 5,45% ; Nor- 
 folk & Western consolidated 4s, 1996, 5.23% ; 
 Louisville & Nashville gold 5s of 1937, 5.09% ; 
 Chicago & Northwestern general 3%s of 1987 
 netting 5.26% ; Burlington general 4s of 1958, 
 netting 5.43%. These are all bonds which will 
 recover sharply in price as soon as the money 
 situation definitely changes, and the limit of 
 foreign government emissions has been seen, 
 
 "The Union Pacific 4%) bonds of 1947, selling 
 at about 82, are around 18 points under their 
 market price of two years ago, and one only 
 has to await changed conditions to see a bond 
 of this type rise to its natural level. If this 
 should occur in three years, the average increase 
 
CERTAIN STOCKS AND BONDS 59 
 
 in value would be 6% per annum, which, added 
 to the nearly 5% current return on the invest- 
 ment should mean an annual return of about 
 11%. If such an advance should occupy five 
 years, the return would be 8%. These figures 
 spell opportunity." 
 
 One field which has attracted me has been 
 bank stocks, and the reasons were very clearly 
 set forth in a series of articles on this subject 
 appearing in The Magazine of Wall Street. 
 
 In selecting securities of banks and other fi- 
 nancial institutions, one is in the same position 
 as the person who is driving an automobile. He 
 has usually three speeds in his gear case. He 
 can travel slowly on the first set of gears, or a 
 little faster on the second set, or very fast on 
 "high." The institution which does an old 
 style banking business may be likened to the 
 first set of gears. It makes progress within 
 a certain radius, but when a bank takes on a 
 trust department, or a close affihation with a 
 trust company, making the two parts of one in- 
 stitution, it may be regarded as traveling on sec- 
 ond speed. But there is still another type of in- 
 stitution which includes both the above and em- 
 braces an additional function which in the finan- 
 
60 HOW I TKADE AND INVEST 
 
 cial district is a very advantageous one to the 
 stockholder. I refer to a bank which owns or 
 is a|aiiated with a ''Security Company" for the 
 purpose of underwriting and conducting syndi- 
 cate and investment security operations, which 
 are, of course, very profitable. 
 
 I have been buying stocks in a dozen or more 
 New York financial institutions. I put these in 
 the custody of a tru'st company, separate from 
 any other securities, so that dividends, rights, 
 and stock distributions would all be paid in to 
 this one account and reinvested in the same class 
 of securities. My observation has shown that 
 to secure the greatest benefit from bank stock 
 investments, one should not spend the income 
 derived therefrom, nor sell his rights, nor sell 
 any stock distributions that are given, because 
 these in time generate other melons of the same 
 sort, and this second generation gives birth td 
 successive series of children and grandchildren, 
 which eventually roll up a very substantial 
 amount of both income and principal. 
 
 In placiog these securities with the trust com- 
 pany for safekeeping and reinvestment, I told 
 the triist ofiScer of the institution that this ac- 
 count would be in debt most of the time, because 
 
CERTAIN STOCKS AND BONDS 61 
 
 I would buy ahead of the income and I would 
 expect the trust company to loan whatever 
 moneys were required for that purpose. 
 
 During the latter part of 1919 two of these 
 opportxmities developed: The Bankers Trust 
 Co. directors recommended an increase in the 
 capital stock from $15,000,000 to $20,000,000, the 
 new stock to be offered to shareholders at a 
 price of $100 per share. This is on the basis of 
 one share of new stock for every three shares 
 of old. Holding shares of Bankers Trust, 
 which cost in the neighborhood of $485 per 
 share, I was entitled to subscribe to new stock 
 at $100, which brought the average cost down to 
 about $389 per share. 
 
 In time these new shares will be produdng 
 other sto<^ dividends, rights, or cash dividends, 
 so that eventually I may have a considerable 
 amount of Bankers Trust Co. stock. By rein- 
 vestment of income in whatever form it is dis- 
 tributed, the cost of this Bankers Trust Co. 
 stock wiU be reduced to a very low figure. 
 
 Another case of this kind appeared not long 
 ago in the form of a notice sent to stockholders 
 of the Chase National Bank, which I pur- 
 chased at about $675 per share. Stockholders 
 
62 HOW I TRADE AND INVEST 
 
 were asked to vote on an increase in the capi- 
 tal stock of the bank from $10,000,000 to 
 $15,000,000, with a proportionate increase in the 
 shares of the Chase Securities Co., which is 
 affiliated with the bank. Holders were to be al- 
 lowed to subscribe to one new share of the 
 Bank stock and one new share of the Securities 
 Company, for each two old shares thereof held 
 prior to December 26, 1919. The subscription 
 price was $250 for one share of stock of the 
 Bank and one share of stock of the Securities 
 Co. I have no doubt that in time the value of all 
 these shares, viz., the new, which I have bought, 
 and the old which will sell ex-rights, will recover 
 to the price which I paid for the old stock, which 
 was $675 per share. This means that I have 
 faith not only in these and the other banking in- 
 stitutions in which I have become a stockholder, 
 but in the men behind them, and in the future 
 of New York City as the world's banking cen- 
 ter. 
 
 I estimate that the average return over a 
 period of years, allowing for rights, melons, 
 regular and extra cash distributions, etc., in the 
 leading issues is something over 12% per an- 
 num. At this rate, my investment should 
 
CERTAIN STOCKS AND BONDS 63 
 
 double itself in a period of something between 
 six and seven years, allowing for the reinvest- 
 ment of all dividends of every sort in the same 
 class of securities. 
 
 The small percentage of failures among bank- 
 ing institutions, now that they are under such 
 rigid control by the Federal authorities, miZ^e. 
 their securities adapted to the conservative in- 
 vestor who is looMng toward income enhance- 
 ment and safety. My own selection included a 
 larger proportion of shares in those institutions 
 which have security companies attached, be- 
 cause these combine two companies in one, and 
 in aU cases they are being conducted with highly 
 profitable results to the shareholders. 
 
 This taMng a sum of money and planting it 
 in a certain field without drawing down the in- 
 come, but with intent to profit by its growth, 
 may be followed out to whatever degee the in- 
 vestor desires. It may be begun with one share 
 of one bank stock, or any other kind of stock or 
 bond. It is an investment operation, but it is 
 undertaken for income and profit, not with the 
 idea of deriving or withdrawing that profit, but 
 to make it yield additional sums for investment. 
 It is a great deal like a savings bank account 
 
64 HOW I TRADE AND INVEST 
 
 for the man with a small amount of cash, I re- 
 membier how, with a great deal of pride, I 
 started my first savings account with a five dol- 
 lar bill (because the bank would not open an ac- 
 count for less), jand how much satisfaction I 
 derived from being able to add a few more fives 
 and tens. 
 
 The man or woman who is obliged to with- 
 draw his or her interest or, in case of a rainy 
 day, pull down part of the principal, will be 
 liandicapped in an operation of this sort, but 
 the object should be to make these deficiencies 
 up when the skies again dear and to keep ex- 
 penses within bounds so that the additions made 
 annually will rapidly increase the earning 
 power of the prindpal. 
 
IV 
 
 UNEARTHING PROFIT OPPORTUNITIES 
 
 WHEN I buy bonds and other high grade 
 securities for income and profit, I favor 
 those which for special reasons are well adapted 
 to my purpose. 
 
 First, I consider those which are selling below 
 their intrinsic value, based on character of se- 
 curity. In suxjh -a case I do not lay too much 
 stress on the interest return, although in some 
 cases it is large. The question of marketability 
 is important with me, however, because I pre- 
 fer issues that can be instantly turned into 
 cash. The reason for this is that always I de- 
 sire always to be in a position to take advantage 
 of a threatened panic or bargain opportunity, 
 and as I watch the market and the general situa- 
 tion very closely, I frequently detect signs of 
 trouble 'way in the distance and prepare for it. 
 
 In the case of certain 5% bonds which I hold, 
 these are well secured, earning a big surplus, 
 which for some reason or another is concealed. 
 
 65 
 
66 HOW I TRADE AND INVEST 
 
 Selling around 60, the income is very large if 
 figured to maturity, but in selecting this bond I 
 had my eye more on the probability that the 
 investment public will wake up to its real value 
 and mark its price up twenty or twenty-five 
 points within the next two or three years. In 
 case of an advance to 85 within three years, 
 there would be about 8%% profit per annuni, 
 to be added to the flat yield of the bond. Such 
 a 5% bond at 60, would net about 8%%, disre- 
 garding any re-investment of income. If, on 
 top of this, I realize another 8%% in three 
 years, the income plus profit would be 16%% 
 per annum. 
 
 A class of bond which I hold and always 
 favor, is the convertible. The advantages of 
 convertible bonds have been too often described 
 in jjast issues of The Magazine of Wall Street to 
 necessitate repetition here, but if one would 
 make 3, persistent study of these convertible is- 
 sues, he would find every year new opportuni- 
 ties for making growing ik'destments. What- 
 ever is a little conjplicated for. the' average in- 
 vestor is apt to be overlooked and' neglected. 
 To get the best results one should be familiar 
 with the technicalities of many kinds of con- 
 
PEOFIT OPPOETUNITIES 67 
 
 vertible bonds and the stipulations under which 
 they are issued.* In some cases it does require 
 some figuring to find out just what can be done 
 with these issues. 
 
 For my own investment I am seldom attracted 
 to convertible bonds solely from the standpoint 
 of income, but only when I see possibilities in 
 the securities into which they are convertible. 
 In 1918 I bought $100,000 of a certain converti- 
 ble bond because I saw great future possibilities 
 in the stock into which they were convertible at 
 par. At that time the stock was selling close 
 to the price of the bonds, viz., around 90. Ob- 
 servation of the action of the bonds during the 
 period of weakness in the stock convinced me 
 that the bonds would not decline very much even 
 if the stock were to break ten or fifteen points, 
 because the investment value of the bonds kept 
 them up at a level where the interest return to 
 the investor brought in buying enough to sustain 
 the market price. By purchasing the convert- 
 ible bonds I would have something that I need 
 not be concerned about, and I was sure that, 
 if the investment public realized the intrinsic 
 
 •These wiU be found in "Convertible Bonds," by Rollins, 
 price $3, net. 
 
68 HOW I TRADE AND INVEST 
 
 value in the stock, my convertible bonds would 
 follow the stock along up. 
 
 This is exactly what happened. Sometime 
 later the stock rose twenty-five points and the 
 bonds kept a little above it, until one day the 
 bonds were selling so much higher than the 
 stock that I sold the bonds and bought the stock 
 instead, thus marking down the cost of my 
 bonds by an amount representing the difference 
 between the price of the two securities. 
 
 This marking down the cost, by the way, is 
 a very important factor in making investments, 
 I keep it constantly in mind. Every investor 
 should remember that by selling a portion of his 
 holdings at a profit he is reducing the cost of 
 the balance. It is good practice. I will elab- 
 orate later. 
 
 Naturally, in dealing, as I do, in all kinds of 
 securities, there are quite a number of reasons 
 for my going into a etock. 
 
 in 1913 or 1914 I wrote a series on "Which 
 Kind of a Stock Is Best?" This was done as 
 much for my own information as for my sub- 
 scribers', and while I am on this subject I should 
 like to say that I take my own medicine. In 
 searching the security market I have a twin 
 
PROFIT OPPORTUNITIES 69 
 
 purpose, viz., to find investment opportunities 
 for my own money and to tell my subscribers 
 about them. I figure that what is good enough 
 for my subscribers is good enough for me. Ai 
 the same time I wish to say that, I make mis- 
 takes at times; so does everybody, no matter 
 how long he has been in the field. 
 
 My constant aim is to show my readers, di- 
 rectly or between the lines, how they may be 
 able to judge for themselves. As was written 
 by an author unknown to me : " There are men 
 who wiU take no initiative on their own respon- 
 sibility, who will undertake nothing without con- 
 sulting others as to the feasibility of the 
 schemes and plans they have in view. When a 
 man puts more confidence in another than in 
 himself he is boimd to lose all will power and 
 become a mere dependent, awaiting orders as to 
 the course of action. It is impossible for such 
 a man to get along in the world and make a suc- 
 cess of his own life. When opportunity comes 
 a,long he is afraid to seize it without asking his 
 neighbor's opinion. ' * 
 
 So what I and my staff try to do is to make 
 our readers think and plan and carry out their 
 campaign in the investment field just as they do 
 
70 HOW I TRADE AND INVEST 
 
 in their own business. This was one of my pur- 
 poses in Writing the series, "Which Kind of 
 a Stock is Best ? " As those articles progresised 
 they indicated that the chain store and mail or- 
 der stocks were, in many respects, better than 
 the other leading groups such as steel, copper, 
 railroad, telephone, etc., the principal reason 
 being that these companies were putting more 
 of their earnings back into their business than 
 any other single group. 
 
 And so I bought Sears, "Eoebuck & Co., be- 
 cause its history shows that every three or four 
 years a stock dividend is declared. This has 
 been the practice of the company for many 
 years. By this method Sears, Eoebuck & Co. 
 keep the cash in their business and use it for 
 healthy and profitable expansion, The stock- 
 holder who owns a hundred shares is given 
 twenty-five or thirty-three shares of new stock, 
 which adds to his income without cutting down 
 the working capital of his company. This 
 twenty-five or thirty-three shares additional 
 will, in ensuing years, probably yield another 
 six or eleven shares and these, in turn, will 
 eventually breed other little stock dividends, 
 all of which, added to the original shares, should 
 
PROFIT OPPORTUNITIES 71 
 
 in time double the quantity of an investor's 
 holdings, without any further investment of 
 cash by him. 
 
 The purchase of a stock like Delaware, Lacka- 
 wanna & Western Railroad is one which I made 
 for an entirely different reason. Its dividend 
 yield did not attract me, but having been over 
 the property I realized what an enormous 
 amount had been expended on improvements of 
 far-reaching importance. One official is quoted 
 as saying that they have invested, in road and 
 and equipment, money for expenditures that 
 could easily have been put off for twenty or 
 twenty-five years. You may say, "That is a 
 strange reason for investing in a railroad stock 
 when the railroad situation is so unfavorable." 
 But let me tell you that when you buy into a 
 company like that, with enormous equities bur- 
 ied as a result of successful operations in the 
 past, you will eventually see a still greater re- 
 turn, because one of these days the railroads, in- 
 cluding Lackawanna, will again come into their 
 own. 
 
 Lackawanna, at the end of 1918, had a profit 
 and loss surplus of $57,247,984 against a total 
 outstanding stock of $42,277,000. In June, 
 
72 HOW I TEADE AND INVEST 
 
 1909, it declared a caSli dividend of 50% out 
 of its surplus, and a stoek dividend of 15%. 
 In November, 1911, it declared a stock dividend 
 of 35%, payable in stock of tbe Lackawanna 
 railroad of New Jersey. The system is only 
 980 miles long, but it is the Croesus among rail- 
 roads. Fi-om 1906 to the present time, 160 is 
 the lowest it has sold. In May, 1919 it touched 
 217. Hence, when in October, 1919, I saw it 
 decline to around 180 on a threatened coal 
 strike, I considered it cheap, and if it should 
 decline further I would regard it as a greater 
 bargain. 
 
 Wall Street history shows that securities 
 more often reach their low point when some dan- 
 ger or disaster is threatened, than upon the ac- 
 tual occurrence of these incidents, and the rea- 
 son the low point is made just prior to, or at 
 the time the event actually occurs, is : By that 
 time every one who is subject to fear-of-what- 
 will-happen, has sold out. When the thing does 
 happen or is prevented, there is no more liqui- 
 dation, and the price rallies on the short inter- 
 est, or else on the investment demand created 
 by the improved situation. 
 
 It was for these reasons that I bought Dela- 
 
PEOFIT OPPORTUNITIES 73 
 
 ware, Lackawanna & Western railroad Com- 
 pany's stock. 
 
 Speaking of high priced stocks like Sears, 
 Roebuck, Lackawanna and others, there is a 
 very important reason why these are cheaper 
 than the very low-priced stocks. Many of the 
 shares selling in the 10 's, 20 's and 30 's repre- 
 sent very little earning power. In many cases 
 only one or two per cent, is being earned on the 
 latter issues, with little or no prospect of divi- 
 dends. Stocks paying 5 to 8% range from 
 $60 to $100 per share. On this basis a stock 
 paying 1% could be worth from $12 to $20. 
 This would indicate that a non-dividend payer 
 is worth somewhere between nothing and $12. 
 Everything above that is hope capitalized. 
 
 Yet we have seen many non-dividend payers 
 sell at all sorts of prices before their initial 
 declaration. American Can, for example, sold 
 not long ago at 68 Avithout ever having paid a 
 dividend. Brooklyn Rapid Transit, in 1899, 
 sold, as a non-dividend payer, at 137; it did 
 not make its first dividend disbursement for ten 
 years after that. 
 
 But take the stocks selling at $200 to $400 
 per share and upward, and in normal times 
 
74 HOW" I TRADE AND INVEST 
 
 you generally find intrinsic values, future pros- 
 pects, or earning power, or all combined, whieli 
 justify these prices and more. Most of the 
 very high priced stocks have hidden equities 
 which may not benefit the stockholders right 
 away, but which are working for them just the 
 same. These factors may not interest the man 
 who is long today and short tomorrow, but 
 they do interest the permanent investor who 
 has his eye on the development of the corpo- 
 ration and the future growth of the various in- 
 dustries and the country in general. That is 
 why I favor high-priced stocks rather than very 
 low-priced speculative issues. 
 
SOME EXPERIENCES IN MINING STOCKS 
 
 THE investor who always chooses securities 
 of companies who constantly put money 
 back into their properties, will scarcely ever go 
 wrong, but he must be constantly on the alert to 
 notice any change in policy due to altered con- 
 ditions, or to control of the property getting into 
 other hands. The New York, New Haven & 
 Hartford Eailroad was formerly an example of 
 progressive and conservative management and 
 for many decades was considered a high grade 
 investment. But the time came when a policy of 
 expansion brought the New Haven to grief. Of 
 this there were many signs, especially when the 
 persistent character of the liquidation indicated 
 that something was wrong. 
 
 Carnegie said, "Put all your eggs in one bas- 
 ket and watch the basket." I would distribute 
 my eggs and watch all of the baskets. 
 
 Never get married to a security. You may 
 
 75 
 
V6 HOW I TRADE AND INVEST 
 
 have it salted down, but there is no reason why 
 you shouldn't freshen up your list every once 
 in a while by going over and carefully consider- 
 ing what you hold and whether something else 
 wouldn't work to better advantage for you. I 
 find I get best results by considering each in- 
 vestment a separate little business enterprise. 
 When I buy a security I figure that while as a 
 bondholder I am a creditor and my money is 
 secured this is not true when I become a stock- 
 holder. That makes me a partner in the enter- 
 prise and as such I want to be a live partner, 
 not a dead one ; for if I don't look after my own 
 interests nobody else will. 
 
 That explains one reason why I like to be 
 associated in partnership with people who are 
 high class in every respect^ — ^because I know 
 that they are not lying awake nights planning 
 ways to do me or the other stockholders out of 
 our money. Possibly no corporation head is 
 beyond criticism, but anyone who puts his dol- 
 lars into corporations like U. S. Steel, Bethle- 
 helh Steel, General Motors, General Electric 
 and other leaders in industry and finance may 
 rest assured that these companies are being run 
 by the highest type of industrial captains who 
 
MINING STOCKS 77 
 
 are intent upon maJdng their enterprises profit- 
 able to the hundreds of thousands of big and 
 little stockholders. 
 
 "Gioose your company" is therefore a good 
 precept for the investor. 
 
 There used to be a gang of highwaymen 
 operating here in the Street and using the lead- 
 ing railroad and industrial shares as the scis- 
 sors by which they parted the public from its 
 money, but that day is rapidly passing. Lead- 
 ers in finance learned long ago that they could 
 make more money by the square deal than in 
 any other manner. Nevertheless, I find that 
 it jxays to be sceptical until you are convinced 
 by the past record of those in the management 
 that they are working in your interest and not 
 in their own. 
 
 For my own benefit, as well as that of every 
 reader of The Magazine of Wall Street, I 
 am investigating these essential factors more 
 than ever before. It is not enough for one to 
 know that a certain development is indicated by 
 the surface facts and conditions — ^I want to get 
 down into the root of things and find out why. 
 For this reason I employ investigators, lawyers, 
 mining and oil engineers. I send people to 
 
78 HOW I TRADE AND INVEST 
 
 different parts of the country to get the local 
 color and all the angles on a proposition. 
 
 After employing one engineer I sometimes 
 send another to check him up. It might cost a 
 few thousand dollars, but when you are put- 
 ting real money into an enterprise you cannot 
 be too sure, nor investigate too thoroughly. 
 Not long ago I had two mining enterprises put 
 up to me, which on a cursory examination 
 looked good. It cost me two thousand dollars 
 to have these properties examined, and on the 
 engineer's reports I turned them down. In one 
 case the mine has turned out better than was 
 first represented to me. Either or both of 
 these properties might develop into big mining 
 enterprises, but taking all the facts into con- 
 sideration I concluded they were not good 
 enough for me to invest in. 
 
 While an engineer's report is by no means 
 the last word on a property, it is ^ hundred 
 tiines better to have an expert opinion than to 
 take your own or some other layman's view; 
 yet the peculiar part of mining is that even 
 though the most eminent engineers may give 
 an adverse report on a property, it may eventr 
 ually fool them. 
 
MINING STOCKS 79 
 
 Mining has a great fascination for me. In 
 fact, what came out of the ground was always 
 of peculiar interest to numerous members of 
 the Wyckoff family. The original Wyckoff, 
 after landing in New York in the early sixteen 
 hundreds, had charge of Peter Stuyvesant's 
 estate, which was located in downtown New 
 York, where the Hudson Terminal Building 
 now stands. His descendant, my grandfather, 
 who organized the Hanover Fire Insurance Co., 
 and was one of the original interests in the 
 Hanover National Bank, was also deeply inter- 
 ested in mining. He invented a separation proc- 
 ess back in the fifties and successfully mined 
 gold in the State of Virginia before and during 
 the Civil War near where the Battle of the 
 Wilderness was fought. 
 
 If I had my business career to plan over 
 again, I would be inclined to faVor mining en- 
 gineering, for it is an interesting profession; 
 but in visiting numerous mining properties and 
 watching the methods of engineers and the diffi- 
 cult conditions which often prevail in the dif- 
 ferent mines, I can readily see how Old Mother 
 Earth can fool the best of them. For that 
 reason I never go into a mining enterprise un- 
 
80 HOW I TRADE AND INVEST 
 
 less I am prepared to lose every cent I put 
 into it. 
 
 But there are many ways in which even a 
 layman can check up such an imposing person 
 as the mining engineer. I have nmde consider- 
 able money in mining stocks, and I expect to 
 make a great deal more because I have learned 
 a lot thus far and will use what knowledge I 
 have to better advantage in the future. 
 
 First of all, I want to know who are the in- 
 terests behind the mine — ^whose dollars are 
 alongside of mine ? Have they a record for suc- 
 cessfully developing other mining enterprises? 
 What mistakes have they made? Were they 
 fooled themselves or did they fool the stock- 
 holders — ^which or both? Along what line is 
 the development work now proceeding? Is the 
 company properly financed? What is the char- 
 acter and reputation of the engineer who is 
 guiding the development work? Is the metal 
 or mineral which they are producing such that 
 an advantageous market is afforded now and 
 at all times? If it is a gold, silver or copper 
 mine, what is the outlook for those metals? 
 Are future conditions so shaping themselves 
 that the mine can be regarded as more or less 
 
MINING STOCKS 81 
 
 of a manufactaring and therefore an invest- 
 ment propoeition? Is the nature of the ore 
 such that it will peter out within a few years 
 or is there a certain deposit of ascertainable 
 value which can be diamond-driUed and its 
 value estimated t Under these conditions, what 
 is the proibable life of the mine and the esti- 
 mated profit per share during that period? 
 These and dozens of other questions are what 
 I ask myself and others before putting my 
 money into a property. 
 
 Some mines are highly speculative ; some are 
 at or approaching the investment stage. My 
 problem is to get aboard the best of them before 
 they get to a stage where the cr-eam is aU off. 
 In other words, I want some of the cream, and 
 in order to- get it I frequently have to go in 
 early and sit in for a long time before the skim- 
 ming process can be accomplished. 
 
 Sometimes I go into a mining stock in order 
 to derive a profit from the fluctuations in the 
 market price, and other times to get my profit 
 out of the ground. In order to illustrate this 
 point I will explain an operation in Magma 
 Copper, which stock I have held in substantial 
 quantity for over four years. 
 
82 HOW I TRADE AND INVEST 
 
 I was coming' downtown one- day when a 
 friend whom I met told me there was "some- 
 thing doing" in Magma, and suggested that I 
 watch it. I did watch it, and saw that careful 
 buying was proceeding. (I always lay more 
 stress on the action of the market than on what 
 anybody says.) As' I remember, the stock or- 
 iginally came out at about $12 per share, rose 
 to $18, then sold off to around $15. When he 
 told me this it was up to $20, indicating that 
 new influences were at work. 
 
 I decided to buy 200 shares and await further 
 developments. The price hung around the 
 same figure for a day or two, when suddenly my 
 broker called me up and said Magma was 21 
 bid, whereupon I immediately gave him an 
 order to buy 500 shares at the market. He had 
 to pay 22 for some of it. I then bought another 
 500 shares, which cost me a point or so higher. 
 As I always like to buy something that is "hard 
 to purchase," the action of this stock pleased 
 me very much, especially as it closed that night 
 around 28 or 29. 
 
 Then I set out to find what it was all about, 
 and I learned that the character of the ore in 
 Magma had been discovered to be such that if 
 it was present in any great quantity the mine 
 
MINING STOCKS 83 
 
 would be one of the most important in this 
 country, for insiders would then consider it 
 worth $200 per share. So I told my friends 
 about it. 
 
 No doubt the bucket shops were heavily short 
 of this stock, because when the urgent buying 
 continued, the price rose rapidly, until in about 
 three weeks it sold at 69, and I had about 
 $55,000 profit on my 1,200 shares. 
 
 Did I take this profit! I did not. I did not 
 go into it for that amount of money. Have I 
 been joshed about not taking it during the time 
 the stock has wiggled back and forth between 25 
 and 55 for the last four years ? I have. Why 
 did I not take it ? I'll tell you : Because when 
 I bought that stock I resolved that more money 
 was to be made out of the mine than out of the 
 fluctuations — ^unless someone was lying. And 
 following my usual resolution to be prepared 
 for the loss of whatever I put into any mine, 
 I made up my mind to sit with my $23,000 in- 
 vestment in Magma until it proved to be either 
 a fake or a bonanza. 
 
 It has proved to be a bonanza, and although 
 the stock is today selling for only one-half of 
 its high price of 69, I not only have the same 
 
84 HOW I TEADE AND INVEST 
 
 opinion of its future as was indicated in 1915, 
 but I have many, many more reasons, for be- 
 lieving in the soundness of the enterprise. 
 
 Magma Copper Company is capitalized at 
 $1,500,000 authorized, and $1,200,000 outstand- 
 ing stock of $5 par value. There being only 
 240,000 shares, a price of 35 represents a mar- 
 ket value of $8,400,000. The leading interest 
 is Col. Wilzam B. Thompson, who, in the last 
 twelve or fifteen years, has made more millions 
 in mining securities than any other man in 
 Wall Street. 
 
 Ever since the real value of the property was 
 discovered Mr. Thompson and his friends have 
 been steadily accumulating Magma, until now, 
 out of the 240,000 shares, there are not more 
 than 20,000 shares in the hands of the p^blic. 
 How do I know this ? Because I have gone to 
 very great trouble and expense to check it up 
 from various angles. I am not taking any- 
 body's word; I have igot at the facts, not only 
 from a Wall Street point of view. A few 
 months ago I visited the property, and with my 
 mining engineer went down to the 1,400-foot 
 level. I saw 40% to 60% bornite on all sides 
 of me in some of the tunnels and cross-cuts. 
 
MINING STOCKS 85 
 
 The property is being developed on a tremen- 
 dous scale, and now that its new shaft has been 
 completed, it is ready for quantity production. 
 Its silver and gold values so reduce the cost of 
 its copper that it is one of the lowest priced 
 producers in this country today. And down 
 below there is a world of ore. 
 
 Those who know Colonel Thompson best say 
 he wiU never sell his Magma. For my part, I 
 intend to wait until I see him start to distribute, 
 and then they can have mine. 
 
 Carping critics will say, "He's trying to 
 boost Magma, so he can sell it." Let them 
 carp. I don't care whether anyone who reads 
 this buys Magma or not. It makes no differ- 
 ence either to Colonel Thompson, to me, or to 
 my friends and subscribers who have bought 
 the stock on the strength of what they have 
 read in The Magazine, and who hold most of the 
 20,000 shares to which I have referred. All I 
 wish to say to them is : Hold it, and you won't 
 be sorry. As for professional parasites and 
 self-appointed critics, let me call their atten- 
 tion to the fact that I talk, write, investigate, 
 trade and invest in nearly all securities on 
 the New York Stock Exchange and outside at 
 
86 HOW I TRADE AND INVEST 
 
 one time or another. Hence, criticisms may as 
 well be prepared in advance and arranged al- 
 phabetically for easy and prompt access when 
 required. 
 
 This experience in Magma illustrates the ad- 
 vantage of thoroughly investigating and then 
 sticking to your holdings like grim death, or 
 until something occurs which, for a definite 
 reason, causes you to change your position. I 
 do not claim that the paper profit in Magma 
 thus far is any criterion, but I wish to empha- 
 size the importance of making a resolution in 
 connection with investment or speculative trans- 
 actions and basing that resolution on sound 
 premises — ^making of them a sort of statistical 
 rock upon which you may place your feet and 
 stand there indefinitely. 
 
 Lots of people have said, "Why didn't you 
 sell out and buy back cheaper?" Personally, 
 I have never made any money by trading back- 
 ward, by which I refer to the hind-sight which 
 is so frequently flourished in Wall Street as an 
 indication that the flourisher is blessed with an 
 acute foresight. 
 
 Had I sold at the high price, I could of course 
 have bought back on a scale down, or a lower 
 
MINING STOCKS 87 
 
 figure, then re-sold and re-bought, but as I have 
 said, I was not in that kind of an operation, al- 
 though it took considerable strength of pur- 
 pose to resist at times. Ore in the ground, 
 when combined with first-class management, 
 ample capital and big personal commitments 
 on the part of those who are running the prop- 
 erty, is about as safe as money in the bank; 
 but it must be the right kind of ore and in such 
 quantity that it will yield a very large return 
 in proportion to the orginal investment. 
 
 Elsewhere the reader wiU find reference to 
 the difficulty in waiting for a big profit, but in 
 the main people have less trouble with their 
 patience when they face a large loss. There 
 is one way in which most of this difficulty can 
 be overcome, and that is by carefully assemb- 
 ling the facts when you enter a commitment and 
 continually checking up all along the line for 
 the entire time that you hold it. There is no 
 need for guess-work, if one will take the trouble. 
 It is merely a question of how much labor and 
 expense you are willing to go to in order to 
 make your investment .successful. 
 
 We succeed in proportion to the amount of 
 energy and enterprise we use in going after 
 
88 HOW I TRADE AND INVEST 
 
 results. Success is not for the man who is 
 willing to sit down and wait for something to 
 fall into his lap. 
 
 It is poor policy, I find, to wait for Oppor- 
 tunity to knock at your door, I train my ear 
 so that I can hear Opportunity coming down 
 the street long before it reaches my door. 
 When Opportunity knocks, I try to reach out, 
 grab Opportunity by the collar and yank it in. 
 
John D. Rockefeller 
 
 Whose fortune of nearly one billion dollars represents invest- 
 ments, for the greater part, in the necessities or near- 
 necessities of life. 
 
VI 
 
 THE FUNDAMENTALS OF SUCCESSFUL INVESTING 
 
 ONE of the most important considerations 
 when making an investment is to under- 
 stand the nature and condition of the industry 
 which that security represents. Look over the 
 mediums which John D. Rockefeller and others 
 of his family select, and you will find that they 
 are mostly in the necessities of life — oil, gas, 
 food or other near necessities, such as iron, 
 steel, harvesting machinery, etc. These are 
 branches of endeavor in which there is an al- 
 ready created and continual demand — ^human 
 need of fuel, light, eatables, or materials neces- 
 sary to produce them. It is a good point to 
 bear in mind. 
 
 As I get deeper and deeper into this prob- 
 lem of making money in securities, and then 
 making the securities make more money, new 
 avenues for thought, research and investiga- 
 
 89 
 
90 HOW I TRADE AND INVEST 
 
 tion are constantly developing. Of late I have 
 been more than ever impressed with the impor- 
 tance of understanding the present condition 
 and future tendency of the industries repre- 
 sented by the multitudinous corporations whose 
 shares are listed or unlisted in New York and 
 elsewhere. It was for this reason that I estab- 
 lished in The Magazine of Wall Street a depart- 
 ment known as Trade Tendencies. This fea- 
 ture is worthy of careful study. 
 
 While in former years I usually began with 
 a consideration of the trend of the market, and 
 then passed to the choice of security, I now line 
 the factors up in the following order: 
 
 (1) Long trend of the market. 
 
 (2) Nature* and tendency of the industry. 
 
 (3) Trend of the selected company's affairs 
 (toward .improvement or contrary). 
 
 (4) Character and reputation of the man- 
 agement. 
 
 (5) Financial position and earning power. 
 
 (6) Position in relation to the intermediate, 
 i. e., the thirty to sixty-day swings. 
 
 WTien all of the above prove up to my satis- 
 faction I feel safe in making an investment. 
 
SUCCESSFUL INVESTING 91 
 
 Of course, there are other considerations, but 
 these are the most important. 
 
 Practically everyone agrees, and I have 
 proved in another series of articles, how vitally 
 important it is to know the long trend of the 
 market. This is the compass by which all 
 courses should be steered. It is so fundamental 
 that there is Kttle ground for discussion, but I 
 may say that it is one of the main points in 
 successful investment. The reason is that even 
 when a purchase is not well-timed, it is likely 
 to show a profit at sometime or other if the 
 broad general tendency of prices be upward. 
 Even poor weak stocks advance to some extent 
 in a buU market. On the contrary, if a person 
 buys a stock in a bear market, he is likely to 
 have to carry it a very long while. If it be in 
 a weak financial position, he may have to see 
 it through a receivership, or he may decide to 
 seU out at a big loss in order to save what 
 little remains. From this it will be seen how 
 important is knowledge of the long trend. 
 
 Suppose I have decided that the automobile 
 industry is in a very sound, prosperous and 
 promising condition, and I am considering an 
 investment in one of the best of the automobile 
 
92 HOW I TRADE AND INVEST 
 
 companies' shares. I would not feel justified 
 in making this investment unless satisfied that 
 the long trend of the market is upward. The 
 action of the market discounts the business 
 situation six months to a year in advance ; prices 
 of stocks point farther ahead than any individ- 
 ual can see, and because these prices represent 
 the combined or composite opinion of the mil- 
 lions of people who are dealing in securities. 
 They express themselves by their purchases and 
 sales ; hence a study of the tendency of the gen- 
 eral market and of individual stocks is a study 
 of the minds of men. 
 
 Therefore, when I decide that the automobile 
 industry is in a favorable position, and that 
 the long trend of the market is upward, I set 
 about to select the company engaged in that 
 industry; then I determine (a) whether the 
 tendency of its business is toward improvement 
 or to the contrary; (b) character and reputa- 
 tion of the management; (c) financial position 
 and earning power ; (d) position of the stock or 
 bond in relation to the general market and its 
 position in the intermediate swings (if it be a 
 stock) represented by the thirty to sixty-day 
 movements in prices. 
 
SUCCESSFUL INVESTING 93 
 
 It is not claimed that I go througli any set 
 formulas, but this is the general plan of rea- 
 soning which I follow, and which, through long 
 association with the various kinds of market 
 securities, financial statements, management, 
 and periodical swings in prices has become al- 
 most instinctive, so that it takes me only a 
 short time to make up my mind that a propo- 
 sition measures up to my requirements. 
 
 At the beginning, of course, I had to sit down 
 like anybody else and pore over a mass of data 
 and statistics and look up records just as a 
 lawyer, doctor, or anyone else has to do when 
 he first begins to practice. But trading and 
 investing is like any other pursuit — ^the longer 
 you stay at it the more tedbnique you acquire, 
 and anybody who thinks he knows of a short- 
 cut that wiU not involve "sweat of the brow" 
 is sadly mistaken. 
 
 Pertaining to the matter of condition and 
 outlook for the industry in which I might be 
 considering a venture, I want to show how it 
 should take precedence over many other factors 
 which are included in the examination of a con- 
 templated investment. When I first came down 
 to Wall Street, there was practically only one 
 
94 HOW I TRADE AND INVEST 
 
 industry represented on the New York Stock 
 Exchange — that of railroading. Everything re- 
 volved around the state of the crops, because 
 wheat, corn, oats and other crops were the 
 country's mainstay, and most of the speculative 
 campaigns by large operators like Gould, 
 Keene, Philip Armour, Deacon White and 
 others, started with the crop outlook as the 
 base. 
 
 That condition has changed. We have many 
 hundreds of industries represented by the listed 
 and unlisted securities that are now freely dealt 
 in by investors, and this list is being added to 
 every week. So, while the railroad stocks are 
 still a factor, there are more oils than rails 
 and a great many more motors than there used 
 to be. All these groups are subject to various 
 influences which affect their respective indus- 
 tries, and in many cases their industries are so 
 intertwined that prosperity or depression in 
 some is bound to bring about a similar condition 
 in others. 
 
 The automobile industry is a striking example 
 of this. If, as one high official has stated, 
 there is a latent demand for two million 
 automobiles, it means that there exists a like 
 
SUCCESSFUL INVESTING 95 
 
 possibility of expansion in the rubber tire, steel 
 and oil industries. Another instance is found 
 in the rails. The roads having been handed 
 back to their owners, once their financial posi- 
 tion and earning power is assured, there will im- 
 mediately spring up an unprecedented demand 
 for railway equipment. This in turn would 
 favorably affect the steel industry, because the 
 railroads are such very large consumers of 
 rails and other equipment requiring the use 
 of steel. 
 
 Then comes the secondary consideration of 
 the effect of prosperity in these lines upon 
 other industries. Included in automobile man- 
 ufacture must be literally hundreds of allied 
 lines such as concerns making bodies, tops, 
 radiators, motors, wheels, etc., now that the 
 indirect effect of a prosperous condition in the 
 automobile trade is disseminated through 
 thousands of different channels. 
 
 The two factors above named have a still 
 greater influence upon the spending power of 
 the millions whose earnings are kept at a high 
 level by reason of the demand for labor and 
 materials, and what is known as the spending 
 power of the public runs into thousands of trade 
 
96 HOW I TRADE AND INVEST 
 
 avenues, resulting in a great stimulation of all 
 lines of industry. 
 
 Perhaps I have got away from my subject 
 a little, but it is interesting to follow a thought 
 towards its logical conclusion. 
 
 The above condition therefore brings about, 
 directly and indirectly, a stimulation of various 
 lines, while in other industries, working under 
 adverse conditions, the effect is contrary; hence 
 we must conclude that there are numerous ten- 
 dencies going on in the market aU the time, 
 some being reflected by higher prices for these 
 groups of securities, while prices of other 
 groups are declining. This will make clear 
 why it is so important to study the various lines 
 of business in order to choose, by a process of 
 elimination, those which are likely to show the 
 best results, even if conditions in other lines 
 are somewhat unfavorable. I have seen cases 
 where the progress of a certain industry more 
 than offset the declining tendency of the general 
 market, resulting in certain stocks going up 
 while most others were going steadily down- 
 ward. fWhen I can make an investment in 
 which the condition of that trade is ideal, and 
 
SUCCESSFUL INVESTING 97 
 
 when the long trend of the market is strongly 
 upward, with all the above-named factors sat- 
 isfactory, I feel rather certain that the outcome 
 will be profitable. 
 
 These points being settled, the next step is 
 to decide what stock in that industry is in the 
 best position as regards earning power and 
 financial strength, character and reputation of 
 management, etc. From an investment stand- 
 point the above factors should dominate, but 
 from a speculative standpoint, the matter of 
 technical position would have almost equal 
 weight. 
 
 In selecting a stock for income and profit, or 
 choosing one which I buy primarily for profit, 
 I always like to choose the one which will make 
 the greatest amount of money for me in the 
 shortest length of time. This is where a study 
 of technical position comes in. A certain stock 
 may look good to me because it has risen from 
 100 to 150 and then reacted under an assault 
 by the bears (but without any especial change 
 in its fundamental position, outlook or earning 
 power) to a price of 110. If it shows at that 
 level strong resistance to pressure, I would 
 
98 HOW I TRADE AND INVEST 
 
 much rather buy it than some stock which was 
 still in the range of distribution after being 
 marked up 40 or 50 points and made very ac- 
 tive around the top. These are but simple 
 examples of a study of the action of different 
 stocks and some of my reasons for choos- 
 ing one rather than the other after giving 
 due weight to all the other factors in the 
 case. 
 
 It is strange how people will continue to ig- 
 nore the important elements just referred to. 
 Probably it is because they do not understand 
 the operations that underlie the fluctuations in 
 securities and which are responsible for many 
 of their movements. I refer to the campaigns 
 mapped out and carried out by pools consisting 
 of groups of a few or many men who look far 
 ahead and observe the approach of a situation 
 which will enable them to buy or sell to ad- 
 vantage. 
 
 As Charles H. Dow used to say: "The pub- 
 lic rarely sees values until they are pointed 
 out,"— which means that the public does not 
 lead, but is led in speculation. It rarely acts 
 until it is told to act, or until action of some 
 
SUCCESSFUL INVESTING 99 
 
 sort is suggested by a bit of verbal information, 
 a market letter, etc. 
 
 But there is another kind of suggestion which 
 is the most potent in its influence on the pub- 
 lic, and that is the action of the market it- 
 self. A rising price for a stock suggests still 
 higher prices and declining quotations bear the 
 inference that prices are 'going lower. Pools 
 work on this weakness, which is due to igno- 
 rance on the part of the public. They accumu- 
 late a stock without advancing its price; then, 
 when market conditions are favorable, they 
 bid the stock up. This excites public buying, 
 because people always want to get in on some- 
 thing that is "going up." Vice versa, groups 
 will often try to depress a stock, counting on 
 the public's support when the issue begins to 
 decline. 
 
 It long ago occurred to me that success in 
 the security market demanded an understand- 
 ing of the operations of those who were most 
 influential, because these interests had been 
 studying the business and operating in the 
 market for many years and were therefore 
 experts. It was sound reasoning to suppose 
 
100 HOW I TRADE AtTO INVEST 
 
 that a knowledge of the principles which they 
 used in their market operations would enahle 
 one to detect their thumbprints on the tape and 
 to follow with pleasure and profit. 
 
 Large interests are practically always in the 
 market. They usually have their scale orders 
 in on both sides so that they buy on declines 
 and sell on rallies. They always have money 
 with which to buy on declines, because they sell 
 on the rallies. They thus realize a profit as 
 well as supply funds for the next decline. 
 If the public would learln to do this, there would 
 be fewer stock market fatalities. 
 
 It is difficult to over-emphasize the impor- 
 tance of studying the technical position, particu- 
 larly when making a speculative commitnaent. 
 Many people may say, "What is a weak or 
 a strong technical position?" My reply is, in 
 brief, that a stock is in a weak technical posi- 
 tion on the buU side when it has been purchased 
 and is held by a large number of outside specu- 
 lators; when most of these are looking for a 
 profit; when the price of the stock has advanced 
 to a point where no further buying can be 
 stimulated for the time being. It stands to 
 reason that when buying power is exhausted a 
 
SUCCESSFUL INVESTING 101 
 
 stock must decline, no matter how strong its 
 finances, management or earning power. 
 
 On the other hand, a stock is in a weak techni- 
 cal position on the short side when the bears 
 have exhausted their ammunition by selling all 
 they can afford and when the buying power of 
 investment and speculative purchasers is such 
 that it resists the pressure of the bears; in 
 other words, when demand overcomes supply. 
 The weakness in such a position is found in 
 the fact that all those who are short are poten- 
 tial bulls; they must, sooner or later, cover 
 their commitments in order to close their trades. 
 They do not wish to remain short indefinitely. 
 It is a well-known fact that bears have less 
 courage than bulls, and they are often obliged 
 to buy at higher prices because the technical 
 position becomes so strong that they cannot 
 force the price lower. Bears, after they have 
 sold short, are an element of strength, not of 
 weakness. 
 
 Much could be written on this subject, which, 
 while far from being an exact science because 
 of the numerous and changing influences that 
 are being thrown into the market at almost 
 every moment, is a study which well warrants 
 
102 HOW I TEADE AND INVEST 
 
 the attention of every investor and trader. The 
 old adage "well bought is half sold" should 
 always be borne in mind, and while this study 
 of the technical position is a point which people 
 get around to last, one's security market edu- 
 cation is not complete without it, nor can it be 
 mastered without patient study, long experi- 
 ence and practice. 
 
There are many men in Wall 
 Street and throughoat the 
 country who make a practice 
 of taking profits in accordance 
 with their ideas of proportion, 
 something like this: They say, 
 "Fifty points is a big profit, 
 even if it is on a small lot of 
 stock? therefore, I will take it." 
 Others say to themselves, "I 
 have a profit of a hundred per 
 cent on my investment and 
 that's good enough. I will let 
 someone else have the rest." 
 In the case of American 
 Graphophone, I followed a dif- 
 ferent rule. The number of 
 points, or the percentage of prof- 
 it, did not influence me. The 
 fluctuations were interesting, 
 but whether the stock went up 
 or down, I decided to wait for 
 it to reach a certain point before 
 I would take profits. This 
 meant the point where the in- 
 siders began to sell. 
 
 Q 
 
 jO 
 
vn 
 
 THE STORY OP A LITTLE ODD LOT 
 
 IN previous articles I have referred to the 
 importance of a thorough understanding of 
 the industry represented by the security in 
 which you have decided to invest. One can- 
 not place too much emphasis on this point. 
 Some people, when they look at the list of se- 
 curities quoted in the dailies, do not know 
 whether the abbreviated titles refer to rail- 
 roads, industjrials, or biUy-goats. But they 
 ought to know and especially should they be 
 acquainted with the history, finances and char- 
 acter of management of their chosen enter- 
 prises. 
 
 For a long time I have been familiar with 
 the history and development of the phonograph 
 industry, and have made calculations as to its 
 future trend. For many years it was largely 
 monopolized through the protection of patents 
 which some people disputed but which were at 
 
 103 
 
104 HOW I TRADE AND INVEST 
 
 any rate effective. And so when in February, 
 1919, 1 was having lunch with a friend, and he 
 told me something important was likely to come 
 out of the approaching- meeting of the Ameri- 
 can (now Columbia) Graphophone Company, 
 I knew that back of any immediate develop- 
 ment in that company's affairs there was a solid 
 foundation for what might occur. 
 
 iWe were discussing how the millions of 
 soldiers who went to the war were coming back 
 music-crazy, and how their experiences abroad 
 and in American camps proved to them the 
 value of the phonograph in the home; how 
 people who never before could afford such lux- 
 uries were now able to buy, resulting in an 
 unprecedented demand for both machines and 
 records. 
 
 "I understand," said my frieud, "that the 
 announcement to follow the Columbia meeting 
 is likely to put the stock to 150." 
 
 As the issue was then selling around 135 I 
 did not pay much attention to it, and had al- 
 most forgotten the incident when one morning, 
 coming down to the office, I noticed in my news- 
 paper a small announcement to the effect that 
 the Columbia directors had declared a dividend 
 
STORY OF A LITTLE ODD LOT 105 
 
 of $2.50 per share in cash and one-twentieth 
 of a share in stock. Elsewhere in the paper, 
 among the obscure news items, it was sug- 
 gested that it would be the policy of the Gf apho- 
 phone Company in future to disburse a cer- 
 tain amount of cash every quarter and a 
 small stock dividend as well. Both the 
 official anouncement and the small news item 
 were couched in such modest terms that the 
 significance thereof did not appear on the sur- 
 face. 
 
 But a little mental calculation worked out 
 like this: $2.50 per share per quarter meant 
 $10 a year. One-twentieth of a share per 
 quarter was four-twentieths, or one-fifth of a 
 share per annum. At the market price of the 
 stock, 135, this one-fifth of a share equals $27 
 per share per annum, or a total of $37 per 
 share — counting cash and value of stock — divi- 
 dend. Conclusion: The price should advance 
 from $200 to $300 per share, dependent upon 
 how certain the regularity of the stock divi- 
 dends intended to be paid. 
 
 Upon reaching the office I phoned the com- 
 pany's headquarters and found that the man- 
 agement planned to declare these quarterly 
 
106 HOW I TRADE AND INVEST 
 
 stock dividends at the one-twentieth rate in- 
 definitely, so I started to invest at least $15,000 
 in American Graphophone common at the mar- 
 ket price. Evidently other people were awake 
 to what that little announcement meant, for 
 there were lots of buyers and few, if any, 
 sellers. I finally succeeded in buying two 
 twenty share lots, averaging 1641/4, and the 
 next that was offered to me was around 179. 
 As this was a long way from the price at which 
 I started to buy, and I didn't like to bid up 
 against so much competition, I decided to give 
 the forty shares to my wife and to see what 
 I could do for her with the little odd lot. Soon 
 the price was 180, then 200 bid, with hardly any 
 transaction in the meantime. 
 
 These forty shares of stock cost $6,575, which, 
 while not much of an investment, had great 
 possibilities, considering its size, as I will show. 
 It was not my first transaction in Graphophone, 
 for I had made considerable money in it on 
 previous occasions, buying it around 70, selling 
 at 135, re-buying around 110, and carrying it up 
 to 160. Considering these transactions, the 
 forty shares cost me much less than nothing. 
 
 About five years ago The Magazine of Wall 
 
STOEY OF A LITTLE ODD LOT 107 
 
 Street published an article on the phonograph 
 industry, which showed it to be in a very 
 prosperous condition with an outlook that was 
 exceptionally promising, A certain New 
 York stock broker, knowing that the stock 
 of the old American Grraphophone Com- 
 pany had been well distributed many years 
 before, and that control was to be had 
 in the open market, went to Wilming- 
 ton, Del., and succeeded in obtaining a fifteen- 
 minute interview with the du Pont interests. 
 The upshot of this was that the du Fonts ac- 
 quired control, buying the stock from below par 
 up to nearly $200 per share for the last of their 
 stock. 
 
 Then began a period of development and ex- 
 pansion under the new and more progressive 
 management. In consequence, the company 
 had made very great strides in the last few 
 years. During this time the stock, which had 
 reached 196 or thereabouts, gradually declined, 
 until in the summer of 1918 it was selling 
 around $50 per share. Solnewhere between 
 that level and the 135 figure which prevailed 
 when my attention was again called to it, those 
 in control evidently saw an opportunity to "put 
 
108 HOW I TRADE AND INVEST 
 
 it over 1 big," just as they had in General 
 Motors and other large corporations in which 
 they were interested, "with a resulting scarcity 
 of stock when the news came out. 
 
 I knew that the new corporation which had 
 recently taken over the old was supplied with 
 an issue of common stock far in excess of 
 what was to be used in the exchange for the 
 old shares, and in this dividend announce- 
 ment I read between ithe lines and was able to 
 forecast much more accurately than if I had 
 not been familiar with the past history of the 
 Columbia, and had not studied du Pont methods 
 of financing and development. 
 
 In the previous chapter you will find a ref- 
 erence to the technical position. It would be 
 difficult to imagine one stronger than that pre- 
 vailing in this stock after the news came out, 
 because, in simple Wall Street parlance, "there 
 was none of it for sale." And it was not long 
 before the stock sold at over $300 per share. 
 
 During the summer, while I was on a long 
 trip to Alaska and the Coast, I used to get the 
 New York papers from seven to fifteen days 
 late, but I knew that anything big or important 
 
STORY OF A LITTLE ODD LOT 109 
 
 would take several weeks to consummate, so I 
 would have ample notice. 
 
 With frequent resting spells and reactions 
 the stock climbed steadily to $400, and then to 
 $500 per share, and with each fresh advance 
 the stock dividends which were being distrib- 
 uted quarterly became more valuable; that is, 
 the one-fifth of a share per annum (confi[isting 
 of four quarterly payments of one-twentieth of 
 a share) had a value of $40 per share when 
 the stock sold at $200; $60 per share at $300; 
 $80 per share at $400 ; and $100 per share when 
 the price advanced to $500. It was the closest 
 thing to ** lifting itself by its boot-straps" that 
 I had ever seen. 
 
 On the 40 shares the first dividend amounted 
 to 2 shares; the second to 2.1 shares, making 
 44.1 shares. By that time the shadows of com- 
 ing events began to show, for the company an- 
 nounced that it would shortly exchange the old 
 stock of $100 par, for new stock of no par value, 
 and that each holder of one share of old would 
 receive ten shares of new stock. Occasional 
 transactions on the Curb had been in the neigh- 
 borhood of $500 per share, and now the new 
 
110 HOW I TRADE AND INVEST 
 
 stock began to be traded in "wlien issued" be- 
 tween 43 and 50, and during the month of 
 August, 1919, ran up as high as 59. At the low 
 level of 431/2 to 46 during August and Septem- 
 ber the stock showed excellent resistance, while 
 the rest of the market remained weak, and from 
 its action I came to the conclusion that we were 
 approaching the "fire-works" stage. 
 
 Along in October the stock was listed on the 
 New York Stock Exchange and began to be 
 very active, advancing rapidly several points 
 per day until it reached 75. The volume of 
 trading greatly increased. In some sessions 
 there were from 50,000 to 75,000 shares dealt 
 in, to say nothing of the odd lots which were not 
 recorded. Numerous newspaper articles called - 
 attention to the company's development. I 
 watched it work back and forth between 70 and 
 75, and when I saw certain indications appear, 
 made up my mind that if it again declined to 70 
 I would sell part of what once was an odd 
 lot. 
 
 The 44.1 shares were by that time exchanged 
 for 441 shares of new ^tock, and soon after- 
 ward a dividend of a fraction over 22 shares 
 
STORY OF A LITTLE ODD LOT 111 
 
 was received, making 463 shares, worth $70 
 
 per share . ., ». $32,410.00 
 
 Plus three dividends at $2.50 per 
 share on various lots 315.25 
 
 $32,725.25 
 Less cost of original 40 shares and 
 commissions 6,575.00 
 
 Paper profit at $70 per share $26,150.25 
 
 The stock dividends which were coming along 
 quarterly amounted to 23 shares or $1,610 worth 
 per quarter, or $6,440 per annum if the stock 
 remained at $70. Add to this the cash divi- 
 dends, which, on the new stock amounted to 
 one-tenth of the old, and were being paid at 
 the rate of 25 cents per share, or $1 per annum, 
 the income amounted to about $6,900 on an 
 original investment of less than $6,6P0. 
 
 That was a big percentage, provided the stock 
 stayed at $70 per share, but the action of the 
 stock indicated that insiders were selling at 
 least a part of their line, perhaps enough to 
 get back their original investment. Deciding 
 
112 HOW I TRADE AND INVEST 
 
 that when insiders sell it is time for outsiders 
 to sell, I disposed of 263 shares at 70, which 
 gave back the original $6,575, besides $12,080.25 
 in cash, in addition to 200 shares paid for in 
 full. 
 
 In fact, allowing for the profit and cash 
 dividends, these 200 shares cost about $60 a 
 share less than nothing. So I didn't see how 
 my wife could lose on that transaction. 
 
 Selling part of the lot put me in a good posi- 
 tion for another reason. If the insiders were 
 to support the stock on a decline, then lift the 
 price to a new high level, I could take advantage 
 of it with the remainder of my holdings. But 
 if, as was more likely, they allowed the stock 
 to sag off, I could replace what I had sold at 
 a lower level and then take advantage of any 
 secondary advances and distribution that 
 might occur. 
 
 The points to bear in mind in regard to this 
 little deal in odd lots are these: I knew the 
 industry, its present over-sold condition and its 
 future trend. Also the position of the Colum- 
 bia Company with relation thereto. 
 
 Inside information said the stock would ad- 
 
STOEY OF A LITTLE ODD LOT 113 
 
 vance 15 points. It was wrong; the price rose 
 hundreds of points. The information on which 
 I really acted was open to everyone. I con- 
 firmed the facts at the company's oflSce. 
 
 By putting myself in the place of the in- 
 siders I was able to follow their reasoning and 
 see the purpose behind their campaign. I took 
 profits when they did, thus placing the account 
 in a strong cash position, beyond the possibility 
 of loss. 
 
 Surface or present conditions were not con- 
 sidered, but only the facts which indicated 
 what the future would be. Technical condi- 
 tions were closely watched for signs of moves 
 by the insiders. 
 
 Selling around the top provided the cash 
 with which to replace at a lower figure. 
 
 I did not get a full hundred per cent, of the 
 possibilities in this little deal, but came mighty 
 close to it. 
 
 My experience with American Graphophone 
 shares show what can occasionally be done with 
 odd lots, and disputes those who 'believe that 
 fractional lots of stock are too small to bother 
 with and should be ignored. I have described 
 
,114 HOW I TRADE AND INVEST 
 
 the matter in detail so that the reasons for 
 every move are clearly set forth, and trust 
 that the suggestions herein will be found of sug- 
 gestive value to my readers. 
 
Jesse L. Livermore 
 
 Whose stock market operations are the most spectacular in 
 the present generation. 
 
VIII 
 
 RULES I POtiLOW IN TEADINa AND INVESTING 
 
 SOME people may form an impression, 
 based on my previous articles, that when 
 one acquires the proper amount of training 
 and experience, making money by trading and 
 investing in securities is an easy proposition. 
 I hasten to correct either this impression or 
 another vrhich might also have been formed: 
 that it is easy sailing for me personally. 
 
 I have yet to find the man, in or out of Wall 
 Street, who is able to make money in securi- 
 ties, continuously or uninterruptedly. My ex- 
 perience is no different from that of many in- 
 dividuals who are known as successful Wall 
 Street men. Like every one else, I have my 
 good and bad periods. Sometimes it appears 
 as though everything I touch pans out well, 
 and at other times everything seems to go 
 wrong. It is much like any other line of busi- 
 ness. 
 
 115 
 
116 HOW I TRADE AND INVEST 
 
 Success in trading means an excess of profits 
 over losses. Success in the investment field 
 means more good than bad investments. If 
 any one tells you he can be almost invariably 
 successful, put him down as trying to impose 
 on your credulity. One hundred per cent, ac- 
 curacy was a height not even attained by the 
 late J. P. Morgan. James R. Keene often said 
 he was doing well if he could be right six 
 times out of ten. I often used to call on him 
 and watch him trading over his ticker on the 
 fifth floor of the Johnson Building, 30 Broad 
 Street, and there was many a time when I 
 could plainly see fijom the nervous way in 
 which he worked back and forth from his ticker 
 to his telephone, and paced up and down the 
 floor like a caged lion, that things were not go- 
 ing well. In his thirty or forty years. Wall 
 Street career he went broke more than once. 
 
 I went into Harriman's office one day and 
 found him a veritable bull in a china shop, be- 
 cause the market had been going contrary to 
 his expectations. 
 
 In the present generation Jesse livermore's 
 operations are the most spectacular, but'he is 
 not by any means always right. Like all other 
 
EULES I FOLLOW 117 
 
 traders, big or little, he maJjes serious mistakes 
 at times. He has personally described to me 
 his methods in detail. They provide for mis- 
 takes, accidents, errors in judgment and those 
 unexpected happenings which every big or little 
 operator must allow for. 
 
 One of the cleverest and most experienced 
 traders on the floor of the New York Stock 
 Exchange^ — a man who usually makes $300,000 
 a year out of his floor trading^ — said to ine, 
 "Whenever I take a position in a stock and find 
 that it is running into a sufficient loss to amount 
 to $20,000 or $25,000, and it begins to bother 
 me in my day-to-day trading, I close it out." 
 
 Now go into the investment field and take the 
 published annual list of investment securities 
 owned by any of the big life insurance com- 
 panies such as the Equitable, Mutual, New York 
 Life^ or others who have the vei'y best con- 
 nections in the financial district, and whose in- 
 vestments are made under the advice and guid- 
 ance of eminent financiers, attorneys, experts 
 and actuaries. You find the same thing— fre- 
 quent investments which turn out badly and 
 which have to be written down and charged off. 
 
 Success in either field, therefore, depends 
 
118 HOW I TEADE AND INVEST 
 
 upon whether your profits exceed your losses 
 and income — how close you can come to one 
 hundred per cent, accuracy. So no matter how 
 long or how hard you study, nor how careful, 
 conservative and experienced your guide, your 
 counsel or your bankers, you must anticipate a 
 certain portion of unfortunate investments and 
 operations. 
 
 It is for this reason that many (but not all) 
 of my investments are made with intent not only 
 to realize large profits but to offset these occa- 
 sional and unavoidable losses. I have found 
 some men who claim that they never take a 
 loss. This may be true, but I would rather take 
 losses than take an inventory of the final re- 
 sult of such operations, because it is bound to 
 show a number of securities that are miles away 
 from their cost and which should be listed 
 merely either as "Hopes" or "Faint Hopes." 
 
 This reminds me of a very clever trading rule 
 followed by Jesse Livermord. Unless a stock 
 shows him a profit within two or three days 
 after he buys or sells it short, he closes the 
 trade, on the ground that his judgment was 
 wrong as to the immediate action of the stock, 
 
RULES I FOLLOW 119 
 
 and he cannot afford to be tied up. He says, 
 "Whenever I find myself hoping that a trade 
 will come out aU right, I get out of it." 
 
 Livermore's purpose in this rule is to keep his 
 trading capital in circulation; never allowing 
 it to become congested. It is a good rule. 
 Think it over, and you will recall that you 
 have often not only lost money by sticking to 
 a hopeless proposition, but you have lost many, 
 many opportunities. 
 
 Another Livermore principle is the cutting 
 of losses. Of course, in his 10,000, 20,000 or 
 50,000 share campaigns he cannot place stop 
 orders like a 100, 200 or 500 share trader, but 
 he usually has a mental stop and when it is 
 reached he closes out the trade. 
 
 It wiU be observed that Livermore, by the 
 use of these two rules, has both a time and a 
 price stop. He will not devote his margin (cap- 
 ital) to a transaction for more than a few days, 
 and he wiU not let the trade run against him 
 for more than a few points. While he, so far 
 as I know, originated the first rule, the 
 second^ viz., the use of stop orders, has been 
 one of the first principles of successful opera- 
 
120 HOW I TRADE AND INVEST 
 
 tors for many years. Harriman, Keene, and 
 a host of others have advocated the absolute 
 limitation of risk. 
 
 While I have made it a practice to limit my 
 risk in most cases, I can trace most of my prin- 
 cipal losses to my failure to place stop orders 
 when the trades were made. And while I have 
 always studied the limitation of risk and gener- 
 ally endeavored to trade ia. a way that will keep 
 the risk down to a minimum, I have very often 
 delayed placing a stop order until the oppor- 
 tunity was lost, and in some cases these losses 
 have run into five or ten points when they 
 might just as well been limited to two or three. 
 These incidents are of value because they show 
 what should be avoided. 
 
 In trading I get the best results by watching 
 carefully for an important turning point, limit- 
 ing my risk, and trading for the ten or twenty 
 point swings. But very often when I have the 
 time to devote to it, and I feel myself in har- 
 mony with the market, I like to trade actively. 
 Jumping in and out of stocks to the extent of 
 5,000 or 10,000 shares a day in the aggregate 
 is a lot of fun, but is usually more profitable 
 
EULES I FOLLOW 121 
 
 for the broker than for the trader, because of 
 the immense handicap he is under in trying to 
 pay commissioiis, taxes, and losses out of the 
 small daily swings and get a profit besides. A 
 trader on the floor of the New York Stock Ex- 
 change has an advantage over a non-member, 
 whose total expenses on such business under the 
 increased commission rates run from $1,000 to 
 $2,000 a day. 
 
 The worth-while changes in security prices 
 do not generally occur within the same session. 
 The market movement or the situation which 
 produces it must have time in which to develop. 
 As Charles Hayden once said to me, ' * The day 
 to buy is not the day to sell." 
 
 Subscribers to The Magazine frequently write 
 me and explain that they are far removed from 
 the market and ask whether they had not bet- 
 ter come to New York or go to Chicago so 
 as to be in "close touch with things." Very 
 often this "closeness" is a handicap. One's 
 real studying is done away from the market, not 
 in a broker's office.. 
 
 The best work I ever did in judging the 
 market was when I devoted one hour a day 
 
122 HOW I TRADE AND INVEST 
 
 in the middle of each session, I did not come 
 to Wall Street. I had no news ticker. I seldom 
 read the news items but judged solely from 
 the action of the market itself; hence I was 
 not influenced by any of the rumors, gossip, 
 information or misinformation with which the 
 Street is deluged day after day. 
 
 The out-of-town investor is therefore not un- 
 der as much of a handicap as he might suppose. 
 If he is trading and can get the result of the 
 day's operation in time to give his orders neyt 
 morning, he is better off than the majority of 
 the people who come down here and hang over 
 the ticker. His opinions are formed from the 
 facts. He must know how to assemble these 
 and draw the proper conclusions. But all he 
 needs is the highest, lowest and la^t prices of 
 the stocks which he is wa,tching. Without be- 
 ing at all egotistical I believe I could go around 
 the world and having arranged to have these 
 few details of a stock like U. S. Steel or any 
 other active issue cabled to me daily, I could 
 cable my orders and come back with a profit. 
 It would not be necessary for me to be advised 
 of the volume of trading in, that stock or th§ 
 
RULES I FOLLOW 123 
 
 general market, although in some instances this 
 might help. Certainly I would not care to 
 have any news of any kind included in the 
 cables. 
 
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IX 
 
 F0EE0A8TING FUTURE DEVELOPMENTS 
 
 IN previcfus chapters I have referred to the 
 value of foresight in the field of investment, 
 and the advantages of keeping your money 
 working where it will prbduce the best results 
 ia the shortest time, I like to go cross-lots 
 toward an objective point. One way to do this 
 is to keep a constant eye on the relative posi- 
 tion of the different industries in order to see 
 where the greatest advantage lies. 
 
 One hardly needs to do more than read the 
 papers nowadays to form the opinion that cer- 
 tain industries are in an excellent position. 
 But which of these is best? 
 
 The steel industry is apparently prosperous. 
 The industry seems likely to go through in a 
 belated way the filling of a vast commercial 
 and industrial vacuum which resulted from the 
 war's absorption of steel. 
 
 The resumption of building operations will 
 
 125 
 
126 HOW I TBADE AND INVEST 
 
 be a big factor in the steel business for the 
 next several years. We all know that the 
 country is underbuilt, and a revival of build- 
 ing activity which has of late become appar- 
 ent, means very big things for the steel trade. 
 
 Now that the railroads are back in the hands 
 of their owners we may expect increased orders 
 for rails, cars and locomotives, all of which will 
 absorb quantities of steel. This should also 
 produce a highly prosperous condition in the 
 railway equipment business for some years to 
 come. 
 
 I have been turning these matters over in my 
 mind recently because I am very confident of 
 the future of the market and I want to know 
 which stocks in the most favored industry are 
 likely to produce the most for me both from the 
 standpoint of income and profit. Market move- 
 ments, when correctly forecasted, pay more dol- 
 lars than dividends. 
 
 While there are many of the minor industries 
 in a very favorable position at present, I 
 have concluded that one in particular stands 
 head and shoulders above all the rest and that 
 is the petroleum industry. The accompanying 
 graph indicates that consumption has run ahead 
 
FUTURE DEVELOPMENTS 127 
 
 of production for the past two years and there 
 is no sign of any change in this trend. This, 
 in conjunction with the forecast by Walter C. 
 Teagle, president of the Standard Oil Co. of 
 N. J., gives us the backbone of the statistical 
 position of oil. Mr. Teagle estimates that by 
 1925 the world will require 675,000,000 bbls. of 
 crude oil against 376,000,000 produced in 1920 
 — an increase of 78 per cent. He asks where 
 such an enormous quantity of oil is coming 
 from. If he cannot tell, you and I need not 
 iguess. 
 
 Should any further assurance be required, 
 we can refer to a report filed by the British 
 Board of Trade in London whose Central Com- 
 mittee reported that demand was tending to 
 outstrip the world's present supply. 
 
 It is plain, therefore, that there is a threat- 
 ened world shortage of oil and that this situa- 
 tion cannot be cured for a long time to come. 
 I am therefore putting money into the best 
 class of oil stocks, for while there are many 
 promising opportunities in other fields I regard 
 this, for the time being, as the best industry 
 in which to take a substantial position on the 
 long side. 
 
128 HOW I TEADE AND INVEST 
 
 My reason is that the margin of profit m 
 the producing and refining of oil, especially the 
 former, will b6 a very substantial one — ^prob- 
 ably much larger, figuring on a per share basis, 
 than in the steel, equipment, automobile, or 
 other of the leading industries whose output 
 may be expanded by the building of more plants 
 and hiring more men. It is different with the 
 oil business. Oil must be sought ; and it is not 
 always to be found where you expect to find 
 it. Many of the old fields are playing out. 
 Many of the 10,000 and 15,000 barrel gushers of 
 a year ago are now running in the dozens or 
 hundreds and in not a few cases have to be 
 pumped at that. 
 
 The Eanger Field on July 1, 1919, was pro- 
 ducing 160,000 bbls. a day. By February 1, 
 1920, this had dropped to 80,000 barrels daily. 
 The Burkbumett Field has shown a very 
 marked falling off, due to close drilling. Many 
 of the biggest wells in Mexico have declined, 
 owing to economic conditions, salt water in- 
 vasion, or possible change of formation, due to 
 volcanic eruptions. 
 
 There is a scarcity of new fields. We hear 
 about discoveries in various sections of this and 
 
FUTUEE DEVELOPMENTS 129 
 
 other countries, but it will require a good many- 
 prolific fields to keep pace with the ravenous 
 consumptive demand. It is apparent that in 
 the oil industry there is no point of saturation, 
 because the trade is continually working to 
 make up a shortage which practically every 
 year pulls down the visible supply. 
 
 The increase in the amount of machinery of 
 all kinds and the elimination of hand labor is 
 an important point in the demand, as each 
 bit of machinery requires more lubrication 
 and the lubricating material always has its 
 base in crude oil. Automobiles are not only 
 consumers of gasoline, but of great quantities 
 of lubricating oil as well. 
 
 Tractors are developing another big new 
 avenue of consumption and must in time sup- 
 plant the horse on the farm, as the motor car 
 has done in the cities. In Seattle there is not 
 today a single horse, so far as I have been able 
 to ascertain. 
 
 The year 1894 does not seem so long ago, yet 
 when at that time I told some one that one of 
 these days we would be traveling in horseless 
 carriages, I was laughed at as being a dreamer. 
 
 Now I wish to record another similar dream. 
 
130 HOW I TEADE AND INVEST 
 
 It is that the streets of New York and all other 
 great centers will, before many years, be un- 
 derlaid with pipes which will carry fuel oil 
 for use instead of coal in heating, manufactur- 
 ing and other purposes. And here is a sug- 
 gestion to any of my readers who are in a po- 
 sition to secure charters from their respective 
 communities, for some day these charters will 
 be worth a lot of money. 
 
 The day will soon pass when men shall be 
 sent down into mines to haul up coal, put it 
 on railroad trains, transport it hundreds of 
 miles, unload it into coal carts, truck it through 
 city streets, dump it into cellars and shovel it 
 into furnaces. 
 
 Enormous oil tanks, similar to gas taiiks now 
 in use, should contain the liquid fuel which can 
 be controlled by the mere turning of a valve 
 or the operation of a thermostat. 
 
 No shovelling coal, or taking out ashes ! This 
 should make life in city or country more attrac- 
 tive, especially to those who have to hustle for 
 the 5 :15. But to the manufacturer, the owner 
 of office buildings, or apartments, this develop- 
 ment will have a much broader application, for 
 it will mean the elimination of a number of 
 
FUTURE DEVELOPMENTS 131 
 
 factors that now contribute to the raising of 
 rent, operating and manufacturing costs. 
 
 You may not follow this suggestion but some- 
 body will, and a lot of somebodies will make a 
 lot of millions in this way. 
 
 Practically every industry, from the peanut 
 stand to the railroad locomotive and the enor- 
 mous industrial plant, consumes oil in many 
 ways. The world of machinery could not exist 
 without oil. The use of machinery and par- 
 ticularly internal combustion motive power is 
 spreading throughout the world. There are 
 vast areas which are merely in the kerosene 
 stage which will eventually be developed to the 
 automobile and tractor stage. Carry the 
 thought further and we see the likelihood that 
 before many years we shall be shipping not only 
 passengers but freight through the air, all of 
 which means a still greater demand for crude 
 oil to be converted iuto gasolene and lubricating 
 oils. 
 
 These are some of the reasons why I have 
 bought oil stocks during recent months. And 
 why, in our Investment Letter, we have recom- 
 mended these securities toi our subscribers. By 
 reason of the crying demand for crude, many 
 
132 HOW I TRADE AND INVEST 
 
 of the refineries which have contracted to sup- 
 ply refined products are bidding against each 
 other, so the companies which really hold the 
 winning cards are the producers. 
 
 I anticipate a period of enormous profit-mak- 
 ing in leading oil companies, particularly where 
 they are intrenched in the field of production. 
 
TWTost people make their mis- 
 ■^"■^ take when averaging, fay- 
 starting too soon; or, if they 
 are buying on a dose scale, say 
 one point down, they do not 
 provide sufficient capital to see 
 them through in case the de- 
 cline runs two or three times as 
 many points as they anticipate. 
 I recall a friend who, after see- 
 ing Union Pacific sell at 2i9 in 
 August, 1909, thought it very 
 cheap at 185 and much cheaper 
 at 160. That made it a tre- 
 mendous faargain at 135. He 
 bought at all those figures. 
 But at fi6, his capital was ex- 
 hausted, and, as they put it in 
 Wall Street, "he went out with 
 the tide." 
 
 Q 
 
TRUTH ABOUT "AVERAGING DOWN" 
 
 AGEEAT deal of money is lost or tied up 
 by people who make a practice of aver- 
 aging. Their theory is that if they buy a se- 
 curity at 100 and it goes to 90, it is that much 
 cheaper, and the lower it goes the cheaper it 
 grows. Like all Wall Street rules and theories, 
 this is sometimes true; but there are a great 
 many times when a security will decline in mar- 
 ket price while its intrinsic value and earning 
 power are shrinking even more swiftly. 
 
 While a decline in price is often due to a 
 slump in the general market for bonds or stocks, 
 or both, owing to some circumstance affecting 
 a certain group of stocks, it also frequently 
 occurs that the price is going down because 
 of an inherent weakness in the company's af- 
 fairs or a diminution of its prospects. Elnowl- 
 edge of such an influence is often confined to 
 the few who are in close touch with the com- 
 
 133 
 
134 HOW I TRADE AND INVEST 
 
 pany's affairs. Sometimes there is a gradual 
 development toward the unfavorable side ; then 
 again there may be an overnight happening 
 which causes a radical change in former esti- 
 mates or value. 
 
 Whatever the cause of a decline, the question 
 of averaging is one that puzzles people who 
 have bought at higher prices and are wonder- 
 ing whether averaging is not a good way out. 
 Very often it proves to be the way to 
 get in deeper. Hence, in order intelligently to 
 judge whether to average, it is jaecessary to 
 know what caused the decline. 
 
 I remember, a few years ago, buying a cer- 
 tain stodk at around 45. Sometime after I 
 bought it the price declined to about 30, at which 
 point I afterward learned the stock was under- 
 written; 80 that to the insiders everything 
 above 30 represented profit. 
 
 The company was doing a splendid business 
 but the stock had been badly handled, and those 
 who were responsible for its market action ran 
 away and left the new baby on the public's 
 door-step. Knowing that the stock was in the 
 hands of the public, I did not average at 30, but 
 waited until it was down to around 15. Then 
 
"AVERAGING DOWN" 135 
 
 I bought an equal amount. This I sold at ten 
 points profit which marked my original cost 
 down to $35. The stock then declined to 12 
 and I bought again, re-selling at 16, reducing 
 my cost to about 31. Some months later it ad- 
 vanced to 38, where I sold. This let me out 
 about even, allowing for interest. 
 
 These transactions ran over two or three 
 years and serve to illustrate a good way of 
 averaging out on a bond or stock which has been 
 disappointing in its action. It is a method em- 
 ployed by large interests who, as previously 
 described, often work on a much closer scale and 
 take advantage of all the small variations in 
 the market. 
 
 Why did I buy the stock when it was down? 
 And why didn't I sell at a loss? Because I 
 made investigations through the company's of- 
 ficials, and found that the corporation was in 
 a very prosperous condition, having reduced its 
 obligations and increased its earning power 
 during the time when the stock was declining 
 from 45 to a fraction of that figure. It was 
 a case where intrinsic values were on the in- 
 crease while the market price was decreasing. 
 
 Thus I kept myself always in a position where 
 
136 HOW I TEADE AND INVEST 
 
 I could buy more in case it went still lower 
 and by selling on the rallies I provided the 
 funds for repurchasing. Having bought the 
 first lot (to average around 15) I was then in 
 a position to sell it on a rally and re-buy it on 
 a decline, so that whichever way the market 
 went I would benefit. Had the price declined 
 to 10 and then 5, 1 would probably have bought 
 an equal amount or perhaps double the quantity 
 at the low level — always with my eye on the 
 compass, which was the company's physical, 
 financial and commercial condition. 
 
 Stocks like this sometimes decline of their 
 own technical weight, that is, the amount of 
 shares that are pressing in liquidation, com- 
 bined with an absence of support; or they 
 may be put down — ^that is, artificially depressed 
 by those who are desirous of accumulating at 
 the low levels. In this case I believe there was 
 a combination of both influences. 
 
 Most people make their mistake when averag- 
 ing, by starting too soon ; or, if they are buying 
 on a close scale, say one point down, they do 
 not provide sufficient capital to see them 
 through in case the decline runs two or 
 three times as many points as they anticipate. 
 
"AVBEAGING DOWN" 137 
 
 I recall a friend who, after seeing tJnion Pa- 
 dfic sell at 219 in August, 1909, thought it 
 very cheap at 185 and much cheaper at 160. 
 That made it a tremendous bargain at 135. 
 He bought at all those figures. But at 116, his 
 capital was exhausted and, as they put it in 
 Wall Street, "He went out with the tide." 
 
 Eighty-five or ninety per cent, of the business, 
 investment and speculative mortalities are due 
 either to over-trading or lack 6f capital, which 
 when boiled down are one and the same thing. 
 And those who average their investment or 
 speculative purchases supply in a great many 
 instances, glaring examples of the causes of 
 failure. 
 
 Years ago, when Weber & Fields formed one 
 of the star theatrical attractions in New York, 
 they used to have a scene in a bank where one 
 of the team was the banker and the other the 
 customer of the institution. 
 
 The "oflScial" observing his "customer" at 
 the wicket, made the very pertinent inquiry, 
 "Put in or take out?" 
 
 I was reminded of this recently when think- 
 ing of the nxunber of people who come down to 
 the Street year after year, and with varying 
 
138 HOW I TEADE AND INVEST 
 
 results (mostly bad, I must agree), keep on 
 putting in and taking out until they either make 
 a success or a failure of it. And I am contin- 
 ually asking myself, as a sort of test question, 
 whether in putting in or taking out I am mak- 
 ing progress or going backward. Like the frog 
 who was trying to jump out of the well, I some- 
 times slip, but every year I can see that I am 
 making progress. 
 
 There are seasons when it pays me to stick 
 very close to shore, because, by reason of other 
 ini3uences, my judgment is not up to par. Some- 
 times, however, I am stubborn enough to keep 
 on fighting through these periods, because no 
 one can stay in the security market for a great 
 many years without growing used to punish- 
 ment. It has already been explained that suc- 
 cess means more good than bad investments or 
 ventures, so the readers of previous chapters 
 will understand just what I mean. 
 
 Everyone should occasionally sit down and 
 take account of stock — ^not securities, but his 
 own ability, judgment, and what is most impor- 
 tant, results thus far obtained. If he finds that 
 the past few months or years have been unsat- 
 isfactory and unprofitable, judging from the 
 
"AVERAGING DOWN" 139 
 
 amount of time, thought, study, and capital em- 
 ployed, he should suspend operations until he 
 ascertains the cause; then he should set about 
 to cure it. This can be done by study and prac- 
 tice (on paper or with ten share lots or single 
 thousand dollar bonds if necessary) until he is 
 confident that he has overcome the difficulty. 
 
 It may be that he is a chronic bull and finds 
 himself in a bear market. I have frequently 
 discovered that I was out of tune with the mar- 
 ket, although I am never a chronic buU or bear, 
 but always the kind of an animal the situation 
 seems to call for. 
 
 It has been a great advantage to me, however, 
 to have gone off by myself at times and figured 
 out just where I stood, and, if things were go- 
 ing wrong, why? I find that it is more impor- 
 tant to study my misfortunes than my triumphs. 
 
Jamks R. Keene 
 
 Who advised the "absolute limitation of risk" in market 
 
 operations. Keene was one of the shrewdest traders 
 
 Wall Street ever knew. 
 
XI 
 
 CONCLUSIONS AS TO FORESIGHT AND JUDGMENT 
 
 IT must be apparent from the foregoing chap- 
 ters, that during the years I have spent in 
 Wall Street I have not only kept my eyes and 
 ears open, but have gained much as a result 
 of study, practice and experience. It is logi- 
 cal to suppose that I have formed certain defin- 
 ite conclusions with regard to the business of 
 trading and investing, and that these, if frankly 
 and clearly stated and fully appreciated by 
 those who read, should be of considerable value 
 to the many who have not devoted so much 
 time or effort in the same line of work. 
 
 No one can stay at it for even a short time 
 without acquiring a certain knowledge, And it 
 is for each to decide whether he is content to 
 plod along in a desultory way, or go in for an 
 intensive study of the subject. My recom- 
 mendation to readers is that they take it up 
 seriouslv- '»ven if they have not a single dollar 
 
 HI 
 
142 HOW I TRADE AND INVEST 
 
 to invest at present. The time will come when 
 they will have funds for investment and the 
 greater their store of information on the sub- 
 ject, the greater the incentive for saving or 
 acquiring money in any legitimate way and the 
 more profitable the outcome. 
 
 In an atmosphere of deceptive surface indica- 
 tions and false news, reports, gossip, methods, 
 etc., such as one encounters in Wall Street, it 
 is sometimes difficult to know just what one is 
 trying to do and how well or how badly he is 
 doing it. It is not easy to size yourself up 
 and to see just what are your basic principles, 
 and how well you are following them. 
 
 Whenever a situation is not entirely clear to 
 me, I find I can clarify it by putting down on 
 paper all the facts, classifying them as favor- 
 able and unfavorable. In thus writing it out 
 on paper I not only have time to reason out 
 each point as I go along, but when I get it all 
 down it can be looked over and analyzed to much 
 better advantage. 
 
 Following this idea I have written down per- 
 haps fifty different conclusions which I have 
 reached with regard to the business of trading 
 and investing, and these I will take up, one 
 
FOEESIGHT AND JUDGMENT 143 
 
 after the other in this and later chapters, for 
 they constitute a partial list of principles which 
 should be recognized and applied, according to 
 individual requirements. 
 
 These points are about equally divided be- 
 tween investment and speculation, but it is 
 so difficult to determine where one begins and 
 the other ends that in many cases I shall be 
 obliged to treat them in combination. The 
 thing we are trying to accomplish is an increase 
 in pur personal wealth, and whether this is 
 done by the careful investment and slow accre- 
 tion of money, the income of which is rein- 
 vested in order to enhance the principal sum, 
 or whether we endeavor to increase our princi- 
 pal by attempting to forecast movements of 
 security prices and to profit thereby—all that 
 is something which each person must decide for 
 himself. 
 
 Both My PfeiMAny and My Ultimate Object 
 Is the Safe and Pboeitable Investment op My 
 Funds. 
 
 I say primary because that is my first and 
 principal object and I use the term ultimate be- 
 cause eventually I expect to become an investor 
 for income only. Provision for himself and 
 
144 HOW I TRADE AND INVEST 
 
 family during the later years 6f his life is what 
 every red-blooded man is working for. Some 
 men-^ames R. Keene was one — continue to 
 trade in stocks until they are very old. But 
 most people want to feel that from at least 
 sixty on they will be free from the necessity of 
 making money on which to live during their de- 
 clining years. 
 
 Trading profits should therefore be used to 
 increase the principal sum which is invested in 
 income-bearing securities, preferably those 
 which will grow in market value. Income from 
 such investments should be made to compound 
 itself by re-investing it as received. 
 
 If Obtb is Not Adapted to Trading He 
 Should Peove it to His Own Satisfaction and 
 Then Abandon the Business.— He should then 
 attempt to become an intelligent and successful 
 investor. Failing of this, he should turn to sav- 
 ings banks and mortgages or other non-fluctua- 
 ting mediums for the investment of his funds. 
 
 A friend of mine once had something over 
 $100,000 worth of bonds, a few of which he de- 
 posited with a broker as margin. The bonds 
 were his backlog; they represented the result 
 of his savings from the time he first entered 
 
FORESIGHT AND JUDGMENT 145 
 
 business, and were bringing in a good income, 
 besides having possibilities. As he traded back 
 and forth, he found that he was gradually tak- 
 ing some of the bonds which he had in his box, 
 and putting them up with the broker, until fi- 
 nally he reached a point where nearly half of 
 the bonds were gone. This, he decided, was 
 conclusive evidence of the fact that he was 
 not adapted to the business of trading. He 
 therefore discontinued trading and resumed the 
 saving tactics by which he had accumulated the 
 first hundred bonds. 
 
 That was some years ago. He has now over 
 $200,000 worth, and when at rare intervals he 
 ventures into the speculative arena, he does it 
 very timidly and with only trifling sums. 
 
 I recommend this man's course to those who 
 have had similar experiences, but with this ex- 
 ception: If they are willing to devote them- 
 selves to the task, they will doubtless overcome 
 their difficulties and be more successful with the 
 added study and experience. But to go right 
 on putting good money after bad, not only re- 
 flects on a man's business judgment but indi- 
 cates a weakness in his character which he had 
 best conquer in short order. 
 
146 HOW I TEADE AND INVEST 
 
 The experiences of our earlier years are well 
 and cheaply bought if we really profit by them. 
 
 No one can avoid having his capital tied up at 
 times in mediums which are not satisfactory. 
 But there should be no hesitation about switch- 
 ing, even though it necessitates the taking 
 of a loss in your present holdings. A good se- 
 curity will make up this loss much faster than 
 one which is mediocre. So the question which 
 one should ask himself with relation to all of 
 the securities which he holds, is this: "Are 
 there any other issues which will work for me 
 more profitably and in a shorter time than 
 these? I cannot afford to let money sleep, nor 
 have it work slowly. I am like a merchant : I 
 must turn my money over as often as I can, 
 so that the average yearly return will be at its 
 maximum." 
 
 One's Capital Should Be Made to Do the 
 Greatest Service in the Shoetest Length op 
 Time. — This applies both to trading capital 
 and investment capital. I have found that it 
 is best to use only a small part of the total avail- 
 able capital for trading. To employ all or most 
 of it is a fatal mistakej, for in case of an unfore- 
 seen situation, causing a large loss, one is 
 
FOEESIGHT AND JUDGMENT 147 
 
 obliged to begin over again ; whereas if the bulk 
 of the capital is invested where it is safe, re- 
 turns an income, and will probably enhance in 
 value, then in case of a calamity a part of it can 
 be turned into cash in order to renew trading 
 operations. 
 
 But this should occur in only rare instances. 
 When a man finds that he has a certain sum in- 
 vested and that this sum is diminishing on ac- 
 count of his pulling it down for trading pur- 
 poses, he is on the wrong track and had better 
 stop short and take account of himself before 
 he travels further. A person who cannot be 
 successful in trading with a small amount of 
 capital, will unquestionably lose a large amount 
 if he employs it. 
 
 In making one's capital do the greatest 
 amount of work in the shortest length of time, 
 it is necessary to be forever on the lookout for 
 better opportunities than those which you now 
 have. If you hold bonds which are selling be- 
 tween 90 and 95, and which may, in a good 
 bond market, advance to 110, you would not be 
 justified in retaining them if you can buy 
 another bond which is just as well secured, just 
 as marketable, and has all the othej* good points 
 
148 HOW I TRADE AND INVEST 
 
 of your present security, besides being convert- 
 ible into a security which has excellent pros- 
 pects of an advance to a very much higher 
 figure. 
 
 Should you own a preferred stock which is 
 paying its 7 per cent, and showing on the aver- 
 age only one and a half times its dividends, 
 whereas you can buy, at the same price, another 
 preferred stock which is earning three or four 
 times its dividend, taking the average of a niun- 
 ber of years, it is by all means best to make the 
 exchange. It is highly important to find out 
 just what we can and cannot do, but we should 
 not be discouraged too soon. I have met thou- 
 sands y and thousands of people who were en- 
 deavoring to make money in speculation and 
 regret to say that very few are really qualified 
 to become successful traders of any impor- 
 tance. 
 
 But there are hundreds of thousands of suc- 
 cessful investors, and it is toward this avenue 
 of success. and independenee that I hope to turn 
 the attention of most of my readers. By study- 
 ing "the public" and its ways, I have learned 
 what kind of operations the majority are best 
 fitted for; while it is a peculiar fact that very 
 
FOEESIGHT AND JUDGMENT 149 
 
 few people delude themselves into thinking that 
 they are good physicians, surgeons, lawyers or 
 dentists, they do try to fool themselves into be- 
 lieving that they are good investors and specu- 
 lators. 
 
 Look around you — do you find that among 
 your acquaintances 100% are well-to-do and 
 successful business men ? Are not the majority 
 just plodding along, neither getting rich nor 
 poor? Well, that is just as true in Wall Street 
 as it is in business. You can generally pick 
 the brilliant successes and count them on the 
 fingers of one or both hands, depending on the 
 size of your circle of acquaintances. 
 
 People are successful in business because, 
 while they make mistakes at first, they study 
 these mistakes and avoid them in future. Then 
 by gradually acquiring a knowledge of the basic 
 principles of success, they develop into good 
 business men. But how many apply this rule to 
 their investing and trading? Very few do any 
 studying at all. Very few take the subject seri- 
 ously. They drift into the security market, 
 very often "get nipped," as the saying is, avoid 
 it for a while, return from time to time with 
 similar results, then gradually drift away from 
 
150 HOW I TRADE AND INVEST 
 
 it, without ever having given themselves a 
 chance to develop into what might be good trad- 
 ers or intelligent investors. 
 
 This is all wrong. People go seriously into 
 the study of medicine, the law, dentistry, or 
 they take up with strong purpose the business 
 of manufacturing of merchandising, but very 
 few ever go deeply into this vital subject which 
 should be seriously undertaken by all. 
 
 Now we all admit that the average man is 
 mentally lazy. He hates work, mental or physi- 
 cal, doesn't want to spend an hour every eve- 
 ning, or even once a week, except at bridge, 
 poker, or something else equally diverting and 
 interesting. Those who do employ their time 
 profitably are headed toward wealth and inde- 
 pendence ; but in many cases the poker players 
 will later be supported by their children. 
 
 But to return to our subject, it should not 
 take more than a few years for a person to find 
 out whether he is qualified for trading or 
 whether he should devote himself to the invest- 
 ment side of the proposition. 
 
 The CtTLirsTATiON of Fobesight Is Most Es- 
 sential. — In the main it is the man with the 
 greatest amount of foresight who is most sue- 
 
FOEESIGHT AND JUDGMENT 151 
 
 cessful in the security market. Foresight is 
 the very essence of speculation. Without the 
 use of it a person is not speculating at all — 
 he is merely taking chances — ^gambling. 
 
 One of the late J. P. Morgan's strong points 
 was his ability to foresee and therefore to an- 
 ticipate the vast changes in financial conditions 
 and security prices. It was marvelous how he 
 frequently predicted, months in advance, the 
 outcome of certain involved business and finan- 
 cial situations which were not understood or 
 anticipated by anyone else. This was one of 
 the qualities that made him great. It enabled 
 him to engage in vast undertakings, of which the 
 U. S. Steel Corporation is a conspicuous ex- 
 ample, but there are many other industrial mon- 
 uments to his financial genius which was, after 
 all, built around his marvelous foresight. 
 
 It was foresight which made E. H. Harriman 
 a great man. It enabled him to anticipate the 
 development of the Union Pacific and Southern 
 Pacific Eailroads and nerved him to undertake 
 the stupendous task of creating a railroad em- 
 pire. 
 
 Harriman once held an ordinary job — ^just 
 like you and I once did, or do now — and if he, 
 
152 HOW I TEADE AND INVEST 
 
 through the cultivation of foresight, and the 
 other qualities which made him pre-eminent, 
 could accomplish such splendid results, then 
 you and I can, by the exercise of the talents 
 with which we are blessed, advance our personal 
 fortunes by concentrating on the development 
 of our own foresight. It wiU prove of value, 
 not only in our investments, but in every under- 
 taking which we enter — financial, business or 
 personal — during our whole lives. So let us 
 give close attention to the subject. A large 
 part of such success as I have already attained 
 is due to my having formed the habit of look- 
 ing ahead to see in what direction future events 
 are likely to run. 
 
 It Is Bettee to Depend on Yottr Own Judg- 
 ment Than on That of Any Othee Pbeson. — 
 If you have not reached a point where you can 
 do this, better continue your studies and prac- 
 tice until you can form a sound, independent 
 judgment on which you can base your commit- 
 ments. 
 
 "We hear a great deal in Wall Street about 
 "inside information" and the value of big 
 eonnectibns. But I have found that the man 
 who depends the most on his own judgment is 
 
FORESIGHT AND JUDGMENT 153 
 
 headed for success if he has not already at- 
 tained it. It is very easy to be swayed by the 
 multitudinous opinions that are bandied around 
 the Street and which may be had for nothing 
 because they are generally worth it. 
 
 Suppose you are a most intimate personal 
 friend of a man who is putting through a big 
 deal in a security which is listed on the New 
 York Stock Exchange. He tells you all the 
 facts and puts you in a position to buy, with a 
 thorough knowledge of what is going on. >You 
 do buy, and perhaps you make money, but more 
 often than not it will turn out when you come 
 to realize, you will be so enthused by your in- 
 side knowledge that you will not sell at the 
 right time, or a hitch will occur which turns 
 your profit into a loss, or your big man is out 
 of town, or something is happening to the mar- 
 ket which he cannot explain. 
 
 But suppose you do get away with a profit — 
 you are apt to be so carried off your feet that at 
 your very next opportunity you will think you 
 hjave Wall Street by the tail and will plunge 
 with all you have made and all you have be- 
 sides, and eventually end up with a loss. The 
 kind of money which does you the most good is 
 
154 HOW I TRADE AND INVEST 
 
 that which you make through your own efforts. 
 All "Wall Street is trying to get something for 
 nothing. Don't join the crowd. Rather, "buck 
 it ' ' — the crowd is generally wrong. Become one 
 of the "successful few who build stone upon 
 stone until they have a solid foundation of 
 knowledge and experience which will last them 
 all their lives. 
 
 If I believed that the people who are now 
 reading and studying the numerous articles 
 which appear in The Magazine would, five 
 or ten years from now, still be looking to it for 
 easy ways to make money, I should be very much 
 discouraged. But if, as I believe, a great many 
 will, through its teachings, be induced to be- 
 come students and ultimately intelligent and 
 successful investors, then I will feel that the 
 many years of hard work which I have put into 
 the publication have been well rewarded. 
 
 Down in New Street, on the block between 
 Wall Street and Exchange Place, you will find, 
 on any pleasant day, a lot of Wall Street 
 "Ghosts" sunning themselves. And by way of 
 explanation let me say that a Wall Street 
 Ghost is one who has tried to make money in 
 the market and failed. He is the saddest sight 
 
FOEESIGHT AND JUDGMENT 155 
 
 in all the financial district. Once a prosperous 
 and perhaps wealthy business man, he is now 
 reduced to mere driftwood among the eddies 
 which surround the Stock Exchange. In and 
 out of the brokerage offices you find him ram- 
 bling in a hopeless fashion, always on the look- 
 out for "tips." The red-headed bootblack and 
 Jim, the shoe-lace man, are types of his confi- 
 dants. He always know where everything is 
 going, but never gets anywhere himself. 
 
 I don't know what becomes of these old 
 "Ghosts" who drift about the old stamping 
 ground, but it is instructive to know that their 
 ranks are recruited from the people who never 
 tried to cultivate a judgment of their own, but 
 always depended on that of others. 
 
 The Longer Youb Expeeience, the Better 
 Backgeound Yott Have fob CoMPAEisoif, and 
 THE Gbeateb Youk Ability to Judge and Fobe- 
 CAST CoBEECTLY.' — ^As Conditions are constantly 
 changing, no two markets are alike and no two 
 daily sessions are similar ; but markets and ses- 
 sions and panics and booms all have certain 
 characteristics which should be carefully stud- 
 ied and intimately understood. 
 
 The man who has never been through a panic 
 
156 HOW I TEADE AND INVEST 
 
 would be apt to find himself badly rattled. Un- 
 der a pressure of excitement and nervous strain 
 he would probably do the wrong thing. But 
 anyone who has experienced a number of panics, 
 knows how to conduct his operations so as to 
 take the utmost advantage of such a rare op- 
 portunity, provided he has previously put him- 
 self in a position to buy at the low prices. 
 
 To some people it may be discouraging to say 
 that you must keep at this business for many 
 years in order to become highly successful; but 
 is not this what you must do in your own line 
 of business ? Are not the best business and pro- 
 fessional men those who have had the longest 
 practice ? 
 
 You cannot go into any phase of endeavor 
 and make money or become prominent "just 
 like that" — you must serve your apprentice- 
 ship. Of course, if you want to join the ranks 
 of the large percentage of people who spend 
 their declining years in the care or custody of 
 their children or relatives, or in institutions, 
 then you can afford to ignore my suggestion 
 that work and study and long experience are 
 essential. But if you have imagination and can 
 picture yourself as possessing wealth and con- 
 
FOEESIGHT AND JUDGMENT 157 
 
 tentment in your old age, you will immediately 
 admit that it is well worth your while to devote 
 serious attention to this subject. 
 
 You have to live anyhow, so why not live 
 well? It all depends on you, for you can gen- 
 erally take out in as great a measure as you 
 put in. 
 
 By long experience I do not mean merely 
 reading the financial columns for thirty or forty 
 years; one dpes not gain experience in that 
 way. I refer to the practical experience of in- 
 vesting in stocks and bonds ; making mistakes ; 
 finding out why and profiting tiiereby in future. 
 
HO 
 
 130 
 
 120 
 
 110 
 
 d. 
 "^ 90 
 
 U 
 
 60 
 
 50 
 
 40 
 
 ::: :' 
 
 80 E 
 
 70 
 
 ' 191415 'la'!/ "18 "-1919— "-1920-"- 1921-"- 1922-"- 1 923-* 
 
 III Z5 Railrodds. IZ5 ladusfrials. =%«; Conribiaed 
 Averages of lb Ra^ilroes^ds &-25 Iadu5hn&ls. 
 
 Ib-YLWl RECORD OF THE STOCK. MARKET 
 
XII 
 
 SAFEGUARDING YOUR CAPITAL 
 
 THE question is not whether you can make 
 money with your original capital but 
 whether you will cease because of the loss of 
 this initial money at the very outset. 
 
 There is everything in getting a good start. 
 In a preceding chapter it was shown that I did 
 not begin to invest until eight years after my 
 studies had commenced, and that I did not be- 
 gin trading until six years after that. Just 
 how long the average investor should pursue 
 his studies without putting his ideas into prac- 
 tical operation is a matter for each individual 
 to decide, but there should be a thorough un- 
 derstanding of the theoretical side before the 
 first ventures or investments are actually made. 
 
 A person becomes competent in other fields 
 because he has generally gone through a long 
 period of practice and preparation. A phy- 
 sician for example, goes to college, attends 
 
 159 
 
160 HOW I TRADE AND INVEST 
 
 clinics, rides in an ambulance, serves in hos- 
 pitals, and, after some years of preparatory 
 work, hangs out a sign. In Wall Street the 
 same M.D, would hang out his sign first; then 
 proceed to practice. In one way the doctor's 
 work, in and out of Wall Street, bears resem- 
 blance, inasmuch as when he begins to practice 
 "his profession he has to acquire patients. In 
 Wall Street it is spelled "patience." Both are 
 absolutely necessary to his success. 
 
 The Mqgadne of Wail Street has often re- 
 peated Warnings against beginning to operate 
 before you know how; but the truth wiU bear 
 many repetitious, and a& our circle of readers 
 is constantly widening we are again emphasiz- 
 ing this- point. 
 
 If Wall Street could onlyretain the same cli- 
 entele year after year and add to it^ the many 
 who for the first time find themselves with in- 
 vestment or trading capital, we should have 
 four million and five million share days instead 
 of one and two million. It is strange that in the 
 financial district, which is the very heart of 
 the nation's commercial and industrial struc- 
 ture, there is such a woeful lack of understand- 
 
SAFEGUARDING YOUR CAPITAL 161 
 
 ing of what the public requires in the way of 
 assistance. 
 
 My organization has devoted a great deal 
 of effort to showing the brokerage houses that 
 in order to permanently retain their clients, 
 steps should be taken to educate them. We 
 have offered to sell the banking, brokerage and 
 investment houses quantities of literature at 
 cost and have tried to show the brokerage fra- 
 ternity how important it is to disseminate edu- 
 cational books tod pamphlets on this subject, 
 in order that their clients, through genuine 
 knowledge, might become permanent instead 
 of transient, patrons of their respective houses. 
 But with rare exceptions, our appeals have 
 fallen upon ears that were deaf. Brokers 
 would rather go on securing^ at great expense, 
 new clients to take the place of those who be- 
 come discouraged and fall by the wayside. 
 Some day a brokerage house will be evolved 
 which has, as a permanent part of its organiza- 
 tion, an educational department whose business 
 it will be to see that its clients are properly in- 
 formed as to just what they should do and 
 how they should do it. Meantime, the in- 
 
162 HOW I TRADE AND INVEST 
 
 dividual investor is deprived of assistance 
 from the logical source whence it should 
 come. 
 
 The people who really stay at the business 
 and continue year after year to buy and sell 
 securities can generally be classified into two 
 divisions. First, those who have outside 
 sources of income and are continually bringing 
 money into the street, and, second, those who 
 are successful in their operations and thereby 
 increase their capital, or to a greater or lesser 
 extent maintain themselves out of what they 
 thus realize. It is unfortunate that the per- 
 centage of those who bring money to Wall 
 Street is so large and that many do not realize 
 that it is their lack of knowledge and their 
 inefficient methods in the financial field which 
 bring such unsatisfactory results. 
 
 Lawyers, doctors, surgeons and other pro- 
 fessional men are obliged, under state laws, 
 to pass certain examinations and receive certifi- 
 icates showing that they are competent to prac- 
 tice. This is for the protection of the public, 
 but no way has been provided whereby the 
 public can be protected against its own opera- 
 tions in the security market. It would be a 
 
SAFEGUAEDING YOUE CAPITAL 163 
 
 good thing if the financial lives of more custo- 
 mers of brokerage houses could be sustained 
 by making them pass an examination as to 
 knowledge of the subject and ability to take 
 care of themselves. Many states require appli- 
 cants to pass an examination before they are 
 given permission to drive an automobile on the 
 public highways. In one ease it is a physical 
 and in the other a financial risk. 
 
 A certain amount of mistakes and a percen- 
 tage of unfortunate investments are to be ex- 
 pected, no matter how well you start or how 
 expert you become. But you should always pre- 
 serve your trading or investment capital by 
 never putting yourself in a position to have 
 this wiped out. As the Irishman said, "It is 
 betther to be hurted than kilt." Lack of capi- 
 tal and over-trading, being the cause of most 
 misfortunes, are the result of being too heavily 
 committed in one direction or another. 
 
 Investors who begin with even a single one 
 hundred dollar capital have the choice of be- 
 ing conservative or of over-trading, but through 
 ignorance many do not realize just when they 
 are over-reaching and when their operations 
 may be designated as conservative. In order 
 
164 HOW I TRADE AND INVEST 
 
 to avoid a danger, they must know where it 
 lies. It would be foolish for a corporal to lead 
 an army into a strange country; and just as fool- 
 ish for any novice to marshal his capital and 
 launch into one or another phase of buying 
 or selling stocks or bonds, without previous 
 study. 
 
 A cross-section of the public's operations 
 would show lack of interest when prices are 
 low and the market is dragging along. When 
 prices begin to advance the public begins to 
 buy and this buying increases in proportion to 
 the extent and rapidity of the advance until, 
 at the top of an important movement, the pub- 
 lic is 95% bullish and, as a rule, loaded up. 
 The more uninterrupted the advance, the 
 greater and more rapid the increase in public 
 commitments. 
 
 Examining the cross-section in a panic we 
 would find that those who went heavily long on 
 the way up and at the top are selling out or be- 
 ing sold out. The buying is by new recruits, 
 consisting of bargain-hunting people who have 
 never before bought securities, combined with 
 the comparatively few who sold while prices 
 
SAFEGUAEDING YOUR CAPITAL 165 
 
 were high, and who therefore have money to 
 invest. 
 
 Prices may have advanced steadily for a 
 couple of years prior to the panic and those 
 who began with a small amount of capital may 
 have accumulated good round sums when 
 figured at the high prices — ^mostly paper prof- 
 its. But as bear markets are generally both 
 swift and severe, these profits are quickly swept 
 away, so that often those who have been piling 
 them up for two years often lose them in thirty 
 or sixty days. 
 
 You may say to yourself: "Oh, well, the 
 public may do that, but I'm not one of the pub- 
 lie." But the fact is^ unless you are a trained 
 and experienced trader or investor, or have, to 
 some extent, a clainl to being an insider, a pro- 
 fessional or semi-professional, then you are 
 one of that vast majority which constitutes the 
 great American speculMive and investing pub- 
 lic. The sooner you realize this fact the more 
 quickly you can adjust yourself to your proper 
 position in the financial scale. 
 
 The point of difference between the public 
 and those who are not of this class is found in 
 
166 HOW I TRADE AND INVEST 
 
 ) 
 the fact that the public is not sophisticated ; in 
 
 other words, not trained in the business. If 
 
 you are trained, you are not a member of that 
 
 body. 
 
 Having thus classified yourself it is your busi- 
 ness to ascertain how you can proceed without 
 danger to the point where you can safely and 
 profitably depend upon your own judgment. 
 My personal opinion is that this can best be 
 done by a course of study before beginning op- 
 erations, because a satisfactory outcome is the 
 result of knowledge plus capital. If you lack 
 either the knowledge or the capital or both you 
 cannot succeed, so the logical course is to get 
 the knowledge first, meanwhile saving or set- 
 ting aside the capital. 
 
 It is stupidity which makes people "rush in 
 where angels fear to tread." And there is 
 something about the Wall Street atmosphere 
 which makes people think that whatever is to 
 be done must be done at once, otherwise the 
 opportunity will get away from them. I find 
 that opportunities are coming along all the 
 time, and that the majority are not as good as 
 they look. So the best ones are worth waiting 
 for. 
 
SAFEGUAEDING YOUR CAPITAL 167 
 
 The young man with his first money might 
 very well spend his spare time for five years 
 in study, investigation, self-training, in order 
 to find out whether he is an investor, a trader, 
 or a speculator, and the more he learns about 
 it the greater he wiU reaUze how very ignorant 
 he was at the beginning. If, at the age of 
 thirty, he sees the necessity for study, and at 
 thirty-five he has accumulated some capital 
 which in the meantime has been reposing in 
 the savings banks or in high grade bonds or 
 mortgages, he should not even then go in with 
 the idea of cleaning up a fortune, but with in- 
 tent to cautiously and conservatively proceed, 
 so that during the entire balance of his life he 
 will steadily build up his fund of investment 
 knowledge and capital on a constantly broad- 
 ening base. 
 
 This matter is not anything that has to be 
 hustled— you can pursue your regular business 
 with this as a side line or hobby, if you like. 
 You can't learn everything in a minute, but of 
 course the more time you can devote to it the 
 more rapidly you can proceed to practice. 
 
 The main point, as I have said, is to so pre- 
 serve your initial capital that you will never 
 
168 HOW I TEADE AND INVEST 
 
 be deprived of it, and the way to do this is to 
 learn what you are about before you go about 
 it. 
 
 It is well to study the methods of other large 
 and successful operators and investors. 
 
 Much can be learned from this source. 
 There is great value in imitation, but of course 
 we must select the individuals whose methods 
 have been scientific and whose results speak 
 for themselves. 
 
 When I was a small boy I became interested 
 in the study of music. Some of my teachers 
 were better qualified than others, but the one 
 under whom I made the most progress was the 
 one who interested me in the broad aspect of 
 the art by inducing me not merely to practice 
 hard but to attend the best of concerts and 
 operas; to study the theory of music, the his- 
 tory of great composers, the characteristics of 
 great compositions, the principles of harmony, 
 etc. This teacher would, when I was learning 
 a particularly difficult passage on the piano or 
 organ, sit down and play it for me so that I 
 could imitate. The result was that I became 
 so interested in my lessons that I devoted to 
 
SAFEGUAEDING YOUR CAPITAL 169 
 
 them practically all of my spare time and 
 money. 
 
 That is the way to go into this subject. 
 While you cannot expect big financiers or large 
 and successful traders to sit down and tell you 
 just how they do it, there is, in these enlight- 
 ened days, a worid of literature bearing on the 
 subject. Past volumes of The Magazine con- 
 tain many articles of this nature. Your public 
 libraries are all supplied with helpful material. 
 Many hints are to be derived from a study of 
 the methods of successful men. 
 
cu 
 
 ccnphere is no place in the modern 
 A. world for the unskilled; no 
 one can hope for any genuine success 
 who fails to give himself the most 
 complete special education. Good in' 
 tentions go for nothing, and indus- 
 try is thrown away if one cannot in- 
 fuse a high degree of skill into his 
 work. The trained man has all the 
 advantages on his side; the un train- 
 ed man invites all the tragic possi- 
 bilities of failure." 
 
xni 
 
 HOW MILLIONS ARE LOST IN WALL STREET 
 
 MANY years ago there was a stock dealt in 
 on the New York Curb called Arlington 
 Copper. The "mine" was said to be over a 
 hundred years old and, with the modern meth- 
 ods which could be applied to the low-grade ore 
 in the property, the promoters claimed they 
 would be able to make a very big profit. 
 
 The seat of this operation was at Arlington, 
 N. J., a small residential town just across the 
 meadows from Jersey City. One could step on 
 an Erie train and be there in twenty minutes. 
 He could have seen a lot of old workings, and 
 a lot of rock that was pointed out as ore. The 
 round trip might have cost a dollar and occu- 
 pied three hours. 
 
 Did any of the people who eagerly purchased 
 the stock on the Curb take a trip over to Ar- 
 lington to see what they were buying? They 
 
 171 
 
172 HOW I TRADE AND INVEST 
 
 did not. They were "too busy," or they had 
 to be home at 6:30, as they had a "dinner en- 
 gagement." Possibly their meal time or their 
 evening's social affair was more important than 
 the many thousands of dollars which they put 
 into this stock, but in any event Arlington Cop- 
 per passed away as many "good things" are 
 apt to do. 
 
 One does not have to look far to find 
 many illustrations of this point. The public 
 does not investigate, but buys and sells on some- 
 body's say-so, and without using the precau- 
 tions that would surely be applied in its own 
 particular line of business. 
 
 For many years I have been impressed with 
 the necessity of having investigation precede 
 investments, instead of succeeding them. Take 
 the field of patents and calculate, if you can, 
 how many hundreds of millions are sunk each 
 year in somebody's new-fangled idea as to how 
 this or that should be done. In discussing this 
 matter with an expert mechanical engineer the 
 other day, it developed that 97% of the patents 
 that are taken out are either of no conamercial 
 value or are never developed to a point where 
 they realize a profit. Yet, as he said, "There 
 
HOW MILLIONS AEE LOST- 173 
 
 are maBy big men in this town whose ear you 
 can get quicker with a new patented appliance 
 than in any other way. They will lay aside 
 their own line of business and take up your new 
 mechanism, if it is something that tickles their 
 fancy." But that is only one field. 
 
 It is impossible to estimate how many hun- 
 dreds of millions are lost because of improper 
 preliminary investigation of the commercial, 
 financial and technical aspects of the enterprises 
 which absorb such a large proportion of the 
 public wealth. Yet there is no other way in 
 which money may be so intelligently spent as 
 in safeguarding capital. 
 
 Most people do not know how to investigate 
 an enterprise. Some one comes along with a 
 newly patented washing machine. He needs 
 $25,000 to "develop it." He would like to get 
 you and some of your friends to put up $5,000 
 each. He will ^ve you 51% interest in the busi- 
 ness. He invites investigation. But you and 
 your friends do not rea,lly investigate — ^you get 
 hold of somebody who is already in the washing 
 machine business and ask what he thinks of it. 
 He is not an expert ; he doesn't know the patent 
 situation — all he knows is whether he can sell 
 
174 HOW I TKADE AND INVEST 
 
 the macliine he is now handling and whether 
 he thinks this is better than his, but he has no 
 broad understanding of the business because 
 all he is. handling is one little machine in one 
 little comer of the U. S. A. A few hundred or 
 a few thousand dollars spent in a thorough in- 
 vestigation would save a lot of trouble, time 
 and money. 
 
 The same principle applies to an oil, mining, 
 railroad, industrial, or any other kind of enter- 
 prise. Money spent in careful investigation is 
 insurance against loss. It is also productive of 
 information which will be valuable in case you 
 desire to go into the business or buy shares. 
 
 An enterprise in which I have an interest has 
 recently decided to put a new product on the 
 market. The demand had been established and 
 greatly exceeded the supply. There was no 
 question as to the company's ability to make 
 the goods and sell them, but there was a ques- 
 tion as to just what grade of goods would best 
 please the public and just how they should be 
 sold. So a very broad survey of the whole in- 
 dustry was ordered, with the result that the 
 company is now in a position to go forward 
 
HOW MILLIONS AEE LOST 175 
 
 with its new goods in an intelligent way, along 
 the line of least resistance. It is this sort of 
 pre-vision which makes for success. 
 
 It is a remarkable and confirmatory fact that 
 the officials of this company frequently take 
 speculative fliers and make investments in se- 
 curities, but their investigations seldom go be- 
 yond the stage of a surface inquiry as to the 
 opinion of one or two parties, including the 
 broker who is at the other end of the telephone 
 listening for an order. 
 
 That reminds me of a point I have often made 
 as to the ethics involved, in the client asking 
 and the broker giving an opinion as to a con- 
 templated investment or speculation. Person- 
 ally, I believe that the client should know what 
 he wants to do before he approaches the broker 
 and that the latter 's function is to execute the 
 order and finance the operation. Many people 
 do not agree with me, but it is a matter which 
 we may take up for discussion at another time. 
 
 Perhaps you cannot investigate personally, 
 owing to lack of time or knowledge of the sub- 
 ject, but you can always secure the services of 
 those who can. In one of my previous chap- 
 ters I stated some of my experiences in mining 
 
176 HOW I TEADE AND INVEST 
 
 stocks and showed how I employed mining en- 
 gineers to examine properties and other en- 
 gineers to check them up. Mining is only one 
 form of industry which is represented in Wall 
 Street, and I should say that there are many, 
 many more ehterprises besides mines that need 
 investigation. Within the past several months 
 a number of propositions have been shown up 
 as representing but a fraction of the value orig- 
 inally claimed for them by the promoters. 
 
 What Wall Street needs is some means of 
 "checking up" on the enthusiasm and, in some 
 cases, the deception of those who are engaged in 
 marketing securities. There are two kinds of 
 people in the financial district: those who are 
 trying to help themselves by helping others, and 
 those who are helping themselves to what others 
 possess. It does not take long to find out 
 whether those with whom you are dealing be- 
 long to the preferred class. 
 
 Investigation of some of the enterprises 
 whose securities are dealt in, is a subject calling 
 f pr a Very wide range of knowledge and ability, 
 and is beyond the reach of the average man. 
 An examination of a property like the Phila- 
 delphia Company, for example, or Cities Serv- 
 
HOW MILLIONS AEE LOST 177 
 
 ice or Ohio Cities Oas would require training 
 in a great many different fields, many of which 
 the average investor does not understand. A 
 thorough investigation of such an enterprise 
 would only be justified by a very large invest- 
 ment. 
 
 It is for this reason that such a large per- 
 centage of people who buy securities are stock- 
 holders in U. S. Steel, because the steel business 
 is something they understand, or think they do, 
 and the Steel Corporation is a leader in the fre- 
 quency and detail of its periodical reports, con- 
 taining essential statistics of which almost any- 
 body can understand the main features. If 
 some other corporations with complex organi- 
 zations would make their operations so well un- 
 derstood to the average investor, and by past 
 performances attain such a degree of confidence 
 in the minds of the public, many people might 
 sell their IT. S. Steel and buy the other se- 
 curities. But with the Steel Corporation oc- 
 cupying a position, of prominence similar to a 
 mountai^ surrounded by little hills, it is easy 
 for any one to see just where the mountain 
 stands and its relative breadth and height com- 
 pared with its neighbor's. 
 
178 HOW I TEADE AND INVEST 
 
 The more I study this subject, the greater ap- 
 pears the necessity for "investigation before 
 investing." In the matter of discrimination 
 alone there is such a wide range of conditions 
 and so many angles from which comparisons 
 may be made, that the subject is, except in some 
 instances, highly complicated and calls for a 
 clear and expert judgment before deciding upon 
 a definite course. 
 
 Next in importance to knowing what to buy 
 is the question as to when it should be done. 
 
 I was discussing this matter with an investor 
 today. He referred to the assets and earning 
 power of a big corporation whose securities had 
 recently suffered a very material decline. He 
 could not understand why the stock should go 
 down in the face of such a showing of commer- 
 cial and fiiiancial strength. 
 
 My answer was this : ' 'You have an automo- 
 bile — ^it consists of a lot of steel, wood, rubber, 
 brass, leather and other material. It requires 
 gasoline, water, air and lubricating oil. Also 
 knowledge as to how to adjust the whole piece 
 of complicated machinery so that all the parts 
 will work harmoniously. The smallest thing 
 
HOW MILLIONS ABE LOST 179 
 
 about your automobile is the spark. Without it 
 the whole mass becomes junk. With the spark 
 at least you can get the machinery to go, and 
 you might plug along. But: Unless your 
 spark is timed to fire at the exact moment when 
 the piston reaches a certain point of elevation 
 in the cylinder, you might as well get out and 
 walk. 
 
 "It is the same way with the stock which you 
 just mentioned. The company has ample work- 
 ing capital, high class management, big earning 
 power, wonderful prospects. It is probably in 
 a better and stronger position than when its 
 stock sold thirty points higher. In t}n.s case 
 the 'spark' is represented by the technical po- 
 sition. At 140 the spark was not properly ad- 
 justed. At 110 the adjustment has improved, 
 but a study of the technical position of this 
 stock will eventually point out the exact moment 
 when it should be bought ; so get all your other 
 factors lined up ready for the time when the 
 technical position shows that it is time to buy." 
 
 In the fluctuations of almost every security 
 there comes a time when it may be most advan- 
 
180 HOW I TEADE AND INVEST 
 
 tageously bought or sold, and the training of 
 one's judgment in the making of decisions as to 
 "when," is one of the fine points in the busi- 
 ness. It is also one of the least understood. 
 
 Certain "authorities" on securities and their 
 markets have very frequently been proven to 
 be badly wrong, principally because they have 
 ignored this important consideration, They 
 may as well ignore the trigger in a gun. 
 
 Carnegie's advice: "Put all your eggs in 
 one basket and then watch the basket" might 
 apply to an industrial organization of which he 
 was the head, but it does not apply generally in 
 the field of investment. 
 
 One's holdings should be so diversified by 
 commitments in various lines of business, in dif- 
 ferent localities and subject to dissimilar influ- 
 ences, that no matter what happens, only a 
 small portion of the investment is affected. 
 
 Before the Spanish War, our warships used 
 to carry an observation tower which consisted 
 of one solid piece of steel so constructed that a 
 well-directed shot would demolish it, but during 
 the war some bright mind in the navy conceived 
 the idea of a tower consisting of a network of 
 
HOW MILLIONS AEE LOST 181 
 
 steel strips which took fifteen or more shots in 
 certain spots to knock it down, and thus was the 
 factor of safety vastly increased. 
 
 Investors should follow out this plan of pro- 
 tecting themselves by a diversification of in- 
 vestments, just as an insurance company avoids 
 the risking of its capital and surplus on a single 
 buUding. By spreading its risk over a vast 
 number of buildings in various localities, it is 
 protecting itself against a catastrophe. 
 
 Whatever the sum invested, it should be 
 spread among at least ten to twenty different 
 securities, greatly contrasting each other in na- 
 ture of business, margin of safety, location of 
 the industry, etc. Thus will your funds be 
 hedged about with protection against shrinkage. 
 And in the search for proper mediums you will 
 widen your knowledge by a careful and dis- 
 criminating study of the subject. 
 
"VKThen you stop to think of 
 it, yow will see that it is 
 impossible for all securities to 
 have eqtial value and pros- 
 pects; therefore some must be 
 better than others. To be able 
 to select the few which are ab- 
 solutely the best requires a very 
 broad knowledge and great 
 statistical and analytical train- 
 ing and capability. The pos- 
 session of such qualifications, 
 however, enables one to go 
 cross lots toward his goal of 
 sound investments and money 
 making. 
 
XIV 
 
 IMPORTANCE OP KNOWING WHO OWNS A STOCK 
 
 IT is important to know whether large opera- 
 tors, inside interests, a pool, or the public 
 dominate the market for a certain security or 
 group. 
 
 You have often heard the expression, "Stocks 
 are in weak hands." It is a matter of almost 
 decisive importeince to know where the stocks 
 making up the leading group of speculative 
 shares or any single security are held. 
 
 The reason this is so important is as follows : 
 A combination of bankers will seldom be found 
 on the long side of the market unless they ex- 
 pect a pronounced change in security market 
 conditions in the near future. Their own pur- 
 chases, therefore, are an indication of probable 
 betterment. When a pool takes hold, it is usu- 
 ally in a certain one or a few issues which are 
 likely to be favorably affected by developments 
 known to a few but not generally known. The 
 
 183 
 
184 HOW I TEADE AND INVEST 
 
 same is true of a large individual operator, who 
 takes a position with a big line of stocks be- 
 cause he is confident that the future will cause 
 others to take the securities off his hands at 
 higher levels. 
 
 Operations on such a scale are very often the 
 deciding factors in the trend of the market, be- 
 cause of the great quantities of securities which 
 are dealt in. Such purchases exhaust the float- 
 ing supply and thus lead to a higher level. 
 Large interests and operators also have a way 
 of influencing the market in the desired direc- 
 tion. This we may temf manipulation, or ad- 
 vertising, or marking up, or whatever we 
 choose, but it remains a fact, nevertheless, that 
 this is frequently done. Some people claim 
 that there is a "power" which dominates the 
 market, and perhaps this is true to a degree, 
 but not in the sense that many believe. Large 
 interests sometimes work together, or observe 
 each other's attitude by the action of their re- 
 spective stocks, and thus operate in harmony, 
 but without any actual understanding. 
 
 There is, however, another group of people 
 operating in the market almost constantly, and 
 this group is really the largest and most power- 
 
IMPORTANCE OF KNOWING 185 
 
 fui of all. I refer to tlie investment and spec- 
 ulative public which is, in most cases, un- 
 trained, and as a body is unorganized. If the 
 public could get together and operate in har- 
 mony so that it would not continually be step- 
 ping on its own toes, there would be a different 
 kind of Wall Street ; for without the public as 
 a buffer, large interests, pools and operators 
 would be comparatively powerless. 
 
 Some may criticize this statement on the 
 ground that it is made offhand and without any 
 definite proof, but I have had occasion in the 
 past to prove that it is true, and do not consider 
 it necessary to present the facts here. The re- 
 port of the committee appointed m 1909 by 
 Governor Hughes for the purpose of investi- 
 gating the workings of the New York Stock 
 Exchange, published in The Magazine for Au- 
 gust, 1909, refers to the operations of the floor 
 traders, who, "from their familiarity with the 
 technique of dealings on the Exchange and their 
 ability to act in concert with others and thus 
 manipulate values, are supposed to have special 
 advantages over other traders." 
 
 I claim that if a few floor traders, properly 
 organized, can get results, the public could. 
 
186 HOW I TRADE AND INVEST 
 
 properly organized, control the situation. I 
 merely mention this to illustrate the point that 
 the big thing to know is where the stocks 
 are, because the position of those who control 
 is an indication of their attitude, pose and 
 power. 
 
 It will be admitted that some years ago— 
 before the railroads were persecuted and their 
 profits curtailed by innumerable anti-railroad 
 organizations — their securities were largely 
 held by the great banking interests, each con- 
 trolling its respective groups of securities. The 
 Bockefellers were in St. Paul, New Haven and 
 others, Harriman and Kuhn-Loeb interests in 
 control of the Union Pacific, Southern Pacific, 
 etc., and the Morgans dominated their special- 
 ties. But a change has come over the situa- 
 tion, and now I may safely make the statement 
 that the great bulk of shares of the American 
 railroads are in the hands of small investors. 
 
 Lapge interests got out long ago. They saw 
 the "handwriting on the wall; they had a right 
 to sell and protect thendselves and they did sell. 
 The big ten thousand, fifty thousand and hun- 
 dred thousand share blocks were split up into 
 small lots and are so held today. The ten share 
 
IMPORTANCE OF KNOWING 187 
 
 owner is now naore representative Of railroad 
 control that at any time in the history of the 
 world and this situation will continue until 
 there is a very radical change in the outlook 
 for the American railroad industry. 
 
 Having satisfied myself that this is the situa- 
 tion, I am in a better position to judge the ac- 
 tion of the market for these stocks and to de- 
 cide upon my individual course, so far as I 
 care to trade or invest in the rails. There 
 are exceptions to this rule, but it is safe to 
 say that outside the individual movements in 
 special issues or groups, there is not likely to 
 be any concerted action until large interests 
 see clearly that the future will be brighter 
 and better, otherwise they would not be justified 
 in accumulating. 
 
 When this accumulation begins, as it prob- 
 ably will, sooner or later, there will be a very 
 distinct change in the character of the mar- 
 ket for railroad stocks. That change will first 
 evince itself in the transactions. 
 
 It will be seen from the above how important 
 it is to know who holds the stocks, and how 
 the public, unorganized, is incapable of apply- 
 ing anything but a superficial aid in the dull, 
 
188 HOW I TRADE ANR'lNVEST 
 
 dragging, declining markets we have had in 
 this group. 
 
 This being the case, the bankers, large op- 
 erators and pools, are looking elsewhere for 
 their security market profits. 
 
 There are some opportunities that are better 
 than any others offering at the moment. 
 One's task is to ferret these out. 
 
 It is astonishing how many people in Wall 
 Street work on "hunches." Whenever your 
 friend tells you about the splendid profits he 
 realized in certain transactions, he is almost 
 certain to tell you, "I had a hunch that it was 
 a purchase at that price." But when a 
 loss results from some of his ventures, he 
 does not lay it to a "hunch" but ta "hard 
 luck." 
 
 People are apt to conduct their investments 
 a good deal as advertising was conducted in 
 former years, when the advertiser's theory was, 
 "put an ad. in the paper and see how you come 
 out." To quote from a very interesting ad- 
 dress by Mr. M. H. Avram, "Advertising is 
 no longer a hit or miss proposition — ^it is scien- 
 tifically conducted and executed along pre- 
 viously determined and experience-proven 
 
IMPORTANCE OF KNOWING 189 
 
 lines. An advertising campaign may deviate at 
 times as to details, due to circumstances that 
 could not be forseen, but in its fundamentals 
 the predetermined line is followed unwaveringly 
 toward success." 
 
 In other words, advertising — formerly a 
 very inexact science — ^has become scientific. 
 It is quite within the bounds of possibility that 
 investing may also be put on the same plane. 
 We are making slow but steady progress to- 
 ward that end. 
 
 In writing this book I have endeavored to 
 give examples as to how some of the difficulties 
 in this big subject can be overcome and the 
 last few chapters have been devoted to obser- 
 vations which may help to solve some of these 
 questions. I do not wish to close without say- 
 ing a word in favor of the careful selection of 
 investment mediums. 
 
 As stated at the beginning of this subject, 
 there are some opportunities that are better 
 than any others. When you stop to think of 
 it, you will see that it is impossible for all secur- 
 ities to have equal value and prospects ; there- 
 fore some must be better than others. To be 
 able to select the few which are absolutely 
 
190 HOW I TRADE AND INVEST 
 
 the best requires a very broad knowledge and 
 great statistical and analytical training and 
 capability. The possession of such qualifica- 
 tions, however, enables one to go cross-lots to- 
 ward his goal of sound investments and money- 
 making. 
 
 It is a deeply interesting subject. The more 
 you learn, the more you realize how little you 
 know, and the more anxious you become to 
 acquire proficiency. 
 
 While as a nation we are perhaps becoming 
 more studious, we are also more pleasure-lov- 
 ing. And one's desire to study and advance is 
 often handicapped by the influences which pull 
 him toward pastimes and recreation. An en- 
 gineer friend of mine tells me that he never 
 goes to sleep without reading on some educa- 
 tional subject for at least half an hour. This 
 habit, now thoroughly formed, has been of in- 
 estimable value to him in his practice. His 
 example may be imitated to very great ad- 
 vantage. 
 
 THE ESD