Wall Street is Not Monte Carlo

Sizable Fortunes have been made and are being made by individuals who invest their money in common stocks. I, myself, have made many millions by investing in them, by buying common shares on the stock market. I own certain shares today that are worth as much as 45 times what I paid for them a few years ago.

Yes, common stocks can prove highly profitable to those who buy them -- to those who choose them carefully and consider them as investments. I would not, however, recommend that anyone spend a penny on stocks for purposes of speculation. I cannot hold out much hope for those who buy stocks in companies about which they know little or nothing on the basis of a tip. Such people expect to make a killing -- but instead, they are lambs leading themselves to the slaughter. That, in my opinion, just about sums up the situation insofar as speculation in general and stock market speculation in particular are concerned.

If purchased wisely, selected common stocks are excellent investments. But they should be bought for investment. The stock market is not a gambling den. Nonetheless, it might be said that speculators bear somewhat the same relationship to investors that roulette players bear to the owners of a casino. Speculators -- like roulette players -- are simply gambling, hoping that they'll guess right and hit a lucky streak. Investors, like casino owners, sit back calmly, coolly and confidently, knowing that the house odds are working inexorably in their favor.

To put it another way, the former are betting on the weather, while the latter are banking on the climate. The weather is notoriously temperamental and changeable. At best, it can be predicted only within certain limits and only for very short periods in advance. The climate, on the other hand, follows an established and predictable pattern year after year and decade after decade. It takes only a single, sudden freak storm to wipe out the speculator. The seasoned and sophisticated investor handily rides out even protracted spells of foul weather, because he has made allowances and provisions for them in his long-term calculations.

Unfortunately, it is difficult to impress these truths upon people who are mesmerized by the idea that they can reap immense profits through in-and-out speculation in common stocks. Even more unfortunately, those most prone to fall into this trap are usually individuals with limited savings or capital who can't afford the losses they almost invariably incur.

I know of countless incidents that prove the financially suicidal folly of random speculation in stocks. Typical -- and telling -- is the story of one of my former employees, a man I'll call George Baker.

George Baker was a likable, industrious man of 32 with a wife and two young children. One day in 1950 he came to me and asked for some advice.

"I've got about $5000 in my savings account, and my wife has just inherited $10,000 from an aunt," he explained. "I'd like to buy stocks with the money, and I thought you might be willing to give me a few hints."

I have never considered myself an investment counselor, and I told Baker as much. I suggested that he consult a professional investment counselor, but he pleaded with me to advise and help him.

I don't like telling other people what they should do with their money, but George Baker was so earnest and persistent in his entreaties that I finally agreed. I suggested that he consider investing his money in two stocks: A, an industrial stock and B, an oil stock. Both were under-priced in relation to the earnings and realizable assets of the companies that issued them. In addition, the companies were even then embarking on expansion programs, and their future prospects appeared extremely bright.

"Both stocks seem to be excellent buys," I told George Baker. "If you purchase them now -- at prevailing prices -- you'll very probably make quite a bit of money on them in the next several years."

To my surprise, Baker's face fell, and he looked terribly disappointed.

"But I want to make money quickly," he protested. "I don't (continued on page 110) Wall Street (continued from page 95) want to wait for years to make my profits. I thought you'd be able to tip me off to something really good -- you know, a stock that'll go up in price fast . . ."

I could see that it was useless to reason with Baker. He didn't want to invest. He wanted to gamble his money in the hopes of getting rich overnight.

The Korean conflict had just begun. Some stocks were dropping, while others, given artificial impetus by widespread predictions of materials shortages to come, zoomed in price. George Baker reacted in a manner characteristic of most speculators. He bought stocks which he believed were "going sky-high." For a time, his shares did continue to increase in value. Whenever we met during those next few weeks, he gave me what were almost pitying looks. It was obvious that he considered me stupid and short-sighted. It was clear that he wondered how anyone with as little imagination as I possessed could ever have become a multimillionaire. Then, the inevitable happened. The overinflated price balloons of the speculative stocks burst. George Baker lost not only all his considerable paper profits, but also the major portion of his original $15,000.

What if he had invested his money in stocks A and B and held them for the 10 years between 1950 and 1960? Well, taking into consideration dividends, stock splits and the increased value of the shares, he would have quintupled his original investment. And, he could have done as well or even better with other sound growth stocks, had he bought them in 1950 and held them as investments until 1960.

George Baker lost his money, but he had not been swindled or robbed by confidence men or tricksters. He had cheated himself of the opportunity to make a large profit over a period of time because he was obsessed with the idea of getting rich quick. Get-rich-quick schemes just don't work. If they did, then everyone on the face of the earth would be a millionaire. This holds as true for stock market dealings as it does for any other form of business activity.

Don't misunderstand me. It is possible to make money -- and a great deal of money -- in the stock market. But it can't be done overnight or by haphazard buying and selling. The big profits go to the intelligent, careful and patient investor, not to the reckless and overeager speculator. Conversely, it is the speculator who suffers the losses when the market takes a sudden downturn. The seasoned investor buys his stocks when they are priced low, holds them for the long-pull rise and takes in-between dips and slumps in his stride.

"Buy when stock prices are low -- the lower the better -- and hold onto your securities," a highly successful financier advised me years ago, when I first started buying stocks. "Bank on the trends and don't worry about the tremors. Keep your mind on the long-term cycles and ignore the sporadic ups and downs . . ."

I've found that this, in a nutshell, is the secret of profitable investment in common stocks. I have bought stocks at low -- often rock-bottom -- prices, resisted the temptation to sell them for quick profits and held them through the years. Some shares I bought during the Depression are worth 75 and 100 times what 1 paid for them.

Great numbers of people who purchase stocks seem unable to grasp these simple principles. They do not buy when prices are low. They are fearful of bargains. They wait until a stock goes up -- and up -- and then buy because they feel they are thus getting in on a sure thing. Very often, they buy too late -- just before a stock has reached one of its peaks. Then they get caught and suffer losses when the price breaks even a few points.

Typical of these people is an acquaintance of mine with whom I had lunch one day in 1955. We talked about many things -- including the stock market. During the course of the conversation I happened to mention that the X Corporation's shares were selling at 4½, and that I thought the stock would go up in price.

By late 1957, the stock stood at 11-1/4. I later learned that my acquaintance had kept his eye on the stock for two years and, when it reached 11-1/4, he finally decided it was safe to buy and purchased several hundred shares. He watched happily while the stock climbed to 13½ in the next six months. Then there was a dip. X shares fell to 10 and stayed there. My Johnny-come-lately acquaintance sold out and lost money. Those of us who'd bought early held on, for the securities were worth more than twice what we had paid for them. Eventually, the stock rose again, going up several more points to reach another fairly steady price plateau. Today, it's around 15 -- and those of us who bought early are holding on to it firmly. I might add that we've also collected satisfactory dividends on the stock through the years.

Many individuals consider themselves investors, yet they view stocks as things to buy and then sell quickly when prices go up a point or two. Now, this sort of stock dealing is fine and proper for a floor trader who is, after all, a professional and who may be in and out of a given stock a dozen times in the course of a single day. That is the floor trader's business. It is not, however, sound investment as I believe the average nonprofessional should understand investment.

As I see it, the average person should consider the purchase of common stock as the investment of surplus capital for the purpose of earning an annual return on that capital and of eventually increasing the capital as much as possible.

The average individual begins "investing" by opening a savings account or by buying insurance or annuities. He usually graduates to buying Government bonds. Later, when he is more experienced and sure of himself, he may decide to invest in common stocks. If and when he does so, he should follow certain definite rules for his own protection and benefit.

1. In the main, the average investor should consider buying only such common stocks as are listed on a major stock exchange. There are many good reasons for this. Many unlisted stocks are worthless, bogus shares peddled by fly-by-night companies. Even when the unlisted stocks are legitimate, the buyer often finds that he is "locked in" with his investment. It is frequently difficult to sell an unlisted security.

The person who buys or sells listed stocks can always be certain he is paying -- or receiving -- a price that is fair and bona fide to the extent that it has been set by buyers and sellers according to the law of supply and demand in a free market place. The same cannot always be said for unlisted stocks, which may be pegged at artificially high prices or, in some cases, have no value at all.

2. Common stocks should be purchased when their prices are low, not after they have risen to high levels during an upward bull-market spiral. Buy when everyone else is selling and hold on until everyone else is buying is more than just a catchy slogan. It is the very essence of successful investment.

History shows that the overall trend of stock prices -- like the overall trends of living costs, wages and almost everything else -- is up. Naturally there have been and always will be dips, slumps, recessions and even depressions, but these are invariably followed by recoveries which carry most stock prices to new highs. Assuming that a stock and the company behind it are sound, an investor can hardly lose if he buys shares at the bottom and holds them until the inevitable upward cycle gets well under way.

3. Withal, the wise investor realizes that it is no longer possible to consider the stock market as a whole. Today's stock market is far too vast and complex for anyone to make sweeping generalized predictions about the course the market as such will follow.

It is necessary to view the present-day stock market in terms of groups of stocks, but it is not enough merely to classify (continued on page 187) Wall Street (continued from page 110) them as, say, industrials or aircrafts, and so on. This is an era of constant and revolutionary scientific and technological changes and advances. Not only individual firms, but also entire industries must be judged as to their ability to keep pace with the needs of the future. The investor has to be certain that neither the products of the company in which he invests nor the particular industry itself will become obsolete in a few years.

In the early part of the century, farsighted individuals realized that automobiles had more of a future than buckboards, that automobile-tire manufacturers' stocks were better investment bets than the stocks of firms that manufactured wagon wheels.

The trolley-car industry was a good bet -- until trolley cars began to be supplanted by buses. Airplane makers who insisted on producing nothing but canvas-covered planes after the clay of the all-metal airplane dawned had little future. Today, the manufacturer of jet or turboprop transport planes is much more likely to stay in business and make money than one. say, who insisted on turning out trimotored airplanes.

It is indeed surprising that so many investors fail to recognize business situations only slightly less obvious than these dated or farfetched examples. They will buy stocks in faltering or dying firms and industries and ignore tempting opportunities to buy into companies and industries that cannot help but burgeon as time goes on.

4. It follows that the investor must know as much as he possibly can about the corporation in which he buys stock. The following are some of the questions for which he should get satisfactory answers before he invests his money:

a. What is the company's history: Is it a solid and reputable firm, and does it have able, efficient and seasoned management?

b. Is the company producing or dealing in goods or services for which there will be a continuing demand in the foreseeable future?

c. Is the company in a field that is not dangerously overcrowded, and is it in a good competitive position?

d. Are company policies and operations farsighted and aggressive without calling for unjustified and dangerous overexpansion?

e. Will the corporate balance sheet stand up under the close scrutiny of a critical and impartial auditor?

f. Does the corporation have a satisfactory earnings record?

g. Have reasonable dividends been paid regularly to stockholders? If dividend payments were missed, were there good and sufficient reasons?

h. Is the company well within sale limits insofar as both long- and short-term borrowing are concerned?

i. Has the price of the stock moved up and down over the past few years without violent, wide and apparently inexplicable fluctuations?

j. Does the per-share value of the company's net realizable assets exceed the stock exchange value of a common stock share at the time the investor contemplates buying?

Whether he wants to invest $100. $1000 or $1,000,000 in common stocks, every investor should ask these questions before he buys stock in any company. If each and every question can be answered Yes, then he can feel quite certain he will be making a safe and smart investment by purchasing the shares -- provided, of course, he follows the other rules for wise investment.

I repeat that I personally believe that selected -- and I want again to emphasize the word selected -- common stocks are excellent investments. There are innumerable fine buys on the market today. Among them are many stocks issued by companies with net realizable assets two, three, four and even more times greater than the stock exchange value of their issued shares.

What does this mean to the investor? Well, for example, let's suppose that the mythical XYZ Corporation has realizable assets with a net value of $20,000,000. At the same time, it has 1,000,000 shares of common stock outstanding and the stock is selling at $10 per share. The arithmetic is simple. The $20,000,000 net value of the company's realizable assets is double the total $10,000,000 value of its outstanding common shares. Thus, anyone buying a share of the XYZ Corporation's common stock at $10 is buying $20 worth of actual, hard assets.

Such situations are not nearly so unusual as one might imagine -- and the shrewd, seasoned investor takes the time and trouble to seek them out. Occasionally -- though admittedly such instances are rare -- especially astute investors discover companies that have undistributed surpluses equal to a sizable percentage of the market value of the outstanding common stock. Anyone buying stock in such a company is actually buying an amount of money equal to a goodly portion of his investment, as well as a share in the corporation's other assets.

I might point out, however, that the exact opposite may be true, and that the investor will still be safe. An individual does not necessarily have to buy stocks in a company whose vaults are bulging with cash in order to make a sound investment. There are many times when an entirely healthy company will be very short of cash.

I think one of the best examples of such a situation in my own career occurred in 1921. On January 24, 1921, the price being paid for crude oil by purchasing pipeline companies stood at $3.50 per barrel. Without warning, the price suddenly broke, plunging to $1.75 per barrel within 10 days. The market continued to drop, and independent oil producers were receiving far less for their crude than it cost them to bring it up out of the ground.

The Minnehoma Oil Company, a producing company in which I'd bought a substantial interest and of which I was a director, was especially hard-hit by the staggering break in crude-oil prices.

Now, Minnehoma Oil was not a small or a poor firm. Its assets -- leaseholds, producing wells, equipment, tools, accounts receivable, and so on -- were valued at more than $2,000,000. Despite all this, when the board of directors met on March 21, 1921, to decide what should be done to ride out the crisis, we learned there wasn't enough actual cash in Minnehoma's till to meet the firm's current operating expenses.

The company's immediate cash requirements were estimated at $50,000. This sum would tide it over the next 90 days, during which time certain accounts receivable would be collected and emergency retrenchments -- including deep cuts in directors' and management salaries -- would sharply reduce operating costs. Meanwhile, the $50,000 had to be somehow obtained -- in cash. The only practical solution was to borrow the required money from a bank.

In other, blunter words. Minnehoma Oil Company, a firm worth over $2,000,000 was in desperate need of a 90-day bank loan of $50,000 -- an amount equivalent to less than 2½ percent of its assets. The directors voted the necessary authority for borrowing the sum from the Security First National Bank on a 90-day, 6½ percent note. The loan was obtained quickly -- and, I might add, repaid promptly. Minnehoma Oil came through the price-break crisis with fling colors, and went on to make excellent profits and pay sizable dividends.

This, I admit, was an exceptional situation brought about by a sudden and unexpected business slump. Nonetheless, I think it illustrates my point. The fact that a corporation is temporarily short of cash should not necessarily deter an astute investor from buying its stocks.

The professional or experienced semi-professional investor has little in common with speculators who hopefully play the market when prices are spiraling up. The veteran investor objectively looks for ban growth stocks -- which he buys and holds, and from which he generally reaps handsome profits over a period of years.

As I've said before, he banks on the climate -- and makes all necessary allowances and takes all precautions so that he can ride out any stock market storms.

Incidentally, it should be made clear that such financial storms are not caused by professional investors or Wall Street financiers. They are brought about by speculators, amateurs and the impulsive -- and frequently totally irrational -- buyers and sellers who stampede to get in on a good thing or to get out from under.

There is still a lingering misconception that the small or amateur investor is at the mercy of the big investors and the Wall Street financiers. This might have been the case in the dim, distant and unlamented days of Jay Gould, but nothing could be further from the truth today. No ruthless, rapacious Wall Street tycoon can rig the market or corner the stocks of an entire industry these days. For one thing, all stock market transactions are closely regulated by such highly efficient and potent watchdog organizations and agencies as the Federal Securities and Exchange Commission -- the SEC. For another, the common stocks of most large corporations are owned by thousands and tens of thousands of individuals, organizations, mutual fund groups, and so on. "Big" investors seldom own more than a comparatively small percentage of a large corporation's common stock.

If anything, it is the professional investor who is at the mercy of the speculator and the amateur -- at least in the sense that the latter categories of stock buyers and sellers set the pattern for the market.

The professional investor purchases stocks on what might be termed a scientific, or at least a cerebral, basis. He analyzes facts and figures objectively and with great care and does his buying for purposes of long-term investment. He is, in effect, banking that the stocks he buys will increase appreciably in value over the next few or several years.

It is the emotional nonprofessional investor who sends the price of a stock up or down in sharp, sporadic and more or less short-lived spurts. A politician's speech, an ivory-tower pundit's pronouncements or prophecies, a newspaper item or a whispered rumor -- such things are enough to trigger wildly enthusiastic buying sprees or hysterical orgies of panicky selling by thousands of self-styled investors. The professional investor has no choice but to sit by quietly while the mob has its day, until the enthusiasm or the panic of the speculators and non-professionals have spent themselves.

The seasoned investor does not allow temporary fluctuations in stock market prices to influence his decisions to any great extent. Usually, he waits until prices return to approximately the levels at which he wants to buy or sell. He is not impatient, nor is he even in a very great hurry, for he is an investor -- not a gambler nor a speculator.

People often ask me what specific advice I would give to individuals who have various amounts -- $1000, $10,000, $100,000 or even more -- to invest in common stocks. My answers are always the same. Whether I had $100 or $1,000,000 to invest, I would consider buying only such common stocks as are listed on a major stock exchange. I would apply the rules and tests I've enumerated and select the soundest and most promising growth stocks.

And, I might add, I would certainly ignore the advice of promoters and theorists who peddle harebrained formulas or secret methods for making huge and quick profits on the stock market. There has been a spate of How to Get Rich Overnight books in recent years. Seasoned financiers and investors laugh at them -- or rather, they feel only pity for the gullible individuals who follow the "advice" contained in such tomes and almost invariably lose their money.

But, all such formulas and secret methods aside, there are many opportunities to make money in stocks today. I personally believe that some of today's best securities bargains are to be found in oil stocks. A shrewd investor who takes the time and trouble to investigate the market thoroughly before he buys will find that there are many oil companies that have net realizable assets worth two or more times the stock exchange value of their common stocks. Such shares are excellent buys, for they have fine prospects for future growth and, in a few years, should be selling at considerably higher prices than they are at present.

I do not mean to imply that there aren't similar situations and equally good stock buys in other sectors of business and industry. I am, however, basically an oilman, and it follows that I should keep much closer tabs on oil-stock situations than I do on other industries.

When I recommend selected oil shares for investment, I am doing nothing more than stating my own personal opinions and preferences. And, while I feel that I am a seasoned investor in securities, I hardly consider myself infallible.

It is always well to remember that common stocks are not the only things in which one can invest his money and hope to see his capital increase even while it is earning a regular return for him. It is also wise to bear in mind that there are many people who feel more secure -- and thus are more likely to succeed -- when they invest in such tangible things as, for example, real estate.

But good stocks are good investments -- as long as they're bought for investment and not for speculation. The average individual who wants to speculate in common stocks might just as well take his money to the nearest gambling casino and play roulette or trente et quarante. He'll be bucking just about the same odds in the salons as he would be bucking on Wall Street. He'll run just about the same chance of losing everything he owns -- and of going home flat broke.