The cycles of speculation

All speculators, and most investors, possess a general idea of the range and trend of prices for a considerable period. This knowledge is more frequently based upon impressions gained during their own years of activity in the speculative world than upon research. The knowledge gained by active participation is certainly the most forcible and lasting, but is frequently productive of erroneous ideas, as will be set forth hereafter.

For the purpose of giving a clear idea of the movements in stocks during recent years, the accompanying chart has been arranged. The use of circles in lieu of the customary straight lines was hit upon as presenting more clearly to the eye the comparative extent of each year’s movement, and more plainly distinguishing one year from another. These advantages are gained without obscuring from view the general trend of prices for the period considered.

For the purpose of establishing a single hypothetical stock whose movements should be representative of the course of all other active securities, the fluctuations of twenty stocks were welded together. That is to say, the high points of these stocks for the year 1896 were added and divided by 20. The same course was followed with the low points, and each year considered was treated in like manner. By drawing a circle upon a numbered chart with the upper rim resting upon the figures representing the high point, and the lower rim upon those representing the low point, an average price for the year is necessarily established at the axis.

The size of the circles shows the actual and comparative extent of the movements, and the position of consecutive years on the diagram shows the general trend of prices.

In selecting the twenty stocks to be used in forming a composite security, care was taken to eliminate the shares of such corporations as have undergone radical changes during the period considered, 1896 to 1905, inclusive. The Rock Island Company, for example, is in itself an important system, but owing to the conversion of $75,000,000 Common stock into $200,000,000 of mixed securities in 1902, the tracing of its subsequent movements would involve unnecessary computations and explanations. It may be added that experimental tests show that the hypothetical stock, call it “Composite Common” for the sake of convenient reference, was faithfully representative of almost all movements from 1896 to 1906, and that the selection of other stocks would have made only insignificant variations in the general result. The original intention was to extend the investigation for a longer period than ten years, but so many readjustments, assessments, and other changes occurred in listed securities prior to 1896 as to make a clear showing difficult.

Common stocks of railroads only were considered. Few Industrials have reached their tenth birthday, and aside from this, their introduction would make a false showing by increasing the dividend rate with no corresponding increase in the selling price of the stock.

The twenty stocks chosen for amalgamation were as follows:

Atchison, Topeka & Santa Fe, Baltimore and Ohio, Canadian Pacific, Canada Southern, Chesapeake & Ohio, Chicago & Great Western, Chicago, Milwaukee & St. Paul, Chicago & Northwestern, Chicago, St. Paul, Minneapolis & Omaha, Erie, Illinois Central, Louisville & Nashville, Missouri Pacific, New York Central & Hudson River RR., Pennsylvania, Reading, Southern Pacific, Southern Railway, Union Pacific, and Wabash RR.

PRICES OF COMPOSITE BY YEARS
FROM 1896 TO 1906, INCLUSIVE.

Fractions were necessarily omitted from the totals employed in charting the movements. They are, however, unimportant. Dividends on Composite Common were as follows:

It has been the frequent contention of the writer that a chart as a basis for speculative ventures is ridiculous, but a diagram framed for the purpose of pointing out certain facts, or inciting the student of speculative affairs to investigation of causes is a different matter. No interested person can look at the accompanying chart without being struck at once with the decline of 1903 following the steady advance of the preceding years. If this observation incites intelligent investigations as to the reasons for the reversal, much good may result. On the other hand, the fallacy of operating on mere mechanical records of the past is shown by the same diagram. If the chart had been handed to one of the mechanical traders in 1902 he would have argued that the average price of each year marked the approximate low point of each succeeding year. It certainly does look convincing, but what follows? The infallible system not only fails to work, but reverses itself, and the average price of 1902 becomes the approximate high price of 1903 and 1904. At about the time the system player has gathered enough figures to go on, a change occurs. No intrinsic merit attaches to any kind of diagram, they being merely convenient forms for tabulating history.

Some interesting coincidences occur in the chart; most remarkable is the exactly similar size and position of the circles representing the years 1901 and 1903. In no instance did the high or low points of any integral stock correspond in these years, but the total footings were identical in each case.

The speculator may extract some value from the diagram by observing that opportunities for profits of forty or fifty points did not occur during the entire period. The extreme possibilities in any one year were 33 points, and much less on the average. If the trader had purchased or sold Composite at an average price, his possibilities of profit would have been limited to about 15 points in any one year. This does not accord with accepted theories. The ordinary speculator who pursues his operations for ten or fifteen points successfully is almost certain to believe that much more profit lies before him, that he is only getting started. There is a reason for this; the public trader takes for his barometer some security which has been conspicuous for its extended fluctuations; he naturally notices and remembers it to the exclusion of the rank and file of stocks. For example, every active participant in speculative affairs knows that Copper had a range of 75 points in a single year, 1901. He bases possibilities too much on this sort of knowledge without reflecting that Copper was a cardinal exception, and that in order to participate in such movements he must throw caution to the winds, and deal in stocks which offer no degree of safety.

Another point established is the lapse of time required in a readjustment of values. It took Composite Common seven years to advance from an average price of 37 to an average price of 105, 68 points. This again falls short of the speculator’s ideas. He expects to buy a stock at 50 today, and sell it at par six months hence, an operation which is shown by the movements of a representative stock to require a period of six years. Again his expectations are founded on exceptions. The same line of reasoning applies to one case as to the other. The speculator unconsciously magnifies everything connected with speculation.

In reviewing the movements of prices from 1896 to 1905, the most important question is, what caused the reversal of form in 1903? A complete answer to this question would be highly educational. There was no panic, nothing faintly resembling one; business suffered some stagnation, it is true; there was a falling off in the iron and steel business, but crops were good, and wheat, corn, oats, and cotton brought good prices in both 1903 and 1904. Serious business depression was more in anticipation than in realization, but 1904 witnessed no material recovery in prices. These causes do not fully explain so radical a change. If conditions had been such as to cause a reduction of dividends, or a scarcity of money in 1903, the decline would be explained, but money was plentiful enough, and dividends were unchanged. The ratio of dividends as compared with prices was also fairly maintained from 1896 to 1902, and it would appear that prices should merely stop advancing when dividends became stationary; but prices did not merely stand still, they went materially backward.

Without pretending to enter into a full discussion of the causes for the change, one or two points may assist in forming a conclusion. The steady advance in prices from 1896 to 1902 represented two things—a recovery from the great depression of 1893, and the natural advances of property values in a prosperous and growing country. The latter point is the more important, and as there has been no cessation of the growth of population or prosperity, other causes for the reversion must be sought. It is not sufficient to merely say that the recovery over-leaped itself, for such an event would have plainly mirrored itself in a reduction in the rate of dividend returns.

Capitalization of railroads in 1903 increased about 14% as compared with an average increase of 6% in the preceding seven years. Add to this the tremendous increase in the capitalization of industrial corporations, and an over-supply of stocks appears as one of the contributary causes—undigested securities.

Dividend rates were maintained, but were not increased. This particularly affects the simon pure speculator. Nothing will drive him into a panic quicker than a decreased dividend, and nothing makes him so sanguine of higher prices as an increase in the rate of payment. He is always basing his operations on rumors of higher dividends, and when one of these rumors fails of verification, it is almost as bad as a decrease.

And dividends did decrease in one important quarter; United States Steel, the speculative favorite, capitalized more heavily than a dozen ordinary corporations, cut its rate from 4 to 3½%, with every promise of a further reduction. This had a far reaching effect, both on speculators and small investors.

It is certain that fundamental conditions have more to do in shaping prices than has speculation, but the speculator helps, and in 1903 he was particularly potent because of the excesses engendered by the unusual speculative advances of 1901 and 1902. He helped to make the prices and he helped to break them, so he may be considered a factor in the reversal.

The small investor helped. He, too, is a dividend man; he seldom looks at earnings, improvements, or extensions—he wants dividends. United States Steel was a body blow to him; it not only affected his purse, but it frightened him.

And it is probable that an army of small investors sold their holdings for another reason—they discovered that they could make a higher rate of income in other channels. So long as both dividends and prices advanced they were satisfied. They were speculating, not investing, but you cannot convince the ordinary man that buying a stock outright, in the hope of an advance in price, is speculation pure and simple.

Much of the money diverted from the stock market in 1903 by the class last mentioned, has never returned to Wall Street. This bears out the theory that higher rates of interest are being found elsewhere. Never before has the public refused to enter the stock market during a period of great prosperity. They are absent now, and furthermore, they show no intention of returning. Possibly they are wrong. The same influences which are operating to give them better returns may be operating to greatly enhance the value of the shares they ignore,—but the small investors want dividends. Their failure to enter the stock market would seem to be strong evidence that they are finding other investment-speculations more attractive than listed shares. If this is the case, the influences leading to higher interest rates are already at work, although not clearly discernible. Diversification of investments would tend to obscure the truth for a time.

But whatever the causes for the stock market relapse of 1903 may have been, the recovery has been complete. The average prices of 1906 were the highest on record.

Cycles of Grain Speculation.[5]

In examining the price movements of wheat and corn for the last ten years, a gradually advancing trend is apparent. That such would be the case was a foregone conclusion; we naturally expect to find wheat and corn in the foremost ranks of a universal movement towards higher prices. The underlying causes for this general appreciation have already been extensively and clearly discussed in Moody’s Magazine.

All Prices Advancing.

The price appreciation of wheat and corn is merely confirmatory of the theory that all prices are advancing, and that they will continue to advance until the balance between gold and other commodities is readjusted.

But there is something else written between the lines of the statistics of price changes in wheat and corn. The relative advance of the two cereals is all out of proportion.

This fact leads us to seek for some specific cause operating either to depress one cereal or enhance the other, irrespective of the influence already named.

The figures for the last ten years are as follows:

WHEAT.

CORN.

The average price of wheat in the first year (1896) was 73 ¹¹/₁₆ in standard format, in the two following years very high prices were established, and the average may be considered abnormal, as the years 1897 and 1898 cover the rise and fall of Joseph Leiter.

To digress for a moment, it may be interesting to note that efforts to carry prices beyond reasonable limits almost invariably result in disaster to the promoters, no matter how far they may be successful in establishing black-board quotations. With the exception of “Old Hutch” wheat corner in 1888, all the numerous attempts to speculate successfully on wholly artificial prices in commodities, have failed. The Sully cotton campaign, the Leiter wheat deal, the Phillips corn deal, the Coster-Martin corn deal, all ended in ruin for their sponsors.

From 1899 to 1901 inclusive, the average price of wheat was a little above 70 cents, in 1902 and 1903 it rose to 80 cents, and in 1904 and 1905 to $1.00.

In the latter years, allowance must again be made for unusual influences, the Russo-Japanese war naturally helping wheat prices; making due allowance for this, it may be fairly considered that wheat has in the last ten years increased its average selling price from about 70 cents to 90 cents, or approximately 30%.

Why Corn Has Risen More Than Wheat.

Corn prices in the same period have advanced 100%; the comparatively large number of uses to which corn is put may partly account for the disproportionate enhancement of its price, but the discrepancy is too great to be entirely explained away on this account. It is necessary to seek some additional and more powerful reason.

The following statistical facts will make it clear that corn and wheat are in wholly different positions.

The United States raised, in 1905, 693,000,000 bushels of wheat. The world’s wheat crop in the same year was 3,275,200,000 bushels. Therefore, we raised approximately 21% of the world’s wheat crop. The year 1905 is fairly indicative of the proportions for the last ten years.

The acreage of wheat in the United States in 1896 was 43,618,646; in 1905 it was 47,854,079, an increase of 38%.

The world’s wheat acreage as indicated by production, is increasing at about the same rate as is the acreage of the United States.

The United States raised, in 1905, 2,708,000,000 bushels of corn. The world’s corn crop was 3,396,800,000; therefore, we raised 80% of the world’s corn.

The corn acreage of the United States in 1896 was 81,027,156; in 1905 it was 94,011,369, an increase of 16%. The world’s corn acreage, as shown by production, did not keep pace with our own ratio of increase, but remained almost stationary.

These figures show that the world is depending on the United States for only 21% of its wheat, and that wheat acreage the world over has increased about 38% in ten years; but the world is depending on the United States for 80% of its corn, and the world’s corn acreage has increased less than 16%.

In order to grasp the full significance of these figures, our practical monopoly of corn production must be appreciated. Even if we admit an equal ratio of increase in corn acreage the world over, it remains for the United States to provide 80% of the increase.

Corn Area Limited.

The probability of any considerable area of new corn land being exploited, either at home or abroad, is very small. A recent circular letter by a man prominent in the cash corn trade, states that there is not an uncultivated acre of available corn land in the United States. This is a radical statement, and does not allow for the fact that with a sufficient price stimulus, considerable wheat, or even cotton land, would be diverted to corn. But whatever allowances are made for an increased corn production, it must be admitted that the possibilities are largely confined to the United States.

Wheat acreage is not thus circumscribed; in fact, the case is practically reversed; almost 80% of the natural increase in wheat production will come from outside our boundaries. Of the principal wheat producing countries,—France, Germany, Russia, Poland and Caucasus, Italy, Hungary, Spain, Roumania and Argentine Republic—the two first named alone fail to keep pace with the United States in ratio of increased production, and others have made up the deficit of these two laggards.

In a nutshell, the difference between the relative positions of wheat and corn is this: The world’s supply of wheat will be furnished by the world, while the world’s supply of corn must be furnished by the United States.

It appears, therefore, that while wheat and corn may both be expected to gradually seek a higher average price in sympathy with the general upward trend, corn is affected by a specific influence, the effects of which must be added to the homogeneous advance.

It is not possible that the supply of corn should increase as rapidly as the demand, under the circumscribed conditions herein set forth. As has already been suggested, the price of corn may become attractive enough to cause the diversion of wheat and cotton lands to corn growing. The possibilities of such a course, however, are not only limited by nature, but such action would stop itself at a certain point by decreasing the supply of wheat or cotton, and again restoring them to favor with the planter.

The speculator may, therefore, reasonably believe that corn is destined, eventually, to reach much higher prices. He must, of course, allow for the temporary influences of large and small crops, and the numerous other actual and technical conditions which cause intermediate fluctuations, and must furthermore bear steadily in mind the fact that there is a limit beyond which the price of corn can never be sustained.

When a given commodity goes beyond a price where it can be replaced by another commodity, it has gone too far; and when necessities become luxuries, they take their places as such, and demand slackens.

Cycles of Cotton Speculation.[6]

The accompanying chart, formed on the same plan as the diagram illustrating the movements of stocks in Moody’s Magazine for May, develops some interesting features in the movements of Cotton for the last ten years.

For the benefit of those readers who did not follow the stock chart, it may be said that each circle represents the fluctuations for a single year. The bottom rim of the circle rests on the lowest price during the period, and the top rim on the highest price. The average price is, of course, established at the axis.

The chart illustrates speculative extremes in cotton, the figures on which it is based are not the prices of Spot cotton, but extreme high or low prices for all options. The result, however, would have been only slightly changed had Spot cotton prices been employed.

The diagram is based on fluctuations of 25 points, or ¼ cent per pound; the prices shown, therefore, are not exact, but they serve to illustrate comparative movements with sufficient accuracy. The high and low figures are not those of a calendar year, but of a fiscal, or crop year, ending August 31 of the years named; thus the prices for 1896 represent the fluctuations of the season 1896-1897. As production is necessarily a vital factor in making prices, this method was adopted to prevent confusion in examining the price effects of lean or abundant production. The range of prices for the period considered (1896 to 1906 inclusive), was as follows:

In the first three years considered we find low prices, and naturally restricted speculation. The speculative price range for the entire three year period is only a shade more than 3½ cents per pound. This was occasioned by two things; first, the general depression following the panic of 1893, and second, over-production. An examination of the prices of staples shows that unusually low figures prevailed in 1898 and 1899. Corn, for example, averaged 27 cents in 1897, and 31½ cents in 1898. Wheat shows high average prices, but the showing is a result of fictitious speculative figures established by the Leiter deal, and cannot be considered a fair criterion. It may be added, however, that wheat sold as low as 64 cents in 1897, and 62 cents in 1898.

The question of over-production will be made apparent by reference to the following table:

Prior to 1897 no crop of over 10,000,000 bales had ever been made; the two bumper crops, 1897-98 and 1898-99 coming together, naturally brought about very low prices, particularly as they occurred in a period of general depression.

In the season next following, 1899-1900, there is a marked falling off in production, which is again reflected in a higher average price. But from that time on, we do not find prices and production in such perfect accord.

It is generally considered now that 10,500,000 bales is a fair crop. In the four seasons from 1900-01 to 1903-04 inclusive, we raised normal crops, while prices advanced. It would be manifestly unfair to consider the year 1903-04 as reflecting with any degree of accuracy the normal price of cotton, for in that period occurred the disastrous Sully campaign. Making due allowance for this, however, it may be assumed that prices would have advanced if no such deal had occurred. This statement is supported by the fact that the bursting of the bubble did not put prices below 9 cents at any time.

Now the most important part of the period is reached, the seasons of 1904-05 and 1905-06.

In 1904-05, in the face of an unprecedented crop of 13,600,000 bales, and in spite of the depressing influence of a speculative debauch in the previous year, the average price of cotton was 8¾ cents.

Still later, in 1905-06, a crop only a little below normal was raised and sold at an average price of 10.93.

Eliminating speculative extremes, and the temporary effects of large or small crops, it appears that the price of cotton is steadily advancing. This is the principal fact for the speculator to consider.

No one pretends to dispute the fact that the prices of all staple-food stuffs, metals and other commodities, as well as labor, have advanced materially in the last ten years. Yet the ordinary speculator ignores this broad general principle, and seeks specific causes for the readjustment in cotton prices. And even this research is seldom conducted intelligently. The investigator attempts to explain higher cotton prices by pointing to reduction of acreage, diversification of crops and organizations formed for the purpose of withholding supplies from the market. He disregards the fact that while these influences play some small part in the matter, cotton is also seeking a higher level in common with every commodity that is bought and sold.

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

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

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

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

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

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

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

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

Conclusion.

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

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

1—What margins are necessary to reasonable safety?

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

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

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

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

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

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

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

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

3—What class of securities is the safest?

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

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

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

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

The principal movements for ten years have been as follows:

1.—The Bull Market of 1897 to 1899.

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

The intermediate reactions were as follows:

2.—The Bear Market of 1899-1900.

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

Intermediate rallies were as follows:

3.—The Bull Market of 1901.

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

Intermediate reactions were as follows:

4.—The Movement of 1902.

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

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

Intermediate rallies were as follows:

5.—The Bear Market of 1903.

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

The intermediate rallies were as follows:

6.—The Bull Market of 1904 and 1905.

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

The intermediate reactions were as follows:

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

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

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

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

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

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

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

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

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

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

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