Successful Stock Speculation

Name: Successful Stock Speculation
Author: John James Butler

by John James Butler

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Speculation Stocks

In: How To ...·Business/Management·Economics

Public-domain ebook sourced from Project Gutenberg #26841.

About this book

Successful Stock Speculation is a concise manual that treats the purchase and sale of securities as a disciplined activity rather than a gamble. The author opens by stressing the importance of Chapter XXV on market information, warning that misleading data is a chief cause of loss, and then proceeds to define speculation in contrast to investment. Early chapters lay out a taxonomy of traders, speculators, bulls, bears, and other market jargon, while later sections argue that the only reliable basis for profit is buying stocks below their intrinsic value, supported by a brief historical snapshot of 1919‑1922 market conditions. The text is organized as a step‑by‑step guide, offering practical definitions, cautionary anecdotes, and a clear hierarchy of what to buy and what to avoid.

Written in the straightforward, didactic style of early‑20th‑century financial literature, the book reflects the period’s confidence in rational analysis and the belief that “safe” speculation is attainable. Its tone is earnest and instructional, with occasional analogies to everyday safety. Readers who enjoy methodical explanations, historical market perspectives, and a pragmatic approach to trading, particularly those with a penchant for the era’s earnest self‑help manuals, will find this work both informative and engaging.

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To speculate is to theorize about something that is uncertain. We can speculate about anything that is uncertain, but we use the word "speculation" in this book with particular reference to the buying and selling of stocks and bonds for the purpose of making a profit. When people buy stocks and bonds for the income they get from them and the amount of that income is fixed, they are said to invest and not to speculate. In nearly all investments there is also an element of speculation, because the market price of investments is subject to change. "Investment" also conveys the idea of holding for some time whatever you have purchased, while speculation conveys the idea of selling for a quick profit rather than holding for income.

To the minds of most people, the word "speculation" conveys the thought of risk, and many people think it means great risk. The dictionary gives for one of the meanings of speculation, "a risky investment for large profit," but speculation need not necessarily be risky at all. The author of this book once used the expression, "stock speculating with safety," and he was severely criticized by a certain financial magazine. Evidently the editor of that magazine thought that "speculating" and "safety" were contradictory terms, but the expression is perfectly correct. Stock speculating with safety is possible.

Of course, we all know that the word "safety" is seldom used in an absolute sense. We frequently read such expressions as: "The elevators in modern office buildings are run with safety." "It is possible to cross the ocean with safety." "You can travel from New York to San Francisco in a railroad train with safety." And yet accidents do occur and people do lose their lives in elevators, steamships, and railroad trains. Because serious accidents are comparatively rare, we use the word "safety."

In like manner it is possible to purchase stocks sometimes when it is almost certain that the purchaser will make a profit, and that is "stock speculating with safety." When Liberty Bonds were selling in the 80's, many people bought them for speculation. They were not taking any risk, except the slight risk that the market price might go still lower before it would go higher, and that did not involve any risk for those who knew they could hold them. The fact that the market prices of Liberty Bonds would advance was based upon an economic law that never fails. That law is that when interest rates go up, the market prices of bonds go down, and when interest rates go down, the market prices of bonds go up. When Liberty Bonds were selling in the 80's, interest rates were so very high, it was certain that they would come down. That the market prices of Liberty Bonds would go up was also certain, but nobody could tell how much they would go up in a given time. It was that element of uncertainty that made them speculative, and not that there was any doubt about the fact that the market prices of them would go up. Buying Liberty Bonds at that time was speculating with safety. If you read this book with understanding, you will know much about speculating with safety.

Some Terms Explained

There are certain terms used in connection with stock speculation that are very familiar to those who come in contact with stock brokers, and yet are not always familiar to those who do business by mail. Undoubtedly the majority of our readers are familiar with these terms, but we give these definitions for the benefit of the few who are not familiar with them.

Trader: A person who buys and sells stocks is usually referred to as a trader. The word probably originated when it was customary to trade one stock for another and later was used to refer to a person who sold one stock and bought another. He was a trader; but the person who buys stocks for a profit and sells them and takes his profit when he gets an opportunity, may not be a trader in the strict sense of the word. However, for convenience, we use the word "trader" in this book to refer to any one who buys or sells stocks.

Speculator: This word refers to a person who buys stocks for profit, with the expectation of selling at a higher price, without reference to the earnings of the stock. He may sell first, with the expectation of buying at a lower price, as explained in Chapter XVII. on "Short Selling." In many cases where we use the word "trader," it would be more correct to use the word "speculator."

Investor: An investor differs from a speculator in the fact that he buys stocks or bonds with the expectation of holding them for some time for the income to be derived from them, without reference to their speculative possibilities. We believe that investors always should give some consideration to the speculative possibilities of their purchases. It frequently is possible to get speculative profits without increase of risk or loss of income.

Bull: One who believes that the market price of stocks will advance is called a bull. Of course, it is possible to be a bull in one stock and a bear in another. The word is used very frequently with reference to the market, a bull market meaning a rising market.

Bear: The opposite of a bull is a bear. It refers to a person who believes that the market value of stocks will decline, and a bear market is a declining market.

Lambs: "Lambs" refers to that part of the public that knows so little about stock speculating that they lose all their money sooner or later. The bulls and bears get them going and coming. If the lambs would read this book carefully, they would discover reasons why they lose their money.

Long and Short: Those who +own+ stocks are said to be long, and those who +owe+ stocks are said to be short. Short selling is explained in Chapter XVII.

Odd Lot: Stocks on exchanges are sold in certain lots. On the New York Stock Exchange, 100 shares is a lot; and on the Consolidated Stock Exchange, 10 shares is a lot. Less than these amounts is an odd lot. When you sell an odd lot you usually get 1/8 less than the market price; and when you buy an odd lot, you usually pay 1/8 more than the market price; that is, 1/8 of a dollar on each share where prices are quoted in dollars.

Point: It is a common expression to say that a stock went up or down a point, which means a dollar in a stock that is quoted in dollars, but a cent in a stock that is quoted in cents, as many of the stocks are on the New York Curb. In cotton quotations, a point is 1/100 part of a cent. For instance, if cotton is quoted at 18.12, it means 18 cents and 12/100 of a cent per pound, and if it went up 30 points the quotation would be 18.42.

Reaction: Every person who has traded in listed stocks probably is familiar with this word. It means to act in an opposite direction, but it is used especially to refer to a decline in the price of a stock that has been going up.

Rally: "Rally" is the opposite of the sense in which "reaction" usually is used. When a stock is going down and it turns and goes up, it is called a rally.

Commitment: This term is used referring to a purchase of stock. It is more commonly used by investment bankers when they contract to buy an issue, but the term sometimes is used by traders.

Floating Supply: The stock of a company that is in the hands of that part of the public who is likely to sell, is referred to as floating supply.

A Correct Basis for Speculating

We maintain that there is only one basis upon which successful speculation can be carried on continually; that is, never to buy a security unless it is selling at a price below that which is warranted by assets, earning power, and prospective future earning power.

There are many influences that affect the movements of stock prices, which are referred to in subsequent chapters. All of these should be studied and understood, but they should be used as secondary factors in relation to the value of the stock in which you are trading.

If the market price of any stock is far below its intrinsic value and there is no reason why the future should bring about a change in this value that will decrease it, then you may be certain that important influences are working against the market price of the stock for the time being. In the course of time the market price will go up towards the real value. This matter will be more fully explained in subsequent chapters.

You always should keep in mind the fact that when you buy a stock at a higher price than its intrinsic value, you are taking a risk. The stock may have great future possibilities, but it is risky to buy stocks when present assets and earnings do not warrant their market prices, no matter how attractive prospective future earnings may appear. However, the possibilities of profit sometimes are so great that one is justified in taking this risk.

It is our belief that the majority of traders buy stocks because they are active in the market and somebody said they were a good buy, even though the real values may not be nearly as much as the market prices.

As an example of this kind of trading, we want to call your attention to a news item that appeared in a New York paper. It stated that on April 1st, some brokers in Detroit, as an April Fool joke, gave out a tip to buy A. F. P., meaning April Fool Preferred, but when asked what it meant, replied "American Fire Protection." Of course, there was no such stock, but there was active trading in it until the joke was discovered. Evidently it is not necessary to list a stock on the Detroit Stock Exchange in order to trade in it.

This story may or may not be true, but we believe the statement that people trade in stocks they do not know anything about is true. You should be careful not to buy a stock merely because somebody says it is a good thing to buy, unless the person making the statement is in the business of giving information on stocks, because it may be only a rumor with no substantial basis. Of course, if many people act on the rumor, there will be active trading in the stock, and it is frequently for that purpose that such rumors are started.

What Stocks to Buy

In deciding what stocks to buy, it is well to consider first the classes of stocks, and then what particular stocks you should buy in the classes you select. We would first of all divide all stocks into two classes, those listed on the New York Stock Exchange and those not listed on the New York Stock Exchange. As a rule, it is better to buy stocks listed on the New York Stock Exchange, although there are frequent exceptions to this rule.

Then, the stocks listed on the New York Stock Exchange may be divided into classes, such as railroad stocks, public utility stocks, motor stocks, tire stocks, oil stocks, copper stocks, gold stocks, and so forth. At certain times certain stocks are in a much more favorable condition than at other times. In 1919, when the industrial stocks were selling at a very high price, the public utility stocks and gold stocks were selling low, because it was impossible to increase incomes in proportion to the increase in operating costs. But since the beginning of 1921, the condition of these two classes of stocks has been improving and the market has reflected that improvement.

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