More books and articles have been written on stock market basics than on perhaps any other business subject in the world. Most of these have as their purpose instructing the reader on exactly how he can invest to make a sizeable amount of money, and if he really applies himself, how he can become rich in either three or five years. One of the most useful books written appeared in 1961. It did not tell you how to get rich. It emphasized the difficulties of invest­ing in the stock market and it performed a tremendous service in this way, plus isolating the significant factors, which record and explain the ups and downs of the market. To invest in the market by following the procedures outlined in that book is anything but easy. It requires a considerable amount of work every day the stock market is in operation. The book is written more for the professional investor to tell him how to make maximum profits out of both the rises and falls of the market.

The average investor will not take the time or perform the work necessary to maximize his profits, and he is satisfied with something less than maximum profits over a period of time. It is this type of person that we are writing for, not the professional investor who often spends 100% of his time on investments. We are, furthermore, writing for the smaller investor, not for the larger, pro­fessional one.

When we talk about stock market basics we are not trying to write one more treatise on how to get wealthy in the stock market. We are talking about that market in comparison with the other investments outlined in this book. This is a comparative review of the stock market. We do not present it as the only outlet for funds, although it certainly is for many people who know only the stock market on the one hand and the savings bank on the other. We treat the stock market as one outlet for funds, an outlet that can be almost the only good outlet at certain times, and a terrible outlet at other times—one that offers too much risk. In 1960 the stock market for the nonprofessional investor was, in my opinion, a substandard investment. Other investments in my portfolio yielded 12% and 14% and sent checks monthly, and the underlying businesses grew stronger while a number of the major firms listed on the Stock Exchanges showed declining profits and the trend of the market was down until late in the year. An inexpert investor in the stock market during most of the year 1960 would have had the cards stacked against him.

In this book we have considered investments primarily of the loan type, those in which a person or organization is obligated to return a given number of dollars, plus a profit, over a period of months or years. Above everything, the proper investigation of these risks and safeguards against losses have been stressed. To provide a balanced picture of investment opportunities as well as a contrast to the fixed obligation, fixed yield type investment, we have included the stock market together with investment companies.

Let us, considering stock market basics, first look at the advantages and disadvantages of the stock market as an outlet for funds. The following are the advantages:

1. Instant availability of funds. The importance of this availability of funds on virtually a moment's notice can hardly be overemphasized. In almost no other type of investment outlined in this book can you get your money as soon as you need it. In many cases you have to nurse along a poor credit for years and finally foreclose on him. The stock market provides almost instant availability. I will remember my first realization of the liquidity of the market. A friend of mine, a broker, decided to sell a large block of stock worth well into five figures in order to take advantage of an opportunity to invest in something else that he felt would rise in value within a day or two. He placed his sell order and we watched the ticker tape. In about five minutes his sale was recorded together with the price. The sale actually took place in New York on the floor of the New York Stock Exchange even though we were sitting in Washington. The price at which the stock was sold was about $.25 per share under the previous sale and could be pretty well forecast. To get your money when you want it and to get it out of an investment that you do not want can be all important.

2. Elimination of the element of dishonesty. The entire field of time sales finance is riddled with dishonesty—on the part of the borrowers and on the part of the dealers. You must always be on your guard against it. Otherwise you may well end up with nothing. In the stock market you do not run this same risk. The chance of any firm on the New York Stock Exchange or American Stock Exchange absconding with your money is almost negligible. Individuals in these firms, of course, are not above em­bezzlement, but their thefts usually cannot materially reduce the value of your stock. Sometimes "overconscientious company men" may cause you a loss by rigging the prices of electrical equipment and other things so as to bring on antitrust suits, but these actions are not thefts of funds you have entrusted to the company.

3. Little possibility of being caught in a default. In sales finance, defaults are common and must be allowed for. The larger portfolios of investments in mortgages, sales contracts and the like always have losses, and these can often be predicted as to percentage of outstanding loans each year. The smaller the portfolio you have the more unpredictable are the losses. You may go on for years and have no losses. Sud­denly $20,000 may disappear. The borrower has defaulted. In the stock market you do not have this risk. Even on the bond market, defaults are not too common and can often be predicted through the study of published records, which we will come to later. This risk of default is largely eliminated by investing in stocks of major corporations.

4. Investment in larger corporations. The largest corporations of the country are listed on the New York Stock Exchange, and the slightly smaller ones on the Ameri­can Stock Exchange. Of course many giants are on the American Stock Exchange and many of them are larger than some on the New York Stock Exchange. When one invests in a larger corporation there is not the risk involved in investing in smaller corporations, partnerships and individual proprietorships. If you buy a second mortgage on a home owned by a seaman second class in the Navy, the risk is obviously greater than that involved in investing in Jersey Standard. On the other hand, the return on the second mortgage is higher, and if the borrower defaults or passes on, the home is your security. But the fact remains that there is great stability in investing in the larger corporations of the country.

5. Capital gains status of price increase. For the past 10 years the dividend yield on securities has taken a decidedly second place to the appreciation in price. With the constant rise of the market for over a decade the attention of the investing public has been turned away from the percentage of dividends a stock pays to what its price will grow to be. This shift in interest has taken place for three reasons: In the first place, the market has been rising with such rapidity that gains in price overshadow yield. Second, as price rises and as earnings per share and dividends per share do not keep pace with the rising stock market, the dividend yield becomes more and more insignificant; and in the third place, gains in the price of stocks are taxable at the lower capital gains rates. For the low-to-medium income earner this means that one hah0 of the amount of the gain is added to his income before applying the tax.

A friend of mine who works in the Department of Defense earns about $15,000 per year. He pays roughly 30% of his income in taxes—$4,500. He has investments, which have been appreciating so as to give him an additional $15,000 per year. If his salary were $30,000 per year his tax would be 47%, or $14,000. But for tax reasons his $15,000 stock appreciation is considered only $7,500 (one half). His taxable income is thus $22,500. On $22,500 his tax rate is about 38% and his tax is $8,550. This tax compares with a tax of $14,000 he would have had to pay had all his $30,000 income been from salary.

A man with $300,000 income is in the 91% bracket, and he will not be helped much as far as bracket is concerned if his gain of $15,000 is cut in half and added to his income. He will pay 91% or one half of the gain ($7,500) which amounts to a tax of $6,825, or 45½% of the gain. To a person in this income tax bracket it is of advantage to pay the straight capital gains tax of 25%. This tax amounts to $3,750. The Internal Revenue Service permits the taxpayer to take his choice of these two methods of determining the tax so that his income tax may be the lowest possible, and which method is used depends upon one's income.

6. Substantial return from investments in stocks. The return on stocks comes from two places: dividends and capital gains, and it has been emphasized that during the past decade the capital gain (the increase in the price of the stock) has been the im­portant thing because it has been substantial and it has a preferred tax status. This is the record of the stock market over the past three decades:

Year	Dow Jones Industrial Average (Dollars Per Share)	Moody's Dividend Yields Of 125 Industrial Stocks (Per Cent)
1929	$311	3.84%
1930	236	4.93
1931	138	6.37
1932	64	7.28
1933	83	3.71
1934	98	3.42
1935	120	3.52
1936	162	3.36
1937	166	4.79
1938	132	3.86
1939	142	3.85
1940	134	5.30
1941	121	6.33
1942	107	6.44
1943	134	4.54
1944	143	4.56
1945	169	3.99
1946	191	3.75
1947	177	5.06
1948	179	5.87
1949	179	6.82
1950	216	6.51
1951	257	6.29
1952	270	5.55
1953	275	5.51
1954	333	4.70
1955	442	3.93
1956	493	3.89
1957	475	4.11
1958	491	3.88
1959	632	3.10
1960	615	3.50
1961	670 (March)	3.11 (March)

If we take the 12-year span from 1949 through 1960 and determine what the return on money invested in the stock market would be, we start out with a composite price per share at the beginning of the period of $179 and at the end $615. The actual return on the $179 invested at the beginning of the period was $615 less $179, or $436. This total return works out to $36.33 per year, or slightly over 20% per year. This 20% is taxable as a capital gain and is thus pre­ferred income. In addition to this 20%, dividends must be added, and these aver­age out to 4.82%, making a total return of nearly 25% per annum, 20% of which is favored income from a tax point of view, and if the stock is not sold, there is no tax at all.

Before we get ahead of ourselves with stock market basics, the answer would seem to be to buy stocks and forget about the rest of the opportunities listed in this book. But the answer is not so simple. We are not buying the Dow Jones Industrial Average. We are buying particular stocks and there is surely no guarantee that they will go like the Dow Jones Industrial Average went. There is likewise no assurance that the Dow Jones Industrial Average will move in the next 12 years as it did in the past 12. And while the general movement was up, it has faltered along the way, and the investor who bought in 1956 and sold in 1957 and the one who bought in 1959 and sold in 1960 were not at all impressed with how well the average moved over the 12-year period. The one who bought at $311 in 1929 and sold for $64 in 1932 was very unhappy; and even though he held his stock until 1961 there was absolutely no point in his riding the market down. He would have done better to sell all his stock, hold cash and buy back in 1932. With the same cash he could buy five times as many shares of the same stock he sold at the 1929 peak.

Before we get into the enormously difficult problem of how to pick a stock, when to buy and when to sell it, let us quickly review some of the disadvantages of investing in the stock market - these are important to stock market basics:

The cash yields are low, as can be seen from the table. If a person must depend on cash income from investments he will not be particularly interested in yields of around 3%when from other investments we have described he can get 10%, 12% or far more.

There is no certainty that the stock will appreciate. Appreciation is a nebulous and fortuitous thing, which may or may not take place, and many professional investors find that their portfolios decline despite their best efforts. The investor is perpetually in doubt as to how much money he has and whether his savings are intact or not.

There is the possibility of a decline in the total fund of savings. One broker in a Washington investment house told me that he does not recall anyone to whom he talked who made money in the year 1960. All lost for the year. Even in a good year if one investor has a portfolio of 10 stocks, it is considered satisfactory if seven go up and only three go down.

There are no guarantees or safeguards on the capital invested. You are worth every day just what the stock market says you are worth on that day, and not a cent more. Maybe the company is fine and the stock will go up, but your wealth is always measured by the daily stock quotation. When the quotation is lower, your fund of sav­ings is lower. In a collateralized loan you have the signature of the borrower's corpora­tion, very often his own personal signature and that of his wife, plus the security of the collateral. If the collateral is a mortgage on a pre-cut home the buyer of the pre-cuthome must pay you. If he cannot pay then you can take over the home, liquidate it and get your money out. These guarantees and safeguards do not exist in the case of the purchase of stock.
One of the very worst features of stock ownership is that it is likely to lead to "stock market-itis." This is a species of neurosis that is most painful when you notice from the newspaper that your stock went down. It is a peculiar thing but often true, that a rise in the price of your stock of $2 does not give as much satisfaction as a drop of $1 gives pain. And on days when the whole market declines a great deal, the suf­fering can often be intense. Another manifestation of "stock market-itis" is the neces­sity to buy the very latest paper each day to follow the course of your stocks to the minute. All other news contained in the paper is secondary.

By its nature the stock market creates the jitters. If a person has say $1,000,000 all in one stock which is quoted at $50 per share, a decline for one day of $1 per share is nothing to get excited about, and is entirely usual. But a $1 decline means an actual loss of $20,000 for that one day.

If you are to operate in the stock market, to be successful and to have even a modicum of peace of mind, you must not be subject to stock market-itis. Cer­tain temperaments should not be in the market at all, because to operate in it successfully you must be with it all the time, and if this application worries you, the possibility of gain may well not be worth the anxiety involved.

Now let us go behind the Dow Jones Industrial Stock Average. In the first place, the Dow Jones Average is composed of just 30 industrial stocks:

Allied Chemical	International Nickel
Alcoa	International Paper
American Can	Johns-Manville
American Telephone	Owens-Illinois Glass
American Tobacco	Procter and Gamble
Anaconda	Sears Roebuck
Bethlehem Steel	Standard Oil of California
Chrysler	Standard Oil of New Jersey
Du Pont	Swift
Eastman Kodak	Texaco
General Electric	Union Carbide
General Foods	United Aircraft
General Motors	U. S. Steel
Goodyear	Westinghouse Electric
International Harvester	Woolworth

These 30 stocks are generally taken as a measure of the entire stock market, but they are not necessarily representative of that market. In the first place there is a Dow Jones Rail Average. Between late February 1961 and early June 1961, the industrial average rose from about 650 to over 700. In the same period the rail average of 20 stocks declined slightly from a level of 145.

There is also a utility average of 15 stocks and this average (gas, electric and water companies) rose from about 107 to 114 in the period.

Standard and Poor's Corporation puts out an index of 500 stocks. In 1949 this figure was 15.23 and in 1960 it was 55.65. The average annual increase in price of these 500 stocks over the years 1949 to 1960 inclusive was over 22%—about 2% more than the Dow Jones Industrial Average. This average is in some ways more representative of the movement of the market in general. Sometimes one of the averages actually takes a different direction from the other. One goes up while the other goes down.

There are two other leading indexes—the New York Times Index and the Associated Press Index. These two indexes vary somewhat from the other two, but not greatly.

At any rate, there are four leading indexes that in a general way represent the stock market as a whole, but only in a general way. There are 1,300 corpora­tions listed on the New York Stock Exchange and just 964 are listed on the American Stock Exchange. Although there are 14 other registered stock ex­changes throughout the country, the two New York exchanges handle 90% of all the exchange transactions, which take place in the United States. By dollar volume the American Stock Exchange does only 10% of the business of the New York Stock Exchange.

But these are not the only traded issues. On the so-called over-the-counter market there are no fewer than 8,000 corporations listed. This listing is done five days a week by the National Quotations Bureau, Incorporated in a com­pendium of 175 sheets, some pink and some yellow, the pink for stocks, the yellow for bonds. While the pink sheets include the smaller stocks, the yellow sheets include some of the soundest bonds sold, those of the largest corporations.

It is obvious that any average must be taken for what it is, whether Dow Jones, Standard and Poor's, New York Times or some other. It may roughly trace and measure the course of the stock market in general, but it can measure 10,000 stocks and their movements only in a very limited way, and certainly it cannot measure the movement of one particular stock with much reliability. When you read the Dow Jones Average for any special hour of the trading day you must remember that it may have very little to do with any stock which you hold or in which you are interested.
Before we discuss criteria for the purchase or sale of any particular stock or stocks, whether traded on the New York Stock Exchange, the American Stock Exchange or over-the-counter, let us take a brief look at bonds. These are fixed obligations of the corporation to repay a fixed number of dollars on a given date with interest, and in this respect they resemble some of the investments we discussed earlier.

These are the yields on the highest-grade corporate bonds (Moody's rating Aaa) over a 12-year period:

YIELDS OF HIGHEST GRADE CORPORATE BONDS
(1949-1961)

1949	2.66%
1950	2.62
1951	2.86
1952	2.96
1953	3.20
1954	2.90
1955	3.06
1956	3.36
1957	3.89
1958	3.79
1959	4.38
1960	4.41
1961 (April)	4.24

If an investor went out and bought a bond on any of the particular dates listed above, these are the yields in dollars he could expect. The difference in yield between years is certainly not caused by any variance in the rate paid by the corporations, but rather by the rise or fall in the price of the bond. These prices vary from day to day just like stock prices, although not over so wide a range. However, Standard and Poor's corporation prices of A1+ issues of bonds varied from 92.8 in February 1960 to 97 in March 1961.

A corporate bond is an obligation of the corporation to repay a fixed amount of money lent to the corporation, but this obligation does not become real until the maturity date of the bond; this may be as much as 80 years away, or even more. In the meantime and for all practical purposes, there is no obligation to repay any fixed sum of money, and what you can sell your bond for varies and can be more or less than you paid. Unless the yield on a bond is very attractive, that is, well above 5%, a bond is not a highly desirable investment for the indi vidual unless he has rather large capital and uses bonds as the smaller individual does the building and loan association.

High-grade state and municipal bonds are infinitely more sought after because many of them enjoy a tax-free status as regards the income tax. Their yield and price parallel that of corporate bonds, but the yield is generally lower because of the tax-free status. In February 1960 Standard and Poor's domestic municipal bond price index stood at 100.4. In March 1961 the index had risen to 108.9, a substantial rise in one year. The yield was 3.44% at the end of the period. To emphasize the importance of this tax-free status, let us suppose a person with $1,000,000 capital invests in tax-free municipals. His annual return is $34,400, most if not all tax-free. If this same income were taxable, his tax might be 50% of his entire income. It would be necessary to have a taxable income of about $100,000 to come out with $34,400 after taxes.*

How, then, looking at stock market basics, is it possible to select intelligently one or more stocks from the approximately 10,000 offered for sale every day?

For decades the advice was, "Buy the blue chips." "Blue chips" are the big, reliable companies, and obviously these are listed for the most part on the New York Stock Exchange. The Dow Jones Average is composed of blue chips, and since there are only 30 listed, at the same time that the average has been going up, it might seem a simple matter to toss a coin to see which ones should be bought out of this list of 30.

* An example of a high yield tax free bond is the Chesapeake Bay Bridge and Tunnel Authority 5¾% bond. In 1961 this bond could be bought under 100 to yield almost 6% and this 6% is equal to 12% for a man whose top income is taxed at a rate of 50%.
But let us get down to specific cases: Standard Oil Company of New Jersey is one of the largest, best managed and generally soundest corporations in the United States. Its earnings per share in 1958 were $2.72, in 1959 $2.91 and in 1960 $3.18. From 1957 through 1960 its dividends have been $2.25 per share each year. From the middle of 1957 to the end of 1960 the price trend of this stock was down. It declined from almost 70 to a point below 40.

Another giant on the list of 30 Dow Jones stocks is the highly successful General Electric. From a high in early 1960 of nearly 100, GE plummeted to a level of close to 60 in the spring of 1961 because of the actions of the United States government in connection with price fixing by the corporation.

There is some merit to the classical approach to the valuation of a stock by analyzing the underlying strength and prospects of the company, but this is only one of the elements to look at. It, of course, should not be overlooked because in the long run, earnings per share will determine the price of a stock. The only question is, "How long?" While you are holding a sound company's stock others may be moving up and you want to move up with them.

Determine the earnings trend of the company over the recent four or five years. It should be up in general, but stocks have moved up in price while earn­ings were declining.

Determine the position of the industry through reading the Wall Street Journal, the financial and business section of The New York Times, the Value Line Investment Survey, and the journals published by every industry and available in any library. The reason Standard Oil of New Jersey was not moving up more rapidly is due to the fact that the outlook for the petroleum industry was not as healthy as some of the other industries.

The most important piece of advice that can be given the investor in stock is that the price of a stock is the direct result of the forces which make the price of anything (stock, commodity or service)—demand and supply. For a long time in the spring of 19611 thought GE was a good buy; that it might go up. I ques­tioned a number of brokers and investment bankers about GE. There was a distinct lack of enthusiasm. Since these are the buyers and these are the people who recommend that customers buy the stock, it was evident to me that the demand was not there. It might change very quickly, but until it did I determined to buy other stocks.

It is important to emphasize this point once again: that the price of a stock is the direct result of how much of a stock is offered for sale and what the demand is. We will return later to this stock market basics point with a striking example.

The next most important piece of advice is that you should buy a stock which is moving up, not one which might move up or one which is moving down and looks as though it might be a bargain. You cannot hope to buy at the bottom and sell at the top. If you try to buy at the bottom you have no assurance that the decline has stopped; and if you try to sell at the top you cannot be certain the rise will not continue. Buy just after a stock has demonstrated its willingness to rise for a few weeks, and sell after about two weeks of decline.

The most foolish piece of philosophizing that an investor can engage in is to say to himself, "I don't need to worry about the declining trend in the price of my stock. It will come back." Yes, it may, but when? And if you sold and simply held cash, you might for your cash get far more shares with which to ride the market up again. At the beginning of 1960 Shell Oil was well over 40. By the summer it was down close to 30, and by the spring of 1961 it was close to 45. The downtrend was clear and the uptrend was just as clear. A person could have sold early in the decline and bought early in the rise. My wife, being as good an analyst as I, if not a little better through "intuition," hit the low point and advised buying at that point. A profit of 50% could have been realized in one year!

Next, follow the market and follow it every few days to determine trend. The closer you are to the market the better you are informed as to what to do. Do not worry about a decline of a few days or a sudden break in the market, no matter how sharp. Worry only about the trend of your stock and the trend of the market.

Use the stop loss order to protect yourself against losses and to provide you with peace of mind. When you purchase stock after careful study and considera­tion, you may not want to put in an immediate stop loss order which is an order to sell if the stock reaches a particular price below the present market. In the past I have placed stop loss orders, when I bought stock, at about two points under my purchase price. If I bought a stock at 501 put in a stop loss order at 48. Very often the stock went down to 48 and I was sold out. I lost both in the price of the stock and in the commission and tax I had to pay when I bought and when I sold. Then I had the unhappy experience of seeing my stock rise above 50 and keep on rising. If an investor followed the rule of placing a stop loss order a few points under the purchase price, he could hardly ever purchase a stock that jumps around like O'okiep Copper. This stock jumps up and down two points during one trading session.

If a stock goes up say 10 points, you may place a stop loss order three or four points under the market. This still prevents a loss and you have already made a good profit in the stock. The strict trailing stop loss order may hurt you not only by getting you out of a rising stock on a minor decline, but the use of trailing stop loss orders by the general investing public damages the market. A slight drop in price of a stock can touch off a series of stop loss orders which lower the price of the stock needlessly.

The major value of having a stock market is the provision of a place in which to buy and a place in which to sell with little delay and at a price, which can to a great extent be known in advance. For this reason stocks listed on the New York Stock Exchange and on the American Stock Exchange offer a great ad­vantage to the investor. He knows where he stands by looking at the daily paper, and he has liquidity. He can get his money out of the stock in a matter of minutes.

If, on the other hand, you are willing to study the market and particular stocks conscientiously, and if you have the time and willingness to seek information on certain companies and their financial structure, the over-the-counter market with its 8000 issues offers a real opportunity to make money. Strangely enough, the over-the-counter market is broken down into two widely divergent types of securities. Most bonds of all kinds are traded over-the-counter, as are most bank and insurance stocks. These are the soundest investments available aside from government guaranteed investments.

In this same market there are traded thousands of small companies most of which hope one day to grow big enough to be listed on one of the two big exchanges.

Early in 1958 I purchased the stock of a finance company that was traded over-the-counter. I was very familiar with the company and its management. The over-the-counter quote was $1.00 bid, $1.50 offered. This means that some­one who owned the stock wanted $1.50 to induce him to sell, while a prospective buyer would pay $1.00. I paid $1.50. I should have asked the over-the-counter broker to try to get it at a particular price—say $1.25. You can usually buy at something between the bid and asked price. But I bought at $1.50. The company paid $.12 in dividends per year, and paid monthly. At the end of the year it paid $.03 more—$.15 in all. I was receiving a 10% dividend rate. Had I bought at $1.00 I would have received the fantastic dividend of 15%. The stock moved up gradually and two years later I sold at $2.50 per share—a capital gain of 67%—33% per year plus 10% per year dividends.

"Over-the-counter" can scarcely be defined. Within stock market basics, stocks traded over-the-counter can be defined as not listed on any exchange. Almost all brokerage houses from Merrill, Lynch on down handle such securities. An over-the-counter security may be handled by any number of the 4,700 over-the-counter dealers throughout the country. On the other hand, a particular stock may be handled by only a few local houses or even one local house.

I work closely with the over-the-counter specialist in one of the brokerage houses in my city. One day he told me that a particular over-the-counter stock was moving up fast. I bought some at $7.50 per share simply because it was moving. I did not even remember the name of the company by the time I got home. Yet I had bought 1,000 shares. Three weeks later the stock had hit 10. Then I thought it was about time for me to look into the company. I attended a stock­holders' meeting and took a look at the financial statement of the corporation that was passed out. In the previous 12 months it had lost $180,000, which had completely eliminated its entire net worth. Its liabilities were greater than its assets. A new management had taken over and had "plans" for the future, possibly mergers.

After the meeting and the publication of the financial statement did the stock go down? It did not. It rose and kept on rising. I sold out at $13 per share five weeks after I bought it. I had made over $5,000 in five weeks (after commissions and taxes) on a $7,500 investment!

The reason for this incredible rise lay in the demand and supply situation of the stock. Most of the issued stock was founders' stock and could not be sold without special permission of the Securities and Exchange Commission. The demand was consequently concentrated on very few available shares. But what will happen when the SEC releases the founders' stock?

The supply side of the stock picture of any corporation is highly important. The stock of a particular corporation is selling for $1.50. But the two main owners of the company have 75,000 and 85,000 shares respectively. The former president owns 32,000 shares. A cousin of the two owners has 60,000 shares. A broker is entitled to purchase 50,000 shares, and a former large stockholder has an option on 70,000 shares. What if any one of these decided to unload a substantial amount of the stock in a hurry? You must know how much stock is out before you can invest intelligently.

Bob Jones, Jr., the Washington stockbroker, tells the story of the man who bought 1,000 shares of a particular stock at $2 a share. Then he bought 1,000 shares more at $4 a share, then a third 1,000 shares at $6. When the stock hit $8 he told his broker it was time to sell. "Sell?" asked the broker, "Sell to whom?" This can be the irony of over-the-counter trading. You may be able to buy all right from a very willing seller, but will anyone be around to buy when you want to sell?

In the daily paper, which I have been, looking at today is a summary of 46 representative new issues put out in 1945 and 1946. The survey of what happened to these issues was conducted by Merrill, Lynch, Pierce, Fenner and Smith.

In April, 1961 a market existed for only five of the 46. One stock has risen to $21 from $5. Another has risen to $34 from $3. These two are the only ones of the 46 stocks quoted, which have risen above the original offering price. Most of the rest have disappeared from the scene. The newspaper write-up of this survey aptly remarks, "The lesson should not be wasted. Many of the firms on the list were in glamorous fields for which a bright future was (and still is) ex­pected: Pre-fab houses, frozen foods, drugs, electronics, plastics. How many of today's high flyers will suffer a similar fate?"

Check your purchases with a local brokerage house, either one well known locally and with a good reputation, or with the local branch of a national house. In the early days of your investing, work closely with the broker and observe the materials and sources he uses and the essential points in a stock he looks for. But you cannot rely on any broker to pick out your stocks and sell them for you. You and only you can do this with the advice of a good broker. Possibly when you are locating such a broker you can ask him to tell you of several of his satisfied customers with whom you can talk. Brokers, like other people, some­times have stocks to unload or are interested in building a market in a stock because they have a lot of it themselves. You have to guard against being the victim of this type of promotion, and you can do this only by making the ultimate decision to buy or sell yourself, with all the facts at hand and with the advice of the broker. One of the most useful services he will perform for you is to pick out for you from the thousands of stocks traded, a workable number for you to consider. It is a hopeless job for one not used to stock dealing to pick a few stocks out of all those offered.

When you buy, do not buy just one stock. Buy four or five at least. The most sophisticated professional can often do no better than pick seven winners out of ten selected. Suppose he had bought only the wrong three that he thought were right at the time he bought them!

My own system of investing is a simple one and is not based on any rule of purchase. Unless I know a company thoroughly and how much of its stock is out and how much overhanging the market in the form of options or founders' stock, I do not usually invest. I have found that without securing as much inside infor­mation about a company as I can, I run a great risk. Inside information comes directly from the management or one step removed from the management. Hearsay information is of little use, particularly that which comes from brokers, unless the broker knows the management and gets his information directly from it.

Within stock market basics, the exception to the rule concerns cyclical stocks. These are stocks of com­panies whose well-being depends on the ups and downs of business. Cyclicals are well known and are generally the heavy industries, both producers' goods like machine tools and consumers' goods like automobiles. They feel the effects of recession and depression more than any other industries. In a recession they fall the most and in a comeback they rise the most. In order to play cyclicals you must watch the trend of business like a hawk—the New York Times Index, the Federal Reserve Index and other measures—and read the business section of the Times, the Wall Street Journal and Business Week, among other period­icals. You cannot hope to get the turning points either at the bottom or at the top, but you can recognize the early stages of a trend when you see them.

It takes little examination of stock price charts to see that cyclicals move with general business conditions, and we have only to go back to the recessions of 1957 and 1960. These are sample cyclical stocks.

• Bethlehem Steel
• U. S. Steel
• General Motors
• Black and Decker
• Clark Equipment
• Bucyrus Erie
• Aluminum Company
• Kennecott Copper

Now look at the price charts on the noncyclicals, and we can take just a few examples of these:

• New York State Electric and Gas
• Potomac Electric Power Company
• Standard Oil of New Jersey

Obviously if things in the business world are getting poor, it is best to be in a noncyclical; and if things are starting to improve, it is best to get out of these and into a cyclical which fell during the recession. In the recession of 1960 I bought no stocks whatever. In July, 1958 I bought like mad and in the spring of 19611 spent about half of my time picking out buys in the market. I did not see the trend late in the fall of 1960. I was too conservative; but when I did invest I was very sure that the recession was over and that consequently my chances of success were good.

The quicker you get used to the sources of information on stocks, the better. If you are not willing to use these constantly, then do not buy stocks. The stock market is a most popular investment. Everyone is in it and everyone thinks he is an expert on it, that he knows the last word. To get in and try to make a decent return requires constant work and constant attention. These are some of the source materials that you should have:

The Stock Guide or record put out by

The Fitch Publishing Co., Inc., 120 Wall Street, New York 5, N. Y.
Standard and Poor's Corporation, 345 Hudson Street, New York 14, N.Y.
New York World-Telegram, 125 Barclay St., New York, N. Y.

These summary records give pertinent facts on thousands of stocks—dividend records, financial position, capitalization, annual earnings for several years, latest stock price and prices for the last several years. Your broker can probably supply you with one of these booklets. It is wise to get a new one monthly if such is issued.

Dividends over the Years put out by

The New York Stock Exchange, 11 Wall Street, New York, N. Y. This little pamphlet lists common stocks on the New York Stock Exchange which have paid a cash dividend each year for 25 years or more. While dividends are very important, for the past decade the appreciation in price of stocks has been more important.

Cash Dividends every Three Months up to 97 Years put out by

The New York Stock Exchange, 11 Wall Street, New York, N. Y. The standard detailed reference services available in any library are:

Moody s Investors' Service which presents detailed descriptions on the opera­tions of every major publicly held corporation in the United States together with figures on assets, liabilities and profits for the present year and for years back.

Standard and Poors Corporation records which are about the same thing. It may be of some help to the reader of financial statements if he secures the booklet "How to Read a Financial Report" issued by Merrill Lynch, Pierce, Fenner and Smith, 70 Pine Street, New York 5, N. Y.

The Value Line Investment Survey

You can get an introductory offer for three months for $5. This survey lists the leading corporations of the country and graphs the stock price trend of each for years. It analyzes each company and makes certain forecasts. The subscrip tion price is high, since a fairly elaborate survey of stocks comes out weekly. The Value Line is issued by Arnold Bernhard and Co., Inc., 5 East 44th Street, New York 17, N. Y.

Just why the buying and selling of a cyclical stock is a good method of in­vestment is illustrated by a comparison of a cyclical—Anaconda Copper—and industrial stock prices in general. This particular cyclical's prices and industrial stock prices have been compared for a 15-year period from 1946 to 1960. There were in this 15-year period no depressions, but there were four recessions. If we had charted stock prices in a major recession and a major recovery the pattern would be far clearer; but it is clear enough as it is.

In this 15-year period there were business slumps in 1949, 1953, 1957 and 1960. At least as far as the spring of 1962 there was no slump.

The Dow Jones Industrial Average dropped from 191 in 1946 to 177 in 1947 and rose to 179 in 1948 where it remained in 1949. Anaconda Copper dropped from 43 in 1946 to 36 in 1947 and 30 in 1949. If we express their comparative drops in another way the comparison becomes much sharper. We can place Anaconda and the Industrial average on a percentage basis where the whole 15 years is considered to be 100% for each series. Then we can plot the changes on a chart to make comparisons. One series will not then be far up on the chart while the other is at the bottom of the chart with the result that comparisons are difficult.

In 1946 the Industrial Average was 52% of the average for the entire period of 1946 to 1960. In 1949 it was 51%—a very slight drop. Anaconda in the same period had dropped from 90% to 63%.

In the 1953 business slump the Industrial Average didn't drop at all. It rose from 77% in 1952 to 78% in 1953 (as compared with the period 1946 to 1960 equal to 100). But look at Anaconda: In 1952 it was 98% and in 1953 77%. By 1956 when things were better the Industrial Average had risen to 141% but Anaconda had risen to 158%.

Then in the recession of 1957 the Industrial Average dropped to 136% but Anaconda plunged to 116%.

Finally, in 1959, just prior to the 1960 slump, the Industrial Average stood at 181% and Anaconda 139%. One year later the former had dropped to 176%, but Anaconda had dropped far more—to 115%.

The chart shows clearly how the swings of prosperity and slack business affect this cyclical stock as compared with stocks in general in the industrial field.

It is not as hard to "play the cyclicals" as one thinks. It is mainly necessary to keep a sharp eye on business conditions in general and on the stock market. When these turn either up or down for a period of time, and by a period of time we might select two months, then get into or out of a cyclical, as the case may be. They go up more sharply than business conditions in general and they fall off much faster. They also rise more sharply than stocks in general and fall off more sharply.

In order to know what business is doing, particularly at the upward and down­ward turning points, it is necessary to keep up with the business news, and you can do this from the following periodicals and other publications:

Wall Street Journal—issued every working day New York Times
Survey of Current Business, price $4 a year from the Superintendent of Documents, U.S. Government Printing Office, Washington 25, D.C.
Business Week

Statistical Abstract of the United States, also obtainable from the U.S. Government Printing Office. This document has a wealth of figures on all elements of the American economy for years back.

Business Statistics, 1959 and 1961 Editions. The two years are mentioned because this is a biennial supplement to the Survey of Current Busi­ness, mentioned above, and is obtainable from the Superintendent of Documents.

In order to be in early on what is happening to business these are some of the things to watch in particular:

• Industrial Production
• New orders for durable goods
• Housing starts (how many new houses are started in construction)
• Piling up of inventories, including automobile inventories (piling up late in the business prosperity period means trouble)
• Notices of corporate profits and dividends in the newspapers (are they increasing or decreasing)
• Comparative profits of corporations in the newspapers (how does the first, second, third or fourth quarter of the year compare with the same period last year)

The Federal government-spending budget as announced in the papers (if it is up, there will be more orders for business firms as well as more fear of inflation, and this fear tends to drive the market up)

• Employment figures
• General price reductions and price rises

The essential point must, however, when looking at stock market basics, never be lost sight of: don't buy a par­ticular stock unless it shows an up trend, not just a rise of one point in a week, but a definite upward pattern; and sell it when it is in a down price pattern.