Speculators Preferred

Apparently most people enjoy gambling, and indulge them­selves at least occasionally and within limits. For those will­ing to risk hundreds of dollars or more at a time, and who like a complicated game, the stock market is ideal for gam­bling or, as it is more politely called, speculation. In most forms of gambling, a player's choices of possible action are few. But a speculator in stocks can choose among tens of thousands of companies, and the other players are invisible, unknown, and unnumbered; also, everybody is free to enter or leave the game as he pleases. The frequent fluctuations in the price of stock furnish the excitement that makes life interesting for a speculator. Whether on the whole he wins or loses may be a secondary matter to him.

Wall Street, physically and literally a crooked, narrow, dark street on lower Manhattan Island, is the principal Amer­ican center for financial operations. On it is the New York Stock Exchange, often called "The Big Board," the most prominent of the stock markets. Near by is the American Stock Exchange, formerly "The Curb." In popular usage, the meaning of the term "Wall Street" is much broader, covering all of the financial activities connected with the ownership of big business in the United States, no matter how or where those activities actually take place. In this sense, anyone who buys or sells shares of stock in a corporation is doing business in Wall Street.

Most every town in the United States contains at least one person called a stockbroker or investment dealer or security dealer. Broker and dealer organizations vary greatly in size, ranging from one-man outfits to partnerships and corporations with big headquarter offices and branches in many cities. Although these firms are independent, they are banded together nationally as members of stock exchanges and associations; and to hold their memberships, the firms must obey certain rules.

To buy stock, a man gives his order to one of these brokers or dealers and pays a fee based on a standard schedule of rates. When he sells stock, this involves another fee, except for stock in a few companies that redeem the stock they issue.

The more frequently a customer buys and sells, the more fees he pays. A broker or dealer cannot make much in­come on a customer who buys stock and holds it for many years, except for the few customers wealthy enough to own a large amount of stock. So a broker or dealer is likely to prefer active speculators as customers; and the stock ex­changes handle transactions in a manner designed mainly to please those in speculation, with extreme emphasis on speed.

A stockbroker or dealer may buy and sell stock on his own account rather than for a client. He acts as a cushion, making it easier for his clients to buy and sell quickly. But from the viewpoint of a long-term investor, he resembles a speculator.

When in speculation your aim is to buy a stock that will soon rise con­siderably in price, so that you can then sell at a profit. Or if he expects a stock to drop in price, he "sells short," a device that enables him to borrow and sell stock he does not own, and to make a profit if the price falls soon enough and far enough. Either way, he needs a forecast or a tip on how the stock's price is going to move. Brokers furnish these as a free service to their customers. Or a speculator can subscribe to one or more of the advisory services that issue forecasts frequently, usually weekly.

An outfit that makes a business of offering advice on the stock market has a better chance of selling its forecasts to a customer who keeps close watch on the market and acts frequently. So while one adviser may differ sharply with others as to what is going to happen and which stock is best to buy or sell, the advisers have the effect of working together in arousing speculators to act, and frequently. The great majority of the advertisements issued by advisory serv­ices and brokers are aimed at people inclined to do at least a little gambling.

Does stock gambling pay? Of course in speculation sometimes you guess right, and in a period of rapid rise in the average level of stock prices, as in 1954 and 1958, the odds are in favor of a speculator's being able to sell his stock for considerably more than it cost him. But is there proof that some method of speculating has worked well, on the average, over a period long enough to include all sorts of conditions? The author has made some unsuccessful efforts to learn the results of consistent speculating. It seems likely that no experienced gambler has adequate long-term records, at least not that he cares to publish.

Wall Street contains numerous brokers and other advisers, apparently quite prosperous, who recommend speculation, the implication being that they can show a client how to gamble successfully. But a cautious amateur needs the answer to two questions: First, did the adviser's wealth come from his own skill in speculation, or from some other source; and especially, is it the result of his skill in inducing large numbers of get-rich-quick clients to pay his fees? Second, if the ad­viser has actually been consistently successful in speculating, does he understand how he did it, and can he explain well enough so that his client can have long-term good results?

Government Regulation

The manner of regulation of the stock market by the Secur­ities and Exchange Commission of the Federal Government is another of the queer aspects of investing. It is an interesting compromise between the conflicting ideas of gov­ernment paternalism and free enterprise.

In a bank that is a member of the Federal Deposit In­surance Corporation, a depositor has a flat guarantee from the U.S. Government that he can always get his money back, and promptly. But in corporate stocks and bonds, the Gov­ernment guarantees nothing. The main effort of the S.E.C. is in the direction that anyone selling stocks or bonds must not conceal or omit important facts; he must make "full disclosure." Of course, this regulation can be far more ef­fective on printed matter than on a salesman's words. The practical effect of the regulation is that a cautious buyer can obtain a good deal of information about an American corporation before he acts—much more than is usually fur­nished by Western European corporations. But there is noth­ing in S.E.C. regulations to prevent a careless American from buying a stock that is no better than a gold brick.

One way to fool the public is by price manipulation. A speculator arranges for some shares of a stock to be bought for him, paying prices higher than necessary. He also starts rumors that the price is going still higher. Then he sells out to gullible speculators. The S.E.C. tries to stop any organized price manipulation, on the grounds that it is an attempt to deceive the public.

Here is part of an item from The New York Times of October 25, 1956, written by Burton Crane, whose reports on Wall Street often reveal an unusual and welcome sense of humor.

Each new stock fraud brings new demands that the public be given more protection. Why isn't it possible, the public wants to know, to wipe out stock frauds entirely?

It is possible. One easy method would be to abolish all stocks. A second, presenting some technical difficulties, would be to abolish money. A third, tinder which com­plete effectiveness could not be guaranteed, would be to have every stock sale supervised by a Government offi­cial.

Some seem to feel that a Government official should be watching each deal, ready to blow the whistle when­ever a citizen shows a tendency to make a fool of him­self. There is no understanding that the entire staff of the Securities and Exchange Commission ranks in size between the Police Departments of Kansas City, Mo., and Atlanta, Ga....

No member of the public has lost money through the insolvency of a member of the New York Stock Ex­change since 1934. Other exchanges boast similar records.

Like the Big Board, they have systems for mediating disputes between the public and their members.

The National Association of Securities Dealers also mediates between the members and the public. Most firms in the over-the-counter market—that is, the market outside the registered exchanges—belong to the N.A.S.D. They do not, however, have to belong.

The exchanges and the N.A.S.D. can mediate be­tween the customers and the broker or dealer. The S.E.C. and the various state securities commissioners cannot. Generally speaking, they must wait until a fraud has been committed. Then they step in and try for a conviction or an injunction, but they seldom can save anybody any money.

Moreover, they complain, victims seldom voice their suspicions when a case is hot. They seem to prefer to wait until the fraud is so far in the past that there is no chance that any of the money remains unspent.

Apparently the present policy of the S.E.C. is to offer no objection to ordinary speculation, but to speak up when the gambling gets lively enough that they fear it may do substantial damage to business outside the speculators them­selves, as it did in 1929. On April 6, 1959, the Com­mission issued a statement ending this way:

For their own protection, investors should exercise ex­treme caution and self-restraint when considering the purchase of securities upon the basis of tips and rumors. The commission's files are full of cases in which sub­stantial losses have resulted from reliance on such bases. Investors should purchase securities upon the basis of known facts and not hearsay. By the use of restraint and judgment, the investor can not only protect himself but also can contribute to the continued health of the capital markets and the stability of the national economy.

It is hard to tell what the Commission intended to ac­complish with this statement. Were their words taken literally, speculation would be pretty well ruined. A speculator using "extreme caution and restraint" would be an interesting speci­men. If he acts only on "known facts," how can he jump in ahead of the crowd?

The "Members, New York Stock Exchange," promptly lined up with the S.E.C.'s warning by placing an ad in The Times April 8, saying in part:

Maybe one tip in a thousand turns out to be right—and even then, usually for the wrong reason. So our advice is:

Keep your hands in your pockets and hold your money tight when someone—anyone—no matter how well meaning he may be—gives you "the inside dope."

Why do we say that? For the simple reason that no one on earth—including the New York Stock Exchange —can tell what the price of a stock will be next week, next month or a year from now. So you're far safer to choose your investments on facts instead of fancies, avoiding speculation.

These facts should tell you about the company back of the securities you buy—its sales, growth, dividend record, expansion plans and outlook for the future. A good place to get that kind of information is from a Member Firm of the New York Stock Exchange. Talk to a Part­ner or a Registered Representative.

Maybe this ad was the N.Y.S.E.'s idea of humor. Naturally it is the brokers themselves, the members of the N.Y.S.E. and other exchanges, who hand out most of the tips and rumors that the S.E.C. objects to. The word "rumor" covers a lot of ground. It may be quite baseless, or it may be a careful and sensible estimate, or maybe it is a fact, but un­official. Whatever its merit, passing out a rumor is the ob­vious way for a broker to arouse a speculatively inclined client to buy or sell, with a resulting commission for the broker. The situation is the same as when a retail salesman tells a customer she had better hurry up and buy that re­frigerator because the bargain price is for today only. Maybe the salesman is stating a fact, and maybe it is just his or his boss's idea of sales technique!

For a few days, the solemn warnings by Government and Exchange, backed by others from brokerage and advisory organizations, seemed to dampen the market's enthusiasm. But in The Times of April 15 Burton Crane's daily column on stock market activities said in part:

Wall Street seemed to emerge from the shadow of warn­ings yesterday into the sunlight of renewed optimism....
Since mid-March Wall Street has hummed with rumors that Vick Chemical had developed a drug to control cholesterol (a fatty substance) in the bloodstream. Yes­terday these were confirmed and, as usually happen in such a case, the stock reacted downward on profit taking, losing 13/4....

Colorado Fuel and Iron was among the fifteen most active stocks and rose 11/4 to 263/4, apparently on brok­erage house estimates that it would report earnings of almost $1 a share for the first quarter....

American Machine and Foundry... A brokerage house predicted that it would clear about $5.50 a share in 1959 and split two-for-one later in the year. This gave it a gain of 25/8....

Analysts gave two reasons for a 33/8-point gain in Union Carbide. Some said that institutions had been buying. Others said they had heard rumors (uncon­firmed of a stock split.

The Street was unexcited over the apparently official report that Skelly Oil and Tidewater Oil were talking over merger plans.

Safeway Stores rose 11/4, seemingly in response to a story in Forbes Magazine. United States Plywood gained 27/8, apparently on brokerage house estimates of 1959 earnings.

Mr. Crane's report just quoted makes it clear that we still have with us the old problem: Should speculation be restricted, and if so, how? This book makes no pretense of answering that question for the market as a whole. But in other chapters we show that a stockowner does not have to gamble unless he wants to.

For contrast with this chapter, would you like to see an argument in favor of gambling? Try Burton Crane's book, "The Sophisticated Investor" published by Simon and Schus­ter, New York, 1959, 273 pages, $3.95. He gives detailed explanations of several methods of speculating.