Fixed Dollars and Buying Power

When looking at how do I sell my stock and when, there are a few questions to consider. Suppose a man buys some common stock at $10 a share, and a month later the price has risen to $11. Does that mean he did well? Or suppose that a month after he bought at $10 the price went down to $9. Does that mean he made a bad buy? Or, taking a longer period of time, if in ten years the value of stock has doubled, is that a good performance? How do we judge whether buying a certain stock was wise?

When a saver makes a deposit in a savings bank covered by the Federal Deposit Insurance Corporation, he knows he can withdraw as many dollars as he puts in, plus whatever interest the bank has paid on deposits. The annual rate of in­terest is apt to be pretty small, causing only a slow change in dollar value of the deposit. But this change is in only one di­rection, and that is upward.

Because most savers are much better acquainted with fixed-price than with equity investments, when one of these peo­ple buys corporate stock he is apt to assume that stock prices come under rules generally similar to fixed-dollar items. When the price of stock is rising, he looks on it as a sort of bonus, as compared to a fixed-price investment. As long as a price rise continues, the gain in value looks just wonderful, provid­ed he is dreaming it will never drop again. Then some day he learns that the price has dropped appreciably, and he hears rumors it will go down further. His natural reaction is that somebody must be crooked; the money was there, where did it go? So in fear and disgust he sells out at whatever price he can get.

In contrast to the innocent stockholder just mentioned, an investor desirous of an intelligent judgment of the perform­ance of common stock must recognize the need for rules substantially different from those on fixed-dollar investments.

In principle, a major requirement of good investing is that both capital value and income keep up with the rise in cost of living. Assuming that our capital is composed of two groups, fixed-dollar items and common stock, we know that the fixed-dollar portion is sure to lose buying power if the cost of living rises, as it probably will; and this increases the need to know whether the buying power of the stock portion of capital is rising or falling.

Over a long period of years the change in dollar value of a group of diversified common stocks is likely to show consid­erable resemblance to the trend of the cost of living index. This is explained in the chapter called "What Is Security?" But usually from one year to the next the two have not kept in step. Often for several years the cost of living rose while average stock prices stayed level or dropped, and then for several more years the trends were reversed.

Here is a recent case for the purppose of looking at how do I sell my stock. In the three years from mid-1953 to mid-1956 average stock prices more than doubled, while the cost of living index scarcely changed. Then after the mid­dle of 1957, stock prices dropped until, in relation to cost of living, they were back to about the same position as three years earlier. So the fact that during a short period of time the dollar value of a diversified stock fund is doing better or worse than the cost of living trend means little as to future prospects.

Compare Stock with Stock

To judge the performance of an issue of common stock, with some approach toward accuracy, it must be compared with other common stock. Because no one stock has prestige enough to be the accepted standard, it is natural to set up an average of several stocks as a basis for comparison. The average may take the form of an index. The customary prac­tice in Wall Street is to use one of the averages or indexes issued by statistical organizations and published in the finan­cial sections of newspapers. An index may aim to represent just one industry, or some other group of stocks. But the more prominent indexes are rather diversified. They include the stocks of large, old companies in various industries and usually are quoted as if they were representative of all stocks.

Most of the diversified indexes are refigured daily. One, the Dow-Jones, is calculated hourly while the New York Stock Exchange is open, such frequency making this index the fa­vorite of speculators who can't wait until suppertime to learn the trend of today's prices. Further details on the indexes are readily available from stock-market publications.

An index is a convenient mechanism for keeping posted on the current movement of prices when looking at how do I sell my stock. One can see the trend by merely glancing at the graph of the index in a newspaper. But an investor needs to remember that an index is nothing more than a group average of whatever stocks it includes, and so long as free enterprise exists, no index contains the ideal or standard stocks, nor does it convey accurate infor­mation about the price trend of the tens of thousands of stocks not included in its average.

There is another kind of average of group stock prices, which we believe is a far more practical standard than an index is. The price of a share of stock issued by an invest­ment company is necessarily influenced by the prices of what­ever stocks the company holds in its portfolio. In nearly all of the mutual-fund type of investment company the rules re­quire that the value of one of the shares it issues to investors reflects exactly and automatically the market price of all the stocks and other property it owns. And for a fund whose as­sets are entirely invested in common stocks, the value of a share issued by the fund varies directly in line with the aver­age of the prices of the shares the fund owns.

At this point a reader may think, "But I am not interested in owning mutual funds; why drag them in?" Our answer is that in this chapter we are not suggesting what stock to buy. But we think it will pay you to learn enough about mutual funds to enable you to select an appropriate one, whose rec­ord you can compare with the performance of whatever stocks you own or propose to buy.

Here are some figures from a large, old common-stock mutual fund to help understand how do I sell my stock. For December 31, 1957, it reported owning common stock in 135 companies, grouped into nineteen in­dustries, plus one group called miscellaneous. The total mar­ket value of the stock portfolio was about $964 million, this being almost 99 per cent of the fund's total net assets of $976 million. This fund had a little over 100 million of its own is­sued shares in the hands of the public. The net assets divided by the number of shares issued gave a net asset value per share of $9.72 on the date named.

When the stock markets are open, a mutual fund's share value is refigured twice daily, and the values for a good many funds are published daily in metropolitan newspapers, The New York Times showing about 140 of them. Once a week newspapers also print the weekly range of share values for these funds, and once a year the yearly range. During the year 1957, according to The Times, the value of a share in this fund ranged from a high of $12.30 to a low of $9.54.

A mutual funds itself publishes quarterly or semi-annually the value of a share issued by the fund. But for long-term comparison of results, the outstandingly useful records are those showing what happened if shares were bought in the fund on a certain date and held for ten or more years. A fund's manner of printing these records must conform to the strict rules of the Securities and Exchange Commission of the Federal Government. This simplifies a performance com­parison between different funds in the same period, also for different periods with the same fund.

Mutual-Fund Performance Records

The figures below are adapted from a booklet issued by a broadly diversified common-stock mutual fund to help look at how do I sell my stock. Assuming that at the end of 1947 one paid $1,000 for shares in this fund and held them for ten years, until the end of 1957, two sets of results are shown, depending on what he did with his divi­dends.

First, suppose he took all dividends in cash. During the ten years he received $598 in income dividends and $325 in capital-gain dividends, often called profit distributions. At the end of the ten years the market value of his original shares was $1,823. Second, suppose he took all income dividends in cash, but authorized the fund to use all of his capital-gain distribu­tions to buy additional shares. During the ten years he re­ceived $647 income dividends in cash, and at the end of the period his shares, including those added by reinvesting capi­tal gain distributions, had a market value of $2,202. Third, suppose he authorized the fund to use his income as well as capital gain dividends to buy additional shares, so that he re­ceived no cash. At the end of the ten years his shares, in­cluding those added by reinvesting, had a market value of $3,261.

Here are the corresponding figures for a twenty-five-year period. Suppose that at the end of 1932 a man paid $1,000 for shares in this same fund and held them until the end of 1957. Figured in the same manner as those just given for ten years, the twenty-five-year results are: First, with all div­idends in cash, income dividends were $2,001, capital-gain dividends $1,456, value of shares at the end of twenty-five years $4,120. Second, with capital-gain dividends reinvested, income dividends in cash were $2,962, and value of shares at end of period, $7,284. Third, with all dividends reinvested, value of shares at end of period, $16,187. Both the ten-and twenty-five-year records just given, cover periods of gen­erally increasing prosperity, and there is no guarantee that the same fund managers can do as well in the future.

By the end of 1957, all mutual funds offered records of the sort just given for at least fifteen years back, except for funds not that old. Some funds publish figures for a variety of periods, enabling an inquirer to select whatever period suits him.

The main virtue of these records lies in their showing of actual and practical investment possibilities, within the reach of an ordinary investor. Starting with as much as $1,000 was unnecessary; proportionately similar results were obtainable by owning only a few shares of a fund. The fund has been a fact, not just an idea, during whatever period is covered. The record reflects whatever ability fund managers displayed in actual selection of stocks for their portfolios. The record is not doctored by hindsight, or by a convenient memory that forgets the sad parts; the bad guesses, as well as the good ones, all had their effect on a fund's total performance. The record shows net results for an investor after paying all ex­penses and fees charged by the fund. The text accompanying a record warns that it does not show the effect of whatever income taxes a shareholder pays; this of course varies with the individual investor.

Suppose an investor does not want to buy shares in any mutual fund when looking at how do I sell my stock, but does like the idea of using one of them as a standard for comparison with his own investment perform­ance; how does he know what fund to use? In truth, an investor's selection of a fund calls for the same study, no matter whether he intends to buy its shares or just to com­pare. He needs to know the difference between types of funds, and how to compare the performance records and other dif­ferences between funds of the same type.