,j

The WaII Street Inxestor

moment prognostications. As
is often
-".,a the case in such situations' someof the-sec-orrd-gu
er.tur.
crystar-ba' gazerstried
to glossoverthe impticatiin,

PART FOUR
The Art of Investrnent

.i'ir," -".r1.;r;, ;111".;;ilr,

pearedto takean almost,"aiJ.
"n_
i""l;;ha;;;,;;;;;;;
."",
worse

thingsto come.
Two days later, several
newspapers and wire_service
correspondentsdescended
or, rn". ff;
wanted to know my opin_
ions and reactions ancl
asked *;;;i
was cloing becauseof the
break in.stock
f
toiJ
ah"*
qui*
franlrly that, while I
_prj"-"r.
sympathized whoreheartedry
*iirr-^iyone rvho frnd tort 'noney

becauseof marker d"u"toprir".,

;; il;

alarm and absolutelynonJfo.

THE
WALL STREBT
INVESTOR

,"J[;J;:l;,'*i,

at pricesfrom30 to 80percenr
berJrvtrt"i,ig6tiid;

il;r",
traded on the American Exchange
and over_the_counter
markets followed suit and arsowent"into
nosedives.Headrine
rvriter: refe quick to respondto the
developrne; ;;;;; ,"
-\
ported by the laggingticker:
BLACK MONDAY PANIC ON WALL
STREET
INVESTONS LOSE BILLIONS AS MANKET
BREAKS
NATToN !.EARs Nsw lg29 DEBAcLE

such rvere the scare rreadsthat appearecr

on the front pages
of the nation's newspapers after trr"ii"*
york stock E;;f;g"
closed for the day.- ny the time i"tur'"aitio",
press' experts and analysts,economists
"..r*'-"ri'ir,"
and pundits
*"r" on"ring their explanatio'.s, hindsigrrt diagnoses
and spur-of-the-

r52

;.;i;;'

;;; ;""ro., ro,.

b,,si,,i,,fi"tu," wasfavorabte
and,

terinthe
r",,,=.'TiX,Ji?,'X'l?nf,lJilJ::li;:;,i
:;,;.,lur,
nTi

Americaneconomy no..th" r"s

;' _;:";iil ;' ;;;;;i#
stocks were

on vlonday, May 28, 1962,prices of the

New york stock Exchange crumbled rapidry before
of seil orders.
The Dow-Jonesinduitriar average".r-or^rnn"he
gtpo"ir,i, ,o
prunged
register its biggest qry-dy q."n t over ""*ry
32 years. Crashing
through the 000 le'er for the first^time si'ce
rg60, it hit a day,s
lorv of 576.99.
By the end of the^day,rlrany_
big-boardstockswere .selling

panic.'

or"

listed-on tho N"*'V.ri'S,o"f.

Exqhange. Irl _y
view, somestocks had
be.eng;;J;;;"r_priced.
Irrationalbuy_
ing had driven their pricer",,
l"t"liy unrearistic revels. The
May

28breakwas.nr,-in"rrii"biJ
.J*"qrr"n"u.
I saidthat I fert the r,"J.
a^ndcertainlyin a much *or" "t"rr.;;;", in a muchhearrhier
,"oiir,ic
-a,

position becauseof the

Iong-needed
adjtrstmentof prices.
i".. whar i ;;;ioing,
the answerwas simple.I
*"s fuyi"g'rt""lr.
"I'd be foolish
":','n !"v,', {".piained to a youngcorrespondentwho looked
though h" ihougf,t I,d takenleave
of
"s
m y sensesby buving *..h"r,
"Most seasoned
"ul.yo""i"v-est-ors
"trJr"";;i;;;.;.rr,"r.
are
doubtress
thing"' I went on- feelingl"-"*n"iirt" croingmuch the same
, schoormaster
conducti,g a short
in the First principres of Investrnent.
"Theyie snapping
"orrru
up the fi* ,;;"k i"rgoin, available
asa re_
sult of the emotionjly
inrpi."d;;lltug
^if;" wave.,,
since the petroreum i.arrtry"
;r
on" I know best, I
bought oilstocks.Bv
ifr" N"* york Stockr*ch"ng"
1h"
trading dayon lvlav29,_my
"J;;
b."k;;;;;;
purchasedseveralrens
of thousands
of sh"res fo,: -y
r hasten to emphasize
that I boughtthe stocksi;r'i;";;;;"r'n,,o
";;;;;;
.,ot tor specularion.
' I fully inte.d hording
on to *"*,""rrr I berieve they
wi'
continuelo increaseinlalue
ov;il;j yearsto come.
It has long been-.rh";";;;
j"r*rrists
and financial
writer.s to interview succe.ssfulio,.
b,r.rinurrn.,"r.,
ancl inveslors

Hoto to Be Rich
whenever there is an "unusual" stock martet development.
The opinions, information and advice gathered from theso
sources are then published, ostensibly for the guidance o[ less
sophisticated investors. For as long as I can remember, veteran
businessmen and investors-I among thsrn-haye been warning about the dangers of irrational stock speculation and hammering away at the theme that stock certificates are deeds of
ownership in business enterprises and not betting slips.
Get-rich-quick schemes just don't work. If they did, then
eve.ryone on the face of the earth would be a millionaire. This
holds as true for stock market dealings as it does for any other
form of businessactivity.
Don't misunderstand me. It is possible to make money-and
a great deal of money-in the stock market. But it can't be
done overnight or by haphazard buying and selling. The big
profits go to the intelligent, careful and patient investor, not to
the reckless and overeager speculator. Conversely, it is the
speculator who suffers the lossesrvhen the market takes a sudden dorvnturn. The seasoned investor buys his stocks rvhen
they are priced lorv, holds them for the long-pull rise and
takes in-between dips and slumps in his stride.
"Buy when stock price5 31s 1e11,'-thelower the better-and
hold onto your securities," a highly successfulfinancier advised
me years ago, when I first started buying stocks. "Bank on the
trends and don't worry about the tremors. Keep your mind
on the long-term cycles and ignore the sporadic ups and
downs.. ."
Great numbers of people who purchase stocks seem unable
to grasp these simple principles. They do not buy when prices
are low. They are fearful of bargains. Th"y wait until a stock
goes by-and
up-and then buy because they feel they are
thus getting in on a sure thing. Very often, they buy too latejust before a stock has reached one of its peaks. Then they get
caught and suffer losses when the price breaks even a few
points.
Tytrrical of these people is an acquaintance of mine with
whom I had lunch one day in 1955. We talked about many
things-including
the stock market. During the course of thl
conversation I happened to mention that the X Corporation's
shares were selling at 4 Yz, and that I thought the stock would
go up in price.
154

The WaII Street lnoestor

By late 1957, the stock stood at LIYa. I later learned that
my acquaintance had kept his eye on tbe stock for two years
and, when it reached \\Ya, he finally decided it was safe to
buy and purchased several hundred shares. He watched happily while the stock climbed to L31/z in the next six months.
Then there rvasa dip. X sharesfell to 10 and stayed there. My
Johnny-comeJately acquaintance sold out and lost money,
Those of us who'd bought early held on, for the securitieswere
worth more than twice rvhat we hacl paid for them.
Eventually, the stock rose again, going up several more
points to reach another fairly steady price plateau. Today, it's
around 15-and those of us who bought early are holding on
to it firmly. I might add that we've also collected satisfactory
dividends on the stock through the years.
I began buying common stocksat the depths of the Depressjon. Prices rvereat their lowest, and there weren't many stock
bul,ers around. Most people with money to invest were unable
to see the forest of potential profit for the multitudinous trees
of their largely baselessfears. I had confidence in the future
of the American economy and realized that the sharesof manv
entirely sound companies with fine potentials were selling at
only a flaction of their true worth.
When I first bought Tide Water Associated Oil Company
stock in 1932, its price was as lou,as $2.12 per share. The
average per-shareopen-market price of the stock rose steadily,
as shorvn below:

$ 8.zs

1933
1934
1935

9.39
11.61
i5.54
20.83

r936
1937

The price fell off during the 1938 slump, but this was just
one of the sporadic tremors. I not orrly held on to the shares I
owned, but bought more.
My confidencewirs fully justiffed in the years that followed
as the value of the stock increasedmany, many times, and Ialong with all the other stockholders-n156 collected handsome
dividends.
In N{av 1932,I also started purchasing Petroleum Corpon-

r 55

How to Be Rich

The WcilI Street Inoestor

tion stock. In that month, I bought 10;000 sharesat

$3.45 per
share. I continued
steadily
until,
S"pt"*fr",
by
fa,
to !"V
1933, I held a total of 1g0,000 shares. In that month, the
shares w'ere rvorth nearly $15 each; the average per-share cost
of my 190,000 shares was only SO.SgZ.
I have reached back to the Depression era for two examples
based on my own experiences. i courd cite others f.o- ih.t
period and from subseqtrent ones. some stocks I own today
are worth more than 100 times what I originally paid for them.
But many other investors have had even greater successes.
More example.swould serve only to further unclerscorethe
sarne basic truth, one that every investor ancl would-be investor would do well to paste in his hat:
So-und sloclcs, purclmsed for inoestment uhen their prices
are
-Iou; and hekl foy t\e long prII, are oer| Iikelg to ytiocluce
high profits th.rough dioidends antl htcrease.t itt- oalue.
This is a self-evident "secret" of successful investment that
vast numbers of people disregard. There are other not-so-secret
secrets that investors would do well to learn and consider as
infexible rules in their stock market dealings.
Highly important among them is the ^xio- that no one
should ever buy a stock without knowing as much as possibre
the company that issuesit. In more-casesthan reiitimate
-aboyt
brokers'would care to count, such so-called investors tave insisted on buying large numbers of shares in companies without having the foggiest notion of what those companies do or
produce.
As I see it, the average person should consider the purchase
of common stock as the investment of surplus capitai for the
purpose--of earning an annual return on that capital and of
eventually increasing the capital as much as poisible.
The average individual begins "investing" by tpening a savings- account or by buying insurance or annuities. He usually
graduates to buying Covernment bonds. Later, when he is
more experienced and sure of himself, he may decide to invest
in common stocks. If and when he does so, he should follow
certain definite rules for his own protection and benefft.
In the main, the average investor should consider bulring
only such common stocks as are listed on a maior stock exchange. There are many good reasons for this. Some unlisted
stocks are wortl'rless, bogus shares peddled by fly-by-night

companies.Even when the unlisted stocks are legitimate the

buyer often finds that he is "locked in" with his investment; it
is frequerttly difficult to sell an unlisted security.
The person who buy.s or sells Iisted .stockscan always be
certain he is paying--or receiving-a price that is fair and
bona fide to the extent that it has been set by buyers and sellers according to the law of supply and demand in a free
market place. The sarne canrrot ahvays be said for unlisted
stocks, which may be pegged at artificially high prices or, in
some cases,have no value at all.
Common stocks .should be purchased when their prices ar.e
Iow, not after they have risen to high levels during an upward
bull-market spiral. Buy when everyone else is selliirg
hol.l
"nd
on until everyone else is btrying-this
is more than
iust a
catchy slogan. It is the very essenceof successfulinvestment.
History shows that the overall trend of stock priceslike the overall trend of living costs, wages and almort r,r"rything else-is up. Natnrally there have been and always will
be dips, slumps, recessionsand even depressions,but theseare
invariably follorved by recoveries which carry most stock
price.s-tonew highs. Assuming that a stock and the company
behind it are sound, an inve.stor can hardly lose if he buys
shares at the botto'r and holds them until the inevitable
uprvard cycle gets rvell under way.
!Vit}al, the wise investor realizesthat it is no longer.possible
to consider the stock nrarket as a rvhole. Today's stock market
is far too vast and complex for anyone to make sweeping generalized predictions about the course the market or iu.t *iti
follow.
It is necessary to view the present-day stock market in
terms-of- groups of stocks, but it is not enough melely to
classify them as, say, industrials or aircrafts, and so on, This
is an era of constant and revolutio'ary scientific and technological changes and irdvances. Not only individual firrns, but
also entire indust'ies must be judged as to their ability to k"up
pace with the needs of the future. The jnvestor has to be
certain that neither the products of the company in which he
i'vests 'or the particrrlar industry itself will become oholete
in a few years.
I' the early part of the ce'tury, fa.siglrted incrivitrrrals
reirlized tlrat automobiles had more of a firturc than buck-

t<A

iiil
II

li

:tr
lii

ii

H.ou to Be Rich
boards, that automobire-tiremanufacturers'
stockswere better
investment bets than the stocks
of ftrms trr"i *"""r"ctured
wagon wheels.
The trolley-carindu.strywas a good bet_until
,
trolley cars

iv u"r"rl-ddt"""
!".g"r to be suppranred-

trsisted on producing nothirqgbut eanvas-covered

"r"r.#*["
pranesafter
the- day of the all-metal
a"wned had little future.
"Ipurr"
Today, the manufacturerof
or
t,rrboprop
iet
i*"-r'o";, il"nu,
is much rnore likely to- bq in busines.s
aid _ake ,ionli U"n
one, say, who jnsisted on turning out
trimotored, iiston_
enginedtransports.
It is indeed surprising that so many investors
fail to
recognize businesssituations onry srightry ressou"Lrr-tt,nn
-r,-*t
these dated or farfetched exampi"r, it
*iii u"y
. in
faltering
dying ffrms and iniusiri"s "iand ignore temfting
-or
opportunitiesto buy into companiesand industiies
tt
h"lp
"i "in"ot
!r1! burgeonasrime goeson.
It follorvs that the inveltor must knorv as much
as he pos_
sibly can about rhe corporationin which
h" t;;; *"1. ff,"
fgllowing are some qhe questionsfor which
f," .f,""ia go
satisfactoryanswers2f
befor.eie investshis _orref ,
1. What is the company'shistory: Is it a solid
and reputable
firm, and does it have atle,
and season"a,i*ug"_
"ffi"i"r,i
ment?
2.
the_companyproducingor dealingin goodsor
.
.k
servicgs
for wh^ichthere will be a contiriuingdemandin
the foreseeabre
tuture/
3. Is the company in a fteld that is not dangerously
overcrowded, and is it in a good competitivepositio;?
4. Are company prclicies and operations farsighted
and
aggressivewithout calling for unjustifiedand
d"nge"rous
o,rerexpansion?
5. Will the corporate balance sheet stand up under
the
,
.
clo_se
scrutiny of a critical and impartialauditor?
6' Does the corporationhavei satisfactoryearningsrecord?
7. Have reasonabledividendsb-eenpaid t"g"rrrry-io ,i;"r.holders? If dividend payments*ur" .riirrrd, i"r" ,i"L-g.rO
and suffcient reasons?
8' Is the-compa'y rvelr rvithin safe rimits insofar as
both
,
long- and short-term borrorrr,ingare concerned?
9. Has the price of the stock moved up ancl down over
t5B

The Walt Street lrwestor

the past- few years without violently wide
and apparently
inexplieable fluctuations?
10. Does the pe-r-sharevalue of the companyk
_
net real_
izable assets exceed the stock exchange lralrre
oi u
stock share at the time the investor cintemplat",
"o_*on
L.ryingl
Many stock buyers have failed to ask tt
q""riio*.
ln
some-cases, they bought the stocks of componi",
"r"
t-toi-froa
not.shown a profft for some time. But the
isiues would ..get
hot," as speculators are wont to say, and
multiply several
times over their issue price rvithin a matter
or *""ks or even
days. Then, someonewoulcl realize that the
heat was being
s:1erat1d solely by irrationar buyi'g-and
the prices *ourd
plummet.
I.repeat that I personalry believe that
.selected-and I want
again to emphasize the word serecterl--common
rio"r,t u*
excellent investments.There are innumerabre
fine uuyr-"" trr"
market today. Amoug them ar.e many stocks
ir*uJ'Uy
panies with net realizable a.ssetstwo, three,
"o__
for.
Lr,"r,
rnore-trrnes greater than the stock exchange value"ri
oi tlr"i,
issuedshares.
What does this mean to the investor? Well,
for exirmple,
let's suppose that the mythicalXyZ Corporation
has realizable
assetswith a net value of $20,000,000. at tn"
,urn"-tirr,", it
has 1,000,000 shares of common stock outstanding
u'J ihu
selling at $10 per share. The arithm"ti" t, siirfii.
19"\ I
rf,"
$20,000,000 net value of the company's realizable irr",,
i,
double the totalg10,000,000 value of its outstanding
shares.Thus,
buying a share of the XyZ Co' "o*,non
o;;ai;",,
_anyone_
common stock at $10 is buying
rvorth
$20
of ocu"l, h"rd
msets.
Such situations are not nearly so unusual
as one might
imagine-and the shrer.vd,seasoned investor
takes the tiire
and trouble to seek them out. Occasionally_tnougn-"a_i,tedly such instancesare rare---specially astute
investors dis_
cover companiesthat have undjstributed surpluses
equal to a
sizable percentage of the market v.rlue of
the outitanding
stock. Anyone buylng stock in such a
i,
"o*Tgnactually buying an amount of rnoney equal
"o_fu"y
,o o gooJty-pr.ii",
of his investment, as well o, sho* irr the
"
assets.
"orpirntio'n,;;,h",
I miglrt point out, however, that the exact opposite
niay be
75q

lr
I,I

fr
il

i
ri

fi

Hous to Be Rich

true' and that the investor

wit stit be safe.An incrividuar
does
have
to
buy
;,;'d #
11, l":":'"rity
are
bulging with cash i"-"..#i,
vaults II
;i-:ot"n"nyrv'hose

ili::ffiJ.Ti;il:ff ; J,,ililffi."T
:#;:;;lilii
investment secret,is

,rj;l*:.,.**t"

that-the owners of

The Wall Street Inoestor

banking that the_,st:_:|, h" buyswill jncrease appreciably
in
value over the next few o.
several
It is the emotiotal
"u"rr.in.r"r,or who
se'ds the
pdce of a stock up or."""pt"f"rliJn"ot
a"io i.-.-fr"ip, ,poro.lic
and rnor.eor
less short-lived spurts. a politi.i.n:i
an ivory_torver
punditk pronouncemer:ts"p*r"h,
oi propheeies,
a newspaper item or
a whispered rurnor-srcr,
trri,'gr'"."'enough to trigger
wirdry
enthusiastic buving sprees
or hysterical ories oi panicky

r",'i,'r"-j
$rus=p'-*#;ll***:*,*'lilll;t"fu
':"n;"rum",i",il,,",

find that U"f"i" il"";":1,""::to_crcs leil a few points, only to

,rl,:.0,.;;;;#is"'TJJf"T"ff
jl" in commonwith'specui;.;

:1_,li

sellingbv thousaljl

n.-iLTl Ti*r1;; "+ij"j"".r":ly

yly",..l:
T".,.k:!
i,r,"1
olriectively
tooU, tlr...fn1Soi,o,
i,i gr.owttr51ssl65_q7[ich
he
h"-gJn"r"llyreapshandsome
o.f years. He b"-n-ks
on the

buysandholds,
""1r1:_Lli"t
profits over a period

climate._and
il:lT"a]I";T:;s:J nt,**"",^i#'i"t". alrprecautions
so

rh"'"-l'

marketstorms'
t# ;tt''1Y-.::"-"k
-_*w,,vel/(r(Ir
misconception

or
lr amaterrr
amateur-S;;;;'
jnveStor
inrrpc+^* iS
i:g:.,,"g
thJ
"t
financiers.

the

that
{nat

the

small
Sma]l

btr, investorsand

.wa,
Thi., ,,';*.1:
in t.he
dim,
distanl urr"*"r..a&lir"Jr"a"ffi,
"ld
T::
be rurthe.-l;;;i,,,th

lT1ffi,:![,u],

today.'
No,.,thru,,,

i'd';::"'n
;T*:,
t#Jil:i^tr
:*;
[:m':::1ru

are closelvregulateduv-ru"rr-r,iei,ry
um"i"nt;;;;;"s
organ*izatio^ ""g"""i",
the Federar
s;"".T_r,jil:ld:g
"i,a
",

il
l;l
;;l

r"r'i-rirr#i""""o"*.

The professio'al
"i
investorhas no choice
to
Ji
b;
quietly
while the mob
-but
hasits day,until th" e"th,oi";;;;
ti,u pnni" of the specularors
and.nonprofessionals
h""; b;;;',i"n;:
The seasonedinvesio;
;;;;""nli'otto*
temporary fluctuationsin stock-market
p'ices-i" i"ir**
his
decisioristo any
great extent.Usually, he.waits
untiifri"", return to approxi_
at whid'

ilT:ti":T jevels

h; ;;;

lo u,.,vor set.n"'i, not

a very great h'r'ry, fo. h"-i,

investor-no, o".l*,"J-"l-in
,.,
nor
a
sPeculator'
P";;i" ffi; " ili'"rer

":ff;
Y:""
il
i[: *Im:'if;:;,
b:
;lH,ffi
il*:
Ji:
u'".r*.v,
iil;F::

1l:wers

#n:,T"li
;:Ttiff,:.iih#i
ilh*
only

000 to invest,I would

suchcomrnon
stocksas.are]isted or a ","ia".
major stockexchange.I rvould
apply
the rules and tests I'";
;;;";;A'Jrrd
,"le.t the sound.est
and mostpromisinqgrowth
,,".Lr.
certainlv igrore t'""oaui""-;i;il;"r.s i"a', I might add, I would
a'd theorists
-fl,
peddlebarebrainedformulas,.It."r"i,,
who
_"tt
oa,
_ulolng
quickprofit,

rlr

ii

r*"1"_,r,",,;:::|#:."11:r#f,"",:"ffi,,;#jh:::

owned by thousanal
3"a--te,rs;i",lo"r*d, 9j jndividuats,
organizations,
mutua-lir"a
.,Big,,
gr"rp,
investors
+ * on.

t1
,l
,t

:l
il
It
I
t!

on th" ,toJ'irrt"t. Therehas

been
Orii*.eir'boot,
in
recent
years.
Seasonedfinanciers"::!n,"r,
and investors llugh.at
lY:."''q
a
spateof Hous,o

:,:[m:ff"f:,iJ"iv,,nulp","?nog"''or"
ffi!":T"illffi
If anything,t,

;F'^j"*.rar investorwho is at
mercy of the speculator
f^.lh ancl
the
the
Ieast in the sense
"-utrr_"t

setthe
l,"t*:.i:[?;::i-"?:"1 .r',,""il'i';;",, andser]ers

The professiona,.ln:".,?:
.
purchases,stocks on
what might
be termed a scientific,
o.. least a ."r"Or"f,
basis.He analyzes
lacts and ffgures objectivelv;;;;i-great
"l
care and does his
buying for purpose,
r""g_i";;;;"J,*enr.
He i.s,in efiec.
"r
160

_them_o, ,o,l*r,
:.|iL:::J.*,1",?Y
*ii,i'auars
'#T,i#"J:i'ru',,:::
q*iui"
whororrow
"advice"
the
{:'
:1",
contained
in
such',"-"r.
ii"
collapse pulled dow3
l.blinkur"d,,

many of these
speculators,
so its history should b" *o.it
;;;;;rg:
In order to achieve any
underrt"njir,g of that
collapse. it
is helpful to first ouickry
;;;i;
#;se of trre markei ove.
the precedins l2^.r""rr.
ff," uoriurt way to clo
this is by
follo.wing th" bor_;ones
ind ustri*i
At the lg50 low.,,.n"^o^__^l*i'i"1"r,.,.1
"u"rng".

averagestood
at 161.60.
Ir climbeclto 2g3.7gUr-ifr"'".a
of 1g52,droppecl
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Hous to Be Rich
to 255.49 in mid-lg53,
then climbed

r"u"r'italiit;;;"
::5?rtilfrrvhich

The Woll Street lwtestor

steadily to 521.04 in

was caused bv oeople.

buying stocks as
hedge against
inflation' If this i*^t,',ri,
th" ins"n-" ffi,ron of-acertain
common_

to around
420at the

extremelv
oddwavto go aboutit. nut
n*

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:J.lffiTH"::",-fX il:f"il:ilu|,T
:"i:*ii"ed]{*sil,:iJ
,,tx,,?H,";*Hljii:li_:,:::i?xi,j,f
,:lnqru;ffi*Hi
jjil"",1,'.;,"fi
oncertaint",",,"
":J[:
:;tffi i":lffiffiTT:s

a late-tg60 low .l go_0,-oi.;;"#H',

base,it shot up to a
then all-timepeak ;Sa.gf-"i'b"""_U*r
13, lg6l.
"f
As the market mo,ve!
,rp_"rJ iir".gf. lg6l, someWall
Streetveterans,rr::1#,frI
pr"_fggecrashsaying
"f,_qr"i"i

iTJJ:i::ffhJ,:lf:il*;;,iliil

theruture,
"", onry

Many years ago, the per_share

price t:s. per_shareeamings
ratio was widelv_thori*,
as a reliable
rule-of-thumb indicat;ffi ".oml,iity_"aopted
rt*il' rTi;"r. ..Ten times earnings.,
rvaslong ionsidered tt'" -"*i-i
m lermissibre price one courd
pay for a stock
,:lt^,:""rg;;i;';*pect
to make a profit.
The', in the"l.d

late tg20s,cM:d"-p";,,r'j"hr.j..iriri"u_
whoseoutrookwasjudged'q"j."
u"rrirh_";;i;;.ja ir,"""p,r_
io' that certain stocks

n.,isl,i-L" *"rarr as much as

15 times
their per-share earn-ing.s.
A"fter tt," 1SZS crash, ratio.s were,
of
course, very much,lower
and, even as late ^. iSSO, ,L"-pri""_
earnings

ratios of the stockstirt.d in

th" n";_J;;;; i'.,i,ir,r,"r
index averagedout to about
6,i.
on the price-eamingsratio undenvent
_^ Yi:-r
considerable
revision
in recent years. 5o*"
knorvledgeabie investors
allowed that in a rapidly
b"r;;o;;g
economy, srocks of
especially healthv.,conrpanies
m"ight reasonabryset for as
much as 20 times their per_sh"r"
J".ni.rgs. Other professional
investors argued persua.sively
tf,"l- *1""n h";lihy-;;;onni.,
-;;;i";;;;
had tangible assets *ith nei,'
p"r-rf,"r"
liquidation values
",

nogancsorthen.i"
ff:H
;,L
m;ll'
l"',1",11
*115,
+t
But ferv seasoned^inv*i*r-;;;rJ.r"a ""*
":'as
such situations
*
h
;;
i;q"db;;; s;;;"";
1?9', .;.
*:fr :f"i'.i:::,-"
"",
jg,li:"r"Jffi.:*::.::rr:,il;
thei,"pe,_sh;;;;.i:"s::;:T
the' 1960-Ig62 perioJ, ,t"gg".i"g"!ri.",
were paid for the
stocks of comparies that f,"a
rregligible assets, que.stionable pote'tiars-and
""'fi
that h";;;i
,ho*r,
much in tire'*.y
"'
of profit.sfor a considerableti*"]-"'
lt has been suggested that
the boom that began in lg60

r62

soared out of sisht. AIr

Juia""L",icrines the observer
believe that the "sreat
to
mass of non-professionar
buyers
was
obeving
a sortor"he.d
ilil
;;j[#"s
up the popular issueswithout '*;;'r"g"rd il;';;";jilJ,o
for facts. Many
people were doins tt ui,
inu"rt_"ii^,f,"f.ing_if
it can prop_
erly be calledthai--r.vith
thui.
,ather than witb their
heads.rhey looked.
"*oii#
_r;fii;;;:;#;rrwth
in srocks thar
were alreadypriced{",
high; tha,i ifr" r

:",:ii:
;Jf ,l",'""J;:;;tnJy"oura;;;lTii:rli;11,f;
It is an ord wat street

saw that the stock market

waysffnda reason
fo, _h;i;;"].'ii ).;r:;;";,il;;J,oo."w'i arit' Innurnerabre

theorieshave been-advanced
to exprainwhy
the market broke.en )vlay
ZA, tgiZ. The blame has
been
placed on evervthingfrom ,."iting-Juoves
by foreign .specu_
lators"to the Kenn"d"y
^i-t"trir",tinl
,"o",ion to the aborted
steel industry price increase_j"
i;;;; on everything but the
mostobviousreasons.
Thg factorsthat bring
on ffnancial

varied.
Forexamplu,
;,.,"1869:
;;J;HrT:

IH"ilj
corneron gold.In lg73 ,nd
ig07, ionf. f"ii,rr"r^rlri#.f,"
trouble'In 1g2g,thestock
market*"s ,,".try overpricecr,
and
the general state of
American

b;;;";;r"
and the rate of Americak economic expansion
*"r" ,u"t
to
;,-,rtify little or none
of the stock buvinq
",
,1,."t,
*"
the towering peaks
:*rre"J;;"*
from which they irievitably
had to fall.
Despite all tie efforts
ifr"ii"""
i"",,
to drarv
a close parallel between
"*p"nded
the lg2g-"ort. and
the Ig62 price
break, the two have practically
uothing rn common.

J;;' l t"'i'*"t l et

weregross
ry overt;J,:::,H:1"'j;":'*".u
pii""d
iartoo
,., ilff;r;
Il.,:-r,
e62,andrt ."ono^y
rvas
expancrin
g ;lii f,ffi":?r-."f,l.i:
"
,rr*";"'iff;r%"'i'

163

Hoto to Be Rich

Y,lli::r111*
such
as there had l::Io"*^structurar
been in lg2g.

"il,i;; 1J;"?
-"r",r1
j"::
llj::l"::,
"1 ;G* i;J;,li"ii,'Tll;
;'f;:r
Il".::Xj.Yg,,:lt

Thte WaIl Street Intsestor

flawsjn rheeconomy

differenees.rn te2e,stockspecu_

J:;
'il;;
T,l"l;^'l_:o^l-':", ih"q" ,.. th-emost imporrantctifierence
ll"T,rll".":",1:.i1'y:il;:*;;;;";i";;;i#ff
rt was
;;'"Ti"ji,,'t"#:hJl"l
33*l3f?l.y1,
i". o
::i:::::f
collapsed, :,',1"^:,:1
ig"a"'
credit collapsed,
too. "i-

somervhat violent one.

",",i,.

As I've said, some stockswere

selling for more than 100
times their earnings.
,i"
iuigf,t
of the 1960_1962
boom. Now, it *o-ul.l.cluring
U" ,?tf,"r- jim""f, for a company to
expand enough to justify sto"k
p.ic"s that were I00 times
the companyt per-shateear.ringsi
E,u"n nrrr.r-ing that every
penny of the company'se^r'ingl
rvere oaid out in diviclends
to comrnon-stockhorders,
the"stockhoid"r, *""li-,alrr u"
receiving only a one-percentreturn
-aiuia.,ras,
on their investment.But
if all earningswere d]stributed
lr,
there wourd be
rlo money left forto
spend
on
expansion.
That, of
!h:."o,*n,:ly
course' wourd effectivery
eriminate any_possibirityof capital
growth. Yet, everr with these
gl",i"gfy self_eviclenttruths
staring them in the face,peopleiougfrt,o,.or;;;;;";i.r.
Such were the difficuit ;i,r";;;,
that cleveloped_and
that caused the stock mark"a
;'i;ii.
Experiencedinvestor-s
should have been.abre to
il',il;arning
signarsroud and
clear Iong beforethe Uay ZAUr""'f.i""f.
place.
I
tf," O"*jon-es industrial average
.stat,ed.previously,
_,_Lr.
shot
to its all-timehigh of 7g4.gr o.,
b""urnb". rs,lg6i. rh"
downward rou"rnoit b"g",,
l.i,rr.ai.t.ty
afterward and
continued
Decemb-errgoi ana
through
J";r";t-l*;.*Th",=
was a brief recovery that continu"J
-edged
until March, when the
Dow-Jones average
;;;;;i20,
but the graph line
shows the recovery was an
uncertain,-falter.ing"""I.' fn"
downward trend was resumecl
in March_and the graph line
from then on makesa-steep .lur".r,i
!-vvvvr'! ih"t
r'
is broken by only a
f":,rnn:Todic upward

iogsl
The May 28, t962,
irice break had its beginnings in
I)ecember lg6l' The. ao**".a---"-.r1urt*".,t
was evidentry
'eeded

a'd urravoidabre.
rrr"f lt l',',ln.,i'at"a in-,i"'lir"qp
price plunge of May 28 rvas
due to' the
"_oaiorr,,i"r"".i""
164

-verging
-on panic-shown by inexpe'enced inve.storswho
were unable to realize that whai
*"' t
and' what was worse' who understood"pp"ni;; ;;; ," happen
;fu;;;;r"ri
*r,"a
was going on around^_them.
To paraphrase Abrah"*-ii,r"oln,
a// stock rnarket investors ..rr'ot
fool thenrselvesall of the
time. The awakening had
to
-a
it dicl.
The anatomy of
,to"L "o_L-_"na
-",.t1",

il;_ffi_busr
.suchas
the counrrvexperie,cedin r96t
;;;rot roo difficurfto ;;aryze.
The seedsof anv burt .r" l,,h;ii
;;, any boom ,frni ouirarip,
the paceof '{'hnteversoricrf";;;
g.ve it its impetrrsin the
first place.
An old and rather-corny comedy
part of an auton'robire
.line has it that the only
that
be made il"ioi*r u,
safetv
device
is trren', tt", ""t*oi
r,oiil
,i;
"
*rr""r.rii,Jl'.n ,n"
.sametoken, there..ar.e
'o safegrrarcls
that
can-,p,.,".,
,f,.
enrotionalirrvestorll.onrhimself.Havi'g bid the ma'ket uf
i..ationaty, these enrot,jonal
i'rvestorsbecameterriffed
""; ",;i;;cred their hordingsjusr
U-nfortunately,
:::.-T:1ll"""lly..
rrg wavesnowbatsand carries "n"J.notionally inspir.ei se'_
witri it ,r3. f,ii",
even thosethat shoulclbe going
.,f ,.nttrur.than "fi[;."".,
dowrr.
withal' I berfeveit is absirtr,Etu''"r."n,i:rr
for the A'rerican
""
public to bearin mind that,
"
l. The nation'.s
-economyrvas relirtively sound on Fricl:ry
afte:roon, May 25,
fSOg, *h;;'in"
''" "^' frr"r" york Stock
Ex_
changeelosedior the *"ek1r,;.
2. The U.S. economywas ju.st
as sounclon the following
i\{ondaymorninq.*1,.n
;;r^nge reopened.
-*"1,*k
3. The
*., bori""i;';;i"r,
sound rvhe' tra<ling
""onoiiu
ended on that
hu"iic lv{onday.F;*:}
a'y-i'dustriar
orders
were canceled.Few_if any*job,
*"r" Iost. Few_if anr,_
businessestablishments
were forced to
-if any-investorl,-larg"
"iu"." their.doors.Few
"lorucompletely
;;"il,
wiped
out assomanyhad beenin lg2g.
I rearizethat a'this is-scant
conrfort to those who rost
money whenstocknricesfet
on M;.;;
rt can onry be hoped
,n1.,-h"t. wiu prolit f,;-tl;"p;,Jj'
re.sson.
r rre wrsernvestorwill recognize
that
"considerabr
offered on the markct are
-many stocksbeing
sti,
y tnrcrerpriced,
For
example,there are maryissues,"il;;; tor as Iittle
as orrethird or evenone-fo"rtr,ir,""n'Ji
o";::i:",." tiquidatiorr'alues

Hou to Be Rich
of the i'ssuingcompanyt
assets'To understand what
ean mean ro the stockholder,
this
th"
OiI Company.
"or,ridu,
";;;;;;uii#oful"
A
the
directors
and
f"y I9-* "go,
Oil Company decided forl."roru
*T^"-1?_r-:rl,
of rhpi, ^,,,h +^
I hold a sub-

Thb WalI Street Inrsestor

their issuedstock. It might
be of
rasonwhy this is so. pridu"ing interestto considerjust one
oii-"-o-paniesnormaty car-r.y
their oil and gas reasesat
cost on their
-$gs,ooo
barancesheets.A lease
t.tjn.,"o-PolY paid, say,
is carried ar that
]Inl"h

1':::l::.'P;"*#,;'il;T;i'::;i"".-il'*it,'*1;"^*:,,1:
:':[,:::q**:lffi
.rJl,,l}li
1i?; 000
:i:TiJ::,fi
:.#:* Ir:,^::tl
t_,,*.
.;|-;;;il;,"i:;:0,.,?
*l:it,*,ix;:
together
barrels.On the b;"kr;,f,"
signiff
ed,r,"o
t"*#,jtff
fJr" rr'rhoro'

Bit":Und

Oil's a.ssets.

The stockhordersof Honoruru

oir had their choice of two
ways in which they could
,"fi ,f,lr. companyt assets.
First,
they could sell their ,,o"f.
,o','f,;;"
companies.or,
alternativery,they courd r,ota
luvi1s
ihei-rtock, set the actuarassets
anddistribute
theproceeds
;;;; tn"*r"r"o-.Ulrli"?,_"t,
dissolving their company.
Honolulu oi's shareirorders
chose
-".o.rrra
the ratter method. The
company's stock was selling
$30 per share_but,
so valuablewere its-tangibl3;;;,
"t
tf,"t
it"
J;" ,illuying
companiespajd for them worked
or.rt,o about $100 per share.
This, of ciurse, was the
,u*
Honolulu stockholder
received for each share he
"""t
h"ld _he.,_alr"
*". a*solved. In other
"or"i"r,
tt"
_words,
of
Honolulu
Oil,s
assetswas more than three "r.f,'rralue
times as much as the total value
of its issuedstock.
Naturally, shareholderscan reap
this particular type of
windfall profit onry when th"
coneemedis di-ssorved.
But it shourd
"o-fry
bepiainto r"" i"*'*"'"r,
,"r",i'ii"r" o
in investing in a company
"aa"J
that has tangible
assets
with a net
liquidation value great", than.the .,n^iu"
of
its
stock.
If, as an
example,the net.riquidation
;
ut".-ti-!r"il"i'oi
.r,"
stock, then, in effec!, e""h doli",
""li oi"tfr"
stockholder,s
invest_
ment is securedby three dollars,worth
;r;;r.
There
.oru
"a;;;il;;bl"
one
might
imagine.
T"h ";;;rr"r",i*
They can"r"be found
in
but
I am most
with compaljes in""tii*-l"iustries,
.f," p".rJlum industry and, more
lami.Ua5
particularly,
with thoseengag"d in the business
of producing
Several oil stocksj:r""d_ by sound,
thriving companiesare
selling at prices well..rvithi;. ;;;-;*ronable
price_earnings
ratio limits- some of these oir
arsot"r" ffirr"
assetsworth three,four and
"o*j"r,ies
,nJr" times the totar val-ie of
"'rrun
t66

as an asserworth
$25,000,eventhough-1n,
oil
companywou.ld
".oifii*;;il,:r;;;ke
gladty pay severat
"il;;;;cing
it
over.
The impti_ I
cations of this bit of
i"[fiig"n"e will not be lost t
on the alert investor."::"r."il;
i
Similar ;";;i;;,
exist in many other I

il;firff:

andthe astureinvestorwilt find th"*

I
onj profit I
{
t
i
t

My own confidencein the

stock market has not been shaken
*

.May2l.priceU.*"t;;;

Pf
il'iler drops.r am stilta
Ireavy
investor in common stocks.
I m stilt banking_to the
m.any millions of dollars_on
the he"lthy climate of
lll" ^of
economy and tt
Urigt t future
a_".Lr"
;T,*::""an
"
"f
This, in essence,is the
only advice and co-unsela successful,
experienced investor

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