How to Make Big Money in the Stock Market

MARKET

One

Introducing the Author

There is a certain glamour and excitement that permeates the Wall Street Scene or game, as it is too often called. Paradoxically, it is a business of the most complex nature, the world’s wealthiest marketplace. Its perennial promise of gold glitters beckoningly on the horizon, yet, like a mirage, its rewards, more often than not, seem to vanish in thin air. But the glamour persists and the excitement engulfs, even overwhelms, hundreds of thousands of men and women from every walk of life and at every financial level. Whether the investor is a novice or a seasoned sophisticated trader, mature in years or flushed with the optimism of youth, few can truly say they have completely escaped the lure of fantastic Wall Street profits and its consequent pitfalls. Perhaps the psychologist can explain human behavior in the market or why men of mature business judgment, of modest means, or comparative fortunes will spend more time selecting a $3.50 cravat than in deciding on a stock purchase totaling many thousands of dollars.

Despite the seemingly apparent ease of making great profits overnight by buying a stock and seeing it jump a number of points the very next day, Wall Street remains the most competitive and probably the most difficult business of them all, as far as making money is concerned. It is not a business where you can succeed without trying; it is not a game which so many boast they play on occasion; it is not a horse race or a roulette wheel; although to some the thrill of picking a winner in Wall Street seems to far outweigh any other consideration.

Let us examine the Street a bit further. On May 17, 1967, the New York Stock Exchange celebrated its 175th Anniversary and the investment community proudly reflected on its progress. At its inception, in 1792, twenty-four brokers gathered together under a buttonwood tree on Wall Street, not far from its present location, and formed a marketplace for the purchase and sale of securities. In 175 years the number of brokers swelled to 35,000 in 3,700 offices. There are 651 member firms and some 1,200 companies listed on the New York Stock Exchange (the Big Board).

Reporting the event, the New York Times wrote:

In this red-plush setting [of the Vivian Beaumont Theatre at Lincoln Center] reminiscent of a Greek amphitheatre, some 700 leaders in business, finance, government and education launched the celebration with a symposium on corporate share-ownership.

The audience heard Keith Funston, president of the Big Board, declare that by the time the Exchange marks its 200th Birthday, the roster of shareowners in the United States may swell to 50 million persons. The present number of corporate stockholders is around 22 million. … The shareowner of tomorrow promises to be vastly different from the shareowner of yesterday. Americans may become as well informed about investing as they are about the comparative merits of automobiles, television sets and other consumer products. Investing in stocks may very well become a standard part of family budgeting.

These simple statistics are repeated here to give the reader a hint of the enormity of the marketplace called Wall Street. On the Big Board alone, it is estimated that about 75,000 buy and sell orders are executed daily; and to this, we must add the substantial volume of transactions on the American Exchange (the Small Board) as well as the many thousands of shares traded over-the-counter, i.e., corporate issues that are not listed on the New York Stock Exchange or the American Exchange.

How well the shareowners of tomorrow will compare to those of yesteryear is a matter of conjecture. It is my opinion that human nature will not change; today’s investors, as well as those during the years to come, will make the same mistakes as those of yesteryear. Some few will be alert enough to benefit by the mistakes of others, but these will comprise a very small minority. Wall Street gossip will continue to be most intriguing, particularly when it concerns the few that in the last decade or two have made million-dollar fortunes from small beginnings. But gossip tends to exaggerate and offers no solace to the many who are sitting with more losses than gains during the same period of time.

Making money in the market is difficult; to make a million dollars is well nigh impossible. But, as my former advertising associates used to say, We do the difficult quickly; the impossible takes a while longer. Perhaps the exception proves the rule. My personal profit experiences are fantastic; even more unbelievable is my total avoidance of losses during the same period, for they usually go hand in hand. An accurate record of my stock transactions will be found in Chapter 4. I ask the reader to study them carefully. The publisher cannot give you an ad-man’s money-back guarantee, but the author enthusiastically assures the reader he will achieve far better than average success in Wall Street if he seriously reviews his own investment methods, habits, procedures, and thinking, as compared to the author’s. After all, I must be doing something right.

As Governor Al Smith used to say: Let’s examine the record. I started as an advertising man, a busy, full-time job if there ever was one. My duties embraced every part of the business: get the account, analyze its sales potential, its market, create the advertising layouts, copy, select the media, bill the accounts, and collect the accounts receivable in order to pay the accounts payable. I believe it was a wonderful training ground for the investment business. I was a very busy ad-man. My initial foray into Wall Street, representing a few hundred dollars, was necessarily relegated to a spare-time study of the market. For the moment, we will skip some of the past history; the reader undoubtedly will be more interested in the present.

My most spectacular achievement is showing me a profit of (at the time of this writing) $2,212,910 on an original investment of $3,000. Please note that no additional money was invested in this stock, outside of purchasing via rights two convertible debentures and rights to purchase one new share for each ten held. These purchases totaled less than $25,000. Also, no pyramiding whatever was involved, for basically I do not believe in pyramiding, doubling-up, averaging, etc. The entire story will be detailed in a following chapter.

A second stock, a utility issue, cost me $2,500, which was reduced by $1,700 (which I switched to American Telephone and Telegraph) to $800. The market value as of this writing totals $92,910. Although not as impressive as the previous paragraph, it is in itself a mighty large nest-egg for a hard-working advertising man.

A third stock, practically unknown and unheralded, more than quadrupled a $12,000 investment in about a year and a half, while the Dow Jones averages slipped very badly.

A fourth company, showing considerable losses for a number of years while their process was being developed, perfected, and marketed, finally turned the corner and its market price went from a low of $5 to over $100, adding another $60,000 profit to my portfolio.

Fifteen of the twenty stocks in my portfolio have split from two to sixty times. The remaining five also show substantial profits.

This most unusual stream of success stories spiraling profits up to the three-million-dollar mark, was accomplished by the author during the last decade. And what should be most impressive to the analyst is the fact that these profits were achieved during a period that witnessed some very violent price declines in the Dow Jones averages as well as in the stock market leaders and favorites, particularly during the years of 1962, 1964, 1966, and 1967. I will attempt to answer all the whys and wherefors in the following chapters.

Two

The Exploration, Examination and Evaluation Preceding the Acquisition

Having whetted your appetite to the extent of three million dollars, the profits this writer amassed mostly during the past ten years from an investment in the low thousands, my task now is to guide the reader through each of my transactions explaining how I did it. On our journey, we will encounter many observations on what not to do, for it is equally important to understand and avoid the many pitfalls that engulf us all. To scan these observations too hastily is to underestimate the value of good thinking … on your part. Perhaps it would help to learn a bit about the author.

It appears to me that from my earliest childhood, I was a staunch advocate of a penny saved is a penny earned. I was never too haughty to question the arithmetic of the butcher, the baker, and the candied-egg dairyman who, I discovered, were always a few pennies in error, but never in my favor. It was not a question of penny-pinching as some may suspect; we were quality minded, particularly when it came to food. A dozen of the best white was the standard order for eggs; when it came to clothes, I bought a Hickey Freeman suit with my own earnings; they had a reputation of being the best … and most expensive. Other brands could be purchased for half and less. This early training must have had some influence on developing my apparent talent for ascertaining the true value of a stock.

I find that I am not alone in my obsession about pennies. Though not meaning to put myself in their category, I recently read (in the New York Times) of some idiosyncrasies among a few men of inestimable fortunes. Jack Warner, who recently retired as vice-chairman of the board of Warner Brothers-Seven Arts Ltd., and sold his holdings in the original Warner Brothers for $32 million about a year ago, goes around flipping off light switches in movie studios and his various domiciles, including a villa at Cap d’Antibes. William Norton Engles, president of the Chicago City Bank and Trust Company washes his socks every night. He says he grew up in Macon, Ga. ‘and we didn’t have a lot of money and that makes an impression on you for life.’ He figures he saves at least $70 a year with the sock washing. (I wish I had know it last summer; with my wife, I spent a few weeks at Hotel du Cap d’Antibes, one of the most beautiful spots on the Cote d’Azur. But when I received my laundry bill, I was convinced I was personally making a major contribution to reducing the French national debt.) J. Paul Getty, the oil tycoon who may be the wealthiest man in the world will not accept mail with postage due. And H. L. Hunt, another oil tycoon who is almost certainly the wealthiest man in the world, if Mr. Getty isn’t, carries lunch to his Dallas office in a brown paper bag.

The Three E’s—Exploration, Examination, and Evaluation—of a company before you acquire a piece of it seems to be about as academic as the Three R’s. What procedure could be more natural than finding a stock, examining its operations, and evaluating its earnings as compared to other companies. But that doesn’t mean that investors as a group follow a natural course of events. I have observed that many among us, with long experience, complicate matters by adhering to their individual preconceived notions, such as: I only buy dividend paying stocks; absolutely no over-the-counters; I look only for low-priced issues; I don’t like textiles, motors, steels, oils, railroads, or chemicals, etc.; I want action-stocks. Individually, each may have some reasons for his likes and dislikes but in most instances (on investigation) you will find they had some sad experiences with the kind of stocks they hate. To carry this line of thought to a proper conclusion, an overcautious analyst would have to temper his recommendations pending a personal psychiatric examination of his client.

There are 1,262 companies listed on the New York Stock Exchange and thousands more on the American Exchange and the over-the-counter markets. Vital statistics relating to past and current sales, earnings, dividends, etc., are available for all of these companies. And there are countless customers men, analysts, advisors, and advisory services ready to supply you with the information you seek. However, investing is not a precise science; if it were, every talented computerized investment advisor and all his fortunate clients would have money trees flourishing in their own backyards. I don’t know if that would give us a better world to live in, but I am sure that backyard real estate values would skyrocket. Moreover, I have known many avid students of the market, far more knowledgeable than the writer in the economics of one particular company and its progress, as well as the country as a whole, who often cannot see the forest for the trees. Yet, some of us consistently do better than others, growing richer while others barely hold their own. And it is their methods I have tried to uncover and share with my reader.

When first I was initiated into the market, it was my good fortune to meet M. Fal de St. Phalle, the head of his brokerage firm and a member of the Parisian banking family. His simple advice was, Know why you are buying a stock. I never forgot it or its implications. I bore a marked resemblance to the man, to such an extent, that one of the partners once said to me, If you can imitate his French accent, walk up to the cashier’s cage and ask very casually for a thousand dollars in cash, and you will get it. Perhaps my thinking about various stock transactions bore a similar resemblance.

I have tried to apply a simple, common-sense approach to the buying of any stock. I try to examine each stock on its own merits without the hindrance of any preconceived notions. Yet, this simple approach is not too prevalent among a good number of the investors I meet in my daily travels. It appears that a single sad experience with one type of stock very often leaves a lifelong impression on an investor or speculator and forever after, he refuses to entertain another stock of a similar nature. It is surprising how few have any pertinent reason for buying a stock other than, I expect to make some money on it,—which certainly bears no relationship whatever with the stock under consideration.

Moreover (and this is addressed to those who have had the good fortune to make a good profit on a stock of their choice), have you ever observed the arrogance of the trader who tells you in a matter-of-fact manner that he has just made a profit on BBX though his broker told him not to touch it, and therefore infers the stock he just bought, CCX, would also show him a profit. Or, he casually adds, How much can I lose on CCX? Hence, a word of caution: one careless miscalculation can eventually destroy a well-planned investment portfolio, just as one rotten apple can spoil a barrelful. Farfetched? Not in the least. I have seen it happen.

One of my lodge brothers related to me very proudly that his son, just out of college, became a customers’ man and after a few quick transactions on his own made enough to buy himself a new car. The father seemed perplexed when I told him that while I was happy for his son’s success, I would have preferred (if he were my son) that he had lost some money. I further explained that the stocks he bought were not the kind I heartily recommend; not that I knew any more about the market than he did, but I was fearful such profits were bound to give the young man a false sense of competency, impelling him to believe that picking winners in the market is an easy business; whereas, some initial losses, like the hard knocks of life, are quick to teach you the more difficult role of careful planning. As it happened, the young man’s success story was short lived. The entire market turned bearish: the better stocks broke while the weaker ones tumbled. His own losses as well as those of this friends who bought on his advice quickly disillusioned him.

There is nothing extraordinary in this experience. It happens in every walk of life. Take the golfer, for example. You have seen the beginner who, with an easy natural swing, starts hitting them straight down the middle and with no inhibitions seems to do everything right, the long irons, the pitches to the green, even dropping long putts. He is convinced a natural born pro is in the making, until the hour of truth arrives. He slices into the rough, and the harder he tries, the worse the slice, Only then does he seriously consult the club pro to find out what he is doing wrong.

Of course, in the selection and purchase of a stock, the difference between the right and the wrong is not easily discernible, and what appears right to one, appears wrong to the other. The choice of one may lead to fortune, the other, oblivion.

As William Shakespeare phrased it, in Julius Caesar, Act IV, Scene III, lines 248 (I understand Shakespeare was an affluent investment counsellor):

There is a Tide in the affayres of men,

Which taken at the Flood, leads on to Fortune,

Omitted, all the voyage of their Life,

Is bound in Shallowes, and in Miseries.

On such a full Sea are we now a-float,

And we must take the current when it serves,

Or loose our Ventures.

William might have been tipping us off as