MANY investors, in their search for information regarding securities, turn to Wall Street as the source of these data, forgetting that Wall Street goes back to Main Street for the facts.
Significant of the important bearing which events on Main Street have upon affairs in Wall Street is the fact that our shrewdest captains of finance and business make periodic trips the principal purpose of which is to get into Main Street in order to get a truer perspective of Wall Street. In the last analysis Wall Street is a mirror of Main Street.
What Wall Street is most keenly interested in is questions such as these. Is Main Street buying Fords or Chevrolets, Frigidaires or General Electrics? Is Main Street cooking with coal, gas, or electricity ? Will Main Street renew its franchise with the trolleys or license a bus line? Are the acres behind Main Street producing as good a crop as last year?
Wall Street anticipates.
Hence, even in the case of rails and public utilities it studies conditions on Main Street in the territory served. True enough, in these two groups the political factor may be given serious consideration for the time, but in the long run it is Main Street which determines fundamental conditions, including the political situation. When too many oil wells are drilled in the hinterland of Main Street the law of supply and demand asserts itself. The prices of oil stocks tumble.
The popularity among conservative investors of the securities issued by our railroads may be due in part to the fact that for years dependable and standardized financial reports have been available to the public. From these reports Main Street could study and compare the progress of any railroad in which it was interested. In other words, from these reports, standardized for ihe Interstate Commerce Commission, Main Street could determine the trend of any railroad and see for itself the composite effect, of business on Main Street upon the railroad in question.
Wall Street looks to Main Street to determine the trend. When Wall Street hesitates we know that Wall Street is uncertain as to Main Street.
Wall Street will always fascinate Main Street so far as the investor is concerned. It is a battle of wits. The keen investor of Main Street is deliberate; otherwise he will not discriminate. He knows that a marked change has taken place in Wall Street during recent years. Whereas in 1907, 1914, and 1920 the stock market as a whole experienced severe reactions, we have within the past few years seen reactions of significant proportions take place in certain groups of stocks which have dropped low in price in the face of a rising market. Textiles, rubbers, oils, and more recently motor-truck stocks of certain companies, illustrate the remarkably selective character of the present market for stocks.
Not for many years has there been a time when greater discrimination was essential, because of the fact that the bond market has experienced a slight reaction and owing to the unusually high level of the stock market.
The tremendous strength which our life-insurance companies enjoy as financial institutions is due to the fact that they are able to diffuse and diversify their investments to a degree that is hardly approached by any other institution. By the very extent of this scientific diversification the element of risk and the factor of loss are reduced to a negligible item. To-day the investor should examine his list most carefully.
One of our most successful magnates once gave as his secret of success the following familiar maxim:' Put all your eggs in one basket and then watch that basket.’ Let me illustrate the mischief of this doctrine, misapplied by an investor who had made a comfortable fortune in business. He invested all his funds in the securities of one company because he knew the president and had implicit confidence in his ability and integrity. This company belonged to one of the groups which I listed as having experienced a drastic reaction in a rising market. To-day the estate is but a fraction of its former size. This investor was unconsciously gambling, first on the life of his friend, and second on the continued prosperity of the company. When the law of supply and demand had settled prices, the folly of this investor’s policy was evident.
The case where the investor is justified in putting all his eggs into one basket is rare. If he is in a business in an executive position and can buy and sell the securities of his company with entire freedom, he should be able to invest in this way with a greater likelihood of success than otherwise. But even in such a case, unless he knows not only the trend of his own business but also the trend of the industry it represents, he is treading dangerous ground.
Diffusion of risk does not mean the buying of the securities of all the companies in one industry or the buying of securities of many of the different industries in a certain locality. Neither would a wholesale purchase of an exceedingly broad list to-day be a proper diversification, because the investor would purchase equities in certain companies that were facing a period of declining profits, whose securities must undergo a material shrinkage. Under present highly selective conditions discrimination is most essential in pursuing the sound policy of diffusion of risk.
While it is agreed that the stock market is at a very high level, and while there are thousands of investors with funds at hand who are itching for the opportunity to invest at more attractive price levels, there are certain factors that seem to indicate that a major reaction in the stock market is not close at hand and when it comes may not be as severe as those in the past.
Business is spotty. Certain lines are active, others dull and depressed. Underlying conditions, however, are sound. Business has not forgotten the lesson of 1920. Buying in many lines is still on a hand-to-mouth basis, inventories are snug. The Federal Reserve System, through its monthly statistical reports, has been a powerful factor in assisting the business man to anticipate conditions. Furthermore, the elastic control which it can exercise in times of need may serve as a preventive to forestall the speculative excesses which would lead to a sharp setback. In effect the Federal Reserve System should act as a stabilizer of business, and thus indirectly as a shock absorber to an otherwise sharp stockmarket reaction.
Two danger signals should be closely observed at this writing. If any security which you hold shows a net loss in a rising market for one day, that may be a coincidence. If t he market as a whole rises, yet this security continues to slip downward against the trend, at once seek impartial counsel.
Another danger signal at this time is the matter of yield. If either a stock or a bond shows a yield that is materially above the average, leave it alone unless you are in possession of all of the facts. When high-grade investment stocks are selling to yield between three and five per cent, yields of eight per cent and over should cause one to stop and ponder. It is a mistake to make the point of yield the vital issue. It is far wiser to ask, ’How much has this company earned over the past five or ten years? How consistent have its dividends been, how conservative its management?’