by HERMAN GASTRELL SEELY
UNTIL the excitement in Wall street last November, it was easy to win a reputation as a stock expert, and a great many hitherto obscure authors of brokerage-house letters did. All that was necessary was to announce, ’Going higher, and, if the market hesitated, scatter a few graceful explanations for the ‘healthy corrective reaction’ and repeat the forecast.
Eventually — until November — the prediction was certain to be fulfilled, for that violent and feverish speculation in securities was a law unto itself where past experience was a hindrance instead of a help in amassing paper profits. In its later days, for this reason, it was almost exclusively a young man’s market, and more than one gray-haired trader, recognizing the danger signals, commented, ‘Nobody over forty is making money now.’ Then he put his own marginal house in order and sat back, only to find that a new advance instead of a crash was in order.
The very vigor and breadth of the buying movement made for a certain specious infallibility on the part of the brokerage-marked letter writers and for comfortable paper profits on the part of their followers. No matter how flagrant the pool operation or how ridiculous the earnings of a company in proportion to the market price of its stock, there was always enough of a following for any sort of tip to run the quotations higher and higher.
The operations of a typical brokerage house with pool affiliations may be taken as an example of the way the system worked in the pre-crash days. The pool manager, being ready to distribute stock which had been acquired at lower levels, flashed over the network of private wires of the firm the following advice:
‘Buy International Rolling Stone at market. Going higher.'
This terse message, being received at the various branch offices, was turned over to the various customers’ men. They in turn called up their more influential clients in this manner: —
‘We hear some pretty good things about International Rolling Stone common. It’s due for a ten-point rise, New York says. Had n’t you better take a hundred?’
The next day the market letter issued by the house repeated the advice to buy International Rolling Stone common and furnished interesting and gossipy information regarding the flourishing state of its business, the possibility of extra dividends, and any other data of speculative interest. And the followers of the letter bought, usually in twenty-five or fifty share lots, according to their resources.
On the third day still another group of small speculators came into play. These consisted of men and women who heard of the prediction through cither of the two groups of direct customers of the firm and hurried to climb on the speculative band wagon.
Thus three distinct waves of buying were induced by the original tip, the volume in each case being heavy enough to push Rolling Stone’s market price another notch higher. The pool passed on as much of the stock to the public as it desired, both groups of direct customers saw the issue quoted at profitably higher levels, and if the hearsay purchasers witnessed a little shifting of values after this final impetus had spent itself, they rarely reproached the author of the market letter. They had merely heard of a good thing too late. That was all.
But these are soberer days. No longer does the ‘Going higher’ forecast hold, nor can a reaction he dismissed lightly as ‘corrective.’ Instead of running true to form, the stock market during much of this year has shown a disconcerting tendency to move in exactly the opposite direction. Last year it was the ruler of the financial roost; to-day it is easily influenced by such unexpected factors as a decline in wheat prices or the fulminatious of some inquiry-seeking senator.
The followers of brokerage-house letters no longer find it easy to amass anything but margin calls, while the market-letter authors who cherish the remaining shreds of a reputation now chant almost in chorus:—
‘We adhere to the belief that operations on the constructive side of the market offer the best opportunities for future profits and advise the purchase of sound investment stocks for the long pull on all reactions.’
This is rather broad but excellent advice, and the problem is to decide just what constitutes a sound stock, and just how long is a long pull. Frequently a solution is suggested in the letter by a list of stocks which are ’well thought of’ or in which ’good buying by insiders is in progress.'
For the novice who would embark now on the perilous waters of the stock market with a brokerage letter as his navigator . chart, these specific recommendations ought to be regarded as danger signals, worthy of the fullest investigation. It is at present far easier to lose money on a market tip than to make it, and this condition is likely to persist.
It should be remembered that there are brokerage letters and brokerage letters. Some, be it distinctly understood, are compiled by Competent economists and are really valuable sources of information on current economic trends.
A second group of market letters dwells less on economic trends and more on stock statistics. A third deals almost exclusively with stock recommendations which may or may not be selected with a primary regard for a possible customer’s financial welfare.
There is a very easy method for separating the sincere recommendations for investment from those with ulterior motives and pool affiliations. That is to become really acquainted with a brokerage-house letter before accepting its advice.
If International Rolling Stone is stressed as a good purchase, don’t buy. Instead, follow the market quotations for ten days or even longer.
If the stock holds fairly close to the level at which the advice was given, put down a mark in favor of the sincerity of the market letter’s author. If it works a little higher and holds most of the advance, do the same.
If the comparison with the quotations shows, on the contrary, that International Rolling Stone advances briskly for a few days and then slides off with even greater rapidity, score a black mark against the prophet in question. If the same thing happens with an overwhelmingly high percentage of his recommendations, the status of the author is only too plain. His chief aim is to assist pools in distributing stock, and the proper destination for his writings is the wastebasket.
At the end of three months or so of such scrutiny, any novice will have an excellent indication of the sincerity of the most plausible brokerage letter. He will not make any money during the analytical period, it is true, but be will probably find that he avoided losing some.