THE steady decline in stocks this autumn ushered in the last stand of the Old Guard of the Great Bull Market. The survivors of that huge army of speculative enthusiasts refused to surrender in the spring when the rebound from the crash reduced losses and even created some modest paper profits. Five months later, when the stock averages sank lower and lower, they went down to financial slaughter amid a machine-gun barrage of margin calls and banking requests for additional collateral.
Unfortunately, casualties were not confined exclusively to the professional speculators. When the stock panic of a year earlier was at its worst, certain eminent financiers proclaimed to all who would listen that good stocks were on the bargain counter. The small investors responded in a volume that amazed the brokerage houses. Being untrained in matters financial, they made their purchases hastily and included spectacular pool favorites as well as seasoned investment issues. They overlooked the qualifying adjective ‘good’ in the advice of the financiers, and had ample leisure to repent afterward.
Many of these small investors committed another mistake. Stocks being on the bargain counter, they bought after the manner of the housewife at a heavily advertised sale who is startled at the size of her charge account on the first of the month thereafter. Instead of acquiring five or ten shares outright, they made arrangements at the bank for more extensive holdings. These unpaid balances did not seem so impressive in the light of 1929 incomes, but 1930 proved to be a different matter. As the depression grew more serious, salaries were cut, easily won sales commissions dwindled, and seemingly steady jobs proved anything but that.
The problem of reducing these loans out of income became serious. Comment by bankers during the spring and early summer gave ample proof of the static condition of collateral loans among all classes of customers. They were safe by reasonable banking standards and the market prices of the moment, but they refused to come down in total.
The summer waned. A few bigger borrowers, possessed of both horse sense and excellent trade information, realized that the autumn recovery would be seasonal at the best, and liquidated. The small investor believed instead the optimistic prophecies of an early return to prosperity, and held on doggedly.
Dividend cuts and omissions multiplied. Semiannual earnings reports were as a rule disconcerting. A further smash in grain prices developed. Stocks began to slip slowly and then at the rate of two to five points a day for even the prime investment favorites. Rallies were brief and the declines in Wall Street disastrously long.
Collateral values shrank to the danger point, and banker and broker alike requested reënforcements. Modest savings accounts were drawn upon at first. Then came sundry reserves in the way of unlisted securities sold by glib salesmen, and with them an unpleasant surprise.
For the small investor was informed that securities of this type, whether stocks or real estate bonds, possess an amazingly low value in a loan envelope and frequently none at all. Attempts to dispose of such assets for cash justified the banking appraisal of their emergency value. In the end, the unfortunate owner sold part or all of his bargain-counter stocks of a year earlier, paid up his debts, and retired from the field, a sadder, poorer, and resentfully wiser man.
Looking back over these pitfalls which trapped so many small investors during the last year, a decalogue of don’ts suggests itself. It cannot help the victims of the autumn decline, but it may prove of value to odd-lot purchasers of stock at the newer bargain levels now prevailing. Here it is.
Don’t buy without personal investigation. Every worth-while investment house maintains a good statistical department where information regarding the past, present, and probable future of specific securities is available. Such information may be had for the asking — but too many investors buy first and investigate afterward.
Don’t buy unlisted securities if you may need them in an emergency. Many unlisted stocks and bonds are of high investment value, but quick conversion into cash is another matter. Now that New York has a real estate securities exchange and Chicago is starting one, even real estate bonds should be of the listed variety if possible. Listing assures a channel for immediate sale.
Don’t yield to ’groundfloor’ temptations. Changing industrial conditions this year caused many a mushroom millionaire to allow the public a share in his business. Stocks of this type were sold by salesmen in great confidence and ’to a very limited clientele who would appreciate the opportunity to get in on the ground floor with this prosperous and successful company.’ Frequently a receivership developed instead of dividends.
Don’t overbuy. It is much more comfortable during a market decline to have a ten-share certificate in the safety deposit box than technical title to a bigger one and a loan at the bank.
Don’t buy because a stock will go higher. The stock of any sound corporation undoubtedly will go higher if, when, and as the current trade recession passes. Meanwhile such matters as steady dividends and adequate investment return are much more important.
Don’t buy because of 1929 earnings. Most economists agree that the profits of last year were abnormal and may not return for a good many months to come. Earnings during the leaner years of the last decade offer a better criterion for investment purposes.
Don’t buy stock in small companies. Many a little-known and unseasoned corporation rode the prosperity wave to affluence and is now being given the first real test of its career. Companies in this class were responsible for a heavy proportion of the dividend omissions during 1930.
Don’t buy because a stock is now comparatively cheap. Many an issue was inflated by pools beyond all justification during the great bull market. The violence of its decline since then should be no inducement to the investor.
Don’t buy because of a telegram or a tip. Tips are usually worthless, while a telegram is frequently used in an unscrupulous stock-selling scheme. Use of the mails to defraud is a serious federal offense. Not so the telegram.
Don’t buy through an unknown broker. He may prove to be a bucket-shop operator. If in doubt, ask your bank about his financial stability.
Of the admonitions in the decalogue, the first is the most important by far. Hackneyed though the expression has become, it would be a wise innovation if every small investor had stamped across the face of his cheek-book cover four terse words: —
‘Before you invest, investigate!’