The Stock Market Revisited

An apology from this department is due to any who may have been influenced by what I wrote about the stock market in the July ATLANTIC last year. Recent movements of stock prices suggest my unwisdom in having discerned what I mistakenly thought was a “great new trend,” and to those who may have lost money as a result of heeding my observations, I offer my sincere regrets. To complete the record, I think it best to reproduce here our market letter in its entirety.

Thanks to the stock market, no one need worry any longer about such difficulties as personal income, jobs and salaries, and how to provide for retirement and old age. These used to be real problems, a nuisance in some cases, and people went to lengths that would seem absurd today in trying to solve them. Some of the more backward authorities are still preoccupied with unemployment: Men over forty-five have trouble finding work, they tell us, and automation continues to displace employees of all ages. But these are mere vaporings. They come from mentalities which are unaware of the stock market and what it does to make ordinary jobs unnecessary. The nine-to-five sort of drudgery and the five-day week are out.

Increasing numbers of “investors,” for want of a better word, have found that they can get all the money they need — more than they had expected — in a hurry simply by putting a few dollars into common stocks. Their general expectation is to double their money in a month or two and then proceed from strength to strength. As a somewhat conservative friend expressed it to me, “Anyone with $30,000 who can’t run it into a half million over the next five years is a nitwit.”

Certain timid observers are disturbed by what seems to them the same excess of bullishness that preceded the crash of 1929, but they fail to understand the changed conditions of today’s market. Margin trading on a shoestring, which so aggravated the 1929 decline, no longer exists, and now there are all sorts of low-priced stocks selling for a dollar or two which might just as well be bought outright. Safety first! In 1929, in other words, the investor put up a $10 margin on a stock selling at $50 and hoped the stock would go up 10 points and double his money. Today’s investor simply picks a nice-sounding “new issue” — a new company is a much more interesting buy, since nobody knows how far up its stock might go, while the limitations of the older, blue-chip stocks are pretty well known to everyone — at something like fifty cents a share. Then, if the stock goes up only a measly point or two, the investor will have doubled or quadrupled his money. Surely it’s more likely that a stock will go up one or two points than ten or twenty points, isn’t it?

Another worry that used to dog the trader of 1929 seems to matter little or not at all today: earnings. The general idea, in the old days, was that a stock ought to sell at around ten or twelve times its current or recent earnings, and twenty times earnings was thought uncomfortably high. The reasoning on this score has changed considerably; no one cares if a stock sells at fifty or a hundred times its earnings. The point nowadays is that its earnings five or ten years hence will justify such a price, and by that time the price will have gone up accordingly, so that now is the time to get aboard. Dividends? Why bother about them? Some dividends are paid only once a year; some are quarterly, which means all that waiting; and some are never paid at all. If the price of the stock keeps on going up, there is no earthly reason to become distracted by dividends.

Well, that’s about it. An investment of, say, $1000 ought to yield profits of anywhere between $5000 and $10,000 a year, and they tell me one can live quite comfortably on that in the small towns of Florida. In any case, I hope this great new trend in securities values won’t stop before I can get this piece into print.