The Great Depression (35 page)

1. Increase liquid assets when security prices are high and speculation rampant. Substitute short-time bonds for long-time bonds and common stocks. Get ready for the inevitable crash. Even if you sell too early—it is better than too late. It is sometimes wise to sell at a price you fixed when you bought the stock.

2. Deal only in well-seasoned securities with a broad market. Slow stocks may tie you up at a critical time.

3. As far as possible deal only in income bearing securities that can be held through a slump. Then if you don’t sell out in time, even tho you may see low prices, you may get a reasonable return on your investment and will probably come out in the end.

4. Buy the stocks outright—not on margin. If you do borrow—borrow from banks—conservatively. If you borrow when stocks are low and money plentiful—you take less risk than when stocks are high and a crash is imminent.

1. First line of attack is accrual of income. Money doubles in 14 years at 5%—12 yrs. at 6%—and 10 yrs at 7%. 1000 for 40 years at 6% will amount to $165,000.

2. Second line of attack is to get an occasional capital increase every few years by sale of securities at higher prices. It is hard to pick a security that will go up quickly but it is less difficult to pick a security that will go up in 2 or 3 years. The difficulty diminishes with the distance. If a good security is bought below value, the investor need not be much concerned with the daily ups and downs of the market. Eventually the market will come up to him and recognize the value of the security. This means recognizing the long swings in the business cycle. It means switching to high-grade common stocks in time of depression when they sell below value—and switching again to bonds in time of prosperity when common stocks are selling at a premium and speculation is rife. When prices are high, that is the time to guard against depreciation. When prices are low that is the time for action with liquid capital. An investor who is loaded in time of depression with high priced common stocks is rendered helpless and can only wait and hope his stocks are strong enough to carry thru. Another source of profit is buying stocks of reorganized companies. It is best to wait until the reorganization is complete and buy the new stocks. Generally the old stockholders get tired of waiting and throw the new stock on the market for what it will bring. If the reorganization has been drastic and takes place just before an upturn in business comes then it should be a good investment.

3. There is a proper security for each phase of the business cycle—and each security—whether bonds or stocks—should bear dividends. The dividend return may vary but should be unbroken. The profit from sale of securities will be irregular and at long intervals. As the cycle changes the security should be changed. It is hard to always judge the exact place in a cycle but it is fairly easy to know whether we are in a period of great prosperity and speculation or in a period of blackness and despair. It is most difficult to know when the turn comes. It is best not to wait for the turn but to follow the simple theory of buying when a security is selling below value and to sell when above value. You will probably lose some profits but this is better than waiting too long. A conservative investor will be satisfied to increase principal to an extent that will double the dividend return. This may not sound like much but if the increase is consecutive and none of the principal lost, it will mount rapidly.

1. Depression is time of greatest profit. The investor who has liquid funds and the courage to act can lay the basis for great profits. The speculator is usually broke or tied up with high-priced stocks.

2. A period of railroad reorganization offers great opportunities in the stocks and bonds of the reorganized companies. If drastically reorganized, the companies will be stronger than ever. Prosperous years are ahead and the new stocks will sell below value.

3. Not too much of your capital should be risked on one particular theory. You may be wrong. You must judge the risk as well as the profit and the latter should outweigh the former.

4. Business will always come back. It will remain neither depressed nor exalted.

5. The stock market forecasts business in only a limited way. The beginning of a stock market movement usually is caused by the trend of business but in the end the movement is carried too high or too low—by the extreme optimism or despair of human nature.

6. As a general rule only strong companies are worth investing in. After a severe depression this may be broadened to include 2nd grade companies which have survived the panic in good shape and have prosperous years ahead. At such times the risk is less. The risk is greatest at the top of a boom.

7. A certain amount of cash, bonds or other liquid securities should always be set aside for protection or to seize unexpected opportunities.

8. A major risk should not be taken for a minor profit. Real skill appears in appraising the risk. If it can be discovered where risks have been exaggerated by the public in lowness of price, the profit naturally follows.

9. The investor has this great advantage over the merchant or speculator—his assets are always liquid. He can switch from the treas. bonds to short or long-term bonds or to stocks with great rapidity—and he can still maintain steady dividends even tho they are lower. The investor should consider his work as a business or profession—his capital is most precious and must not be lost or tied up. He must be more interested in broad economic movements than in day by day fluctuations of the stock market. He must not let his long viewpoint be disturbed by too close contact with the stock market. He is not interested in tips. The investor must be hot in action—cold in thought.