PART FOUR

The Art of Investment

THE WALL STREET

INVESTOR

On Monday, May 28, 1962, prices of the New York Stock

Exchange crumbled rapidly before an avalanche of sell

orders. The Dow-Jones industrial average plunged nearly

35 points to register its biggest one-day drop in over 32

years. Crashing through the 600 level for the first time

since 1960, it hit a day’s low of 576.93.

By the end of the day, many big-board stocks were

selling at prices from 30 to 80 percent below their 1962

highs. Shares traded on the American Exchange and over-

the-counter markets followed suit and also went into

nosedives. Headline writers were quick to respond to the

developments being reported by the lagging ticker:

BLACK MONDAY PANIC ON WALL STREET

INVESTORS LOSE BILLIONS AS MARKET

BREAKS NATION FEARS NEW

1929

DEBACLE

Such were the scare heads that appeared on the front

pages of the nation’s newspapers after the New York Stock

Exchange closed for the day.

By the time later editions

came off the press, experts

and analysts, economists and

pundits were offering their explanations, hindsight

diagnoses and spur-of-the-moment prognostications. As is

often the case in such situations, some of the second-

guessers and crystal-ball gazers tried to gloss over the

implications of the collapse, while others appeared to take

an almost sadistic delight in

prophesying even worse things

to come.

Two days later, several newspapers and wire-service cor-

respondents descended on me. They wanted to know my

opinions and reactions and asked what I was doing because

of the break in stock prices. I told them quite frankly that,

while I sympathized wholeheartedly with anyone who had

lost money because of market developments, I saw little if

any reason for alarm and absolutely none for panic.

The over-all current business picture was favorable and,

what was even more important, gave promise of getting

better in the future. There was nothing basically wrong

with the American economy nor the vast majority of

companies whose stocks were listed on the New York Stock

Exchange. In my view, some stocks had been grossly over-

priced. Irrational buying had driven their prices to totally

unrealistic levels. The May 28 break was an inevitable

consequence.

I said that I felt the stock market was in a much

healthier and certainly in a much more realistic position

because of the long-needed adjustment of prices. As for

what I was doing, the answer was simple. I was buying

stocks.

“I’d be foolish

not

to buy,” I explained to a young corre-

spondent who looked as though he thought I’d taken leave

of my senses by buying when everyone else seemed to be

selling. “Most seasoned investors are doubtless doing much

the same thing,” I went on, feeling somewhat like a

schoolmaster conducting a short course in the First

Principles of Investment. “They’re snapping up the fine

stock bargains available as a result of the emotionally

inspired selling wave.”

Since the petroleum industry is the one I know best, I

bought oil stocks. By the end of the New York Stock

Exchange trading day on May 29, my brokers had

purchased several tens of thousands of shares for my

account. I hasten to emphasize that I bought the stocks for

investment

and not for speculation. I fully intend holding

on to them, for I believe they will continue to increase in

value over the years to come.

It has long been the custom for journalists and financial

writers to interview successful businessmen and investors

whenever there is an “unusual” stock market development.

The opinions, information and advice gathered from these

sources are then published, ostensibly for the guidance of

less sophisticated investors. For as long as I can remember,

veteran businessmen and investors—I among them—have

been warning about the dangers of irrational stock

speculation and hammering away

at the theme that stock

certificates are deeds of ownership in business enterprises

and

not

betting slips.

Get-rich-quick schemes just don’t work. If they did, then

everyone on the face of the earth would be a millionaire.

This holds as true for stock market dealings as it does for

any other form of business activity.

Don’t misunderstand me. It is possible to make money—

and a great deal of money—in the stock market. But it can’t

be done overnight or by haphazard buying and selling. The

big profits go to the intelligent, careful and patient

investor, not to the reckless and overeager speculator.

Conversely, it is the speculator who suffers the losses when

the market takes a sudden downturn. The seasoned

investor buys his stocks when they are priced low, holds

them for the long-pull rise and takes in-between dips and

slumps in his stride.

“Buy when stock prices are low—the lower the better—

and hold onto your securities,” a highly successful financier

advised me years ago, when I first started buying stocks.

“Bank on the trends and don’t worry about the tremors.

Keep your mind on the long-term cycles and ignore the

sporadic ups and downs . . . “

Great numbers of people who purchase stocks seem

unable to grasp these simple principles. They do not buy

when prices are low. They are fearful of bargains. They

wait until a stock goes by—and up—and then buy because

they feel they are thus getting

in on a sure thing. Very

often, they buy too late— just before a stock has reached

one of its peaks. Then they get caught and suffer losses

when the price breaks even a few points.

Typical of these people is an acquaintance of mine with

whom I had lunch one day in 1955. We talked about many

things—including the stock market. During the course of

the conversation I happened to mention that the X

Corporations shares were selling

at 4 ½, and that I thought

the stock would go up in price.

By late 1957, the stock stood

at 11 I later learned that

my acquaintance had kept his eye on the stock for two

years and, when it reached 11 1/

4, he finally decided it was

safe to buy and purchased several hundred shares. He

watched happily while the stock climbed to 13 ½ in the next

six months. Then there was a dip. X shares fell to 10 and

stayed there. My Johnny-come-lately acquaintance sold out

and lost money. Those of us who’d bought early held on, for

the securities were worth more than twice what we had

paid for them.

Eventually, the stock rose again, going up several more

points to reach another fairly steady price plateau. Today,

it’s around 15—and those of us who bought early are

holding on to it firmly. I might add that we’ve also collected

satisfactory dividends on the stock through the years.

I began buying common stocks at the depths of the

Depression. Prices were at their lowest, and there weren’t

many stock buyers around. Most people with money to

invest were unable to see the forest of potential profit for

the multitudinous trees of their largely baseless fears. I

had confidence in the future of the American economy and

realized that the shares of many entirely sound companies

with fine potentials were selling at only a fraction of their

true worth.

When I first bought Tide Water Associated Oil Company

stock in 1932, its price was as low as $2.12 per share. The

average per-share open-market price of the stock rose

steadily, as shown below:

Year $

1933 8.23

1934 9.39

1935 11.61

1936 15.54

1937 20.83

The price fell off during the 1938 slump, but this was

just one of the sporadic tremors. I not only held on to the

shares I owned, but bought more.

My confidence was fully justified in the years that

followed as the value of the stock increased many, many

times, and I— along with all the other stockholders—also

collected handsome dividends.

In May 1932, I also started purchasing Petroleum

Corporation stock. In that month, I bought 10,000 shares at

$3.45 per share. I continued to buy steadily until, by

September 14 1933, I held a total of 190,000 shares. In that

month, the shares were worth nearly $15 each; the average

per-share cost of my 190,000 shares was only $6.537.

I have reached back to the Depression era for two

examples based on my own expe

riences. I could cite others

from that period and from su

bsequent ones. Some stocks I

own today are worth more than 100 times what I originally

paid for them. But many other investors have had even

greater successes. More examples would serve only to

further underscore the same basic truth, one that every

investor and would-be investor would do well to paste in his

hat:

Sound stocks, purchased

for investment when

their prices are low and held for the long

pull, are very likely to produce high profits

through dividends and

increases in value.

This is a self-evident “secret” of successful investment

that vast numbers of people disregard. There are other not-

so-secret secrets that investors would do well to learn and

consider as inflexible rules in their stock market dealings.

Highly important among them is the axiom that no one

should ever buy a stock without knowing as much as

possible about the company that issues it. In more cases

than legitimate brokers would care to count, such so-called

investors have insisted on buying large numbers of shares

in companies without having the foggiest notion of what

those companies do or produce.

As I see it, the average person should consider the

purchase of common stock as the investment of surplus

capital for the purpose of earning an annual return on that

capital and of eventually increasing the capital as much as

possible.

The average individual begins

“investing” by opening a

savings account or by buying insurance or annuities. He

usually graduates to buying Government bonds. Later,

when he is more experienced and sure of himself, he may

decide to invest in common stocks. If and when he does so,

he should follow certain definite rules for his own

protection and benefit.

In the main, the average investor should consider

buying only such common stocks as are listed on a major

stock exchange. There are many good reasons for this.

Some unlisted stocks are worthless, bogus shares peddled

by fly-by-night companies. Even when the unlisted stocks

are legitimate the buyer often finds that he is “locked in”

with his investment; it is frequently difficult to sell an

unlisted security.

The person who buys or sells listed stocks can always be

certain he is paying—or receiving—a price that is fair and

bona fide to the extent that it has been set by buyers and

sellers according to the law of supply and demand in a free

market place. The same cannot always be said for unlisted

stocks, which may be pegged at artificially high prices or, in

some cases, have no value at all.

Common stocks should be purchased when their prices

are low, not after they have risen to high levels during an

upward bull-market spiral. Buy when everyone else is

selling and hold on until everyone else is buying—this is

more than just a catchy slogan. It is the very essence of

successful investment.

History shows that the overall trend of stock prices—

like the overall trend of living costs, wages and almost

everything else—is up. Naturally there have been and

always will be dips, slumps, recessions and even

depressions, but these are invariably followed by recoveries

which carry most stock prices to new highs. Assuming that

a stock and the company behind

it are sound, an investor

can hardly lose if he buys shares at the bottom and holds

them until the inevitable upward cycle gets well under way.

Withal, the wise investor realizes that it is no longer

possible to consider the stock market as a whole. Today’s

stock market is far too vast and complex for anyone to

make sweeping generalized predictions about the course

the market as such will follow.

It is necessary to view the present-day stock market in

terms of groups of stocks, but it is not enough merely to

classify them as, say, industrials or aircrafts, and so on.

This is an era of constant and revolutionary scientific and

technological changes and advances. Not only individual

firms, but also entire industries must be judged as to their

ability to keep pace with the needs of the future. The

investor has to be certain that neither the products of the

company in which he invests nor the particular industry

itself will become obsolete in a few years.

In the early part of the century, farsighted individuals

realized that automobiles had more of a future than buck-

boards, that automobile-tire manufacturers’ stocks were

better investment bets than the stocks of firms that

manufactured wagon wheels.

The trolley-car industry was a good bet—until trolley

cars began to be supplanted by buses. Airplane makers who

insisted on producing nothing but canvas-covered planes

after the day of the all-metal airplane dawned had little

future. Today, the manufacturer of jet or turboprop

transport planes is much more likely to be in business and

make money than one, say, who insisted on turning out

trimotored, piston-engined transports.

It is indeed surprising that so many investors fail to

recognize business situations only slightly less obvious than

these dated or farfetched examples. They will buy stocks in

faltering or dying firms and industries and ignore tempting

opportunities to buy into companies and industries that

cannot help but burgeon as time goes on.

It follows that the investor must know as much as he

possibly can about the corporation in which he buys stock.

The following are some of the questions for which he should

get satisfactory answers before he invests his money:

What is the company’s history: Is it a solid and

reputable firm, and does it have able, efficient and

seasoned management?