A Correct Basis For Speculating

We maintain that there is only one basis upon which successful

speculation can be carried on continually; that is, never to buy a

security unless it is selling at a price below that which is warranted

by assets, earning power, and prospective future earning power.

There are many influences that affect the movements of stock prices,

which are referred to in subsequent chapters. All of these should be

d and understood, but they should be used as secondary factors in

relation to the value of the stock in which you are trading.

If the market price of any stock is far below its intrinsic value and

there is no reason why the future should bring about a change in this

value that will decrease it, then you may be certain that important

influences are working against the market price of the stock for the

time being. In the course of time the market price will go up towards

the real value. This matter will be more fully explained in subsequent


You always should keep in mind the fact that when you buy a stock at a

higher price than its intrinsic value, you are taking a risk. The stock

may have great future possibilities, but it is risky to buy stocks when

present assets and earnings do not warrant their market prices, no

matter how attractive prospective future earnings may appear. However,

the possibilities of profit sometimes are so great that one is justified

in taking this risk.

It is our belief that the majority of traders buy stocks because they

are active in the market and somebody said they were a good buy, even

though the real values may not be nearly as much as the market prices.

As an example of this kind of trading, we want to call your attention to

a news item that appeared in a New York paper. It stated that on April

1st, some brokers in Detroit, as an April Fool joke, gave out a tip to

buy A. F. P., meaning April Fool Preferred, but when asked what it

meant, replied "American Fire Protection." Of course, there was no such

stock, but there was active trading in it until the joke was discovered.

Evidently it is not necessary to list a stock on the Detroit Stock

Exchange in order to trade in it.

This story may or may not be true, but we believe the statement that

people trade in stocks they do not know anything about is true. You

should be careful not to buy a stock merely because somebody says it is

a good thing to buy, unless the person making the statement is in the

business of giving information on stocks, because it may be only a rumor

with no substantial basis. Of course, if many people act on the rumor,

there will be active trading in the stock, and it is frequently for that

purpose that such rumors are started.