What Stocks Not To Buy
A great deal more can be said about stocks you should not buy than about
stocks you should buy, because the list is very much larger.
Stocks not listed on the New York Stock Exchange, as a rule, should not
be bought by a careful speculator, but as stated in the previous
chapter, there are exceptions to that rule. Billions of dollars have
been lost in the past by buying stocks that have become worthless. A few
years ago a list of defunct securities was compiled, and it took two
large volumes in which to enumerate them. New ones have been added to
them every year. Therefore, it is very important that you should give
careful thought to the subject of what stocks +not+ to buy.
Nearly all promotion stocks (stocks in new companies) are a failure. An
extremely small percentage of them are very successful, and the
successful ones are referred to in the advertising of the new ones; but,
on the basis of average, the chances are you will lose your money
entirely in promotion stocks. We believe that most of the promotion
companies are started in perfectly good faith, although some of them are
swindles from the beginning; but no matter how honest and well meaning
the organizers are, the chances of success are against them. Therefore,
we say that promotion stocks should not be bought by the ordinary man
who is looking for a good speculation, because his chances of making a
large profit with a minimum risk are very much better when he buys
stocks listed on the New York Stock Exchange and uses good judgment in
Among the listed stocks there are many you should not buy. First of all,
eliminate them by classes. Do not buy the classes of stocks that are
selling too high now. You may say that there are some exceptions in all
classes. That may or may not be so, but in any event, you have a better
chance of profiting by confining most of your purchases to the classes
of stocks that are in the most favorable position.
As a rule, when stocks are first listed, they sell much higher than they
do a short time afterwards. Of course, that is not always true. It is
more likely to be true when a stock is listed during a very active
market, when prices are more easily influenced by publicity. The high
price of it is usually due to the fact that publicity is given to it,
and as soon as the effect of this publicity wears off, the market price
of the stock declines.
It is a good rule never to buy stocks that brokers urge you to buy. Your
own common sense ought to tell you that a stock that is advertised
extensively by brokers is likely to sell up in price while the
advertising is going on and will drop in price just as soon as the
Many people notice that and they think they can profit by buying when
the advertising starts and sell out when they get a good profit, but the
majority of them lose money. The stock may not respond to the
advertising, or if it does go up, they may wait too long before selling.
Those who do sell and make 200% or 300% profit in a very short time are
almost sure to lose it all in an effort to repeat the transaction. Many
of those who read this know it is true from their own experience.
You should leave such stocks strictly alone. You may win once or twice,
but you are sure to lose if you keep it up. As a rule stocks of this
kind have very little value and the brokers who boost them make their
own money from the losses of their foolish followers.