It’s May 28, 1962 and the stock market is spiraling. It was the biggest one day drop since 1929. And it happened fast.
The flash crash that day left the Dow down 5.7% at the close, 26% below the 1962 high near the start of the year, and below 600 for the first time in two years. Many stocks ended the day 30% to 80% below their highs for the year.
A rebound the next day offered respite from the panic. Two days later J. Paul Getty offered encouraging words when pressed for comment, “I’d be foolish not to buy… Most seasoned investors are doubtless doing much the same thing. They’re snapping up the fine stock bargains available as a result of the emotionally inspired selling wave.”
However, the volatility persisted until late in the year. And J. Paul Getty expanded further in an article published that September.
He blamed herd behavior and emotional investors on the irrational prices and crash. He criticized the speculation that drove stocks with little to no assets to trade at over 100 times earnings.
He relayed the message that get-rich-quick schemes don’t work. His “not-so-secret secrets” of investment success: sound companies, bought at low prices, and held for the long run is the way to wealth.
His real secret: not be panicked by market moves. While it’s hard to remove emotion from investing, its necessary for long-term success because emotional buying at ever higher prices leads to emotional selling when markets turn and panic sets in.
Finally, Getty reminded readers of his investing rules which he laid out nine months prior:
As I see it, the average person should consider the purchase of common stocks 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… If and when he does so, he should follow certain definite rules for his own protection and benefit.
1. 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. Many 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.
2. 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 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 trends 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.
3. Withal, the wise investor realizes that it is no longer possible to consider the stock market as 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 buckboards, that automobile-tire manufacturers’ stocks were better investment bets than the stocks of firms that manufactured wagon wheels…
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.
4. It follows that the investor must know as much as possible 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?
- Is the company producing or dealing in goods or services for which there will be a continuing demand in the foreseeable future?
- Is the company in a field that is not dangerously overcrowded, and is it in a good competitive position?
- Are company policies and operations farsighted and aggressive without calling for unjustified and dangerous overexpansion?
- Will the corporate balance sheet stand up under the close scrutiny of a critical and impartial auditor?
- Does the corporation have a satisfactory earnings record?
- Have reasonable dividends been paid regularly to stockholders? If dividend payments were missed, were there good and sufficient reasons?
- Is the company well within safe limits insofar as both long- and short-term borrowing are concerned?
- Has the price of the stock moved up and down over the past few years without violent, wide and apparently inexplicable fluctuations?
- Does the per-share value of the company’s net realizable assets exceed the stock exchange value of a common stock share at the time the investor contemplates buying?
Whether he wants to invest $100, $1000 or $1,000,000 in common stocks, every investor should ask these questions before he buys stock in any company. If each and every question can be answered Yes, then he can feel quite certain he will be making a safe and smart investment by purchasing the shares — provided, of course, he follows the other rules for wise investment.
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