The 1922 investing classic offers an introduction to new investors and sits as a reminder that the basic investment principles have remained the same over the past century.
The Notes
- “Our purpose is to protect you against losses as well as to enable you to make profits, and it is very important that you understand how to provide for safety in your speculating.”
- “To speculate is to theorize about something that is uncertain.”
- “In nearly all investments there is also an element of speculation because the market price of investments is subject to change.”
- “When interest rates go up, the market prices of bonds go down, and when interest rates go down, the market prices of bonds go up.”
- “Speculator: a person who buys stocks for profit, with the expectation of selling at a higher price, without reference to the earnings of the stock.”
- “Investor: An investor differs from a speculator in the fact that he buys stocks or bonds with the expectation of holding them for some time for the income to be derived from them, without reference to their speculative possibilities. We believe that investors always should give some consideration to the speculative possibilities of their purchases. It frequently is possible to get speculative profits without increase of risk or loss of income.”
- “‘Lambs’ refers to that part of the public that knows so little about stock speculating that they lose all their money sooner or later.”
- “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… All of these should be studied 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.”
- “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.”
- “You should be careful not to buy a stock merely because somebody says it is a good thing to buy…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.”
- “In every instance, when you make a selection, you should consider the company’s assets, present earnings, and prospective future earnings, and then take into consideration all the influences that affect price movements.”
- “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.”
- “Billions of dollars have been lost in the past by buying stocks that have become worthless… 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.”
- “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 advertising stops. 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.”
- “Stocks should be bought when they are cheap. By being cheap, we mean that the market price is much less than the intrinsic value.”
- “As a usual thing, it is a good time to buy stocks when nearly everybody wants to sell them. When general business conditions are bad, trading on the stock exchanges very light, and everybody you meet appears to be pessimistic, then we advise you to look for bargains in stocks.”
- “It seems to be characteristic of human nature to think that business conditions are going to continue just as they are. When business is bad, nearly everybody thinks business will be bad for a long time, and when business is good, nearly everybody thinks business will be good almost indefinitely. As a matter of fact, conditions are always changing. It never is possible for either extremely good times nor for extremely bad times to continue indefinitely.”
- “There are times when stocks should not be bought, and that is when nearly all stocks have advanced beyond their real values.”
- “We think it is seldom advisable to refrain entirely from buying for any great length of time. There usually are some good opportunities if you watch carefully for them.”
- “You should sell stocks when the market price is too high. That is a general rule, but it is necessary for you to study all the influences affecting stock prices to be able to decide more accurately when you should sell your stocks… Another general rule, is to sell stocks when nearly everybody is buying them.”
- “It is a well known fact that the great majority of people buy stocks near the top and sell near the bottom. Naturally when everybody is optimistic, stocks will sell up high, but sooner or later they will come down again, and when everything looks very promising is a good time to sell. It is better to lose a little of the profit that you might have made by holding on longer than not to be on the safe side.”
- “The man who tries to sell at the top nearly always loses, because stocks seldom sell as high as it is predicted they will, or, in other words, the prediction of higher prices is advanced more rapidly than the prices.”
- “During the extreme activity of a bull market, it seems that nearly everybody is talking in exaggerated terms of optimism. That is why most traders seldom ever take their profits in a bull market. They wait until stock prices start to come down, and then they are likely to think there will be rallies, and keep on waiting until they lose all their profits.”
- “Some people make the mistake of selling too soon. Just because your purchase shows a liberal profit is no reason why you should sell. The stock may have been very cheap when you bought it.”
- “It is not always a mistake to sell a stock in order to get funds to put into something else that seems more promising, even though the stock you sell is likely to go much higher.”
- “Stock prices move up and down in cycles. These are the major movements in prices, but there may be many minor movements up and down within the major movements.”
- “Stock price movements nearly always precede a change in business conditions; that is, an upward movement in stock prices is an indication that business conditions are going to improve, and a downward movement in stock prices is an indication that business conditions are going to get worse.”
- “A steady upward movement in stock prices is a sure sign that business conditions are beginning to improve, even though that improvement is not noticeable.”
- “Major stock movements are not an exact duplicate of any previous ones, and it is impossible to tell how long they will last or just what course they will take.”
- “A period of prosperity is noted for high prices, high wages, and increasing production in all lines. Everybody is optimistic. Most people spend their money freely, and that makes times better… During this period, speculative stocks are selling at their highest prices; and under the influence of this movement, many stocks that have no actual value sell up at high prices. Of course, wise speculators sell all their stocks during this period.”
- “Following a period of prosperity comes a period of decline. The first sign of it usually is a severe break in the stock market. At that time general business is running along at top speed and there is no sign of a let-up, but this break in the stock market should be a warning… When stock prices do not rally beyond the prices at which they were before the break occurred, it is a sign that the turning point has been reached and that the bear market has started, although the majority of people do not realize this until a long time afterwards.”
- “Many people who lost all their money during the speculation period, become thrifty and economize during the period of depression, and start in to save again. Nearly everybody is pessimistic during this period… This is the time to get stock bargains, but the general public as a rule doesn’t take advantage of it. People are scared and think prices will go still lower.”
- “Perhaps no other one thing influences the movement of stock prices so much, in a large way, as money conditions. It is impossible to have a big bull market without plenty of money… When money is tight, it is impossible to get enough to carry on a large movement in stocks.”
- “Within the major movements of stock prices, there always are several minor movements, which are caused by various influences. One of the important causes is the technical condition of the market. Another cause might be called a psychological one.”
- “We have rallies in bear markets. Of course the professional bears sell during these rallies, with the expectation of buying later at a cheaper price.”
- “The major movements are so slow that people get out of patience, and yet those who are guided only by the major movements are operating on a much safer basis. We believe that a greater amount of money can be made, with a minimum risk, by being guided principally by the major movements, while taking advantage of the minor movements in a minor way.”
- “A peculiar psychological influence is noticed when a company declares an extra dividend. The price of the stock usually goes up, while as a matter of fact the intrinsic value of the stock is decreased by the amount of this dividend.”
- “When one finds that a mistake has been made, the sooner one sells and takes a loss the better.”
- “It is our opinion that more money is lost by the public in manipulated stocks than in promotion stocks, and we read a great deal about the enormous losses in them. Promotions that are failures may be perfectly legitimate and conducted in the utmost good faith, but manipulations are nearly always for the purpose of swindling the public. However, the lure of them is so great many people cannot withstand the temptations of them even after they have been ‘trimmed’ several times.”
- The minimum margin rules were about 20% of the purchase price in the 1920s.
- “We think it is not advisable to do any short selling as long as there are good opportunities to make money by buying.”
- “Great care must be exercised in selling stocks short. You might sell a stock short because you know the market price is 100% greater than its real value, but it is possible for manipulators to force it up a great deal higher.”
- “It is generally said that nearly all the buyers of puts and calls lose, and that is our opinion. Therefore, we advise you to leave them alone.”
- “There is one instance where a stop-loss order can be used to advantage, and that is near the top of a bull market. It is impossible to tell when the market has reached the top. If you sell out too soon, you may lose a profit of several points. Of course, it is better to do that than to take a chance of a large loss. In that case, you might instruct your broker to place a stop-loss order at two or more points below the market, and keep moving it up as the market price moves up. Then when the reaction does come, he will sell you out and prevent you from losing a large part of your profit.”
- “The failures in stock speculating are caused mainly by ignorance and greediness. Many people who would be satisfied with a fair return on their money in a business enterprise, think they ought to make a 100% profit in a few weeks in stock speculation.”
- “It does not pay to take big risks. That is true in stock speculating the same as in any other undertaking. Most speculators are keeping their minds all the time on the possibilities of profit and not thinking about the possibilities of losing.”
- “If you want to be successful in stock speculating, there is one thing you must learn to do, and that is never to think about the big profits you might have made if you had bought such and such a stock, because the probabilities are you could not have afforded to take the necessary risk in buying that stock. Of course, after it is all over, it may look to you as though the buying of that stock was a sure thing, but the buying of such stocks is never a sure thing. The risk always exists.”
- “There is an old saying, and we believe a very true one, that a man who speculates with the idea of getting rich quickly loses all his money quickly, but that the man who speculates with the idea of making a fair return on his money usually gets rich.”
- “We consider the avoidance of loss more important than the making of profits… If you are careful in keeping your losses down to a minimum, your profits are likely to be very liberal. Any trader who trades for any great length of time is likely to make large profits sometimes, and yet the majority of them have greater losses than profits.”
- “Do not speculate in stocks nor in anything else without any knowledge of what you are doing, and try to use as much good judgment and care as possible in all of your transactions. If you do not know what to do, get advice from someone who is supposed to know and who is not interested in having you buy or sell.”
- “If the reckless trader gets advice on stocks, he is not guided by it if it is of a conservative nature. If he does take advice, it is likely to be from one of those unreliable market tipsters who is very emphatic in his statements about what the market is going to do. The reckless trade lets his greed and desire for large and quick profits influence his judgment.”
- “Our advice is never to hesitate to sell and take a loss if you can put the proceeds from the sale into something better rather than leave it in the stock in which it is now. It is not so much a question whether or not the stock you are holding will go up, as it is whether or not you would buy that particular stock if you were just coming into the market to make a purchase.”
- “It is much better to go to the extreme in carefulness and be satisfied with very small profits than to take great risks.”
- “The circulation of pseudo news is the frequent cause of incalculable losses. Nor is it alone in the matter of circulating false information that these news venders are at fault. The habit of retailing ‘points’ in the interest of cliques, the volunteering of advice as to what people should buy and what they should sell, the strong speculative bias that runs through their editorial opinions, these things appear to most people a revolting abuse of the true functions of journalism.” — Henry Clews
- “You must remember that a broker’s market letter is published for the purpose of getting business, and business is created only by the customers’ trading. Therefore it is to the broker’s interest to have his customers make many trades instead of a few trades.”
- “Men of affairs who will not play poker at home, and are shocked at the mention of faro and roulette, which any old-timer will tell you are easier to beat than the stock market, think they are using business judgment when they try to make money on stock market ‘tips.'” — Roger Babson
- “Many people buy stocks at the wrong time, and most of those who do buy them at the right time, buy the wrong stocks.”
- “There always is so much publicity about these very active speculative stocks that the public is attracted towards them. Newspapers and brokers’ market letters give altogether too much space to them. Such stocks sell far too high, and when the break comes, it brings ruinous losses to many people.”
- “The stocks that most people buy are usually the very stocks that should be left alone. The stocks you should buy are usually the ones you hear very little about.”
- “There is only one SAFE way to speculate, and that is to be guided by a knowledge of the fundamental conditions of each stock and also of the industries they represent.”