John Moody’s 1906 classic is a guide to the hazards, mistakes, and lessons of investing in the early 1900s. It’s a detailed account of how much, and yet how little, investing has changed over the last century.
The Notes
- “The Art of Wall Street Investing involves two important primary principles. The first is to place one’s principal where it will be entirely secure, and the second, to gain as large a percentage of return as possible without in the least disturbing or lessening the security of the principal.”
- “Although the popular impression is probably the reverse, it is certainly a fact that a greater sum of money is annually lost in the country through unwise investment in Wall Street, than through pure speculation… And furthermore, the losses resulting from unwise investing are far more important to the community at large; for while speculative losses are in a sense anticipated, the losses through mistaken investments are usually unexpected and unprepared for.”
- “We may put it down as axiomatic that only those are legitimate investments where the primary motive is the safe securing of one’s principal and the rate of return thereon is looked upon as secondary. A speculation, on the other hand, is where the desire for large profit is so strong that the safety of the principal becomes in effect a minor consideration.”
- “In contemplating an investment in a given security, each case should be judged on its own merits.”
- “In defining value, we mean, of course, permanent earning power, for it is chiefly the permanent or growing earning power that makes the value… And it must also be borne in mind that it is the permanent, or average, earning power rather than the possible temporary income which is to be considered. By permanency is meant a matter of generations, rather than years.”
- “The lesson…is obvious enough. It is that no one should buy a bond or stock without first having carefully read the certificate. This may seem like an unnecessary warning, but in truth it is a most material one. Thousands and thousands of dollars have been lost by the neglect of this simple precaution. “I didn’t read the bond” is the explanation that has again and again been offered when time has disclosed a different investment from the one intended to be paid for. The fact is that comparatively few unprofessional bond and stock purchasers ever carefully examine the instruments they acquire.”
- On IPOs: “It is a notable fact that no poor securities are ever offered. They are always good so long as they are on the market. It is only after they have been purchased that they prove to be worthless.”
- “The mistakes made, in nine cases out of ten, have been the purchase of “cheap” securities. The hope of realizing a little more than ordinary interest, by buying paper at a discount, has proved to be the rock on which unnumbered capitalists have split. In addition to their money’s worth, they have endeavored to get something for nothing, with the result of most generally getting nothing for something. It is remarkable how blind are people, ordinarily sagacious enough to make money, to the fact that property cannot pay a revenue beyond its producing capacity.”
- “By what rule or rules is the investor to govern himself. No formula can guarantee him absolute safety.”
- “The first and main thing to be studied is safety. And yet there is such a thing as going too far in the matter of prudence. The investor may pay too dearly for safety. There are securities which, compared with others that are to be had, sell at prices much above their real worth. The reason is that everybody knows them to be good, and investors who don’t want to take the trouble to investigate, or are afraid to trust both their own judgment and the counsels of their friends, are willing to pay extra prices for them. But there are plenty of others that may be had at lower figures, which are just as good.”
- “By far the greater number of losses to investors have been in securities purchased exclusively on the recommendation of interested outside parties. While it is well to get the opinion of a reputable broker, the purchaser should investigate for himself.”
- “Many persons seem to think that stocks and bonds must have a value if they are quoted at some stock exchange, forgetting how many fancies have been ballooned until they have burst at such places.”
- “Stock-exchange quotations are often unsafe guides to buyers. They represent not merely the value of the property but also the pitch of speculation at the time. When securities are converted into foot-balls for gamblers to play with, they are pretty certain to be too high or too low. The main advantage they can have is a readier marketability in case of an urgent need to sell, but it is at the times when such need is likely to exist that they are pretty certain to be at the lower point.”
- “Securities, in the long run, must stand upon their merits, and purchasers have merely to follow business principles as taught by the canons of common sense.”
- “It is during periods and seasons of depression, when securities are forced upon the market, often to be sacrificed — and such opportunities are certain to come if waited for long enough — that the shrewd investor finds his richest harvest. That, however, cannot be said of the ordinary investor. He usually buys when securities are up and confidence is unimpaired, and becoming frightened as the market values go down, sells when they are at the bottom, and holds his money to reinvest in something else no better, and probably not as good, when the tide has turned.”
- “As a rule, the best time to invest is when others are unloading. In money matters it is never safe to follow “the crowd.” Nor is it safe, (which is little more than the expression of the same idea in another form) to purchase a security when it is on the “boom.” A peculiarity of our money market, conservative as it is popularly supposed to be, is that it is constantly changing its favorites.”
- “One thing the investor would do well never to forget is that there are always plenty of good securities in the market. No one with money need ever fear that others will get all the solid investments, and, in the apprehension that there will not be enough of that sort to go around, put up with an inferior article.”
- “Another thing of a precautionary nature it is well enough for the investor to do, and that is to scatter his purchases. The old adage about not putting all the eggs in one basket applies with peculiar force to investments.”
- “Against the theory of scattering investments, men sometimes quote the advice of Andrew Carnegie to “put all your eggs in one basket, and watch the basket.”… The average investor simply cannot “watch the basket” in the way implied by Mr. Carnegie, and therefore it is a safe principle for him under all ordinary circumstances, to limit his chances of loss to the greatest possible extent through a wide and judicious distribution of his capital.”
- “Bonds represent or are secured by liens on property. Stocks are the property. Sometimes people fail to realize that stocks are the property itself and persist in assuming that they are merely a sort of legal attachment to it.”
- “In analyzing or judging the value of stocks in general, quite different methods should be employed in the various classes of corporate issues. Stocks of railroads, industrials, tractions, mines, and so forth, while all of the same species are each of a different genus, and they are all the result of different evolutionary processes.”
- “The individual investor does not give much thought to the temporary condition of the market, and it does not matter much to him what the temporary course of prices may be.”
- “The investor buys to secure an income; that is to say, he places his money in what he thinks or is led to believe is an absolutely secure piece of property, and he has no other purpose in view than that of receiving a current return upon it in the shape of interest or dividends. Such is the pure investor, while the pure speculator is one who pays no attention to dividends and interest as an income, but is actuated entirely with the idea of profit on principal… A semi speculative investment is one which furnishes an income in the shape of dividends or interest, and at the same time is supposed to promise a reasonable appreciation in principal over a certain period of time.”
- “A “gamble,” on the other hand, is where a man buys and sells on a blind chance, without any particularly sane reason, except that he thinks that a turn in the market up or down is due, or that the pools and “big fellows” mean to give a twist to the stock.”
- “The most effective way to interest a certain very considerable portion of the American public in propositions the ultimate purpose of which is the separation of the individual from his property, is through what is known in Wall Street as the “get-rich-quick” scheme. It is an old saying that the American public likes to be fooled and judging from the way these many fraudulent schemes keep bobbing into sight with never-ending regularity, it would seem that the saying has lost none of its truthfulness.”
- “New York has no more entertaining public exhibition than its Stock Exchange. It is one of the show places of the city. The visitor who for the first time looks down from a gallery upon its members in the act of transacting business is astonished at the apparent confusion he witnesses. He seems to have entered a madhouse. The idea that the market values of our leading securities should be determined by what appears to him to be a howling mob of incurable lunatics, is incomprehensible.”
- “Of the ordinary Wall Street speculator, however clever or however favored for a time, it is perfectly safe to say that, if he lives long enough and sticks to the business, he will finally come to grief.”
- “The inventiveness of the speculative broker is something marvelous. He can ruin the country one hour and save it the next. He can blight the crops of a whole section, or he can fill the land with abundance. He can make war or he can make peace, exactly as his monetary interest demands. Rumor-mongering seems to be a part of his trade. He is the chief of liars.”
- “When a financial storm threatens the country, the Exchange is almost certain to be the center of disturbance. No other institution is so sensitive. It exaggerates all the symptoms of trouble. It sends out its alarming reports as the storm cloud sends out its lightnings. Looking at it as the barometer of values, the timid naturally conclude that everything is lost, and thus the evil is unduly magnified. Wall Street is as much the natural field for panics as the prairie is for tornadoes.”
- “In Wall Street no one is always right; cheap advice is plentiful; some men learn only by failing; losses make us more cautious; interrogate before you negotiate; money is most valued when lost; don’t buy an egg until it is laid; fraud is built on misrepresentation; speculation begins when certainty ends; opportunity is often lost by deliberating; get information before you invest, not after; get an investment that will let you sleep; it is idle to wait for your ship to come in unless you have sent one out; those who lament their misfortunes are generally they who do not recognize their opportunities; buyers of stock belong to two classes: those who trade on tendencies and who take hold wherever the market is active without much reference to values or prices, and those who always try to buy when prices are down instead of when they are up.”
- “In Wall Street the investor determines the prices of stocks in the long run. This state ment is sometimes disputed by those who point to the fluctuations which are confessedly made by manipulators without regard to value. It is true that such fluctuations do occur, but when the manipulation is over the influence of the investor is again felt.”
- Market History
- For Reference: The book was published in 1906.
- “One of the money-making devices of the time is the formation of companies that issue their bonds on the security of the other people’s bonds that they have purchased, either yielding a higher rate of interest or obtained at lower prices than they expect to realize for their issues.”
- “There seems, in fact, to be no limit to the production of securities that are spread before capitalists and investors. There never was a time when it was so easy to invest money and to lose it. Of the securities that are offered with first-rate recommendations, it is probable that about one-third are actually good, one-third have some value, and one-third are practically worthless. Hence the very natural inference that whatever art there may be in the matter of investing is to be exercised chiefly in the avoidance of unworthy offerings…”
- “The advertisements of some bond-sellers are often marvelous productions. No such securities as they have to offer have ever been on the market before. They are absolutely safe; they pay extra rates of interest, etc., etc. The wonder is that with so much capital seeking investment, it is found necessary to advertise such perfections at all!”
- “During the days of the free-silver agitation, and for nearly a decade before, nearly all railroads and financiers inserted the “gold clause” in bonds, which was simply a statement printed in full on each bond and coupon to the effect that the issue would be paid, not in “money” or “currency,” but in gold.”
- Railroads
- Stock markets were largely made up of railroad stocks and bonds in the late 1800s/early 1900s.
- “In the period extending from 1893 to 1897, a large number of the most important railroad systems of the country were reorganized, and their capitalizations scaled down very extensively — in some cases more than fifty percent. In the same period many of the larger industrial combinations were also reorganized, the chief among these being the well-known Cordage Trust.”
- Moody laid out what investors should consider:
- Rail and equipment property value
- Location, length, land values, population growth
- Exclusive rights of way, terminal sites, privileges
- “It is the condition of exclusiveness that gives it most of its value.”
- Does earning capacity during the worst years cover maintenance and debt charges?
- “Operating expenses is the one item in a railroad report which should always be examined with the greatest care. It is the account most readily manipulated, and through its dissection one can most clearly judge the character and management of the property.”
- “The investment market for industrial and traction securities has undergone a vast development in Wall Street during the past half dozen years. Previous to that time a thorough discussion of Wall Street could be made without any particular reference to this subject, but nowadays a large proportion of the transactions there are in either industrial securities or those of the various public service corporations.”
- Get Rich Quick Frauds
- Guaranteed Egg Company
- Sold in New York City, 7% guaranteed preferreds with a bonus in common stocks.
- “The prospective earnings, which were to amount to a fabulous sum, were to result from the sale of eggs at high prices, the said eggs to be laid without fail at a certain unceasing rate by several thousand hens, which were the entire stock in trade of the company. These hens were supposed to do the double work of hatching new broods of chickens and at the same time laying their regular guaranteed proportion of eggs. It was also assumed that only hens and not roosters would be hatched and that every egg would be good. The essence of the “guarantee” on the preferred stock appeared to be wholly based on the theory that the hens had somehow been forced into a promise to lay eggs night and day, if need be, in order not to allow the preferred stock dividends to lapse in any possible
way. The company was capitalized in the neighborhood of a million dollars and its only tangible property, aside from the chickens, was a farm of twenty acres located about thirty miles from New York.” - “Absurd as this whole proposition was, there were enough investing idiots walking around loose in New York City to “nibble” at this bait to the extent of over $ 80,000 in cash.”
- Jergensen’s Sea Water Gold Company
- Jergensen devised a scheme where he “invented” a process to pull gold from seawater after reading an article claiming that the ocean water contains a small percentage of gold.
- He built a factory on the coast in South Lubec, Maine, bought small gold bricks, and showed the gold to people in Boston, while bragging about his “invention.” He invited anyone to join him at the assay office to test the gold’s authenticity. Then he invited them to visit his factory. He repeated this process with can’s of gold dust, claimed to be from the factory. He eventually sold stock in his company to the people he fooled.
- “It was afterwards estimated that before the fraud was publicly exposed, Jergensen and his accomplices had secured nearly a million dollars. The final outcome was, that Jergensen secretly escaped to Europe with most of the money…”
- Guaranteed Egg Company
- Stock Water: “the production of corporate securities representing little or no cash investment, and which innocent persons are led to purchase in the belief that they are getting full values.”
- Stock Pools
- A large group of speculators would often form a “pool” that would manipulate the price of a stock or group of stocks in order to profit. Stock pools were common.
- “The stocks subject to the manipulation are made to look weak and strong alternately — weak in order to induce “short” selling, when the “pool” is a free buyer, and strong to induce “outside” buying when the “pool” is a seller. That part of see-saw manipulation is continued, making the stocks active and attractive to the public until many thousand shares have been accumulated. In the meantime the most favorable rumors and reports relating to the value of said stocks are carefully put forth through market letters, newspapers, and other well-known mediums. This is done for the purpose of inducing the public to buy, on the perfectly correct theory that the public does buy when it is asked to, providing the price is high and advancing… The “strong” parties have “unloaded,” the public is “holding the bag,” and wonder what is the matter.”
- “A new form of advertising for “lambs” has become popular, which requires no capital beyond the sum needed for newspaper bills. The advertisement usually states that for a small sum, paid “weekly” or “monthly,” the subscriber will receive “sure tips” on the market’s movements, and that in consideration of one-quarter or one-half of the profits secured… These “brokers” have a “sure thing,” as they always advise one person to operate for the decline and another for an advance. They are certain to make money in one of the transactions. It is marvelous what a number of otherwise cautious, careful people are victimized yearly in these shady operations.”
- Bucket Shops
- “Pure betting is done in bucket-shops, is of no use to the community, is destructive to the morals and pockets of young men, and cannot be too severely censured.”
- “This is a place usually advertised as a brokerage office where bets are made on regular stock exchange quotations. No actual transactions take place. Usually money is put up by the customer and a commission is charged for buying and selling the same as on a regular exchange. When the quotations show a profit to the customer, he is privileged to demand his profit; when the limit of the customer’s margin has been reached in the price of the stock, the customer has lost his bet and his money and is “wiped out.””