How To Get Rich Buying Stock

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"Dr. Ira U. Cobleigh is highly regard-
 ed in the financial world. This isn't a
 big b o o k . . . but it packs a wallop."
                         —Florida Magazine

"How the common stock investor can
 run up a bankroll. Recommended."
                           —Library Journal

"Anyone with money to invest would
 be wise to study this book."
                           —Durham Herald

"Written in layman's English . . .
 brass tacks advice on investing."
                   —San Francisco Examiner

"Easy-to-read, down-to-earth."

                              — N . Y. Times

"Packs a mine of market wisdom."
                         —American Banker
"A new volume by The Maestro . . .
 a generous helping of valuable
        —Commercial and Financial Chronicle
                                       HOW TO
    Also by Ira U. Cobleigh
                                       GET RICH
How to Make a Killing in Wall Street
and Keep It!

Expanding Your Income                   BUYING
Winning in Wall Street

                                         Ira U. Cobleigh

                                                                                 Introduction to the Paperback Edition           7
HOW TO GET RICH BUYING STOCKS is a paperback edition of the best-
selling hard-cover book, reprinted by special arrangement with the David   1.    "Get Thee Money" and, Having Gotten It,
McKay Company, Inc., and with brand-new material added by the author.
                                                                                    Speculate                                    9
                                                                           2.    Common Stocks, Respectable and Reward-
                                                                                    ing, Diverse and Volatile—and a Present-
                                                                                    day Must for Your Dollars                   15
                    BELMONT BOOKS Edition 1961                             3.    Common Stocks—Which Are the Ones That
                                                                                    Go Up, and How Much?                        21
                                                                           4.    What About Income?                             33
                                                                           5.    Stock Prices Are the Slaves of Earning
                                                                                    Power                                       41
                                                                           6.    Cross Bearings on Market Values—the Rela-
                                                                                    tionship of Bond to Stock Yields, Price/
                                                                                    Earnings Ratios, and Notes About Timing     57
                                                                           7.    Promotional and Early-Stage Stock Specula-
                                                                                     tion—Possible Profits and Probable Pit-
                                                                                    falls                                       69
                                                                            8.   Short-run Speculation and Special Situations   75
                                                                            9.   Convertibles and Warrants                      81
                                                                           10.   Relative Importance of Marketability and of
                                                                                     the Two Available Markets—Listed and
                                                                                     Over-the-Counter; Influence of Govern-
                                                                                     ment, Inflation and Supply on Security
                                                                                     Prices                                     -87
                                                                           11. The New Economic Climate of the 1960's,
                                                                                 and How It May Influence Your Invest-
                                                                                 ment Decisions; Indicated Market Trends
                                                                                 in 1961-1962                              101
  Copyright © 1959,1961 by Ira U. Cobleigh, all rights reserved
                                                                           12. The Tactics for Success in Securities and
 BELMONT BOOKS / published by                                                    Some Final Instructions                   111
 Belmont Productions, Inc.
 66 Leonard Street, New York 13, N. Y.                                           Postscript                                121
 PRINTED IN THE U N I T E D STATES OF AMERICA                                    List of Sixty "Golden Companies"          123
                                                                                 Charts of Earning Power—Stock Prices    45-56

                                    In our modern society there are two main ways of
                                getting rich—by investing in real estate or by buying
                                 stocks. But before you do either you must earn, or get
                                 your hands on, surplus money. This is money you don't
                                 need for living expenses, travel, education, doctors, minks
                                 or motor cars. The reason most people never get rich is
                                 that they can't save a dime. They feed the piggy bank
                                 only to raid it; or installment payments keep them ever
                                 in hock. So if you want to travel the road to riches learn
                                 to save! Life on the cuff may be beautiful but it won't
                                 keep you in Cadillacs!
                                    Once you've got a few thousand together you're on the
                                launching pad to opulence. We mentioned the two for-
                                tune building arenas—real estate and stocks. Real estate
                                investing is far older. When Jacob swindled Esau out
                                of Pappy's pastures, or Joshua arranged for occupancy of
                                the Promised Land, there were no stock certificates
                                around to invest in—only land. Fact is—the first stock
                                company wasn't founded until the time of Queen Eliza-
                                beth, and she has the honor of being the first woman
                                    Real estate has built some of the greatest fortunes in
                                history and we have nothing but kind words to say about
                  •             putting money in land or buildings. But we're dedicated
                                to stocks—those beautifully engraved, easily negotiable
                                pieces of paper that, selected wisely, bought right, and
                                patiently held, may make you rich. The Rockefellers, the
                                Morgans, the Mellons, the Woolworths—all made great
                                fortunes in the stock market—so why can't you?
                                    Perhaps you can, if you learn the rules of the game and
                                combine knowledge and good judgment with a little bit
 of luck. You don't need to be a genius to be a successful
investor. Many people not as bright or clever as you have
retired to Nassau on their stock market winnings. Ob-
 viously one way to success in securities is to follow the                           CHAPTER I
methods of those who have "made it". That's where this
book comes in. Essentially it is a distillation of the ana-              "Get Thee Money" and,
lytical methods, the techniques, the timing and the mar-                Having Gotten It, Speculate
ket wisdom of hundreds of successful speculators. If
these methods worked for them, they can work for you!             There are five main ways of getting "in the money"
   In short you require (1) some practical system for          without stealing it: inherit it, marry it, earn it, win it, or
stock analysis and selection, (2) criteria for making the      grow it. You're not going to get much help here on the
right decisions (judgment), and finally (3) a long range       first four methods. We can't help you pick your parents,
financial program. Many do well on the first two counts        your spouse, your vocation, or a lucky sweepstake's ticket,
only to founder on the third. You simply have to stake         but you will be introduced to some exciting ideas on the
out a program tailored to your own temperament, your           subject of growing money. You can handsomely increase
own financial needs and goals, or you'll wind up in a          what money you have, and what money you're going to
maze of buying and selling that may enrich your broker,        have. This book will show you how.
but keep you from significant profits. "How To Get Rich
                                                                  You can't start growing money without a surplus of
Buying Stocks" is designed to serve as your own personal
                                                               some sort or size—a sum of money you don't need for
road map to profit and prosperity. May all your stocks
be IBM's!                                                      daily living, or as a reserve against prolonged illness,
                                                               unemployment, or other adversity. If you haven't such
                                                               a surplus now, you'd better begin saving at once and
                                                               building a grubstake that can make you rich. Every prop-
                                                               erty investment requires some original capital, so if you
                                                               do not already possess it, get yours on tap as rapidly as
                                                                  There is nothing truer than the market adage, "It
                                                              takes money to make money." But it need not take a lot.
                                                              Anything from $1,000 to $5,000 is good for openers;
                                                              and from there on, the sky's the limit. Minks, Mercedes,
                                                              mansions, and Mediterranean cruises—they are all there
                                                              waiting for you, depending only on how fast you make
                                                              your money grow.
                                                                  Assurning you do have a cash surplus, be it a few
                                                              thousand, as an already sizable amount in savings de-
                                                              posits or negotiable property, then you are ready to ad-
10         HOW TO GET RICH BUYING STOCKS                                        "GET THEE MONEY"                       11
dress yourself to the serious business of making that         ownership can be in stocks, royalties, real estate, Broad-
money grow—getting rich, that is.                             way plays, precious jewels, ships, paintings, race horses,
                                                              stamps, or rare books. But it has to be in something (1)
                                                              that you can own and (2) that can, if you're fortunate,
        Static Investments Won't Make You Rich                "go up" either in price or the income it can produce
    Almost no one who is rich, in the accepted standards      over time (it can also of course go down!). In actual
 of that term, got that way with static investments—those     practice, of all the markers in this game of finance listed
 designed solely to preserve and sustain designated prin-     above, by far the most rewarding have been stocks and
 cipal sums, and to repay them, either on demand or at a      real estate. The very great majority of all the wealthy
 specific future time, with interest either paid out as in-   men you know, or read about, made their "bundle" in
come, or retained and compounded. Savings accounts            either stocks or real estate—or a combination of both.
 and bonds, insurance policies and mortgages—these are        We do not propose any comparisons, plus or minus, on
 the classic citadels of thrift where the main goal is not    the advantages of one over the other. There are some
to get you rich, but to see that you don't lose what you      wonderful books out on real-estate investment. Read
 started out with, and to accord you some rental allow-       them if capital gains from the ground excite you. But our
 ance for your money in the form of interest. If you were     promised stint is in stocks—common stocks that can
 to live for a couple of hundred years, compound interest     make you rich, that enjoy ready marketability, that re-
 on untouched deposits might make you rich. The way           quire no maintenance or labor force, take up little room,
 it is, however, you simply don't have enough time to         can be swiftly transferred and appraised almost daily.
grow a fortune by compound interest, unless you either        Stocks have made tens of thousands of Americans rich.
 have a few hundred thousand to start with, or happen         They can do the same thing for you if you learn the win-
to be a usurer.                                               ning techniques. They can also add zest to the rest of
    So while most of the modern economic gimmicks de-         your life.
signed for crib-to-crypt freedom from want—savings,
insurance, Social Security, etc., rely on compound in-
terest, to get rich you need something else—something            Are You Temperamentally Equipped to Speculate?
more—the growth of your money through capital gains.             But first, are you the type? Can you take risks or
All the men you know who have made fortunes made              rapid changes in fortune in stride? Even the highest-
them that way, except for a few very old men who had          grade common stocks can drop as much as 50 per cent
high earned income years ago before the upper tax             in price in a recession. Can you stand a paper loss like
brackets became so voracious. "You can't take it with         that? Or will you start cracking your knuckles, reaching
you," and the income tax tries its best to see that you       for the aspirin, or breaking ground for an ulcer? The
don't have anything to take anyway!                           purchase of common stocks, however attractive or gain-
    Capital gains, in turn, are achieved only by owning       ful it may prove on a long-term basis, is essentially a
an equity in property. The Rockefellers, Astors, Van-         speculation in which you take risks, usually quite di-
derbilts, Whitneys, Harrimans, and Fords all became           rectly in ratio to the hope of gain. For example, if you
rich by capital gains from equity ownership. This equity      buy American Telephone and Telegraph common, which
12         HOW TO GET RICH BUYING STOCKS                                         "GET THEE MONEY"                      13
 has paid $9.00 a share for decades, the risk of heavy         tain well-defined personal characteristics: he should have
 market loss is quite slight. Equally there is small expec-    a logical mind, be patient, bold, imaginative, even tem-
 tation that these shares will double in price. The risk of    pered, well informed, eagerly interested in all financial,
 loss is small, and the hope of gain equally so. The specu-    political and world news (all of which affect security
lative element here is obviously slight. But switch, for       markets), insistent on facts, capable of making swift
example, to mining shares and you get involved in              decisions, and not one to hem and haw in making them,
 totally different magnitudes of risk. There's a Canadian      or to regurgitate them after they're made. The most im-
 copper company with the improbable name of Temagami.          portant qualities in a speculator are probably great pa-
Its shares sold in 1956 on the Toronto Exchange as high        tience, a long-term viewpoint, cool and dispassionate
 as $7.00; yet as this is written, they're trading at $1.00.   judgment, zeal for financial success, and serenity of mind.
 How would you feel if you'd paid $7.00? And conversely,          Above all, don't shy away from the word speculation.
if you bought these shares today, wouldn't you nurture         Webster's dictionary defines it as:
a sneaky hope that they'd go back to $7.00 someday?               "Careful thought and reasoning about something that
Well, that's speculation—risk versus gain. You'll love         cannot be definitely proved or known."
it and doubtless prosper if you can take market swings—           And as a second definition, "buying and selling with a
reverses as well as killings—without batting an eye. Even      view to making profits from future price changes." For
the shrewdest, best-informed, and most successful specu-       our purpose, it doesn't make any difference which of these
lators have losses, so expect them on occasion. But if         definitions you use; the second merely applies the first
you're the kind of person to worry and stew about them;        to market operations. In a broad sense, all of life is a
if you turn nervously and frantically to the financial sec-    speculation—the application of thought and reasoning
tion the moment you buy a paper; if you're highly elated       to making logical plans for favorable and satisfying fu-
when the market goes up, and moody and morose when             ture results.
it goes down, then, quite frankly, you're not tempera-            Don't confuse speculation in stocks with gambling.
mentally equipped to speculate. You'll be so jumpy you         Gambling is betting, relying partially on mathematical
won't make the right decisions, and market jitters may         probabilities but mostly on luck. A gambling failure
even affect your health. If you're timid, you're no specu-     means a total loss of your stake, whether you're playing
lator. "Scared money never wins."                              the horses, roulette, poker, greyhounds, or lotteries. When
   If the foregoing are your qualifications, you're a con-     the horse race is over, if your plater plodded in fourth,
servative investor, a conserver against loss, and a seeker     the money you bet is gone forever. You can never re-
or safe income; unless you can reorient yourself, you'd        cover it. In speculation (except on margin), even the
best confine your investments to the traditionally de-         most miserable stock that has descended from dollars to
fensive ones—savings accounts, insurance, and such in-         pennies may come back someday. A gambling loss is a
stitutional blue-chip stocks as American Telephone and         hopeless one; yet even the poorest speculation usually
Telegraph, Union Pacific, Consolidated Edison, Standard        holds out some hope, however forlorn, of future recovery
Oil of New Jersey, Procter and Gamble, General Foods,          and possible profit.
General Electric, Chase Manhattan Bank, etc.                      So much for definitions. Intelligent speculation is the
   Conversely, the successful speculator should have cer-      broad highway that leads to riches. If you have a
surplus you can afford to place at some reasonable
risk and are satisfied that you can take a debonair,
sportsman's viewpoint about the big gains and the nag-                         CHAPTER 2
ging losses you may encounter, then you are ready to
proceed with methods for selection of stocks that can       Common Stocks, Respectable and
make you rich. Good luck—and happy yachting!              Rewarding, Diverse and Volatile—and a
                                                            Present-Day Must for Your Dollars

                                                             The common stock doesn't go very far back in his-
                                                          tory. It came into being with the creation of the business
                                                          corporation and represents, in reality, nothing more or
                                                          less than a pro-rata partnership share in an enterprise
                                                          of unlimited life and limited liability. Fifty years before
                                                          the Pilgrims made a dock of Plymouth Rock, King
                                                          Charles II of England granted a corporate charter to
                                                          "The Governor and Company of Adventurers of England
                                                          Trading into Hudson's Bay." Under this charter, Hud-
                                                          son's Bay Company began operations on May 2, 1670.
                                                          It is today the oldest company doing business in North
                                                          America, and its capital stock is, therefore, the grand-
                                                          daddy of all those billions of shares, listed and unlisted,
                                                          which now represent the ownership and partnership in
                                                         corporate America.
                                                             It took a long time and great economic changes before
                                                         common-stock ownership really caught on. In King
                                                         Charlie's day, and for a century or so thereafter, few
                                                         people, save the very rich, or mincing fawners on a
                                                         monarch's bounty, could acquire shares. There were few
                                                         companies, there was little public information about
                                                         them, and sales and transfers of certificates all took place
                                                            In the New World all corporate charters were based
                                                         on royal grants until after the Revolution, when indig-
                                                         enous state-chartered corporations began business. At
                                                         first they were mainly financial ,ones such as the Bank of
                                                         New York, the First National Bank of Boston, and the
                                                         Insurance Company of North America—all founded be-
16         HOW TO GET RICH BUYING STOCKS                               PRESENT-DAY MUST FOR YOUR DOLLARS                 17

fore 1800. The nineteenth century witnessed a splurge          sion, went rampant, if not beserk. People who never
in corporate formation: canal and railway companies,            before had had the money began to buy stocks. Not that
water and gas utilities, iron and textile companies, tele-     they knew anything about securities, or had any stand-
graph and newspaper companies, plus a spate of banking,        ards by which to judge them—oh, no. They bought stock
life and fire insurance companies. Even then, however,          because (1) that was the smart, fashionable thing to do,
share ownership was for the few and the rich.                   (2) they expected them to go up forever, and (3) they
    In 1869, completion of the transcontinental line and       could buy on margin and thus accelerate their gains by
a rising general prosperity caused copious flotation of        making $1.00 of their own perform the work of $5.00 or
railroad shares, and the first really big flock of specula-    $8.00. Meanwhile, stocks were breaking into new high
tive sheep was fleeced by such predatory market pitch-         territory almost every day. For most, however, their
men as Jay Gould, Jim Fiske, E. H. Harriman, Jim Hill,         stocks aged no longer than their bootleg hootch. Within
and Commodore Vanderbilt. Owing partly to cupidity             three short years more than 80 per cent of the eager
and stupidity, partly to the submerged larceny that per-       occupants of the share market in 1929 had either taken
vaded the policy of certain corporations, and partly to        a frightful beating or were wiped out altogether. And
the mystic swings in the business cycle which few under-       they blamed it all on common stocks and the stock mar-
stood and none could control, thousands lost their sav-        ket—not on themselves for their ignorance, their avarice,
ings or saw their hard-earned dollars sadly rubbed down        and their sheeplike qualities, and their failure to heed any
in a cruel stock market. All of which gave common              warning signal. And what had just begun to be under-
stocks in general and Wall Street in particular a bad          stood, and would ultimately prove true, namely, that
name.                                                          good stocks are conservative long-term investments, was
   In the early 1900's huge combines in steel, tobacco,        lost sight of in the hurly-burly of distress liquidation and
oil, and insurance. emerged with vast issuances (and          the depression that ensued. Nobody blamed a credit
some watering) of stock, as did a rising trolley industry     inflation, nobody noted that hallowed real-estate first
that was due to wax and wane and wind up—all within a          mortgages defaulted in droves, nobody blamed a swollen
third of a century. All these phenomena broadened the         real-estate market—they blamed it all on Wall Street.
interest in, and expanded the ownership of, common            And for the next twenty years they blamed Hoover as a
stock. Population and per-capita income were rapidly on       sort of political and economic whipping boy, personally
the rise; and beginning in 1914 with the $5.00 day's pay,     responsible for all their financial woes.
pioneered by Henry Ford, wage earners slowly emerged              This, in capsule, reviews the changing status of com-
as potentially the biggest buyers of everything but yachts    mon stocks in our society over the last three hundred
and oil paintings, including common stocks. Motorcars         years—the founding and growth of corporations, limited
were for everyone, and the twentieth-century people's         popular share participation; the roaring and reeking rail-
capitalism was on its way—a capitalism based on ex-           way markets of the Gay Nineties, with villainy rampant
panded purchasing power and rising personal savings.          in the canyons of finance, the big trusts and their spawn-
   In fact, so lusty looking was this capitalism and so       ing of share certificates, and finally the somewhat pre-
apparently broad and solid its prosperity after World         mature conclusion in the 1920's that common stocks had
War I, that optimism, hand in hand with credit expan-         come of age and at last could be bought and perma-
18         HOW TO GET RICH BUYING STOCKS                              PRESENT-DAY MUST FOR YOUR DOLLARS               19
nently held by prudent investors. Actually the embrace,       the $11 1/2 billion mark in total assets in 1958, are huge
and the swift rejection, of common stocks (in the 1929-       and avid buyers of common stocks.
32 era) took place because the objective was wrong.              So the common stock has now come of age. You
The reason for stock purchase should not be the itch for      should own common stocks; not only to fend off the
quick and gaudy profit; rather it should be a continuous      wolf of inflation but if you would journey on the road
search for shares in well-managed growing companies,          to riches. The main goal of intelligent investment is no
in dynamic industries, which can, over time, produce          longer merely keeping principal intact; it is the preserva-
steady and sustained advances in earning power, divi-         tion of purchasing power against a fading dollar. Hence
dends and net worth.                                          we say again: "Own common stocks." The ensuing
   You are familiar with what followed—the Roosevelt          chapters are designed to help you select and decide on
administration reflation, a federal policy of low interest    the right ones—the ones that go up!
rates, the guaranty of bank deposits, the Social Security
program, and a whole series of laws concerning the
offering of, and dealing in, securities, culminating in the
creation of the Securities and Exchange Commission. All
of these together were conducive to a more stable econ-
omy by providing many built-in and formidable defenses
against serious depressions; and they operated powerfully
toward a broad restoration of confidence in securities and
markets. And common stocks gained in status, stature,
and respectability.
   In the years since the end of World War II acceptance
of common stocks in large mature corporations with
records of sustained earning power, growth, and dividend
stability, as suitable for conservative investment, has
become nationwide. In 1958 more than 81/2 million indi-
viduals were actual stockholders and tens of millions
more, indirectly, through their interest in insurance, pen-
sion, and retirement funds. Quality common stocks (un-
der certain conditions and varying restrictions in the
several states) have become proper and legal investments
for trustees, savings banks, and life-insurance companies.
Endowed institutions are heavy shareholders with such
universities as Harvard, Princeton, Brown, and Cornell
having more than half of their endowment resources in-
vested in common stocks. And mutual funds, which passed
                      CHAPTER 3

 Common Stocks—Which Are the Ones
    That Go Up, and How Much?
   Having decided that common stocks are wonderful,
and that they may work wonders for you, we now come
squarely up to the big question: "Which ones?" Ob-
viously, with more than 3,000 issues traded daily on the
major exchanges, and 20,000 more regularly quoted over
the counter, the problem of selection is exceedingly diffi-
cult. You can't solve it by buying them all, for who has
that much money? Moreover, hundreds and hundreds of
issues simply do not qualify as suitable or probable
vehicles for exciting capital gain. Coal shares have been
pretty doggy for a decade; air-transport stocks increase
their revenues and carry myriads more people but they
have a tough time increasing earnings and dividends.
Rails in recent years have been beset by truck, water,
and pipeline competition, and rate, tax, and debt struc-
tures that had them pretty well handcuffed. Competition
among brewers and distillers has been acute; textiles
have had price problems and labor costs that kept them
from dynamic forward motion in earnings or market
price. And so it goes—a lot of industries and hundreds
of stocks in recent years have gone no place and per-
formed in a meager or negative manner for their share-
   In contrast with equities of this sort, there has sprung
up in the past decade a fetish for so-called "growth"
stocks. This adjective has been so bandied about and
overworked that it has been applied to almost any share
in a company that showed the least expansion in gross
and/or net from year to year. We propose a more ac-
curate definition.
22         HOW TO GET RICH BUYING STOCKS                                           COMMON STOCKS                       23
   A true "growth" stock is one that over any period of        corporate beings as American Cyanamid, Dow Chemical,
three years or longer will display a rise in gross earnings    Minnesota Mining, Food Fair, etc. The men on this
and net profits substantially above the annual increase        "team" will usually be imaginative, bold, intelligent, hard
in population or gross national product (about 3 per           working, dedicated, and ambitious.
cent a year for each). In other words, to qualify in the          And in addition to "hep" management, and usually
"growth" category, a company should add at least 6 per         implementing its judgment, there is the decision to spend
cent to net sales (preferably a lot more) and more than        heavily on research into new products, new production,
6 per cent to net profit in each succeeding year. Most         distribution, sales promotion, advertising, and transpor-
accepted growth stocks will do far better than that; but       tation techniques. And, finally, in the classic "growth"
these percentages will serve as a floor.                       company there is a definite program of using deprecia-
   To achieve this kind of corporate and financial prog-       tion (and/or depletion) reserves and a high percentage
ress, you will find first that these companies are located     of retained earnings to expand the enterprise by making
in an industry itself growing far more rapidly than the        regular capital additions and improvements. This is done
economy as a whole. These superior performing indus-           not only to keep the company abreast of its competitors
tries, in the 1950 decade, would surely include natural        but to set the stage and build the base for larger earning
gas companies, publishing companies, supermarkets, drug       power in the future. The dividend policy of growth
and chemical companies, electronic enterprises, life in-      companies is seldom to pay out in cash more than 40 per
surance and finance companies, and specialty companies        cent of net annual earnings. Such a retentive policy
such as the makers of outboard motors, paper products,        assures adequate expansion funds from internal sources,
and oil drilling machinery.                                   and usually prompts pleasing recognition of rising net
   Mere location of a corporate enterprise in a dynamic       worth by declaration of stock dividends or splitting the
industry is not enough, however. (Since 1900 there have       stock from time to time.
been more than 800 motorcar companies, with but four              A final characteristic of the growth stock is an un-
successful survivors left today.) No, other ingredients       usually high percentage conversion of gross income to
are necessary for outstanding success—principally man-        net. After all, the ultimate purpose of a corporation is
agement. Why did Ford succeed? Because it was led by          to make money for its shareholders; and those that do it
a technical and managerial genius—Henry Ford! What            best are the ones that can deliver to net the most out of
made Standard Oil great? John D. Rockefeller! What            each dollar in plant investment and each dollar of gross
propelled International Business Machines from a $5.00        revenue.
stock to an elite blue chip? Thomas Watson! What pro-             We have lingered long enough over definitions. It's
pelled Franklin Life Insurance into a financial institu-      time we got down to cases. Accordingly, you will find
tion of the first magnitude? The unique sales and admin-      below a list of truly splendid "growth" companies—at
istrative talents of Charles E. Becker. This is, of course,   least they have proved so in the past. The list is unique
an oversimplification. But it brings home the enormous        and, frankly, we doubt if these twenty-four companies
importance to an enterprise of superior leadership. Today,    have ever before been grouped together. And, as a sort
very few companies are "one-man bands." There is usu-         of brain teaser, before you examine the fist, answer, if
ally an echelon of top managerial talent in such effective    you can, this single question: "What do the common
24           HOW TO GET RICH BUYING STOCKS                                          COMMON STOCKS                      25

shares of these distinguished companies all have in              McGraw-Hill Publishing Company, Inc.
common?"                                                            Largest publisher of trade journals.
                                                                 Minnesota Mining & Manufacturing Company
                                                                    Famous maker of Scotch tape.
                     Growth Companies                            Outboard Marine Corporation
     American Cyanamid Company                                      The company that put leisure America on the water.
        A distinguished chemical and pharmaceutical enter-       Polaroid Corporation
          prise.                                                   Maker of the famous Land camera.
                                                                 Rohm & Haas Company
     Ampex Corporation
                                                                   The genius of Plexiglas.
        A sensationally successful maker of magnetic tape.
                                                                 Searle (G. D.) & Company
     Connecticut General Life Insurance Company
                                                                   Ethical drugs.
        A large, well-managed purveyor of insurance and
                                                                 Superior Oil Company (California)
     Disney (Walt) Productions                                     For years one of the highest priced oil stocks.
        Mickey Mouse in the millions.                            United States Foil Company
     Food Fair Stores, Incorporated                                Leveraged investment in Reynolds Metal (alumi-
        Dynamic supermarket.                                          num).
     Foote Mineral Company                                       Winn-Dixie Stores, Incorporated
        Leading lithium producer.                                  Merging and emerging supermarket giant
     Franklin National Bank of Long Island                       Zenith Radio Corporation
        One of the fastest growing commercial banks in             Entertainment electronics and hearing aids.
     General American Oil Company of Texas                         This, you must admit, is a unique bracketing of com-
        Highly successful producer of petroleum.                panies. You were asked, in the paragraph preceding the
     Giant Portland Cement Company                              tabulation, "What do the common shares of these dis-
        Rapidly growing cement company.                         tinguished companies all have in common?" This is the
     Gustin-Bacon Manufacturing Company                        answer. The common stocks of each and every one of
        Leading maker of glass fiber insulation.                these unusually successful corporations increased in mar-
     Halliburton Oil Well Cementing Company                    ket value by more than 500 per cent in the ten-year
        Leading supplier of specialized services for oil        period from January 1, 1947, to January 1, 1957. Ac-
           drilling.                                           tually some of these did much better. But difference in
     Hugoton Production Company                                performance here is not really imporant. The main point
        Big natural-gas producer.                              is that $10,000 lodged in any one of these twenty-four
     International Business Machines Corporation               common stocks in 1947 would have grown to more than
        The giant in business machines and automation.         $60,000 in ten years. That is successful investment. That
     Lone Star Steel Company                                   is the kind of stock selection that can make you rich.
        Specialist in steel pipe for the petroleum industry.       Actually if we wanted to "load" the statistics we
26         HOW TO GET RICH BUYING STOCKS                                           COMMON STOCKS                         27
could have singled out more spectacular performers. A         your capital gain would substantially have exceeded 500
four-way life-insurance package of $2,500 per unit total-     per cent. (In the same decade the Dow-Jones average of
ing $10,000, divided equally among Aetna, Travelers,          industrial stock advanced but 180 per cent.) This ten-
Jefferson Standard, and Connecticut General Life in the       year period was selected because it represented a fair
same decade would have gained 700 per cent—without            period for examination, disturbed only by the Korean
even mentioning cash dividends! However, it would be          War.
unfair to document, in demonstration of attainable long-         This average gain of more than 500 per cent is, you
term capital gain, only those whose performance was           will agree, a splendid result. Investing like that can make
most dazzling. Such procedure would inevitably lead you       you rich. But this is all hindsight. "What good is it now,"
back to the founding stockholders of Ford, Standard Oil,      you say, "to scan this fortune-building list of stocks I
or General Motors who, as we all know, made the fan-          might have bought ten or eleven years ago? What I want
tastic parlay from peanuts to plutocracy.                     is a list like that today, that can do as well for me in the
   But why dwell on all these historic and scintillating      next ten years."
successes, these ecstatic expansions of meager money
into magnificent solvency? It's not what some other
lucky or shrewd bloke did in the past that matters—it's                      500 Per Cent Is Par for the Course
what can you do with your dollars today that counts!              Your request is sensible, and we propose to derive
Accordingly, instead of drooling over the rapid riches         the answer from the twenty-four cases cited. A lot of
gained by fortunate shareholders in an earlier era, we         groundwork has already been done. Since these twenty-
propose now to distill from their experience the basic         four issues all advanced at least 500 per cent, a practical
techniques that made them rich, and, correctly applied,        target for you is clearly indicated. The stock you select
can do as much for you. For, quite candidly, these            for current purchase must have within it the potential
twenty-four growth companies did not and do not consti-        capacity to rise at least 500 per cent in the next ten
tute so many lush golden oases in an economic desert.         years. (It may go up a lot faster—so much the better!)
Hundreds of other companies grew rapidly in the same          Five hundred per cent is par for the course and you must
decade—many of them smaller and lesser known ones.            reject summarily any issue, if the available facts about it
Our purpose is not, however, to suggest that brilliant        indicate a slower or more slovenly growth. You must
market gains may be attained only by delving among            have an attainable investment goal, and you must shoot
obscure little enterprises in search of the bargain of the    for it. That goal is 500 per cent plus.
century. No, indeed. What we are really doing is trying           It's all very well to say glibly, "Aim for 500 per cent,"
to arrive at the principles of successful stock specula-      but how is this "case method"—deduction from past
tion by the same method long used to educate budding          performance—going to help? By sheer logic! If repre-
young barristers in law schools—the case method.              sentative issues have historically racked up a high gain
   We have presented twenty-four diverse cases, or ex-        ratio, then isn't it logical to conclude that dramatically
amples, of shares of sizable enterprises that you could       advancing securities all have something in common? The
have bought January 2, 1947. Had you held shares so           brilliant performers of the future must possess today
 bought in any, or in all, of these companies for a decade,   many of those same qualities that have propelled stocks
28         HOW TO GET RICH BUYING STOCKS                                            COMMON STOCKS                       29
upward in the past. What, then, are these unique quali-         that may lead indirectly to a dazzling new product five
ties, these common denominators, of securities that did         years from now.
go up, in the past, and ones that should go roaring up             4. The company must have sales superiority which
in the future? There are at least eight; and here they          can effectively merchandise new products and expand ex-
are.                                                            isting markets. Look at the way Minnesota Mining "sold"
                                                                Scotch tape, G. D. Searle "sold" Banthine and Drama-
                                                                mine, IBM "sold" its electric typewriter.
       Eight Essential Qualities of Growth Stocks
                                                                    5. The company must be growing at a rate at least
    1. The industry itself must be dynamic. Every one           twice that of the economy as a whole, and should be
of the twenty-four was in a burgeoning industry. Tired          growing faster than others in its own industry. Review
industries don't qualify! Look over the twenty-four—            the rise in gross and net of any of the twenty-four and
drugs, chemicals, publishing, electronics, oil, natural gas,    you'll get the point.
aluminum, paper, and paper products. All these indus-              6. The company must have a reputation for the
tries have a growth rate more than twice (1) the annual         excellence of its products. If the product is shoddy or
rate of increase in United States population and (2) the        undependable, corporate growth is certain to be arrested.
annual rate of increase, in productivity.                      Good will is a terrific corporate builder. Fine products
   2. Management must be intelligent, aggressive, dedi-         are almost always the end result of a well-managed
cated, if not brilliant. Look at the genius behind Disney      company with contented, well-paid (and often stock-
Productions; the laboratory know-how and merchandising         holding) employees who like their work and working
savvy at American Cyanamid; the technological leader-          conditions. A plant frequently embroiled in labor strife
ship at Polaroid, Zenith, IBM, and Ampex; the talent            will earn erratically, and customers will question whether
controlling costs and selecting market sites at Food Fair      the product is good, if turned out by disgruntled work-
and Winn-Dixie. All of these companies have in top             men nursing grievances.
management one, two, or a dozen key men who are com-               7. The company must earn at an unusually high rate
petent, bold, imaginative, hard-driving executives whose       and must plow net earnings back. All of the twenty-four
loyalty is, in most instances, assured and retained by         do both! Earnings before taxes should be 12 per cent or
substantial shareholding in the enterprise.                    better in most manufacturing companies; and no more
    3. The company must stress research. Look at the           than 40 per cent should be paid out each year in cash
twenty-four. Most assay high in research and develop-          dividends. Rise in net worth should be recognized by
ment. Where would IBM, Zenith Radio, Ampex, Pola-              stock dividends and splits. This unusual earning power,
roid, Rohm & Haas, and Minnesota Mining be if they             in turn, is the result of eagle-eyed cost controls.
did not keep constantly out in front by dedicating both            8. The company must be stock minded. It must work
money and brains to unremitting research? Now, not all         sedulously to make its common shares a more val-
research will pay off. And some stress product research        uable equity. Most of the "brass" in the twenty-four are
 (for quick addition of new and profitable items) while        important shareholders. They want their stock to go up,
others go in more for pure research—a general delving          so they don't dilute the shareholders' interest by large
public stock offerings, and they create leverage by financ-
ing through debt or senior securities.
   Now, of course, these eight are not the only things
that can assure corporate success, but they are elements                              CHAPTER 3
which (1) nearly all growth companies have in com-
mon, and (2) companies must evidence if they are to                                  The Gist of It
attain outstanding success. Look again over the twenty-
four and ponder for yourself the relationship existing        1. The stocks that can make you rich are "growth" stocks.
between the eight essentials and their rapid corporate        2. Twenty-four sizable company shares cited advanced
successes. Remember, too, that these eight essentials will       more than 500 per cent in ten years!
enable you to rule out in advance, hundreds of issues         3. Most of these had eight essential qualities in common
                                                                 that made them go up.
whose potential for growth is limited.
                                                              4. These eight essentials are the most effective criteria for
   You have already traveled a long way on the road              selecting growth stocks today!
map to riches. You have dedicated yourself to a long-         5. Your target—500 per cent gains in ten years.
range viewpoint. That, in itself, insulates you from many     6. Select promising stocks and hang onto them. In-and-out
pitfalls. It makes certain that you will ignore "tips,"          trading is for the birds!
hearsay, and rumor in making investment decisions. You
will not trade in and out of the market in an attempt
to glean quick profits of a few points. If you do, your
program will turn profitless; trading commissions and
taxes will eat away your gains, and your financial pro-
gram will deteriorate to "operation butter churn." Not
only that, but you'll be forever kicking yourself for
selling, for a quick gain, a stock that would have made
you a small fortune, if you'd only held onto it.
   Nobody knows what the market is going to do tomor-
row and those who think they do are jackasses. The
people who really get rich in Wall Street buy promising
securities and hold them for a long time. The best invest-
ments of the very rich are only sold by their executors!

                      CHAPTER 4

              What About Income?
    The tragic fact is that tens of thousands of investors
 have doomed themselves to meager capital gains by their
 stubborn insistence on current income. This is owing
 primarily to archaic thinking. For decades the investment
 accent on safety of principal and stability of income,
derived from holdings of static securities, has so in-
fluenced financial thinking that, even today, thousands
 demand 5 per cent or better in current return before they
will even consider any stock purchase. The error of this
thinking is monstrous. For it is a definitely observable
fact that, usually, those shares affording the highest cur-
rent returns afford the least potential for capital gains.
So we reach the logical conclusion that if you want to
make money—a lot of money—in the stock market—
FORGET ABOUT YIELD! To many diehards this in-
junction is virtual heresy; yet analysis will show it, over
any period of years, to be golden advice.
    Now it is true that under certain conditions, sustained
high-level current income is important. Especially among
the quite old, and those persons, sixty-five plus, who
have retired, it is a major goal to pin down a reliable
current income, high enough to support in reasonable
comfort the retirant and/or his spouse. To do this, Social
Security, a pension, and investment in income-type stocks
such as Norfolk and Western, American Telephone and
Telegraph, Pacific Gas and Electric, Coca-Cola, Pullman,
etc., are commonly deployed to create the highest current
income than can be relied upon. Equally, widows with
certain fixed expenses and but slight opportunity to add
to their resources by saving money look to the stock
market only for those issues with a long record of con-
tinuous and rather generous cash dividends.
34          HOW TO GET RICH BUYING STOCKS                                               WHAT ABOUT INCOME?                     35
   All that is probably quite as it should be, but our                          Original Investment       $100,000.00
                                                                                Market Value Ten Years
 seasoned view, based on years of observation of _share                           Later                   $156,090.86
performance, is that anyone with investible funds who                           Capital Gain              $ 56,090.86
                                                                                Total Cash Dividends
has a reasonable life expectancy of five or more years                            Received               $ 69,211.90
should forget about the redoubtable dividend payers and                  GROUP II—STOCKS PRIZED PRIMARILY FOR
buy "growth" stocks of the type we've been discussing.                    GROWTH
Just to document our case, we're going to compare ten                   Assuming $10,000 invested in the common stock of
highly respected "income" stocks with ten well-regarded                 each of the following companies 12/31/46:
"growth" stocks. To assure impartiality, the ten selected                                                                  Market
                                                                                                            Total Cash    Value of
in each category were actually drawn out of a hat con-             Amount                                    Dividend     Holdings
taining a total of sixty issues by two analysts and a uni-          Invested               Company          Received     12/31/56
versity economist.                                                 $10,000     American Cyanamid Company $ 6,448.12 $ 28,779.00
                                                                     10,000    American Home Products
   We're going to compare these twenty issues over a                            Company                       7,376.60   40,348.00
ten-year period from December 31, 1946, to December                 10,000     Caterpillar Tractor Company    8,243.20   63,184.00
                                                                    10,000     Dresser Industries             8,145.07   49,065.25
31, 1956, not primarily on the basis of capital gain (al-           10,000     McGraw-Hill Publishing
though we will illustrate that), but with a view to prov-                        Company, Inc.               13,154.30   68,856.00
                                                                    10,000     Minneapolis-Honeywell          6,788.99   52,080.00
ing which group, over the period, supplied the better               10,000     Minnesota Mining &
                                                                                 Manufacturing                6,814.30   89,142.00
income in the form of cash dividends on original capital            10,000     Penn-Dixie Cement Corporation 10,089.75   61,480.00
investment. Here are the figures:                                   10,000     Chas. Pfizer Company           5,651.10   23,908.50
                                                                    10,000     Tennessee Gas Transmission    13,963.67   51,058.60
                                                                   $100,000                                 $86,675.10 $527,631.35
           December 31, 1946, to December 31, 1956
           TEN-YEAR CASH DIVIDEND RECORD                                       Original Capital
                                                                                 Investment              $100,000.00
  A. GROUP 1—STOCKS PRIZED FOR INCOME                                         Market Value Ten Years
      Assuming $10,000 invested in the common stocks of                          Later                   $527,631.35
      each of the following companies on 12/31/46:                            Capital Gain               $427,631.35
                                                       Market                 Total Cash Dividends
                                         Total Cash Value of                     Received                $ 86,675.10
 Amount                                   Dividend    Holdings      C. RECAP AND COMPARISON
 Invested            Company              Received    12/31/56                                  12/31/46   Ten-Year   12/31/56
 $10,000 American Tobacco Company $ 5,049.15 $ 9,025.12                                         Original     Cash      Capital
   10,000 Atchison, Topeka & Santa Fe                                                          Investment Dividends     Gains
             Railroad                     10,710.00    26,775.00   GROUP I. (Income Stocks) $100,000.00 $69,211.90 $ 5.6,090.86
   10,000 Consolidated Edison Company      7,400.00    16,650.00   GROUP II. (Growth Stocks) $100,000.00 $86,675.10 $427,631.85
   10,000 International Harvester Company 7,867.40     16,054.50
   10,000 National Dairy Products
             Company                       7,425.60   20,808.00      This comparison is really quite amazing. The stocks
   10,000 Procter & Garmble                7,228.50   24,055.50    in Group I, long favorites of conservative investors for
   10,000 Pullman Incorporated             5,792.00    11,538.75
   10,000 Singer Manufacturing Company 4,122.50         6,608.75   dependable and reasonable dividend returns, actually
   10,000 Sunshine Biscuit Company         8,191.75    15,108.62   produced $17,464.20 less than Group II. And in capital
   10,000 F. W. Woolworth Company          5,425.00     9,466.62
$100,000                                 $69,211.90 $156,090.86    gains, of course, the difference in performance is fantas-
36         HOW TO GET RICH BUYING STOCKS                                          WHAT ABOUT INCOME?                      37
tic. These results, so startlingly in favor of growth stocks,    money in a single company, and it went broke, you'd be
were due in large part to an increase in the number of           wiped out. You'd lose both principal and income. So
shares via stock dividends.                                      some diversification is desirable. Further, diversification
   Now bear in mind there was nothing tricky in this             is effective in accounts where income is stressed, on the
comparison. Stocks which for years have appeared on              theory that even though one or two stocks may cut or
many lists of "income" stocks were matched in perform-           pass their dividends, others will keep on paying or per-
ance with issues selected at random which have appeared          haps even increase theirs, thus offsetting the loss from one
on many growth lists. Yet the amazing conclusion reached         quarter by a gain in another. All of which has led to a
is that even if your goal is income, you're better off in        quite panoramic theory of investment scattering including
"growth" stocks. Given any length of time, expanding             diversification as to industry, geography, type of security,
earnings and dividends, usually on an increased number          etc. In principle, all this is logical enough, but it's been
of shares (received without cost) in growth companies,          overdone. It has resulted in "scatterization" wherein a
should exceed the more fixed and, theoretically, more de-       broad assortment of securities has often been included in
pendable cash income from institutional-type blue chips.        investment funds just to create diversification. The result
If you think this comparison an extreme or a "slanted"          may be a fund of great stability as with respect to mar-
one, then pick out income issues and "growth" ones on           ket value and continuity of income, but insulated against
your own, and see how you come out. The answer, in              dramatic capital gain. It "buys the market," rather than
virtually every case, is that "growth" shares will live up      emphasizing individual issues which may gain and grow
to their billing by far superior gain in market value, and      three times faster than the market as a whole. Now this
more, surprisingly, they'll actually deliver more cash in-      sort of broad diversification is necessary and almost in-
come while doing it!                                            evitable in the big investment trusts, insurance compa-
   Accordingly, if you really want stocks to make you           nies, endowment and pension funds. These have so much
rich, don't insist on high current yield when you do            money to invest that they simply have to include dozens
your buying, and under no circumstances let a higher            or even hundreds of different issues.
yield be the controlling factor for preferring one stock
over another!
                                                                     What You Need Is Aggressive Diversification
                                                                   For the individual who is not, (yet) a millionaire,
              Diversification Is for the Birds                  however, extensive diversification is impractical and will
   Another hoary investment objective that has been             reduce his potential for dramatic rise in net worth. What
dreadfully overworked is diversification. "Don't put all        you really need is aggressive diversification, not the de-
your eggs in one basket" has been mouthed so many               fensive kind! Your goal should be to diversify, not in
times that it has, for many investors, become a virtual         order to spread the risks of possible loss, but to attain
ritual. But just how important is it? The whole idea be-        representation in a group of the most promising and
hind it is, of course, to insulate against possible loss and    exciting "growth" stocks you can find. These, of course,
to minimize the impact of such a loss, if any, on an            may spread over many lines of endeavor: electronics,
investment fund. Obviously, if you invested all your            chemicals, drugs, minerals, specialties, etc. Moreover,
 many growth companies, Merck, Minnesota Mining, Olin
Mathieson, General Dynamics, etc., contain within their
own corporate activities broad elements of diversification.
   This aggressive diversification may well lead to your
ownership of no more than eight or ten securities. If you                             CHAPTER 4
get eight well-selected growth stocks, you'll be able to                            The Gist of It
follow them and keep completely informed about them.
Why should you clutter up your list with lethargic shares      1. Buying stocks on the basis of their immediate current
when you can include dynamic ones?                                 income is a delusive practice.
   While others you know may have assembled an invest-         2. The best "growth" stocks prove to be the best income
ment list of forty or fifty issues, don't worry about it.          stocks in the long run.
The broader your list, the less chance there is for the best   3. Diversification has been badly overemphasized.
performing issues to make you rich. Finally, in seeking        4. Most people try to own and to follow too many different
breadth of diversification, there is a definite tendency to       securities.
include representation in an industry that isn't going any     5. Own no more than ten stocks (unless you're a million-
                                                                  aire), and select them with a virtual disdain for current
place. Own no more than ten stocks—but select those as            income.
you would pearls!
   The foregoing was not offered just for the purpose of
flying stubbornly in the face of tradition and convention.
On the contrary, it was presented to bring into new
perspective the logic behind diversification. If you admit
that you are going to select your stockholdings quite at
random, including only those "blue chips" already ac-
ceptable to, and approved for purchase by, the big invest-
ment trusts, then you might as well diversify broadly. But
if you're really sold on this "growth stock" idea, then
you'll want to make sure you haven't dragged down your
potential for gain by including unbouncy equities as a
burnt offering on the sacred altar of diversification.

                       CHAPTER 5

          Stock Prices Are the Slaves
               of Earning Power
       An unusual analysis of the controlling factor
       responsible in the long run for the rise or fall
                     of share quotations.

    What makes stocks go up or down? This question has
 been asked millions of times and answered in a bewilder-
 ing variety of ways. You cannot, however, get away from
 a basic fact. You have probably observed yourself that
 if a company increases its net earnings, year after year,
 its stock goes up; and if it records repeated losses, its
 stock goes down. From that rather commonplace obser-
 vation we have derived a basic principle of paramount
 importance to those who would get rich buying stocks—
 stock prices are the slaves of earning power!
    This principle requires some explanation and expan-
 sion. Stock-market motion is primarily influenced by
 two sets of factors that sway the decisions of the human
mind, both individually and en masse—the logical and
psychological. The logical ones would include such things
as a state of peace or war, rising or falling national in-
come, the basic condition of each industry, the level
and direction of sales, earnings, dividends, assets, book
value, new products, profit margins, labor situation, etc.,
in particular companies in that industry. The psycho-
logical factors (which often ignore or conflict with the
logical) embrace all of those emotional swings between
hope and fear, from great mass confidence and enthusi-
asm to great anxiety, or even panic. They include re-
actions to war or its possibility, inflation, political
changes; the popularity and rise of outstanding national
                                                                     STOCK PRICES ARE SLAVES OF EARNING POWER            43
                                                                 power business but frankly this book would miss its
or international leaders, or their eclipse or death; the
                                                                 mark completely if it did not exhort you to observe and
idealism, the indifference, or the cynicism of the times;        analyze trends in earnings as your most helpful guide
the occurrence of earthquakes, pestilence, or epidemic;          in selection of securities that will go up. As proof of
or the rise to challenging power of foreign nations or           the magnetic force exerted by earning power on stock
alliances.                                                       prices, please look at the charts on pages 45 through 56.

       Logical and Psychological Market Factors
                                                                       Stock Prices Are the Slaves of Earning Power
    In general, it may be said that the psychological fac-
                                                                     The twelve stocks were selected from diverse indus-
tors are more temporary and unpredictable, while the              tries and the time covered was the decade from Decem-
logical factors are more consistent and calculable and,          ber 31, 1947, through December 31, 1957. The charts in
hence, more predictable. Of all the logical determinants         most cases reflect the psychological market depression
of share market direction, by far the most important is          around the time of the Korean War, when earnings went
earning power. Business corporations exist to make a             up but anxiety prevented share prices from following
 profit out of the production of goods or the supplying          suit. Note also that even with such gyrating earnings as
 of services, and it is only natural that the most significant   displayed by New York Central the stock tried its best
 gauge of their success is profitability—the amount and          to follow, although there was some lag due to the time
 trend of net earnings year after year.                          it takes for changes in earning power to be apprehended
     This prepotence of earning power is obviously no            by tens of thousands of shareholders and investors.
 invention of ours—it has been understood and applied                In particular, note how well such issues as Merck,
 by successful stock buyers for generations. Earning power       Scott Paper, National Dairy Products, Florida Power and
 is of two orders—past and future—and of those two,              Light, and Lily Tulip Cup follow, almost magnetically, the
 the indicated future trend is far more important in the         trend of earnings. This was actually a quite random selec-
  determination of the price of a stock than its historic        tion of stocks, but almost any series of diversified issues
  earnings. It is necessary to understand this point because     would have proved this point we're hammering that—
  the stock market is a prophetic creature, and becomes          stock prices are the slaves of earning power!
  romantically attached to issues with apparent poten-
  tials for dramatic rises in earnings in future years. So                   Short-run and Special Factors—
  it is that growth stocks frequently sell at very high multi-              The Exceptions That Prove the Rule
  ples of net earnings; and in soaring markets, enthusiasm
                                                                    Convincing as this chart is, it must be remembered that
  for them borders on absurdity, as when Radio common
                                                                 at certain times the market will virtually ignore earnings
   sold at 500 in 1929. That wasn't discounting the future—
                                                                 and may enter upon, for a time, such psychological binges
   it was discounting the millennium! (It is good to re-
                                                                 as the happy dream world of 1929, the deep blues of
   member and recall these market excesses from time to
                                                                 1932-33, and the war psychosis of the early 1940's.
   time lest your own judgment get out of perspective when
                                                                 Moreover, certain exceptions will occur—a merger pros-
   bullishness is both rampant and contagious.)
                                                                 pect which sends a stock soaring; a fight for company
      We don't wish to become tedious about this earning-

control such as occurred in 1958 when E. L. Bruce Com-
pany shares, with no significant change in earnings,
zoomed from $17.00 to $140; or a company may be
liquidated with certain of its assets bringing very favor-
able realizations. But all these psychological variants and
special situations do nothing to change the long-term
principle—stock prices are the slaves of earning power!
Thus the stock you seek that can advance by at least 500
 per cent within ten years must display an almost contin-
 uous, and preferably steep, rise in earning power through-
 out that decade. Nearly all growth stocks perform thus.

                       CHAPTER 5

                      The Gist of It

 1. Earning power is the fuel that drives stock prices up.
 2. Rising earning power is the most important single fac-
    tor to look for in a stock.
 3. The charts conclusively demonstrate the magnetic force
    exerted by earnings.
 4. Special and psychological factors may influence market
    direction for a while, but over any long period earning
    power will assert itself as the controlling factor.
                       CHAPTER 6

    Cross Bearings on Market Values—the
     Relationship of Bond to Stock Yields,
      Price/Earnings Ratios, and Notes
                 About Timing

     Sophisticated investors and analysts over the years
  have developed a whole series of trading cross references
  by which they customarily gauge the height of the mar-
  ket, what they believe to be the relative attraction of
 individual stocks, and the velocity of markets in one
  direction or the other. Since there are so many admirers
 and adherents of these criteria, we should, perhaps, slip
 into these bayous of finance for a few pages to learn, if
 possible, what these savants are talking about, and what
 light, if any, they are able to throw on prudent and
 profitable security selection and purchase. Probably the
 oldest bench mark by which to judge the general altitude
 of the stock market is the relationship of bond yields to
 stock yields. So we'll look at that relationship first.

                Stock Versus Bond Yields
   In classic theory stocks are more volatile in price,
 more speculative, and less certain deliverers of income
than bonds. Accordingly, the yield on high-grade bonds
should be, in pure theory, always lower than on invest-
ment quality stocks. This proposition has been regarded
for some decades as virtually axiomatic. Yet in mid-
1958, and for the fourth time in the twentieth century, we
were faced with a condition wherein current yields on
prime bonds were actually higher than the current aver-
age yield on a broad group of major industrial stocks.
58         HOW TO GET RICH BUYING STOCKS                                 CROSS BEARINGS ON MARKET VALUES                59

Now what does that mean—bonds yielding more than                civil-service workers, etc., and that it savagely destroys
stocks? Historically, it has usually meant that stocks were     the purchasing power of those retired and living on fixed
selling too high and that smart, large-scale investors          incomes, such as pensions, annuities, or Social Security
should switch into bonds (1) for better income, (2)             payments. Inflation is a heavy, and usually increasing,
better protection against market loss (if stocks declined);     invisible tax on those least able to pay it. Contrariwise,
and (3) even a modest opportunity for capital gain as           it is a golden boon to debtors who borrow good dollars
bond prices recovered.                                          and pay back, in later years, in cheaper ones. In fact, if
   Now this broad program of preferring bonds to stocks         it were not for rising debts and over-extended debtors,
on grounds of yield seems to have worked out fairly well        inflation might never have existed. As it is, however, it
on previous occasions, but in 1958 two new major eco-          has been a disturbing fact of life in one or more of the
nomic factors emerged which may well call into ques-            major nations of the time in every century since money
tion the further usefulness of bond yields as a stock-         began, with the exception of the nineteenth.
market gauge. These new economic factors are (1) in-               If inflation has been around so long, and is so well-
flation, (2) tremendous and steady demands for choice          recognized as economic disease (1) why don't we do
stocks by institutional investors—pension, endowment,          something about it and (2) what are the best indi-
and mutual funds.                                              vidual defenses against it? We don't do much about it
                                                               because the remedies are too rugged and unpopular. We
                                                               could attack it by a balanced budget, reduction in all
                     Inflation Forever                         federal, state, local, and personal debt, freezing wages
  While inflation, like the weather, is something every-       and prices, encouraging saving and thrift, and buying only
body talks about, only a very few really understand it,        what we can pay for. But none of these things is at all
or view it as the economic monster it really is. There         popular or easy, so we don't do them! Instead, what do
have been a lot of "quickie" definitions: (1) "too many       we see? A Republican administration under Eisenhower
dollars chasing too few goods," (2) a faster rise in dis-     in 1958 dedicated to balanced budgets and a sound
posable, income than in the production of goods, (3) ex-      dollar, yet racking up the largest peacetime deficit in
pansion of debt and reduction in savings, (4) deliberate      history ($12 billion) and pushing the peacetime debt
oversupply of money via the printing press. These de-         limit past $280 billion. We see an inexorable increase in
scriptions are by no means complete but they give you         the price of labor year after year impelled by endless
the idea. For the man in the street, inflation means sim-     union demands for more; we see instalment debt (in
ply a rise in the cost of living, or, stated differently, a   1957) at an all-time high and more than two thirds of
decline in the purchasing power of his annual income.         our motorcars being bought on time. And we see no
This we have all seen, and can document. Between 1941         limit to the rising trend in government defense spending.
and 1957 the erosion of the dollar had decreased its          Now all these are inflationary and virtually nothing is
purchasing power by more than 50 per cent. Now you            being done to stop them. Inflation is here to stay; it's
don't need to be cloistered Harvard economist to see          one of the economic facts of life and as an investor you
that this fading dollar has a crushing effect on all those    must take it into account. There are only three defensive
on fixed salaries—schoolteachers, firemen, policemen,         elements against it in sight: (1) control of the supply and
60         HOW TO GET RICH BUYING STOCKS                                  CROSS BEARINGS ON MARKET VALUES                  61

price of money by the Federal Reserve system, (2)               earnings per share. This is a more baffling gauge to work
the probability of higher taxes all around, and (3) the         with than comparative yields, since each of its variables
fact that you can't have a really roaring inflation until all   is more volatile; and an infinite ratio is possible if a stock
the labor force is at work and all production facilities        sells, for example, at 20, and either earns nothing, or
are working at very near capacity. With 7 per cent of the       shows a deficit.
labor force on the beach, and steel mills operating at only         The most general price/earnings ratio used is for in-
75 per cent of capacity (as was the case in November            dustrial stocks, with the group of representative issues
 1958), inflation must operate "under wraps." But it will,      composed of either the Dow-Jones list, or of other groups
in due course, resurge.                                         selected by a financial' publication or an investment serv-
    Meanwhile, what about investors? What should they           ice. These ratios have shown wide swings in the past—
do? The best long-range defenses are in good stocks,             at the market lows (for year), below 5 to 1 in 1932,
particularly those in natural-resource companies (oil,           around 6 to 1 in 1949, 8 ½ to 1 in 1954, and around
natural gas, aluminum, timber, ore, etc.); in those with         15 to 1 in 1958. Now all this doesn't give you too much
 a low labor-cost factor (chemicals, pipelines, etc.); and       solid meat to chew on because (1) of the steady inflation
 generally highly leveraged companies with large debt           of the dollar (a built-in propellant toward higher market
 ahead of common stocks. The stock market is a better           prices), (2) in recent years the high federal tax on
 protective vehicle under inflationary conditions than           market profits (25 per cent for bracketeers) tending to
 bonds, mortgages, savings accounts, or endowment in-            keep holders from selling, and (3) accelerated deprecia-
 surance policies. Other respected bulwarks against infla-      tion and heavy research and development write-offs tend-
 tion include real estate, especially acreage and unim-         ing to reduce reported corporate earnings.
 proved land, rare paintings, precious gems, and gold. But          Going further, for individuals delving more deeply into
 for most, selected stocks are probably more attractive         the lore of price/earnings ratios, those existing for differ-
 because of their superior marketability and their sensitiv-    ent industries should be carefully noted. Mining, oil com-
 ity to changing economic conditions.                           panies, railroads, sugar companies, sell as a rule at quite
     If we have spent some time on inflation it was neces-      low price/earnings ratios; gas, electric, and telephone
  sary to do so because inflation must be considered by         utilities considerably higher ones; and drug, glass prod-
  every prudent investor. Having set into perspective this      ucts, chemical, publishing, electronic, infrared, and tech-
  specter of inflation, let us return now to the more me-       nological enterprises may sell at twenty, twenty-five,
  chanical methods by which stocks are customarily eval-        thirty, or even forty-five times current net earnings, de-
  uated. One of the most respected of these methods is a        pending on just how enthusiastic the investing public
  comparison of price/earnings ratios.                          is about the growth factor in each instance. Now is prob-
                                                                ably as good a time as any to remark that even growth
                                                                stocks can be overvalued from time to time, and just
                  Price/Earnings Ratios                         because you've bought an exciting growth stock doesn't
   The second generally accepted standard cross check           mean that it will do nothing but go up! It, too, may back,
 on market altitudes is the price/earnings ratio—the mar-       fill, or sink before going into orbit!
 ket price of a stock expressed as a multiple of its net            It would be idle to infer that we have given anything
            HOW TO GET RICH BUYING STOCKS                                   CROSS BEARINGS ON MARKET VALUES                  63
like adequate or complete coverage to price/earnings              unusually high (by comparison), you'll often find it is
ratios, or explored to the full their message as to whether       because of lower labor costs, lower sales costs, or efficient
stocks in general (or any particular one) are cheap at            and (usually) newer plant facilities. Sometimes extra-high
•any given time. It can be quite solidly stated, however,         or accelerated depreciation charges will reduce and con-
that at any time when a general average of industrial             ceal, for a time, true earning power. Intra-industry com-
                                                                  parisons are the answer. If one company, not just in a
stocks reveals that a price/earnings ratio is as low as,
                                                                  single year, but over five years or longer, shows a consist-
 or lower than, 7 to 1, and industrial earnings are in a
                                                                  ently higher profit margin than its competitor, the stock
 rising trend, then you should buy stocks even if you
                                                                  of that company is the better vehicle for dividends and
 hock your insurance to do so! Also, almost any good
                                                                  capital gain.
 chemical or electronic is in a buying range if it sells below
 a 10-to-l earnings ratio. Further, the surest sign of a bull
 market is when share prices rise faster than earnings do.                  Return on Invested Capita!—Book Value
     The foregoing is all background material. There is still
                                                                      Still another useful bench mark is the return on in-
 nothing more important than selecting individual stocks
                                                                   vested capital—not the total capital in the business but
  on the basis of their rapid potential rise in earnings, but
                                                                   just that share of it that belongs to common stockholders.
  such stocks will act all the better marketwise if they op-       How do you figure that out? It's quite simple—just divide
  erate in a milieu of broad investor confidence and en-           the company's net income after taxes by its net worth.
  thusiasm.                                                       But what, you ask, is "net worth"? The balance sheet,
                                                                  which is found in every annual report, enables you to
                      Profit Margins                              calculate net worth quite simply. Just add to the value of
   Another interesting cross check on stock values is the         the common stock (as stated on the balance sheet) the
profit margin. To arrive at that you merely divide a              company's surplus and reserves (if any) and you arrive
company's net income (customarily before taxes) by its            at net worth. Divide this net worth by the number of
net sales. If, for example, a company has sales totaling          common shares outstanding, and the result is net worth
$5,000,000, and a pre-tax net income of $500,000, the             per share or, as it is more familiarly called, "book value."
profit margin is stated at 10 per cent. This is a quite          Finally divide net income per share (in any given year)
respectable ratio—higher, in fact, than achieved by most          into this book value as of the first of that year, and you
corporations. Profit margins will differ widely between          get what we started out for, the return on invested
industries and between companies in the same industry.           capital.
They will be quite high in a good chemical company and               Now this return on stockholders' investment is a very
low in a food chain where a small markup and big vol-            important thing for you to know. You have just so much
ume are the factors for profitability.                           money to invest; and obviously you'll do better with it
   Most important, however, are the comparisons you              if you lodge it in companies that are real money-makers.
can make between companies in the same industry.                 The best way to see whether they are such or not is to
The profit margin is usually an excellent index of cost          view their past record—to see just what percentage they
control and managerial competence. If the margin is              have been earning on their common stock.
                                                                         CROSS BEARINGS ON MARKET VALUES                65
                                                                now; multiply that figure by 10, and deduct 20 per cent
   There are some criteria to go on. A 30 per cent or
                                                                from the quotient. That is (under this mathematical gim-
more return on book value is excellent. To illustrate, in
                                                                mick) about the right price today for the issue in ques-
the five-year period of 1952-56, Smith-Kline and French
                                                               tion. To illustrate, assume Z-Boom Electronics earns
Laboratories, Electronic Associates, McGraw-Hill Book
                                                                $2.00 per share in 1958, but you think it will earn $5.00
Company, Cessna Aircraft, Polaroid Corporation, Out-
                                                               in 1962. What should you pay for it today? $5 X 10 =
board Marine and Manufacturing all showed a return
                                                               $50. $50 —- $10 = $40. Now don't go out right and
on net worth of above 30 per cent per annum. And as
                                                               left and "buy" on this formula, as it's really nothing
you would expect, the common shares in each all re-
                                                               more than sophisticated guesswork. It assumes certain
corded outstanding market gains. In the same five-year
                                                               earnings four years hence (about as far ahead as profits
period Filtrol Corporation, Foote Minerals, Halliburton
                                                               can be predicted) and further assumes ten-times as the
Oil Well Cementing Company, Maytag, Minnesota Min-
                                                               minimum price/earnings ratio on which a growth stock
ing, and Food Fair Stores all earned more than 25 per
                                                               should sell. You may find this formula of value, how-
cent on book value. And again the shares of these re-
                                                               ever, as a cross check.
 corded dramatic gains. Our purpose here is not to be-
 labor you with statistics but to emphasize again the basic
 importance of this vital earnings ratio. A company must,           Timing and Theories of Price Trend Prediction
 in fact, earn substantially more than 10 per cent on its
 stockholders' investment or it just won't qualify as a            Which brings us up to the much-bruited-about ques-
 growth stock.                                                  tion of "timing." There is an old adage in Wall Street
                                                                that to succeed you must "Buy 'em cheap, and sell 'em
    This ratio is obviously not an absolute one; it will
                                                               dear." That, no doubt, is perfectly wonderful advice ex-
 depend on amount of stock and the extent of "plow
                                                               cept that no one knows, with absolutely certainty, when
 back" of annual net earnings, the amount of bonds, loans,
                                                               stocks are cheap or when they are dear. There are certain
 or preferred ahead of common, and the price which the
                                                               fairly common attempts, however, to divine market trends.
 company may receive for new shares sold to stockholders
                                                               Perhaps the most famous of these is the "Dow Theory,"
 or the public. But keep on the lookout for companies
                                                               which consists of charting volume and activity in certain
 consistently earning 20 per cent plus on net worth and
                                                               key issues day by day, and, from that data, drawing cer-
  you'll wind up owning some mighty fine stocks.
                                                              tain conclusions (partly by historic comparison) about
                                                               the long-term direction of the market, probable height and
                 Possible Pricing Formula                     depth of forthcoming intermediate swings, and the herald-
                                                              ing of so-called "buy signals" and "sell signals." The
    There's one other "figure" method of evaluating stocks    defects in the Dow Theory appear to include (1) some
 you might want to consider. It is a formula, surely not      basic technical disagreement among its own communi-
 to be relied upon, but perhaps useful in determining the     cants; (2) the tendency of the system to reveal what is
 fair, normal, or reasonable price to pay for a growth        going to happen only after it has already occurred; and
 stock. So for what you may find it to be worth here's        (3) the fact that the system only deals with actively
 the formula. Estimate the per share earnings of the          traded market leaders, and sheds little fight on trends
 growth stock you're looking at, as of four years from
 66         HOW TO GET RICH BUYING STOCKS                                  CROSS BEARINGS ON MARKET VALUES                  67
  among lesser known equities or those traded over the           and have patience. It's true that a dynamic stock well
  counter which often go along their own merry market way        bought will go up faster in a bull market than in a dull
' in blithe disregard of "blue chips." If you are a sophisti-    or bearish one, but that is no reason to defer buying.
  cated investor with a flair for mathematics, charts, and       How many market fortunes have been lost, after a beau-
  graphs, you may get a kick out of the "Dow Theory,"            tiful stock had been selected and decided upon, by
  but it is no sure-fire method of keeping you in Cadillacs!     "waiting to buy it cheaper"—and missing it altogether!
     Other techniques to determine buying or selling deci-       If you have solid reason for expecting a stock to produce
  sions include a wide variety of "formula" systems. One         a high percentage, long-term gain, don't fiddle around—
 of these defines stock prices as "normal" at a certain          buy it! If you prefer to buy it out of annual savings al-
 point, say, for example, the average of years 1949—51.          locating, say, $1,000 or $2,000 a year toward adding to
 At that point the fund might be 60 per cent in stocks and       your holdings, at market prices prevailing when you have
 40 per cent in bonds. Then, when or if the stock market         the funds (dollar-cost averaging), go ahead that way. But
  advanced, say 20 per cent, stocks would be sold to create      if a stock is a real value and you're confident about it,
 a fifty-fifty ratio; and so on. If stocks went below normal     you'd better get aboard. Even in bear markets there are
 by a certain percentage, then some bonds would be sold          always certain companies whose earnings are going ahead
 and stocks bought.                                              so rapidly that their stocks will advance or at least not
     A particularly alluring siren song is that of certain       sell off. Average the cost of your stock, if you wish, but
 "advisory" services who extravagantly advertise how very        you'll never get rich on the zooming stocks you didn't
 right they were in putting their clients in particular stocks   buy! The decision to buy a stock with a dynamic poten-
 which performed dazzlingly. Beware of these high-pres-          tial is far more important in the long run than when
 sure ads of outfits implying that they know how to              you buy it.
  "beat the market" and, for a few paltry dollars, will teach
 you to do so. Nobody ever "beat the market" except
 by sheerest luck. There is no theory, system, or science
 that has ever been able accurately and consistently to
                                                                                         CHAPTER 6
 predict short-run, up or down, market swings. As reliable
 as any is probably the thesis that hemlines of ladies'                                 The Gist of It
  skirts and business prosperity tend to go up and down
 together! If you like shooting crap, go ahead and try,          1. Comparative bond and stock yield are not sure-fire
 but don't be silly enough to think your clairvoyance will          guides to stock prices.
 make you rich.                                                  2. Price/earnings ratios are a barometer of sorts, but better
     But you ask, "Is there nothing then to this 'timing'           for history than prophecy.
 business? Aren't there some times when it's better to           3. Dow Theory interesting but not infallible.
                                                                 4. Timing stock purchase is far less important than shrewd
 buy or sell than others?" Yes, of course there are, but
                                                                    share selection.
  Since you can't be sure just when these golden moments
  arrive, you're smarter to stick to what you do know.
 Buy growth issues in companies with the forward look,
                     CHAPTER 7

      Promotional and Early-Stage Stock
          Speculation—Possible Profits
                and Probable Pitfalls
    Promotional stocks will usually do one of two things
 for you—go up or blow up! No other field of speculation
 is so tricky, so risky, or so uncharted. Most books on
 investing give promotional stocks a quick brushoff. They
 tell you to forget about them; that many such issues are
 outright frauds and most are doomed to failure. And yet
 we all know that many eminent and highly successful
 companies, such as Hazeltine Corporation, Louisiana
 Land, Pacific Petroleum, Oklahoma Natural Gas, etc.,
 were all promotions once, and the stock of each sold at
 one time below $1.00 a share. So it's hard to dismiss
 promotional stocks with a mere wave of the hand when
 a quite small investment in just one good one can make
 a young fortune for you. For instance, in 1954 there
was a public offering of Acoustica Associates, Incorpo-
rated, an eager enterprise developing ultrasonic vibration
techniques useful in missilery, cleansing of instruments,
 and the measurement of stored fluids. The stock was
offered at $1.00 a share. The company survived, began
to prosper, and in 1961, sold as high as $35. One
thousand dollars in 1954 would have swiftly grown to
$36,000. New Hosco, a long-shot Canadian copper,
soared from 17 cents to $7.00 and dropped back again
below $2.00, all in the summer of 1958. Now these are
the kinds of promotional stock we would all like to ride,
but how do you find one? How do you pick a winner like
these out of the thousands offered every year, or from the
welter of Canadian mineral shares, many of them hop-
ping madly all over the Toronto Exchange?
70         HOW TO GET RICH BUYING STOCKS                               POSSIBLE PROFITS AND POSSIBLE PITFALLS             71
                                                               in the company treasury. Underwriting commissions of
                                                               between 10 per cent and 20 per cent on new companies
           Causes of Early Corporate Failure                   are fairly standard. And once the money is in, it should
   The task is not easy, and it requires, at the outset,       not be siphoned off by high initial officer salaries. Re-
recognition of certain basic facts. The mortality rate of      wards to management should come through market rise
new companies is very high indeed. The major causes            in their shareholdings, after the company has survived
of failure, however, are quite well known: (1) insufficient    and begun to succeed. In a mineral venture there must
capital, (2) incompetent or even dishonest management,         be enough original capital at hand to carry the property
(3) defects or "bugs" in the new product or service, or        through the drilling,' exploration, and development phase
(4) in a mining company, insufficient poor-grade ore           at least until a sizable commercial grade ore body, or
bodies or mineral zones, or high extraction costs.               petroleum reserve, has been defined.
  Since the causes of failure of so high a percentage of            II. Management. In a mining or petroleum venture
companies, in their promotional or early stages, are            there should be a top-flight geologist and/or mining en-
almost standardized, it should be possible, if not to select     gineer actively on the property directing the development
winning futurities, then at least to screen out issues that
                                                                program. You can't mine successfully by remote control
virtually promise to blow up in your face. Accordingly,
                                                                or under the guidance of a retired delicatessen proprietor!
When some friend comes to you all excited about some            In a manufacturing or service organization, the executive
penny stock of a company with a newly patented process,         officer should have sound training and experience in the
a new wonder drug, a chain of motels, a uranium mine,           field and be dedicated to the enterprise. Directors and
a marina site, or a billion tons of iron ore in Greenland,      officers should be men of ability, substance, and integrity,
check over this "can't miss," "get in on the ground floor,"     preferably with some record of past success in related
"another I B M " hunk of extravagant financial optimism         ventures. Frequently you'll find at the helm either a crack-
by three useful criteria. The company you stake your           pot who has been badgering his friends about his pet
hard-earned dollars in should assay high in the three           idea for years, or an agile promoter who is in the deal
M's—Money, Management, Merchandise.                             only to pump up the price of the stock, sell his, and run
                                                               like a rabbit! These are the characters to avoid unless you
                                                               want to wallpaper a whoopee room with worthless cer-
                      The Three M's                            tificates.
   I. Money. There must be enough money in the com-                III. Merchandise. The budding company must have
pany treasury (or on its way there from proceeds of cur-       some worth-while product, service, or mineral to offer
rent financing) to carry the enterprise through its early      and there must be a broad enough and durable enough
stages. This is usually a period of two years, or until        market for this merchandise to assure company survival
the company reaches an annual gross of more than $1            and growth. Hula hoops, pogo sticks, coonskin caps, and
million. To get and retain this adequate and vital money       buggy whips go out of style too fast! Not only must the
supply, bankers or underwriters must not be too greedy         product be worth-while; it should be better than that of-
at the outset. At least 70 per cent of total money raised      fered by competitors, present or potential. If it's a mineral
by underwriting or original subscription should wind up        company, make sure it has reasonable and legitimate
                                                                         POSSIBLE PROFITS AND POSSIBLE PITFALLS
                                                                  geologists who combine experience and self-confidnce
prospects for locating and bringing into production a             on occasion will leave a company such as Noranda or
major ore body, or oil wells, that can be profitably              Shell Oil to form an eager and hopeful company of their
worked. A stock promoter's word for this is not enough.           own. If you check the past records of individuals like
Insist on seeing a detailed and certified report by an            these, you may well find that they have unusual talent
engineer or geologist, expert in his particular field, esti-      and competence brightening visibly the horizons for suc-
mating the extent, location, and quality of probable min-         cess in their new venture.
eral reserves or recoverables. It usually helps, too, if your          Actually much of what we said earlier about growth
property is located near one where profitable mineraliza-         stocks applies here since obviously these baby companies
tion has already been proved.                                     must either grow rapidly or fail dismally. They must
                                                                  generate rising earning power in order to survive. But
                  Other Points to Watch                           don't place your hopes too high on finding a stock you
                                                                   can buy at $1.00 that will sell at $20.00 a few years later.
    These Three M's will prove a sieve through which               The odds are at least 100 to 1 against you. Look at all
dozens of dubious, if not hopeless, promotions will fall           the uranium shares offered in 1955-56—and how few are
to the ground. Even assurance on all these points, how-            alive today!
ever, doesn't insulate against failure. Be sure, in addition,
                                                                       There's one final technique about promotional stocks
that the firm, or security dealer offering the shares, is
                                                                   that many successful speculators have used. It's called
both solvent and reputable. Ignore phone calls from
                                                                   "operation bait back." If you do buy a low-priced long
 people you never heard of, or from a remote city, offer-
                                                                   shot, and if by good fortune it goes up 100 per cent or
ing to "reserve for you" 10,000 shares of Zilchboom
                                                                   more, then sell half! This insures you against "roller-
 Electronics at 15 cents a share. Such characters are
                                                                   coaster profits" where, if the stock sells off, you wind up
 frauds and fakers and they fleece the gullible out of $500
                                                                   back where you started; and the half you keep costs you
 million a year. Don't be a sheep. Since the time of Jason
                                                                   nothing. If it moves up a lot more, you're riding on vel-
 there hasn't been any such thing as "golden fleece"!
                                                                   vet; and if it doesn't, you're not out of pocket.
     Then, too, watch out for dilution of the equity. Make             With all the cautionary measures cited above, there is
 sure that promoters haven't acquired for themselves too           no reason why, with some small portion of your in¬
 generous an amount of stock at much lower than public             vestible funds, you shouldn't "have a go" at one or two
  offering price, or been given warrants to buy an unrea-           of these penny hopefuls. If you're lucky, you usually will
  sonable number of cheap shares in the future.                     show a terrific percentage of gain; and if you lose, you'll
      Actually the best results in early-stage enterprises seem     understand that you took a big calculated risk in hope of
  to stem from unusual managerial competence. For ex-               a big gain. Surer if not so sensational results are more
  ample, a number of most successful electronic and chem-           likely to come, however, from investing in companies
  ical companies were formed and animated by one or                 well past their growing pains and early agony and gross-
  more technical experts who had gained broad knowledge             ing from $3 million a year up.
   and experience working for big companies such as West¬
  inghouse, Sperry Rand, or Dow; and then decided to
   strike out for themselves. Equally, mining engineers or
                                                                                    CHAPTER 8
                      CHAPTER 7                                          Short-run Speculation and
                     The Gist of It
                                                                            Special Situations

1. Promotional shares are exciting but very dangerous.           While this book concentrates its attention on growth
2. The causes of early-stage corporate failure are well       stocks, and urges, in the main, quite long-range retention
                                                              of expanding equities, it would be remiss in its mission
    known.                                                    of making you rich if it did not devote some attention to
3. The Three M'S can screen out a lot of "turkeys" for
                                                              opportunities for capital gains on shorter-term holdings.
4. Managerial competence is paramount.                        Speculation of this order does not, as a rule, aim for as
 5. You still will need a lot of luck and fortitude to win.   high a percentage rise as 500 per cent but does envision
                                                              sizable profit realization for some special reason, and
 6. But if you pick the right promotion, you may make a
                                                              within a quite predictable, and not too protracted, period
    fortune!                                                  of time. Here again, however, the primary rule remains—
                                                              stock prices are the slaves of earning power. Potential
                                                              rise in earning power is again the main basis of security
                                                              selection even in this short-run speculation.
                                                                 How can you tell a good "short-run" speculation when
                                                              you see one? What are the things to look for? Such
                                                              shares are found in several categories. First, there are so-
                                                              called "cyclical" stocks, traditionally the steels, heavy ma-
                                                              chinery, and machine-tool stocks, textiles, building sup-
                                                              plies, and certain metal shares, especially those producing
                                                              copper, lead, and zinc. And among these cyclical shares
                                                              which, in the past, have risen or fallen in sympathy with
                                                              the surge or dip in general business activity, those dis-
                                                              playing the widest market swings, up and down, have
                                                              been the marginal or potential producers—those less
                                                              efficient enterprises with higher operating costs that make
                                                              money, for the most part, only in "good times." For in-
                                                              stance, the price of copper rose steadily between 1953
                                                              and 1956, reaching, in that year, a ninety-year high of
                                                              46 cents a pound. This created substantial rises in the
                                                              shares of the big companies, and caused stocks of lesser
                                                                      SHORT-RUN SPECULATION AND SPECIAL SITUATIONS          77
companies to soar. Magma Copper ran up from a 1953                 capital-gains taxes or (2) you love a roller-coaster gam-
low of 21 to a 1956 high of 139; Granby, a definitely              bit that winds you up just about where you started.
marginal company, showed a rise in the same period from                So much for cyclicals. If you want to learn more about
6% to 23. In Canada, shares of a remote producer in                this sort of trading, go to your nearest university business
British Columbia, Granduc, ran up to past $8.00, and               school library or read Chapter XIV in a book called How
Temagami to above $7.00 in 1956 only to sink below                 to Gain Security and Financial Independence which, by
$1.00 a share for each, when copper backed down to 25              a coincidence, was written by the author of this volume!
cents a pound in 1958. These case histories illustrate                 A second technique for achievement of important cap-
cyclical swings in metal shares, and prove that, even with-        ital gains within a period of from six months to three
out a deep depression such as 1929-32, cyclical swings are         years is to seek out companies which either have been
 still with us and can create exciting market gains for            pepped up by the infusion of an eager new management
 the shrewd, the daring, and the perceptive.                       or enlivened by the introduction of an important new
    Another classic performer along cyclical lines is the          product, or products. Every year you will note a num-
 machine-tool industry. We have a splendid example here            ber of stocks of unexciting "so-so" companies which
 —Bullard Company. From a 1953 low of 17½ it rose                  suddenly come to life, become market darlings, and go
 to a 1954 high of 51 5/8 only to dip again in 1957 as low          roaring up on the strength of a new president or a new
 as 9 3/8. Among heavy industrial-machinery shares, Mesta          product.
 Machine advanced from a 1953 low of 28 to 64¼ in 1956.                Take P. Lorillard Company. For years it tagged along
     Now these examples of cyclical issues are not unique.         behind the bigger ones—American Tobacco, Reynolds,
 They are, in fact, quite representative of shares, and            and Liggett and Myers. In all the years between 1945
  profit potentials, created by fairly moderate cyclical swings.   and 1957 Lorillard common never sold below 15 nor
 To make money in such shares, you must follow two                 above 3 2 ½ , and never earned more than $2.73 per
  things: (1) the general level of business activity and (2)       share. In 1955 and 1956, in particular, the entire ciga-
  the decline in earning power of the subject issues to what       rette industry was shaken by unpleasant medical reports
  appears to be rock-bottom levels. There is no absolute           tending to associate cigarette smoking with the incidence
  rule here, but when full-scale earnings from high-level          of cancer. Tobacco stocks acted sick. Then came the
  operations have dwindled by 60 per cent or more, then            filters, which removed clinical anxiety from smokers'
  the chances are that your cyclical stocks have declined          minds. One of the best filters (micronite) was researched
  sufficiently to be in a buying range.                            by Lorillard, and Kent cigarettes caught on. So much so
                                                                   that earnings rose from $1.34 in 1956 to $3.79 in 1957
     The point to note, however, is that you buy only at
                                                                   and $3.76 for the first six months in 1958. Lorillard
  depressed or semi-distressed levels and you sell as soon
                                                                   common, a faithful slave of rising earning power, duti-
  as historic high levels of share earnings have again been
                                                                   fully rose from a low of 15 1/8 in 1956 to 83¼ in Oc-
  approached or exceeded. In cyclical. issues there is no
                                                                   tober 1958; and shrewd buyers of the stock picked up
  stubborn long-term determination to hold. You sell when
                                                                   200 per cent to 300 per cent in capital gains in less than
  your target has been achieved—perhaps a 100 to 200
                                                                   two years. Upgraded management and a sensational new
   per cent capital gain. And there is small reason, at that
                                                                   product had done the trick.
   point, to hang on longer unless (1) you just hate to pay

    Another company that dramatically changed its cor-       for Ford Motor Company shares when they were first
 porate complexion and made a lot of money for share         publicly offered at 6 4 ½ ; and although the stock sold
 buyers is Rexall. In the years between 1947 and 1957        above 69 at once, it soon established a market range
 the common woggled along in the market ranging, in all      considerably lower. These new issues are often interesting
  that time, between a low of 4 1/8 and a high of 11¾. It    and frequently profitable, but market response to them
 was going no place, and kept on doing so! Animated by       is exceedingly difficult to fathom in advance.
 aggressive management, headed by Mr. Justin Dart, a            There is another broad range of short-run speculations
 lot of unprofitable and high-cost stores were closed, and   called "special situations." These would include reorgan-
 new emphasis was placed on the manufacturing phar-          izations, liquidations, and receiverships, cases where
 maceutical and ethical drug division and the merchan-       shares are selling at a heavy discount from book value;
 dising of new products researched by it. So, in 1958,       and mergers before which the shares of the smaller com-
 Rexall suddenly got out of its rut, earnings entered an     pany may be bid up substantially. Lawsuits and patent
 up trend, and the stock advanced from 8 1/8 to past 28.     settlements may lead to a swift rise in the price of a stock
    American Motors was a tired company till its Rambler     and competitive buying for control of a company may
 model zoomed into popularity in 1958 (a poor motorcar       zoom a stock upward. Certain motion-picture stocks have
 year), with the common rising from a low of 8 to 35         taken on a new vigor because oil has been struck on
 in November.                                                company property. "Spin-offs" are often rewarding. You
    Now there is no need to bother you with a long list      buy a stock that will distribute shares of a controlled or
of other historic examples. Just keep on the lookout for     subsidiary company to its own shareholders. Frequently,
companies beefed up by new management, or coming             by then selling the "old stocks," after the spin-off, you
out with an important new product line, and you may          achieve a very low cost for the shares you received as
be able to discern another market winner. But remem-         a dividend. Then, too, in recent years we have seen com-
ber, these are not essentially growth stocks. Corporate      panies actually worth more than they seem to be because
improvements in such cases, even though swift and dra-       their heavy "tax loss carry-over" makes them attractive,
matic, may not continue over a long run, but simply          for merger purposes, to a company with high earnings.
carry the enterprise to a higher plateau. So prepare to      Studebaker-Packard by 1958 had an accumulated loss of
sell when earnings flatten out.                              more than $130 million. It is difficult to outline all of the
    A third interesting source of short-run profits is in    techniques for capital gains in these "special situations,"
new issues, particularly when they represent the first       as each is a law unto itself. This is a field, however, in
public offering of a company whose shares have hitherto      which sophisticated investors who have delved into the
been privately held. Carter Products, Revlon, D. S.          facts have made a great deal of money. But you must get
Kennedy Co. (radar screens), Diner's Club, Chock Full        all of the facts. Riding a rumor can be expensive!
O' Nuts, Incorporated, Duffy Mott Company, all rose to
premium prices immediately after their public share
offering. This evaluation of new issues is not easy, how-
ever, and sometimes investor enthusiasm for such can
be misplaced. For instance, there was a mad scramble
                                                                                    CHAPTER 9
                      CHAPTER 8
                                                                        Convertibles and Warrants
                     The Gist of It
                                                                 Ever since speculation in corporate securities became
1. Changes in corporate complexion by virtue of new man-      fashionable, investors and bankers have sought a way
   agement or new products can elevate stocks.                to engage in it and, at the same time, reduce the risks of
2. Short-run and sizable profits are frequently possible in   possible loss—to obtain some defense of their dollars
   cyclical stocks.                                           in case the market sold off drastically. One speculative
3. These must be "bought right" and sold when earnings        vehicle designed with such defensive qualities in view is
   have fully recovered.                                      the "convertible." This is a senior security, usually either
4. Special situations can be very profitable but require      a debenture bond or a preferred stock, which, because
   special knowledge.
                                                              of its prior position on the corporate balance sheet and
5. These techniques are supplements—they do not replace
   purchase, and patient retention, of growth issues.         its dependable fixed income, will have investment status
                                                              and a relatively stable market. To this fixed-income se-
                                                              curity with a definite face value or redemption price is
                                                              added a conversion privilege—the right to convert it into
                                                              a certain number of shares of common stock in the same
                                                              company at a certain price (or prices) and for a definite
                                                              and limited period of time.

                                                                          Dual Personality of Convertibles
                                                                  Now the price at which this convertible security sells
                                                              basically depends on the quality of the security itself—
                                                              where the debenture or preferred would sell, under ex-
                                                              isting money rates and market conditions, if it had no
                                                              conversion privilege. To that basic or "money-rate" value
                                                              of the security must be added whatever the convertible
                                                              privilege may be worth, presently or in the future. Let's
                                                              take an example.
                                                                 Colorado Fuel and Iron Company 4% per cent deben-
                                                              tures due January 31, 1977, sold on October 22, 1958,
                                                              at 100. Each $1,000 bond was convertible at that time
                                                              into 33 1/3 shares of common (until January 31, 1967),
                            80                                                           81
    82         HOW TO GET RICH BUYING STOCKS                                     CONVERTIBLES AND WARRANTS                    83
    equivalent to a per share price of $30.00. But this           quite well-protected convertible preferreds. These issues
    common stock sold, on the day in question, on the             are valued by investors not so much for dazzling capital
    Stock Exchange at only $23.00 a share. The right to           gain as for their defensive protection in uncertain mar-
    convert into common at that time was thus entirely with-      kets and their suitability for "salting away" profits de-
    out value, since 33 1/3 shares times $23.00 equalled $766.    rived elsewhere, on an acceptable-income basis, but still
    But the bond, without any share privilege, was worth,         keeping one foot in the speculative door. Convertibles
    as a fixed-interest investment, only $950. From which         are not so likely to make you rich as to keep you
    you can swiftly conclude that investors were willing     to   that way!
    pay $50.00 for the right, for the ensuing 8 1/3 years,   to
    Convert into 33 1/3 shares at $30.00. Further, when or   if
    the common sold at $40.00, the bond would be worth       at                 Warrants—Financial Butterflies
    least $1,333, and so on.                                          The ingenuity of financial minds has for years sought
       To conclude, the risk of immediate loss in market           techniques for benefiting by price advance, if any, of
    value on Colorado 4 7/8 bought at $1,000 could hardly          common stocks with a (1) maximum gain and (2) a
    exceed $50.00; yet the potential for gain was very great.      minimum capital outlay. The slickest device for such
    If the common stock sold, for example, at $90.00, the          purposes is a tricky security called a stock purchase
    bond would be worth $3,000.                                    warrant. It's tricky and baffling in that it's not a bond or
       From the foregoing example you can perceive the             a stock, and never has any book value; it never pays
    basic qualities and virtues of all convertible securities.     dividends or shares in profit or loss; it is eternally devoid
                                                                   of lien; yet it can, under certain circumstances, create
(   The idea is to buy them at a price close to their
    intrinsic market value as income-bearing securities, and      the widest imaginable swings in market value. It can
    with, as long-lasting and as attractive a conversion privi-   deliver gains running into thousands of per cent; or it
    lege as you can get. It is important, too, to buy "con-       can swiftly become totally worthless. Atlas Corporation
    verts" in a dynamic company, as it would be silly to pur-     warrants advanced from 25 cents apiece in 1942 to
    chase the convertible if you didn't think the stock would     $12.50 in 1946!
    go up.                                                           Essentially, a warrant is merely an agreement on the
       Convertibles, bought right, are indeed one of the safest   part of a corporation to sell a share (or shares) of its
    vehicles for speculation, but they cannot be held for-        common stock to the warrant holder at a certain price
    ever, and should be sold when a satisfactory gain has         and usually for a limited period of time; but sometimes
    been achieved, or converted into stock.                       without time limit. In dabbling in warrants, the thing to
       The selection opportunity among convertible bonds          consider is (1) the possibility of rise in the related com-
    is excellent. There are issues by American Telephone          mon stock, (2) the price you pay for the warrant, and
    and Telegraph Company, Scott Paper Company, Douglas           (3) how much time you have before the warrant expires.
    Aircraft, Shamrock Oil, W. R. Grace & Company, Phil-          Warrants are usually most attractive (and cheapest) in
    lips Petroleum, Radio Corporation, Union Oil Company,         the early stages of bull markets. They are seldom worth
    Sinclair Oil, J. I. Case Company, Pacific Petroleum, and      more than one third of the market price of the related
    dozens of others to choose from; plus dozens more of          stock; and they operate in a mathematical relationship
                                                                              CONVERTIBLES AND WARRANTS                   35
to a common stock somewhat like a moon to a planet.              there will be dozens more as the years go by. If you do
They always seem to sell at more than they're worth.             buy warrants, watch their maturity date like a hawk,
They have sort of a built-in over-spin that gives them           since an expired warrant is absolutely worthless regard-
a market price where no real value exists, and a premium         less of what you paid for it. In general, prefer the long-
price when actual mathematical value can be established.         term and perpetual variety. There's enough risk in these
                                                                 corporate chameleons without having time run out on
   Here are a few sample warrants taken at random from
the market of October 23, 19S8. These will acquaint you
                                                                    Common-stock warrants are the most volatile cor-
With warrants, if you're not already familiar with them,
                                                                 porate security. Bought right and sold right, they can
and illustrate the price spreads customarily prevailing
                                                                 make you a baby fortune. In some instances, warrants
between warrants and the stocks they represent a "call"          can advance three or four times faster than the common
on:                                                              of the same company. They can also plummet like a hail-
              Examples of Common-Stock Warrants                  stone. They do, however, provide a uniquely attractive
                      Price 10/23/58                             and inexpensive form of speculating on the future of a
                       of       of Expiration Provision          company. They're delicious hors d'oeuvres, but poor
Issue                Warrant Common Date          to Buy         entrees, in a speculative repast.
Allegheny Corporation 6      8½      Perpetual 1 share of
                                                @ $3.75
Atlas Corporation        4    7¾     Perpetual 1 share of
                                                common                                  CHAPTER 9
                                                 @ $6.25
 Northspan Uranium     1½     2¼     12/31/66 1 share of
                                                common                                 The Gist of It
                                                 @ $3.00
 Sheraton Corporation ll½ 17½ 9/1/66             1.2 shares of   1. Convertibles give you a chance to have your cake and
                                                 @ $20.83           eat it, too.
                                                 per share       2. The secret in buying convertibles is to get them at
 Keer McGee Oil      13½     55½      6/30/64   1 share of          a price close to the price they would command if they
                                                 common             had no share privilege.
                                                 @ $80
                                                                 3. Sell convertibles when you have achieved the gain you
 Tri-Contmental         27     39     Perpetual 1.27 shares of
                                                                    sought, unless the stock is so good you'd rather convert.
    Corporation                                  common
                                                  @ $17.76       4. Warrants are dazzling but dangerous performers. They
                                                 per share          toil not but they sure can spin!
    Note the overpricing characteristic of warrants. Alle-
  gheny warrants were actually worth 4 % , yet they sold
  at 6; Atlas warrants were worth1½ yet they sold at 4;
  Northspan, giving the privilege by buying stock at $3.00,
  was technically worthless with common at 2¼; and
  Kerr-McGee warrants were miles away.
     There are dozens of other warrants on the market and
 remarkably undervalued equities, with most promising
  futures, dealt in only over-the-counter. It may be pleasing
  to own American Tel. and Tel., General Motors, or
  Radio common with their tens of millions of shares out-
 standing and their broad markets with thousands of
 shares traded daily; but it does not follow that such issues
 will produce the most dynamic capital gains for you. So,
 to bring this matter into perspective, let's examine both
 the listed and the over-the-counter markets.
    There are in the United States (1958) nineteen se-
 curity exchanges altogether, the largest and best known
 being, of course, the New York Stock Exchange. Yet
 the over-the-counter market is larger than all of these
 put together. Nearly all municipal bonds, more than 95
 per cent of all government bonds, the capital stocks of all
 of our 14,000 operating commercial banks, the shares of
 all of our publicly owned independent life insurance com-
 panies and of most fire and casualty companies, some 80
per cent of all our preferred stocks and the capital
 stocks of more than 35,000 corporations—all of these are
traded over the counter, and nowhere else. This is not
 advanced to dim the luster of our major exchanges, or to
dilute the importance of the Dow-Jones averages, or other
renowned market meters deriving their fodder from trans-
actions in listed securities of leading corporations. It is
offered to dispel from your mind the widely held notion
that the unlisted is uniquely the home of doubtful, dan-
gerous, and dubious securities; that bid and asked over-
the-counter markets are wide and undependable; and that
unlisted dealers are to be viewed with some suspicion.
This is all nonsense. There are, of course, some hope-
lessly sunburned securities over the counter; and some
listed ones forever fugitive from earnings or dividends.
There may be a few greedy exchange members as well
as over-the-counter dealers. Bear in mind, however, that
some of the best securities you could possibly own are
traded only over the counter; that under policing of the
90         HOW TO GET RICH BUYING STOCKS                           TWO MARKETS      LISTED AND OVER-THE-COUNTER        91
Securities and Exchange Commission and the National           the price you get will be at, or near, the bid prevailing
Association of Security Dealers, market procedures and        at the time.
broker dealer integrity and solvency are subject to con-
stant surveillance and check; and that the great majority          Requirements for and Advantages of Exchange
of firms who are members of the New York Stock Ex-                                    Listing
change maintain trading departments for execution of             After presenting the main distinctions between the
orders in over-the-counter securities, and statistical de-    listed and unlisted markets it might be well to outline how
partments supplying customers with information about          a company qualifies for listing on an exchange, and what
them.                                                         are the reasons for so doing. All exchanges require a
                                                              formal application for listing, reciting certain vital cor-
      Operational Differences Between Listed and
              Over-the-Counter Markets                        porate facts. We won't burden you with the specific
                                                              requirements of each of the eighteen exchanges in the
   The listed and over-the-counter markets actually com-      United States; we'll just give a capsule summary of the
plement each other more than they compete. Each pro-          major qualifications for listing on the New York Stock
vides a special function—and each functions differently.      Exchange. For this a company must have recorded annual
The market for a security listed on an exchange is an         net earnings after all charges and taxes of $1 million or
auction one. Buyers and sellers in a given issue will meet,   more; have $8 million or more in net tangible assets,
through brokers, at a trading post on the floor of the        more than 400,000 shares of common stock (not closely
exchange, where, throughout the trading hours, shares are     or family held), 1,500 or more stockholders. Further,
sold (usually in 100-share units) to the highest bidder at    it must regularly supply earnings statements and balance
a price where bid prices, and offers to sell, coincide. All   sheets and other financial data—major changes in stock-
transactions are recorded and reported immediately; and       holders, etc.
the total volume traded and price ranges for the day on
                                                                 The reasons that prompt a company to list its stock
any listed issue become a matter of public record.
                                                              would include (1) corporate prestige, (2) obtaining
    In over-the-counter trading, all transactions are ne-     financing at (usually) lower cost, (3) daily or frequent
gotiated. There is no publicity about actual trading, the     actual and recorded transaction in its shares, (4) higher
volume, price variations, and prices actually paid. This      market prices for its securities (usually, but not neces-
lack of record of market prices and transactions more         sarily), (5) superior loan and collateral value of a
than anything else is what disquiets investors about un-      "listed" issue, (6) greater acceptability to large and
listed issues. Usually the only thing to go by is a tabula-   institutional investors, (7) broader and more active
tion of bid and asked prices of over-the-counter issues,      market attracting new stockholders.
published daily in many of the large metropolitan news-          The over-the-counter market is the first place where
papers. And these prices themselves are only indications      the equity of a company is quoted after its ownership
and not the actual figures at which a given stock might       has spread from a few to a few hundred individuals. Thus
at a given moment be bought or sold. The actual price         the over-the-counter market may supply bid and asked
you pay for an unlisted security would be at, or close        prices on more than 35,000 different issues. Some of
to, the offered price; and conversely, if you wish to sell    these, perhaps 5,000 of them, will trade every day; in
92         HOW TO GET RICH BUYING STOCKS                                TWO MARKETS—LISTED AND OVER-THE-COUNTER             93
                                                                     and in democracies they have always outvoted them; and
others, there may be only a few transactions a year. But
                                                                     they always will. This ever-expanding political prepotence
active or thin, in big company issues or in some tired
                                                                     of the multitude is, of course, responsible for the sharp
shares of a little copper company, the over-the-counter
                                                                    trends toward socialism in the twentieth century and the
market functions by providing a place for buyers and
                                                                    increasing areas of government intervention in almost
sellers to meet, and where transactions may be arranged
                                                                    every nation on the globe, including the United States.
and completed. Further, it is not sufficiently understood
that every new issue starts off over the counter (even                 Beginning in the mid thirties, our government became
though it may be "listed" a few months later), and most             active in many hitherto unentered economic areas. It
issues spend their entire lifetime there. All the dazzling          dedicated itself to a' program looking toward full em-
market leaders, shares of nationally known corporations,            ployment, extensive public works, a vastly expanded
selling in large daily volume on an exchange, are over-             public-power program highlighted by TVA, cheap money,
the-counter graduates.                                              and new government controls over, and regulation of,
                                                                    public utilities, banking, security and investment markets;
   This point is stressed because many of the choicest
                                                                    and it embarked on broad programs of economic and
stock bargains in this or any other decade have been
                                                                    social welfare including subsidized housing, old-age
acquired early by combing over unlisted securities and
                                                                   pensions, minimum wage laws, the forty-hour week, etc.;
coming upon undervalued securities, unnoticed or un-
                                                                   and to these have been added an immense defense pro-
known by tens of thousands of people because their eyes
were glued on ticker-tape symbols! Foote Mineral once
said at 50 cents a share, Tennessee Gas Transmission at                These have all proved both permanent and pervasive.
$2.00, IBM (predecessor company) at $5.00, Louisiana               They are integral parts of the economic climate which
Land at 50 cents, R o h m & Haas at $20.00, Seaboard Air           all investors must take into account in making their in-
Line at $ 1 . 0 0 — a l l over-the-counter—before they attained    vestment plans and decisions. Essentially, they all spell
the publicity and prestige which now attach to exchange           "four things: (1) rising government expenditures and
listing. So, don't neglect the over-the-counter market!            deficits, (2) rising national debt, (3) higher taxes, and
                                                                   (4) inflation — continuous, unremitting inflation. The
Your next two Cadillacs may be waiting for you there.
                                                                   price of everything, over a long period of time, has gone
And don't unduly exercise yourself about "thin" markets
                                                                   up and will continue to go up! Everyone is going to need
—they'll get "thicker" and higher as and if earnings and
                                                                  more dollars to live on each year if he is to maintain
corporate stature grow, and more investors hear about a
                                                                  his style and scale of living. If you doubt this, consider
thriving company. Just because a security is unlisted
                                                                  the recession of 1957-58. For the first time in our national
doesn't mean it's listless!
                                                                  history a substantial slackening of business activity, and
                                                                  unemployment beyond 8 per cent of the working force,
 Advancing Role of Government in Economic Spheres                 brought about no significant decline in the general price
                                                                  level, in wages, or in the cost of living. Huge government
   The whole trend of all economic history is one long            expenditure, vast corporate organizations, and broad
advance of the "have-nots" against the "haves." The poor,         unionization of labor have injected great rigidity into our
or persons of meager resources in every country and               price system—rigidity on the down side, that is, but no
clime, have always far outnumbered the rich and opulent,
94         HOW TO GET RICH BUYING STOCKS                           TWO MARKETS      LISTED AND OVER-THE-COUNTER        95

limits on the "up." Motorcar prices have risen steadily        millions seeking good stocks. And the competition of
from the new Ford you could have purchased in 1923 for         investment trust, insurance company, and thrift institu-
$425 to $1,800 for the equivalent model in 1958. Hous-         tions, pensions, endowment, and welfare funds for top-
ing, groceries, milk, real-estate acreage, doctor's bills,     quality equities seems destined to drive many blue chips
hospital costs, college tuitions, wages (steel workers got     to market altitudes dictated importantly by scarcity. The
66 cents an hour in 1936; $2.76 in 1958)—all of these          Dow-Jones Industrial Average will cross 800 long before
and hundreds of other items are in an apparently un-            1970; and the best values for exciting capital gains may
stoppable upward long-range curve. Even under Eisen-           have to be smoked out from among lesser known issues
hower's Republican administration, dedicated to sound          of smaller companies; and, in many instances, over-the-
money, we had the largest peacetime deficit in history in      counter securities. In any event, millions more people will
1958-59.                                                       own common stocks than ever before.

                     Inflation Forever                              Where to Learn About Possible Growth Stocks
   Thus it is that every important investment decision            With such a bewildering array of areas for economic
must take into account the probability of continued in-        expansion, how do you actually learn about the particu-
flation. II inflation really gets out of hand, then the        lar stocks you should be looking into? Examine the
government is certain to move in with traditional brakes       portfolios of mutual funds specializing in growth stocks.
—price/wage, credit, and rent controls, plus higher taxes.     Ask your broker to prepare a list of, say, low-priced elec-
If the inflation is kept orderly, as seems most likely, then   tronic companies and apply to these, individually, the
good common stocks are among the best defenses with            tests outlined earlier in this book. The daily paper may
some accent on those with natural resource assets—pe-          mention a new device that guides or propels a missile,
troleum, natural gas, timber, ores and minerals, includ-       or a new projected cure for some disease, a new dehy-
ing gold. Going into debt is also fashionable in an            drating process, a new infrared application, or a new
inflationary regime, since you borrow "good" dollars and       fabric or plastic with an enormous potential demand.
pay back later on in "cheap" ones.                             Find out which company is doing this pioneering and
   Just keep in mind that inflation is going to be there!      look into it. It may present exactly the investment oppor-
What are some of the other elements bearing upon in-           tunity you seek. Most financial journals list available re-
                vestment in the decade ahead of us?            ports and analyses on dozens of companies, prepared by
                                                               responsible brokerage and investment houses. Send in for
                                                               the ones that interest you. Keep constantly on the alert.
               Enormous Buying in Stocks                       The best way to find a good growth stock is to keep con-
   Finally, what about stock markets? A vast sum of            stantly looking for it!
money representing the accumulation of more than a
quarter of a century of prosperity and inflation is, and            Technical Factors Affecting the Supply of, and
                                                                            Demand for, Common Stocks
will be, in the market. High personal income and levels
of savings plus fear of the dollar will also send more            There is a widely held opinion that the stock market
96          HOW TO GET RICH BUYING STOCKS                           TWO MARKETS      LISTED AND OVER-THE-COUNTER          97
has a built-in upward bias because the long-run demand         and maintain leverage has been important. A number of
for common stocks appears likely to exceed the supply.         eminent corporations (Allied Chemical, for example),
   To test the validity of this opinion let us first examine   which for years prided themselves on their freedom from
the factors on the demand side. Foremost, of course, are       corporate debt, have, in the postwar years, floated large
the rising trends in our population and in per-capita          issues of bonds or debentures, or arranged long-term
national income and savings, automatically building a          bank credits. They did so not only because borrowing was
broader technical base for stock ownership. Further, the       the cheapest way to raise capital, but because debt cre-
acceptability and popularity of common stocks have             ation tended to maximize the percentage of gross sales
increased impressively since the end of World War II.          flowing through to net earnings for stockholders.
This is evidenced by the existence, in 1958, of more than
10 million individual stockholders, $11 ½ billion in                                 Stock Split-Ups
rapidly growing investment trust funds (with a very high
                                                                   Something should be said, too, about the importance
percentage of stock holdings), and steadily rising stock
                                                               of stock splits as an element affecting the supply side of
purchases by insurance companies, endowment, pension,
                                                               the market. There is a theory, which has gained consid-
and welfare funds. In addition, a number of major com-
                                                                erable acceptance in recent years, that the splitting of a
panies, such as Sears Roebuck, J. C. Penney, and So-
                                                               stock, bringing it into a lower and more popular price
cony-Mobil are steady buyers of their own stocks for
                                                               range, merely by expanding the number of available
their employee-benefit and retirement funds, and under
                                                               shares, adds to supply and, as a by-product, attracts a
individual employee stock-purchase agreements. All of
                                                               myriad of new investors.
these factors would seem, barring a major depression, to
point to a steady long-term rise in the demand for com-           This theory, in so far as it affects the supply situation,
mon stocks.                                                    is a dubious one. One of the characteristics of successful
                                                               companies, over the years, has been the practice of de-
     What about the supply? It appears that for a variety      claring stock dividends. This custom redounds to cor-
Of reasons the physical supply of stocks is lagging be-        porate prestige, promotes stockholder contentment, and is
hind demand and will probably continue to do so. First         usually accompanied, or followed by, an increase in cash
of all, the tax rate on corporations makes it more attrac-     dividends. Every one of the twenty-four growth com-
tive for corporations to finance by bonds, or other            panies (outlined in Chapter 3) split its shares one or
indebtedness, than by common stocks. Interest charges          more times in the ten-year period covered. Mere in-
are fully deductible, while net earnings available for         crease in stock supply, however, was by no means a
common stockholders are subject (1958) to a maximum            major consideration in the issuance of all these new
federal tax rate of 52 per cent. This tax structure has        shares. Accounting benefits in transferring a slice of sur-
operated to reduce the volume of new common-stock              plus to capital-stock account were one motive. Broader
issues. In 1956, 29 per cent of all new financing was in       and more active trading markets provided another. Fol-
common stocks; in 1957, 25 per cent; in 1928, 55 per           lowing financial fashion was another motivating factor.
cent; and in 1929, 74 per cent.                                (In the bull market of 1956, 56 companies, whose shares
   Not only has taxation restricted the supply of com-         are listed on the New York Stock Exchange, split their
mon stocks, but the desire of managements to create            shares 2 for 2, or more.)
98         HOW TO GET RICH BUYING STOCKS                          TWO MARKETS       LISTED AND OVER-THE-COUNTER          99

   Stock extras are a bullish phenomenon. They flourish      ratios, and probably lower average stock yields, on repre-
in rising markets and usually occur among highly pros-       sentative issues, during the next decades.
perous companies. While a split-up actually gives the
stockholder nothing he does not already possess (except
a larger number of shares), it does convey to him evi-
dence of (1) corporate prosperity, (2) retention and                                 CHAPTER 10
reinvestment of a sizable portion of net earnings, (3)
implication of larger future cash dividends. Further, mar¬                          The Gist of It
ketwise, two new shares often miraculously become worth
more than one old one. From this phenomenon many             1. Marketability is desirable but should not be overstressed.
investors conclude that a stock about to split is a stock    2. Over-the-counter market is far larger and more com-
about to go up!
                                                             3. All new issues are first traded over-the-counter and
  The year 1958 was a memorable one for stock splits.           many remain there.
The Great Atlantic and Pacific Tea Company split 10          4. Listed favorites are over-the-counter graduates.
(or 1, Upjohn, 25 for 1, and the biggest split in history,   5. Some of the choicest values are found over the counter
a 3 for 1 in American Telephone, gave new enthusiasm            before the general investing public notices or appreciates
to a stock market already at an all-time high. In the case      their worth.
of American Telephone, the split was accompanied by a        6. Don't neglect unlisted issues, or you may pass up a
10 per cent increase in cash dividends, and was designed        fortune.
specifically to increase the number of shareholders by       7. Consider scarcity value of issues and their floating supply.
bringing the stock into a more popular market range          8. Inflation is a perennial factor pushing stocks to higher
(around 75 as against 225). Although A. T. & T. had at       9. Benefit from stock splits.
the time (December 1958) 1,626,000 stockholders, it
sought tens of thousands more who would buy, in years
to come, the securities this giant utility must sell to
finance its vast and continuous expansion program calling
for at least $13 billion in the 1960 decade. Such huge
new security offerings will, obviously, substantially add
to the total supply of common stocks.
   Reviewing the argument, however, we don't see much
in the stock-split theory that points to significant addi-
tions to the stock supply. As a matter of fact, splits
might be said rather to animate the demand side, since
lower-priced issues historically have attracted more buy-
ers. In any event, there does exist an apparent ascend-
ancy of demand indicating new and higher price/earnings
                     CHAPTER 11

The New Economic Climate of the 1960's,
and how it may influence your investment

   With all this talk about stocks that will go up and
make you rich, some consideration should be given to
the economic climate in which, over the 1960-70 decade,
your investing must be done. These are not simple times.
They are complicated by a steady rise in taxation, the
continuing world menace of Muscovite merchants of may-
hem, great political, economical and social upheavals in
many sections of the world, particularly in those areas
emerging from colonialism.
   So more than at any other time in our history is it
necessary to consider world factors on deciding when to
buy or sell, and what issues offer the sturdiest prospects
for juicy price advances.
   Among these factors are the powerful new postwar
economies of Japan, West Germany, France, Italy and
England. The substantially lower labor costs in those
countries (particularly in Japan) have created imports
that have made big dents in American markets—in
cameras, transistor radios, steel, compact motorcars,
chemicals, textiles and plastics. So foreign competition is
an element in many investment decisions. A corollary to
that is the powerful trend of American companies to
locate factories or branches abroad. Companies such as
Ford, International Harvester, Procter and Gamble,
Perkin-Elmer, Woolworth, Coca-Cola, Firestone and
dozens of others derive an increasing amount of earnings
from oversea operation. In each case, if you're consider-
ing a stock investment in one of these, you must weigh
the importance of political factors abroad, possibilities of
 102        HOW TO GET RICH BUYING STOCKS                                ECONOMIC CLIMATE OF THE 1 9 6 0 ' 5
High taxation or even confiscation (as in C u b a ) and the     an electronic system more intricate than anything dreamed
ease or difficulty with which profits can be transferred       of so far.
and foreign currencies converted into American dollars.           If the military gave this roaring industry its big start,
                                                               business was not far behind in applying waves, transis-
         Long Range Domestic Economic Factors                  tors and circuitry to automation. Your garage door may
    On the home front, no less than abroad, there are new      open electronically, calculators and computers, increas-
 factors to consider—a $1.25 per hour minimum wage,            ingly, are doing our accounting, bookkeeping, and calcu-
 17,000,000 million people 65 and older, unemployment          lations of everything from bank deposits to the flow of
 on the rise due to automation, a constantly shortened         oil or gas through pipelines. We have electronic eleva-
 work week producing far more leisure time, jet travel         tors replacing operators by the ten thousands. Half of
that brings the most remote parts of the world within a         1961's typewriter crop will be electric units.
day's journey. Then, of course, both here and all over            The hardware starts with building blocks such as semi-
the world, there is the impact of seething population on       conductors (transistors, diodes and rectifiers); then adds
 a limited land supply. We're still making people, but we've   capacitors and circuits; then progresses to complete sys-
stopped making land.                                           tems for communication, data processing, missile control
    Now all of these things point to new areas of invest-      and guidance. In the area of communication, microwaves
ment activity and new stocks that may come into wide           are doing a million new things, including bouncing back
favor replacing in popularity and growth the more tra-         messages from balloons in space. TV and radio are, of
ditional investment issues.                                    course, commonplace, and soon we'll have pay TV.
    Let's look at some of the industries with a bright         Skiatron, Zenith and Paramount telemeter represent the
future in the 1960's. First, electronics. Here's an indus-     three most likely systems for this. The idea is you'll see
try that's surely a live wire for speculators. Total elec-     a first run Broadway show or movie on your own home
tronic sales expanded from $2.8 billion in 1950 to over        set, and be billed, perhaps a dollar, to look at it. If you
$10 billion for 1960; and there's no end in sight. Sales       don't subscribe, all you'll get is a jumbled snowy picture.
will reach $16 billion by 1965.                                   Now about companies. Raytheon, Texas Instruments,
    Electronics is not only big business, but represents in    Litton, High Voltage Engineering, Transitron, Sprague
truth a whole new way of life. Electronics has taken over      Electric, Motorola, Zenith, R.C.A., General Electric and
a lot of tasks for mankind. It got its big billing from        Westinghouse have all made big names, and there has
rocketry. All of our big bomb-toting missiles—the Atlas,       been an exciting bunch of relative newcomers. Milgo
the Titan, the Polaris, etc.—depend on electronic compo-       Electronics came out at $1 and sold in four years at more
nents and systems for control, instrumentation, guidance,      than $60 a share. Loral Electronics was publicly offered
navigation, activation, reporting and communication.           at $12 in 1959, and in 1961 sold after a 3 for 1 split at an
About 55% of all costs of missiles is in the electronic        equivalent price of $120. Electronics Associates gained
hardware they carry; and it's getting more sophis-              1000% in four years. Del Electronics came out at $4
ticated and complicated with each new technological ad-        in 1960 and sold at $20 within 6 months. Milo Electron-
vance. The rocket that sails around the Moon will have         ics, a major distributor of the products of others, offered
 104          HOW TO GET RICH BUYING STOCKS                                ECONOMIC CLIMATE OF THE 1960'S                105
its c o m m o nat $5 In March 1961. The shares sold at           of automatic pin spotters, BarChris Construction Co.,
 $11 within a month.                                             major builder of bowling alleys, and chains such as
    These are just a few illustrations of the money to be        Sports Arenas, Inc., Lence Lanes, American Bowling
made in the "right" electronic stocks. From an analytical        and others. Photography is fabulously popular and has
standpoint they defied description. Some of these new            made fortunes for Polaroid shareholders. Travel is in-
issues roared to gaudy prices on little more than ro-            creasing and bringing fine profits to hotel chains such
mance, the reputation of a couple of scientists, a patent        as Hilton and Sheraton, motel companies such as Holiday
or a proprietary item. Even though earnings and divi-            Inns, and restaurant proprietors such as Howard John-
dends were months, or even years, away, speculators con-         son. Jets bring new profit horizons to air lines and Grey-
verged on these issues. Electronics became the darling of        hound never "had it so good". Car rental outfits—Avis,
market and the sky seemed to be the limit. Electronics is        Hertz, etc., have a profitable present, and a bright future.
still hot, but here is surely a field where great caution is        Leisure often leads to ownership of a second home, at
necessary. When the fashion fades, some of these shares          a beach, a lake or in a southern clime. So land companies
could rapidly fade. Remember the glamor shares of                are going to get a lot of new customers. These com-
yesteryear. Radio common sold at 114 in 1929 and never           panies include General Development, Arvida Corp.,
hit that price again in 32 years. Technicolor sold at $85        Major Realty, Disc, Inc., Alico, etc. Companies selling
in 1930 and at $1 two years later. So if you get a big           sporting goods for golf, tennis, softball, will thrive; and
gain in issues like this, at least sell half at a plump price,   pleasure boating and marinas will zoom.
so that you don't wind up on a roller coaster.                      Education in the Sixties will lead to exciting investment
   Certain electronic shares will perform brilliantly in         opportunities. There are the new teaching machines in
the surging sixties. Try to buy them at not more than            which one or two companies may be star performers; and
30 times earnings, if possible. Avoid paying too gaudy a         publishing has taken on a new look—particularly among
premium for anticipated growth. In addition to com-              those making textbooks. About 44 million young people,
panies mentioned earlier in this chapter, some of the            from kindergarten through graduate school, are now stu-
newer small business corporations provide interesting            dents. They are eager customers of such publishers as
entry into electronic equities. One such is Electronics          Prentice-Hall, McGraw-Hill, Random House, Allyn and
Capital Corp. which might deserve your investigation             Bacon, Holt, Winston and Rinehart, Crowell-Collier,
since it is the shepherd of, and a major investor in, 16         Grolier. Book companies are deploying an attractive
eager companies in early stages of corporate development.        growth curve—so much so that their shares, which used
                                                                 to sell at around 15 times earnings, now sell, many of
                                                                 them, at 30 times earnings or more.
                  Investing in Leisure Time
   Another attractive area for investment in the surging
                                                                              Energy Automation and Finance
sixties will be found in companies serving the leisure
time needs of our expanding population. Bowling has                In the field of energy new sources are emerging—
already zoomed, bringing great gain to Brunswick Corp.,          gas turbines, nuclear power, fuel cell, thermoelectricity,
American Machinery and Foundry and BowlMor, makers               and solar heat. Companies that pioneer in these tech-
106        H O W TO GET RICH BUYING STOCKS                                  ECONOMIC     CLIMATE     OF    THE    1 9 6 0 ' S 107

nologies may be the new IBM's of the unfolding decade.
   Labor-saving methods will be urgently advanced in a
myriad of businesses. We've talked about the new calcula-                           Whither the Market?
tors, computers, billing machines and data processing ma-            About the markets to come, they'll be big ones (6 mil-
chines for offices, and automated factory assembly lines.         lion shares daily) volatile and active. By 1970 we'll have
The next big area for cost cutting is in building construction.   25 million stockholders in America and the Dow-Jones
In the average house, 70% of the building cost (exclud-           Industrial Average will have crossed 1000. There will,
ing the land) is in labor. So we're seeing a number of            as in the past, be sharp selloffs, lopping off 20% to
companies surging ahead in pre-fab and "shell" homes.             30% of share valuations in a single year. There will be
National Homes and Jim Walter Co. have become dy-                 times when selling a major slice of what you own may
namic and substantial corporations in this field; and there       make sense. When the clamor of the Bulls is loudest,
are a lot of eager newcomers.                                     when the market makes front page headlines, when the
   In banking and finance the 1960's will witness further         barber, the bootblack, the stenographer and the taxi
great growth of consumer finance, and life insurance com-         driver are all talking learnedly about the market—then
panies. Many fortunes have been made by early buying in            look out! The "mullets" always buy at the top.
companies such as Household Finance, Industrial Accept-               Specifically remember that stocks have historically been
ance, and in life companies—Lincoln, Franklin, Connec-             "a sale" when:
ticut General, Republic, Jefferson Standard and others.               (1) There's a spate of new issues grabbed up at
The "money" companies have always been a rewarding                         moon-high prices.
corporate endeavor. They'll continue so in the 1960's.                (2) When the price/earning multiple of the Dow-
   With regard to scientific advances it's foolish to even                 Jones Industrial exceeds 19.
try to catalogue the areas of growth and the scintillating            (3) When bank loans are high, and good bonds yield
investment opportunities that await the perceptive, the                    25% more than blue chip stocks.
shrewd and the lucky. Whole technologies of cryogenics,               (4) When the biggest activity is in the lowest priced
ultramagnetics, automation, oceanography, microwaves,                      stocks.
radiation, and a new array of wonder drugs are all in in-             (5) When the number of stockholders in major compa-
cubation. We'll live longer, better, and with less effort in               nies decline (they've been selling).
this decade.                                                          These are the warning buzzers. When you hear them,
   The foregoing was no attempt to be a latter-day Jules           some lightening of your list, some cashing in on profits,
Verne, or to assume the mantle of a prophet. It was de-            may be well in order. But even at market height there
signed to alert you to the many exciting new or expanded           are some unheralded issues on their way up to greatness.
industries, and new companies that the 1960's will spawn.          Be on the lookout for them at all times!
Some of these companies will offer fortune-building op-
                                                                            Indicated Market Trends In 1961-62
                                                                    The spring of 1961 saw the end of the second post war
                                                                  "quickie" recession. It was even shorter in duration than
                                                                         ECONOMIC CLIMATE OF THE 1 9 6 0 ' S          109

the 1958 recession. Beginning with moderate animation          industries growing at a rate above 6% a year. Many
in January, 1961, however, the market gained renewed           chemicals and some electric utilities would qualify here
momentum, and, in April, the renowned Dow-Jones                along with some of the more glamorous "growth" stocks
Industrial Average surged into new alltime high ground,        mentioned earlier. Investing in this 1961-62 period will
above the previous altitude mark of 685.45, reached            therefore accent selectivity.
January 5, 1960.                                                  We have not seen the last of recessions. These and in-
   What did this mean? It meant that the stock market,         ternational tensions are ever the grist for bear markets.
which has been notably accurate in foretelling business         They will recur! So, sometime in the next two years, you
trends several months in advance, was heralding an up-         may be well advised to sell and cash in on the more
turn in business for 1961 running well into 1962. So it         volatile and vulnerable speculative issues you hold. There
is the investors, in mid-1961, are in a confident mood.         are two old Wall Street adages you should keep in mind:
They rush to buy new issues as though they were going           "The trees don't grow to the sky"; and, in the market
out of style. Five and six million shares on the "Big           "nothing recedes like excess!"
Board" are becoming commonplace; and stock exchange
seats are selling at the highest prices in 25 years—above
   Which brings us to the big question! Is the 1961-62                                CHAPTER 11
period a good time to buy stocks, or are they too high?
We must temper our answer. By historical standards,                                  The Gist of It
some note of caution should be sounded. When the Dow-
Jones Industrials are selling at 20 times earnings, that is    1. There will be many developments in international poli-
                                                                  tics and economics during the 1960's and changes in
a warning, not that earnings have stopped rising but
                                                                  our own financial climate which must be considered as
that* they are being appraised at a very rich ratio. So           background for investment.
prudence and restraint are the order of the day, when          2. Electronics, leisure time, education and scientific ad-
dozens of stocks seem to have little forward motion left          vances point the way to exciting new investment oppor-
in them. Yet confidence is so strong, and prosperity so           tunities.
widespread that no serious market decline seems on the         3. The surging sixties will document the greatest prosperity
immediate horizon. Some of the best market minds are              in history.
predicting a rise to above 750 on the Dow-Jones barometer      4. There will be times in the 1960's when stocks should be
before the end of 1962. They base such views on the sus-          sold instead of bought; there are five warning signals.
tained vigor of the economy, the probable resurgence of
the steel and motorcar industries, the relative scarcity of
stocks, and the long range inflationary trend that has not
been halted—only slowed down.
   Our own ideas (which constitute absolutely no rec-
ommendations) would be that many stocks with strong
earnings, are still in a buying range, particularly in those
                    CHAPTER 12

    The Tactics for Success In Securities
        and Some Final Instructions

    There's one trouble about this book. It goes blithely
along citing stocks that have gained fantastically, out-
lining methods and procedures productive of great finan-
cial advancement; and it fairly exudes assurance and
optimism. It all makes speculative success seem so de-
ceptively easy. Frankly, it really isn't that easy! Even
though there are dozens—even hundreds—of stocks that
gained more than 500 per cent in market value in past
decades, relatively few persons owned or kept them. So
certain personal attributes, in addition to the psycholog-
ical and temperamental qualities listed in Chapter 1, are
necessary. You must, for instance, be an informed in-
vestor. While a fortunate few seem to be able to play
finance "by ear," relying almost entirely on hunch, luck,
or some sort of sixth sense, in buying or selling stocks,
 most of us have to base our success, if any, on the right
 decisions based on correct and current financial informa-
 tion. We may hope for a little luck along the way, but
 that is no substitute for getting the facts.

       Learn All You Can About Likely Companies
   For example, you will recall the eight qualities that
"growth" stocks seem to have in common. Assuming
you have in mind, or there has been suggested to you,
a particular security for purchase, how do you check off
its rating on those eight points? Your broker may be
able to give you some information; financial manuals and
services and published reports of the company will help.
But that's not enough! That's not all the information you
112        H O W TO GET    R I C H BUYING STOCKS                       THE TACTICS FOR SUCCESS IN SECURITIES            113
 should have to go on. You've got to be your own inquir-           The foregoing illustrates some of the appropriate areas
ing reporter. You can perhaps go to the company head-           of inquiry about the stock you may be considering. Learn
quarters, if it's not too far away, and talk with some of       all you can about a company. Such investigation will
its officers. Or you can write to the company for specific      either confirm your decision to buy or establish to your
things you'd like to know about it. Above all, ask ques-        satisfaction the deficiencies of the company in respect to
tions! Ask customers of the company how they like its           the eight essential qualities aforementioned.
products, service, etc. Are the products superior to the
competitor's items, advanced in design, style, packag-
ing, etc? If you know anybody who works there, ask                             Read the Right Publications
him how he likes his job. Is the working climate con-              So much for specific delving. Your general knowledge
genial? What does he think of its management? Does              about corporate, business, and financial affairs must also
the business run smoothly or is there a lot of execu-           be kept, up to date. For that purpose, nothing is better
tive friction? Find somebody in a competing company             than the Wall Street Journal; and you'll find such week-
and ask him a few questions. Some of the very best ap-          lies as Barron's and The Commercial & Financial Chron-
praisals of a company may be made from what its com-            icle of great value. Forbes magazine is another good one
petitors say about it. Find out all you can about company       to consider. You will be surprised at the expansion of
"attitude." Is it flashy and flamboyant, with jazzy offices,    your knowledge from such reading. It will add zest and
a flair for sensational advertising? Are any of its key offi-   interest to your life, build background for your judgment,
cers the night-club and race-track type? Even the most          and help you greatly in making profitable market de-
flourishing enterprises can be wrecked by playboy-type          cisions. One of the greatest assurances of investment fail-
management, however competent it may be 'when it's on           ure is sustained ignorance!
the job. Flashy people are seldom "cost conscious."                There are some other elements bearing upon your
   Another point to check on is the company's real-estate       do-it-yourself investment program that didn't seem to fit
policy. Too often a company, in a relatively early phase        into earlier chapters, so we'll try to cover them here.
of corporate life, will build a new plant, usually laying          As you have doubtless noted, a major accent in this
out quite a sizable chunk of money on it. The new               book is on percentages. It is of no particular conse-
building frequently is the result of managerial vanity and      quence to us if American Tel. and Tel. goes up 4 points
an overweening urge to create corporate prestige with           in a brisk market. Our concern is with percentages; and,
brick and mortar. In all probability the enterprise would be    of course, 4 points is a small percentage of, say, 225. It's
better off if it continued to lease its faculties. This pro-    a pretty mousy gain in relation to your target of 500 per
gram could prevent the tying up of company cash in real         cent! So in selecting the stocks that are to win for you,
estate and keep such funds where they better serve cor-         in general terms, you'll be picking from lower-priced
                                                                stocks, preferably those selling below $20.00 a share.
porate need—in working capital or for research, sales
                                                                The logic behind this is quite apparent. The chances of a
promotion, etc. Further, the bright, shiny, new building
                                                                $20.00 stock doubling—going to $40.00—are probably
may prove far too small, as the company expands, and
                                                                50 per cent greater than for a $40.00 stock to move to
have to be sold, perhaps at some sacrifice, owing to the
                                                                $80.00. And a stock with any sort of promise (in a bull
specialized nature of the structure.
                                                                       THE TACTICS FOR SUCCESS IN SECURITIES              115
 market) can move from $2.00 to $4.00 probably four
                                                                you supplied all the funds. Suppose, however, you had
 times faster than a share selling initially at $20.00. These
                                                                bought the same house at $20,000, putting up only
 observations are all based on the fact that lower priced
  shares (assuming they are in a sound company) attract         $10,000 of your own and borrowing $10,000 on mort-
 a far broader following than do higher priced "blue            gage. Then when you sold at $30,000 you'd have made
 chips." People like to own more shares. They seem              the same $10,000 profit but that would have been 100
 to prefer to buy 100 shares at $20.00 than 10 shares at        per cent (instead of 50 per cent) on your money. The
 $200; and owning 1,000 shares at $2.00 makes a guy             leverage created by borrowing the $10,000 doubled your
 feel like a "big-shot" trader. He calculates hopefully that    profit.
 with each point rise he's $1,000 richer. The dozens of            Similarly in the example below of a corporation with
 stock splits that you see every year are all designed to       bonds and preferred stock ahead of its common shares
 bring shares into a more popular price range to attract        you'll note a rise of only 40 per cent in net income,
 more investors.                                                doubled the amount available for the common stock.
   Another thing to look at besides the price level at          "X" Company              Year A      Year B
entry is the number of shares outstanding. For example,         Net Earnings           $1,000,000   $1,400,000   + 40 per cent
Radio Corporation has 13,843,000 outstanding common             Bond Interest             300,000      300,000
shares; Socony Mobil, 48,353,000; General Motors, 279,-         Preferred Dividend        300,000      300,000
                                                                Available for Common      400,000      800,000   +100 per cent
612,000. Think what dramatic, even incredible, increases
in earning power would have to be achieved for any of              In actual practice many companies are unleveraged.
these stocks to advance 500 per cent. General Motors has        For example, Pullman Incorporated and Alpha Portland
to earn $279 million net to increase per share earnings         Cement have only common stock outstanding. Other
by a single $1.00! So regardless of the quality, market-        companies, however, are highly leveraged: Household
ability, and investment stature of stocks like these, they      Finance Company, Sheraton Corporation, El Paso Nat-
are so mature and outstanding in such volume that a 500         ural Gas Company, for instance. (Most stock warrants
per cent gain from present levels is almost impossible.         provide a fantastic amount of leverage.)
So always take the number of outstanding shares into               Now this leverage is obviously a two-way street. By
account—generally the fewer the better for purposes of          the same token that earnings applying to a common stock
sizable gain. This emphasizes again the necessity of exam-      can advance far more rapidly in a leveraged corporation
ining smaller, less mature, and well-developed, but ex-         than in a non-leveraged one, they decline also at an
panding, companies.                                             accelerated rate. When earnings are going ahead, leverage
   Finally we ought to discuss leverage. It's important and     is a wonderful thing. "Debt working for you is leverage;
has a vital bearing on financial results. Actually leverage     against you it's ruin!"
is merely a device whereby somebody else's money is                Another way of achieving leverage on stock is, of
working for you. The most common example is in a home           course, by a margin account where you put up (depend-
ownership. If you buy a $20,000 house for all cash and          ing on regulation at the time) from 50 per cent to 90
sell it two years later for $30,000, you have made 50           per cent of the needed money, borrowing the rest. This
per cent on your money. There was no leverage—since             margin buying is not, however, recommended; and it's
                                                                        THE TACTICS FOR SUCCESS IN SECURITIES          117
 better to get your leverage by buying shares in companies       ings relationships and assumes an unattainable future up¬
 where the leverage is built into the corporate structure.       curve in earnings—then stand from under. Sell any issue
                                                                 you own in this category. The entire market may not have
        Consider the Size and Permanence of Demand               gone wacky, but this section surely has!
    While talking at such length about growing industries
 and companies within them, we may not have stressed                                     When to Sell
 sufficiently the importance of breadth and continuity of            Which brings us to some final instructions of major
 demand. We have seen crazes such as hula hoops, yo-yos,         importance about when to sell. Quite possibly you may
 and Davy Crockett coonskin caps sweep the country,              acquire a fine growth stock, possessing most, if not all,
 create fantastic demands (and fabulous profits) for their       of the essential qualities stressed earlier. If you had
 makers—and then swiftly vanish. Television manufac-             bought. Rohm and Haas at $50.00, Amerada at $5.00,
turers after World War II perceived a voracious and              American Cyanamid at $5.00, Superior Oil of California
apparently limitless demand; yet by 1957 they had so             at $200, Upjohn at $300 (before the split in 1958), then
blanketed their market that in many cities there were            you might well decide to keep your stock forever—make
more TV sets than either telephones or bathrooms—and             it the "anchor" of your list. Many people own such a
television shares languished. So apply as much logic and          stock—one that has performed so amazingly well for
judgment as you can to the permanence and the magni-              them that they become wedded to it. But such tenacity,
tude of product demand in the case of each company                logically arrived at and sentimentally sustained in one or
you look at. Our rising population (200 million by                two instances, should not deter you from selling other
 1967), the increasing percentage of oldsters in it, our          holdings when the time is ripe or when your 500 per cent
constantly greater leisure and expanding income—all               capital-gain mark has been crossed.
these create durable long-term demands in those "growth"
                                                                      On a number of occasions you will be faced with the
industries cited in Chapter 3. Plaid caps, plus-four knick-
                                                                  decision as to whether or not to sell. One factor that
ers, the bustle, and the coal stove may go out of style,
                                                                  prevents a lot of people from selling their stocks (even
but Carter's Little Liver pills, corn flakes, petroleum, and
                                                                  when logic indicates they should) is the capital-gains tax
aluminum don't!
                                                                  to be paid. Include that factor in your reasoning, of
   Remember too, that there are fads and fashions in              course, but in the main you should sell a stock when (1)
finance. These, on occasion, carry shares in particular           it appears to have maximized the growth or gain potential
industries to unreasonable, if not ridiculous, heights. Con-       (television shares had reached such a point in 1955),
sider the mania for public utility holding companies and           (2) another issue, preferably in the same price range,
bank stocks in 1929; the excessive enthusiasm for air              offers a far better long-term prospect, (3) you need, or
transport shares in 1946; for rails between 1946 and              want to use, the profit money to defray heavy medical
1950; television shares in the early fifties; and uranium          or surgical expense or, on the brighter side, want to put
equities in the 1954—56 period. Wherever enthusiasm for            a grandson through college, take a world cruise, or buy
a particular group carries shares to an altitude that dis-         a cruiser, (4) the company in question, through poor
regards statistical realities, ignores traditional price/earn-     management, obsolescence of product, impact of com-
118        HOW TO GET RICH BUYING STOCKS                              THE TACTICS FOR SUCCESS IN SECURITIES           119

petition, or other causes, has stopped "going places" or       partment of Interior or IBM? TVA or American Elec-
started to deteriorate.                                        tric Power Company?
    Contrariwise, you don't sell a stock merely because            America became great by a system that nurtured and
it has gone up a lot and shows a handsome profit, or be-       rewarded initiative. Common people, common stock, and
cause it's gone down below your cost and you've gotten         common sense make for a great commonwealth!
jittery about it. You've got to expect ups and downs, and          Finally, assuming your success in securities, do some
take them in stride. Equally, don't sell because you think     good with your money and live a little. Don't turn miserly
you can make more money trading in and out of the               and make money a god. You didn't bring any of it into
market, because you can't, and won't! It is quite as im-        this world and you won't take any of it out. Why pile it
possible to pick the top of a market swing as it is to pick     all up just so Uncle Sam can someday collect a whacking
the bottom, and you're mad if you think you can do               (and confiscatory) inheritance tax? Make some trust
either. There is almost no time when it would be smart          funds for your family, do something nice for a less for-
to "sell everything." Properly selected companies will          tunate friend, arrange bequests to your church, university,
keep on growing through thick and thin. America has been        and deserving charities, but don't get to be cheap and
in a long-range bull market for more than ninety years,         penny pinching as you grow older. Money in some abun-
excusing a few panics, depressions, and recessions. For         dance should bring you and your family comfort and joy
two-thirds of the time the market has been going up!            —not make an old sourpuss out of you. Good luck and
It's a poor country for pessimists; and there are at            happy yachting!
all times some wonderful unsung and undervalued equi-
ties somewhere in the market, just waiting to be recog-
nized and acquired by the right person—possibly you!
The trick is to ferret out "blue chips" long before they                              CHAPTER 12
become   such!
   Finally, all the opportunities for the making and en-                              The Gist of It
joyment of money to which we have referred are pos-
sible because of this God-given country of ours, its vast       1. Keep financially informed, and ask questions!
resources, its democratic government, its free-enterprise       2. Percentage of gain is what counts—so buy in the price
system of economics, and the character, intellect, ability,        ranges where unusual percentage of gain is mathemati-
initiative, idealism, and tenacity of its people. Let's keep       cally more probable.
it that way by our voice at the ballot box. Keep the            3. Check the number of outstanding shares. Too large
crackpots and socialists out of government; work for a             capitalization is a market "drag."
balanced budget and a sound dollar; for just and ade-           4. Look for leverage—but don't get it by buying on margin!
quate taxes (not the punitive "soak the rich" variety);         5. Consider the breadth and permanence of product de-
and let's keep government out of business wherever pos-            mand.
sible, never permitting it to enter an area already well        6. When to sell—and the four reasons for doing so.
served by taxpaying enterprises. Which is better run,
the Post Office Department or General Motors? The De-
           Sixty Golden Companies

                 In the Surging Sixties

  Fansteel Metallurgical Corporation
  McLouth Steel Company

 Opemiska Copper Mines Limited
 Molybdenum Corporation of America
 Mt. Isa Mines (Australia)
 Cerro Corp.
 National Lead Company
 Falconbridge Nickel Mines Limited

  Smith Kline & French Laboratories
  Eli Lilly & Company
  Schering Corporation
  G. D. Searle Company
  Carter Products

  Continental Oil Company
  Shamrock Oil & Gas Company
  Texas Gulf Producing
  Amerada Petroleum Corporation
  General American Oil Company
  Home Oil, Ltd.
ELECTRONICS                                      American Potash & Chemical Corporation
  Del Electronics                                Monsanto Chemical Company
  Electronic Associates                          Stauffer Chemical Company
  Texas Instruments, Incorporated                Sun Chemical
  The Perkin Elmer Corporation
  The Foxboro Company                          MERCHANDISING
  Electronics Capital Corp.                     Salada-Shirriff-Horsey
  Dynatronics                                   Virginia Dare Stores Incorporated
                                                Automatic Retailers of America
  Aluminium, Limited                           TRANSPORTATION
  United States Foil Company                     Delta Air Lines, Incorporated
                                                 Hertz Corporation
  United States Life Insurance Company         GENERAL
  Republic National Life Insurance Company      Arvida
  Springfield Insurance Company                 American Marietta Corporation
  Industrial Acceptance Corporation, Limited    Gulton Industries
  Investors Syndicate, Limited                  Kaiser Industries Corporation
  Seattle—First National Bank                   Sheraton Corporation.
  Great Western Financial Corporation.          Disc, Inc.
  Reinvestment Insurance
                                                  The above companies have been selected as appearing
PUBLISHING                                     to have unusual possibilities in the decade that lies ahead.
  McGraw-Hill, Inc.                            Merely, however, because a company appears on this
  Prentice-Hall                                list under no circumstances constitutes a recommenda-
  Grolier, Inc.                                tion of its common stock, now or ever; and no informa-
                                               tion is here given on the basis of which you could pos-
NATURAL GAS                                    sibly decide upon the suitability or unsuitability of any
  Trans-Canada Pipe Lines Limited              shares for purchase. You must get, from reliable sources
  Western Natural Gas Company                  (from your own broker, from corporate reports, pros-
  Dome Petroleum, Limited                      pectus, or financial or analytical services), the current
  Canadian Husky Oil, Limited                  and pertinent facts about these or any other company
  Hugoton Corp.                                that interests you, and make your decisions based on
                                               such facts.
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City                                            Zone        State
                          — American Banker

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