Superperformance Stocks

An Investment Strategy for the Individual Investor Based on the 4-Year Political Cycle

by Richard S. Love

Prentice-Hall, Inc., Englewood Cliffs, Mew Jersey

Special thanks go out to the guy who makes this possible

I can´t say what a lucky guy I am to met you To the Individual Investor, Acknowledgments e Ar s Investment y Securit e Whos , Government s Hi y b d Manipulate Whipsawed by Wall Street Professionals, My sincere thanks to Oscar Collier for his valuable and Dominated by Institutions. l Darrel o t d an , assistance d an t encouragemen , advice Husted for his important editorial contributions.

The Securities Research Company, 208 Newbury t permi o t h enoug d kin s wa , 02116 , Mass. , Boston , Street me to reproduce their charts for use in this book. I . them o t e gratitud f o t deb a e acknowledg

Strategy Investment An Stocks: Superperformance Individual Investor Individual the for Cycle Political 4-Year the on Based e Lov . S d Richar y b Copyright © 1977 by Richard S. Love e b y ma k boo s thi f o t par o N . reserved s right l Al t excep , means y an y b r o m for y an n i d reproduce , review a n i s quotation f brie f o n inclusio e th r fo without permission in writing from the publisher. a Americ f o s State d Unite e th n i d Printe Prentice-Hall International, Inc., London Prentice-Hall of Australia, Pty. Ltd., Sydney o Toront , Ltd. , Canada f o l Prentice-Hal i Delh w Ne , Ltd. e Privat a Indi f o l Prentice-Hal Prentice-Hall of Japan, Inc., Tokyo e Singapor , Ltd. . Pte a Asi t Southeas f o l Prentice-Hal d Zealan w Ne , Wellington , Limited s Book l Whitehal 10 98765432

Library of Congress Cataloging in Publication Data Love, Richard S Superperformance Stocks.

, Speculation . 3 . Investments . 2 . Stocks . 1 I. Title. HG6041.L67 1977 332.6'45 76-57244 5 0-13-876151- N ISB The information in this book has been obtained from sources believed to be reliable. Discussion of individual Contents . only s purpose e illustrativ r fo s i s companie d an s stock Nothing in this book is to be taken as advice to buy or sell specific securities. Such advice must always take into h whic , outlook t curren d an e pric n i s change t accoun are beyond the function of any book. Parti The Search for a Successful Investment Strategy Chapter 1 Buy to Keep or Buy to Sell? 3 The Concept of Growth 4 5 h Approac l Cyclica e Th 7 e Climat l Politica e th e Evaluat Is Institutional Investment Strategy Changing? 9 Stock-Price Cycles 10 Reading the Long-Term Charts 11 5 1 l Painfu e B n Ca g Wron g Bein 6 1 h Approac y Buy-Sell-Bu e th f o s Disadvantage e Th

Part II ? Stocks y Bu u Yo d Shoul n Whe Chapter 2 Business Cycles 21 Chapter 3 Washington Policies 25 y Monetar d an l Fisca h Throug l Contro c Economi Policies 26 Follow the Political Cycle 27 8 2 s Policie y Inflationar 0 3 y Realit l Politica . vs g Plannin c Economi 2 3 s Price k Stoc d an y Polic y Monetar l Federa Do Not Be Misled by Short-Term Monetary Trends 33 5 3 s Cycle l Politica e Th 4 r Chapte 9 3 2 1927-3 , Bust d an m Boo t Bigges e Th 8 1932-3 , Recession d an y Recover t Roosevel e Th 3 8 y 40 Volatilit e Pric r fo k Loo s Chapter r Postwa e Immediat d an I I r Wa d Worl 44 Stock Prices Reflect the Law of Supply and Cycle 1: 1949-53 44 Demand 84 7 1953-5 : 2 e Cycl 45 A Tale About Volatility and Timing 87 0 1957-6 : CycleS 46 Price Distortions by Stock Exchange Specialists 89 2 1960-6 : 4 e Cycl 48 Look for Rebounds 91 6 1962-6 : 5 e Cycl 49 Which Stocks Rebound? 92 0 1966-7 : 6 e Cycl 4 9 g 51 Followin d Tren d an g Sellin l Emotiona 4 1970-7 : 7 e Cycl 54 Leverage 96 CycleS: 1974- 55 The Dangers in Leverage 99 i Cycsle e Stock-Pric e th f o y Summar 0 10 56 s Stock d Low-Price n i e Leverag 1 10 s Warrant n i e Leverag k Ris w Lo r fo k Loo 5 r Chapte 59 Chapter 9 Look for New Earning Power 105 Buy During the Selling Climax 59 d Tren y Primar s Market' e th h Wit e Trad 5 10 61 s Price k Stoc d an e Chang l Natura f o s Discoverie m Fro g Resultin e Chang Resources 107 7 10 s Policie t Governmen n i e Chang Part III Technological Change 109 Which Stocks Should You Buy? Growth-Stage Companies 110 2 11 s Companie e Matur 7 6 t Firs y Safet 6 r Chapte 4 11 s Stock h Growt g Selectin n Whe n Cautio e Us 7 6 e Declin o Als t Bigges e Th Good Management Is Vital 115 Price Trends of Income Stocks 68 Turnaround Situations 115 Most Stocks Are Price-Cyclical 71 A Comparison of Two Growth Stocks 116 Buy for Large Capital Gains 72 Anticipate Growth 119 A Superb Company Does Not Necessarily Have a Earnings Explosions 122 Superb Stock 4 12 7 s 2 Earning d Reporte f o l Skeptica e B g Accountin n o d Depen s Earning d Reporte 5 7 d Recor e Th : Stocks e Superperformanc 7 r Chapte Procedures 124 Features of Superperformance Pric5 e 12 Action d 77 Anticipate y Usuall e Ar s Earning r Highe Superperformance and Company Earnings e Pric e 77 Superperformanc t Affec s Trend g Earnin 9 7 e Siz y Compan d an e Superperformanc Action 125 The Role Future Earnings Play in Stock Prices 126 Superperformance and Subsequent Stock-Price Action 7 12 80 s Earning d Reporte e Evaluat 1 8 s Stock e Superperformanc f o s Characteristic Do Call Options Depress Stock Prices? 185 Chapter 10 Look for Expandable Price/Earnings 185 Ratios 129 e Cycl l Politica e th r Remembe Declines in Individual Stocks vs. Declines in the 1 13 s Price k Stoc d an y Psycholog Stock Market 187 2 13 s Value k Stoc g Establishin s Signal g Warnin e th r fo h Watc 188 4 13 s Value g Establishin n i s Problem Market Price vs. Inherent Value 134 Chapter 13 Selling Short 191 8 13 s Dividend . vs e Pric t Marke e Sal t Shor a g Timin 192 9 13 s Ratio s Price/Earning g Estimatin t Shor l Sel o t e Tim l Idea e Th 193 1 14 s Ratio s Price/Earning f o e Influenc e Th e Estat l Rea n i t Bus d an m Boo f o s Pattern 194 7 14 n Situatio l Idea e Th Profitable Short-Sale Opportunities Have Been Numerous 196 9 14 p Sponsorshi d Goo r fo k Loo 1 1 r Chapte y Systematicall s Sale t Shor t Selec 197 An Example of Sponsorship 151 s Professional y b g Sellin t Shor 200 2 15 s Investor l Institutiona y b p Sponsorshi s Sale t Shor g Coverin 203 Trend Following 161 Spotting Trends 162 The Sequence of Trend Following 163 4 16 s Price k Stoc d an , Publicity , News PartV Buy Stocks You Understand 167 The Strategy for Success

Chapter 14 Sources of Information and Ideas 207 y Regularl w Revie o t s Publication 207 Part IV s Cycle e th e Recogniz o t n Lear 211 When Should You Sell? Look for Potential Price Movement 214 s Succes r fo l Crucia s I t Judgmen l Individua 214 1 17 m Rhyth g Timin e Th 2 1 r Chapte 217 3 17 s Decline t Marke k Stoc d an y Econom l Nationa e Th Chapter 15 Points to Remember Presidential Elections and the Stock Market 174 When to Buy Stocks 218 219 Watch Out for Surprises 176 y Bu o t s Stock t Wha To Hold or to Sell? 178 s Stock l Sel o t n Whe 220 9 17 s Switche y Polic l Federa o t t Aler e B A Possible Exception 180 Appendix A: Superperformance Stocks, 1962-74 223 The Pricing Rhythm 182 A Big Problem for Investors: The Stock Exchange Appendix B: Superperformance Stocks, Specialists 183 October 1974-October 1976 237 How Specialists Operate 184 27. Athlone 153 Charts 28. U.S. Steel 158 29. Burroughs 159 30. Xerox 160 31. Winnebago Industries 172 32. Outboard Marine 177 33. Avon Products 181 2 1 s Price k Stoc d an s Election l Presidentia . 1 34. MGIC Investment 195 3 1 r Moto d For . 2 35. Grolier 198 3. Metromedia 14 36. Rite Aid 199 4. Federal Budget Deficits and Surpluses 29 s Airline n Easter . 37 201 5. Durations of Stock Price Cycles 37 38. Thiokol 208 6. United Financial Corporation of California 63 9 6 Jonew Do s . Utilit7 y Average 8. American Telephone and Telegraph 70 9. Skyline 78 10. General Motors 85 11. Jack Eckerd Corp. 86 Tables 12. Natomas 95 13. Trans World Airlines 98 2 10 s Inn y Holida . 14 15. Gulf & Western Industries 103 8 10 s Industrie e shor f Of o Vetc . 16 7 3 s Cycle e Pric k Stoc e Th . 1 e Tabl 17. Bausch& Lomb 111 18. The S-Curve in the Dow Jones Industriar Bei h l Wit d Compare s Election l Presidentia . 2 e Tabl Average 6 5 11 3s High t Marke l Bul d an s Low t Marke 19. Chrysler 117 20. Polaroid 120 Table 3. The Disparity Between Book Value and 21. Kresge 121 Market Price 135 22. Syntex 123 6 13 e Pric t Marke n Tha r Lowe e Valu k Boo . 4 e Tabl 23. McDonald's 142 24. International Flavors and Fragrances 143 Table 5. Book Value Higher Than Market Price 137 25. International Business Machines 145 26. Du Pont E. I. de Nemours 7 15 s 14Institution 6y b x Xero f o n Accumulatio . 6 e Tabl Part I The Search fora Successful Investment Strategy Chapter 1 Buy to Keep or Buy to Sell?

a y b d interviewe s wa r advise t investmen n well-know A national magazine a few years ago and asked to sum up the investment philosophy he would recommend for the person who still has twenty or thirty years in which to buy stocks. He advised buying to keep rather than buying to sell. : magazine r anothe n i d state t columnis l financia A "The conventional wisdom of stocks being bought and put away for the long-term has been so discredited that " here. t i n o l dwel o t d nee o n s i e ther Here are two financial advisers with two opposing e wer s statement e th e Sinc ? right s i e on h Whic . opinions made prior to the devastating 1973-1974 bear market when almost all stock prices declined severely—their f o d perio a g durin d 1929—an e sinc s decline t steepes increasing pessimism concerning the national economy, the investment adviser who said that long-term . right e b o t s appear d discredite n bee s ha t investmen During that year stocks declined in value about $500 , Xerox r o , IBM t bough o wh r investo n a , However . billion h growt r othe o s r o n doze a f o y an r o , Kodak n Eastma r o companies in the 1950s or early 1960s and has held the . well y ver e don y certainl s ha s share d woul , First . problems o tw t leas t a e ar e ther t Bu an individual investor have done as well buying and holding even the most consistently strong stocks as by n whe g sellin d an d depresse e wer s price n whe g buyin n o e evidenc e th t tha e believ I ? high d appeare s price y clearl k boo s thi n i e thos s a h suc s chart m long-ter y timel y b d obtaine y usuall e ar s result r bette t tha s indicate selling, and then repurchasing the stock or a more suitable one after a bear market has run its course. s turn k stoc a n whe g sellin r fo n reaso t bes e th , Second

3 d an , back e com r neve s stock y man t tha y simpl s i k wea stock's price back in 1964 completely discounted an others take many years to return to earlier price levels. entire decade of growth for the company. Investors are not willing to pay as much now for a company and its prospects as they were ten years ago. So although the h Growt f o t Concep e Th nation may grow and expand, and an individual company may grow and expand, this does not necessarily mean f o e purchas e th f of d triggere s ha t tha d wor a s i Growth that the company's stock must rise in price. s American f o s million y b k stoc f o h wort ' dollars f o s billion In recent years there have been hundreds of for many years. As far back as the 1920s thg e belief increasin wa d s an s sale g expandin g reportin s companie widespread that the way to invest wase toth s buy thcase s e stock numerou n I . prices k stoc g declinin t bu , earnings s 1930 e th g Durin . it d hol o t d an y compan g growin a f o s i e pric k stoc g declinin t bu s earning g risin f o n combinatio some investors presumably had second thoughtsd an , . Bulonger r o t the e decad a d laste s ha t tha d tren m long-ter a mania for growth reached another peak in the 1960s; indicates that investors are not as willing to pay as much r fo , 1961 n i s stock t mos f o s level s price/earning e th for earnings as they once were. With inflation pushing up example, were even higher than in 1929. the yields available from bonds and certificates of deposit, But although rapid growth is a highlyy desirablmone r e thei g placin h wit d satisfie e ar s investor y man s stock' a f o p relationshi e th , company a n i d fin o t e featur there rather than in lower-yielding and riskier stocks. price to the company's rate of growth must be realistic. The concept of growth has been shaken even more o t s wa t tha h growt r fo s price h hig d pai e hav s Investor n America e th f o e natur l cyclica y increasingl e th y b n ofte h whic d an , future e th n i s year y man , many r occu economy, the result of the higher rate of inflation in recent y eventuall s stock h growt , Moreover . all t a d happene r neve s numerou e th y b d cause n bee n tur n i s ha h whic , years reach maturity and the rate of growth slows down. big-spending programs favored by Washington politicians. h wit s stock h growt e confus s investor y man o To d squeeze s fund e th f i d an , money g bi e requir s program g Bi growth companies. A company may have rapidln y growinWashingto e g th , insufficient e ar s taxpayer e th f o t ou sales and earnings over a period of ten years or more, but if managers in effect create or borrow whatever additional the stock was extremely overpriced at the beginning of money is required to pay the bills of the government. that ten-year period because investors were looking So what does this mean for the individual investor? e ris t migh k stoc e th f o e pric e th , growth e futur o t d forwar d upward-and-onwar y stead f o t concep e th t tha s mean t I very little allt a .f , i Communication s Satellite Corporationr thei t , bu , grow t migh s Companie . shaky s i " "growth or Comsat, is such an example. When the company was stocks often go through periods of severe price distortion, organized, in 1964, its stock was sold to the public for sometimes being greatly undervalued, then overvalued m enthusias c publi t grea s wa e Ther . share a s dollar y twent two or three years later. about the "growth" expected for this stock, and its price d happene s Thi . share a s dollar y sevent r ove o t e ros y quickl . earnings y an d reporte y compan e th e befor s year l severa The Cyclical Approach Although profits were reported in 1968 and have been d fluctuate s ha e pric s stock' e th , then e sinc g risin y steadil Instead of just looking for "growth," there is a better, widely between eighty-five and twenty-three dollars a more rewarding approach to achieving stock market e th , words r othe n I . 1975 d an 4 197 s a y recentl s a e shar profits, which I discovered by studying the patterns

4 § . charts r twelve-yea n o d plotte s price k stoc y b e mad y ever r fo y mone s people' r othe d spen o t s love o wh These charts reveal that the vast majority oe f stocFrisbe k o pricet d ai s n foreig m fro g rangin e caus e imaginabl move in four-year cycles of strength ann d weaknessreaso y primar , wite th hs i g spendin g bi s Washington' . research r afte occurring s weaknes d an o t r prio g occurrin h strengt . us f o l al s afflict t tax—inflation—tha n hidde e larg e th r fo k stoc n i s weaknes r o h strengt e Th . elections l presidentia Until the Federal Government gets its spending under prices reflects the mass optimism or mass pessimism of control, if it ever does, the problem of inflation and r fo s earning r lowe r o r highe e anticipat y the s a s investor economic instability, with its booms and recessions, companies. r Fo . us h wit e b l wil , failures s busines d an s price g spiralin I nvestors are not the only people who are alternately the investor this can spell opportunity or disaster, optimistic and pessimistic. Our economy is cyclical in . insight s individual' h eac n o g dependin d an m optimis f o s wave n i t ac , too , buyers e becaus t par pessimism. When people are pessimistic concerning their s house s a h suc s purchase g bi g makin y dela y the , future e Climat l Politica e th e Evaluat and automobiles; but when they all become optimistic and do their buying at the same time, shortages are Many thousands of pages have been written about e th f o e Becaus . raised e ar s wage d an s price d an d create o t s approache l technica d an s analysi l fundamenta - businessmen , prices g risin t bea o t d an , shortages common stock investment. Comparatively little attention retailers, wholesalers, manufacturers—place larger orders has been given to the importance of political influences, than they really need, so their inventories grow. But the particularly as they affect the timing of purchases. But it new higher prices cause hesitation on thes part of thdecision t e importan e th f o t mos t tha n Washingto n i s i buyers. So buying—and business-slow down and mass are made that will cause you to lose or make money in pessimism gradually replaces optimism. e decid l wil s policymaker n Washingto . market k stoc e th d determine e b n ca s price k stoc f o y histor e th s a t Jus ; surplus e possibl a r o t defici t budge a e b l wil e ther f i very quickly by simply glancing at the y picturan e b e l recorwil e d ther f i e decid l wil s policymaker n Washingto r fo n reaso e th , charts k stoc m long-ter n o d portraye s policymaker n Washingto d an ; taxes l federa n i s change volatile stock action at a certain time can be determined will decide if there is to be a monetary contraction or by reviewing the financial magazines and newspapers of expansion. It would be a big mistake, when deciding on , record l historica e th o t d relate s Thu . period e th g bein s policie e ignor o t , sales r o s purchase k stoc long-term charts become a picture of economic history,. government l federa e th y b d formulate l internationa d an n inflatio , recessions d an s boom g recordin Many made-in-Washington decisions are influenced crises. The charts are a reflection of massy behavioEver . r office l politica r fo g runnin f o s necessitie e th y b r o c pani n i t reac s investor f o s million s a , patterns four years there is a presidential election, and the White enthusiasm to the news of the day. House incumbent knows that he or his political party's Will the cyclical four-year stock-price pattern nominee will stand a better chance of winning if the e th o t d relate y closel s i t i e becaus , Yes ? continue . election e th f o e tim e th t a s prosperou s i n natio f o m ter e th s a g lon s a d an , office f o m ter l presidentia Politicians consider the "pocketbook" issue to be the office remains four years the same pattern is likely to . all f o t importan t mos persist. n pla n ca e h t tha s i r investo e th o t e significanc e Th n politicia e Spender-th g Bi e th f o e Ag e th n i e liv e W on the country being economically strong during an

6 7 election year, and since rising stock prices are associated Congress to bring the Federal Reserve Board's power with a strengthening economy, he can expece tTh risin . g stock committees l congressiona f o l contro e th r unde prices during the two-year period prior to the election. result would probabl stila e ly b greate r increasn ei s thi r longe o n s i e ther n electio e th r afte t Bu monetary inflation. concern, and another problem begins to receive increasedc political-economi e thes f o e significanc e Th attention: inflation. The booming economy of the decisions and numerous others emanating from n inflatio e th s aggravate r yea n electio l presidentia Washington is that they have a very pervasive influence r prio t jus s sometime d election—an e th r afte o s , problem e th n o s a l wel s a s investor f o y psycholog e th n o to election day—steps are taken to attempt to slow down . money f o t cos d an y availabilit the inflation rate. These restrictive moves by the Federal Before making purchases, then sure ,b asses eo t e sth Reserve Board may include increases in the rediscoune th w t Revie . climate c economi l politica g prevailin rate, increases in the reserve requirements of member President's annual budget message to Congress to . requirements n margi n i s increase d an , banks determine whether he expects to be able to balance the Such steps are usually effective in graduallt y slowinggovernmen d increase s expect , instead , or t budge e th o t s react t marke k stoc e Th . economy s nation' e th s administration' e Th . deficit e larg r anothe d an g spendin e slid a , decline o t s begin d an y quickl e mor s policie w ne l nationa e th t no r o r whethe y largel e determin s policie that might last as long as two years. . slowed r o d stimulate e b l wil y econom e declin t marke k stoc e th f o d en e th r fo l signa e Th Monetary indicators turn up before there is a comes when Washington begins to adopt policiee whil t s to fighbough e tb d shoul k stoc d an , upswing s busines w ne e includ s step e Thes . developing s i t tha n recessio e th d regarde y highl e On . down g goin l stil s i s busines expansive measures by the Federal Reserve Board, and investment advisory service has stated that every one of x ta d an g spendin t governmen d increase f o s policie l fisca their major buy signals since 1945 was given before the cuts. These new economic stimuli will not stoe th p f tho ed sliden e eth d Towar . cycle s busines e th n i h troug e th s i m pessimis p dee e sinc , immediately s price k stoc n i f i s stock l sel o t d prepare e b d shoul u yo d perio m boo prevailing mood at such times. But after a delay of weakness develops in monetary indicators, which occurs several weeks or months, the market will. have a sellinbusiness n i gd an t marke k stoc e th n i s peak e th o t r prio climax and reverse its direction, though the nation's economy is likely to continue weakening for several more months. Is Institutional Investment Strategy Changing? s price k stoc f o n directio e th n i g upswin e Th w ne a f o g beginnin e th s i x clima g sellin e th g followin e averag l industria s Jone w Do e th , 1966 , 9 y Februar n O r o o tw t abou r fo h bullis e continu l wil h whic , cycle e pric r Octobe n i , later s year e nin t Almos . 1001.11 d reache two and a half years, through the next presidentias a w lo s la s wa e averag l industria s Jone w Do e th , 1974 election. 573, indicating that investors who had bought and held That, in general, is what investors should expect stocks were not faring well. Of the thirty large companies e th n o t effec s it d an e cycl l politica e th f o e becaus t twenty-eigh , industrials s Jone w Do e th e compris t tha y monetar l Federa . prices k stoc d an y econom s nation' were selling at lower prices in October 1974 than they policies, moreover, are likely to become more political had been in February 1966. rather than less, since there are persistent efforts in the Some of the largest institutional investors have

8 9 k growth-stoc n one-decisio e th m fro y awa e mov o t d starte the Dow Jones industrial average was in a general investment strategy, the buy-and-hold approach to up-trend, interrupted about every four years by sharp investing. The 1973-74 bear market evidently brought declines. After 1965 the general trend has been sideways, about this change in the thinking of some portfolio but still interrupted by bear markets. The patterns of k ban a d interviewe Magazine Forbes 4 197 n I . managers s chart n o y onl t no d trace e b n ca s weaknes d an h strengt h wort n billio 6 $1 d supervise o wh t vice-presiden r senio of market averages but also on the charts of many stocks e "W : saying s a m hi d quote Forbes . money n pensio f o such as Ford Motor, shown in Chart 2, and Metromedia, didn't feel that we were smart enough to buy and sell shown in Chart 3. f o s period h throug g goin e wer y the n whe s stock e thes The chart of the Dow Jones industrials shows that over-valuation and then buy them back when they went bear markets occurred in 1949, 1953, 1957, 1960, 1962, down." But now, he said, "When the degree of valuation 1966,1969-70, and 1973-74, with periods of greater r ou e shar o t g willin e mor e b l wil e w , excessive s become f o t char r twelve-yea e Th . years e thos n betwee h strengt t a t tha s appear t i o S " enthusiasts. w ne h wit s holding d an , 1969-70 , 1966 f o s decline e pric e th s show d For least some large institutional investors are rethinking 1974-75 and the greater strength between those bear e intermediat n a e us l wil d an y strateg t investmen r thei r smalle h muc a , Metromedia f o t char e Th . phases t marke term buy-sell-buy approach. This investmens t it philosoph f o e pric ye th n i y volatilit r greate s reveal , company h whic , prices k stoc n i s swing r large n eve e caus l wil stock, but the price history shows the weakness in 1966, s investor l individua r fo s opportunitie r greate s create e th n betwee s rallie g stron h wit , 1974-75 d an , 1969-70 who are alert enough to buy and sell the right stocks at periods of weakness. As illustrated by the long-term the right time. charts, it is apparent that stock-price cycles are not only real, but are also quite consistent in the length of their intervals between bear market lows. Stock-Price Cycles

If the buy-and-hold approach to investing is unsatisfactory, Reading the Long-Term Charts as it often has been, then the alternative is to buy for resale, preferably at a much higher price. But how are the ideal The long-term charts in this book, developed by Securities times to purchase and sell stocks determined? Th, e Boston , Street y Newbur 8 20 , Company h Researc answer is found in the cyclical pattern of stoce kth pricesn whe ,t a tha o s d designe e ar , 02116 s Massachusett . decades w fe t pas e th r ove d develope s ha t tha n patter s thi , coincide e lin s Earning e th d an s bar e Price-Rang n o d identifie y readil e b n ca s price k stoc n i s Cycle indicates that the price is at fifteen times earnings. When e valuabl e ar h whic , averages t marke f o s chart m long-ter the price is above the earnings line, the ratio of price to for determining the trend of stock prices in general. earnings is greater than fifteen times earnings; when . charts k stoc l individua n o d identifie e b o als n ca s Cycle o t r investo n a t permi s chart e Thes . less s i t i , below Chart 1 portrays the record of six market averages, determine quickly whether the P/E ratio of a company l cyclica e Th . average l industria s Jone w Do e th g includin is expanding or contracting, and by how much. y clearl s industrial s Jone w Do e th y b d trace n patter reveals the periods of price weakness as well as the long 5 196 o t 9 194 m Fro . prices k stoc g advancin f o s period

10 11 R MOTO D FOR . 2 T CHAR

e pric c periodi e th s show y clearl t char r twelve-yea s Thi declines in Ford common stock. From a high above 60 in late 1965, the price dropped to below 40 in December 1966. By late 1968 the stock had regained its earlier levels, but a new n i d ende e declin e Th . 60 t a 8 196 r Novembe n i n bega e declin n i 0 8 e abov e pric e th d carrie n the e ris A . 37 t a 0 197 y earl January 1973, but the stock dropped to below 30 during the 1973-74 bear market. Chart by Securities Research Company

12 w CHART 3. METROMEDIA Being Wrong Can Be Painful

The 1973-74 bear market made many investors painfully aware of the fact that they can be seriously hurt if they n i g sellin e ar s stockholder r othe y man e whil s stock d hol y casualt d an e fir n eve , plunge 4 197 e th g Durin . panic insurance companies were forced into heavy selling from their portfolios. These companies need a surplus usually about equal to 25 percent of the net premiums that they e larg a d ha s companie y casualt d an e fir e th t Bu . write portion of their surplus invested in stocks, and several e wer y The . surplus r thei f o t percen 0 8 s a h muc s a t los . severe e wer s losse d an s stock l sel o t d force e therefor e th f o s portfolio k stoc e th n i e declin e valu t marke e Th fire and casualty insurance companies during the 1973-74 bear market has been estimated at several billion dollars. There are other disadvantages to buying and holding. s Other . plunging r afte k bac e com r neve s stock e Som n Eve . levels r earlie r thei o t n retur o t s year y man e tak General Motors, usually considered to be among the strongest of companies, has had its stock sell at prices e tru n bee o als s ha s Thi . 1965 n i d reache e thos w belo r fa d an e Telephon n America . companies e matur r othe f o 4 196 n i 5 7 f o h hig a d reache , instance r fo , Telegraph s ha t DuPon . since r eve e pric t tha w belo n bee s ha d an not regained its 1965 high, nor has U. S. Steel regained its 1959 high, or Alcoa its 1956 level. There are numerous other examples. s market r bea t tha s i e disadvantag t bigges e th t Bu are injurious to your health and might even kill you, though no warning to that effect is printed on stock certificates. During the severe sell-offs of the 1969-70 g advertisin d an , television , radio s thi f o t char r twelve-yea e Th e rat e th t tha d reporte r commentato o radi a t marke r bea 6 2 t abou m Fro . stock s it f o e natur l cyclica e th s show y compan o t d believe s wa s thi d an , increased d ha s attack t hear f o in early 1966, the price dropped to below 12 in late 1966. By. prices k stoc n i e plung e th o t d relate e b late 1968 the price had risen to above 50, but by mid-197h 0wit had d associate m proble e sever a s i h anguis l Menta fallen to 9'/z. By mid-1972 the price was bacr k up to conside 38 n , buteve t no o d s investor t mos t tha s market r bea t i l leve t tha m Fro . 1974 r Septembe n i % 4 o t d droppe n the until they are hopelessly entangled in the continuing again rallied sharply during 1975 and 1976. Chart by Securities Research Company 14 o t n whe d an l sel o t t wha d an l sel o t r whethe f o a dilemm stock-price cycles are so great that in most cases the n betwee s plunge s investment r thei f o e valu e th e whil , sell profits to be obtained will vastly exceed the capital gains 10:00 A.M. and 3:30 P.M. on five days ow f fe th t e week-alpas e th f o l y histor e stock-pric e Th . paid e b o t s taxe the while hoping that their stocks will go bacr fo kt up ttalen o e th e hav o wh s investor t tha s reveal s decade their purchase prices so that they can at lease t hav ge d t outwoul s time t righ e th t a s stock g sellin d an g buyin even. During such periods there is almost a nationwide been much more successful than investors who merely sigh of relief when the closing bell rings at the stocl kinitia r ou r answe o T . stocks d hel d an d purchase r fo n reaso a s i s weekend f o l arriva e th d An . exchange question, the financial columnist who advised the wild jubilation, for stock prices do not decline then, and purchase of stocks for resale rather than to keep is . hurt e b t canno u yo s day s gloriou e whol o tw r fo o s correct. t almos , fear , tension t constan f o d kin s thi n i g Livin t tha e decre l wil t marke k stoc l impersona e th t tha c pani r o s thousand y man o s e b l wil h wort s individual' n a millions of dollars less on Friday than on the previous Monday take numbea tolls d sit ,an f live yearr o spe . I knew a man who had built a thriving business over the years, but who decided to retire when he was in d an e pric d goo a t a s busines s hi d sol e H . sixties e lat s hi invested the money in various "growth" stocks recommended by his broker. Within months the market e sever e th n i g endin , decline p stee a n o d starte d ha sell-offs of June and October 1962. My friend's stocks . price e purchas r thei f o n fractio a o t e valu n i d decline k attac t hear a f o d die d an n hypertensio d develope e H two years later. Most investors would not be as severely affected as this businessman was, but plunging stock prices affect just about everybody who owns stocks—at least twenty-four million people.

The Disadvantages of the Buy-Sell-Buy Approach o t h approac y buy-sell-bu e th f o s disadvantage e Th n o d pai e b t mus s Commission : apparent e ar g investin purchases and sales; income taxes must be paid on capital gains, and, in addition, the investor might not feel t a s stock k bac y bu d an l sel o t y abilit s hi t abou t confiden the right time. But in spite of these negative aspects, the advantages of buying and selling in accord with li 17 Part II When Should You Buy Stocks? Chapter 2 Business Cycles

e th n i s cycle o t d relate y usuall e ar s cycle e Stock-pric national economy. Companies exist to make money. Those that are not profitable do not remain on the r o d purchase e ar s Stock . years y man r fo e scen l nationa c pessimisti r o c optimisti e becom s investor e becaus d sol about company earnings. Company earnings are usually dependent on the state of the nation's economy. Business cycles result from fluctuations in the economic activity of a nation. They consist of a phase of f o l Reviva . contraction y b d followe n expansio c economi business activity emerges from the contraction and becomes the expansion of the next cycle. d experience s ha s State d Unite e th f o y econom e Th periods of decline throughout the nation's history. The d identifie s ha h Researc c Economi f o u Burea l Nationa g datin , contraction s busines f o s period y thirt n tha e mor as far back as 1834. In European countries cycles of business have been traced back to earlier periods. According to some economists, the accumulation of large amounts of capital appears to be the key factor in the development of business cycles. Fluctuations in the d an s automobile s a h suc , goods e durabl f o n productio capital equipment for businesses, have been much more severe than in the production of nondurables. This is . credit n o d purchase y frequentl e ar s durable e becaus They are also postponable items. Thus, purchases tend to be bunched together in periods of optimisim and easy credit. An expansion phase of a business cycle may , consumers , business y b g spendin d increase m fro e originat s exces e hav s bank e phas s thi n I . government e th r o s i y mone e mor , advances m boo e th s a t Bu . reserves s reserve s exces y Eventuall . it e financ o t d require

21 disappear and credit sources dry up. Commerciae sever I I l r bankWa sd Worl e Sinc . advance n i s month l severa l additiona e receiv y the f i y onl s deposit e mor e creat n ca y approximatel d occurre e hav s price k stoc n i s reaction , up s rate t interes s drive s loan r fo n Competitio . reserves every four years, and the bottom of the price decline has e obtainabl n bee t no s ha y mone s occasion e som n o d an a g followin r yea d secon e th g durin n ofte t mos d occurre at any price. r yea t firs e th n i e lat o als t bu n electio l presidentia Eventually a slowing down of thes booha e m begindeclin e sth tf oo g beginnin e Th . election e th g followin p sto s sale ; rapidly e ris s cost n Productio . place e tak varied from less than a month following the election to ; oversupplied e becom s item r consume e som ; increasing . later s month n thirtee y approximatel o t e reluctanc a d an t doub y b d replace s i m overoptimis go further into debt. The momentum of the business expansion finally falters and begins to reverse itself. To a large extent, then, business cycles result from widespread feelings of optimism or pessimism, as well as from the cost of and availability of credit. Tight money policies will slow a boom. But easy y econom n a g pullin n i e effectiv s les e ar s policie y mone out of a slump, although low interest rates and readily available credit will help. Government spending also will be beneficial, but investment spending is the most important factor. The business contraction can sometimes . years r fo t las According to business cycle theory, a ceiling is established for cyclical upswings when full employment y theor e Cycl . possible t no s i h growt r furthe ; reached s i also presupposes that a floor is established when excess e Th . off d worke n bee s ha y capacit n productio expectation of profit is the strong motivating force behind investment decisions. If corporation managements believe that a good profit can be obtained from new manufacturing facilities, they will probably decide to w ra , labor , money f o t cos e th t Bu . facilities e th d buil materials, and equipment must be sufficiently low to justify the investment. And a market for the products w ne , met e ar s condition e thes f I . anticipated e b t mus e cycl s busines a d an r occu l wil t investmen s busines upswing will take place. Stock prices anticipate the decline in business by s a t jus , decline o t s begin s busines e befor n dow g turnin stock prices anticipate upturns in the business cycle

22 23 Chapter 3 Washington Policies

e ar , cycles s busines e lik , prices k stoc n i s Movement forecast by political developments and are affected by actions related to the election of a United States . years r fou y ever t Presiden The key to correctly anticipating the direction of n i d foun e b n ca s price k stoc d an y econom l nationa e th Washington. The President and other Washington politicians and bureaucrats have gained extensive control over the American economy since the Depression of the 1930s. e th f o s maneuver e th d watche s ha o wh e Anyon e th f o e awar s i e tim g lon a r fo t Establishmen n Washingto o t s bureaucrat d an s politician s it f o e desir t incessan control or manipulate most aspects of American life. , housing d an n educatio s nation' e th n i d involve e ar y The s America' . industry s it f o h muc d an , transportation s it s i s a , control r thei r unde t exten e larg a o t s i y energ e considerabl a e exercis o als y The . commerce n foreig degree of control over the nation's economy through h throug d an , supply y mone e th f o n manipulatio r thei l Federa e th f o y authorit g spendin d an g taxin e th Government. e gav s 1930 e th f o n Depressio c economi e sever e Th an important boost to government interference in the y closel t mos n bee s ha t tha e interferenc , economy t economis h Britis e th f o s theorie e th h wit d associate John Maynard Keynes. Central to Keynesian economics is the belief that the government should stimulate spending if there is a tendency to unemployment, and that it should restrain . inflation d increase d towar d tren a s i e ther f i g spendin Keynesian economists believe that the government can regulate spending by varying the level of taxes and

25 subsidies, thereby altering the amount of purchasing have taken steps to decrease the availability of credit . consumers f o s hand e th n i r powe and to increase its cost when inflation has been a serious Investment spending can be regulated by varying threat to the country's stability. These steps have the tax rate on profits and by controlling the availability usually preceded, and probably influenced, the resulting and cost of credit. The inducement to invest could thus changes in the primary trend of stock prices. be controlled to the extent that it depended on thl e contro o t e mad e ar y polic y monetar n i s Change prospective net rate of return after taxes. Thus, the inflatio switchiny nb g fro mpolica f monetaryo y easo et Keynesian economists concluded, the selectioy b n n of recessio t figh o t d an , restraint y monetar f o e on d depen d woul d deman g regulatin r fo s technique t differen switching from monetary restraint to monetary ease. But on the goals that the government is pursuingy b d . affecte s sometime s i e chang y polic e th f o g timin This power to slow down or speed up the level of political considerations. Policies of monetary restraint, economic activity can lead to many abusesl , among thepresidentia r m afte l unti d delaye e b n ca , example r fo the possibility that the economy might be stimulated elections so that a plunging stock market and a e hav o wh s individual e th f o e purpos e th s serve t i n whe deteriorating economy will not affect an incumbent control. Too much stimulation can be destructive, since President's chances of re-election. A comparison of e sever a n i t resul d an n inflatio s seriou r trigge n ca t i f o s date e th h wit s price k stoc f o s chart m long-ter f o e b o t m see s sometime s concern e thes t Bu . recession monetary policy changes, federal fiscal actions, and the secondary importance when compared with the necessity schedule of presidential elections reveals that there have of winning elections with votes boughs t witpolicie h y the monetar d an l fisca l federa n whe s occasion n bee taxpayer's own money. l politica e accommodat o t r orde n i d modifie e wer ambitions. The importance of this information to the individual investor is not only that it can help him to Economic Control Through Fiscal anm hi d t Monetarassis n yca t Policiei t tha st bu , losses t marke k stoc e som d avoi f o e sal d an e purchas e th g timin r fo y strateg a g plannin n i Although most investors are probably aware that stocks. business activity has moved in patterns of boom and bust, prosperity and recession for hundreds of years, they are perhaps less aware of the specific influences e Cycl l Politica e th w Follo that Washington exercises in determining the timing of . phases e thes Since it is possible to anticipate periods when federal e th s i h whic , policy l fisca l federa f o s effect e Th authorities can be expected to take actions detrimental government's spending and taxing authority, and federal to stock prices, and also to anticipate times when monetary policy, which is its control over the nation's favorable action is expected, an investment strategy money, have been well established. For over a decade based on these political decisions can be successful. changes in federal monetary policy, for example, have The principal influence that will determine when c economi s nation' e th f o l leve e th n i s change d precede you should buy and sell stocks is the political cycle, the activity. Monetary authorities have taken steps to four-year presidential term. There is a desire on the part increase the availability of credit and to lower its costs of the politicians whose policies determine national when the nation has been in or close to a recession. They economic trends to have the confidence of the voters

26 m n i e influenc t importan t mos e th d an , time n electio t a l genera e hav o T . prosperity s i e confidenc g creatin prosperity, then, the business cycle must be in a phase h wit , improving s i y econom l nationa e th h whic n i production and employment increasing and wages rising, o als s i t I . optimism f o g feelin l genera a n i g resultin during this phase of the business cycle that stock prices are rising, with the primary trend of the stock market moving upward. y econom l nationa e th n i e surg d upwar e th s a t Bu continues, prices and wages also accelerate and inflation , election e th r afte , So . problem r bigge a s become , consider o t e angl l politica a r longe o n s i e ther n whe anti-inflation policies are initiated, which gradually : phase t nex s cycle' s busines e th o t t shif a t abou g brin contraction. Preceding the slowdown in the economy , trend y primar s market' k stoc e th n i n downtur a e b l wil f o d perio a r ove prices k stoc f o n directio c basi e th r o s dip y temporar y b y briefl y onl d interrupte , months rallies.

Inflationary Policies r occu s boom c economi t tha l coincidenta n tha e mor s i t I regularly during presidential years and that recessions occur in years between presidential elections. Business cycles cannot be eliminated, but their timing can be affected considerably by the fiscal and monetary policies of the Federal Government. e th f o r powe g spendin d an g taxin e th , policy l Fisca Federal Government, is the most powerful influence f o e siz l overal e Th . economy s nation' e th g affectin e th e ar s a , important y ver s i s appropriation l federa budget deficits (shown in Chart 4). The deficits requirs n i t marke n ope e th n i s fund w borro o t y Treasur e th competition with business. If these funds cannot be readily obtained in the open market, the Federal Reserve Board purchases the Treasury's securities, thereby

28 29 1930s and Keynesian economics introduced a new y the t tha g sayin f o y wa r anothe , debt e th " "monetizing . supply y mone s nation' e th o t y mone w ne g addin e ar y Man . spending t governmen e large-scal d towar e attitud A study correlating periods of inflation with politicians and economists became convinced that the n i d publishe s wa s deficit t budge l federa e larg t subsequen attainment of full employment was more desirable than the July/August 1974 edition of the Financial Analysts a balanced budget. Journal. authore Th . Jess Mr , e Levin, determined that World War II caused massive government spending the periods of strong inflation follow periods of large for military purposes and the accumulation of purchasing

e H . years 2 / 2 o t 2 / 1 f o g la a h wit , deficits l federa , war e th g Followin . individuals d an s businesse y b r powe 1

t defici t budge l federa e th 1 n i e increas y "Ever : concluded Congress passed the Employment Act of 1946, which g correspondin a n i d resulte y invariabl s ha 5 194 e sinc y responsibilit d an y polic g continuin e th s wa t i t tha d state increase in the acceleration of inflation; and every of the Federal Government to promote maximum surplus has produced a slow down in this s ratewa t I . . Therpower e g purchasin d an , production , employment assumed that fiscal and monetary policies would be used have been no exceptions." e complicat o als t budge l federa e th n i s deficit e Larg to attain these objectives. the Federal Reserve Board's responsibility for maintainind g widesprea d gaine d ha h approac s thi s 1960 e th y B a consistent noninflationary monetary policy. When the acceptance among liberal economists and politicians. The federal budget has a deficit, as it has had continuousll fisca f o e y us e th g favorin s economist y b s argument for more than a decade, the U. S. Treasurs y musincrease t t borrowtha e ar y . econom s nation' e th l contro o t n actio y b d create s agencie l federa r othe f o t hos a , addition n I in government spending add directly to demand for Congress also make demands for credit. The Export- goods and service, and that reductions in tax rates l Federa e th , Banks n Loa e Hom l Federa e th , Bank t Impor . demand g increasin thereby , income e disposabl e increas g Financin l Environmenta e th d an , Banks d Lan . effect r multiplie a e hav s action e thes f o h Bot Authority, to name a few, do not have their credit Economists also assumed that an overheated e th t tha s i t resul e Th . budget e th n i d reveale s demand g reducin y b n dow d coole e b d coul y econom l nationa d expan o t e pressur t constan r unde s i e Reserv l Federa y theor s thi t Bu . taxes g increasin d an g spendin l federa collided with hard political reality. Politicians are quick . supply y mone e th When the Federal Government spends billions of to spend money and reduce taxes, but it is usually very dollars more than it receives in taxes, it is necessary to difficult to convince them that the opposite actions—less s sell y Treasur . S . U e th s thi o d o T . deficit e th e financ spending and increased taxes—are sometimes necessary bonds to buyers who will underwrite the big federal to slow inflation. The unpleasant chore of slowing the d an , inflation e mor f o e caus e th e b l wil h whic , spending economy has been left to the Federal Reserve Board, s bond e th f o e valu l rea e th , ironically , reduce l wil h whic g tightenin y b y econom e th s slow y effectivel h whic credit. being purchased by the buyers. y particularl n bee e hav s policie l fisca e whil , So t i n whe y econom s nation' e th g stimulatin n i l usefu y Realit l Politica . vs g Plannin c Economi need stimulating, responsibility has fallen upon the monetary policymakers, the Federal Reserve Board, to Until recent decades a balanced national budged Fe t e waTh s . inflation t comba o t y necessar s step e tak considered desirable. But the Great Depression of the accomplishes this through its control over reserve

31 30 requirements—the amount of money that membes r bankTrend y s Mone m Ter t Shor y b d Misle e B t No o D e th d deposits—an f o e percentag a s a e reserv n i d hol t mus r membe d charge e rat t interes e th s i h whic , rate t discoun e b o t r investo n a r fo e possibl s i t I : warning f o d wor e On e Sinc . Reserve l Federa e th m fro w borro o t s bank misled if he attempts to follow weekly trends in the increases in the discount rate have the effect oe f forcing considerabl s i e ther e sinc , figures k stoc y mone s i s busines y b borrowing , rates t interes r othe p u e Reserv l Federa e Th . week o t k wee m fro n fluctuatio discouraged. Decreases in the discount rate, on the other does not have the tools to control movements in money hand, force interest rates down and make borrowing with precision over the short term. A more accurate more attractive. approach would probably be to accept the stated The Fed can also act to peg interbank loans, intention of the Federal Reserve as described by the o als n ca d an , levels d desire t a , funds l federa d calle Fed's spokesmen. Federal Reserve policy is often take action to increase or decrease stocke th margi y b s n conference s pres d an s speeche n i t ou d spelle r powe g buyin l potentia e th t affec h whic , requirements Board's chairman and other members. In the past, these for securities. public statements have been accurate indicators of whether the Fed was moving toward a tighter or easier l Federa e th 8 196 n i e lat , example r Fo . policy y monetar Federal Monetary Policy and Stock e Prices squeez o t d intende t i t tha y publicl d state d Boar e Reserv inflation from the economy. This occurred while stock There has been a strong correlation between declining prizes were still rising strongly. Following the 1966 l Federa e th y b s policie e restrictiv d an s price k stoc d announce e Reserv l Federa e th , money t tigh f o d perio Reserve, and also between rising stock pricey s anreadil de Femor d y mone e mak o t s step g takin s wa t i t tha policies of monetary ease. The discount rate was available. However, although these steps were publicized, . market r bea 4 1973-7 e th g durin y repeatedl d increase , signals e th o t g reactin n i w slo e quit s wa t marke e th y b e eas y monetar f o y polic a o t d switche d Fe e th t Bu lowering the discount rate in December 1974 and January 1975. During 1927 the Federal Reserve Board had an easy-money policy that contributed to heavy stock market speculation. Bank credit expanded and the r fo s loan n i s themselve d overextende s bank l commercia n actio e restrictiv n bega y slowl d Fe e Th . purchases k stoc by moderately raising discount rates in early 1928 and e refus o t d threatene t i 9 192 n i o Als . 1929 n i n agai re-discount privileges to banks having excessive loans based on securities for collateral. At that time the Federal Reserve lacked the authority to slow stock market speculation. It was not until after the 1929 crash that the Fed was given authority to set margin requirements.

32 33 Chapter 4 The Political Cycles

f o m ter l presidentia r four-yea e th , cycle l politica e Th r ove t developmen e th r fo e responsibl n bee s ha , office k stoc n i e cycl r four-yea a f o s decade e thre t pas e th . D n Frankli g durin n inceptio s it d ha n patter e Th . prices Roosevelt's term of office in the mid-1930s, but the f o s demand e th y b y econom l nationa e th f o n dominatio World War II prevented the cycle from developing fully until the postwar period. s cycle e pric k stoc f o s duration e th s show 5 t Char since the 1940s. Presidential elections were held during the first week of November in 1948, 1952, 1956, 1960, 1964, 1968, and 1972. There were declining stock , 1960 , 1957 , 1953 , 1949 n i t ou d bottome t tha s market 1962, 1966, 1970, and 1974. Of these dates, the only one not in a normal cycle is 1960, which was a y econom l nationa k wea e Th . year n electio l presidentia and declining stock market played significant roles in t marke r bea e th f o l Al . year t tha s result n electio e th bottoms except 1960 occurred within two years after each election. Since 1949 there have been seven complete cycles in the primary trend of stock prices, as revealed on the long-term charts of six stock averages. The beginning and ending months, and the duration of each cycle, are shown in Table 1. Some bear market troughs were h whic g durin " bottoms, e "doubl y b d characterize prices plunged a second time following an initial rebound. Three double bottoms are listed (October and d an r Octobe , 1962 r Octobe d an e Jun , 1957 r Decembe December 1974) because at least one stock average r othe e whil h mont e on g durin m botto s it d recorde averages recorded their lowest levels during another month.

35 Table 1

Cycle Trough Date e Cycl f o h Lengt ) Trough o t h (Troug

June 1949 s month 3 s year 4 September 1953 4 years 1 month October and DecemMi f (to October 1957) 1957 3 years October 1960 (October to October) 1 year 8 months June and October 1i82 (to June 1962) 4 years 4 months Dctober 1966 3 years 7 months 0 197 y Ma s month S s year 4 Dctober and December 1 974

Prior to 1960 the bear market lows occurred during 0 196 r afte ; election l presidentia a g followin r yea e th they have occurred in the second year after each l congressiona m midter f o r yea e th , is t tha ; election n i r Octobe n i d reache s wa h troug e th e Sinc . elections o t n temptatio t grea a s i t i , markets r bea e th f o f hal conclude, based on time patterns, that the next big opportunity for stock purchases could be in October 1978.

36 37 The bear market that occurred during the 1960 With the exception of the third stock-price cycle, presidential election year probably r has haothe e d th a f no importanl al , 1960 t n i d ende d an 7 195 n i n bega h whic and lasting influence on the timing of Federal Reserve six cycles began prior to the presidential-election year monetary policies. The 1960 bear market reached its . election e th r afte d ende d an bottom just a few days before the election, timing that seemed almost designed to have maximum impact a g Followin . running e wer o wh s incumbent e th t agains 2 1927-3 , Bust d an m Boo t Bigges e Th , 1959 r yea l fisca n i t defici t budge l federa n billio 2 $1 e offic e leav o t d determine s wa r Elsenhowe t Presiden The severe economic recession of the 1930s had many of l fisca f o y polic A . budget l nationa d balance a h wit its origins in the boom of the 1920s. When the boom e rar a d ha 0 196 r yea l fisca d an d adopte s wa t restrain t descen s it n bega y econom s nation' e th d ende y finall d Boar e Reserv l Federa e th , addition n I . surplus t budge into the Depression of the 1930s. The pattern of had a restrictive monetary policy. The results s includetime y man dr recu o t s wa t bus d an m boo c economi credit restraints, higher interest rates,e ath f milo de recessionscal e th n ,o at no t bu , decades g followin e th g durin e th f o s los a d an , percent 7 1 f o s price k stoc n i e declin late 1920s and early 1930s. y b y Kenned . F n Joh o t n Nixo . M d Richar y b n electio The boom and bust of the 1920s appear to have f o s policie c economi e Th . vote e th f o t percen 1 f o 1 . had little relation to the presidential election of 1928. e restrictiv e th d an n Administratio r Elsenhowe e th The monetary inflation of the late 1920s originated in policies of the Federal Reserve weref citeo d d asBoar amone g thReserv el Federa e th f o s policie y mone y eas e th principal reasons for the Republican d loss. Englan f o k Ban e th y b d pressure s wa h whic , York w Ne In order to conclude that there will be ine thth ee futurinflat eo t s bank l centra n Europea r othe d an a cycle pattern consisting of a strong presidential-electionr thei n o e pressur e - reliev o t r orde n i y econom n America d perio a d an , prices k stoc g stron h wit y econom r yea currencies. The flood of money released in 1927 and between elections with a weak national economy and 1928, combined with a mood of unbounded optimism, declining stock prices, it is necessary to anticipate led directly to the debacle of 1929. whether U. S. Presidents will act in their own self-interes, 1929 e t lat n i e declin o t n bega s price k stoc n Whe r whethe r o , party l politica r thei f o t interes e th n i d an n bee d ha s purchase h whic n o t credi f o d pyrami e th t Presiden s a , actions e tak d an s thi d disregar l wil y the s Speculator . liquidation y heav g triggerin , collapsed e mad n oppositio e th p hel y ma t tha , 1960 n i d di r Eisenhowe who had bought on margin were forced to sell in order . candidates s it t elec o t y part to cover their loans from banks and brokers. t Presiden f o 0 196 n i s action l fisca e th d regar e w f I The evaporation of wealth caused by the 1929 e cycl e th n the , aberration n a s a d Fe e th d an r Eisenhowe stock market crash brought about the economic , months t eigh d an s year r fou f o n spa a d ha e hav d woul Depression of the 1930s. In Germany the depression was close to the normal span for a price cycle. It is even more severe than in the United States; one result s Eisenhower' t Presiden t tha e conclud o t e reasonabl . Hitler h Adolp f o r powe o t e ris e th s wa election-year anti-inflation policy was an exception, It was during the desperate days of the 1930s that o t d expecte e ar s politician t incumben t mos e sinc the first steps were taken to control economic ups and take actions that will assist their re-electioe Th n . or theactions t Governmen l Federa f o s mean y b s down continuation in office of their politicay l partywa e .th d opene y econom s nation' e th l contro o t y abilit for subsequent abuses, as politicians sought to have a beginning of the New Deal. By 1936 the nation was well . interest l persona r thei n i s wa t i n whe y econom g stron s thi g durin s wa t i t Bu . recovery c economi o t y wa s it n o The wild speculation of 1928 ans d 1929control anw dne thd e gaine t Governmen l Federa e th t tha d perio l Federa e th e becaus r occu o t e abl e wer h cras g resultin s control , economy s nation' e th f o n directio e th r ove Reserve Board did not have the weapons to slow a that they quickly learned to abuse. skyrocketing stock market. It was several years after the Federal Government control of the nation's t se o t y authorit e th n give s wa d Fe e th t tha c pani 9 192 o t s president n America y b n temptatio e th d an y econom margin requirements. d starte s purpose n ow r thei r fo y econom e th e manipulat Easy credit by banks played a large role in the during the New Deal era. In 1936 British economist heavy speculation of those years and in the crash that John Maynard Keynes wrote his General Theory of a s wa 7 192 f o y polic y easy-mone s Fed' e Th . followed d advocate h whic Money, and Interest Employment t credi k ban f o n expansio d rapi e th n i r facto g contributin government control and regulation of the whole for stock market speculation, which allowef o s d commerciainstrument l l principa e Th . nation a f o e lif c economi banks to overextend themselves in loans for stock Keynes's policy were to be national budgetary deficits purchases. During the summer of 1927 the discount rate and surpluses, variations in the rate of interest, and the was lowered from 4 percent to 3.5 percent. A year use of government-financed projects. A goal was to later, in mid-1928, it was raised to 5 percentt ye , .high Is n wa d deman l tota t tha o s y econom e th e manag September 1929 the discount rate wa. s raisespiral dy to 6 inflationar n a n i s price p u e driv o t s a h hig o s t no percent in New York, but it was lowered to 5 perceng t onamon t impac d widesprea d ha s theorie s Keynes' November 1 and to 4.5 percent on November 15, Franklin Roosevelt's New Deal bureaucrats, and the 1929. This was after stock prices had started their steep economist was admired and respected by FOR himself. plunge. But a large percentage of the selling was forced Many of the policies advocated by Keynes were accepted s ha e estimat e On . credit d overextende f o e becaus g sellin by Washington and have been used extensively since the been made that more than a million Americans were Depression years. carrying about three hundred million shares of stock on This period was the beginning of manipulation of margin. r fo y frequentl , politicians y b y econom s nation' e th Mass emotion also moved from euphoria—"Bs wa t e a Roosevel . D n Frankli . purposes n partisa w narro . panic o period—t e th f o n sloga e on s wa " America n o l bul a g followin s step e tak o t t presiden t firs e th y probabl Inflation quickly changed to deflation and huge losses of presidential election to collapse a booming economy values and buying power. e th e creat o t s effort e mad g havin r afte , deliberately boom prior to the election. This began the pattern of s condition c economi g boomin h wit t deligh l presidentia The Roosevelt Recovery and Recessionn , 1932-3concer l 8 presidentia d publicize d an n electio e th o t r prio about inflation following the election. n i d reache e wer n Depressio t Grea e th f o s depth e Th r recove o t g beginnin s wa s State d Unite e th 6 193 y B 1932, and in that year the nation's economy slowly from the Depression. An editorial in The Nation on began to move upward. Much of the economic recovery November 7, 1936, commented: "Whether by good luck was the result of policies taken by the nee wth o Roosevelint t wen t t Roosevel t Presiden t managemen d goo r o Administration to stimulate the economyn o ., This wabetter s s the condition c economi h wit n campaig n electio

40 41 the whole, than at any time since the end of 1929. This seemed as if the scenes of October, 1929, might be w fe t las e th n i y relentlessl o s n i t se y recover f o e tid m fro , weeks r fo g fallin n bee d ha s Price . re-enacted months that the campaign against thek Newstoc f Deao x l oinde n Times York New e th 8 2 l Apri o t 6 h Marc economic grounds virtually collapsed." The editorial prices declined from 142.12 to 126.76, but most of that continued: "Even before the recent favorablt Wha . e month e th f o k wee t las e th n withi d occurre s los York New e th , companies l stee e th y b s announcement s busines n i p slum a d heral t i s Doe ? decline e th d cause Sun pointed out that the aggregate net earnings of the activity or, as the financial pages of the newspapers tell 7 4 y nearl d increase d ha s companie l industria 3 11 t firs us, should we dismiss it as a mere reaction from s earning r thei r ove 6 193 f o r quarte d thir e th n i t percen e ar l genera n i s condition s Busines ? over-speculation in the same period a year ago, while e the ne"Sinc : t profit of thcontinued l e editoria e Th " satisfactory. y extremel s wa 6 193 f o s month e nin t firs e th n i s companie e sam business reports remain excellent, it is evident that we f o s month g correspondin e th n i n tha r highe t percen 2 5 shall have to look elsewhere for the cause of the stock 1935."* market decline. Two sets of influences appear to be at But the cost of living was also rising. Several work, one domestic and the other international. Primary months after the election, John Maynard Keynes stated: among these is the growing belief that the government o t y tr o t t governmen e th r fo d passe s ha e tim e "Th intends to check inflation by various restrictive stimulate business activity and ... it should now devote measures. The present recession really started with the o t t attemp e deliberat a , policy y contrar e th o t s effort s it announcement of higher reserve requirements for the slow down the forces threatening boom s conditions.ha t I . " System e Reserv l Federa e th f o s bank r membe n i h speec R FO n a y b d followe s wa t statemen s Keynes' received its greatest impetus from the series of warnings n agai e ar 9 192 f o s danger e "th t tha d warne e h h whic which the President has issued against price increases and a n withi t bu h mont r o k wee s thi t no , possible g becomin speculation. These domestic influences have been year or two," and also blasted the high prices sprice oy f commodit n i p dro e worldwid a y b d reinforce commodities, particularly copper and steel. His speech caused, apparently, by the lessening of the danger of reflected his sense that the business of recovery from the immediate war in Europe.... As matters stand at Depression was at an end and his new concerd n witviewe e hb t no d shoul s price n i e declin e th , present inflation. m fro n reactio y health a s a t bu m alar r fo e caus s a l unti g waitin s president n America f o n patter e Th over-speculation. Another possibility remains, however. d ha s policie n slowdow l signa o t s election l nationa r afte The decline in prices itself might induce a new begun. A member of the Federal Reserve Boars i , d psychology m boo e lik , Panic . cycle y deflationar announced that the Government would drop its policy contagious."* of stimulating heavy industry. The Fed began e to tightesever t n mos e th f o e on s wa 7 193 f o t marke r bea e Th credit. Earlier, in August 1936, it had increased member on record. The Dow Jones industrial average plunged from bank reserve requirements by 50 percent. a high of 195.6 in March 1937 to a low of 98 in March Stock prices reacted by declining sharply. Another 1938. The nation's economy, which had been starting to editorial in The Nation on May 8, 1937, commented on boom at the time of the 1936 presidential election, fell the reaction: "For a few days toward the end of April it into a recession, a newly-coined word. FOR did not want

Nation. The f o n permissio e th h wit d 'Reprinte Nation. The f o n permissio e th h wit d •Reprinte to be accused of dumping the nation into e a depressionhom d an , . end s year' t a n billio 3 $2 o t n billio 3 $ y b But steel production declined to only 19 percent of construction had its second-biggest year on record. But capacity. there were also warnings of runaway inflation. In e th f o s bank r membe y b g borrowin 2 195 r Decembe . high r twenty-one-yea a t hi m Syste e Reserv l Federa World War II and Immediate Postwar From the June 1949 low, stock prices advanced for three years and seven months to a Dow Jones industrial I I r Wa d Worl f o k outbrea e th n the d an , war f o t threa e Th average high of 295.06 on January 5,1953, just two and the great armaments production associated with it, months after the 1952 presidential election in which propelled the American economy on to a strong new Republican Dwight D. Eisenhower defeated Democrat upward course. Adlai Stevenson. World War II dominated the national economy Within days after taking office, the Eisenhower during the early 1940s, and fear of a postwar recession Administration began making moves to slow down the was the dominant influence during thed yearBoar se immediatelReserv l y Federa d an y Treasur e Th . rate n inflatio following. Wall Street was bearish. Thel pessimisfedera e mTh cause. dcredit f o n expansio e th m tri o t s step k too . 1933 e sinc s Iqvel t highes s it h reac o t t interes t shor e th funds rate—the interest banks charge each other on d re-electe s wa n Truma y Harr 8 194 r Novembe n I loans—was increased. Efforts were made to cut the President of the United States with a surprise victory budget and to decontrol the U. S. economy. In June the over Thomas E. Dewey. Following the election, stock Federal Reserve Board raised the discount rate and sold prices promptly collapsed and continued to decline until thirty-year government bonds through its open market mid-1949, when an economic recession . that lastedcirculation fof o r t ou y mone g takin y thereb , operations . began 9 194 f o t mos But the nation's economy was already declining . 1954 f o r summe e th l unti d laste t tha n recessio a o int Cycle 1: 1949-53 The hard-money policy was reversed. Credit was expanded; interest rates were kept from going higher; The first postwar stock-price cycle began at the June 14, and the Federal Reserve Board lowered the reserve 1949, Dow Jones industrial average low of 160.6. During . banks r membe r fo s requirement the spring of 1949 the Federal Reserve decreased margin From their January 1953 high, stock prices declined requirements, thus increasing investors' purchasing for eight months to a September 15, 1953, low of s requirement e reserv e th d decrease s time e thre d an , power 254.36, which completed the first postwar stock-price of banks that were members of the Federal Reserve . months e thre d an s year r fou f o e cycl System, thus increasing the amount of funds available Stock-price cycle 1 had a rise of 84 percent (DJI), for loans. In July, President Truman appraised the then a decline of 14 percent. recession as "moderate" and proposed stimulating the economy. Cycle 2: 1953-57 By 1952 the national economy was booming, aided by the arms produced for the war in Korea. Personal The second postwar stock-price cycle began at the incomes were at record levels and retail spending was at September 1953 low. For two years and seven months its highest peak ever. In 1952 consumer credit increased stock prices advanced to a high in the Dow Jones

44 industrials of 524.4 on April 9, 1956, a presidential9 195 y - Jul y B . strong d turne n agai y econom e th election year. The national economy was again booming. employment and personal income were at all-time highs* s enormou n a s wa e Ther . sharply e ros t credi r Consume The U. S. economy was growing rapidly. Housing demand for money, which resulted in rising interest construction was booming, but housing costs were d ha 6 195 t tha d indicate e measur c economi y Ever . rates . pressures d upwar g experiencin eclipsed all previous years; the gross national product There was a strong bull market in stocks; by July , increased o als g livin f o t cos e th t Bu . percent 6 e ros the Dow Jones industrial average had advanced about and inflation was a problem. h strengt e Th . year e th f o t firs e th e sinc s point y ninet Following his 1956 re-election, in Januarn o yg 1957,peakin y finall , 1959 f o t res e th r fo d continue President Elsenhower stated in his message to Congress January 4,1960, at 688.2 for the Dow Jones industrials. that inflation was the main domestic problem. Several The booming economy and the continuing rise in . controls e pric d an e wag e us o t d threatene e h r late s week commercial loans caused the Fed to become concerned y b t Bu . prices k stoc n i p di e sever a s wa n reactio e On about the increasing demand for money. Businessmen July 1957 stock prices rebounded andg the Dow Joneoverspendin , s credit r fo d deman r thei " up h "bunc o t d ten industrials rose to within a point of thei. r all-timgood s i s e highbusines n whe s inventorie d an s good l capita r fo reached in April 1956. But in July, Federal Reserve In early September 1959 the Fed increased the discount , "inflation t tha d state n Marti . M m Willia n chairma d Boar n i l leve t highes e th s wa h whic , percent 4 o t e rat not deflation, is the real danger." Thee Fed'sinc e s tight-monerat e th n i e y increas h fift e th d an , years r twenty-fou policies slowed the boom. Steel production fell to the 1957-58 recession, when the Fed set the discount o als t outpu e automobil d an y capacit f o t percen 0 7 . recovery o t d ai n a s a t percen 4 3/ 1 t a e rat declined. Inventories were at high levels; the rapig d slowin n i e effectiv e wer s policie y tight-mone e Th t tha y capacit w ne d create d ha s busines f o e rat n expansio the economy. Stock prices also declined irregularly for had to be absorbed. By the end of 1957d the Fereache de was averag l industria s Jone w Do e Th . months n te moving slowly to make credit more plentifule th . before s day w fe a t jus , October n i 2 564. f o w lo s it l industria s Jone w Do e th , high 7 195 y Jul e th m Fro 1960 presidential election. The October low was the end average declined rapidly to a low of 416.2 on October 22. , cycle e stock-pric r postwa d thir e th f o completing the second postwar stock-price cycle, which The declining trend of the economy and the stock lasted four years and one month. The pricn e cyclelectio l e had a presidentia a r fo l unusua s wa 0 196 n i t marke . percent 1 2 f o e declin a n the , percent 6 10 f o e ris year. Either the cycle timing could not be managed p to n whe r yea l presidentia e on s wa 0 196 r o , effectively Cycle 3: 1957-60 policymakers were not trying particularly hard to win n recessio 8 1957-5 e th t tha e possibl s i t I . election e th 7 195 r Octobe e th t a n bega e cycl e stock-pric d thir e Th had occurred too early and that therefore the economy low of 416.2, a level that was almost duplicated again in had also rebounded too soon and with too much n o n formatio " bottom e "doubl a m for o t , December s it h reac o t e cycl w ne e th g causin s thu , 1958 n i h strengt stock charts. In January 1958, during the recession, peak too quickly from the point of view of politicians d en s year' y b d an y strongl e ris o t n bega s price k stoc running for office. If restrictive economic policies are were up 37 percent. e th , election l presidentia a r afte n soo o to d starte d an 8 195 r summe y earl y b r ove s wa n recessio e Th deflation-reflation cycle is likely to run ahead of a

47 politically desirable schedule. But it is often necessary to . economy e th n i n inflatio e littl y comparativel s wa s i n inflatio f i e desirabl s i n tha r soone p ste e th e tak Although business was improving, there was no accelerating at a high rate. From a political point of view boom. d en e th t a s i y econom e th g slowin n begi o t e tim r bette a s Thi . election l presidentia a g followin r yea t firs e th f o In December 1961 stocks plunged sharply. From timing would permit about a year to fighs t inflatioJone w nDo wit e hth , 15 r Novembe n o 3 741. f o h hig e th slowdown measures and another yeah r of whic recover, 1962 l y Apri n i 6 524. o t d decline e averag l industria t nex e th g durin d perio s prosperou y highl a o t g leadin completed the fourth stock-price cycle. presidential election year, which would be near the top Stocks plunged in late 1961 and early 1962 e th m boo o t s president y b e desir e th t Bu . cycle e th f o primarily because many investors perceived that prices economy prior to elections has also caused thes m to take price/earning e th h wit d compare h hig o to e wer y necessar e b d woul n tha r soone s measure n anti-inflatio e wer s investor e larg y Man . past e th n i s stock f o s ratio . stimulus l additiona e th t withou s yield d bon ; bonds m fro e availabl s yield e th o t d attracte t percen 9 3 s wa e ris e th 3 e cycl e stock-pric g Durin had increased their spread considerably over the n o g beginnin , Moreover . stocks m fro e availabl s yield and the decline 18 percent. d allowe d Boar e Reserv l Federa e th , 1962 , 1 y Januar n o s rate t interes r thei e increas o t s bank l commercia Cycle 4: 1960-62 savings accounts. Mutual savings banks, and savings and The fourth cycle in the stock averages begane at thSom e. rates r thei d increase o als , associations n loa October 1960 low, which was 564.2 on the Dow Jones investors were probably tempted to take profits and place their capita safa n ei l place until another attractive e wer s measure y monetar e Expansiv . average l industria x si y onl , did e On . along e cam y opportunit g buyin implemented by the Federal Reserve Board during the months later, in June 1962. t discoun e th d decrease d Fe e Th . 1960 f o f hal d secon e th n o t percen 4 2 f o e ris a d ha e cycl e pric e Th rate twice, decreased margin requirements, and also Dow, then a decline of 29 percent. twice decreased the reserve requirements of member g stron a f of r trigge o t d helpe s measure e Thes . banks stock market. Also effective was the rhetoric of Cycle 5: 1962-66 presidential candidate John F. Kennedy, who promised fifte hTh stoccycle th ken i averages Junbegae , th et 25 n a " again. g movin y countr e th t "ge o t 1962, low of 524.6 by the Dow Jones industrials and The result was a very strong stock market in 1961. n i t highes e th e wer s level s price/earning 1 196 e lat y B . 1966 o t n electio l presidentia 4 196 e th t pas d extende s stock s Numerou . 1929 n tha n eve r highe , history t recen This was a period of buildup for the Vietnam war and were sellin fortyr gfo , fifty eightr ,o y times their n annuaI . l programs c domesti " Society t "Grea f o g beginnin e th earnings. But the mania for growth caused prices to November 1963 Lyndon B. Johnson became President of e th o int r fa o to s earning d discounte t tha s level h reac t Presiden f o n assassinatio e th g followin s State d Unite e th future. Stock prices were too high relative to present Kennedy. and prospective earnings. , year n presidential-electio a , 1964 y Januar n I e th d an 1 196 n i y sharpl p u e wer s profit s Busines President Johnson proposed an income tax cut, rise was expected to continue throught 1962. TherPresiden e e Th . Kennedy t Presiden y b r earlie d planne and his economic advisers predicted that the cut would

48 49 o t n billio 2 $4 d ad d woul t tha s busines n i m boo a k spar in the gross national product was substantial in 1967. the gross national product. The main stimulus for the record boom was expected to be spending by Cycle 6: 1966-70 individuals. . 1964 h Marc n i e effectiv e becam t cu x ta e incom e Th The sixth postwar stock-price cycle began at the lows set The withholding tax rate dropped from 18e to 14 averag percent l , industria s Jone w Do e th n o ; 1966 r Octobe n i and the amount withheld from paychecks was reduced this was 735.7. The price cycle peaked about a month immediately. Retail sales were up; bank credit expanded; after the 1968 presidential election. y deliberatel A . increased y suppl y mone s nation' e th Like most of the economic booms, the boom planned boom was accelerating. t Governmen l Federa y heav y b d stimulate s wa 8 1967-6 f o n Lyndo t tha n electio n a , day n electio y b t Bu spending. The fiscal year ending June 30, 1967, had Johnson won by a landslide against , Senato30 e rJun Barrg y endin r yea l fisca e th d an t defici n billio 7 $8. n a e th t abou d expresse g bein s wa n concer , Goldwater f o d perio a s wa s Thi . deficit n billio 2 $25. a d ha , 1968 increasing inflation. Prices were rising d foan r manm y raVietna wn i r wa e th r fo n Washingto y b g spendin g bi o als e wer s Wage . items d manufacture d an s material d an , education , welfare r fo d an , programs e defens r othe rising. Economist Arthur Burns warnedg that an acceleratin f o d perio a s wa t I . cities f o g rebuildin e th inflationary psychology was reasserting itself. inflation, and the main culprits were the Federal During early 1965 the nation's economh whic y , continuedeficits e d larg d an g spendin y heav s Government' e th f o d warne d Boar e Reserv l Federa e Th . boom o t required it to borrow in competition with individuals deterioration of credit. But by April they crisirel o t s d in force e wer s bank l Commercia . businesses d an . anticipated s wa r wa r bigge A . intensified d ha m Vietna y Januar y B . Reserve l Federa e th m fro s loan n o e mor . up d speede d ha m Vietna n i r wa e th r summe y B a t tha d persuade n bee d ha n Johnso t Presiden n eve 8 196 The boom in the national economy, whicn h waUnio e sth f o e Stat s hi n I . necessary s wa e increas x ta providing both butter and guns, continued to speech he asked Congress to enact a 10 percent tax accelerate. surcharge for the 1969 fiscal year, which meant that s low 2 196 s it m fro y steadil e ros t marke k stoc e Th most of the tax would be collected after the November . 1964 d an 3 196 h throug d tren d upwar n a d continue d an . election l presidentia 8 196 In April and May of 1965 the Dow Jones industrial In February, Federal Reserve Chairman Martin e th f o t resul a s a s point 0 10 t abou d droppe e averag warned of the very dangerous level of speculation in the war's intensification. But stock prices g reboundedconsiderin ans dwa d Fe e th t tha d disclose e H . market k stoc reached new highs just over 1,000 in January and increasing the margin requirement. He blamed speculative r fo y steadil d decline y the e ther m Fro . 1966 y Februar excesses on inflation psychology—the belief that n o s low t marke r bea g establishin , 1966 f o t mos inflation would continue and become worse. Stocks October 10 at 735.7 on the Dow Jones industrias wa t l Credi . rebounded y quickl t bu y sharpl d decline average, which completed the fifth postwar stock-price gradually tightened by the Federal Reserve Board over cycle. The rise was 48 percent (DJI) and dan thn e declininflatio b e cur o t r orde n i s month l severa f o d perio a 26 percent. e th f o n chairma e Th . abroad r dolla e th n strengthe o t The 1966 bear market was not accompanied Federal Reserve warned again of inflation and blamed by an "official" recession. Nevertheless, the e droH . p deficits g continuin s it d an t budge l federa e th

50 51 predicted that an uncontrollable recession or an continued inflation. One pointed out that we have an e th t i d calle d an , result d woul n inflatio e uncontrollabl inflationary bias woven into our system. "When worst financial crisis for the United States since 1931. unemployment goes up you get into a politically By late spring of 1968 rising interest rates and the controversial area," he said. growing tightness of mortgage credit were hampering Several days after the 1968 election, which was home construction, which was also affected by zooming won by Richard Nixon over Vice-President Hubert construction costs. Wages set new record highs and retail Humphrey and George Wallace, one of Nixon's economic sales boomed. Economists announced that the inflation advisers, and the leading authority on business cycles, spiral could be stopped only by a sizable slump in was interviewed. Dr. Arthur Burns expressed the business activity, but they noted that politicad l pressurean y mone s f o supply e th n i n expansio t tha n opinio weighed heavily against such an inflation cure in an credit should be slowed and that the most pressing . 1969 n i n recessio a d predicte y The . year n electio problem was bringing inflation under control. d widesprea s wa s stock n i n speculatio e Meanwhil By mid-December there were fears of runaway and the volume of trading reached new high levels. The inflation. Money managers began tightening credit again. stock market surged on the talk of peace in Vietnam. On December 17 the Federal Reserve Board ordered the By August 1968 the money managers in Washington discount rate increased to 5.5 from 5.25 percent. e Reserv l Federa e Th . sides l al m fro d pressure g bein e wer Banks raised their prime rates. o t e advic g conflictin f o t amoun t vas a d receive d Boar n Lyndo t Presiden n eve , 1969 , 24 y Januar n O f o s Economist . credit d an y mone n loose o t r o n tighte Johnson, in his final economic report to Congress, called the Johnson Administration warned thee Feth d d an o fn an inflatio e reduc y slowl d woul t tha y strateg a r fo n electio s a y earl s a s busines n i n slowdow g embarrassin excessive boom in business. He recommended a e wer s Move . decline o t n bega t credi f o t cos e Th . day t credi d an y mone d Boar e Reserv l Federa n i n slowdow taken by the Fed to lower the discount ratee .th High-leved an d l agree n Administratio n Nixo e Th . expansion r thei d expresse n Administratio n Johnso e th f o s official Fed proclaimed its intent to curb credit gradually. delight at the action of the Federal Reserve. The stock averages began to decline in mid-December In the fall of 1968 the business boom remained and the slide continued irregularly until late May 1970, strong. Prices continued to rise. The m Johnsobotto e n Th . occurred c pani g sellin a f o x clima e th n whe Administration revealed that it was not able to make on the Dow Jones industrial average was at 627.5 on n i o t d agree d ha t i t tha s cut g spendin n i n billio 8 $ e th May 26, which was the end of the sixth cycle. The Dow the spring in exchange for cooperation from Congress. Jones industrial average rose 26 percent, then dropped Chairman Martin of the Federal Reserve Board stated: 37 percent. "We are in the midst of an inflation that is changing the A business recession began in late 1969 and lasted w ne e possibl a f o d warne e H " country. s thi f o r characte t budge e rar a d ha 9 196 r yea l Fisca . 1970 f o t mos r fo tightening of money and credit. But the Chase surplus of $3.2 billion, and fiscal year 1970 had a Manhattan Bank in New York announced a reductio. n inbillion 8 $2. f o t defici t budge l smal y relativel the bank's prime rate from 6.5 to 6 percent. Several The considerable concern and manipulation by e Reserv l Federa e th t tha d state r banke r anothe r late s day top-level officials in Washington lest the national Board had turned prematurely toward a stimulativp hel o t h e enoug g lon y health y sta t no t migh y econom monetary policy. Other bankers and economists foresaw their side in the 1968 presidential election once again

52 53 e tim n electio t a y econom g stron A : facts o tw p u s point and 1974. Stock prices had their greatest declines since y the d an , politicians l high-leve o t l goa t importan n a s i 1929. are sometimes inept at attaining that goal. As a result The Dow Jones industrial average reached a peak of businessmen, employees, stockholders, d retirees, andowntren dg lon a g startin e befor 3 97 1 y Januar n i 2 1067. h muc o to m fro r suffe l al s American r othe y man k stoc r othe , However . 1974 f o s f sell-of e sever e th o t h muc o to d an s election o t r prio m boo y inflationar averages reached their peaks prior to the Dow industrials. economic recession following them. A more stable The Dow Jones transportation average reached its peak in f o s overstimulu e th d avoi o t e b d woul h approac x inde k stoc d low-price s Poor' & d Standar . 1972 l Apri large-scale federal spending and budget deficitsk Stoc ,n which America e th d an , 1971 f o g sprin e th n i d peake would also permit a more gradual approach when Exchange market value index reached its peak levels in the tightening money. Equally important wouldk be planninStoc k Yor gw Ne d base y broadl e Th . 1972 f o g sprin r occu y the t tha o s s downturn c economi f o g timin e th e th f o l al s include h whic , index e composit e Exchang n soo o to s occur n recessio a f I . cycle l politica e th n i r late k pea s it d reache , exchange t tha n o s stock n commo after an election, then the recovery is also likely to in January 1973, the same month as the Dow Jones s a n downtur a n begi t migh d an e schedul f o d ahea r occu industrials. The NYSE average is considered to be the best election day nears. To politicians up for re-election that market average that can be constructed, si nee it includes r fo e pressur y appl o t y likel e ar y the o s , news d ba s i all of the common stocks on the New York Stock additional economic stimuli, such as tax cuts or increased Exchange, and they are also weighted by capitalization, y inflationar h thoug n eve , spending t governmen thus taking into accoun variatione tth sizn si f eo pressures would call for the opposite actions. companies. All of the stock averages completed the d an r Octobe f o " bottom e "doubl e th g durin e cycl h sevent Cycle 7: 1970-74 s average k stoc e som f o s level t lowes e Th . 1974 r Decembe were reached in October; others had their lows in h whic , trough 0 197 y Ma e th t a n bega e cycl h sevent e Th December. The Dow Jones industrial average reached its was 627.5 on the Dow Jones industrial average. A change low in December at 570.0; the New York Stock Exchange in monetary policy toward more plentiful and cheaper composite index and Standard & Poor's 500-stock money had been adopted several months before the. October n i s level t lowes r thei d ha e averag May trough was reached, and the Fed continued a th d e an t percen 1 4 f o e ris a d ha 7 e cycl e Stock-pric expansionist policy through 1971 and into 1972. decline of 46 percent. e th n i t defici e Th . inflationary o als s wa y polic l Fisca , 1971 , 30 e Jun g endin r yea l fisca e th r fo t budge l federa Cycle 8: 1974- was $23 billion, and the deficit for the 1972 fiscal year was $23.2 billion. Following weakness in late 1971 The eighth stock-price cycle began at the December 1974 d upwar d trende d an g stron e becam s industrial w Do e th low in the Dow Jones industrial average and rose sharply until after the November 1972 presidentian i , l later election s month . w fe A . conditions d oversol y deepl m fro But inflation was again becoming a large problem, and April 1975, the nation's economy began to recover from d adopte s wa t restrain y monetar f o y polic a n agai the trough of the recession. The economic stimulus came d resulte h whic , election l presidentia e th g followin from federal policies calling for a large decrease in income 3 197 n i y econom e th f o n dow g slowin l gradua a n i s policie y monetar e expansiv d an , budget d recor a , taxes by the Federal Reserve Board, including decreases in e the cycl e stock-pric e th f o t poin g turnin r uppe e Th r membe f o s requirement e reserv e th n i d an e rat t discoun n i d occurre n electio 2 195 r Novembe e th g followin n a d an s price k stoc g soarin e wer s result e Th . banks e th t bu , election e th r afte s month o tw , 1953 y Januar economic recovery prior to the 1976 presidential election. November 1956 election was straddled by a "triple top." Stock prices reached unusual, almost identical, peaks seven months before the election, three months before s Cycle e Stock-Pric e th f o y Summar s A . election e th r afte s month t eigh d an , election e th e stock-pric f o d recor e th f o e awar e becam s investor e mor During the last two political-business stock-price cycles, declines following a presidential election there should r afte n soo n bega n contractio c economi g fosterin s policie be a tendency for stocks to reach their highest levels each election and stock prices reacted by declining. sooner, perhaps even before election day. Following the November 1968 election the bull market Each of the eight cycles has been assisted in its high was attained in December 1968, and following the initial price upswing by expansive measures of the November 1972 election the bull market high was reached Federal Reserve Board. Stimulative monetary policies in January 1973. But following the 1960 an, d 1961962 4, 1960 , 1957-58 , 1953-54 , 1949 n i n take e wer elections the bull market continued for slightly more than 1967, 1970-71, and 1974-75. Each of these periods was e th g followin h hig t marke l bul e Th . cases h bot n i r yea a k Stoc . prices k stoc n i h troug a f o m botto e th o t e clos November 1960 election occurred in Novemben r 1961adoptio e th , g and followin e cas h eac n i y sharpl e ros s price the bull market high following the November 1964 . Fed e th y b y polic y monetar e expansiv f o election came in February 1966. But in both cases, as in the two later cycles, a bear market occurred before the economy began a new rise prior to the next presidential n i n show s i s cycle e stock-pric e th f o g timin e Th . election . table s thi

Table 2 Bear Market Presidential Bull Market Low Election High

June 1949 Nov. 1952 Jan. 1953 Sept. 1953 Nov. 1956 Apr. 1956, July 1957 Oct. 1957 Nov. 1960 1 196 . Nov Apr. 1962 4 196 . Nov 6 196 . Feb 6 196 . Oct Nov. 1968 Dec. 1968 May 1970 Nov. 1972 3 197 . Jan 4 197 . Oct 6 197 . Nov

56 Chapter 5 k Ris w Lo r fo k Loo

l individua o t e cycl e stock-pric e th f o e significanc e On d shoul s Investor . strategy a s offer t i t tha s i s investor o t s opportunitie t expec o t n whe y approximatel w kno . risk w lo y relativel t a s stock y bu Stock purchases should be made when the risk of loss appears to be minimal and the potential for large gain s opportunitie t bes e th t pas e th n I . good y ver e b o t s appear for large gains with slight risk have been near the bottoms of the bear markets which have occurred regularly n whe s i t inves o t e tim t safes e Th . years r fou y ever t abou n Whe . decline g lon a r afte t weakes s appear t marke e th s i n inflatio d an g boomin s i y econom l nationa e th o t n begi n ofte s price k stoc , concern f o e b o t g beginnin l federa e anticipat s investor e som e becaus e declin anti-inflation policies such as tight credit. At bear market k Stoc . true e b o t r appea t no s doe s thi , however , bottoms n eve s market r bea n i e declin o t e continu y usuall s price after the Fed has switched from a policy of monetary n i , example r Fo . ease y monetar f o e on o t t restrain February and March 1970 there was widespread n soo d woul d Fe e th t tha s economist g amon n expectatio ease up on credit, and the Fed itself stated that tight-credit . progressed r yea e th s a y graduall d relaxe e b d woul s policie untit no lthas y bealate wa etth Ma rt i market Bu t plunged to its final low and prices began to rebound.

Buy During the Selling Climax

o t n pla , investing l successfu o t h approac l genera a r Fo purchase stocks when the market is forming a base following a bear market, and plan to sell stock when bull markets are beginning to grow old. Many investors y particularl , actions e thes g takin y difficult e hav y evidentl . way t tha d en o t e hav y necessaril t no o d s market when it comes to selling stocks. There is vasd an t , professionaprotracted le b n ca m botto t marke r bea a s Sometime assistance available in selecting stocks for purchase, but the subsequent bull market recovery slow and gradual. in determining when to sell a stock, the individual A more difficult problem arises when you investor is usually on his own. , depressed a t a t no s i t marke e th t bu t inves o t t wan d an , stock e som g purchasin n i d intereste e ar u yo f I n i e mov s price k stoc , However . level t bargain-basemen the stock averages are in a bear market, wais i tt I unti . l therecontinue o t d ten , established e onc , which s trend is evidence which indicates that the end of the downward important to determine whether the trend of the market, movement has arrived. The evidence could include very as indicated by the various averages, is bullish. The specific sharp price declines with a big increase in volume, the stocks that interest you might remain bullish even in a number of stocks declining vastly exceediny the t g thostha d e goo y ver e ar s odd e th t bu , market r bea l genera advancing. If you follow stock prices closely, you will will not. In bull markets we usually have a market of a s reache g sellin c pani n whe x clima g sellin e th e recogniz stocks, with some very bullish, some bearish, and some peak. Most newspapers will feature the eveny t inever bannet ralmos t marke r bea g stron a n i t Bu . inconclusive headlines and stock market analysts will l be quoteFedera e dth ar s whethe e determin o t y Tr . weak s turn k stoc saying that the Dow Jones industrials will o falt y l tr anothe o Als . r credit g easin r o g tightenin s i d Boar e Reserv 150 points. There will be long lists of new lows but few, determine the trend of earnings of corporations. The g sellin e th g durin g buyin s mis u yo f I . highs w ne , any f i combination of rising earnings and an expanding money d secon a e hav t migh u yo d an s week w fe a t wai , climax supply should indicate a continued bull market. g followin , low r earlie e th s test n ofte t marke e chance—th a technical rally. There will be other evidence that the bear market low is at hand or near. The Federal Reserve Trade With the Market's Primary Trend Board is likely to begin increasing the nation's money n ofte e ar s requirement n margi t marke k Stoc . supply f o n directio e th g determinin r facto l influentia t mos e Th e stimulat n ca e Reserv l Federa e th f o s Policie . reduced . market e th f o d tren y primar e th s i s price k stoc c specifi d boar e th f i t i s depres o als n ca y the ; market k stoc e th t i , market k stoc e th n i l successfu y consistentl e b o t , So . desirable s i n actio t tha s believe e b t no o D . trend s market' e th h wit e trad o t t importan s i t importan y ver a y pla s emotion s market r bea g Durin s i t i , market r bea a s i e ther n Whe . market r bea a n i l bul a r bea e th n whe y particularl , securities f o s sale e th n i e rol wise to be either in cash, ready for a buying opportunity d an s seller h Bot . stage x clima g sellin l fina s it n i s i t marke at the bottom of the decline, or a short seller if you are buyers expect lower prices. Sellers dumt p theishor r fo r stocks s in candidate d goo g selectin t abou e knowledgeabl e continu l wil e pric e th t tha n certai l fee y the e becaus c pani s i t marke k stoc e th f o d tren y primar e th n Whe . sales to decline. Buyers hold back because they y expecdifficult e t evehav s n stock t stronges d an t bes e th n eve , down bigger bargains to be available in a few weeks. In this bucking the trend. period, when emotions are the dominant influence of no e purchas e th g considerin s i r investo n a n Whe stock prices, values become distorted and outstanding turnin r g majo e th n betwee s period g durin s securitie . available e ar s opportunitie g buyin points at bull market tops and bear market bottoms, one Although most recent bear marketf so havn e endedirectio de th s i e determin t mus e h s thing t firs e th f o r bea , reversal d tren g stron a d an x clima g sellin a h wit the primary trend. He must also try to estimate how

60 61 long a major uptrend will continue before a reaction is CHART 6. UNITED FINANCIAL CORPORATION OF CALIFORNIA n i n bee s ha d uptren n a r longe e th , Normally . likely effect, the greater is the likelihood of a trend reversal. New or young bull markets are safer than stale or old bull markets. This is one reason why daring, aggressive speculators are usually more successful than more conservative investors. They buy earlier, and usually at lower prices, in a new bull market. Investors who wait until they are sure, and they are numerous, are likely to e befor d tren e intermediat y reactionar a y b t caugh e b they have much price appreciation in their stocks. During years that have experienced bear markets l unti k wea n remai l wil t tha s stock y man e ar e ther December and sometimes until the end of the year. This weakness is usually due to continued selling in order to establish losses and sometimes gains for income tax purposes. Since this type of overhanging supply will disappear by December 31, this time of the year often ranks high for buying opportunities. In late December 1967,1 became interested in the California Savings & Loan stocks and purchased shares of United Financial and Wesco Financial. That year had a n i n bee d ha s L' & . S e th d an r yea t marke r bea a n bee s A . 6 t Char n i n show s a , midyear t abou e sinc e declin expected, the tax-loss selling ended in late December. n i 4 $1 d pai d ha I h whic r fo , Financial d Unite e th d sol I e th d an , July g followin e th 4 / 3 24 t a , December e lat e t 7 15 t a d purchase d ha I h whic , stock l Financia o Wesc

. July n i a / 28 t a d sol , 11 r Decembe n o g sellin f o d en e 3 th r afte l unusua t no e ar s Rebound for tax purposes. In some years the reversal occurs early, around Thanksgiving, as in 1971. That year a buying stampede occurred that was largely technical. Most of the tax-related selling had been completed by then. There were no news developments to changd en e e th thr e nea s downtrend r thei e revers n ofte s stock g Declinin . economy l nationa e th f o e natur l fundamenta of the year, as selling for income tax purposes subsides. The g stron ; 1966 s wa r yea t marke r bea r Anothe arrow indicates a trend reversal in December 1967. s Jone w Do e th h bot y b d experience e wer s rebound Chart by Securities Research Company industrials and Standard & Poor's Index of 500

62 63 t a 6 196 d ende s industrial w Do e Th . Stocks e Composit r Simila . 871 t a e wer y the y Februar y earl y B . 780 t abou Part III patterns can be found near the end of other bear market Which Stocks Should You Buy? years such as 1957, 1960, and 1962. They offer . investors t aler r fo s opportunitie In late 1974 the market averages declined to a bear d rebounde n the t marke e Th . 4 r Octobe n o w lo t marke strongly and the Dow Jones industrials gained about 100 e th g durin d an n agai d decline t marke e th t Bu . points second week in December reached levels slightly above those of October 4. From the early December lows the s price , 1 y Januar r afte , Then . mildly d advance t marke surged on high volume. The strong market lasted for e th t tha e not o t g interestin s i t I . months x si n tha e mor l stil s wa y econom s nation' e th e whil d occurre y rall y rall t marke k stoc g stron e Th . recession a o int g slidin happened because almost everyone who was considering selling would have done so by the end of December, for income tax reasons. With selling for tax purposes out of the way, many investors were aware that the market was f o e spit n i e du s wa d reboun a t tha d an d oversol y seriousl the bad economic news. Other buyers anticipated the economic recovery following the recession. So stock market prices moved, as they so often do, months prior to the actual economic recovery. In late 1975 stock prices again trended downward g intermediatejow—durin n low—a a e mad n agai d an the first week in October. This was followed by an eighty-point rally and decline, which ended again in early December. From early December the market slowly strengthened and once again exploded in a high s Jone w Do e Th . 1,1976 y Januar r afte y rall e volum industrial average gained more than 120 points in e brok h mont e th r fo g tradin f o e volum e th d an , January e th n Agai . Exchange k Stoc k Yor w Ne e th n o s record l al removal of the supply of stock being sold for tax purposes was an important cause for the new market strength. Many earnings estimates for the next year are also made in December, an additional stimulus.

64 Chapter 6 Safety First

s i t I . safety s i k stoc g buyin n i n consideratio t firs e Th good policy to allot only a fraction of available funds for investment in stocks. It is also important to keep in mind that safety is derived more from the good timing of the purchase and less from the financial strength of the company. The stocks of the nation's largest and g durin y drasticall d droppe e hav s corporation t stronges . declines t marke k stoc l genera

e Declin o Als t Bigges e Th

When stock market averages reached a new 1973-74 low f o e valu e th n i e declin r two-yea e th , 1974 , 4 r Octobe n o stock holdings exceeded $500 billion steee .Th p decline in market values affected investment companies, mutual , foundations , companies e insuranc , funds n pensio , funds and college endowments as well as millions of individual t stronges e th , stocks e speculativ o t n additio n I . investors of growth stocks and high-quality stocks of great financial strength were also affected. The drop in market value of IBM exceeded $30 billion, of Sears Roebuck $12 billion, of AT & T $7 billion, and of Exxon $10 h bot k Koda n Eastma d an s Motor l Genera . billion declined more than $14 billion in value. s stock l individua f o s decline e pric r two-yea e Th included Avon Products from 140 to 185/s, Polaroid

, V 0 15 o t / 365 m fro M IB / , 14 o t V 3 14 m fro 2 4 8 2 1

s Numerou . /2 1 4 o t 4 3 / 12 m fro k 1 Roebuc s Sear d an

1 1 other quality stocks suffered declines as severe as these.

67 Price Trends of Income Stocks E AVERAG Y UTILIT S JONE W DO . 7 T CHAR The income stocks, most of which are utilities, were in a d continue f o e becaus e decad a t abou r fo e declin t persisten inflation. Compared with the quick, spectacular results y carefull f o e purchas d well-time e th n i e possibl e ar t tha selected superperformance stocks, those stocks which s i t i , less r o s year o tw n i e pric n i e mor r o e tripl s stock e incom o t d occurre s ha t wha e not o t g interestin selected because of their large dividends. Chart 7 shows Jonew Do s e utilitth y average, whic calculatehs i d from the prices of fifteen large electric and gas utility companies. Inflation and the resulting high yields from e hav s deposit k ban m fro s rate t interes h hig d an s bond had a continuous depressing effect on the prices of most f o e becaus d purchase s stock n commo r othe d an s utilitie n ca s stock e incom t tha y wa y onl e Th . dividends r thei keep the stock price up is by raising the dividend to a t interes d an s yield d bon h wit e competitiv s i t tha l leve g includin , stocks e incom r othe t Mos . deposits k ban m fro n i n show , Telegraph d an e Telephon n America t gian e th f o t pligh e Th . downtrend s thi w sho o als , 8 t Char •66 I '67 I '68 1 '69 I "7O I '71 I T2 I T3 I '74 I '75 I conservative, hold-for-income type of investor was dramatically shown when Consolidated Edison, the big The long-term decline in the price and price/earnings ratios r fo d dividen s it g payin d omitte , utility y Cit k Yor w Ne d an 7 196 , 1966 n I . chart s thi n i t apparen s i s stock y utilit f o e th f o k stoc e Th . years e eighty-nin n i e tim t firs e th e lin s earning e th e wher n show , 15 s wa o rati E P/ e th 8 196 company declined to one-fifth of its , 1965 higher hig s hwa ano drati thE eP/ e th 6 196 o t r Prio . bars e pric e th s crosse Jonew Do s utility average decline abouo dt t one-hals it f y usuall e ar s stock y Utilit . lower n bee s ha t i 8 196 e sinc d an . high e all-tim . dividends r thei r fo d purchase o t n lear t mus r investo l individua e conservativ e Th Company Research Securities by Chart buy and sell for his own protection because he has no e extrem r fo e responsibl e ar t tha s force e th r ove l contro e th e ar s force e thes g Amon . stocks n i s move e pric stop-and-go fiscal and monetary policies of the Federal Government, the persistent inflation that continues to e th , securities e investment-typ f o e valu e th e erod extensive in-and-out large-block speculation of y b s earning f o n distortio e th , investors l institutiona m pessimis d an m optimis f o s extreme e th d an , companies

68 69 H TELEGRAP D AN E TELEPHON N AMERICA . 8 T CHAR found in crowd psychology as unsophisticated investors rush in to buy near the top of bull markets and panic into selling near the bottom of bear markets. There will f o s fear d an , recessions d an s boom e b o t e continu e continu l wil n speculatio f o s Cycle . recessions e possibl to be with us, offering opportunities to the alert and knowledgeable.

l Price-Cyclica e Ar s Stock t Mos

For many years certain stocks have been considered to e ros s companie e thos f o s busines e th , is t tha ; cyclical e b t tha d assume o als s wa t I . cycle s busines e th h wit l fel d an some industries and certain companies were noncyclical— little affected by the changes in business conditions. The attitude developed among investors that cyclical industries were to be avoided and that others, such as established growth companies, were to be favored. To a certain extent this artificial division of companies into y difficult d ha s ha T & T A f o k stoc e investment—grad e Th cyclical and noncyclical has been deceptive because , 1964 n i e mad s wa h whic , level e pric h hig r forme s it g regainin althoug earninge hth f somso e companies migh little b t e although earnings and dividends have increased. In 1964 the affected by the business cycle the price of the stock stock had a price/earnings ratio of 25. In late 1974 the P/E is often as cyclical as that of companies strongly had contracted to 8. AT & T has been a favorite of institutional affected by the business cycle. Virtually all stocks are 6 1,06 y b d owne e wer s share 5 196 n I . years y man r fo s buyer price-cyclical. Stocks that are not earnings-cyclical often institutions; 717 institutions held sharee s in 1976. susceptibl The ear prics ethu d an , ratios s price/earning r highe e hav decline since 1965 of income stocks such as AT & T has paralleled to reactions when the primary trend of the market the long-range decline in bond prices. The company furnishes tele- begins to decline. This can occur even during a period of . country e th f o t percen 2 8 t abou o t e servic e phon increasing earnings. Chart by Securities Research Company The safest time to invest is also the time that offers the best opportunities for large capital gains. To determine the reason that some stocks rise in price, a r ove d studie I , decline s other e whil , dramatically n ofte e twelv illustrating h eac , charts k stoc m long-ter d thousan years of prices, earnings, and dividends. The review included all of the corporate giants as well as hundreds of small and medium-sized companies. It revealed that the overwhelming majority of price moves during which

70 71 the price increased to three or more times its original f o s low t marke r bea e th m fro s rebound s a n bega e valu his Cadillac is a good car. He knows that General Motors e thos e wer y onl t No . 1974 d an , 1962,1966,1970 is a good company. Therefore, he reasons, General periods the safest times to buy, but they also were Motors is a good stock to buy. A few years ago I listened outstanding buying opportunities for large capital gains. on my car radio to a stock market analyst being t marke e th n whe s i s stock t mos y bu o t e tim t bes e Th s adviser' e th f o n discussio e th g Durin . interviewed looks like a disaster. It is then that thed risk ishoul s s lowest aninvestor t d tha d state e h y philosoph t investmen . highest e ar s reward l potentia e th buy "quality" stocks. e th d aske " recommend? u yo o d s stock t "Wha interviewer. s Gain l Capita e Larg r fo y Bu "Oh, General stock, MotorsT & sT lik,A e that," was the reply. s increase e larg , is t tha , performance k see t no o d u yo f I The twelve-year price histories of these stocks are e ar u yo s stock y bu u yo n Whe ? stocks y bu y wh , value n i s downtrend n i n bee e hav y The . 10 d an 8 s Chart n i n show h muc s i t I . capital r you h wit k ris l substantia a g takin e sinc T & T A , 1965 e sinc s Motor l Genera : years r fo more likely to be partially lost than to be increased. To 1964. Keep that in mind when you hear someone say justify the risk that you are taking, you should ha dI f expecI " t chips. e blu g bi e th o t k Stic . quality y "Bu to be rewarded with big gains. If you do not aspire to followed that advice in the early 1960s I would not have big capital gains, you might as well turnt youtha r n backwhe s on Inn y Holida r o , Syntex r o x Xero t bough , haven r safe a n i l capita r you e plac d an t marke k stoc e th . stock r over-the-counte n a l stil s wa y compan for if you do not use a systematic approach to s Motor l Genera f o e pric e th 4 197 r Novembe y B attain large capital gains, if you approach investing stock had declined to a seventeen-year low, "but" some conservatively or use a haphazard method" , back. th e chancecom s s alway s stock y "qualit , say s expert k stoc d investe r you f o h muc e los l wil u yo t tha d goo e ar Possibly so, but you might have to wait a few decades. capital. / believe that an investor should look for stocks that are capable of tripling in value within two years. Since it is unlikely that the investor will buy the stock at the lowest price and sell it at the highest, it is more likely that he will double his investment rather than s i e ther s unles d purchase e b t no d shoul s Stock . it e tripl . move g bi a f o e chanc d goo a

A Superb Company Does Not Necessarily Have a Superb Stock e th d calle e b t migh t tha e attitud t investmen e on s i e Ther "Cadillac Fallacy." Assume that an investor knows that

72 73 Chapter 7 d Recor e Th : Stocks e Superperformanc

l capita e larg r fo s stock n commo f o n selectio e Th gains depends primarily on a search—a search for Superperformance. Superperformance stocks are those . increases e pric d sustaine , strong e mak t tha s stock d an 4 197 r Octobe n betwee ; uncommon t no e ar y The October 1976 about one stock in every five tripled in price. During the two-year period following the bear market lows in late 1974 there were 243 stocks that s a s stock 8 1,01 f o s chart m long-ter n o y identif d coul I l cal I s action , price n i e mor r o d triple g havin Superperformance. I define a Superperformance stock a t a d increase d an e pric n i d triple t leas t a t tha e on s a . period r two-yea a g durin s time e thre f o e rat m minimu , years o tw n tha s les d laste t tha s move d ha s stock y Man s increase e pric t persisten d ha s stock r othe y man d an that lasted longer than three years. If the rate of price increase in each case was greater than three times in two years, it is included in the Superperformance e pric e th f i d ende d considere s wa e mov A . category r o , months x si n tha s les n i h hig w ne a h reac o t d faile if there was a price reaction of 25 percent or more, e ar e Ther . reaction e th f o n duratio e th f o s regardles numerous cases of brief reactions in stocks that were followed quickly by additional strength which multiplied . times y man e pric e th n well-know n i d occurre s ha e Superperformanc growth stocks; it has happened, at one time, in stocks of companies that are now considered to be large, stable, e th n i s occur n ofte o als e Superperformanc ; mature d an . known e littl d an l smal e ar t tha s companie f o s stock It is triggered by many actions, such as a surprise s company' a n i e increas e larg a f o t announcemen earnings, or the decision of one company to merge with

7S another. But most often it is found in stocks thatn areActio e Pric e Superperformanc f o s Feature rebounding from oversold conditions, such as those characteristic of bear market bottoms. Superperformance price action is not consistent year d rebounde t tha s stock e superperformanc 3 24 e Th k stoc e Th . stocks h growt t greates e th n eve n i r yea r afte from the 1974 bear market lows were in addition to prices usually move rapidly upward for a period of e superperformanc 9 58 f o l tota a d ha t tha s stock 4 43 e superperformanc e th s i s Thi . years l severa r o s month moves during the period beginning y witb hd the 196followe e 2b t migh e stag e superperformanc e Th . stage t marke r bea 4 197 h wit g endin d an m botto t marke r bea a price reaction, or a sideways price movement. After a 9 58 e thes f o s characteristic d an s duration e Th . lows period of consolidation, which sometimes lasts for years, superperformance moves were studied in greate. rstage e superperformanc r anothe e b t migh e ther detail on long-term charts. All are listed in the An example of superperformance as it appears on a Appendix. line chart is shown in Chart 9, which is a twelve-year The analysis of the superperformance moves chart of Skyline Corporation, a major producer of mobile e th m fro s rebound s a n bega m the f o 7 40 t tha d reveale e thre s show t char e Th . vehicles l recreationa d an s home 1962, 1966, and 1970 bear markets; 20e 7 moves begansuperperformanc t firs e Th . phases e superperformanc s move 4 4 ; markets r bea 6 196 e th f o m botto e th r nea move began near the bottom of the 1962 bear market; d an ; market r bea 2 196 e th f o m botto e th r nea n bega the price more than quadrupled in less than a year. The . market r bea 0 197 e th f o m botto e th r nea n bega 6 15 e th f o d en e th t a n bega e phas e superperformanc d secon There were 182 superperformance price moves that 1966 bear market; the stock multiplied more than a r unde d perio e th g durin e tim r othe e som t a n bega e Th . years o tw g followin e th g durin e pric n i s time n doze study. third price superperformance phase began at the May 26, e superperformanc , performers r sta 7 5 e wer e Ther 1970 bear market low and ended less than two years n tha r greate s increase e pric d experience t tha s phase d quadruple n tha e mor e pric e Th . 1972 y earl n i , later e wer s move e pric 2 16 l additiona n A . percent 0 1,00 s a h suc s phase e superperformanc e Pric . move t tha g durin greater than 500 percent. these can be highly rewarding financially in a relatively e mak t mus u yo s stock n commo n i t inves u yo n Whe s stock r fo k loo o wh s investor t bu , time f o d perio t shor d an , stocks h whic , buy o t n whe : decisions t correc e thre with superperformance potential must know what they e th t tha g overwhelmin s i e evidenc e Th . sell o t n whe are looking for. The search for superperformance really good price gains are made by stocks as they candidates must be thorough and systematic, and the rebound from the lows of four-year cycles. timing of the purchase and sale are also vital. But for There has been a wide range in the time span of investors who can make three correct decisions the superperformance phases, from three months to rewards are often large. s duration d ha e hav s move e th f o t mos t bu , sixty-three of eight to thirty-three months. Eleven of the superperformance price moves lasted less than six Superperformance and Company Earnings 2 28 ; months e twelv d an x si n betwee d laste 2 14 ; months d laste 4 12 ; months r twenty-fou o t e twelv d laste e b n ca s move e pric k stoc e superperformanc y Man twenty-four to thirty-six months; and 30 had a duration correlated with earnings increases by companies. About of more than thirty-six months. s move e pric e superperformanc e th f o t percen 8 3

76 77 CHART 9. SKYLINE coincided with or briefly followed large increases in the t percen 8 2 l additiona n a n I . earnings y quarterl d reporte s earning e th t bu d occurre e mov e pric e superperformanc a were only moderately higher. In about 34 percent of the e th n betwee e mad e b d coul n correlatio o n s move e pric superperformance move of the stock and earnings gains by the company. In many of the latter group there was a declining trend at the time the price upswing began. w fe a n bega s earning g increasin f o d tren a s Sometime e th f o g beginnin e th r afte e mor r o r yea a r o s month superperformance price move. A comparison of each stock's price/earnings ratio t a ) share r pe s earning s it y b d divide k stoc e th f o e pric e (th the beginning of each of the 589 superperformance moves e mov h eac f o d en e th t a o rati s price/earning e th h wit 9 6 n I . cases 4 46 n i d increase o rati e th t tha d reveale instances it decreased or remained the same, while in 56 cases there was an earnings deficit at the beginning of the move and P/E computations were not made. Of the 464 superperformance moves during which an expansion or g durin 6 8 e wer e ther , occurred o rati E P/ e th n i e increas l additiona 8 11 n I . more r o d quadruple o rati e th h whic cases the P/E more than tripled, and in another 156 the P/E at least doubled from the beginning of the move to its end. A P/E increase of less than 100 percent occurred . moves e superperformanc 4 10 g remainin e th g durin e superperformanc e th f o 0 10 f o e sampl m rando A e th n bega s stock e th f o t percen 7 3 t tha d reveale s move r unde s ratio E P/ . 15 d an 0 1 n betwee s ratio E P/ t a e mov 0 2 d an 5 1 n betwee s P/E' , percent 3 3 d contribute 0 1 contributed 20 percent, and 10 percent of the superperformance moves had stocks with P/E ratios above 20 at the beginning of the move.

e Siz y Compan d an e Superperformanc

Most strong-performing stocks belong to small companies 9 58 e th f O . stock f o s share w fe y relativel h wit This long-term chart of Skyline clearly shows the stock's three superperformance phases, indicated by arrows. Skyline is a major producer of mobile homes and recreational vehicles. Chart by Securities Research Company superperformance price moves during the period, in 481 phases have ended in the months of December, January, of the moves the company had a capitalizatios suggest nh of leswhic , s months r othe e th g durin n tha l Apri d an e mov e pric e th e tim e th t a s share n millio e fiv n tha n i e rol t significan a y pla s factor x ta e incom t tha d an e fiv n betwee d ha s companie e th s move 8 5 n I . began determining when profits are taken. ten million shares of common stock, and at the beginning There appear to be three principal causes for the n millio y twent d an n te n betwee e wer e ther s move 1 4 f o price reactions. These include weakness in the stock shares outstanding. There were only 9 superperformance market in general, including the beginnings of a new bear y thirt o t y twent h wit s companie f o s stock e th n i s move market; the overpricing of stocks, which often results h wit s companie 2 y onl e wer e ther d an , shares n millio in profit-taking and a lack of new buying interest; over thirty million that had this type of price action. and a drop in a stock's earnings. However, in most of the e befor e slid s it n bega e pric s stock' e th s instance r latte , cases y man n I . decline o t n bega s earning d reporte e th n Actio e Stock-Pric t Subsequen d an e Superperformanc though, the earnings decline was undoubtedly anticipated by some investors. a r afte s price g declinin e experienc s stock t Mos f o w revie A . course s it n ru s ha e phas e superperformanc e superperformanc 9 58 e th g followin n actio e pric e th Characteristics of Superperformance Stocks moves revealed that in many cases the price decline is e pric e sever a t withou d ende s move 5 8 y Onl . severe When stocks begin to regain strength after touching bear a o int d move t tha s stock s include l tota 5 8 e Th . reaction k bac e bounc t tha s stock e th e ar h whic , lows t marke sideways price action and stocks thate sufferesom y b d d leshel s f thanbelie a o t y Contrar ? strongest d an t fastes a 10 percent retracement of the superperformance move. investment advisers, it is not the big, quality stocks. The Of the other 504 moves, within one year 63 began a rebounds from the 1966 and 1970 bear market lows d ha y the t amoun e th f o e mor r o t percen 0 10 f o e declin were rapid and strong; hundreds of stocks participated. n A . move h bullis e entir e th d retrace t tha d advance s wa , however , market r bea 2 196 e th m fro y recover e Th d retrace e wer s move e superperformanc 5 13 l additiona . strongly d rebounde s stock w fe y Comparativel . slower by 100 percent or more declines that began a year or There were 44 stocks of the 1,018 studied that began more after the end of the superperformance move. In superperformance moves that originated at the 1962 some cases the decline did not begin, until severaIndustries F l yearAC : s follows s a e wer y The . lows t marke r bea 0 10 o t 0 5 d ha h eac s move 4 8 l additiona n A . elapsed d ha , Chrysler , Milwaukee o Chicag , Cerro , Airlines n America t tha e declin a y b d retrace e mov h bullis e th f o t percen Columbia Broadcasting, Continental Airlines, Control began within one year, and 95 bullish moves had 50 to 100 Data, Culligan International, Delta Airlines, Dennison, percent of their moves retraced by decline, s thatGreyhound bega, nCable l Genera , Products s Evan , Pepper . Dr more than a year after the bullish superperformancs Flavor l e Internationa , Hoover , Engineering e Voltag h Hig move had ended. Seventy-two moves experience, Chemical dd an s Mineral l Internationa , Fragrances d an 5 5 d an , year e on n withi t percen 0 5 o t 0 1 f o s decline Joy, Massey Ferguson, Motorola, National Airlines, moves were followed by 10 to 50 percent declines Northwest Airlines, Pan American World Airways, Pasco, that began more than a year after ths e enBate d d ofan thg e Readin , Refining l Oi e Stat r Quake , Pennzoil e superperformanc e mor y Man . phase e superperformanc , Skyline , Scovill , Minerals e Jo . St , Drilling e Offshor

80 81 Syntex, Technicolor, Texas Instruments, Textron, Tidewater Marine Service, Time, Trans World Airlines, Chapter 8 r Ai d Unite y (formerl L UA , Works e Dy e Piec d Unite y Volatilit e Pric r fo k Loo . Xerox d an , Airlines n Wester , Industries V U , Lines) s companie s numerou f o s name e th s contain t lis s Thi f i , few s ha t I . stocks r glamou s a n know e becam r late t tha any, stocks that were considered established blue chips After an investor has concluded that an ideal time has in 1962. The budding glamour stocks: is o nn the lisquestio t t includnex e eth , stocks f o e purchas e th r fo d arrive nine airlines; air travel at that time was a rapidly "Which stocks?" To answer that question one of the l financia e hav o als s stock e airlin d an , industry g expandin first features to investigate is price volatility. By reviewing leverage. Many other stocks were of companies with a set of long-term charts an investor can quickly identify unique new products: Xerox and Dennison (copiers), those stocks that have had a history of high price s Instrument s Texa , pills) l contro h (birt x Synte volatility and those that have had little volatility. The (transistors), Skyline (mobile homes), and Control volatility a stock has experienced in the past tends to w ne a d receive t jus d ha r Chrysle . (computers) a Dat continue in the future. It is a result of the company's . team t managemen size and the nature of the markets for its products, its f o c characteristi e wer s earning g increasin y Rapidl financial leverage, and the volume of trading in its stock, most of the stocks on the list. Another notable feature is A volatile stock's price rises more in bull markets . 1962 n i l smal e quit l al e wer s companie e thes ; size r thei k stoc e th y b d represente s a , stock e averag e th n tha k stoc f o s share 0 10,000,00 n tha e mor d ha e on y Onl e th n tha s market r bea n i e mor s decline d an , indexes outstanding—Massey Ferguson, with abou. t 13,400,000larger h muc e .ar s swing e pric s it , Thus . stock e averag n tha s les d ha s companie r forty-fou e th f o t Twenty-eigh The reason for investigating volatility is simply that . stock n commo f o s share 0 5,000,00 , stocks y bu o t e tim t perfec e th k pic o t l logica t no s i t i This review of the price history of mora t e thaselec nn athe d an , bottom t marke r bea a r nea s a h suc thousand stocks has yielded some good t cluei e s regardinbecaus y g strongl d reboun o t y likel t no s i t tha k stoc t wan e w f i r fo k loo d shoul e w s stock f o s type e th lacks volatility. Most of the huge, mature corporations, to invest for rapid price appreciation. A winning such as the international oils and major utilities, do combination in potential superperformance d stocan l k is smal s numerou ; volatility e pric h hig e hav t no rapidly rising earnings, a small supply of stock, low P/E medium-sized companies, on the other hand, do. ratios, and a product that promises strong future growtha y b d . cause s i e pric n i e increas e percentag e Larg e th f o e siz e th y b y particularl t bu , factors f o r numbe floating supply of the stock and the demand for shares e th s i p relationshi y demand-suppl e Th . investors y b r o g risin s i e pric e th r whethe f o t determinan n mai declining, and how fast. s i y availabilit s it d an k stoc r fo d deman , turn n I determined by several factors including the price level and price action of the stock; the future outlook of the company, including its earnings trend; the trend of and

83 CHART 10. GENERAL MOTORS r o m pessimis e th ; general n i s stock f o n actio t curren optimism of investors; sponsorship and promotion of the stock; the cost and availability of money; and news e b d shoul s influence e thes f o t Mos . developments d an d selecte s i k stoc c specifi a e befor d considere purchased.

Stock Prices Reflect the Law of Supply and Demand s economic e colleg a n i d covere s subject t firs e th f o e On y suppl f o w la e th d an n competitio l commercia s i e cours g sellin d an g buyin n i e compet s Individual . demand d an services and commodities of all kinds. As buyers, individuals seek to pay as little as possible for the goods, t tha d fin y the t Bu . want y the y propert r o , services others are also in the market for the same things and, as a result, they often have to pay more than they had r thei f o e dispos o t k see s individual , sellers s A . planned y man e sinc t bu , price e possibl t highes e th r fo s good Large companies like GM, which has over 285 million shares o t e hav often y the g thin e sam e th o d o t g tryin e ar s other of common stock outstanding, usually have relatively stable g bein s item e th n Whe . hoped d ha y the n tha s les r fo e settl stock prices. But this chart reveals that even high-quality stocks y suppl e th , stocks n commo r popula e ar d sol d an t bough can be subject to sharp sell-offs. GM declined from about 84 in can often be insufficient to meet the demand. . The percent resul 5 6 f to p dro a , 1974 e lat n i 9 2 o t 3 197 y earl is an increase in the price of the stock, which brings Chart by Securities Research Company e th s reduce d an s seller m fro y suppl r bigge a h fort demand of buyers so that a temporary equilibrium is achieved. The supply is determined primarily by the number of shares in the capitalization of the company. A large company like General Motors, shown in Chart 10, has a e whil , stock n commo f o s share n millio 5 28 n tha e mor relatively small company like Jack Eckerd, shown in a , Obviously . shares n millio 7 1 t abou y onl s ha , 11 t Char strong demand for the shares of Jack Eckerd is going to have a greater effect in increasing the price of the stock l Genera n o e hav d woul e siz e sam e th f o d deman a n tha Motors. The big demand is caused by many factors, such as

85 84 CHART 11. JACK ECKERD CORP. y theavailabilit r o , sponsorship g stron , publicity e favorabl of large sums of money for investment. Often it is caused t resul e Th . popular y widel g becomin t produc w ne a y b g floatin l smal y relativel a r fo g biddin g stron e b n ca r fo n situatio classic e th g creatin , stock f o y suppl superperformance price action. Some of these strongest superperformance price n betwee e imbalanc e sever a f o t resul e th n bee e hav s move limitee th d suppl f stocyo k offeree th salr d dfo e an strong demand by investors wanting to purchase the stock. When Syntex was rising in a strong superperformance move in 1963, trading in the stock frequently had to . imbalance d supply-deman e th f o e becaus d stoppe e b 0 1 r unde m fro s month e twelv n tha s les n i e mov a r Afte to over 190, the move was finally broken by institutions offering large blocks for sale. t marke k stoc e th n i s gain g bi r fo s Opportunitie s companie l smal y relativel n i r occu o t y likel e mor e ar s share f o s million y man h wit s companie n i n tha outstanding. Look for a small company introducing a unique product that is likely to become widely used. This is the combination that has time after time resulted in dynamic growth and volatile superperformance stock-price action. s stock d low-price n betwee y volatilit n i t contras e Th and blue chip stocks can be measured by comparing the performance of Standard & Poor's index of low-priced common stocks with the Dow Jones industrial average, e th n i s corporation t larges e th f o y thirt s contain h whic country. Four months after their 1974 bear market low, the index of low-priced common stocks was up 85 p u s wa e averag l industria s Jone w Do e th e whil t percen . percent 5 3 y onl

g Timin d an y Volatilit t Abou e Tal A

This Florida drugstore chain had fewer thae nth 400,00n i k 0 stoc share s s Airline h Dutc l Roya M KL t bough I n Whe e superperformanc t firs s it n bega t i n whe g outstandin k stoc f o mid-1960s at 106 3/4, the stocks of most airlines were price move in 1962. In 1966, when the second superperformance t a , 1970 n I . shares 0 800,00 n tha r fewe e wer e ther , started e phas the beginning of the third move, the company had a capitalization 87 of about 7,200,000 shares. Company. Research Securities by Chart doing well. The biggest problem was in selecting the He replied that he would. By eleven o'clock I had M KL e chos I . best m perfor d woul t tha k stoc e airlin received no phone call. I was beginning to become a n tha s les d ha t i ; capitalization l smal s it f o e becaus apprehensive because I was absolutely certain, having . time t tha t a k stoc n commo f o s share f hal a d an n millio watched the price action of the stock for a few x si r ove d ha n the s airline r othe e th f o t mos , contrast n I months, that it would reach the final peak that morning. million shares of common. In 1966 KLI " M wanow? s g not onldoin yM aKL s i w "Ho . again r broke y m d calle I y suppl g floatin e th t bu , capitalization l smal a h wit k stoc asked. y closel e wer s share e th f o y man e sinc r smalle n eve s wa "Down four points," he replied. a s wa e Ther . government h Dutc e th y b t percen 1 7 , held . him d tol I " it. f o l al l Sel . it l "Sel large and growing short interest. The result was great That summer morning in 1966 was close to the 3 a n o , closely e typ s thi f o k stoc a g watchin y B . volatility , 1966 n i 4 / 5 15 f o e pric a m Fro . KLM r fo p to l fina 1 e volatil s it t predic o t e possibl t almos s i t i , basis y dail KLM eventually declined to 13 /4 in 1974. This is moves. When the price jumped, heavs y shormove t e selling superperformanc e pric t tha n illustratio r anothe n i g brin d woul s weaknes e pric y An . follow n soo d woul o t e abl e b t mus r investo l individua e Th . phases n i . again p u e pric e th g drivin , covering t shor identify stocks early in their superperformance phase The monthly short-interest figures are summarized and sell when there is evidence that superperformance is and published in the Wall Street Journal and other approaching its end. When there is new evidence that the y Man . month h eac f o twentieth e th t abou s newspaper fundamentals of a stock, such as earning power, are short sellers would cover their short positions prior to weaker than previously estimated, the strong demand d afrai e wer y the e becaus s statistic e th f o n publicatio e th for the stock also disappears. e th e caus d woul s figure d publishe e th n i e increas n a t tha stock to jump again, jeopardizing their short positions. I finally decided to sell my KLM stock because its Price Distortions by Stock Exchange Specialists a , pattern r spea e unsustainabl n a d showe t char near-vertical formation, which often means heavy The normal supply-demand relationship is severely profit-taking and a price reaction. I decided d topermitte l selstil l am t abousyste tt specialis e primitiv e th y b d distorte ten thirty on the morning the short interest was published to operate at the stock exchanges. The specialists are n ru d woul g coverin t shor y panick t tha d assume I e becaus r floo e th n o l sel d an y bu o wh s member e exchang k stoc up the price of the stock on the day prior to the publication of the exchanges and who are assigned by the stock n actio s thi f o t amoun n certai a t tha d an s statistic e th f o exchange to make a market in specific stocks. In actual . released e wer s figure e th r afte y shortl r occu o als d woul practice they are often the antagonists of the public I called my broker and told him that I wanted to sell all investors. e b o t t i d expecte I e becaus g mornin t tha M KL y m f o , buying s i c publi e th d an g rallyin e ar s stock n Whe the final top in the stock. I asked hit m hoShor w . the stocsellers t k washor sd an s seller y usuall e ar s specialist e th . said e h " points, r fou t abou p u s "It' . doing selling is the selling of stock not owned by the seller. "Well," I replied, "if it is still going up there is no It is accomplished by borrowing stock. The short seller t ou p to o t t i d expecte d ha I . now g sellin y m n i t poin expects a price decline which would allow him to buy this morning. Will you keep an eye on it and call me an equal number of shares at a lower price, permitting right away if it starts to drop?" a e mak o t d an r lende e th o t m the n retur o t m hi

88 89 g coverin d an g sellin n betwee e differenc e th m fro t profi e fac t migh s investor s hazard e th e illustrat s example prices. from the activities of stock exchange specialists. Heavy short selling by specialists gives them a vested interest in having the stock's price decline to a s sale t shor r thei r cove n ca y the t tha o s , level r lowe s Rebound r fo k Loo and make a profit. The price decline is forced by heavy short selling at the top of the rally. The forced price The strongest rebounds usually occur when the entire e otherwis t migh h whic s pressure g buyin s cool e declin , 1966 , 1962 n i s a , oversold y drasticall s i t marke k stoc continue. s hundred , begins y recover e th n Whe . 1974 d an , 1970 n dow s drive h whic , selling t shor y heav f o e spit n I e Som . action y recover g stron e th n i t par e tak s stock f o l norma e th e tim f o d perio r longe a r ove , prices k stoc manage within months to regain the price level that they . influential e mor e b d shoul s pressure g sellin d an g buyin t no t migh s stock r Othe . sell-off e th o t r prio d possesse r thei " "cover r o k bac y bu y eventuall t mus s seller t Shor e th o t e challeng e Th . levels r forme r thei n regai r eve . sales t shor l wil t tha s stock e th y identif o t g attemptin n i s i r investo r thei t ar e fin a o int d develope e hav s Specialist rebound the fastest and the highest. y Theoreticall . down s price k stoc driving r fo s technique On October 4,1974, stock market averages reached they are supposed to be responsible for maintaining an new lows in a bear market that had started in January 1973 n i s fluctuation e wid g minimizin y b " market y "orderl r fo 2 197 r Decembe n i d an , industrials s Jone w Do e th r fo their assigned stocks by purchasing and selling for their more broadly based averages. The Dow Jones industrials s price t suppor o t n motivatio r thei t Bu . accounts n ow declined from a January 11,1973, high of 1067.2 to a o t e desir r thei s a g stron s a e b o t r appea t no s doe often g Followin . 783.56 f o w lo s energy-crisi , 1973 , Decembers o t d happene I 6 197 f o g sprin e th g Durin . prices s depres a rally in March 1974 to 878.13, the stock average began observe a stock listed on a regional stock exchange that its long decline to the October 4 low near 573. The last e singl a n i t percen 9 1 t abou r o , points 4 / 1 3 n falle d ha e mor f o p dro s precipitou a d include e declin e th f o e stag f o e volum e Th . 14 o t 4 / 17 m fro , session g tradin than 200 points between August 7 and October 4, a

d di t specialis e th o s , shares d 1 hundre x si y onl s wa g tradin Friday. On Monday, October 7, the market staged a not appear to be supporting the price, which rebounded strong rally; the Dow Jones industrials advanced 23 points. the following day. d advance s average e th , Tuesday n o p dro 3 4.9 a g Followin On another occasion I noted a newo t s s iteday me thathre t nex e th g durin s point 4 55.5 l additiona n a e headlin e th h wit n publicatio l financia a n i d appeare finish the week at 658.17. This was a typical "buyer's "Stock Exchange Fines, Censures Specialist." The news stampede" caused by large numbers of investors m fir t specialis a n i l individua n a w ho d describe y stor y severel e th y b d create s bargain e th y bu o t g attemptin . stock a n i t marke y orderl n a e mak o t d faile y allegedl g followin e th n O . market e th f o n conditio d oversol He was charged by the exchange with openin. g the continued e advanc g stron e th , 14 r Octobe , Monday f o e sal e th g triggerin y thereb , price a w lo o to t a k stoc During the six trading days the Dow Jones industrials had e th n whe d execute e wer h whic , orders p sto ' investors advanced more than 100 points. This type of strong stock's price declined to specific levelsf .o Thm e openinbotto e th g t a s movement e pric f o l typica s i d reboun price was the low for the day. It caused stop orders for bear markets. It indicates a major price reversal and is e Thes . executed e b o t s share f o r numbe l substantia a . purchases e mak o t e tim t bes e th

§0 91 Which Stocks Rebound? them had price increases of over 35 percent. Drug stocks were not the strongest group, however. There were three The big question we have been asking is: "Which stocks?" groups of stocks that reached their lows two to four u yo d perio s thi g durin y closel s table k stoc g studyin y B e th y b d recorde s low 4 r Octobe e th o t r prio s week d an y strongl g reboundin e ar s stock h whic e determin n ca market averages and the vast majority of stocks. These which are not responding. Many of thg e strondrillin l g oi rebounder e offshor se th d include s stock f o s group e thre n reaso t tha r Fo . leaders t marke e th e becom o t y likel e ar n i k wee d thir e th g durin " "bottomed h whic , companies r thei d an s stock e thos y identif o t t importan s i t i y an n tha r stronge d rallie y subsequentl d an r Septembe characteristics. other group; the mobile home stocks, which also began After reviewing the monthly Securith y Chartwhic , s ofstocks n loa d an s saving e th d an ; then y rall o t 1,105 leading stocks published by the Securities turned strong early in September. These three stock e th y quickl e determin o t e abl s wa I , Company h Researc d an e hom e mobil e Th . prices n i d reboun e th d le s group stocks with the largest percentage increasey s durinseverel m g fro th g e reboundin e wer s stock n loa d an s saving t tha s stock e seventy-nin e wer e Ther . rally 1 4-1 r Octobe s prospect d an , businesses e thos n i s condition d depresse y six-da e th g durin t percen 5 3 t leas t a y b d increase l Federa e th e becaus t brigh d seeme t improvemen r fo period. Although it is not likely that all of the Reserve Board had adopted policies for easier money. t tha g stron o s e b o t e continu d woul s stock e seventy-nin t no d ha s industrie g dru d an g drillin l oi e offshor e Th they would increase by 300 percent ovef o e r a two-yeabecaus d r decline d ha s stock e thes t bu d depresse n bee period and thus become superperformance stocks, it is the general bear market for stocks. very likely that many potential superperformance stocks In contrast to the strength shown by these groups are included in the list. The strong-rebound stocks are and many other stocks, some large, mature companies e th r fo s leader t marke w ne e th f o y man e includ o t y likel continued to decline to new lows during the strong next two years. , loan d an s saving e Th . averages t marke e th n i g upswin , 4 r Octobe e th m fro t mos e th d rebounde t tha s Stock e wer h whic , stocks e hom e mobil d an , drilling e offshor n bee d ha t tha s stock d oversol d include w lo t marke , 1974 , volatile e ar , advance e th n i s leader t prominen t mos e th e wer t Mos . rebound e th o t r prio y sharpl g declinin l smal e hav t Mos . chips e blu t no , stocks e speculativ g risin g includin , fundamentals g stron h wit s companie capitalizations. Some of the offshore drilling stocks earnings trends. Small capitalizations were more . period f brie t tha g durin e pric n i d double e th ; capitalizations e larg h wit s companie n tha s numerou f o r numbe e th s i h whic , interest t shor e larg A . represented t no e wer s chip e blu y primar , mature , large shares that have not been covered or repurchased, Of the seventy-nine stocks, forty-twa e o hacaus d n ofte n ca , capitalization l smal a h wit d combine f o d an , shares n millio n te n tha r fewe f o s capitalization stock to jump in price when the market turns bullish. . shares n millio e fiv n tha r fewe d ha e twenty-thre e thes Fifteen of the seventy-nine stocks had short positions n millio y twent d an n te n betwee d ha s stock n Ninetee of at least twenty thousand shares when the strong rally shares, seven had twenty to thirty million shares, and began. eleve mord nha e than thirty million shares largese Th . t This review of strong rebounders from the capitalization was seventy-eight millio, n sharesstocks g . stron l al e includ t no s doe w lo , 1974 , 4 r Octobe , rebounders g stron e th g amon e wer s airline r Fou d decline h whic s stock w fe a e wer e ther e sinc , course f o f o n te ; companies g dru e th s wa p grou t larges e th t bu d include t tha e plung e th g durin l al t a t no r o e littl y ver

92 93 d di y the h Althoug . averages e th s a l wel s a s stock t mos S NATOMA . 12 T CHAR t mos d affecte t tha f sell-of g stron e th g durin e declin t no stocks, neither did they rally as strongly during the rebound phase. It appears that many stocks that are relatively strong during a bear market are in their own up-cycle, t tha e futur a d an , sales d an s earning g increasin h wit appears bright. But the stock's price trend is dominated by the bearish primary trend of the general market, r othe t mos h wit g alon e declin o t e pric e th s cause h whic h bearis e th n Whe . severely s a t no t bu , prices k stoc n ow r thei n i e ar t tha s stock , bullish s turn t marke earnings up-cycle should also turn bullish. This is not , cycles h bearis n ow r thei n i e ar t tha s stock f o e tru however; even after the primary market trend turns e becaus k wea y relativel n remai o t y likel e ar y the h bullis of their own down-cycle of declining or static earnings and sales, or an unfavorable company outlook.

Emotional Selling and Trend Following e ar s stock g stron n whe s occasion y man e ar e Ther battered down to bargain-price levels by the highly 2 1 t Char . market r bea a f o l typica g sellin l emotiona a , Natomas f o d recor s earning d an e pric e th s show m petroleu e extensiv s hold o als t tha y compan g shippin e th 9 196 n I . Sumatra f of d an a Se a Jav e th n i s interest price reached a high of 130, then descended to a 1970 bear market low of 13, but rebounded to 101 in 1971. g discoverin y compan l smal y relativel a t abou a Euphori y heav ; up m zoo o t e pric e th d cause s resource l oi w ne short selling followed by panic selling caused the decline. The rebound occurred as short sellers purchased stock to cover their sales. Trend followers saw the stock's price rising sharply, so they also started buying. News items . part a d playe o als One of the strongest rebounds from the 1970 bear market e th t bu , stock e volatil y unusuall n a s i s Natoma bottom was made by Natomas, which had a large short interest, r othe y man o t d regar n i d foun e b n ca n situatio e sam a small capitalization, and considerable publicity and sponsor- - antici e wer s investor , Indonesia n i s reserve l oi e larg h Wit . ship pating a bright future for the company. Superperformance 94 moves are indicated by arrows. Chart by Securities Research Company stocks: heavy emotional selling during bear e marketth n o d s in realize e b l wil t percen 0 10 r o , $10,000 f o s decline t marke l Genera . strongly d reboun t tha s stock e hous e th f i , hand r othe e th n O . $10,000 f o t investmen o t s opportunitie e creat 0 197 d an 2 196 f o e thos s a h suc drops in value by only 20 percent, and the buyer sells pick up excellent stocks at bargain prices. Mans yhi stockf o t s percen 0 10 e los d woul e h , $40,000 r fo t i decline not from any inherent weakness but because investment of $10,000. they were driven down by heavy short selling followef o d e structur l capita e th n i n commo s i e Leverag . selling c pani y b many industries, such as airlines and utilities. In a utility, When the market is close to a selling climax after a bonds and preferred stock may account for two-thirds of e th d reboun o t y likel e ar t tha s stock e th , decline g lon the invested capital, with the common stock representing s fundamental g stron h wit s stock e activ n ofte e ar t fastes the balance. The result is that the common shareholder and small capitalizations that have been sold heavily in enjoys a high degree of leverage. Fixed charges, the the general market decline. payment of interest on the bonds and dividends on the preferred stock, must be made before the common stock is entitled to receive any. But once the fixed charges are Leverage l tota s a , Thus . stock n commo o t s goe e balanc e th , paid income rises, common share earnings begin to show a Financial leverage in a stock is often responsible for high larger percentage gain than total profits. When earnings s company' e th e becaus e pric s stock' e th n i y volatilit decline, the percentage drop in the common share profits reported earnings can fluctuate greatly if there are large is larger than the percentage decline in total income. amounts of debt in the capitalization. . stocks e high-leverag n i r dange t grea e th s i s Thi s opportunitie t presen n ofte e leverag h wit s Stock t bu , income t consisten y fairl a e hav s utilitie t Mos timin profite purchasr e sale th fo th t eth f go d ,bu ean when high leverage is combined in a company with an must be good, for a stock with high leverage can be erratic income pattern—such as certain railroads or risky. A stock has high leverage if the company has a companies strongly affected by the business cycle- large proportion of bonds and preferred s i stoc h k relativwhic , eoccur ton ca e shar r pe s earning e th n i y volatilit r fo g outstandin s bond s ha y compan a f I . common e th often reflected in even greater volatility in the price of several million dollars, the bond interest will be the stock. The earnings record and price performance for r fo t lef e b l wil r remainde e th d an e incom m fro d deducte Trans World Airlines is shown in Chart 13. The company the common stock. Assuming that a company has has $958 million of bonds in its capitalization and also income of $500,000 but $400,000 must go fo. r bondleverage l financia h hig e therefor , stock d preferre . stock n commo e th r fo t lef 0 $100,00 s i e ther , interest n i d foun c characteristi a o als s i e leverag l Financia 0 $600,00 o t e incom n i e increas t modes y relativel a t Bu stock warrants, stock options, and in many low-priced e th r fo t amoun e th f o g doublin a n i s result r yea t nex e th s ha k stoc e th e wher s case n i y particularl , stocks . $200,000 o t 0 $100,00 m fro , stock n commo formerly sold at much higher prices and where each Perhaps the most familiar use of leveragl e is in reapotentia e l considerabl s ha k stoc n commo f o e shar estate. If a home buyer purchases a $50,000 house and earning power behind it. In situations where there is a g investin y actuall s i e h , it n o e mortgag 0 $40,00 a s obtain high volume of dollar sales relative to shares of common s rise e hous e th f I . capital n ow s hi f o 0 $10,00 y onl stock there is operating leverage. Retail stores, such as 20 percent in value and is sold for $60,000, a profit grocery chains, often have a high volume of sales but

96 97 S AIRLINE D WORL S TRAN . 13 T CHAR r o t improvemen y An . margins t profi w narro y relativel e th n o t impac g stron a s ha s margin n i n deterioratio . stock n commo f o e shar r pe s earning High leverage is also involved when the discovery of a large new oil field or metal ore body is made by a small company. If the discovery is made by a large company the leverage is much smaller, since the increase in the value of assets per share would be less. Margin accounts, which use borrowed money to purchase securities, are another well-known example of the principle of leverage.

The Dangers in Leverage

h hig h wit k stoc a t selec u yo n whe d sacrifice s i y Safet leverage in preference to one with small leverage. A company with a very large debt burden is in greater n Pen e th f o e cas e th n i s a , bankrupt g goin f o r dange e conservativ y financiall n reaso t tha r Fo . Central companies are preferred by many investment advisers. However, financial strength did not prevent the value of s les o t 4 197 n i g declinin m fro k stoc s Motor l Genera than one-third of its 1965 price. Financial strength did not prevent IBM from declining in less than two years

h strengt financial d di r No . /2 1 150 o t 4 / 1 365 m fro 12 / 143 m fro g fallin m fro d Polaroi e debt-fre t preven

f o h strengt l financia e th d an e leverag t Bu . /s 14 o t d evaluate d an d studie y thoroughl e b d shoul s 5 companie s i y mone n Whe . purchase r fo d selecte e ar s stock e befor tight and expensive, companies with large cash positions e us o t w ho w kno y the f i y particular , advantage n a t a e ar . effectively s resource l financia r thei The October 12, 1974, Business Week had a very useful tabulation showing the debt of companies as a s it n o t apparen s i y volatilit e pric f o y histor s airline' s Thi percent of equity. By studying this information an e th h wit s range e pric e th f o n compariso A . chart r twelve-yea investor can quickly determine which companies have earnings line, which is also on the chart, reveale Th s . thanot t earningo d h s whic d an s structure t deb d leverage y highl a d reache e pric e th t bu , 1965-66 n i e pric e th e befor d peake debt of Eastman Kodak, for example was 5 percent of s decline e pric e Sever . 1972-73 n i s earning e th o t r prio k pea from 1967-1970 and from 1972-1974 paralleled declines in earnings. 99 Company Research Securities by Chart equity. For General Motors it was 10 percent; for however, and sometimes present investors with Lockheed 308 percent; for Trans World Airlines, 249 outstanding buying opportunities. When the business percent; and for McCrory, 799 percents . stock l cyclica y man , up g turnin f o e evidenc s show e cycl e declin s profit n whe , recession f o s period g Durin also pick up strength. Many low-priced stocks have low s amount e larg e hav t tha s companie , businesses t mos r fo prices only temporarily, and are capable of regaining of debt sometimes have no profits at all. But as the much higher price levels when the business climate national economy emerges from recession, corporate improves. The important feature to look for is strength. sales and profit margins begin to increase. The percentage Determine if the company has the resources to rebound increase in profits can usually be much larger for and to bring its stock back to its former high esteem. stocks with large leverage than for stocks with small Quite often earnings are only temporarily depressed and leverage. Highly leveraged companies, then, are even will improve. Other factors, such as announced g buyin e ar n ofte d an , business-cycle-sensitive e mor expansions or new products, will sometimes give new life opportunities when the stock's price is depressed. to a depressed low-priced security. One of the quickest ways to identify low-priced stocks that might have the potential to regain former Leverage in Low-Priced Stocks n A . charts m long-ter f o t se a w revie o t s i s level e pric h hig example of this type of situation is shown in Chart 14 d low-price n i d foun t tha s i e leverag f o e typ r Anothe y b s stock e candidat g findin r Afte . Inns y Holida f o stocks and warrants. y compan d an k stoc e th e evaluat , charts g reviewin Of the 152 superperformance moves that began at thoroughly prior to making a purchase. or within six months of the 1970 bear market lows, 107 started from a price below twenty dollars. Only five of the superperformance stocks began their rapid rises at Leverage in Warrants prices above fifty dollars. Fourteen began at prices e th f o e twenty-on ; dollars y fift d an y thirt n betwee A warrant is an option issued by a company that gives stocks started between twenty and thirty dollars. The its owner the right to purchase a specific number of largest number of superperformance moves, 71, began at shares of the company's common stock at a specific prices between ten and twenty dollars. There were 33 price and prior to a specific date. There are a few moves that began at prices between five and te. n dollarsstock y ,bu o t t righ l perpetua a g grantin s warrant . share a s dollar e fiv n tha s les t a n bega t tha e thre d an Warrants have become numerous in recent years, This tabulation indicates that the bestn i d placeissue y to look generall e ar y The . hundreds e th n i g numberin for potential superperformance stocks is among common association with financing programs, making bonds or to twenty-dollar to five- the in selling are that stocks preferred stock more salable. The warrant is detached range. Comparatively few high-priced stocks move into and is traded separately. superperformance price action. Warrants are highly leveraged; they can rise much Companies that are strongly affected by the business faster in terms of percentages than the common stock, cycle, such as those in the construction industry, often and can decline much more rapidly. The value of have abrupt declines in sales and earnings that are only warrants is also determined by the amount of time temporary. Stock prices react to these business declines, remaining before the expiration date, since they become

TOO 101 S INN Y HOLIDA . 14 T CHAR

, states l al n i s motel 0 1,50 r ove f o k networ a s ha s Inn y Holida n eve g declinin n bega e pric s stock' e Th . overseas d an , Canada - re o als t i t bu , 1974 y 1973-earl e lat f o s crisi l oi e th o t r prio bounded strongly from its 1974 bear market lows. Chart by Securities Research Company 102 103 t tha d discovere s i k stoc a n Whe . that r afte s worthles appears to be capable of a superperformance move, Chapter 9 always check to see if there is also a warrant. Look for New Earning Power The most important factor in selecting a warrant is the price movement of the common stock on which the warrant is based. If the common stock appears to be a good investment, a warrant based on the s stoci h k iswhic , likelyprofit s i s companie f o e objectiv y primar e Th to be an even better performer. Chart 15 shows the then used to finance further expansion of the company relative performance of the warrants and common stock or is paid out to stockholders in the form of dividends. of Gulf & Western. The stock increased in price from Companies are not in business to make automobiles about 8 !/2 in late 1974 to 26 in early r 1976thei r . Durinfo n g threaso ee Th . widgets r o s set n televisio r o p soa r o same period the warrant increased from 1, V2 tocapital t 81/2.inves s entrepreneur t tha n reaso e existence—th During declines the warrant lost much more value than imagination, and energy—is to make money. If there the common stock. Between early 1972 and late 1974 were no profit motive there would be no reason for the warrant declined from 7 to 1 1/2 while the stock enterprising individuals to go to the effort of organizing dropped from 20 to 81/a. Leverage is a more important and building up businesses. Since profit, or earnings, is factor when the common stock is selling below the the reason for the existence of companies, investors exercise price for the warrant; above the exercisf o w e vie pric f o t e poin e th m fro s companie e evaluat d shoul the stock and warrants move together, point for point. . potential g profit-generatin r thei In addition to the leverage, the other big advantage In most well-established companies earnings can be e th r fo d require s i y mone s les t tha s i t warran e th f o e hav e ther f i r yea o t r yea m fro t forecas y accuratel e quit d min n i p kee o t t importan s alway s i t i t Bu . action e sam e larg a o T . business e th n i s change e extensiv o n n bee that there is an expiration date. Avoid warrantg s or projectin stoc f o r k matte a y simpl s i g forecastin e th e degre options that have less than a year to go before eth t the rightreflec y s usuall s price k stoc s case e thes n I . trends n a g Requirin . worthless e becom s option e th d an e expir o t d expecte s i t i s a d an s exist t i s a n situatio t profi investment to perform within a short period of time continue. Most large companies are little affected by . success f o s possibilitie e th s limit y severel changes such as new products. Their product lines are so extensive that one or two variations make little difference. But there are numerous smaller companies that s price k stoc r thei d an , change y b d affecte y strongl e ar g takin e ar t tha s change e th t reflec t no o d s sometime place—changes such as the development of a new product w ne r fo k loo o t e plac e On . management n i t shif a r o . occurring s i e chang e wher s i r powe g earnin

s Price k Stoc d an e Chang Change means opportunity, and change is one thing that is certain. Wars begin and wars end eventually. Federal

104 105

i monetary policy causes tight money, then policies change Change Resulting from Discoveries of Natural Resources d electe e ar s president w Ne . plentiful s become y mone d an and the old retires from the scene. Technologe y createpric e s superperformanc d an s occur e chang c Dramati new products for the consumer. Companies are organized, action takes place when a natural resources company t no r o e littl y ver w gro y Man . decline d an , mature , grow makes a big oil field discovery or a mining company at all before they disappear from the sceney . But througdramaticall s h strike e Larg . deposit e or w ne g bi a s discover . change s i e ther a panoram e entir e th increase the assets and earning power of a company, Technological change during the past century has particularly if it is relatively small. For example, the A . profit r fo s opportunitie s countles s investor d afforde r Sulphu f Gul s Texa y b 4 196 l Apri n i t announcemen hundred years ago there was railroad buildingd an , . Thesilver , n the copper f o y bod r majo a d discovere d ha t i t tha automobile was developed; then the airplane; and zinc ore in Canada resulted in strong superperformance s decade o tw t pas e th g Durin . radio d an ; electricity d min n i p kee d shoul s Purchaser . stock s it n i n actio e pric g encompassin s area n i d occurre s ha h growt s fabulou s thi f o s situation n i y earl y bu o t t importan s i t i t tha , electronics , rocketry , television r colo , copying , computers type. The most dynamic part of the action often occurs birth control pills, mobile homes, and travel. Well-managee th n i s d Sometime . hours n eve r o , days f o r matte a n i and innovative companies in these fields, and many stock market he who waits too long is likely to be the others, have had outstanding growth. Many stockholders loser. who purchased shares of these companies in their early One place where change has occurred in recent r othe e ar e ther y Toda . handsomely d profite e hav s stage years has been in the offshore oil and gas drilling companies in a similar early stage of development. business. The consensus of opinion among drilling r investo e prospectiv e th t tha s require m the g Findin contractors has been that prosperity for the industry conduct a search that must be systematic in order to would last at least a decade. Moreover, in order to meet avoid overlooking a possible winner. n America e th , petroleum r fo d deman d anticipate e th e involv o als t migh y compan a n i e plac g takin e Chang e offshor d worl t tha d estimate s ha e Institut m Petroleu r anothe f o n acquisitio e th r o t managemen n i e chang a oil output would have to quadruple by 1982. company. It might involve a major mineral or oil field e th f o e on f o d recor s earning d an e pric e Th discovery. But change implies the introductioe n oOffshor f ao newVetc , industry e th n i s companie t independen e th n i t accoun o int n take n bee t no s ha t tha t elemen . 16 t Char n i n show s i , Industries previous evaluation of the company's worth. Thus a r o p u e shar a f o e pric e th g movin , occurs n re-evaluatio . value n i n dow Change in Government Policies a s i s product e competitiv w ne f o n introductio e Th change that can often be particularly significantg . For wide-rangin a e hav s policie t governmen n i s Change f o x Xero o t e significanc e th e b l wil t wha , example influence on stock prices. For example, the Federal IBM's entry into the copier market? What will be the Reserve Board frequently changes the amount of cash e competitiv Kodak's n Eastma f o d Polaroi o t e significanc required by the customer to purchase stocks on margin. instant photography? What is the long-range meaning Since 1950 there have been five periods during which for Detroit of the sales entry of Japanese automobiles the margin requirement was set at 50 percent. That is, into the U.S.? the customer needed only half of the money required

10® 107 S INDUSTRIE E OFFSHOR O VETC . 16 T CHAR s wa t percen 0 5 r othe e th ; purchase k stoc e th r fo s time r othe t A . broker s hi y b k ban a m fro d borrowe since 1950 the margin requirement has been at 55, 60, 70, 75, 80, and 90 percent. A high margin requirement obviously curtails the amount of buying on credit that can be done. It is normally used when the market is very bullish; a lower margin requirement is set when the t requiremen n margi e th g Lowerin . depressed s i t marke has the effect of adding billions of dollars of potential buying power that can be used for the purchase of stocks. r unde e ar x ta s gain l capita e th n i s Change consideration in Congress. It has been estimated that about $20 billion in securities are frozen because their holders are reluctant to sell and be liable for the tax. e th n i s change e mak o t e lik d woul n congressme e Som . rate x ta s gain l capita e th r lowe d woul t tha w la d increase s a h suc , changes y polic t governmen e Som expenditures for highway construction or military r offe , equipment d an h researc l medica r o e hardwar many opportunities for alert investors. Other changes, such as modifications in import restrictions, might spell potential trouble in the future for some companies. Awareness of new inventions, new policies, and developing world events is essential for successful investment.

Technological Change

e uniqu a f o n introductio d planne r o n introductio e Th new product can have a dynamic effect on the price of the stock of a relatively small company. Many investors d an s situation g developin , new o t d attracte e b o t d ten to ignore old, established, stable situations. A large, This company is one of the group that is benefiting from the n i e stabl y relativel n remai o t y likel s i y compan e matur . gas d an l oi r fo s operation g drillin e offshor n i m boo g continuin price, thus offering comparatively little opportunity for A new manufacturing facility for offshore equipment was com- . gains l capita e larg d an y steadil g increasin n bee e hav s earning e Th . 1974 n i d plete Bausch and Lomb, although a relatively small are expected to continue. Superperformance is indicated by the arrows. Chart by Securities Research Company 109 company, has been an established manufacturer of E LOM D AN H BAUSC . 17 T CHAR s eyeglas g producin , years y man r fo s product l optica lenses and frames, and scientific instruments. Several d acquire d ha t i t tha d announce y compan e th o ag s year the rights to produce a revolutionary new "SOFLENS" contact lens. The announcement was given a considerable e th n Whe . pages l financia n o y publicit f o t amoun f o e volum e th 1 197 y earl n i d release s wa n informatio trading in the stock increased tremendously, as can be f o m botto e th t a s bar l vertica e th m fro d determine Chart 17. The price of the stock also made a very large jump, quadrupling within a few months. s investor s numerou , 1972 y earl n i , Similarly suddenly developed Wankel fever as the new rotary , Curtiss-Wright f o k stoc e Th . publicized s wa e engin which holds the North American license for the Wankel-type rotary combustion engine, jumped more than 500 percent on high volume in less than seven e engin e th n i t interes d describe s storie s new s a s month s a , Eventually . manufacturers e automobil r majo e th y b interest in the new engine diminished, the price of the stock declined to its pre-Wankel level. These two cases illustrate the reaction that investors w ne e uniqu a f o n introductio e th o t e hav s sometime product by a small company. Most newly developed n ofte t bu , these s a d publicize y highl s a t no e ar s product the new product, sometimes after a number of years, . earnings s company' e th o t y substantiall d ad s doe Widely sold new products can also give sizable boosts to e th s a , companies e larg f o s earning d an s sale e th r fo d di a camer c Instamati e th f o e sal d an t developmen l optica f o r manufacture s thi t tha 1 197 n i t announcemen e Th Eastman Kodak. But the effect on the pricea on i f d the stocresulte s k len t contac t sof w ne a e produc d woul s product of a large company is not as dramatic. e volum g bi a d an e pric s stock' e th n i e mov e superperformanc of trading, as shown at the bottom of the chart. Chart by Securities Research Company Growth-Stage Companies

Many new companies are born every year; some will not d an e stag h rapid-growt r thei h reac s Other . survive

111 become vigorous and strong. Some companies have A . stopped s ha r o w slo s i h growt r thei ; maturity d reache few are declining in their old age; and a few railroads that were born in the mid-1800s are now dying. e th n i s gain l capita e larg r fo g lookin r investo y An e th n i e ar t tha s companie r fo k loo d shoul t marke k stoc growth stage of the life cycle. These are usually ; years w fe a r fo d establishe n bee e hav t tha s companie r thei t tha o s h enoug g lon e existenc n i n bee e hav y the chances of survival are pretty good. But they are usually f o s share w fe y comparativel h wit , companies l smal y fairl . million n te r unde y usuall , issued k stoc n commo The percentage growth of sales and earnings, and d rapi e mor h muc e b y usuall n ca , price s stock' e th o als - hundred-and a r fo n tha y compan e five-million-shar a r fo fifty-million-share company, particularly if an appealing new product is being manufactured and large companies do not have the advantage of patents and established distribution channels for that particular product. f o l potentia h growt d rapi e th f o n expressio n A small companies as compared with large ones is found in the exponential curve or S-Curve. The growth curve, shown in Chart 18, moves from the horizontal, swings t Mos . maturity n i f of s level n the , growth t fas n i d upwar large companies are now in the slow-growth mature stage. Many smaller, young companies are in the dynamic rapid-growth stage.

Mature Companies t investmen f o t amoun e considerabl a n bee s ha e Ther . quality g buyin d advocate s ha t tha s year e th r ove e advic "Stick to the blue chips," it said, "and you won't be recore hurt.th t d" Bu reveal s tha investon e ta b n rca . time g wron e th t a p chi e blu a s buy e h f i y severel t hur And even if he does not lose financially, he usually has gained very little, particularly considerin riske gth e sh f o s consist e averag l industria s Jone w Do e Th . taken s ha e th n i s corporation t stronges , biggest e th f o e som is the big job of investors who are searching for growth, country; included are companies like AT&T, duPont, and for superperformance price action based on growth. General Electric, General Motors, Goodyear, U. S. Steel. e th t Ye . investments p chi e blu d considere e ar t Mos stock prices of most of these companies reached their l Vita s I t Managemen d Goo peaks years ago. s stock e som t a k bac k loo s let' , perspective r Fo Avoid new stock issues. This is one of the surest ways to l Genera s wa e Ther . 1952 n i r investo e th o t e availabl lose your money. The story might sound terrific, but it h wit c Electri l Genera , shares 0 87,000,00 h wit s Motor takes more than a story to build a successful business. It 0 285,500,00 s ha s Motor l Genera y Toda . 28,800,000 o t y mone f o t lo a d an t managemen e capabl y highl s take shares outstanding, U. S. Steel has 54,000,000. , andstages t developmen s it h throug y compan e th y carr General Electric has. 90,700,000. e lif e th f o e stag h growt e th n i e ar t tha s Companie But there were also some much smaller companies cycle often have more momentum than large, mature, y onl h wit s Product n Avo s wa e Ther . 1952 n i e availabl f o t presiden e th o ag s year w fe A . companies d establishe 596,000 shares; today Avon Products has 57,800,000 Xerox, Joe Wilson, stated that it was very important for shares. Polaroid was also available in 1952 with 404,000 his company to maintain its momentum. The image d Haloi d name y compan l smal a o als s wa e Ther . shares d presente t tha s a t importan s a s i y compan a y b d presente s share 0 189,00 d ha t I . papers c photographi e mad t tha t tha s indicate y compan a n i m Momentu . individual n a y b of stock. The capitalization of the company, now called it is on the move, progressing, with steadily increasing s IBM' . shares 0 78,900,00 o t n grow w no s ha , Xerox , alert n a s indicate m Momentu . earnings d an s sale 2 195 n i s share 0 3,000,00 m fro n grow s ha n capitalizatio aggressive management willing to listen to new ideas and to about 145,000,000 in 1974. So, although the to try out new methods. Momentum implies that a , grow o t d continue 2 195 n i e larg e wer t tha s companie w ne s introduce d an h researc n o y mone s spend y compan their growth was exceeded many times oveh r wit b yy much compan A . research t tha m fro g resultin s product smaller companies which were little known at that time. momentum is rewarded for its good performance by investors, who often are willing to pay a premium price . motion n i y compan a f o k stoc e th r fo s Stock h Growt g Selectin n Whe n Cautio e Us o t y necessar s i t i , companies e growth-stag g choosin n I Turnaround Situations be very selective. Stock prices can be pushed up quickly y usuall t tha y stor r o n promotio d goo a f o e becaus Sometimes companies are reinvigorated, often because a t Bu . development e futur r fo s plan e impressiv s describe new management team has taken over. When this occurs, in the long run stock prices are based on earninn bee g s powerha t .tha y compan A : turnaround a s i t resul e th So the story has to begin to come true or else disillusioned sliding downhill begins again on a new, upward growth n dow e driv d an k stoc r thei l sel o t n begi l wil s investor cycle. the price. As long as the story is coming true through In the late 1950s and early 1960s Chrysler l wil s investor t mos , earnings g increasin y satisfactoril Corporation had the image of a company about to go continue to hold their stock. Separating fact from fancy out of business. Year after year the company's share

114 e wer s Dealership . declined t marke e automobil e th f o R CHRYSLE . 19 T CHAR being closed. Chrysler's share of the market continued in e th e b o t d appeare m proble e th f o t par e larg A . decline a unattractive styling of some car models, with a resulting c dynami a , Eventually . sales d an y popularit n i e declin e th e rescu o t n i t brough s wa m tea t managemen w ne t almos n situatio e th e improv o t n bega y The . company immediately. Chrysler was a typical turnaround situation d ha e pric e Th . stock e th d purchase I n whe 3 196 y earl n i already started to rise rapidly in typical superperformance action. By the end of 1963 it had quadrupled; the climb continued through 1964, finally terminating near the end of the year. Chart 19, a twelve-year chart of Chrysler, shows the strong price superperformance phase that occurred from the 1962 bear market bottom until late 1964. 1 r fo 2 o tw d include e phas e superperformanc e Th n i s increase y b d propelle s wa e ris e Th . splits k stoc d an 4 196 n i 6 $5.4 e wer s earning e shar r Pe . earnings $4.19 in 1963, compared with $1.74 in 1962, $.30 in 1961, $.87 in 1960, and deficits in 1959 and 1958. The turnaround was brought about by the new management's cost-cutting measures and increased sales. Management changes are frequently the forerunner of turnarounds. One approach to successful speculation is to keep close watch on companies undergoing this type of change. s Stock h Growt o Tw f o n Compariso A y the e becaus l sel s other e whil s stock y bu s investor e Som anticipate the future in different ways. Some sell because when they look a few months ahead they see a possible The chart illustrates the turnaround that began in 1962 when recession coming. Others, looking farther ahead, buy new management assumed control of the company. The arrow because they believe that the price of the stock already points to the superperformance price phase. The earnings of discounts a possible recession. They are anticipating the the company have been sensitive to business cycles, resulting in d an s revenue f o h growt t vas e th d an , recovery s busines volatile stock-price performance. . companies e som n i e se y the t tha r powe g earnin Company Research Securities by Chart

116 117 h wit s companie c specifi e som f o g knowin l recal I e th d an h researc n bee s ha t I . consistently d increase e hav such obvious growth potential that at the time I cost of developing new photographic systems that have wondered why other investors did not seem to view the depressed earnings. At some point in the future the I 3 195 n I . did I t tha m enthusias e sam e th h wit k stoc stock's growth potential is likely to be seen again, as it purchased the stock of an unlisted compank stoc y e thath f t o ha e d apric e th n whe 8 196 d an 4 196 n betwee s wa a s wa t I . restaurants r popula f o n chai g expandin y rapidl e superperformanc g stron a n i t percen 0 60 n tha e mor e ros capably managed company and appeared to have vast phase. potential for growth. Yet for a long time the stock Kresge, on the other hand, has not been as highly remained relatively quiet. It appeared to me that hardly publicized and has less frequently been referred to as a n eve d ha r o , company e th n i d intereste s wa e els e anyon glamour stock. All it has done is to grow steadily year w no , Inc. , Shoppes t Ho s wa y compan t Tha . it f o d hear after year in the relatively unglamourous and highly known as Marriott Corporation. Todays it has Kresge' a . chain of merchandising e stor y variet f o d fiel e competitiv . restaurants d hundre e fiv t abou s own d an s hotel net income has increased each year since 1962; gross Sometimes an investor just has to wait and wair t folonge rn eve n a r fo y steadil d increase e hav s revenue . opportunity d goo a f o e awar e becom o t s investor r othe period. The company's K-Mart chain has become the It is a matter of being too far ahead of the crowd. There largest discount chain in the country. are times when an abundance of patience is required. t firs s it n bega k stoc e Kresg n whe , 1963 n I e elusiv y ver a e b s sometime n ca l potentia h Growt superperformance price phase, the company had only quality. Many companies that have been referred to in 5,518,000 shares of stock. The P/E ratio was about 14. the financial press year after year as glamour y stocks doreasonabl a ; present s wa n combinatio l idea n a o S not appear to have nearly as much growth as numerous priced stock in a small company that had vast growth unpublicized companies. Compare the performance of potential and increasing earning power. Polaroid in Chart 20 with that of Kresge (S.S.) in Chart e th , company d publicize e th n bee s ha d Polaroi . 21 glamour stock. Polaroid Corporation's stock for many h Growt e Anticipat years was given a very high price/earnings multiple by investors. For at least a decade the stockg had stron a e P/E anticipat o t e possibl s i t i s companie e som h Wit s sometime d an , 50 r ove y frequentl , 30 r ove y consistentl growth in revenues and earnings for many years in the as high as 90. Yet Polaroid's earnings trend has often future. The gross revenues of IBM, for example, were been erratic, as is shown by the chart. From 1967 to $410,000,000 in 1953, $2,863,000,000 in 1963, and d Polaroi . earnings n i e increas o n y virtuall s wa e ther 5 197 f o s revenue s gros d ha x Xero . 1974 n i 0 $12,675,000,00 holds hundreds of patents in the field of instant, $268,000,000 in 1964 and $3,576,400,000 in 1974. In one-step photography. In Polaroid's process, the the early 1950s it was therefore possible to see that vast materials required for developing and printing are part growth ahead for IBM, just as it was possible to see the of the film. This permits the person taking photographs growth potential of Xerox in the early 1960s. Many n withi a camer e th m fro t prin d complete a n obtai o t investors did see the vast potential of these companies . investors o t d appeale s ha t tha l potentia s thi s i t I . seconds and acted. Vast growth potential is one of the reasons Moreover, the company has continued growing even these companies have been popular, which has resulted though net income has remained quite static. Revenues in their having high P/E ratios.

119 CHART 20. POLAROID CHART 21. KRESGE(S.S.)

For many years investors have seen vast growth potential in This stock of the leading discount retailer has experienced a d ha s ha k stoc e th d an , processes c photographi w ne s Polaroid' three superperformance price phases. The first phase began high P/E ratio. However, since 1968 the earnings trend has been in 1963 and lasted until 1966; the stock approximately quad- rupled in price. The second phase began in early 1967 and ended generally flat. A superperformance phase began in 1964g . durin , phase d thir e Th . quadrupled n agai e pric e th ; 1969 e lat n i Company Research Securities by Chart r bea 0 197 e th r nea n bega , again d quadruple e pric e th h whic market bottom and lasted until January 1973. Except for one quarter in 1969 ;the earnings have consistently increased from r faste n eve d increase s ha e pric s stock' e Th . quarter o t r quarte 120 than earnings, and there has been a large expansion in the P/E ratio, as can be seen on the chart by the increasing separation . lines s earning e th m fro s bar e rang e pric l vertica e th f o Chart by Securities Research Company r fo s year f o r numbe a t wai o t y necessar s i t i f i n Eve CHART 22. SYNTEX a stock to be recognized, eventually such patience can s i e alternativ l rea y onl r You . rewarding y ver e b o t e prov to find another stock that will have superperformance price action sooner.

Earnings Explosions

Earnings explosions are often of great significance g earnin d develope y newl o t n attentio l cal y the e becaus n tor d ha I g clippin l smal a s acros n ra I y Recentl . power e Th . 1963 f o r summe e th n i r newspape l loca a m fro d ende s month 6 n i n Corporatio x "Xero : reads g clippin . vs e shar a 6 $2.6 r o 1 $10,327,03 d earne 0 3 e Jun $5,658,165 or $1.74 in 1962 period." That is an example of an earnings explosion: a large sudden increase in the profitability of a company. x Xero r afte t jus d occurre n explosio s earning e Th introduced its new copiers, and the earnings increase was directly traceable to revenues from the new copiers. At about the same time in 1963 I purchased another stock that was beginning to look very interesting, Syntex Corporation, shown in Chart 22. Earlier in the year Syntex had sold at under $12 a share. By January 1964 it had reached as high as $190 per share before e th f o e On . reaction a d cause g sellin l institutiona y heav strongest forces propelling the price increase was the rumor, later confirmed, of a large increase in earnings. e wer r yea l fisca 3 196 e th r fo s earning e th e cas s thi n I f O . 1962 l fisca r fo s earning e th e quadrupl n tha e mor , earnings d reporte n tha e importanc r greate n eve w ne e uniqu a d develope t tha y compan l smal a s wa x Synte however, was the expectation in the minds of speculatort vas d ha h s whic , pills l contro h birt , product d patent-protecte that future earnings would be even larger. Syntex at that growth potential. In 1963 the company had a big increase in time was one of two companies pioneering the earnings and also received extensive publicity. The stock has d coul s Investor . pills l contro h birt f o t developmen had strong sponsorship and institutional interest. The arrows r fo s earning d increase d an t marke e larg y ver a e anticipat indicate superperformance phases. the future. Thus, the expectation of large future earnings Company Research Securities by Chart caused a buyers' stampede for the stock.

122 123 Be Skeptical of Reported Earnings n I . not o d s other e whil , properties e th f o e lif d expecte the case of large oil companies, millions of dollars are Many investors act on the basis of reported dan earningss profit d , reporte t tha t fac e th p u s point t I . involved e th n i y onl t exis t migh s earning e th n whe n eve . skepticism h wit d regarde e b n ofte d shoul s earning a f o e b r o , accountant e creativ e som f o n imaginatio The important question for the investor to keep in merely temporary nature. Many of these investment mind is: "Are the earnings going to continue to increase in errors are caused by the fact that companies report their the future?" The best clues are likely to be found in the quarterly earnings to the financial presse , th wher d an e, the management f o s plan e th , business e th f o e natur e th t Bu . distributed y widel d an d printe s i n informatio y qualit e Th . revenues d an s sale f o e volum e th n i s trend quarterly figures are unaudited. Moreover, no details are of earnings increases, in other words, must be evaluated. given that might help investors to evaluate the figures and determine whether a reported earnings increase . situation y temporar a y merel r o d tren w ne a s indicate d Anticipate y Usuall e Ar s Earning r Highe e wer s price k stoc n whe , recession 0 197 e th g Durin e Corporat . occurred n actio r anothe , depressed y severel y b d uncomplicate e ar t tha s earning t abou w ho t Bu treasurers suddenly became ultraconservative, writing manipulation, that are higher simply because the down inventories, buildings, research projects, and company had a much more profitable year? Let's future costs by setting up reserves. Tha. t approacdoubled e hhav y the d an d reporte e ar s earning e th e suppos lowered 1970 earnings, but every dollar charget d ofno , f No ? right , price n i p u o g d shoul k stoc e Th against 1970 added that much to future profits. necessarily. Not if a dozen mutual fund managers had Corporate officers have justified such an actioy The n . by double y merel t no , triple o t s earning d expecte e ar s write-off n Whe . shareholders s help t i t tha g statin would be disappointed and might decide to sell. Other concentrated in a single year it assists the stock in investors who had predicted the earnings increase rebounding the next year. These accounting practicee larg f o ss Report . news e th n o l sel o t e decid t migh probably reinforce the cyclical action of the earnings of increases in earnings have their biggest impact when many companies and the price action of tht e stockalmos , . Some happens t tha n Whe surprise. a s a e com y the t no t migh d an e natur n i l cyclica e ar s increase s earning everyone has an opportunity to participate in the indicate newly developed earning power.n a t tha t effec e th t interpre o t e abl g Bein . rise g resultin y ver s i t marke e th n o e hav l wil t repor s earning important. And even more significant is the light it Reported Earnings Depend on Accountingd Procedurecontinue r fo s s prospect s company' e th n o t cas t migh future profits. Earning power, real and potential, is the If an investor is interested in particular groups, such as . for k loo o t e featur t importan t mos oil or steel companies, he should keep in mind that all companies do not necessarily report their earnings in the same manner. They might use different accountinn Actio e g Pric e Superperformanc t Affec s Trend g Earnin o t t difficul y ver t i s make e cours f o h whic , procedures , instance r fo , companies l oi g Amon . stocks e compar My review of the long-term charts of 1,018 stocks e th r ove s expense g drillin f o t cos e th r defe e som e ar n ofte s trend s earning d increase t tha d reveale

124 important influences in superperformance stock-price common stock depended on what it would earn in the e stock-pric e th f o t percen 8 3 y Approximatel . moves f o d tren g risin a w sho d woul k stoc d goo a d an , future s increase e larg d followe y briefl r o h wit d coincide s move g evaluatin f o d metho e th n i e chang s Thi . earnings in the reported quarterly earnings. Ans additionadistinction l 2e 8th f o g blurrin a n i d resulte s stock n commo percent of the moves appeared to be associated with between investment and speculation, since emphasis was 4 3 t abou n i t bu , increases s earning e moderat y relativel n o f o d instea l principa f o t enhancemen e th n o d place percent of the price moves no correlation could be. investment e th m fro d receive d dividen e th made. There were many cases of declining prices during periods of rising earnings, particularly when bear market conditions prevailed. The long-term chart histories of Evaluate Reported Earnings o t t overreac s investor t tha e indicat s earning d an s price reported or expected earnings increases.o t t no r o t inves o t n decisio s hi e bas t mus r investo e Th invest on much more information than merely reported n i e increas e th d cause t wha t ou d fin t mus e H . earnings The Role Future Earnings Play in Stock Prices reported earnings and he must determine whether or not the increase can be expected to continue. A large The movement of individual stock pricest I . , thenthing ,e is one-tim a e b n ca s earning d reporte n i e increas e th n i d anticipate s earning e th o t n ru g lon e th n i d relate r o y propert f o e sal e th r o s credit x ta m fro t resul t migh s a h suc , present e ar s influence n certai n Whe . future l stee t larges s nation' e th f o e on y Recentl . assets r othe l nationa n i s change r o s development s new t importan t bu , earnings n i e increas e larg a d reporte s corporation monetary policies, virtually the entire stock market this was principally caused by a change in accounting moves in unison in a bullish or bearish direction because methods. In another example, in early 1974 the investors anticipate the influence tha, t thInc. e , newAvis d charge n Commissio e Exchang d an s Securitie . earnings e futur n o e hav l wil t developmen t repor g misleadin d an e fals a s shareholder g mailin h wit o s n bee s alway t no e hav s earning e futur t Bu for 1973's first quarter; Avis had failed to disclose that important in determining the value of a stock. Benjamin about 70 percent of its earnings had come from vehicle Security k boo r thei n i d Dod . L d Davi d an m Graha sales. e th t tha t ou d pointe , 1934 n i d publishe t firs Analysis, y b y closel d followe s i s earning f o d tren e th e Sinc g durin d develope n valuatio r fo t concep s earning f o d tren t repor s management t mos , investors f o y majorit e th the latter stages of the bull market culminatiny g in 1929dutifull s i n . informatio e th d an y quarterl s earning Formerly, investment in common stocks was based on reported in the financial press. The price of the d dividen d establishe d an e suitabl a : elements e thre y quarterl o t y quickl s react y usuall k stoc s company' return, a stable and adequate earnings recordt , andifferen d e assear s t figure d announce e th f i s report s earning s wa t investmen k common-stoc o t h approac s Thi . values from those that had been anticipated. But the details on d an s earning t pas e becaus e inadequat d considere which the quarterly results are based might not be dividends could no longer be considered an index of available for study until many, many months later. Thus, future earnings and dividends. During the 1920s change investors can be and frequently are misled by the in the fortunes of companies was rapid. , as it is todaymanagements . y As compan y b d reporte s earning y quarterl a result, the idea became dominant that the value e ofth d mastere e hav s accountant e creativ t mos e Th

127 l Interna e th o t s earning l minima g showin f o e techniqu g investin e th o t s earning g explodin d an e peopl e Revenu Chapter 10 public. This sleight-of-hand approach calls for bullish Look for Expandable Price/Earnings Ratios e dos e larg a t bu s purchaser k stoc l potentia r fo y publicit . reported e b o t e hav s taxe e incom n whe , later y realit f o e corporat n i h bot , people y man o to n bee e hav e Ther e th d regarde e hav o wh , Street l Wal n o d an t managemen y b t no d cause e ar s move e pric e superperformanc t Mos g sellin d stoppe y The . taken e b o t r sucke a s a r investo developments such as increased earnings, but rather by e Th . ago s year y man s visitor o t e Bridg n Brookly e th e Th . developments e thos o t s investor f o n overreactio a d discovere s artist k quick-buc e th t tha s i n reaso s obviou y b y accuratel e quit d measure e b n ca n overreactio more sophisticated and a much more lucrative place: comparing the increase in the price to the increase in Wall Street. earnings—that is, by the expansion in the P/E ratio. So try to anticipate earnings for specific companies Some of the biggest stock market profits are made by d tren e th e determin o t y Tr . market l genera e th r fo d an going along with the crowd while it pushes the price and the extent of the increase or decrease. in earningsoptimism p . nonsto n i r highe d an r highe k stoc a f o . figures d reporte e investigat d an l skeptica n remai t Bu Superperformance price moves occur in a stock when Select stocks that seem to be undervalued in relation to large numbers of investors all think alike and cause a prospects for growth. e everyon d an y rapidl e ris s price k Stoc . stampede g buyin d an y Suppl . prices r highe n eve g expectin , bullish s i d an y bu o t t wan e peopl y Man . operate s force d deman . rapidly s escalate g biddin e th o s , sell o t t wan w fe g durin d obtaine e ar s profit t quickes e th s Sometime t tha s stock e activ y ver n i m optimis f o s period e thes everyone seems to be aware of and many people are trading. But with this type of stock it is important to be r thei y dela n ofte s investor s Cautiou . early n actio e th n i purchase until they are absolutely certain that they are right in buying a stock. It is often at this point that the stock, which has been going up in price for some time, e th g joinin n i e lat o to e b t no o D . reaction a r fo e du s i action; it is also important not to overstay a position that has turned stale or has started to decline. Be alert for turns or changes in investor psychology. For your own protection it is discreet to use stop-loss orders if the price of a stock has risen rapidly. r stockbroke a o t n instructio n a s i r orde s stop-los A to sell a specific number of shares of stock if the price declines to a designated level. The broker will try to sell e ar s order s Stop-los . price d designate e th t a k stoc e th

128 intended to minimize losses. This step is particularly of the same stocks had contracted to lower multiples. t marke e th w follo o t e abl t no e ar u yo f i d recommende This contraction in the P/E ratio occurred while closely. d ha g settin l psychologica e th t Bu . rising e wer s earning h bullis e th h wit g alon o g o t s time e ar e ther s a t Jus changed, for 1973 was the year of Watergate and the , leave o t s time o als e ar e ther , crowd e th f o m enthusias g approachin n a f o r fea t brough 4 197 d an , crisis y energ to stand aside. The time to sell is when the bullish drive recession. So the real change occurred in the psychology is beginning to lose its momentum, to turm n staleoptimis . d an e confidenc f o d moo a m fro , investors f o t las t no o d s phase e superperformanc e Pric s reflect o rati E P/ e Th . pessimism d an t doub f o e on o t indefinitely. Most of them last only a couple of years, . attitude n i e chang t tha then the stock reacts into a downtrend or sideways price action. The prevailing mood of investors changes, d an t doub o t , optimism h bullis m fro , slowly n ofte s Price k Stoc d an y Psycholog c pani o t y finall d an , pessimism h bearis o t , apprehension as the decline accelerates. As with unbounded optimism, Of all the forces that influence stock prices, mass fear . thinking e negativ f o r powe e th e underestimat r neve and mass greed can often be the most dominant. Strong Fear and pessimism become so overwhelming at times psychological forces can move prices in individual that even the strongest, most bullish-lookinr faste g d stockan r s arfaste e, whole a s a t marke k stoc e th d an , stocks f o d moo e speculativ e Th . deluge g sellin e th n i p u t caugh t tha s new e th y b d justifie s i n tha d downwar d an d upwar d an m pessimis f o s wave n i e mov o t s appear s investor usually gives the impetus to the move. By causing price optimism that are based on actual economil c or politicapsychologica l, extremes w lo d an h hig o t o g o t s move . conditions e thos y amplif y greatl h whic t bu s condition s opportunitie g buyin d an g sellin t excellen e creat s force When the national economy becomes strong, the stock for alert investors. market often becomes even more bullish than is justifieo t s d alway r o c optimisti e b o t s alway c unrealisti s i t I d an n dow s turn y econom e th n Whe . facts e th y b s i e ther d an m optimis r fo e tim a s i e Ther . pessimistic e b forecasters begin warning of a possibles i recessiond moo r , thyou en tha t importan e Mor . pessimism r fo e tim a d justifie s i n tha c pessimisti e mor n eve e becom s investor your sensitivity to whether the crowd is optimistic or and they sell stocks down to bargain-price levels. pessimistic. The rewards are few if you are optimistic Investment psychology often loses its logice anTh d. becomespessimism f o s wave n i g sellin s i d crow e th e whil t importan y particularl a y pla a medi s new e Th . emotional y b d crow e th t figh t canno u yo t bu , wrong e b y ma d crow role in developing moods of mass optimism or pessimism. yourself. If you try to buck the stampede, you will be The P/E ratio reflects the enthusiastic optimism or trampled. If you buy a stock too early during a period 1 196 n i d perio e on t A . investors f o m pessimis y gloom of highly emotional selling, you will soon discover that t a ; 24 t hi s industrial s Jone w Do e th f o o rati E P/ e th you have a loss, and perhaps a large one. The time to be s wa t i 4 197 e lat n i d an ; 10 s wa o rati e th 3 197 f o d en e th n a r afte s i , bargains p u k pic o t r o l sel o t , contrary l individua y man r fo o rati e th n i e chang e Th . 6 s a w lo s a emotional binge of mass optimism or pessimism has lost stocks was much greater. In early Januarl wil y s 1973,other thn e Soo . imminent s i l reversa a d an m momentu k pea t marke l bul a d reache e averag l industria s Jone w Do realize that the future is not as bleak or as rosy as it had of 1,067. At that time the P/E ratios of some stocks appeared. News developments, particularly the way they s ratio E P/ e th 4 197 y b t bu , multiples h hig y ver d reache are reported in the media, frequently are the biggest a o T . mood t dominan e th g creatin n i e influenc t investmen d closed-en e th y b p u d pointe y clearl considerable degree prices are made bl y emotionsubstantia s t ana ds year r fo d price n bee e hav t tha s companie by the shifting attitudes of large numbers of investors. discounts from their net asset value. During bear Emotions also play a very significant role in markets the discount expands; in bull markets it selecting a stock for purchase. The image of a company contracts. e w f I . name s it n i d an s busines f o e typ s it n i d projecte s i In the early years of this century assets were usually name a company Planetary Explorations Unlimited, for given greater weight than they are now and investors example, to start in the business of exploring the traditionally bought stocks for their dividends. Today a d min e th n i n impressio t differen a e creat l wil t i , universe g earnin e futur s it y particularl , power g earnin s company' d name y compan a , say , than r investo e prospectiv a f o power, is the most important consideration. Consolidated Concrete. o t s i e valu g establishin o t h approac r Anothe g income-payin m fro e availabl s dividend e th e compar stocks with the yield available from bonds and other Establishing Stock Values e wer s yield d bon 8 195 l Unti . investments f o s type e th y b d pai g bein s dividend e th n tha r lowe y considerabl g takin t studen e graduat a s wa I n whe , 1940s e lat e th n I companies comprising the Dow Jones industrials. During t tha l recal I , University a Columbi t a s course s busines the years prior to 1956 the average yield of forty bonds , values f o n determinatio e th n o g lecturin , professor e on n i g beginnin , But . percent 4 d an 3 n betwee d fluctuate explained that a piece of property is worth as much as 1956, bond yields began to climb irregularly, rising to h wit s i t i o S . it r fo u yo y pa o t g willin s i e someon above 10 percent in 1974. Dividends paid by the stocks k thin u yo h whic r fo s stock d Fin . stock n commo k Stoc . 1951 f o t mos g durin t percen 5 6. e abov e wer t a e pric r highe a u yo y pa o t g willin e b l wil e someon s yield e th 8 195 n I . 1951 r afte y steadil d decline s yield some time in the future. This approach isd applicablbon d an , e to stocks m fro n tha r highe e becam s bond m fro any type of investment—in a diamond, a painting, a yields have been higher ever since, by a wide margin. The bushel of corn or wheat, a house, a piece of land, or a erosion in the value of the dollar through inflation has share of common stock. The market pricn I . e of thyields ed itembon n i e increas e larg e th r fo e responsibil n bee f o s extreme e factors—th l psychologica e th s reflect more recent years inflation has been the major cause for optimism and pessimism—that can causes tha eh valusuc , e of stocks e income-typ f o e declin e pric y stead e th an item to vary widely, sometimes in just t a feno e w ar hour t tha s s or companie e matur , large d an s utilitie e th days. When the market value of an item is plummeting, growing rapidly but are also not increasing their it reveals that the fear many people have of lowes a r e values purchas r thei y justif o t y sufficientl s dividend r highe r fo s hope r thei n tha r stronge s i y propert r thei r fo income-type investments. prices. s stock f o e valu e th g establishin f o s method r Othe There are several methods for establishint tha s g the assume h whic e on g includin , developed n bee e hav theoretical value of a stock as comparedf wito h h itswort sellint g presen e th o t l equa s i y securit a f o e valu e th , value k boo s company' e th s i e On . market e th n i e pric all future payments. Another method attempts to , assets s company' e th p u g addin y b d determine s i h whic estimate future earnings and dividends for a specific f o r numbe e th y b g dividin d an , liabilities e th g subtractin period of time, such as ten years. The investor must common shares outstanding. The large, discrepancrate t ydiscoun thae th t d calle , return f o e rat r fai a t tha e believ s i e valu t asse d an e valu e marketplac n betwee s exist k stoc a f i , Thus . percent 9 y sa , percentage n certai a s i

132 133 declined in price to yield 9 percent, it would be priced overpriced relative to their inherent value often have to yield what that investor considers to be a fair rate of severe price declines sooner or later, but many of them return. Sometimes the expected dividend rate is remain in an overpriced state for years before the price combined with an estimated rate of price appreciation to reaction occurs. In a similar way, some stocks of m ter e th s i " return l "Tota . stock e th r fo e valu a h establis y frequentl e ar s industrie s unglamourou n i s companie used for what your investment earns annually on a depressed in price, as compared with stocks in general. combined yield and price-change basis. Throughout the late 1960s and early 1970s when most stock prices and the market averages were soaring, the steel industry stocks remained depressed. The mere fact Problems in Establishing Values that a stock is depressed in price relative to its inherent value does not necessarily mean that an adjustment will The problem with attempting to establish ak stock'stoc e sTh valu. rise e l wil e pric s stock' e th t tha d an e mad e b using these methods is that certain assumptiong s abouFindin . t years y man , many r fo d depresse n remai n ca the future are made. It is assumed, for instance, that "value" is not enough, by itself, to assure that a t tha , rate d predicte a t a w gro o t e continu l wil s earning specific investment is good. The book values of stocks dividends will continue and will be increased ae t a certailarg r thei n h wit n compariso n i e stabl y relativel e ar rate over a specified period of time, or that the stock's fluctuations in market price. price will appreciate at a certain rate. But there are The large disparity between the book value per comparatively few stocks that are really suitable for share of a stock and its market value is illustrated by the these methods of establishing value. For most companies following table. s earning h whic t a e rat a h establis o t t difficul y ver s i t i f o e rat a t predic o t t difficul e mor n eve d an , grow l wil price appreciation. The desire to establish value in this Table 3 manner has caused many companies to manipulate or "manage" their earnings so that they show a steady rate 1971 1974 of earnings increase. The managed earnings might or book value market value book value market value a g placin h wit m proble e on o S . reality t reflec t no t migh s i e valu c intrinsi s it n o d base k stoc n o h wort l theoretica 1 1 Polaroid 17 117 /s-76 19 88 /i>-14V that the intrinsic value for most stocks cannot be 8 1 481/ -353/8 precisely determined. How can anyone determine with U. S. Steel 67 35 /8-25 72 2 3 1 precision the future competition that a product will IBM 57 365 /4-283V4 60 254-£ 0 15 y compan d an s earning e futur t Distan ? encounter Xerox 13 1263/4-843/4 18 1271/s-49 developments cannot be accurately forecast. d Portlan h Lehig 5 Cement 25 17-1s 2/ 38 1- 8 V 1 2 5 3 3 34 Market Price vs. Inherent Value Natomas 31 101 /8-43 /4 73 V8-34 /s

There often appear little b eo st relationship betweee nth In the examples of U.S. Steel and Lehigh Portland e ar t tha s Stock . value t inheren s it d an k stoc a f o e pric Cement the book value per share of the stock has

134 remained consistently above the market price of the Halliburton book value 25% of market price stock. In the other examples shown in the table the Burroughs market price has stayed consistently much higher than Schering-Plough d Polaroi f o n exceptio e th h wit , share r pe e valu k boo e th Bristol Myers in 1974. Not only is there little or no relationship between the book value per share of the stock and its Avon Products d fluctuate s ha f itsel e valu t marke e th t bu , value t marke ) (S.S. e Kresg widely, in response to levels of company earnings, but McDonald's . pessimism r o m optimis r investo o t e respons n i o s e mor . ratio E P/ e th y b d measure y effectivel s i r latte e Th 5 197 e Jun s Poor' & d Standar n i n tabulatio A Stock Guide of the 292 largest companies based on their Examples of companies that had much higher book d ha s companie e th f o 0 12 t tha d showe e incom t ne 4 197 values than market prices included: a higher book value than market value, while 127 . value k boo n tha e valu t marke r highe d ha s companie Table 5 Examples of companies that had much higher market prices than book values included: Consolidated Edison: book value 293% of market price Signal Cos. ti It 234% " tt tl Table 4 l Stee c Republi ft tt 260% " tt it Lykes Youngstown tt it 327% " tt ll International Business Santa Fe Industries it it 232% " tt II Machines: book f valuo % e 32 market price Southern Pacific 19 it 336% " it it Eastman Kodak it ii 20% " ii tt Anaconda Co. tt it 361% " tl tl Xerox ft ii 29% " it ft Seaboard Coast Line tt It 314% " it il Dow Chemical it ii 23% " it it r Rubbe & e Tir l Genera it it 209% " it ll Minnesota Mining rt it it tt &Mfg. it It 22% " ft it h Pittsburg g Wheelin 357% " ft it It tl e Gambl & r Procte ii it 24% " tt it Woolworth (F. W.) 202% " tt ti it ll Weyerhauser ii it 28% " ft it Consumers Power 244% " it 19 it ll American Home 1C Industries 389% " Products it it 10% " tt ft Coca-Cola ii it 18% " tt ti s Table n o s stock e th f o s chart m long-ter e th f o w revie A ii it tt tt Johnson & Johnson 18% " 4 and 5 revealed that the stocks on the first table—the Lilly (Eli) & Co. it ii 15% "e shar ft r pe e it pric t marke r highe h muc a e hav t tha s stock Schlumberger it it 14% " tt it than book value—are also stocks that have had

136 137 consistently rising earnings and a price history thae th t n i s stock t twenty-eigh e th f o n eightee t marke y The . trend s earning d upwar e th d followe y generall university's portfolio increased their dividends. But the were also stocks that were heavily favored by e institutionath g durin e l valu n i t percen 5 40. d decrease o portfoli s a s ratio s price/earning h hig d ha e hav y The . investors y universit e th t tha d state r manage t investmen e Th . year well as high price/assets ratios. had erred in maintaining a fully invested position, but h wit s stock e table—th d secon e th n o s stock e Th . ability g timin f o k lac e th d acknowledge high book values per share relative to their market price s earning c errati d ha e hav t tha s stock e share—ar r pe and price records. They have not been favorites of Estimating Price/Earnings Ratios . investors l institutiona It is apparent, by comparing these two stock After you have estimated the earnings to be expected by groups, that stock selections have been made th er basefo o drati onE P/ a e estimat o t y necessar s i t i , company a good earnings trends. Large assets have been less stock. How many times its earnings do you expect the important in determining purchases. Will l thwil ey investmencompan a tt tha e estimat u yo f I ? for l sel t migh k stoc selection pattern change? In the future will investorsd coul t i t , tha d an e shar a s dollar e fiv f o s earning e hav g dominatin w no s investor l institutiona e th y particularl conservatively have a P/E ratio of 10, then the stock common stock investment, buy stocks on the basis of should be expected to sell for fifty dollars at some time k Stoc . not y Probabl ? earnings f o d instea e valu k boo in future months. If the current price of the stock is y primaril d base e b o t e continu y probabl l wil s selection only seventeen dollars, then the stock might be on the outlook for the earnings of individual companiese th f o d . tren y primar e th f i y bu d goo a d considere market is upward and is expected to continue climbing. d discovere I s chart m long-ter e th f o w revie y m n I s Dividend . vs e Pric t Marke that there were a few stocks whose earnings were increasing at a faster rate than their price. They were the A review of the long-term charts, which show the level exceptions. In 464 of the 589 superperformance moves e pric d an s earning s a l wel s a s payment d dividen f o the P/E ratio at the end of the move was higher than at histories, also revealed little relationship betweee nth the beginning. dividend level and the stock's price. In numerous P/E ratios expand to higher multiples when the instances stocks have had declining price trends while future looks very good; they contract to lower multiples their dividends were being increased. There are very few when the future looks bleak or uncertain. P/E's are e hav o t s appear e increas d dividen a h whic n i s case sensitive measurements of mass psychology. The n betwee p relationshi f o k lac e Th . increase e pric a d cause s i y psycholog r investo t tha , therefore , indicates e evidenc o tw n o d observe e b n ca t payou d dividen d an e pric just the opposite of what it should be for successful earlier charts—Dow Jones Utility Averagef ,o Chard en te 7th , t ana dh hig n bee e hav s ratio E P/ e sinc , investment American Telephone and Telegraph, Chars t ha 8—an e pric d k on stoc a r afte s i t i t Bu . moves e superperformanc International Business Machines, Chart 25, d whican n h cautio t tha s year e thre r o o tw r fo d upwar d move . chapter s thi f o d en e th d towar s appear a low P/E ratio are called for, since it is at this time that The investment manager of a large universite th n y eve d An . occur o t y likel t mos s i n reactio e pric a endowment reported that during 1974's severe bear . reactions e pric e hav s stock t bes y ver

138 My study of the long-term charts also indicateds les y usuall e ar s earning r lowe , sell-offs t marke n I n whe n begi s move e pric e superperformanc t mos t tha l psychologica e ar n tha s price k stoc r lowe r fo e responsibl P/E ratios are at a relatively low level, oy r in stockcompan sa , that Thus . ratios E P/ r lowe n i g resultin s influence e th f o t percen 0 1 t abou y Onl . P/E's w lo y relativel e hav might have earnings of $8 a share. With its stock selling s i t I . 20 e abov s ratio E P/ d ha t tha s stock n i n bega s move e th t tha e assum s let' t Bu . 20 s i o rati E P/ e th , $160 r fo e doubl o t , 45 s a h suc , ratio E P/ h hig a r fo t difficul y ver e th t tha d an n recessio a d entere s ha y econom l nationa E P/ a h wit k stoc a r fo y eas y relativel s i t i t Bu . 90 o t e ar r yea t nex r fo s earning d anticipate s company' ratio of 10 to double to 20 or even to triple to 30. expected to decline to $4 a share. If the price of the Stocks with high P/E ratios are more dependent migh t i , t on earnings e th s a o rati e sam e th t a s decline k stoc r rathe , prices r highe t abou g brin o t s earning d increase decline to 80, retaining the P/E ratio of 20. But because than expanding P/E multiples. e th , stockholders g amon m pessimis s mas f o t effec e th f o P/E ratios reflect the popularity of a stock. If the P/E ratio might contract to 15 or less. The result might s i o rati E P/ e th , good k loo y compan a f o s earning e futur . lower r o 0 $6 f o e pric k stoc a e b likely to be high, perhaps 20 or 30. If the future of the The P/E ratio can also be expressed as an earnings company appears to be fabulous and investors are highly yield. For example, if a stock earned five dollars during e ar e ther f i t Bu . 60 r o 0 5 e b t migh o rati e th , optimistic d hundre e on s i e pric s stock' e th d an r yea t pas e th indications of future problems, perhaps portending an dollars, the P/E ratio is 20; the earnings yield is 5 r o 0 1 o t e declin t migh o rati E P/ e th , decline s earning o rati E P/ e th , dollars y fift s i e pric s stock' e th f I . percent less. is 10 and the earnings yield is 10 percent. d predicte e ar y compan a f o s earning e th n whe o S McDonald's shown on Chart 23, and International E P/ e th f I . double o t e pric e th t expec t no o d , double o t Flavors and Fragrances, on Chart 24, are good illustrations of the company is exceptionally low at th. e time thmultiples e E P/ g expandin d ha e hav t tha s companie f o estimate is made, the result might be that the pric6 e196 wiln i l1 1 m fro d expande o rati E P/ s McDonald' more than double. If a share of stock is selling for five to 90 in 1972. International Flavors and Fragrances s i E P/ s it , share a r dolla e on e wer s earning d an s dollar also revealed its steadily increasing popularity by having 5. If earnings are expected to be two dollars, the . ratio E P/ g expandin n a e th e caus o t y likel s i s new s thi y b d generate m optimis e th f i r highe n eve r o 0 2 r o 0 1 o t s perhap , expand o t E P/ rate of earnings increase is expected to continue. Thus a s Ratio s Price/Earning f o e Influenc e Th o t d expecte e b t migh e shar a s dollar o tw g earnin k stoc s dollar y fort r o , 10 f o E P/ a h wit s dollar y twent r fo l sel n i d occurre e hav y ma t impac l psychologica e sizabl A if the P/E expands to 20. n bega s newspaper f o s page l financia e th n whe 2 197 k stoc a f o e exampl l theoretica a e tak , However printing the P/E ratios of stocks. Until then this earning a dollar a share that is expected to double information was not readily available, and it is unlikely earnings to two dollars a share. The stock, however, has that many individual investors consistently went to the been selling for eighty dollars, with a P/, E of 80. It isignificance s r greate f O . ratios e th g computin f o e troubl therefore unrealistic to expect the stock to more than perhaps, is the ability to see at a glance how the P/E double in price. The increased earnings are already ratios of various stocks compare. One effect of having . stock e th f o e pric h hig e th n i d discounte t tha s i s investor f o s million y b y dail n see s ratio E P/ e th

140 CHART 23. McDONALD'S S FRAGRANCE D AN S FLAVOR L INTERNATIONA . 24 T CHAR

E P/ a s show n chai t restauran e nationwid s thi f o t char e Th The increase in the P/E ratio of this stock is shown by the n Whe . multiples h hig o t d increase r o , expanded s ha t tha o rati widening gap between the Price Bars and the Earnings line. the Price Range bars and Earnings line coincide, the price is at The P/E expanded from 25 at the end of 1963 to 75 at the s Earning e th e abov s i e pric e th n Whe . earnings s time n fiftee end of 1972. In late 1973 the stock's price began to decline line, the ratio of price to earnings is greater thad en n e fifteeth t a nd times occurre t tha s earning n i n downtur e th e befor g lon f o o rati E P/ e th 2 197 n I . less s i t i , below n whe ; earnings d an , detergent , cosmetics e th e ar s customer s IFF' . 1974 f o McDonald's increased to as high as 90. The arrows point to beverage industries. 143 superperformance. Company Research Securities by Chart Chart by Securities Research Company they are likely to be more cautious about purchasing aS MACHINE S BUSINES L INTERNATIONA . 25 T CHAR stock with a high P/E ratio when they see hundreds of them listed with low multiples. There are times when an investor is justified in n whe s i t Tha . multiple E P/ h hig a h wit k stoc a g buyin y rapidl y ver g increasin e ar y compan e th f o s earning e th and show evidence of continuing to increase substantially in the years ahead. If the rapid growth is expected to continue for years, and it certainly has been predictable for some companies in their early growth stage, then the stock is a buy. This was the case in early 1963, when I was contemplating buying Xerox. At the time the P/E was 39, which was then very high as compared with most other stocks. But the rapid growth features of the stock were so obvious that in this case the high P/E was s it d continue k stoc e th , Subsequently . justified d expande o rati E P/ e th d an e ris e pric e superperformanc to as high as 77. The following January the stock was , itself y b , not d shoul o rati E P/ h hig a o S . 1 r fo 5 t spli discourage an investor from purchasing a stock; it is only . considered e b o t y man g amon t elemen e on Recently I came across an old 1958 tabulation of stocks tha ratiE t gavP/ o a ed thei ratiosha E rP/ M IB . 1 1,13 y toda ; institutions 7 36 y b d owne s wa d an 7 48. f o hold the stock. Many investors at that time probably o to d discounte d an h hig o to s wa E P/ e th t tha t though e th r fo h approac t correc e Th . growth e futur h muc e hav l wil y compan e th r whethe e determin o t s i r investo rapid and consistent growth in earnings. If a company s year d an , high o to e b t no l wil y usuall E P/ e th , that s ha a n bee g havin s a d regarde e b l wil e purchas e th r late tremendous bargain. In comparison, duPont E. M I. IB f o l leve e pric e th n i e ris e th e decad t pas e th r Ove de Nemours had a P/E ratio of 31 in 1958. Many common stock has been in concert with increased institutional e sinc , IBM o t t duPon d preferre y evidentl s investor . billion 9 $3 r ove s i M IB f o e valu t marke l tota e Th . ownership duPont stock was owned by 608 institutions, now 367 Company Research Securities by Chart hold the stock. The performance of the two companies can be compared by referring to Chart 25 for IBM and Chart 26 for duPont. t i t Bu . ratios E P/ r highe y justif s rate h growt r Highe

144 S NEMOUR e d . E.I T PON u D . 26 T CHAR is the growth rate expected of the company in the future that justifies the high P/E. Quite often just the opposite occurs, and a stock is given a high P/E after the rapid-growth phase has occurred. And frequently stocks that are about to have rapid growth have low P/E's n bee t no s ha l potentia h growt e futur g stron e th e becaus discovered by investors. For example, Xerox had a much higher P/E in 1967 and 1972, after its growth rate had slowed, than it had in early 1963, when its rapid-growth n phenomeno e sam s Thi . stage y earl n a n i s wa e phas occurs repeatedly.

The Ideal Situation

Many stocks have had high P/E's for years, but have had relatively slow rates of growth. It is difficult to justify a P/E of 50 when earnings are increasing at about 5 Over the past decade there has been a decrease in the number percent per year. One question to ask yourself before of institutions owning Du Pont stock. The decline in the stock's buying a stock with a high P/E ratio is: "Does the rate price reflects this lack of interest by institutionsh . hig s thi t a o rati E P/ a y justif s earning n i e increas f o Company Research Securities by Chart level?" An ideal situation is to find a strong growth stock with a low P/E ratio. It is possible to find such stocks, s i t marke k stoc e entir e th y virtuall n whe y particularl weak and is depressing rapidly growing companies along with the stagnant ones. The big sell-offs of 1962, 1966, 1970, and 1974 created these conditions, and they were ideal times to make stock purchases. Pessimism was dominant and the P/E ratios were relatively low.

146 147 Chapter 11 p Sponsorshi d Goo r fo k Loo

Sponsorship is the recommendation or promotion of a stock with the intent or expectation that it will rise in price. Stockbrokers often sponsor stocks, which they usually recommend widely to their customers and r sponso s sometime s Companie . public e th o t y frequentl n ope e th n i s purchase g makin y b k stoc n ow r thei n pensio e employe r fo e don y frequentl s i s Thi . market s a t ac o als s service t investmen d rea y Widel . funds . recommendations e purchas e mak y the n whe s sponsor e th s i p sponsorshi f o e typ d use y commonl e On investment or market letter. There are hundreds of these reports or letters, most of which are mailed weekly to a list of subscribers, usually with specific stocks being p sponsorshi f o e typ r Anothe . purchase r fo d recommende includes the recommendations that stockbrokers make to their customers. In the large brokerage firms that have offices nationwide the list of stocks recommended for purchase is drawn up in a central securities research office, usually in New York. Thus, when thousands of c specifi a t tha d advise e ar s office f o s dozen n i s investor s constitute n actio t tha , recommended y highl s i k stoc e th s i p sponsorshi f o e typ d thir A . sponsorship g stron n institutio n a often , investor e larg a t tha t suppor g buyin or the company itself, gives to a stock when the stock's price declines to a predetermined support level. u yo n whe f yoursel k as o t n questio t importan e Th see a stock being sponsored is: "How good is the y especiall , sound e b n ca p sponsorshi e Som " sponsorship? s organization h researc e larg e th f o n certai f o t tha t effor d an y mone f o s amount e considerabl d expen t tha in their analyses of companies. But there are some market letters that can do the investor more harm than n I . carefully s recommendation r thei e Evaluat . good

149 mid-1968, only weeks before the stock market begae nth an whe k des y m t a y bus s wa I o ag s year l Severa new bear market, I received a considerable number of telephone rang. It was a broker friend who wanted to let f o e purchas e th g advisin s letter t marke d unsolicite me in on a great opportunity to buy some stock in a stocks. e th s i e "Wher : was n reactio y M . brewery n northeaster f o y war y particularl e b d shoul s investor l Individua great potential in a regional brewery?" I told my friend e ther s 1950 e th n i k Bac . promotions k stoc e low-pric g Durin . buy o t d decide I f i w kno m hi t le d woul I t tha were hundreds of promotions involving new oil and the next few days I watched the stock's action on the f o e Som . stocks s electronic , later , and s stock m uraniu d droppe d ha e pric e th t tha d notice d an s page l financia them became successful companies, but most of them sharply. . scene e th m fro d disappeare y eventuall "What happened to your beer stock?" I asked a s i t tha n promotio f o e typ r anothe s i e ther t Bu n fiftee t abou n dow s it' t tha e se I " . later s day w fe d an t hones n a n whe s occur s Thi . prevalent e mor h muc points." respected analyst researches a stock and makes a buy "Well," my friend replied, "that's quite a story. It recommendation without taking into account all of the seems that the president of the brewery gave that bullish e H . book s thi n i d describe e ar t tha s influence s numerou tale to one of our vice-presidents, then unloaded a big might not take into account, for example, changing block of his own stock. I think we were taken." investor psychology, which might suddenly give a n i P/ k E stoc s it r sponso can t managemen s company' A ratio of 15 to a stock that for years had enjoyeg d a issuin P/ y Eb s i n commo t mos e th ; well s a s way r othe ratio of 30 or more. This has happened to many stocks. favorable quarterly earnings reports, which, unlike the Boeing, for instance, in late December 1973 had a P/E . audited t no e ar , reports l annua , 17 r ove s wa o rati e th r earlie r yea A . 9 t abou f o o rati r o d sponsore g bein k stoc y bu o wh s investor t Mos . higher r o 5 4 t a s wa o rati e th r earlie s year l severa d an promoted are afraid of missing the action, of passing up d ha y compan e th d towar s investor f o e attitud e th t Bu o t s i h approac t bes e Th . Syntex r o x Xero g buddin a h muc s a y pa o t g willin s a t no e wer y the d an , changed k stoc e th d evaluate e hav u yo l unti n i g jumpin d avoi r investo g Changin . been d ha e onc y the s a s earning r fo s i m proble t nex r you , good s look l stil t i f I . thoroughly f o t bes e th e caus n ca t tha e forc a s i y psycholog to determine when to buy it. e hav t migh t I . mistakes d ba e mak o t s advisor t investmen very little to do with the financial status of a particular company. It is often concerned principally with the An Example of Sponsorship confidence that investors feel regarding the future of the nation and its economy. In early 1974 there was an interesting example, shown e th g capturin t a d aime n ofte s i n promotio k Stoc on Chart 27, of sponsorship by a company's management. imagination of investors, who are told a story about the The company, Athlone Industries, is one of the largest big plans of a company. If the promotional campaign is manufacturers of stainless-steel plate and a major s sometime , up n ru e b n ca k stoc a f o e pric e th , successful distributor of industrial fasteners. During the severe quickly, even though the company might go bankrupt a sell-off of October-December 1973 Athlone declined to y b d burne n bee e hav s investor f I . later s year w fe d climbe e pric s stock' e th y Januar y earl n i g Startin . 10 promotions too often, or if the promotion is not steadily, reaching 24 in June 1974. This occurred during . rise o t y unlikel s i e pric s stock' e th , convincing a period of general weakness in the stock market, but Athlone received a considerable amount of favorable S INDUSTRIE E ATHLON . 27 T CHAR e Valu e th , 5,1974 l Apri n O . period e th g durin y publicit r fo t highes e Athlon d ranke y Surve t Investmen e Lin e twelv t nex e th g durin e performanc t marke e probabl months. At the time, the stock's price was fourteen dollars, its yield was 6.6 percent, and the P/E ratio was , group y industr w ne a n i e Athlon d include e Lin e Valu . 3 "Specialty Steels." The evaluation of the Speciality s wa l stee s stainles r fo k outloo e th t tha d state s Steel more favorable than in many years. On April 30,1974, Athlone announced that it had repurchased 132,000 of its common shares since the beginning of the year. On May 31 the company s it f o s share 0 25,00 d purchase d ha t i t tha d announce common stock for $468,750, bringing the company's l annua e th t A . shares 0 157,00 o t r yea t tha s purchase d estimate n chairma y compan e th 7 1 y Ma n o g meetin 1974 sales at $240,000,000 up from 1973 sales of $187,970,000. He estimated that net income per share might exceed $7.50 and could conceivably double . results s 1973' During the 1974 period the company also placed e th s wa d an Journal Street Wall e th n i s advertisement subject of a feature story in Forbes. Standard & Poor's l substantia a d predicte , 1974 , 24 e Jun n o Reports Stock earnings gain and stated that the shares were appraised conservatively. Stay alert for sponsorship of this kind, e b o t r appea y compan a f o s fundamental e th e wher g supportin y activel s i t managemen e th e wher , excellent d recommen s service y advisor d respecte d an , stock e th . retention r o e purchas s it s Investor l Institutiona y b p Sponsorshi t tha k stoc g stron y exceptionall n a f o e exampl n a s i s Thi moved higher, against the downward trend of the vicious 1974 Purchases by institutional investors can also give strong bear market. Most stocks move with the primary trend. Athlone sponsorship to stocks. The trick is to selece larg t stocky ver a sd thaha d t an 4 197 n i y earl p sponsorshi g stron d receive they are buying or will buy, and to avoid stocks that increase in earnings. they are selling or will sell. So it is often wise to avoid Chart by Securities Research Company

153 e larg d hel e hav s institution f o s hundred h whic n i s stock alert and trained nonprofessional who is willing to give y probabl e ar s holding e thos f o e Som . years r fo s position the necessary time and attention to managing his e ar e ther , contrast n I . sold e b l wil d an e stal g growin t mos s a l wel s a o d o t e abl e b d shoul s investment o t g beginnin t jus e ar s institution h whic n i s stock s alway institutional investors. . interest w sho n Pen e th n i d investe y heavil e wer s Institution Although mutual funds have receivede mucth n i h y more bankruptc d entere d railroa e th n whe l Centra publicity, their assets are dwarfed by the largeh r wit an s d institution 9 9 e wer e Ther . 1970 f o r summe more numerous corporate and state pension funds. A 1,608,000 shares in June 1970. Two years earlier, in e th y b e mad s wa s investment l institutiona f o y surve July 1968, there were 105 institutions that owned publication, Institutional Investor and printed in the 4,061,000 shares. By May 1969 these totals had declined August 1976 issue. The 300 largest institutionay lb fundt bu , s shares 0 3,231,00 d an s institution 2 10 o t have total assets exceeding $685 billiond , which increase d ha s institution f o r numbe e th 0 197 y Januar e insuranc , departments t trus k ban y b d manage e ar to 110, although the total shares held declined to e ar e Ther . companies t managemen d an , companies , bankruptcy e th r afte , 1970 r Octobe n i n Eve . 1,925,000 n tha e mor g managin h eac s manager y mone t seventy-eigh there were 89 institutions with 1,022,000 shares. With $1 billion worth of stocks. Moreover, thee pensiohav s n investor l institutiona , stock f o s block e larg y ver f o e becaus e siz n i g growin y constantl e ar s fund difficulty getting out of a deteriorating situation even f o r facto s Thi . contributions l payrol ' employees when they want to. Most funds lack the flexibility of increasing institutional participation tends to give a the individual investor. bullish long-term bias to the stocks of companies that Ten or fifteen years ago the institutions concentrated . interest l institutiona p develo o t n begi , Electric l Genera , duPont s a h suc s stock n i s holding r thei More than 70 percent of the dail. y tradinSteel . g U.S volum d an , e Carbide n Unio , T & T A , Motors l Genera on the New York Stock Exchange is now made by Today more institutions own McDonald's than U.S. e th r Ove . thousand o tw r ove r numbe h whic , institutions Steel; more own Xerox than duPont; more own past ten to fifteen years the extent of their activity has Burroughs than Kennecott Copper. Institutional a t a m the s put e siz e mer r thei t Ye . phenomenally n grow ownership of General Motors, General Electric, and disadvantage compared with alert individual investors. AT & T has declined but is still large. In order to benefit The latter can go into a 50, 80, or evenf o 10 s 0 percenbillion g t cash involvin y activit l institutiona s thi f o l al m fro position quickly if there is a market breat kou oe r an figur advers o t y tr ed shoul r investo l individua e th , dollars news development indicating an approaching bear where the institutions will be investing their money in market, whereas a $500 million pension fund is not as the future. flexible. e th s stock h whic e determin o t s i h approac e On Professional money managers have been wrong at institutions are buying. By comparing the number of . right s wa c publi e th n whe s point g turnin t marke l crucia s i t i s time c specifi t a k stoc a g holdin s institution , 1969 y earl d an 8 196 e lat n i t tha d reveale y stud 0 197 A g bein s i t i r whethe e determin o t l individua n a r fo e possibl g buyin e wer s institution , market l bul a f o p to e th r nea acquired or distributed by institutional managements. while the public was selling. Near the bottom of the It is advisable to select stocks that are beginning to be s institution , 1970 y May-Jul n i , market r bea t subsequen accumulated by institutions rather than stocks that n A . buyers e wer s customer t odd-lo e whil s seller e wer f o s hundred y b s year y man r fo d hel n bee e hav

154 institutions; in the latter situation distribution of stock e ther 2 196 n i k Bac . purchases l additiona s a y likel s a s i Table 6 were 575 institutions that owned U.S. Steel common stock; by the end of 1972 the number owning U.S. Steel Date Number of Institutions had declined to 63. The stock's performance during the period is shown in Chart 28. In contrast, Chart 29 88 l institutiona f o e favorit a n bee s ha t tha k stoc a f o s i September 1963 investors during the past decade. At the beginning of January 1964 89 9 3 f o s portfolio e th n i s wa k stoc s Burrough , 1965 May 1965 125 institutions and had a P/E ratio of about 17. At the end May 1966 213 s it d an s institution 6 31 y b d hel s wa s Burrough 3 197 f o e th t tha s reveal e lin s Earning e Th . 40 r ove s wa o rati E P/ November 1966 278 s ha y generall t tha d tren s earning n a d ha s ha y compan June 1967 314 s attract t tha e featur a , rising y consistentl n bee January 1968 387 . interest l institutiona July 1968 450 The institutional holdings of stocks are published on a monthly basis and it is not difficult for an May 1969 437 individual investor to determine if institutions are January 1970 488 r particula a f o k stoc e th g distributin r o g accumulatin March 1970 500 company. It is reassuring to an investor to know that a June 1970 504 d accumulate g bein s i e purchas o t t abou s i e h k stoc s market k wea g Durin . investors l institutiona y b y steadil October 1970 637 t suppor o t d tende e hav s resource l financia g stron r thei August 1972 485 the stocks in which they are interested. December 1973 579 d ha s ha t tha k stoc a s i , 30 t Char n o n show , Xerox November 1974 647 strong institutional sponsorship for about ten years. In e wer e ther , 1 r fo 5 k stoc s it t spli x Xero n whe , 1964 December 1975 580 newspaper stories saying that the action would permit September 1976 575 o t g interestin s i t I . participation l institutiona d increase n show s a , then e sinc n participatio t tha f o t exten e th e se d derive s wa n informatio e Th . table g followin e th n i e comparabl y precisel t no e ar d liste s period s variou e Th from Standard & Poor's monthly Stock Guide.n I . varied d surveye s institution f o r numbe e th e sinc earlier years fewer institutions were surveyed than in more recent periods. It is more important to determine the trend of d concerne e b o t n tha k stoc a n i t investmen l institutiona k stoc a r Afte . it g ownin s institution f o r numbe e th h wit has been in a portfolio for a long time and has not s a , managers t investmen , expected s a l wel s a d performe

156 CHART 28. U.S. STEEL CHART 29. BURROUGHS

The price of U.S. Steel common stock declined over the past , stock e th g ownin s institution f o r numbe e th h wit g alon e decad . buyers y heav e wer s institution 4 197 y earl d an 3 197 e lat n i t bu The rising price trend that began in late 1973 reflects the increased interest in the stock by institutional managements. Chart by Securities Research Company

s ha t equipmen s busines f o r produce r majo s thi f o k stoc e Th been steadily accumulated by institutional investors during the s earning g risin y consistentl d ha s ha y compan e Th . years n te t pas since 1964. Arrows indicate superperformance phases. Chart by Securities Research Company

159 CHART 30. XEROX d an d disillusione e becom , investors l individua s a l wel switch to another investment. The fastest growth of a company, and the most likely time for superperformance y relativel s i y compan e th n whe s occur , stock s it f o small. But many worthwhile gains can also be made in d increase p develo y the f i s companie r large f o k stoc e th . sponsorship l institutiona What is the attitude of many institutional managers toward earnings? They look for consistently rising earnings—particularly if the earnings advance enough— and they will pay a high premium if the rate of the rise , stable n i d unintereste e ar y the t Bu . enough p stee s i . rising t no e ar y the f i s earning e dependabl Glamour stocks with rising earnings are in demand; e ar , quality h hig f o n eve , companies e stabl , mature l institutiona e th r fo s account e attitud s Thi . neglected popularity of strong, reliable, and growing companies such as Pfizer, Schlumberger, Kresge, and Schering-Plough. But institutional managers are always looking for something new—tomorrow's glamour stock. It is a challenge to the individual investor to find that stock prior to or at the same time that the institutions discover it.

Trend Following

There are numerous traders in the stock market, many e th t tha d convince e ar o wh , successful y ver m the f o important thing is to determine if the prices of specific stocks are trending up or trending down and to take a k stoc s Numerou . trend e th h wit n positio t shor r o g lon r compute h wit y exclusivel t almos l dea s service y advisor h strengt d an n directio d tren e th w sho t tha s tabulation of long lists of stocks. As one more source of evidence to consider before purchasing a stock, technical information of this type can be very helpful in assisting your decision making. It n bee s ha t tha k stoc r anothe s i s copier e offic f o r produce s Thi does not make sense for an investor to purchase a stock accumulated heavily by institutional investors over the past . move e pric e superperformanc a s indicate w arro e Th . decade . 1966 e sinc r slowe n bee s ha h growt f o e rat e Th Company Research Securities by Chart if its price is in a pronounced downtrend. There is no company's business, its capitalization, its income financial future in fighting the market. Look instead for statistics for the past ten years, its present and past P/E . uptrends w ne g stron ratios, the trend of the company's earnings, and the d associate s problem n certai , however , are e Ther s Perhap . prospects m long-ter d an m near-ter s company' with trends. If you are considering purchasing a stock most important, you will have a recommendation or that is in a price uptrend, you should be concerned with two if the shares appear to have potential long-term how long the trend will continue. If the uptrend has appreciation. been in effect for a long period of time there might bw e ne a a r fo n reaso e th e determin o t t importan s i t I number of stockholders, including performance-minded uptrend. If it is caused by increased earnings, as many e th t tha d min n i p Kee . sell o t g plannin e ar o wh , funds are, the new trend will carry much farther based on, say, sales volume normally peaks out beforee thth ee pricewher .s case n i n tha s earning d reporte f o g doublin a e th y bu u yo f i g rewardin y ver e b n ca d tren a g Followin d triggere t wha e determin o T . smaller h muc s wa e increas stock early and sell it when the uptrend is broken. Even the action it might be necessary to obtain financial more rewarding is the ability to anticipatd e trenuptren dw changesne g stron . e th h whic n o y da e th r fo s newspaper Be willing to take profits when a stock'se price becomeassistanc e th t s enlis o t y necessar e b o als t migh t I . began unrealistically high. of your broker. When you have determined its cause you o n r o e littl f o s i n informatio d tren d Computerize will be in a better position to estimate how strong and r thei g changin f o s proces e th n i e ar s stock n whe e valu enduring the new uptrend will be. trends. I have received computer printouts designating Although some stocks remain in strong uptrends stocks as buys on the basis of projected trends on the for many years, most stock prices are much more erratic very day that the stocks have sold off sharply and in their trends. Stocks often have personalities which are y bu e possibl t bes e th t a , Moreover . trend d reverse . charts m long-ter r thei n i d reflecte point—at the very bottom of a bear market—trend In summary, when you see stocks that are beginning studies are of no help. So do not stray froms ththi e p biu gw follo d shoul u yo , chart e lin a n o s uptrend strategic picture while engrossed in analyzine th gg technicaincludin , l material r othe g reviewin y b n informatio details. points described in this book, and apply it to that . stock c specifi

Spotting Trends The Sequence of Trend Following One of the quickest methods of selecting candidates for purchase is to review sets of line charts. Look for stocks The following sequence of events sometimes occurs e th n i e increas n a h wit s uptrend w ne g beginnin e ar t tha when a stock begins a new uptrend. A large purchaser, sales volume. Then quickly learn all yoe u can abouavailabl e th t these e accumulat o t s begin , institution n a y usuall stocks. Ask your broker for information. Check reference supplies of stock for sale. Traders and trend followers d shoul u yo h researc r you m Fro . library r you n i s source e b o t y bu d an k stoc e th n i y activit w ne e th r discove be able to determine almost everything you need to where the action is. This causes the sales volume to know about each company in order to make e mor a ny Man . rising e continu o t e pric e th d an e increas intelligent appraisal. You will learn many detailg bein se ofar ths e Share . trend e th h wit y bu s follower d tren

162 163 purchased because someone else is buying th. e stock.sell-offs The e sever s cause n ofte , crisis e missil n Cuba continued rise becomes a phenomenon of mass r particula a r o s new f o n repetitio t constan e Th e th y probabl , individualist e som y Eventuall . psychology f i n tha e influenc r greate e hav o t s appear n ofte t viewpoin e th g buyin y b d uptren e th d starte o wh r manage d fun n I . time e singl a t broadcas r o d printe s i n informatio e th stock when it was depressed and unwantede ,wer decides pill l s to contro h birt d develope y newl e th n whe , 1963 , institutions r Othe . block e larg a s sell e H . profits e tak being introduced, the flood of often repetitive stories in r pape r thei g losin f o d afrai d an s weaknes w ne e th g seein newspapers and magazines added tremendously to the e Th . too h cas r prefe y the t tha e decid y suddenl , profits fast, volatile run-ups in Syntex and, to a lesser extent, in share price is knocked down and now a downtrend Searle—the two companies that first introduced the pills. y Bu . late e b o t t no t importan e therefor s i t I . begins An investor who owns stock in a company that receives when the new rising trend is in an early phaset and selbenefi lo t y likel s i y publicit d widesprea e favorabl . beginning s i n deterioratio t tha e evidenc s i e ther n whe enormously from the quick run-up in the price of the When you select a stock only on the basis of its shares. tape action or chart action, you are buying it becauso eint r investo n a d lea o als n ca y publicit s Sometime someone else thinks it is a good buy. If, on the other a trap, as with the notorious Penn Central case. The hand, the fundamentals of the company alsf oo t appearamoun toe considerabl a d receive d ha k stoc d railroa be bullish and if there is an earnings uptrend, an favorable comment prior to the company's bankruptcy , growth s sale l potentia e larg a d an , ratio E P/ e expandabl in the summer of 1970. One widely read financial then there is probably justification for the stock writer for a magazine enthusiastically described in his purchase. But never become a slave of the computer; column the great future for the railroad, then selling

simply bu t y no becaus o d computee eth r says "buy." e th f o s asset d nonrailroa e th t tha d state e H . 7 /2 6 t a s new e th t abou r compute e th d tol s ha e on o N 1 $6.5 billion corporation constituted one of the largest o D . ahead t jus e li t tha s reversal d tren d an s development real estate enterprises in the world, and he went on to e possibl r fo t aler y sta ; optimistic y overl e becom t no say that the stock offered a most interesting combination . reaction e pric g resultin e th d an s distribution k stoc of huge assets and excellent management. n metropolita e larg a n i g writin , columnist r Anothe s railroad' e th o t r prio s month w fe a r newspape s Price k Stoc d an , Publicity , News bankruptcy, interviewed a Penn Central director. The , stockbroker a o als s i o wh , director e th d quote t columnis News and publicity have a strong influence on stoct k greates e th d ha l Centra n Pen e th t tha g sayin s a e th s i s a , disseminated y widel n whe y particularl , prices prospects of any stock he knew about, and adding that e nationwid h wit y toda s State d Unite e th n i e cas n i p u o g d coul t tha k stoc r othe y an f o w kno t no d di e h television network news and nationally distributed price to five times its present value. He referred to a magazines and newspapers. h researc t investmen s hi y b y compan e th n o t repor The type of news that often upsets investors is that department that referred to Penn Central's enormous e ar s Investor . uncertain e futur e th s make h whic assets per share of $124. The report estimated that the . events d anticipate h wit , future e th h wit d concerne a 0 $5 f o s exces n i h wort e wer e alon s holding e estat l rea Sudden, good, and unanticipated news can trigger wild share, and that transportation investments were 2 196 e th s a h suc , news d Ba . enthusiasm g buyin . share a 5 $2 o t 0 $2 t leas t a h wort y probabl

164 Publicity, then, favorable and unfavorable, can have Buy Stocks You Understand a strong influence on the price of any company's stock e Unfavorabl . sell o t r o y bu o t s investor g persuadin y b y b d understoo y easil e b n ca t tha s stock e som e ar e Ther e favorabl ; price s stock' e th s depres n ca y publicit most investors, and there are stocks that even highly d an s new d An . rise o t e pric e th e caus n ca y publicit qualified experts find difficult to understand. The f o t movemen e th n i e rol a y pla y onl t no y publicit easiest stocks to understand usually belong to companies individual stock prices, but are also very influential in that are relatively uncomplicated, such as a growing causing the waves of optimism and pessimiss i t tha mt that oftenproduc w ne a h wit s busines a r o s motel f o n chai sweep through large numbers of investors. During the well-protected by patents. h wit d alternate n ofte m pessimis f o s period r wa m Vietna Stocks that are difficult to understand, such as periods of optimism. When the Arab oil embargo was most electronics stocks, I tend to avoid. The electronics imposed in 1973 the barrage of negative, repetitive news industry has had tough competition and a history of n televisio l nationa e th y b t broadcas n opinio d an I o ag s year w fe a e quit , However . failures y compan t no t abou t brough a medi s new r othe y b d an s network s electronic l smal a f o k stoc e th n i d intereste e becam o embarg e th y b d affecte y directl s stock n i s sell-off y onl s component f o y variet a d manufacture t tha y compan but also declines in stocks with little or no connection for electronics systems. The stock had very strong to the problem. sponsorship from a widely read technical market letter On May 27, 1970, at the very bottom of a severe and also from a highly respected stock advisory service. I , 627 t a s industrial s Jone w Do e th h wit , market r bea purchased the stock based on their recommendations financial experts on both television and radio were and on the fact that the stock was in a strong uptrend on quoted as expecting the averages to decline at least a chart. In short, I was buying blindly on the basis of y man w ho e tim e th t a d wondere I . points 0 10 r anothe s alway k stoc e th t Bu . uptrend y earl n a d an p sponsorshi r Simila . opinions e th n o d acte e peopl g unthinkin bothered me because I could not figure out the potential opinions, predicting additional severe declinesh wit n , have competitio n i e wer h whic , products s it r fo t marke r othe f o s bottom e th r nea n televisio n o d expresse n bee l smal a t a k stoc e th d sol I o S . companies r bigge f o e thos l instrumenta e ar s network s new e th , Thus . markets r bea profit after a few months. Eventually the stock's price in causing many investors to sell, often shortly before a went into a decline from which it has not recovered. bear market hits bottom and stocks begin their rebound. When it comes to evaluating high-technology stocks e th d an , course f o , true s i e revers e th s Sometime the investor can have a problem. Most of us are not national news discovers a bull market an, d gives Moreover it . engineering r o , physics , electronics n i s expert publicity just as it is about to top out and start a estimating the profit potential of new products is often o t s i r investo l individua n a r fo e cours t bes e Th . decline complicated. High P/E ratios and erratic earnings trends n televisio l nationa e th n o s new l financia f o y war y ver e b . stocks e thes f o y man n i d foun s feature e ar f o t resul e Th . magazines s new l nationa n i d an s network o t t difficul s i t tha y compan f o e typ r Anothe the barrage of publicity, particularly in promotine th e g beardetermin o t g Tryin . conglomerate e th s i e analyz , disaster g impendin r fo s reason e th g reiteratin y b s market trends in its various businesses can be very complicated is that impressionable persons become morn i es i ant dtha more e conglomerat e on s i e Ther . investors t mos r fo r thei l sel y the y frequentl t tha o s h muc o s , fearful s aid g hearin , production r sulfu : businesses g followin e th securities near the bottom of a bear market. and instruments, boats, natural gas distribution,

166 w Ho . development e estat l rea d an , devices n antipollutio e th g regardin t insigh t ge r investo l individua n a s doe future of a company like that? I have had some success Part IV When Should You Sell? e th e rais o t g tryin s wa t managemen e th t tha g notin y b price of the company's stock by increasing the earnings per share. This can be accomplished not only by increasing earnings but by decreasing the number of y b d accomplishe s i n reductio e Th . outstanding s share techniques such as offering to exchange debentures for common stock, or by having the company purchase its s conglomerate e Sinc . market n ope e th n o s share n ow often acquire other companies by exchanging stock, y strongl e b o t r appea s sometime s management r thei f o e pric e th e increas l wil t tha s step e tak o t d motivate the common stock. n a e hav u yo f i t significan s i n informatio w Ne understanding of the particular company or industry u yo g understandin t tha t withou t Bu . affected s i t tha will not see the significance of new facts or developments. s development s new n i e significanc e se o t r orde n I o t y necessar s i t i , stocks c specifi o t e relat t migh t tha understand those stocks. For example, if you own the stock of a company engaged in home construction and you read in the newspaper that the chairman of the Federal Reserve has indicated that the Fed is intent on reining in the nation's expansion of credit, you should be able to see significance in that statement as it relates y bu u yo t tha t importan s i t i o S . company r you o t stocks that you understand. c economi d an l financia e sam e th d rea s investor l Al news in newspapers, magazines, and investment advisory services. The difference between individuals is in the way they react to identical information. Some see . not o d s other ; meaning d an e significanc

168 Chapter 12 The Timing Rhythm

At some point a superperformance stock will cease to be o Winnebag f o 1 3 t Char s a , stock e superperformanc a Industries dramatically reveals. Even IBM has had price reactions as high as 50 percent. When it appears that a sizable reaction is likely to occur, the prudent approach t nex e th r fo g searchin t star n the d an l sel o t s i y usuall d depresse t a e superperformanc y bu o t y opportunit prices. While safety of investment is derived from the good m fro d derive s i e performanc d an , purchase e th f o g timin l capita f o n preservatio e th d an s profit , volatility e pric g timin d An . sale e th f o g timin d goo e th m fro d derive e ar the sale is more difficult than timing the purchase , simultaneously s low t marke r bea r thei h reac s stock e becaus but their bull market highs are attained independently. e th n whe g sellin d an s average k stoc e th g Followin e sinc , unsatisfactory n ofte s i n dow s turn d tren y primar numerous stocks reach their peaks prior to the peaks in the averages. The price and volume trend for each stock must be studied independently and action taken accordingly. s purchase e mak o t y tr d shoul r investo n a s a t Jus when a stock is depressed in price, he should attempt to sell after a stock's price has surged. Just as stocks are d depresse n bee s ha e pric e th n whe t stronges y technicall y alread s ha l sel t migh o wh e everyon d an e tim g lon a r fo e hav s price r afte t weakes y technicall s i k stoc a , sold e th ; time f o d perio e considerabl a r fo y steadil n rise number of investors who have paper profits and who are tempted to cash in rises as the stock's price rises. One of the most effective methods used to n o n actio s it w follo o t s i k stoc a l sel o t n whe e determin a chart daily. If the price begins to decline and breaks a

171 S INDUSTRIE O WINNEBAG . 31 T CHAR predetermined "sell" level, call your broker and tell him to sell. The year-end period—December, January, February—is the time of the year when bull markets most often change to bear markets. Bear markets began , 1966 y Februar , 1960 y Januar , 1973 y Januar n i December 1968, and January 1973. e superperformanc f o s span e tim e th f o w revie A phases might be helpful to an investor who is trying to determine when to sell, or whether to buy a stock that s increase e pric d rapi w Fe . uptrend g stron a n i y alread s i last longer than two and a half years and many have durations of less than a year. About half of the rapid r twenty-fou o t e twelv f o s duration e hav s increase e pric months.

The National Economy and Stock Market Declines

It is easier to anticipate general market declines than n dow n tur s average k Stoc . stocks l individua n i s decline g initiatin e ar s official l federa t tha e evidenc o t e respons n i steps to slow down the nation's economy because of inflationary pressures and an excessive use of credit. But n i n participatio t governmen e activ o n e wer e ther f i n eve d woul e cycl e th f o e phas n expansio e th , boom a g slowin eventually end and the business decline and contraction would take place. As costs increase, inflation accelerates and consumers begin to resist paying the higher prices. Money moves the markets. High interest rates s rate t interes g Risin . money r fo d deman h hig e th t reflec o s , higher e ar s issue d bon w ne f o s yield e th t tha n mea investors purchase them in preference to lower-yield old bonds or stocks purchased for dividend income. The old This chart of Winnebago, the country's largest producer of bonds and the income stocks decline to prices at which motor homes, shows dramatically that when fortunes of a they become competitive with the new bonds. A rapidly growing company change suddently, the decline in the booming economy in which demand for bank credit is . extreme e b n ca k stoc s it f o e pric soaring is likely to result in money becoming scarce, Chart by Securities Research Company particularly if the Federal Reserve does not take steps,

172 173 which are inflationary, to compensate for the increased fight inflation, so anti-inflation measures are usually s price k stoc d an s increase y mone f o t cos e Th . demand taken. d an s stock f o t ou s move y mone s a d depresse e becom s thi f o e awar e b d shoul s investor l Individua . bonds o int government-related cyclical pattern or scenario in order g stron y usuall s i y econom s nation' e th h Althoug to plan the timing of purchases and sales more s contraction s busines , held e ar s election l presidentia n whe o t y likel e ar s year n Presidential-electio . effectively often occur near the time of midterm congressional witness a strong stock market, but a bear market is likely elections. The business contractions that frequently to begin during the first two years following the l presidentia a h throug y midwa y approximatel r occu l fisca t governmen g anticipatin y B . election l presidentia l politica e th y wh n reaso l principa a y probabl e ar m ter and monetary policies you will be able to stay ahead of party in control of the White House loses congressional the technical evidence that most of the experts use as a seats in midterm elections. Midterm congressional basis for decisions. elections were held in 1946, 1950, 1954, 1958, 1962, The key factor determining whether or not stock n i d occurre s recession c Economi . 1974 d an , 1970 , 1966 s lie n electio l presidentia a r afte g stron n remai l wil s price 1945, 1949, 1953-54,1957-58, 1960-61, 1970, and in the results of the election. If investors perceive that a 1974-75. In 1966, moreover, there was a perion d inflatio o f f o tigh e t wav w ne a t star o t y likel s i t presiden w ne n a d labele t no s wa h whic s busines g declinin d an y mone harmful to stock prices, they are likely to react by official recession. A comparison of these two lists reveals selling. In fact, stock prices can begin to turn weak even f o s year e th n betwee n correlatio e clos a s i e ther t tha prior to presidential elections if the investing public midterm congressional elections and years in which believes that they know who the winner will be, and . occurred s recession know that his policy positions will be detrimental to investment in stocks. The results of elections sometimes catch investors Presidential Elections and the Stock Marketd defeate n Truma y Harr n whe 8 194 n i s a , surprise y b k stoc , election e th r afte y da e Th . Dewey . E s Thoma t canno n patter t marke r market-bea l bul r four-yea e Th prices dropped sharply and continued to decline for be guaranteed to continue in the future, but there is a months. good, specific reason for believing that it will. The d an s purchase k stoc g timin r fo y strateg l genera A d an e Hous e Whit e th f o l contro n i s i t tha y part l politica r bea e th g durin s stock g buyin f o t consis d coul s sale s i t Governmen l Federa e th f o h branc e executiv e th s stock g sellin d an s election l presidentia n betwee t marke understandably reluctant to lose the office because b d e oshoul f y strateg l genera e Th . time n electio d aroun voter dissatisfaction with poor economic conditions in modified whenever market conditions do not appear to g declinin , unemployment h hig s a h suc , country e th be following this theoretical pattern. , result a s A . prices k stoc g fallin d an , profits s busines s sale d an s purchase n pla d shoul s investor h Althoug most recent presidential-election years have been within a general strategy that takes into account the prosperous years and incumbent administrations will four-year political and stock-price cycles, they should e th r afte t Bu . future e th n i s prosperou m the e mak o t y tr also be alert and willing to change their strategy if l leve h hig a g maintainin r fo n concer s les s i e ther n electio important events or surprises occur. After all, if a major of prosperity and there is increased determination to war breaks out, the entire scenario is radically changed.

174 175 g bein f o , times e th h wit e tun n i g bein f o r matte a s i t I CHART 32. OUTBOARD MARINE aware of the ebb and flow of national interest, money, and effort. Always be ready for the unexpected. s Surprise r fo t Ou h Watc

Surprises are sudden, unexpected changes. The Cuban missile crisis of 1962 and the Arab oil embargo of 1973 e Th . information e advanc d ha e on o N . surprises e wer stock market could not discount the event in advance. The professional has no advantage over the individual investor when a surprise news development occurs. In fact, he is at a decided disadvantage: Most individuals f i , quickly s holding l smal y comparativel r thei l sel n ca o t r manage d fun a r fo t difficul e mor s i t i t bu , necessary dispose of or even reduce his much larger portfolio. Surprises usually trigger a new price trend, so be prepared to take action quickly. y risk e b n ca t i , surprise f o t elemen e th f o e Becaus . bearish r o h bullis y excessivel e b o t r eve r investo n a r fo We live in an age when the Dow Jones industrials e Volatil . day a n i e mor r o s point y twent e mov y frequentl stocks often move ten points or more in a single session, and low-priced stocks sometimes gain or lose one-fourth a s a s come t tha s new d Ba . value r thei f o d one-thir r o e mor h muc s stock e som d affecte s crisi y energ e surpris e Th e Th . sell-off t marke k stoc p shar a n i s result e surpris t larges s nation' e th , Marine d Outboar . others n tha y severel surprise war in the Middle East and resulting Arab oil producer of outboard motors, was especially hard hit by the w Do e th n i p dro t two-hundred-poin a d cause o embarg sudden development in early October 1973. Jones industrials in just twenty-eight trading sessions, or Company Research Securities by Chart in slightly over a month, which was one of the sharpest w Do e th f o y da r pe s los e averag e Th . record n o s sell-off Jones industrials was over .7 percent—almost the same rate of decline that occurred in 1929 over sixty-five e mor n eve d decline s stock l Individua . sessions g tradin y ver f of d sol t tha k stoc a f o e exampl n A . sharply sharply on the surprise news is shown on Chart 32, Outboard Marine. Looking ahead, investors should conside theiw rho

176 177 stocks will react if Congress modified tal x lawhelpfu ss i t ot i treas t Sometime . price n i p run-u l substantia a d ha capital gains as regular income. By anticipating possible in determining whether you should continue holding a e th e befor n actio y precautionar g takin d an s event e futur stock to ask yourself if you would be willing to buy the events occur, the element of surprise is reduced and stock now, after the price run-up. If the answer is no, stock market losses may possibly be minimized or why expect someone else to buy it? A stock that shows averted. signs of deterioration or appears to be overpriced should be sold. r conside y usuall s investor k stoc a g purchasin n Whe To Hold or to Sell? the risk involved versus the profit potential, often referred to as the risk/reward ratio. But after they have There are some individuals who hold on to their stocks owned a stock for a few years, many investors cease indefinitely. It was estimated recently that many billions evaluating it. Usually this is the time that the risk of of dollars' worth of stocks are held by investors who potential loss should be considered, for the reasons consider themselves to be locked in becaus. e thevalid e yb dr o notlonge o n y ma e purchas s stock' e th g justifyin want to pay taxes on their capital gains. In some cases the profits simply disappear. 9 58 e th g followin n actio e pric e th f o w revie y M s Switche y Polic l Federa o t t Aler e B t tha d reveale s move e pric e superperformanc 4 1962-197 e pric e sever a t withou d ende s move e pric e th f o 5 8 y onl Just as the Federal Reserve System can encourage the l bul e th f o 8 19 t tha d an , more r o t percen 0 1 f o n reactio g stimulatin d an t credi g loosenin y b t marke k stoc moves were eventually canceled by declinee s as largReserv l e as orFedera e th , economy l nationa e th n i g spendin . move e pric e superperformanc e th n tha r large can also depress bull markets by restricting the supply of e th t marke k stoc e th n i l successfu e b o t s i e h f I credit, inhibiting spending. Not all bull markets end t ou g carryin n i e lat e b t no t mus r investo l individua because of U.S. Government monetary and fiscal policies, e th t a s stock d goo g Buyin . decisions g sellin d an g buyin however. Prices in the 1961 bull market apparently n tha s investor e mor r fo s problem s cause e tim g wron reached such high levels that they could not go any higher, s i t i , Likewise . stocks r poo y hopelessl f o s purchase g discountin e wer s stock y man f o s price e th e becaus s ha t tha t marke a n i g sellin y dela o t e mistak a y obviousl y the n Whe . future e th n i s year y man o to s development o t y polic d goo s i t i n whe s time e ar e Ther . bearish d turne reach price levels that are unrelated to tangibles such as t Bu . up g goin d stoppe s ha t i e becaus y simpl k stoc a l sel earnings, prices fall even if there is no depressing influence this decision has to be made by studying the specific such as a threatened recession. Evidently there are enough d an , potential s it , history s earning d an e pric s it , stock e lin f o t ou e ar s price t tha g realizin , who s investor numerous other factors. Once the decision has been compared with traditional values, decide to take profits. s sometime n ca m botto e Th . delay t no o d , sell o t e mad s new e advers n whe h hig o to s i l genera n i t marke e Th be a long way down, as is revealed by some of the charts triggers a psychological reaction that results in high-volume in this book. Some stocks never come backy , and relativel fo s i r t marke e th n whe s occur s new d ba f I . selling those that do return to former price levels, , thwords e r waitinothe n I g . severe s a t no y usuall s i n reactio e th , low period can sometimes be long. the stock market is too high when investors perceive it Often investors continue to hold a stock after it has to be too high, and the market is not too high if

178 investors do not panic from bad news. The market action S PRODUCT N AVO . 33 T CHAR t marke e th r o k stoc r particula a r whethe s determine f itsel in general is too high. And this should usually determine whether you should sell or hold a position. a f o t resul a e ar s movement t marke k stoc e Sinc d an d worl , psychology s mas f o e mixtur x comple , power g buyin d an , policies c economi , politics l nationa it is vital that you stay alert to changes in these forces and be ready to sell positions quickly if necessary. Any sharp decline in the stock market should be regarded as d an p run-u p shar a d ha s ha k stoc r you f I . warning a d shoul u yo , chart e lin a n o n formatio r spea a s a s show g establishin o t r o g sellin o t n consideratio s seriou e giv stop-loss positions. The chart of Winnebago Industries, e th n i n patter t stil a f o e exampl n a s show , 31 t Char f sell-of g stron a m fro g resultin , stock t tha f o e pric following a period of rapid price appreciation. l sel o t y necessar s i t i y wh s illustrate y graphicall t I a r afte e plung o t t star y the n whe y quickl s stock e som strong superperformance bull move. When a stock's price begins to plunge it is very difficult to determine at what level the drop will stop, because most selling on the l emotiona , panicky g stron a s develop n dow y wa t I . slide e th d exten d an e accelerat s call n Margi . character r fo g lookin t star n the d an y earl s profit e tak o t r bette s i . opportunities g buyin w ne d an e declin e th f o m botto e th Even well-established blue chip growth stocks have periods of weakness that can cause sharp reactions in their price. A recent example is the decline in Avon n i 4 / 3 9 13 f o h hig a m fro , 33 t Char n o n show , Products early 1973 to under 25 in 1974. Stocks with very high s decline p shar o t e susceptibl e b often n ca s ratio E P/ . down s turn d tren t marke y primar e th n whe d shoul s sometime s companie h growt t stronges e th f o s Stock be sold if the stock becomes extremely overpriced or if conditions s Sometime . growth f o e rat r slowe a e indicat y compan e th n withi A Possible Exception y bu d goo a s become d an d oversol y radicall s become k stoc e th f o r manufacture t larges s world' e th s i s Product n Avo . again There is one type of stock that sometimes. mighsales e t better house-to-hous n i g specializin , toiletries d an s cosmetic be held rather than sold and repurchased. This is the Chart by Securities Research Company

180 181 stock of a budding growth company that hae s th no g t had a supportin r fo e motiv y an r longe o n s i e ther d an y compan l smal a e b t migh t i , Typically . run-up e pric s begin c publi e th e declin o t s start e pric e th s A . market t bu t produc w ne e uniqu a t marke o t g beginnin s i t tha e pric e th y Eventuall . decline e th g acceleratin , sell o t whose stock price has not increased substantially. reaches a new base, at which level the process of Examples are Xerox and Syntex when they were in their . again s begin n accumulatio s term n i , benefit o t d starte t no d ha d an s stage y earl y ver It is therefore desirable to buy stock just as an of stock price, from their vast growth potential. upswing is beginning and to sell after the price has e lat e b o t t no t importan y ver s i t I . advancing d stoppe buying and not to be late selling. In this Wall Street The Pricing Rhythm version of musical chairs anyone who is caught owning stock when the music stops is a dunce. Not only is there a timing rhythm to stock prices, but also a pricing rhythm. Stock prices move through stages, as can be readily seen on some of the charts in this book. A Big Problem for Investors: The Stock Exchange The sequence of action consists of, first, the establishment Specialists of a base, formed sometimes over a period of years. o int s accelerate n the , rise o t s begin e pric e th y Graduall s exchange e th y b s specialist f o e us e th f o s Defender . advancing y consistentl e pric e th h wit e stag g upswin n a s Thi . declines m fro s stock t suppor y the t tha d conten The upswing stage is gradually replacedn i b t y a stagsuppor ee durinth s gwa e Wher . phony y obviousl s i t argumen which the price stops advancing, but moves irregularly 1974 during the biggest price decline since 1929? Where sideways. This stage is the top, and professionals often was their support of Avon Products, which dropped refer to a stock as looking "toppy." Stocks in this stage from 140 to under 20? Where did the specialists support d an h fourt e th r fo , sold e b d shoul t movemen e pric f o Polaroid—at 14 Vs after it had plunged from 143 1/4? last stage is the downtrend. The declines in many stocks Specialists and stock exchange insiders are more likely retrace their entire advancing stage, as was indicated in to be the cause of sharp declines. Most investors would Chapter 7. Eventually the price of the stock k declinestoc y s to friendl e th m fro p hel t withou f of r bette e b a new base, and it might remain at that level for years. exchange specialist. They would prefer to keep their The stages of base, upswing, top, and decline often shares of those big trading profits in their own pockets. result from patterns of accumulation and distributiok n bstoc yl sel o t s investor l individua r fo e tim l idea n A e bas a n i s i t i n whe k stoc e accumulat o wh , professionals o t n begi s insider e exchang k stoc e th e befor e therefor s i and sell when the price has advanced. Their buying knock prices down with their heavy short selling. But l technica y b k stoc e th n i t interes s trigger n ofte y activit d an t specialis e exchang e th h wit l al s i e advantag e th s printout r compute h watc o wh , investors d an s analyst his buddies on the trading floor. Their books of buy and charts to learn what "big money" isg doingbuyin . e Afteth f ro ae magnitud e th m the l tel s order l sel d an price advance has occurred and the public has become and selling pressures, so they know precisely when to r o , sell o t n begi s professional e th , stock e th n i d intereste begin selling short. The individual investor does not "distribute." The price ceases to advance, but trading have this advantage. But after a stock has had a volum heavye b thir e n e.Th dca stage "top,e ,th s "ha sharp price run-up, a protective stop-loss order can be been reached. The professionals have sold d their stocbombe s ki k stoc e th f I . lower s point w fe a d entere

182 183 large-blocy b k short Sailin positione gth - wil sole b ld short, he sells borrowed stock and assumes that prices automatically. d covere e b n ca k stoc d borrowe e th t tha o s e declin l wil later by purchasing the shares at a lower price. The price r unde o t 6 1 y Ma n o 0 $33.5 m fro d decline s share s Avi f o How Specialists Operate e th d confirme s Avi n whe , 1973 , 6 e Jun n o s dollar 1 $2 profits from vehicle sales in the company's earnings. Since stock exchange specialists and insiders have a very When there are negative news developments or t i , prices k stoc f o n directio e th n o e influenc t importan other evidence that a stock should be sold, the public might be helpful to analyze the actions that they should stockholders are often much slower in learning of the take in order to maximize their own profits. Near the developments and in taking action than are the n i k stoc e accumulat y the t marke r bea a f o m botto e th n o n actio e th o t e clos y sta o wh s trader l professiona k stoc s A . market g risin g approachin e th r fo n preparatio t developmen e surpris a s i e ther n Whe . floor e exchang k stoc n o s profit g takin , sellers e ar s insider e th e ris s price e th , sold e b d shoul k stoc a r o s stock t tha g indicatin positions they had accumulated at lower prices. As traders usually manage to sell short or dispose of their prices continue to rise they become short sellers, having holdings before the public has that opportunity. s dictate n the t self-interes r Thei . supply r thei d distribute lower prices, which are brought about by timely short selling to drive prices down. Do Call Options Depress Stock Prices? The actions of the exchange specialists illustrate a technique that individual investors shoulo d learn—thaChicag e th n o t isd , sol e ar s stock 0 15 t abou n o s option l Cal , depressed d an , inactive , quiet e ar y the n whe s stock y bu o t Board Options Exchange, the American Stock Exchange, g stron s i m the r fo d deman e th n whe s stock l sel o t d an A . Exchange a Philadelphi e th d an , Exchange c Pacifi e th e tim e precis e Th . volume h hig n o g surgin e ar s price d an call option is a right permitting the buyer to purchase a . ending s i e surg e volum d an e pric e th n whe s i l sel o t e pric c specifi a t a k stoc f o s share f o r numbe d state s shakeout d an s run-up e pric g involvin s Movement . months x si o t p u y usuall , period e tim d limite a n withi following heavy short selling are price cycled s oflimite e th s i n optio n a h suc f o e disadvantag g bi e Th short-term or intermediate-term duration that occur . exercised e b n ca t i h whic n i d perio e tim within the longer-term four-year cycles brought abour fo tg hopin , options s buy t tha c publi e th s i t i e Sinc by presidential, congressional, or Federat l no Reserv s i t I . e Board professionals y usuall e ar s seller e th , rise e pric a policies related to the four-year political cyclee th .n i e ris a t permi o t s professional f o t interes e th n i r occu s alway t no o d s price k stoc n i s Decline price of the stock, so stocks with options are probably because stockholders have decided to sell. Oftel ncal f thi ee b d woul y the n tha e mor e pric n i d depresse price decline results from short selling by hedge funds, . them t agains d trade t no e wer s option e Th . traders g bi r othe r o , specialists e exchang k stoc 1973 Securities and Exchange Commission complaint against Avis revealed that one hedge fund had sold short Remember the Political Cycle d ha r selle t shor e th t tha d an , stock s Avi f o s share 0 25,40 been given access to information that hat d noStree l t beeWal ny b d playe s tune o t e danc s investor l Individua k stoc s sell r speculato a n Whe . public e th o t d disclose insiders and big institutional investors. But the music is

184 e b o t e continu l wil e Ther . Washington n i d arrange d an 7 mid-195 n i k pea a d reache t Employmen . recession political cycles and business cycles. As a result, there will began to decline sharply. s price k stoc g wildly—swingin d widely—an e b o t e continu But the stock market turned strong in early 1958, as Wall Street insiders try to grab large profits and the during the depths of the recession, and remained strong n a n i s buy r o c pani l emotiona n a n i s sell c publi y econom e Th . 1959 h throug d an r yea t tha f o t res e th r fo k stoc g swingin y widel e th n i d An . euphoria l emotiona r yea n presidential-electio e tim e th y B . strong d turne o als markets there will always be superperformanct emarke stocks k stoc .d an y econom e th , however , arrived 0 196 t star o t y likel t mos s i t marke r bea y primar w ne A had started to decline again, an undesirable prospect e dat e th m fro s month n fiftee t abou f o d perio e th g durin . party l politica t incumben n a f o w vie f o t poin e th m fro t firs e entir e th h throug s election l presidentia f o t Presiden s a , 1968 n i d happene n patter r simila A postelection year until the following Februaryo t d trie . y Every desperatel s adviser c economi s hi d an n Johnso t excep , years y fift t pas e th f o t marke r bea y primar keep the nation's economy booming until election day f I . period h fifteen-mont t tha g durin d starte s ha , 1960 d advocate e h n electio e th r afte y shortl t Bu . year t tha the nation's economy is undergoing a severf eo inflationart threa e th yf o e becaus y econom e th n dow g slowin boom whe electioe nth heldns i , measures wil takee b l n . inflation g acceleratin to slow the boom and to reduce inflation within a few months following the election; this occurred following the presidential elections of 1937, 1952, 1956, 1968, Declines in Individual Stocks vs. Declines in the Stock and 1972. But if the economy is not overinflated, the Market a s a h muc s a r fo d delaye e b t migh s policie e restrictiv year. Following the 1964 presidential election, Stocks decline for a variety of reasons related to each restrictive actions were not taken until late 1965, about specific company and its future prospects. Sometimes a year afterward. e th s sometime d an e declin o t d expecte e ar s earning t presiden t incumben n a f o w vie f o t poin e th m Fro stock is simply overpriced. who wants the nation's economy to be boomingd at the represente s a , hand r othe e th n o , market k stoc e Th time of his campaign for re-election, a bear market in by market averages that include many companies, e restrictiv f i n soo o to r occu t migh n recessio a d an s stock t Governmen l Federa f o e becaus often t mos s decline s hi r afte y immediatel n take e ar s policie y monetar policies such as increasing income taxes, which causes election. For if the bear market and recessioy npolic t begin and governmen e th t Bu . decline o t s profit y compan end too soon, it would mean that the next t bulcredi lf o marke t cos e t th e increas o t n bee s ha d use n ofte t mos o to r occu o als d woul y econom g boomin a d an s stock n i g slowin n i e effectiv s i h whic , availability s it e decreas d an soon and they might start another decline befores thedecline r fo s reason r Othe . activity s busines n dow next election. This is exactly what happened between include the overpricing of numerous stocks, as in late 1956 and 1960. , pessimism r investo d widesprea d an , 1968 e lat d an 1 196 Presidential-election year 1956 was a boom year as during the period between 1946 and 1949. e th r afte t Bu . prices g risin d an y econom g stron a h wit Declines can also be triggered by heavy short election President Eisenhower expresseo dt r fearprio abou, t thehowever , often t mos d occurre s ha s Thi . selling rate of inflation. The Federal Reserve Boars da , began market a l bul y primar a n withi s decline e intermediat policy to restrict credit. The result was the 1957-58 professionals try to drive prices down to levels at which

187 they can cover short sales and re-establish long positions. accepted by many institutional investors and individuals. e ar s stockholder y man e becaus l successfu e ar y The e pric e extrem e th s ignore h approac n one-decisio e Th frightened into believing that the price on fi theie r stocmov s k price k stoc s a y regularl s occur t tha y volatilit will decline even further, and therefore decide to sell. waves of strength and weakness. The one-decision Bear markets can also occur because of the collapse purchase of Polaroid by institutional investors might s Today' . 1929 n i d happene s a , credit f o d pyrami a f o k stoc e th n whe , 1972 r o 1 197 n i d soun d appeare e hav regulations covering credit for stock purchases should was selling above $140 a share, but the weakness of the prevent widespread forced selling as occurredo t ind that decline d Polaroi n whe t apparen s wa h approac debacle. under 20 in 1974. There have been hundreds of similar cases. t righ e th y bu o t y necessar s i t i l successfu e b o T s Signal g Warnin e th r fo h Watc stock at the right time and to sell it at the right time. You should think like a speculator, but instead of The main warning signals for an individual investor to buying today and selling next week, think of buying look for, therefore, are the signs of a government-induced and selling in terms of the four-year cycles in stock t affec d woul h whic , activity s busines n i n slowdow n presidential-electio g durin s stock l sel o t n Pla . prices company profits and stock prices. years, when there is very likely to be a strong stock To find the warning signals it is important to market based on a prosperous economy resulting from follow the financial news closely, paying particular expansionist federal fiscal and monetary policies. Plan attention to statements from Federal Reservr e Boarbea e dth f o m botto e th o t e clos s stock e purchas o t members and from Administration leaders and market that occurs regularly during the period between e anticipat o t y necessar o als s i t i t Bu . economists presidential elections. To do this you must follow economic and political conditions several months ahead. financial developments very closely in order to determine If inflation is becoming a bigger problem, expect that when the Federal Reserve Board has changed from a steps will be taken to slow it. policy of monetary firmness to a policy of monetary Two key indicators to watch for sell signals are the ease. Moreover, you must be aware of the shift in the , Board e Reserv l Federa e th y b t se s i h whic , rate t discoun psychological attitude of investors from extreme and the interest-sensitive utilities averages. Changes in the pessimism to optimism. discount rate often signal the Fed's intentions to expand Investors who are fully invested must sell stock e averag s utilitie g risin A . supply y mone e th t contrac r o s fund t sufficien e hav o t r orde n i s profit e tak d an is favorable, but be cautious if it has turned down. A available to buy attractive situations after the next comparison of the Dow Jones utility andk industriastoc e th n li e mad e ar s fortune y wa e th s i s Thi . sell-off averages reveals that the utility average began i nh tohig decline ar s e price n whe s stock l sel t mus u Yo . market before the industrial average in four of thn e laswhe s t six beastock e r attractiv y bu o t y mone e th e hav o t r orde markets. their prices are way down. So do not overstay a bull e mor e ar s investment t marke k stoc l Successfu market. Knowing when to sell your stocks is one of the r fo y strateg l logica a f o e us e th m fro t resul o t y likel l individua e th , you t wha f o s Regardles . success f o s secret buying and selling than from a random approace hav o t he or continu l wil s price k stoc , do o t h wis , investor from the "one decision" method that has been widely bear cycles and bull cycles reflecting business conditions

188 and anticipated business conditions, tight money and plentiful money, increasing earnings and decreasing Chapter 13 earnings, booms and recessions. For survival, anticipate. Selling Short Always stay one jump ahead.

I recall the evening of the 1968 presidential election, when Richard Nixon defeated Hubert Humphrey in a close vote, not so much because of the details of the election but because of my own activities that evening. s wa I , reported g bein e wer s return n electio e th s A seated at a table studying stock charts and company fundamentals. The result of my research was a long list of stocks that I considered to be candidates for short , stocks l sel o t , decided d ha I , time e th s wa s Thi . sales . election e th n wo n politicia h whic o t d regar t withou The year 1968 experienced a wave of fear-of- inflation psychology. Stock market letters advised readers to "buy stocks now before it is too late." Many d convince s wa I t bu , overpriced y extremel e wer s stock that they were also about to be deflated. They were. A e th n electio l presidentia 8 196 e th r afte s week w fe Federal Reserve Board adopted policies of increased monetary restraint. The stock market averages reached o t n bega t descen g lon e th d an r Decembe n i s peak r thei the May 1970 bear market lows. e mad e b y usuall n ca t marke k stoc e th n i s Profit e Th . them g buyin y b n tha t shor s stock g sellin y b r faste reason is that price declines are usually much steeper than price rises, which occur more gradually, over a longer period of time, and are usually accompanied by a healthy amount of pessimism that gradually lessens the e th n o , declines e Pric . continues e ris e pric e th r longe other hand, contain an element of panic that increases as stock prices plunge lower. s i h whic , stock d borrowe f o e sal e th s i e sal t shor A arranged for a customer through his stockbroker. A profit or loss is realized when the short sale is covered by t tha s share f o r numbe e interest—th t shor e Th . purchase a

191 have been sold short and not covered by purchases—is period that the best opportunities occur for profitable published for New York and American Stock Exchange short selling. stocks about the twentieth of each month. The figures The time to sell short is not necessarily identical York New The Journal, Street Wall e th n i d liste e ar : do s Stock . positions g lon n i s profit e tak o t e tim e th h wit . newspapers r othe d an Barren's, Times, not all reach their final bull market tops at the same e mor s time y man e ar t marke k stoc e th n i " "Bulls time. Moreover, the stock market averages usually form l sel e peopl w fe y Comparativel " "bears. n tha s numerou a top which on charts is shown as a broad, trendless h hig A . prices n i e declin a expect y the n whe t shor k stoc pattern often lasting for months, in contrast with stock percentage of short selling is done by the stock exchange market bottoms, which are sharp "V" patterns. specialists on the trading floor. Yet during about one In addition, stocks selected for short selling are not and a half years of each price cycle the primarn y trenwhe d d owne e wer t tha s stock e sam e th e b o t y likel of the stock market is down. In recent years the market prices were rising. Therefore, the action sequence opportunities for making money fast by selling short in is likely to be to sell stocks that have been owned, wait bear markets have been more numerout s thaselec n n thethe , down n tur o t d tren y primar s market' e th r fo opportunities for rapid capital appreciation in bull candidates for short sales. When an investor sells a stock markets. During the bear markets that reached their that he has owned for a couple of years and in which he f o s thousand e wer e ther 4 197 d an 0 197 n i s climaxe e pric a t a t ou l sel o t y tr d shoul e h , profit e sizabl a s ha stocks which declined to a fraction of their former near the top, but the exact highs are much more difficult levels. to predict than are the exact lows at the bottom of a One reason for the much smaller numbes i d r of shorexpecte e tb n ca t tha t mos e th y Usuall . market r bea seller thas i t comparatively little informatior no e th g durin e rang h hig s it n i k stoc e th l sel o t e abl e b o t d oriente e ar s Broker . subject e th n o e availabl s i e assistanc . market l bul e th f o e phas t las r fo s recommendation d an n informatio g furnishin d towar The safest time to establish short sales, on the buying stocks, not for selling or short selling. other hand, is after stock prices have started to decline m fro e chang o t g beginnin s i y psycholog r investo d an . bearish o t h bullis Timing a Short Sale f I . importance l crucia f o s i e sal t shor e th f o g timin e Th t Shor l Sel o t e Tim l Idea e Th a stock with a highly volatile price history is sold short at the wrong time, the result could be soms e quickcondition ann d whe g actin e b t marke k stoc e th d woul w Ho s question n certai f yoursel k as , Therefore . losses e sizabl are ideal for selling short? Under ideal short-selling before you venture to sell a stock short. e Thb ed questionwoul s s average l industria s Jone w Do e th s condition , political e th f o n i e w e ar e stag t Wha : include d shoul starting to decline after making new highs. Fewer business, and stock-price cycles? Are we near the top of individual stocks would be making new highs. During the a bull market? Which stocks are leading candidatek stoc e th sr fofo r3 197 y Januar n i d peake t tha t marke l bul t importan s i t I ? decline o t t star s price n whe s sale t shor averages, numerous stocks started price declines earlier. to recognize the end of a bull market and the beginning Some examples shown in this book are Skyline (Chart 9), of a bear market because it is during that transition Holiday Inns (Chart 14), and Winnebago (Chart 31).

192 High P/E ratios, over 50 to 1, in many glamour or T INVESTMEN C MGI . 34 T CHAR "growth" stocks are found when conditions are ideal for short selling. In January 1972 MGIC Investment had a

. 5 /s 9 s a h hig s a d sol k stoc e th d an 1 o t 0 8 f o o rati E P/ k 7 stoc e Th . Vs 6 s a w lo s a d decline d ha t i 4 197 e lat y B is shown in Chart 34. There is an abundance of evidence, some fundamental and some technical, that reveals the conditions desirable before selling short. Under ideal conditions for short sales the national economy would s i m boo e th t tha s sign e b d woul e ther t bu , booming e b growing old. Business investment would be at such a high level that it could not be sustained. Interest rates would be in a rising trend. Wage rates would be rising e b d woul t Unemploymen . declining s margin t profi d an d an g increasin e b d woul n inflatio f o e rat e th t bu , low A . officials n Washingto o t n concer r greate f o e b d woul presidential election would have been held recently. Two periods with these conditions present were late 1968 and 1972, both presidential-election years.

Patterns of Boom and Bust in Real Estate

The real estate market also booms during these periods of widespread national prosperity. In December 1972 n i m boo e large-scal a g experiencin s wa a Florid condominiums, one of the largest real estate construction a t inspec o t d stoppe I e tim t tha t A . times l al f o s period building overlooking the ocean in southern Florida. It was about half completed, but three-fourths of the s price t tha d tol s wa I d an , sold n bee d ha s apartment were to be raised by five thousand dollars on January 1 t A . 1 h Marc n o s dollar d thousan e fiv r anothe d an e wer s buyer n constructio r unde m condominiu r anothe t Bu . hand n i s pen d an s checkbook , line n i g standin e th y B . arrived d ha " money t "tigh s month x si n withi l residentia f o r insure e privat t larges e th s i t Investmen C MGI a n obtai o t e impossibl t almos s wa t i 3 197 f o l fal mortgages. The stock had a P/E ratio of 80 to 1 when the mortgage loan and sales had declined to a tiny fraction stock's price began its decline in January 1973, the same month that the stock market averages began their declines. MGIC's decline accelerated in early 1974, when lower earnings began to be reported. Chart by Securities Research Company of the earlier level. By 1974 it was estimated that there The best candidates for short sales, then, are stocks were at least ninety thousand empty unsold condominium that have already started to decline when the primary apartments in Florida alone, and bankruptcies were trend of the market begins its downturn. Weak stocks becoming widespread. So there appears to be a real become even weaker when the stock market turns down. estate cycle that follows fairly closely the cycles in stock An example of this is shown in Chart 35 of Grolier. In prices. A major factor in slowing down both real estate this case the stock's price had started to decline before booms and stock price spirals is, of course, the cost and the market averages began their downward movement. availability of money. The earnings of the company had also started to decline, n i r fo k loo o t r facto t importan r anothe s i h whic selecting a candidate for a short sale. In cases of Profitable Short-Sale Opportunities Have Been companies with very high P/E ratios, a reduction in the Numerous rate of earnings increase is often sufficient to cause a price reaction. I reviewed long-term charts to determine how many Rite Aid, shown in Chart 36, and MGIC Investment, e th f i s sale t shor l successfu n bee e hav d woul s stock shown in Chart 34, are two stocks that began their price short sales had been made in January 1972, when the slides when the stock market averages began to decline. stock market averages reached their highr s andThei . begatime ne th t a s ratio E P/ h hig y ver d ha s stock h Bot their slide into the 1973-74 bear market. price declines accelerated when their earnings began to Of 1,018 stocks reviewed, 378 would have been decline. unsatisfactory selections. Twenty-eight of these began Stocks with high P/E ratios can sometimes be good their declines later than the averages, and the short sale candidates for short sales, but they are often strong would not have been successful if established in January popular stocks and frequently have considerable 1973. The remaining 350 stocks were unsatisfactory for sponsorship from institutions. So a general conclusion various reasons, including the fact that many of them cannot be made that high P/E stocks are usually good rallied sharply, late in 1973, before resuming their decline. short-sale possibilities. The selection has to be based Others declined, but the extent of the decline was too upon other factors, such as the stock's earnings trend t no d di s stock s case r othe n I . sale t shor a k ris o t l smal o rati E P/ e th h wit , market e th f o d tren y primar e th d an decline at all, but moved upward against the primary just one more factor to be considered. High P/E ratios can trend of the market, or moved in a sideway. s patternhowever , . stock a o t n attentio s investor' n a l cal y quickl But there were 640 stocks on which a short sale would have been successful if made at the time the averages peaked. Of these, there were 118 stocks that y Systematicall s Sale t Shor t Selec began their declines at the same time as the averages; 111 stocks had started their declines within the six Many of the factors that are reviewed in selecting stocks months prior to the peak in the averages; and the for purchase are also involved in selecting candidates for remaining 411 stocks had been declining for more than short sales. Leverage, for example, can work to enlarge a six months prior to the peaking out of the averages. In decline in a company's earnings in some years just as most cases their declines accelerated rapidly after the effectively as it can enlarge an earnings gain in other stock averages turned down. years. The heavily leveraged airlines, such as Eastern in

197 R GROLIE . 35 T CHAR CHART 36. RITE AID

Grolier is a big publisher of reference books, including Encyclopedia Americana and New Book of Knowledge. The Rite Aid operates discount drugstores in the northeast and is earnings trend and the stock price of this stock e were alreaddeclin o t n y bega k stoc s company' e Th . wholesaler d foo a o als declining when the stock market averages began their decline during the same month as the stock market averages, January in January 1973. 1973, but the stock's price decline accelerated after earnings Chart by Securities Research Company f o o rati E P/ a d ha k stoc e Th . year t tha r late e declin o t n bega 198 60 to 1 in January 1973. Company Research Securities by Chart CHART 37. EASTERN AIRLINES Chart 37, are an example. Heavy selling by institutions can also cause sharp price declines, just as their heavy . rapidly e increas o t s price e caus n ca g buyin t investmen e th f o d moo l psychologica e Th community and the general news background are important in creating the bear market conditions that are so helpful for successful short selling. The Arab oil embargo that went into effect in late 1973 is one d widesprea e th s create t tha s new f o d kin e th f o e exampl s repetitiou e Th . sellers t shor o t l helpfu o s m pessimis reporting by the news media of rising unemployment t interes g risin f o , inflation f o s rate g increasin f o , figures rates, and of war threats are important in overcoming . investor n America e th f o m optimis l natura e th There are certain stocks that should be avoided, such as those that have large short-interest positions. During bear market rallies these stocks can severely whipsaw a short seller because there are numerous other short sellers who are frantically trying to cover their short sales. Numerous weak stocks that do not have e th m fro y satisfactor e mor e ar s position t shor e larg s les h muc e ar y the e becaus w vie f o t poin s seller' t shor susceptible to explosive bear market rallies. For similar . capitalizations l smal y ver h wit s stock d avoi s reason Select an actively traded stock. It is important to be able to cover the short sale with a purchase without e volatil f o y histor a h wit s stock n Whe . difficulty s i s order p sto f o e us e th , short d sol e ar s move e pric sometimes desirable. Buy-stops can be placed about a . rally t las e th f o k pea e th e abov t poin

Short Selling by Professionals Eastern is one of the largest domestic airlines, operating f o s professionals—member y b e don s i g sellin t shor t Mos primarily along the eastern seaboard. Like most airlines, the stock exchanges, including specialistst . cos Thei h hig r e activitth f o e y is becaus t deb h wit d leverage y highl s i n Easter f o n sectio " Laboratory t "Marke e th n i y weekl d publishe e fluctuat n ca s earning t tha s i t resul e Th . aircraft t je n moder f o s investor l individua r fo e mistak a e b d woul t i t Bu Barren's. n o t effec g depressin a g havin n ofte , year o t r yea m fro y wildl to imitate the short-selling pattern of these insiders. The the stock's price. Eastern's stock price was already declining . declines r thei n bega s average t marke e th n whe 3 197 y Januar n i Chart by Securities Research Company 200 201 e exchang k stoc y b g sellin t shor h muc t tha s i n reaso as the 1975-76 bull market started to gain strength. specialists is associated with their market-making y earl d an r Octobe f o g sellin t shor y heav e Th activities. They "lean against" the direction of the market. November 1974 occurred when stock prices were rising, They often sell short heavily when the market averages are which is typical of most short selling by professionals. s investor l individua n whe s occasion e th n O . rapidly g risin At bull market tops the volume of short selling by stock should be selling short—that is, as prices begin bee n s majoha s r member e exchang k stoc r othe d an s specialist declines—short sales totals by specialists and, 6 insiderr s Decembe g endin k wee e th r Fo . lower t somewha . rallies t marke g durin n tha r lowe n bee e hav a d reache t marke l bul a n whe k wee e th s wa h whic , 1968 One of the heaviest periods of short selling occurred peak and began the bear market that ended in May 1970, in late 1974, when the stock market averages and most short sales by exchange members totaled 3,219,500 stocks were severely depressed. A severe sell-of. f occurreselling t d shor f o l leve e moderat y relativel a , shares in mid-1974, which reached a selling climax on October 4. The next bull market top for the Dow Jones Stock prices rebounded strongly from thes sellingvolume climae Th . x 1973 , 11 y Januar n o d occurre s industrial and regained 100 points on the Dow Jones industrial of short selling for the week ending January 12, 1973, f o d perio s thi g durin s wa t I . weeks o tw n withi e averag y b e wer 0 4,691,50 h whic f o , shares 0 5,496,60 d totale k stoc y b g sellin t shor t tha prices g reboundin y strongl exchange members; of this latter figure 3,187,800 were . heavy y exceptionall s wa s specialist d an s member e exchang n whe , earlier r yea a , comparison r Fo . specialists y b During the week ending October 11, 1974r , for Novembe e th m fro y sharpl g risin e wer s price k stoc example, total short selling reached 12,105,900 shares, a 1971 intermediate low of 790.6 on the Dow Jones very high level thaf O . t total, 8,651,800 shares were sold industrial average, the week ending December 3, 1971, r numbe t tha f o d an , members e exchang k stoc y b t shor had these figures: total short sales 8,571,700; short sales 5,432,700 short sales were by stock specialists. The heavy by exchange members 7,000,100; of the latter total, r fo s figure e Th . weeks l severa r fo d continue g sellin t shor 5,148,600 were by specialists. the week ending October 18, 1974, were 9,769,300 s average t marke e th 1 197 r Novembe e lat m Fro shares sold short, of which 7,001,300 were by exchangs Jone ew Do e Th . months e fiv r fo y steepl d climbe r Fo . specialists k stoc y b e thes f o 0 members—4,510,30 g durin s point 0 17 n tha e mor e ros e averag l industria the week ending October 25, total short sales were the period. Anyone who sold short during the late 7,317,500, of which 5,147,400 were by stock exchange November-early December 1971 period could have been members; of this number, 3,176,400 were by specialists. hurt financially. Heavy short selling by stock specialists, Heavy short selling continued during the week ending then, is more often associated with rising prices, and it , shares 0 8,178,00 d totale s sale t Shor . 1974 , 1 r Novembe can be unwise for individual investors to do as the of which 5,926,800 were by exchange members and specialists do. A safer time for short sales is when stock 3,706,300 of that total were by specialists. . declines r majo d starte e hav s price The heavy short selling was effective, and k wee e th g Durin . market e th f o n directio e th d reverse ending November 8, 1974, the Dow Jones industrials Covering Short Sales dropped 40 points and by the end of the first week . points 0 17 n tha e mor s wa e declin e th r Decembe n i The best way to select short-sale candidates is by studying From that level the market began again to rally, long-term charts for direction of price movements,

202 203 P/E ratios, and earnings trends. Select stocks that are s i y safet , purchases k stoc h wit s A . declining y alread . sale t shor e th f o g timin d goo e th n i d foun PartV When should the short sale be covered? For The Strategy for Success maximum profits do not cover the short sale until the 0 1969-7 e th g Durin . course l ful s it n ru s ha t marke r bea bear market short sales would have been made when the k stoc e th y b d reveale s a , trend y primar s market' averages, turned down in December 1968; the short sale f o m botto e th t a 0 197 y Ma n i d covere n bee e hav d woul the bear market. Again, in January 1973 the stock t shor d an e declin l cyclica r thei n bega s average t marke s purchase g coverin e Th . made n bee e hav d woul s sale would have been made during the panic stage of the e b d shoul s sale t shor o S . 1974 r Octobe n i t marke r bea s condition c economi h wit s period g durin d covere similar to those of May 1970 and October 1974. e thos f o s new c economi t importan t mos e Th e wer s leader l politica n Washingto t tha s wa s period taking steps to stimulate the national economy. Their moves included increased government spending, advocacy of lower income taxes, and a Federal Reserve Board policy of monetary ease. But at bear market a y usuall s i e ther t tha e pervasiv o s s i m pessimis s bottom period of weeks or months before the stock market reacts to the new stimulative policies. One reason for new stimulative policies by federal d an h hig e ar s figure t unemploymen t tha s i s official rising, industries are not operating at full capacity, the next presidential election is two years away, and it is time to get the economy moving again. These are the . soon d en l wil t marke r bea e th t tha s signal Bear markets end in an emotional panic phase during which prices often plunge dramatically in just a few days. For maximum profits the short sale should be covered during this selling-climax phase. It is usually r fo s commitment w ne t tha , course f o , point t tha t a e cycl e stock-pric w ne a d an , made e b d shoul s purchase begins.

204 Chapter 14 Sources of Information and Ideas

? stocks e superperformanc d fin o t k loo u yo o d e Wher t Ho n (the t Marriot d discovere I . places t differen y Man t a s restaurant s company' e th n i g dinin y b ) Shoppes about the time the first public offering of stock was made in the early 1950s. I first discovered Holiday Inns p tri a n o s motel r thei f o e on n i t overnigh d staye I n whe s wa k stoc e th d an s 1950 e lat e th n i s wa t Tha . Florida o t an over-the-counter security at that time. s sometime s librarie n i g browsin r o g readin e Extensiv brings about the discovery of a promising company. I s article g readin r afte s mid-1950 e th n i l Thioko d purchase in technical magazines describing new developments in missile systems. Thiokol, shown on Chart 38, was one of the pioneers in the development of solid propellant motors. Leads to many other superperformance stocks were found as a result of systematic searching. The search can be accomplished in many different ways. Here are a few of them. Regularly review sets of long-term line charts such as those in this book. Review the charts for the various characteristics I have outlined—that is, for price volatility, expandable P/E ratios, and price and volume trends. Stocks that are undervalued compared with previous periods can be easily identified on the charts.

y Regularl w Revie o t s Publication

It is important for anyone who has common stock investments also to invest a relatively small amount of o t y wa y onl e th s i t I . publications l financia n i y mone stay abreast of the latest decisions by Washington

207 CHART 38. THIOKOL f o d tren e th t affec t migh t tha s decision , policymakers stock prices. The financial news coverage in most newspapers is unsatisfactory. k stoc d an l financia r fo r newspape y dail t bes e Th e b n ca h whic Journal, Street Wall e th s i s new t marke e th f o s section t mos n i x mailbo r you o t d delivere country on the day of publication. The Journal provides a considerable amount of detailed financial information of importance to investors. This includes the daily charts d an , transportation , industrial s Jone w Do e th f o utilities averages tabulationd an , averagee th e f sth o y sb s listing e th , diary t marke e th e ar t importan o Als . hour of new highs and lows, the daily percentage leaders, the . reports s earning f o t diges e th d an , stocks e activ t mos s i s contribution t importan t mos Journal's the f o e On that it keeps investors up to date on a daily basis. The M/G Financial Weekly contains an encyclopedia of valuable information on approximately 3,450 stocks, including all stocks on the New York and American k stoc h eac r fo n tabulatio e Th . Exchanges k Stoc contains a chart and extensive data on price, volume, trend vs. the market, earnings per share, P/E ratios, dividends, shareholdings, and the financial position of each company. d publishe Guide, Stock Poor's & Standard e Th monthly, contains vital information on over five Stock e Th . stocks d preferre d an n commo d thousan l principa s company' h eac n o n informatio s give Guide s company' e th , coverage e price-rang d detaile , business , record s earning d an e structur l capita , position l financia data on dividends, and the number of institutions holding each stock, including the number of shares held. d detaile e ar h whic Reports, Stock Poor's & Standard analyses of most publicly traded stocks, is widely r othe s publishe o als s Poor' & d Standar . respected y weekl e th s a l wel s a s material e referenc e valuabl Outlook. Strong earnings growth and superperformance price action The Value Line Investment Survey publishes a l smal e th f o t resul a s a s 1950 e th n i l Thioko r fo d occurre weekly Summary of Advices and Index containing , motors t propellan d soli r fo r contracto s a n selectio s company' . ICBM n Minutema e th r fo s motor g includin 209 Chart by Securities Research Company d an s group y industr h whic n i s stock d hundre n sixtee becomes available. Then evaluate the stock and take individual stocks are ranked on their probable marke. t stocks y bu o t s arrive e tim e th n whe n actio e Lin e Valu . months e twelv t nex e th r fo e performanc Many of my best investments have been made as a f o d perio a r fo e rang e pric s stock' h eac s estimate o als result of periodic sessions reviewing the information and three to five years in the future. Detailed analyses of evaluations in these publications of the stock advisory each stock are published on a rotating basis in the services. They can be found in most public libraries as "Ratings and Reports"section. A weeklyy "Selectiosuppl l wil ns & broker t Mos . offices stockbrokers' s a l wel t curren n o n informatio s contain n sectio " Opinion l individua n o s report f o s copie h wit s customer developments in the stock market and a stock-of-the- companies. week selection. Moody's is another of the large financial advisory Moody's s i s investor o t e valu r particula f O . services Learn to Recognize the Cycles Handbook of Common Stocks, which is published quarterly. The volume contains reports of 1,500f o stock s scycle d repeate e ar e ther t marke k stoc e th n I r Fo . alphabetically d arrange 0 1,01 d an m for r tabula n i . decline d an n distributio n the , advance d an n accumulatio each of the latter there is a chart portraying its market When the public is selling in panic at bear market price history for the past twenty years and a description bottoms, the insiders—the stock exchange specialists of the company and its business. A package of statistics and other professionals—are buying. When the public is and other facts on the stock are also includede . th , prices r highe h muc t a g buyin y enthusiasticall f o s source e valuabl e ar t tha s publication r Othe , observing h throug s i t I . selling e ar s professional ideas are Barren's, Business Week, Forbes,g U.S.sellin d Newsan g & buyin e thes g anticipatin d an , understanding World Report, and the Wall Street Transcript. Thera n e pla ar en ca r investo l individua e th t tha s pressure many technical publications which can be of great value successful investment strategy of well-timed stock in providing the names of companies that are developing purchases and sales. new products or are active in other ways that will have Within the bull market stage of each stock-price . growth s company' e th n o g bearin t importan n a cycle there are phases consisting of dramatically rising Barren's contains advertising by numerous stock prices and phases in which prices are moving irregularly e thes f o e som f o s letter t marke e Th . services y advisor sideways or into decline. The most dynamic rise occurs services often contain important information on new when stock prices rebound upward from the bottom of developments in specific companies as well as s i purchas m e pessimis n whe , time s thi t a s i t I . markets r bea recommendations. . quickly e mad e ar s gain l capita e larg t tha , widespread If you find stocks that seem worth investigating, The new dynamic bull market is triggered because , information r fo y compan h eac o t y directl e writ e ar s stock t tha e realiz s trader l professiona d experience a d fin t migh u Yo . reports l annua f o s copie g includin o int d scare e b t migh o wh e anyon , is t out"—tha d "sol prize investment. e conclud s professional e Th . so e don y alread s ha g sellin The intelligent use of reference materialy s is onheav l e of additiona y b d surprise e b t no l wil y the t tha the keys to success. A helpful method is to keep files selling. g bein s stock f o s name e th g containin s notebook d an Cycles within the four-year political cycles are n informatio t importan s a e fil e th o t d Ad . investigated often caused by selling for income tax purposes. There

210 211 e th r nea d starte e hav t tha s rallie g stron y man n bee e hav characteristic of market troughs and tops. When stock . concluding s wa s purpose x ta r fo g sellin s a r yea a f o d en s new f o e barrag a y usuall s i e ther d depresse e ar s price Exceptionally strong rallies began in Januars y 1976new n , Televisio . recession g approachin n a g regardin January 1975, December 1971, December 1970, and programs and the daily newspapers are filled with t dependen s i e cycl g tax-sellin e th e Sinc . 1967 y Januar g declinin d an t unemploymen g risin g regardin n informatio upon the one-year reporting period for federal income sales and production. Usually there is an insinuation that e mad s Purchase . duration n i d limite s i e cycl e th , taxes conditions will become worse. Many investors find it r fo y heavil d sol g bein e ar t tha s stock n i g Thanksgivin y b e thes g durin s stock y bu o t t difficul y psychologicall tax purposes can often show good capital gains by . pessimism p dee f o s period February. n begi s price k stoc n i s decline , hand r othe e th n O t wha o t s i r conside o t s investor r fo n questio e On during periods of widespread optimism, when the nation s desire o wh , stockbroker e th f o t self-interes e th t exten is prosperous and the economy is booming. During these to have a steady income, conflicts with that of the periods sales and production are high and little concern a e receiv o t s i t interes e whos , investor l individua is voiced regarding unemployment. But it is during these y likel s i r broke A . investment s hi r fo n retur m maximu periods of prosperity that investors who wish to decrease f o w revie y m t Bu . time y an t a k stoc a d recommen o t . stock l sel d shoul k ris stock charts revealed that the best time to buy mose t mad e hav s professional t Stree l Wal e astut n Eve stocks during the past fourteen years was near the bad guesses regarding which of the twin devils, recession d an , 1962,1966,1970 f o s market r bea e th f o m botto or inflation, the Fed has decided to fight. Hundreds of 1974. These periods lasted only a few4 months197 f o l . It isApri d an h Marc n i t los e wer s dollar f o s million primarily during these low-risk/high-rewars dprice periodse th g , includin , prices d bon g plummetin f o e becaus a m fro r recove o t g beginnin s i t marke k stoc e th n whe y agenc t governmen d an s bond l municipa d an e corporat f o y secondaril d an , buy d shoul s investor t tha , market r bea issues. Bond dealers, which are banks and big securities during the periods of market weakness that occur from firms, had loaded up in anticipation of higher prices. Bond October through December in years whed n therbon ; efall is sellinyield d g bon d an s rate t interes n whe e ris s price . purposes x ta e incom r fo s losse h establis o t d bon e Th . rise s yield d an s rate t interes n whe l fal s price So should we buy stocks to keep, or buy and sell market had expected that the cost of money would decline e experienc e th n o d Base ? cycles e th f o s stage e th h wit in 1974 as a result of an easing of credit policy by the s reward l financia r greate e th s decade e thre t pas e th f o Federal Reserve and by declining demand for loans. But would undoubtedly have gone to those investors who interest rates climbed as the demand for loans increased t Bu . times t righ e th t a g sellin d an g buyin t a t adep e wer . credit d tightene d Boar e Reserv l Federa e th d an l sel d an y bu o t e desir r o y abilit e th e hav s investor l al t no Stocks purchased for their dividend income may be . cycles e th h wit particularly susceptible to Federal Reserve Board Some investors do not buy at the f propeo n r time,expansio e th n Whe . restraint y monetar f o s policie when prices are depressed, because thes y fear thbecome et riskcredi , down s slow y suppl y mone s nation' e th n whe d lessene s i k ris t tha e perceiv o t l fai y The . involved e Sinc . rise s rate t interes d an n obtai o t t difficul e mor stock prices are depressed and that risk is increased dividends from income-type stocks would be at a r fo n reaso l principa e Th . prices h hig f o s period g durin disadvantage compared with the higher bond yields, their imperfect perception of risk is the news atmosphere money-sensitive common stocks decline.

213 Look for Potential Price Movement considered the investor to be a more conservative man,, an individual more interested in safety and dividend It is generally true that the stocks of big, mature income than in taking a risk that might bring a large companies with large capitalizations are not likely to capital gain but might also cause the loss of the decline as rapidly as the stock prices of smaller investment. o t y likel e mor s i e declin w slo a , However . companies These traditional viewpoints are incorrect. Real n whe e tim a t a l sel o t e failur a d an y complacenc e caus safety lies more in the good timing of purchases and the stock has gone into a price decline. The purchase of sales than in the size or the financial strength of f o e sens a r purchase s it e giv o t y likel s i k stoc y qualit a f o y man f o s stock e Th . purchase r fo d selecte s companie security that might not be justified. In mid-Septembet persisten n i rn bee e hav s companie t larges s nation' e th 1974, for example, IBM had declined 58 percent from downtrends for a decade or more. Among them are its 1973 high; General Motors had declined 57 percent, companies shown on charts in this book, such as AT & T, , percent 0 6 c Electri l Genera , percent 5 5 k Roebuc s Sear t mos s a l wel s a , Steel . U.S d an , duPont , Motors l Genera and Texaco 49 percent. Some of these declinee sthes werd e in purchase o wh s investor e Conservativ . utilities addition to declines from even higher prices established stocks for their safety and income have suffered large in the 1960s. Rather than "quality," the important losses for many years. Inflation has been taking its toll. . movement e pric l potentia s i k stoc a n i r fo k loo o t g thin The dividends offered by utilities and other income-type e th f o k stoc e th n eve s price e som t a t tha d min n i p Kee h wit e compet o t h enoug e larg n bee t no e hav s stock highest quality can be overpriced, and thaf t o a ts some certificate , bills y Treasur . U.S , bonds m fro s yield prices even low-quality stocks can be underpricedn bee . s ha t resul e Th . mediums r othe d an , deposit y safet e Th . stocks e conservativ n i s downtrend m long-ter feature considered so desirable did not exist. On Individual Judgment Is Crucial for Success the other hand, the well-timed purchase of carefully e thos o t g rewardin y highl n bee s ha s speculation d selecte . speculation y entirel t almos s i t investmen k stoc n Commo individuals who have had the determination to spend Today very few stocks are purchased solely for their the time and effort required to study the stock market dividends. In most cases the purchaser of common and individual securities in a systematic manner. r highe a t a m the l sel n ca e h t tha g speculatin s i s stock The critical test in managing investments is . gains l capita r fo , is t future—tha e th n i e tim e som e pric n informatio t interpre o t y abilit e judgment—th l individua e hav s counselor t investmen y man , Traditionally correctly. An investor can have all the latest facts believed in a buy-and-hold approach to the stock but if he does not have the ability to arrive at the market, with safety obtained through diversificatio. ntrouble ane dhav o t d boun s i e h , conclusion t correc the purchase of quality stocks. Traditionallye th y , Wall Streebasicall e t hav s investor t mos , speaking y Generall , taker k ris a e b o t r speculato e th d considere s ha same information available to them. It is differing someone who would buy a stock today t and pladifferen n ty o bu sel o lt s individual e caus t tha s interpretation it in six months or a year at a higher price. It was stocks, or some investors to buy the stock that others assumed that he was willing to assume greater risk in the are selling. r weake , volatile e mor g selectin y b n gai r large f o e hop s ha t Stree l Wal , Traditionally . purchase r fo s stock

214 215 Chapter 15 Points to Remember

t marke k stoc l successfu r fo d followe e b o t y strateg e Th investment can be summarized as follows: 1. Buy when stock prices are extremely depressed following a steep decline. These periods have occurred about every four years, usually within a few months of the midpoint of a presidential term of office. k stoc n i d uptren e th g durin s position g lon d Hol . 2 prices as the market recovers from depressed levels. o tw t leas t a r fo e ris o t e continu y usuall s average k Stoc years, although the rise for numerous individual stocks can be much shorter. 3. Sell after stocks have had a considerable rise in price, particularly if a presidential election has been held recently—usually an indication of a possible change in national economic policy. 4. Sell short or remain in cash as stock prices decline from high prices and as a result of federal policies. Do not re-enter the market as a buyer too soon. Wait until the selling climax has been reached. 5. In the immediate future bear markets might not e becaus 4 1973-7 d an 0 1969-7 f o e thos s a e sever s a e b investors are likely to be more cautious than they were in 1968 and 1972 about running up stock prices to high levels. Moreover, a large market has developed in options for people who have an urge to gamble. 6. Future market action also depends to a large d Unite e th f o t Presiden d electe s i o wh n upo t exten n anti-inflatio d an s policie g spendin l federa e becaus , States measures depend considerably on presidential positions, which vary with the individual who occupies the seat of power. But the average presidential incumbent w follo o t d expecte e b n ca n re-electio r fo g runnin the usual inflationary policies prior to an election,

217 and then tell the^ttecs: "Vote forme, I gave you purposes can occur through December 31, the heaviest prosperity." selling usually takes place a month or two earlier, and . December y b d reboun o t d starte e hav n ofte s price k stoc Major trend reversals occur when all the heavy selling When to Buy Stocks has at last run its course. e estimat o t y onl t no e abl e b t mus r investo e Th . 7 p kee , stocks y bu o t n whe g determinin n i u yo t assis o T future profits for a company but also to anticipate the these points in mind: s a , profits e thos n o e plac l wil t marke e th t tha e valu 1. Follow the financial news closely to determine reflected by the P/E ratio. e restrictiv a m fro s switche e Reserv l Federa e th n whe 8. Large capital gains from common-stock . ease f o y polic a o t y polic y monetar t a k stoc t righ e th g buyin y b d obtaine e ar s investment 2. During bear markets do not buy until selling the right time and selling it at the right time. The right reaches the climax stage as fear-stricken investors dump time for the purchase and sale is dependent to a great t marke r afte s occur s Thi . market e th n o s securitie r thei extent on the stages of political cycles, which determine averages have declined a couple of hundred points or the timing of business and stock-price cycles. more over a period of at least nine months. The selling climax will consist of two hundred or more stocks w ne g makin s stock o n d an r yea e th r fo s low w ne g makin What Stocks to Buy Jonew highsDo s e industriaTh . l average will decliny eb twenty points or more, then suddenly rebound as To assist you in determining which stocks to buy, keep o t n begi d an s position t shor r cove s professional : mind n i s point e thes reaccumulate long positions at depressed prices. g anticipatin n o s depend t investmen l Successfu . 1 3. The biggest stock-price gains are madc e whespecifi nn o e plac l wil s investor r othe t tha e valu e th e th n I . levels d depresse m fro d reboun o t n begi s price securities in future years. The most important ability for h throug y midwa t abou d occurre n ofte t mos s ha s thi t pas an investor to have, therefore, is the ability to forecast a presidential term of office. . correctly s development d an s trend e futur 4. The final test of whether a stock is a "buy" is 2. Prior to purchasing a stock, review on charts its the price action of the stock itself. Check to see if it is price and earnings history for the past several years. This beginning to rebound strongly from its depressee th o als de price Determin . perspective n gai o t y wa k quic a s i level. . up r o n dow s i t i r trend—whethe e pric t curren n ofte s earning y compan d expecte n tha r Lowe . 5 d depresse m fro g reboundin e ar s stock n Whe . 3 cause stock prices to decline to attractive levels. This is price levels, the stocks most likely to rebound the fastest the time to buy stocks, which will turn up as earning. s prospects g stron h wit e thos e ar t highes e th d an return to a normal rate. But be sure to select companies 4. To determine which stocks are currently being that have sufficient strength and bright futuresf o - e literatur e th w revie , promoted r o d sponsore companies that will bounce back. e th r fo r broke r you k as , services y advisor t investmen f o r Decembe n i s i y bu o t s time t safes e th f o e On . 6 d an , company s hi y b " "buys s a d rate s stock f o s name . markets r bea e sever d experience e hav t tha s year carefully read the financial press for stocks being Although the selling of stocks to establish losses for tax favorably publicized.

218 219 t mos e th f o e on s i r powe g earnin e Futur . 5 e stock-pric t stronges e Th . cycles e stock-pric d an important features to consider when evaluating stocks advances often take place during the year prior to the for purchase. presidential-election year. Stock prices have frequently 6. Stay up-to-date on proposed policies emanating started to decline within a year following the presidential . securities c specifi t affec t migh t tha n Washingto m fro election. 7. Better investment results are usually found 2. Stock prices discount the future; prices move among dynamic small or medium-sized growth-stage because of economic conditions expected many months . industry f o s giant e th g amon n tha s companie ahead. Stock prices often reach their peaks before 8. Stocks being accumulated by institutionay the ; l levels t highes s it s reache y prosperit s busines investors should show better results than stocks being rebound from their bear market lows while business is sold on balance by institutions or those in which there is . recession a o int g slidin l stil . interest l institutiona o n y b d announce s a , policy y monetar n i s Change . 3 s stock t mos n i l smal o to s i d rewar l potentia e Th . 9 officials of the Federal Reserve, are strong signals of a most of the time to justify the risk taken by the investor change in the direction of stock prices. with his capital. f o t movemen e th n i e influenc g stron a s i s New . 4 10. Look for opportunities to make large stock prices. Since about five million people read the percentage gains. s article d an n informatio , day y ever Journal Street Wall 11. Do not buy a security until you have in that newspaper can and often do have an effect on investigated and evaluated it thoroughly. Knowledge and prices. . research l carefu h throug d gaine e ar t insigh 5. When good news no longer pushes up the price , speculation r o t investmen t i l cal u yo r Whethe . 12 of a stock, the stock might be a sell candidate. keep in mind that when you buy any common stockn stha r greate s i k ris e downsid e th f i e Determin . 6 . risk d calculate a g takin e ar u yo the potential profit. 13. It is important that every individual who buys 7. When the upward momentum of a stock's price f o e awar e b k stoc n commo g buyin g contemplatin s i r o has slowed or stopped, consider whether the stock A . take o t d affor n ca e h k ris l financia a f o h muc w ho should be sold. security might look like an outstanding opportunite th yy inbu o t g willin e b d woul u yo f i f yoursel k As . 8 k ris e th e relat o als t mus l individua h eac t bu , respects l al security at its present price. If you would not be willing f himsel k as d shoul e H . situation l financia n ow s hi o t to buy, why expect someone else to? a y Frequentl . afford n ca e h s los a f o h muc w ho s price h hig l fina r thei h reac l al t no o d s Stock . 9 e futur t grea f o y possibilit e th y onl s contain y compan s month l severa t ou p to t migh e Som . simultaneously growth, not the assurance of it. . averages t marke e th n i p to l fina e th o t r prio 10. A goal of many institutional investors- continuous, uninterrupted growth—is unrealistic. The When to Sell Stocks real world consists of cycles. e ar y man ; decline t jus t no o d s price k Stoc . 11 To assist you in determining when to sell, keep these forced down by heavy short selling on the part of : mind n i s point . traders l professiona 1. Determine the stages of the political, business, 12. Stockbrokers have a strong bullish bias.

220 221 . business r thei r fo d ba e b o t d considere s i m Pessimis r you r fo d ba e b s sometime d coul m optimis r Thei Appendix A investments. Superperformance Stocks n the d an d purchase e b t no d shoul s Stock . 13 1962-74 t marke r bea a g durin s stock n i g lon n remai o T . forgotten is not only illogical, but also expensive. Re-examine your positions often. The following stocks experienced Superperformance g assignin s market' e th m fro t resul s losse t Mos . 14 . 1974 o t 2 mid-196 m fro d perio e th g durin n actio e pric lower P/E multiples rather than from any fundamental The time span of each Superperformance phase and the company change, such as lower earnings. percentage increase in the price of the stock are shown. 15. Stock prices move because of expectations, Most of the stocks that had Superperformance action . expectations e thos s measure o rati E P/ e th d an are included, but the list should not be considered e declin a s precede n ofte n inflatio f o e rat h hig A . 16 all-inclusive. In addition, numerous stocks were in stock prices and a downturn in the national economy. eliminated because price reactions exceeding 25 percent Businessmen and consumers react to rising costs and occurred during the Superperformance action. To qualify n reductio p shar e Th . spending n o k bac g cuttin y b s price as a Superperformance stock, the price had to increase d an n productio f o s level r lowe n i s result d deman n i at least 300 percent in a minimum of two years. , grows m pessimis s A . unemployment g increasin . spending t abou s cautiou e mor n eve e becom s consumer e declin o t e continu s price k stoc d an p develo s Recession AAV Companies Allegheny until confidence is restored. 8 196 r 1966-Decembe t Augus % 400 400% July 1970-April 1971 ACF Industries s Airline y Alleghen 300% June 1962-November 1964 400% January 1965-April 1966

Adams-Millis Alien Group r 1966-Octobe r Septembe % 700 400% December 1966-January 1967 1968

Admiral Allied Maintenance 6 196 l 1965-Apri y Januar % 800 400% December 1966-June 1968

Aileen Allied Products 1200% October 1966-January 300% January 1965-May 1965 1969 300% June 1965-March 1966

Airwick Ambac Industries 600% January 1971-August 1972 400% October 1966-October 1967

Alaska Interstate Amcord 300% November 1971-April 1972 300% January 1967-August 1968

Alberto Culver Amerada Hess 400% September 1966-August 300% July 1965-May 1966 1967 400% October 1966-November 1968 Alcon Laboratories 300% May 1970-June 1971 300 1f70-February %Ma y 1973

222 223 American Airlines Apache Banister Continental Burndy 4 196 h 1962-Marc r Octobe % 300 500% November 1966-June 1968 1 197 y 1970-Februar y Jul % 300 400% October 1964-April 1966 400% November 1971-December e Maintenanc g Buildin n America APL Corp. 1972 Burns International Security Services Industries 300% August 1964-October 1964 8 196 r 1966-Octobe r Octobe % 600 8 196 y 1967-Jul y Februar % 800 7 196 e 1966-Jun r Novembe % 400 Bath Industries 2 197 h 1970-Marc e Jun % 300 500% December 1966-June 1968 Burnup & Sims Archer-Daniels-Midland 2 197 l 1970-Apri y Jul % 700 3 197 y 1970-Januar y Jul % 1200 America3 n197 Districr t Telegraph1972-Septembe l Apri % 300 300% May 1970-March 1972 b Lom & h Bausc Burroughs Asamera Oil 600% July 1970-January 1972 300% May 1965-August 1966 s Expres n America 400% March 1965-April 1965 300% April 1973-October 1973 500% October 1966-January 1970 450% May 1970-January 1973 500% November 1968-June 1969 Baxter Laboratories Buttes Gas & Oil American Greetings Athlone Industries 7 196 r 1964-Septembe y Jul % 700 1200% December 1966-February 2 197 y 1970-Jul e Jun % 400 1200% October 1966-December 1969 1968 m Petroleu o Belc y Suppl l Hospita n America 400% October 1966-November Caldor 300% October 1966-June 1968 Atlas 1967 400% July 1970-February 1972 300% December 1966-August 1967 l Internationa l Medica n America Benguet Consolidates Product r d Compute a Californi 1500% November 1966-October A-T-O 600% February 1967-February 600% October 1966-July 1967 1967 300% November 1966-January 1968 1968 400% March 1968-January 1969 s Mine u Chibougama l Campbel 300% May 1970-March 1971 Automated Building Components Berkey Photo 300% August 1965-April 1966 400% December 1966-December 300% November 1963-April 1964 American Petrofina 1968 6 196 l 1965-Apri e Jun % 300 Capital Cities Communications 9 196 y 1966-Ma t Augus % 500 300% June 1970-April 1971 300% January 1964-January 1966 Blessings 300% May 1970-March 1972 American Safety Equipment Automatic Data Processing 400% May 1964-April 1965 400% September 1964-May 1965 1400% August 1965-December Carlisle 1967 Block (H & R) 400% July 1965-July 1967 d Standar n America 0 197 y 1968-Januar h Marc % 300 1400% October 1966-December 300% October 1966-December 1968 Castle & Cooke 1968 Avco 8 196 r 1966-Decembe y Jul % 300 300% January 1967-August 1967 Boeing Ametek 500% July 1963-January 1966 Cerro 300% January 1967-Septembes r Product y Aver 300% November 1962-November 1967 800% November 1965-January 1970 Boise Cascade 1964 500% October 1966-May 1968 AMF Avnet Certain-Teed Products 400% May 1970-April 1972 500% October 1966-December 1967 l Internationa f Branif 2 197 y 1970-Ma y Jul % 400 1500% January 1964-June 1966 Amrep Aztec Oil & Gas Champion Home Builders 2000% Januar1 y 197 1967-Ma y y 1970-Jul 196 e 9 Jun % 300 Browning Ferris 1000% December 1967-May 1969 1 197 y 1970-Februar y Jul % 300 300% Decembe2 197 r 1970-Apriy 1970-Jul l y 197Jul 2 % 2600 Babcock & Wilcox Angelica 300% June 1970-April 1971 Brunswick s Industrie a Chelse 9 196 l 1968-Apri h Marc % 300 500% July 1970-April 1972 900% January 1967-August 1968 s Tool l Oi r Bake Ansul 500% May 1970-December 1972 Bucyrus-Erie Chicago Bridge & Iron 300% December 1964-February 500% November 1963-February 1000% June 1970-November 1973 1966 g Manufacturin y Ball 1966 r 1970-Novembe r Decembe % 1200 Chicago Milwaukee Anthony Industries 1972 Bunker Ramo 500% October 1962-November 1964 9 196 y 1966-Ma r Decembe % 1200 300% October 1918-duMs 1967 2 197 y 1971-Jul t Augus % 800 Bangor Punta Chock Full O'Nuts 300% October liiB-JSttuWy t@6l 300% December 1966-December 1967

224 225 Chromalloy- American Consolidated Freightways Dennison Emery Air Freight 300% June 1965-February 1966 300% July 1970-January 1972 500% October 1962-January 1964 300% October 1964-June 1966 300% October 1966-December Chrysler Continential Airlines 1967 s Chemical & s Mineral d Englehar 4 196 r 1962-Septembe e Jun % 600 400% November 1962-March 1964 300% July 1970-July 1971 600% January 1967-July 1968 r 1965-Septembe y Januar % 400 g Investin y Cit 1966 Denny's Esquire 500% October 1966-January 1968 600%7 Octobe196 h r 1966-Januar1964-Marc r y 196Septembe 8% 1000 Continental Mortgage Investors 300% March 1968-December 1968 g Refinin & l Oi k Clar 600% October 1966-May 1969 Ethan Alien 700% October 1964-June 1966 Deseret Pharmaceutica2 197 h l 1970-Marc e Jun % 900 9 196 e 1968-Jun h Marc % 300 a Dat l Contro 300% September 1966-November 400% December 1962-December 1967 Ethyl Clorox 1963 300% November 1971-January 400% June 1963-January 1965 3 197 y 1970-Januar e Jun % 500 600% October 1966-October 196? 1973 s Product s Evan CM I Investment Cook United Diebold 700% January 1963-April 1965 300% April 1968-August 1968 400% December 1966-November 0 197 y 1968-Februar h Marc % 300 600% May 1970-May 1972 1968 Faberge' t Equipmen l Digita 400% May 1966-March 1968 Coastal States Gas s Laboratorie r Coope 500% October 1966-December 900% October 1966-March 1970 300% April 1968-January 1969 1967 a Camer d Fairchil 900% December 1964-February ) (N.Y. g Bottlin a Coca-Col Cordura Dillingham 1966 450% February 1970-August 1972 700% October 1966-December 1967 700% December 1966-September 9 196 r 1968-Decembe h Marc % 400 1968 Fansteel l Nationa e Col 7 196 y 1966-Jul r Octobe % 400 700% October 1966-December CTS Corp. Disney 1968 300% December 1964-March 1966 300% October 1966-Decembel Financia r t Wes r Fa 1967 8 196 t 1968-Augus h Marc % 300 Coleman Culligan International 450% October 1967-January 1970 400% October 1962-September Dr. Pepper Fedders 1964 300% October 1962-April 1964 1000% December 1966-November n Aikma & s Collin 400% December 1966-October 1968 300% May 1970-March 1972 Curtiss-Wright 1968 500% December 1971-July 1972 400% May 1970-April 1972 Federal National Mortgage Colt Industries Association 600% October 1966-May 1968 Cutler-Hammer Dome Petroleum 300% July 1970-January 1972 300% July 1970-August 1971 400% June 1966-July 1967 Columbia Broadcasting System 1 197 y 1970-Jul t Augus % 300 l Signa & n Sig l Federa 300% October 1962-May 1964 Cyprus Mines 300% October 1966-March 1968 400% August 1964-February 1966 Duplan Columbia Pictures Industries r 1966-Decembe r Decembe % 1700 Ferro 400% September 1966-June 1968 Dayco 1968 300% August 1970-August 1972 300% October 1966-January 1968 Communications Satellite ) (Jack d Ecker Financial Federation 300% May 1970-Aprih l 1971 Agresearc b DeKal 400% May 1964-February 1966 300% December 1967-September 1 197 y 1970-Jul e Jun % 300 1000% November 1966-October 1968 Compugraphi3 197 y c 1971-Januar r Novembe % 300 1969 500% November 1971-July 1972 300% May 1970-September 1971 First Charter Financial Delta Airlines 350% September 1966-April 1967 s Science r Compute 400% May 1962-March 1964 EG&G 800% October 1966-December 400% January 1965-April 1966 600% May 1966-October 1967 Fischbach & Moore 1967 300% January 1967-December Deltona Ehrenreich Photo-Optical Ind. 1968 Conra8 c198 y 1966-Januar r Decembe % 300 6 196 h 1965-Marc t Augus % 300 350% Octobe9 196 rr 1966-Januar1968-Octobe y l 196Apri 8 % 700 600% December 1966-December 1968

227 221 s Food r Fishe General Development 450% December 1966-January 900% October 1966-May 1969 Gulf & Western Industries Howmet 1968 500% June 1964-April 1966 900% April 1965-October 1967 400% April 1968-February 1969 General Instrument 300% October 1966-February 1967 550% September 1964-August 1966 300% May 1970-Aprig l 1971 Manufacturin n Huffma Fleetwood Enterprises 300% November 1967-February r 1967-Decembe y Januar % 2400 Genuine Parts Gulton Industries 1969 1968 450% May 1970-May 1972 300% June 1965-June 1966 700% May 1970-April 1972 r 1966-Decembe r Octobe % 350 Humana Georgia-Pacific 1967 500% February 1968-December Flexi-Van 350% October 1966-December 1968 500% September 1967-November 1968 Halliburton 1968 500% May 1970-January 1973 Huyck 300% July 1970-March 1972 Giant Food 900% September 1966-January 350% October 1966-November Handleman 1970 Fluor 1968 8 196 y 1966-Januar r Octobe % 400 6 196 y 1964-Januar e Jun % 400 Hygrade Food Products 7 196 e 1966-Jun r Octobe % 300 s Lewi & s Gidding ) H. n (Joh d Harlan 400% March 1968-December 1968 350% October 1966-June 1967 500% May 1970-April 1972 r Tige g Flyin ICN Pharmaceutical 450% June 1965-April 1966 Gino's Heller (Walter E.) 900% December 1966-January 1968 300% October 1966-July 1967 2400% December 1966-November 300% December 1966-October 400% July 1970-April 1971 1969 1968 Imperial Corporation of America 2 197 e 1970-Jun t Augus % 300 300% December 1967-March 1968 Foster Wheeler Helmerich & Payne 7 196 y 1966-Jul r Octobe % 300 e Marin l Globa 400% October 1966-January 1968 Imperial Oil 300% December 1972-January 450% June 1966-January 1968 300% May 1970-December 1972 1974 Hewlett-Packard y Jewelr n Gordo 6 196 l 1964-Apri t Augus % 300 Interco t Min n Frankli 350% September 1964-March 1966 3 197 y 1970-Januar y Jul % 450 350% October 1966-July 1968 9 196 y 1968-Februar y Jul % 300 r 1966-Decembe r Octobe % 700 400% September 1970-April 1971 1968 Highs VoltageFragrance d an s Flavor l Internationa 300% September 1962-September 1300% June 1962-July 1966 Fuqua Grainger 1963 7 196 e 1966-Jun y Jul % 500 400% June 1970-December 1972 l Chemica & s Mineral l Internationa s Hotel n Hilto 470% October 1962-February 1966 GAF s Store g Dru y Gra 900% October 1966-November 350% July 1970-March 1972 300% April 1964-January 1966 1968 International Rectifier 350% December 1966-November 500% May 1965-April 1966 Gannett 1968 Hoffman Electronics 400% June 1970-August 1972 300% August 1970-March 1971 Interstate United l Chemica s Lake t Grea 600% June 1967-November 1968 Garan 7 196 l 1966-Apri r Octobe % 300 Holiday Inns 1100% November 1966-December 400% October 1966-December Iowa Beef Processors 1968 Greyhound 1967 300% July 1965-February 1966 600% June 1970-January 1972 300% June 1962-April 1964 Home Oil y Suppl l Hospita o Ipc GCA Corp. Grumman 9 196 y 1968-Ma t Augus % 350 300% October 1966-January 1968 400% October 1966-September 300% June 1964-February 1966 400% May 1970-September 1971 1967 Itek Guardian Industries Hoover 300% April 1963-January 1964 e Cabl l Genera 400% December 1971-May 1972 350% May 1962-March 1964 300% July 1965-August 1966 6 196 l 1962-Apri r Octobe % 550 Gulf Resources Horizon d Fun n Japa General Cinema 450% June 1965-March 1966 9 196 r 1966-Octobe r Octobe % 2100 400% March 1968-May 1969 800% June 1967-December 1968 300% September 1966-August 350% July 1970-December 1970 300% May 1970-April 1971 1967 Jim Walter n Johnso d Howar 800% October 1966-December 500% July 1970-May 1972 1968

228 229 n Johnso & n Johnso e Furnitur z Levit Marriott MGIC Investment 300% May 1970-May 1972 1300% May 1970-May 1972 400% August 1966-December 1968 1100% December 1966-May 196i 300% July 1968-December 1968 2 197 y 1970-Ma y Jul % 350 800% May 1970-January 1973 Johnson Products 300% May 1970-December 1970 Loews Mary Kay Cosmetics Microdot 8 196 y 1966-Januar r Octobe % 200 300% August 1971-January 1973 600% October 1966-September Josten's 1 197 y 1970-Jul y Jul % 300 1967 8 196 y 1966-Ma r Decembe % 300 Masco s Store g Dru s Long 600% November 1966-October Microwave Associates Joy 400% December 1966-December 1968 5 196 t 1965-Augus e Jun % 300 650% October 1962-February 1966 1968 400% May 1970-April 1972 600% October 1966-October 1967 400% May 1970-February 1972 Kaiser Industries n Ferguso y Masse Milgo Electronics 300% October 1966-January 1968 LTV Corp. r 1962-Novembe r Novembe % 300 8 196 e 1968-Jun h Marc % 300 600% October 1966-August 1967 1964 350% November 1971-May 1972 Katy Industries 600% December 1966-January Lubrizol Mattel) y Bradle n Milto 1968 300% December 1966-December r 1966-Septembe r Decembe % 1300 600% October 1966-June 1968 1968 1968 900% May 1970-June 1972 d Broa & n ma f Kau 0 197 h 1966-Marc r Octobe % 2600 Lucky Stores Mav Departments Stores Industrie e Hom e Mobil 1 197 l 1966-Apri r Octobe % 700 300% July 1970-January 1972 1000% May 1970-April 1972 Kawecki Berylco 7 196 e 1966-Jun r Octobe % 300 Lykes-Youngstown McCulloch Oil s Industrie o Mohasc 300% June 1967-May 1968 400% January 1967-August 1967 300% July 1970-April 1972 King's Department Stores 450% May 1970-April 1971 400% December 1966-May 1968 Madison Square Garden s Science a Dat k Mohaw 1 197 y 1970-Ma e Jun % 300 400% October 1966-July 1967 McDermott (J. Ray) 2200% December 1965-December 300% June 1963-March 1965 600% May 1964-May 1968 1967 Magnavox s Airline h Dutc l Roya M KL 6 196 i 1965-Apri e Jun % 300 McDonald's l Too e Machin h Monarc 6 196 h 1965-Marc t Augus % 400 r 1966-Decembe r Octobe % 500 300% December 1966-November e Hyd & e Malon 1967 1967 Knight Newspapers 300% May 1970-June 1972 750% September 1970-December 2 197 t 1970-Augus y Jul % 350 1972 Monroe Auto Equipment Mapco 0 197 h 1966-Marc r Octobe % 900 Kresge (S.S.) 300% October 1966-October 1968 s Dougla l McDonnel 300% July 1970-March 1972 300% Septembe3 197 y r 1963-Decembe1970-Januar y rJul % 450 7 196 y 1966-Jul r Octobe % 300 1965 300% July 1970-March 1971 Motorola 400% January g 1967-OctoberManufacturin 196n 9 Maratho 700% October 1962-March 1966 3 197 y 1970-Januar y Jul % 450 500% November 1967-January y Compan g Truckin n Lea e M 1969 400% October 1966-February 1969 Murphy Oil Lafayette Radio Electronics 350% November 1971-October 8 196 e 1966-Jun r Octobe % 400 Marcor e Sho e Melvill 1973 400% May 1970-July 1971 300% December 1967-June 1969 400% October 1966-December 1968 Murray Ohio Manufacturing r Siegle r Lea Maremont 9 196 l 1966-Apri r Octobe % 400 6 196 l 1964-Apri r Decembe % 300 1300% July 1970-November 1972 Menasco r 1966-Decembe r Octobe % 800 Nashua Leaseway Transportation Marion Laboratories 1967 r 1966-Decembe r Octobe % 400 650% August 1970-June 1972 800% October 1966-October 1968 300% July 1970-February 1971 1968 350% July 1970-July 1972 2 197 t 1971-Augus r Novembe % 300 Leslie Fay s Airline l Nationa 6 196 l 1964-Apri e Jun % 500 Marley Metro-Goldwyn-Mayer 1800% June 1962-April 1966 1000% April 1965-June 1968 7 196 r 1965-Octobe y Jul % 400 Lenox 300% July 1970-April 1972 h Chemsearc l Nationa 500% January 1967-February Metromedia 400% June 1970-January 1973 1969 300% October 1962-October 19^3; 500% October 1966-January 1968 300% July 1970-March 1971

230 231 National Semiconductor Papercraft s Inn a Ramad s Resource o Rosari 3 197 r 1973-Octobe y Jul % 400 300% August 1966-January 1968 400% December 1966-January 500% November 1971-March 1974 r 1966-Septembe r Octobe % 800 1968 1967 Pargas 300% May 1970-July 1971 Royal Crown Cola 5 196 h 1963-Marc r Decembe % 350 300% October 1970-December National Union Electric Ranco 1971 450% December 1964-April 1966 Pasco 8 196 r 1967-Decembe e Jun % 300 300% Decembe5 196 l r 1970-Augus1963-Apri r t 197Octobe 1% 400 Royal Industries 400% October 1966-November Raymond International 400% September 1963-February Natomas 1967 500% October 1966-August 1968 1966 800% Apri0 l 1968-Ma197 r y 19691970-Octobe y Jul % 300 400% August 1966-July 1967 500% May 1970-September 1970 g Drillin e Offshor s Bate & g Readin n Galio y Peabod 700% October 1962-April 196s 5 Tog s Rus New Englan9 d Nuclea196 h r 1968-Marc l Apri % 450 300% May 1970-September 1970 300% October 1966-June 1968 700% May 1970-August 1972 800% May 1970-July 1972 1 197 h 1970-Marc y Jul % 300 Reliance Group New Process Perm-Dixie Industries 1400% October 1966-Decembem r Syste r Ryde r 1966-Novembe r Decembe % 900 7 196 r 1966-Octobe r Octobe % 300 1968 600% October 1966-February 1969 1969 300% October 1970-August 1972 700% May 1970-January 1972 Pennzoil Research-Cottrell 5 196 l 1963-Apri r Octobe % 400 8 196 y 1967-Ma r Novembe % 300 Ryan Homes s Industrie s Norri 8 196 e 1966-Jun r Octobe % 350 500% May 1970-May 1972 300% May 1970-April 1972 350% October 1966-July 1967 2 197 h 1970-Marc y Jul % 400 Perkin-Elmer Reserve Oil and Gas St. Joe Minerals 450% November 1970-June 1972 400% January 1967-January 1968 300% October 1962-January 1965 g Kin . Northrup 300% November 1971-June 1972 Petrie Stores Resistoflex Sanders Associates 550% May 1970-January 1973 300% Octobe6 r196 1966-Octobey 1965-Jul t r 196Augus 7 % 500 Northwest Airlines 650% November 1966-December 2000% October 1962-June 1966 Philip Morris Revco D. S. 1967 500% May 1970-January 1973 500% August 1966-July 1968 Northwest Industries 300% May 1970-April 1972 Sangamo Electric 1300% October 1962-April 1966 Phillips Industries r 1965-Decembe y Januar % 300 400% June 1970-April 1972 2000% November 1966-December Rite Aid 1965 1968 1000% May 1970-April 1972 300% October 1966-November Norton Simon 1967 y 1966-Januar r Decembe % 300 Pickwick International Robins (A. H.) 1968 1500% September 1966-May 1969 350% November 1970-January Sante Fe International 350% July 1970-May 1972 1973 8 196 r 1966-Novembe e Jun % 450 Occidental Petroleum 300% May 1970-April 1971 r 1966-Novembe r Octobe % 450 Pittston s Brother r Rockowe 1967 300% July 1969-April 1971 9 196 y 1967-Ma e Jun % 800 Sav-A-Stop 500% August 1964-February 1966 Ogden Pizza Hut Rohm & Haas 350% October 1967-November 400% October 1966-January 1968 500% August 1971-January 1973 3 197 y 1970-Februar y Jul % 400 1969 e Marin d Outboar Polaroid Rohr Industries Savin Business Machines 2 197 h 1970-Marc y Jul % 450 500% June 1964-August 1966 5 196 r 1964-Decembe e Jun % 300 700% April 1968-April 1969

Overnight Transportation Ponderosa System Roll ins s Industrie n Saxo 300% Octobe2 r 197 1966-Jun e e 1970-Jun 196 y 8Ma % 4500 5 196 l 1964-Apri h Marc % 1000 550% December 1965-June 1966 700% May 1970-September 1971 500% October 1966-November 300% September 1966-June 1967 Quaker State Oil Refining 1968 8 196 r 1968-Decembe h Marc % 300 Pacific Petroleums 450% October 1962-March 1966 300% July 1970-July 1972 500% October r 1966-June1970-Decembe 196t 9 Augus % 400 g Brewin ) (Jos. z Schlit 1972 Rorer-Amchem 300% November 1970-November Pan American World Airways 8 196 y 1966-Ma r Octobe % 300 1972 4 196 l 1962-Apri r Octobe % 500 300% July 1965-June 1966

232 233 Schlumberger Sony Talley Industries Tonka 400% January 1967-September 400% July 1965-March 1966 450% February 1965-July 1966 900% October 1966-May 1968 1969 600% January 1968-November 400% October 1966-September 800% May 1970-December 1973 1969 1967 Town & Country Mobile Homes 450% November 1971-January 800% March 1967-September 1968 SCM Corp. 1973 Tandy 6 196 l 1965-Apri e Jun % 500 5 196 y 1964-Ma y Jul % 300 Transamerica Southland 500% November 1966-January 350% October 1966-December r Fetze d an t Scot 350% January 1967-December 1968 1968 1968 500%June1970-May 1972 300% March 1968-November 1969 Southwest Forest Industries 2 197 y 1970-Februar y Jul % 300 s Airline d Worl s Tran n Foresma t Scot 9 196 l 1968-Apri y Januar % 450 Tappan5 196 h 1962-Marc r Octobe % 750 300% June 1964-June 1966 300% Decembe1 197 l r 1967-Decembe1970-Apri r rNovembe % 300 Spencer 1968 Scovill 550% April 1968-January 1969 350% July 1970-April 197s 2 Line n Transco 6 196 l 1962-Apri r Octobe % 500 1 197 r 1970-Decembe y Jul % 300 Sperry Rand Technicolor s Industrie e Lin t Coas d Seaboar r 1966-Decembe r Octobe % 300 300% October 1962-October 1963 TRE Corp. 300% July 1970-October 1971 1967 400% January 1967-July 1967 500% August 1966-February 1967 700% August 1970-February 1972 Seaboard World Airlines Sprague Electric Teledyne 350% Jun7 e 1965-Apri196 y l 19661965-Januar e Jun % 400 6 196 e 1965-Jun y Jul % 400 s Product a Tropican 500% October 1966-October 1967 1400% May 1970-May 1972 Searle (G.D.) t Pain s Brand d Standar 2 197 y 1970-Jul y Jul % 300 650% December 1966-February Teleprompter Twin Fair 1970 7 196 y 1966-Ma r Octobe % 300 1000% October 1966-February SEDCO 400% May 1970-February 1972 1968 600% July 1970-November 1972 Telex p Cam n Stokely-Va 7 196 t 1966-Augus r Octobe % 300 s Laboratorie o Tyc Seven-Up 350% December 1966-Octobe 1700% April 1969-January 1970 750% November 1966-January 1968 0 197 h 1968-Marc l Apri % 300 1967 m Petroleu o Tesor 300% November 1971-January 1972 400% March 1968-December 1968 Servomation Sundstrand Tyler 300% Jun7 e196 1970-October r 1971965-Decembe y 1 Jul % 800 2 197 l 1970-Apri t Augus % 500 Texasgulf 400% July 1963-April 1964 Sheller-Globe g Minin e Sunshin UAL 300% December 1963-April 1965 350% December 1963-September 350% September 1964-April 1966 1964 Texas Instruments 350% July 1970-April 1971 Simmons Precision Products 700% October 1962-August 1966 Supermarkets General Unarco 2500% February 1965-April 1966 Texas Oil & Gas 300% April 1964-February 1966 5 196 e 1964-Jun e Jun % 300 8 196 l 1966-Apri r Septembe % 400 Simplicity Pattern 300% May 1970-September 1971 300% October 1966-October 1967 United Aircraft Textron Superscope 350% February 1964-January 1966 Skaggs Companie7 196 e s 1966-Jun r Octobe % 500 900% October 1962-December 500% October 1966-October 1968 1967 s Brand d Unite Syntex Tidewater Marine Service 1000% December 1966-January 2100% October 1962-January 1964 1968 Skyline 1000% December 1962-December 900% Novembe6 196 y r 1962-Septembe1965-Februar e rJun % 350 1964 600% July 1970-March 1972 1963 1 197 h 1970-Marc t Augus % 300 United Financial of California 2100% January 1967-December y 1966-Februar r Septembe % 300 1968 r Donne n Systra Time 1967 400% May 1970-October 1971 300% October 1966-December 500% October 1962-December 300% December 1967-September 1967 1965 1968 Smith International 1000% August 1964-December Taft Broadcasting Tokheim r Nuclea d Unite 1968 300% January 1964-JarHjary 1068 300% December 1966-June 1968 400% October «66-October 1967 300% July 1970-March Is971 300% December 1971-July 1972

234 235 United Piece Dye Works Watkins-Johnson 800% Novembe8 196 y r 1962-Augus1966-Jul r t 196Octobe 3% 600 1000% Octobe1 197 r 1966-Mah y 1961970-Marc y 8 Jul % 300 Appendix B 700% May 1970-March 1971 Superperformance Stocks Webb (Del E.) U.S. Filter 700% December 1966-May 1969 October 1974-October 1976 6 196 y 1965-Januar e Jun % 400 300% October 1966-May 1967 Wells, Rich, Greene 1 197 h 1970-Marc t Augus % 500 U.S. Industries During the two-year period following the bear market 400% October 1966-Januars y Airline 196 n 8 Wester 3 24 e wer e ther 4 197 r Decembe d an r Octobe f o s low 650% May 1962-May 1964 U.S. Leasing y b n actio e pric e superperformanc d ha t tha s stock 400% Octobe1 r 1966-Decembe197 l 1970-Apri y r Jul % 500 1967 tripling or more. The stocks were: Wheelabrator-Frye 450% August 1970-March 1972 400% October 1966-August 1968 U.S. Radium 750% Marcs h 1964-NovembeIndustrie d r 196Consolidate 5e Whit 1000% December 1963-August Abbott Laboratories Avco Unitrode 1966 Adams-Millis s Industrie r Bake 300% December 1970-May 1972 Williams Addressograph-Multigraph Bangor Punta Upjohn 1100% February 1964-January Aileen Beckman Instruments 600% May 1970-August 1973 1966 400% October 1966-January 1968 Airco Beech Aircraft Uris Buildings 300% May 1970-April 1971 Akzona Bendix 500% December 1966-May 1969 s Industrie o Winnebag e Interstat a Alask Big Three Industries UV Industries 1200% December 1970-April 1972 Alien Group Blue Bell 400% June 1962-February 1963 350% August 1965-April 1966 Wyly Allied Stores Boise Cascade r 1966-Novembe r Octobe % 3700 Allis-Chalmers Brockway Glass g Processin l Metallurgica y Valle 1968 6 196 y 1965-Februar y Jul % 1100 Ambac y Securit l Internationa s Burn 500% October 1966-August 1967 Xerox Amcord Services 4 196 r 1962-Octobe e Jun % 700 Burndy Varian Associates r Filte r Ai n America 400% June 1964-April 1966 XTRA American Airlines Burnup & Sims 1400% November 1964-April 1966 Caldor Vetco Offshor8 196 ee Industrie1966-Jun sr Octobe % 600 American Bakeries 500% May 1970-April 1971 e Maintenanc g Buildin n America Capital Cities Communications 3 197 r 1971-Decembe t Augus % 400 Yates 9 196 h 1968-Marc h Marc % 450 y Famil n America Centronics Data Computer Victor Comptometer g Seatin n America Chemetron 350% April 1964-October 1965 Zale 600% December 1966-December American Standard Cluett, Peabody Vornado 1968 Ampex CNA Financial 500% December 1964-April 1966 300% May 1970-March 1971 Zapata s Industrie y Anthon Coleman 6 196 y 1963-Jul l Apri % 1100 APL Corp. Collins & Aikman 700% October 1966-July 1968 Wackenhut s Picture a Columbi 300% December 1966-December 300% July 1970-July 1971 Archer-Daniels-Midland 1967 Arlen Realty & Development Combustion Equipment Associates Zayre Asamera Oil Compugraphic s Food d War 800% February 1964-October 1965 350% December 1965-February Atlas s Science r Compute 1966 Congoleum r 1966-Decembe r Octobe % 600 Zurn Automatic Data Processing 1968 700% November 1966-May 1968 Conrac

236 Consolidated Freightways General Development Leaseway Transportation' Occidental Petroleum Cook United General Dynamics Leesona Olin Cooper Industries General Instrument Levi Strauss Pan American World Airways Crane l Medica l Genera Levitz Furniture Pay Less Drug Stores Northwesl Crouse-Hinds General Signal s Industrie n Litto Petrolane CTS Corp. s Product r Gerbe Lockheed Aircraft Philips Industries Cubic Gino's Lykes Pickwick Internationa, Curtiss-Wright Gray Drug Stores Macy (R. H.) Pittston Dana Great Lakes Chemical f Che c Magi Pizza Hut Dart Industries Gulf & Western Mapco m Syste a Ponderos Data General Gulf Resources and Chemical Maremont Purolator n Hudso n Dayto Gulton Industries Marley l Internationa d Raymon Denny's Hanes May Department Stows RCA Deseret Pharmaceutical g Minin a Hann MCA Research-Co ttrell k Shamroc d Diamon Harris McCord Revco D.S. t Equipmen l Digita Heublein McKee (Arthur G.) Rexnord Disney (Walt) Productions Hilton Hotels McLean Trucking e Textil l Riege Eagle-Pichet s Inn y Holida Melville s Industrie e Grand o Ri Easco Hospital Corporation of America Menasco Manufacturing Rite Aid Eastern Gas and Fuel Associatel s Internationa t Hos Merrill Lynch Rockower Brothers s Store s Brother n Ediso House of Fabrics Mervyn's Rollins . Ltd I EM Houston Natural Gas Metro-Goldwyn-Mayer Ryan Homes Envirotech Houston Oil & Minerals Metromedia Ryder System n Alie n Etha Howard Johnson s Associate e Microwav St. Joe Minerals s Product s Evan Humana Midland-Ross Sambo's Restaurants Fairchild Camera & Instrument Imperial Corporation of America Milgo Electronics Sanders Associates Falcon Seaboard International Rectifier Milton Bradley Savin Business Machines Farah Iowa Beef Processors Mobile Home Industries Scott & Fetzer Fedders y Suppl l Hospita o Ipc Moore McCormacs k ResourceAirline d sWorl d Seaboar l Signa l Federa Itek s Industrie c Scientifi o Narc z Lat & n Seligma Fieldcrest Mills Itel National Medical Care Seven-Up First Charter Financial Jim Walter National Semiconductor Sheller-Globe Fisher Scientific n Loga n Jonatha Neptune International Simmonds Precision PrraiJuctiS Fleetwood Enterprises Joy Manufacturing New Process Skaggs Fluor r Mille e Kan Norris Industries Smith International r Pape d Howar t For d Broa & n Kaufma Northrop Superscope Franklin Mint ) (Walter e Kidd Northwest Airlines Tandy GCA Corp. Koehring n Simo n Norto Tektronix a Cinem l Genera Koppers NVF Co. Teledyne

238 23g Teleprompter Univar Telex s Industrie y Valle l Internationa r Tige Valmac Industries Tokheim s Associate n Varia TRE Corp. Viacom International s Industrie y Trinit Wallace-Murray Tropicana Products Wal-Mart Stores TRW Warner Communications m Fil x Century-Ra h Twentiet Watkins-Johnson Tyco Laboratories Wheelabrator-Frye s Brand d Unite d Consolidate e Whit United Nuclear Woolworth (F. W.) United Refining Yellow Freight System U.& Filter Zayre U.S. Shoe Zenith Radio s Technologie d Unite Zurn Industries

240