Tame Stocks in Wild Markets

THE same factor which makes a child fear the dark and play at pirates and robbers is behind the wilder fluctuations of securities on the stock exchanges— imagination. For a stock to cover a wide range of advance or decline, it must appeal to the imagination of traders. If a stock has no such appeal, it rarely fluctuates wildly, and its movements are subject to the laws of profit and loss and supply and demand.

That is why, ev on in chaotic mrkets, there are groups of securities which remain fairly stable and comparatively unaffected by the general excitement. In their case, it is exactly as if the dark room had been lighted. The figments of the imagination disappear and the trader finds them safe and unchanged, just as the child at dawn finds ihc familiar and reassuring objects in the bedroom.

It is an old saying and a true one that Wall Street always discounts in advance what it knows. It is equally true that, in markets such as have prevailed for months on end, Wall Street discounts not only what it knows but what it hopes or fears, and does so two and three times over. In a period of wide speculation most of the public that enters the market does not care whether a stock earns or pays 2 or 10 per cent. What the traders attempt to discount is whether the stock will advance two or ten or a hundred dollars a share in the succeeding few days. It is in stocks such as these that imagination lakes the place of knowledge.

There has been a remarkable change in the last year or two in investment fashions. Many the new operators in securities have turned away from bonds and toward common slocks. A safe 4½ lob percent no longer has its old-time appeal. The investor reasons that the bonds cannot make more than that, whereas the common slocks are unlimited as to the amount they may distribule.

The investors further figure that, while the bonds are protected by the assets of the company, unless the company can make profits on its common stock, those assets are likely to be a broken reed. This is specious reasoning. Their imaginations lend to the situation of the common stocks of some concerns an optimism which is made to take the place of security .

This trend and the danger attached to il were recently brought forcibly to the attention of the public by Secretary of the Treasury Andrew Mellon, in advocating buying of bonds.

’This does not mean,’he said, ’that many stocks are not good investments. Some, however, are too high in price to he good buys.'

The railroad stocks as a group usually offer an example of tame stocks in wild markets. There are no dark rooms and few delusions about the rails. Everyone knows that few new railroads will be built. The public is given the earnings of the roads monthly. It knows that there will continue to be freight to be hauled and passengers to be carried. It is fully aware that if the roads earn more than 6 per cent on their valuation the government will take the excess.

Such stocks have no appeal to the imagination. They are in the bright room of earnings. Consequently they have little attraction for those who want to make huge profits in a brief time through speculation. As a result, even the wilder markets leave them almost untouched compared with other issues. It is only when possibilities of a merger or of a struggle for control give opportunity for a play of imagination that their fluctuations become violent.

In 1928, a year of broadest fluctuations, Illinois Central, for example, ranged from 131¾ to 148¾. Great Northern was high at 114¾ and low at 98½. Pennsylvania, during the year, moved between 611/8 and 74½, Reading between 94¼ and 1193/8, and St. LouisSan Francisco between 109 and 122. Union Pacific was high at 2247/8 and low at 186½, Southern Pacific shuttled between 1311/4 and 1175/8, and Southern Railway between 1655/8 and 139½. Not one of these stocks paid less than 3½ per cent annual dividends, and distributions ranged from that up to 10 per cent.

Among some of the others which moved only wilhin comparatively moderate bounds was American Chicle, paying 2 per cent, which ranged from 44 to 49½ American Telephone and Telegraph, high at 211 and low at 172; Endicott Johnson, high at 85 and low at 743/4; and a number of others making line earnings.

How different, on the other hand, has been the course of the stocks that have appeal to the imagination. Some have never earned anything, but have been motivated by what, hopeless enthusiasts imagined they may, might, would, should, or could make. The Radio Corporation of America has never paid a dividend, yet it ranged in the last three years to 1929 from 82 to 420. The other radio stocks have acted in a like manner in several instances. The coppers have surged similarly, because speculators read a bright prospect on one side of the situation without ever looking to see what might be written on the other side of the page.

The mere fact that there might be a struggle for stock control in Standard Oil of Indiana between the Rockefeller and Stewart factions so wrought on the imagination of the publict that the stock rose from 707/8 in 1928 to 108¼, all bough it is generally conceded that neither side made extensive purchases.

Despite repealed warnings by President A. P. Giannini, the public imagined such extraordinary expansion for Rancilaly Corporation that the stock rose to 223 a share in 1928 — and then what a fall there was! On pure imagination, Ford Motors of Canada rose in 1928 from 676 to 890 a share and then dropped to 670 after a statement by the vice president of the company that there was not the slightest ground for this speculative rise. Canadian Marconi rose from 3 to 28 in 1928 and slid back to 7 on a similar announcement by executives.

No one doubts that aviation has a great future, but some speculators have imaginations so keen that they are bidding up airplane stocks now to where they will be lucky to rest five years hence.

Sooner or later the days will return when earnings and dividends will determine the prices of stocks, just as the time comes when the morning light banishes the phantoms of the night from a child’s room. When that time comes, the investors who stuck to tame stocks in wild markets are likely to be far better placed than those who allowed imagination full play. The growth of imagination has been so extensive in the last year with regard to some issues that it will require long periods for the companies, like immature young animals, to grow up to their huge, clumsy financial feet. The grass is likely to be green on the financial graves of many traders before the fruits of their predictions are harvested.