were made two shares, as that would give the trader time in which to recover from his losses as well as some confidence in acting at the proper time and would be a sort of school in which experience could be gained.

We think exactly the same reasoning holds good with regard to trading in 100-share lots on a basis of $1,000. Brokers accept such orders readily enough, but it is none the less over-trading, and none the less likely to result in the loss of the trader's capital. The man who buys 100 shares on a 10 per cent. margin and stops his loss at 2 per cent. has lost nearly one-quarter of his capital. He tries again and perhaps makes 1 per cent. net. His third venture results in a loss of 3 per cent. more and in a nearly total loss of confidence, leading him probably to sell short just when he ought to have averaged, thereby completing the sacrifice of his money.

If the same man with a capital of $1,000 had begun with 10 shares he could have stood his loss; he would have had courage to average or to buy something else at a low point and would very likely come out ahead.

Almost any man can show profits in stock by assuming that he would do so and so at various conditions of the market. He succeeds theoretically in this way because there is nothing at risk and his judgment is clear. The moment, however, that he has a risk which is very large in proportion to his capital, he consults his fears instead of his judgment, and does in practice exactly opposite what he would have done had his transactions been purely academic.

The remedy for this is to keep transactions down to a

point, as compared with capital, which leaves the judgment clear and affords ample ability to cut loss after loss short; to double up; to take hold of something else, and generally to act easily and fearlessly instead of under the constraint which inevitably comes from a knowledge that the margin of safety is so small as to leave no room for anything except a few anxious gasps before the account is closed.

If people with either large or small capital would look upon trading in stocks as an attempt to get 12 per cent. per annum on their money instead of 50 per cent. weekly, they would come out a good deal better in the long run. Everybody knows this in its application to his private business, but the man who is prudent and careful in carrying on a store, a factory or a real estate business seems to think that totally different methods should be employed in dealing in stocks. Nothing is further from the truth.

CHAPTER XIII.

* METHODS OF TRADING.

A correspondent inquires: "How can a man living at a distance from Wall Street hope to follow the market closely enough to make any money trading in stocks ?"

This question comes to us in different forms frequently, and shows misapprehensions as to what is involved in successful trading. Many people seem to think that if an operator is in Wall Street, he can tell what the market is going to do. Nothing is further from the fact. The more a man really knows about speculation, the less certain he becomes in regard to any market movement, except as the result of general conditions.

The distinction to be made between trading in the Street and trading from out of town is clear in one point. The operator who watches the ticker or blackboard can turn at very short notice, but the ability to turn quickly often proves a great disadvantage, because it leads to many turns at the wrong time.

The out of town speculator should not attempt to make quick turns, unless by private wire connections he is able to watch the market as a matter of business. The out of town operator should trade on broad lines and from an investment standpoint. He should deal not in stocks that

*Dow's Theory.

.

happen to be active, and not on points but almost wholly on well considered convictions as to the probable course of the general market and the relative position of price to value of the special stocks in which he proposes to deal.

The first question to consider is what constitutes a speculative investment. We should say it meant in most cases a railway stock paying regular dividends, publishing earnings gross and net, at regular intervals and giving full particulars of its financial and physical condition as often at least as once a year. If oftener, so much the better.

It is possible to derive fairly accurate knowledge of the value of such a stock. It should be considered essentially with reference to its ability to maintain or increase its dividends. If the stock seems likely to continue a current rate of dividend, and the return on the cost is such as to make it fairly satisfactory as an investment, it is a good stock to buy when, in sympathy with decline in the general market, it has fallen below its normal price.

Take, for instance, Union Pacific common. A few months ago this stock was selling between 50 and 60. It was paying 4 per cent. dividends, and the company was known to be earning over 8 per cent. Here was the case of a stock obviously selling below its value. It has since risen more than 30 points. There were other stocks, perhaps not as cheap in point of value, but of which, much that was favorable could be said. Three months ago the values of railway stocks generally were above their prices.

Now, this can be said of very few stocks, and this fact ought to make an outsider slow to buy. The chances are that there will come, as there seems to be coming, declines

which will carry prices back to a level where it will agair be prudent to buy. Suppose that time to arrive. The wise course for an outsider will be to buy of a good railroad stock, an amount he can easily purchase outright, and which he would be willing to hold as an investment in case the price should decline. Should it then decline considerably it would probably be prudent for him to buy more, lowering his average, but only after careful revision of the facts bearing upon the value and upon the general market. This stock should be held without regard to current fluctuations, until it showed a satisfactory profit. Then it should be sold and the operator should wait weeks or months if necessary for an opportunity to take it or some other stock back upon favorable terms.

The outsider who tries to follow the market from day to day, is not likely to have very marked success. The operator who selects investment properties carefully and buys after the market has had general declines, and who exercises a good deal of patience both in waiting for the time to buy and for the time to sell—who, in short, treats his speculation as an investment, will be likely to make money in stocks as a rule.

A correspondent writes: "Is there any way by which an outsider who cannot watch fluctuations of the market hourly can trade in stocks with a fair chance of making money?"

We think there are two methods by either of which an outsider has a fair speculative chance. The first is to buy