stocks for investment; that is, to pay for them outright when they are selling below value and wait until they are up to value, getting the difference for a profit.

Value is determined by the margin of safety over dividends, the size and tendency of earnings; the soundness of the balance sheet and of operating methods, and general prospects for the future. This sounds rather complicated, but is not especially difficult to work out.

For instance, a year ago we almost daily pointed out that earnings had greatly increased during the year past; that fixed charges had not increased, hence that the actual value of stocks had advanced while prices had in most cases declined. It was obvious that this could not last; that net earnings must decrease or prices advance. There were then many stocks cheap on their earnings and this was easily a matter of demonstration.

In the same sense it can now (1902) be said that most stocks are dear on their earnings. It is true that earnings have increased somewhat over last year, but prices of many stocks have advanced from 50 to 100 per cent., and in whatever form the yardstick is applied the result is unfavorable to value as compared with prices in a large number of the active stocks.

When a stock sells at a price which returns only about 312 per cent. on the investment, it is obviously dear, except there be some special reason for the established price. In the long run, the prices of stocks adjust themselves to the return on the investment and while this is not a safe guide at all times it is a guide that should never be laid aside or overlooked. The tendency of prices over a considerable

length of time will always be toward values. Therefore, the outsider who by studying earning conditions can ap proach a fairly correct idea of value has a guide for his investments which will, as a whole, be found safe.

Most people, however, when they talk about making money in stocks do not mean the slow road through investments but the short cut by way of speculation. We think here again there is one rule worth all others on this subject. It is a rule which is carried out with greater or less precision by a majority of successful traders. It has been approved by the great masters of speculation and it is indorsed by the practical experience of almost everybody who has dealt at all freely in stocks.

This rule is to cut losses short but let profits run. It sounds very easy to follow, but is in reality difficult to observe. The difficulty arises from the unwillingness of an operator to take a small loss when experience shows him that in many cases such a loss need not have been taken. Furthermore, the practice of this rule suggests that having, for instance, bought a stock and taken a loss, the stock should be bought again, and this may have to be done three or four times before an advance finally comes. These three or four losses prove very burdensome and lead people oftentimes to decide not to cut the loss short and that is generally when a large loss ensues.

The question will of course be asked whether there should be a uniform stop loss, or whether it should vary with varying conditions. Experience indicates that two points is the wisest place to stop a loss. If a stock goes two points against the buyer, it is very liable to go more,

and it suggests that the expected move has either been delayed or is not coming.

Suppose, for instance, that an operator believes from information, study of values, experience in markets and the tendency of the period, that Union Pacific ought to be bought at 107. If he buys at that price and the stock falls to 105, theoretically he should cut his loss, buying it again when the indications are again favorable.

Extended records of trading show that this policy, blindly followed, with blind following also of the plan of letting profits run, would give better results than most people are able to obtain by the exercise of judgment. At the same time, judgment can sometimes be wisely employed in cutting a loss.

It is not, for instance, necessary in all cases to take a loss because the price is suddenly jammed down 2 points. If the market shows a tendency to rally, wait a little. If a decline in the stock bought is obviously due to a collapse in some other stock, and that collapse seems to have spent its force, it would be unnecessary to execute the stop. The idea is to stop the loss when the market has legitimately declined to that extent.

In letting profits run there are two ways of determining when to close. One is to wait until the general market shows a decided change of temper. The other is to keep a stop order about 3 points behind the high prices on the advance and close on that stop. Here, again, experience has shown that when a stock starts on a manipulated advance, it is seldom allowed to react as much as 3 points until the move is completed. If it reacts 3 points, it may

mean trouble with the deal, although there are cases where such reactions are allowed for the purpose of shaking out following. Here, again, something can be left to judgment.

But the great thing is having bought a stock and having got fairly away from the purchase price, not to be in too great a hurry about selling, provided that the general market is bullish. In a bear market, the whole proceeding ought to be reversed, the operator taking the short side instead of the long, but in other respects applying the same rule.

We do not wish to be understood as saying that there is any sure way of making money in stocks, but the principle of buying after a period of steadiness in prices, stopping losses and letting profits run will, as a matter of statistical record, beat most people's guessing at what is going to occur.

CHAPTER XIV.

*THE OUT OF TOWN TRADER.

A correspondent asks: "How can a man living at an interior city, where he sees quotations only once or twice a day, make money by trading in stocks?"

This question touches a point which seems to find widespread acceptance, namely, that proximity to Wall Street is a special advantage in trading. It certainly is for some kinds of trading. If a man owns a seat on the Stock Exchange and pays no commissions, he can probably do best by operating for his own account on the floor of the exchange, although not every man with these facilities is able to make his profits exceed his losses.

For practical purposes, it may be said that most traders in or out of Wall Street are handicapped by the commission of $25 for buying and selling 100 shares of stock. There probably are some evasions of the commission rule, but as far as individual operators are concerned commissions are not much evaded.

A commission of $12.50 for buying and as much more for selling 100 shares of stock is insignificant if there are ten or even five points difference between the buying and selling price. But the commission is serious if the difference between the buying and the selling price is only one point. A man who started in to trade for one point profit

*Dow's Theory.