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meets an investment demand somewhere. This condition was illustrated by the action of Delaware & Hudson in the panic of May 9, 1901. It had nearly, if not quite, the largest decline of any stock on the list, falling in half an hour from 160 to 105, chiefly because people generally did not know the price at which stock was being offered.

It may be accepted, therefore, that in a general decline merit in a stock will not count for the time being. Good and bad will decline measurably alike. But here comes in a marked distinction. When the recovery comes, a day or a week later, the good stock will recover more and hold its recovery better than the poor stock. Delaware & Hudson is again a good illustration. After the quotation of 105 was printed on May 9 orders to buy the stock came from all sections, and in another hour the price was in the neighborhood of 150.

Value will always work out in the course of time. A stock intrinsically cheap and a stock intrinsically dear may be selling at the same price at a given time. As the result of six months' trading they may have presented the appearance of moving together in most of the fluctuations, but at the end of the period the good stock will be 10 points higher than the poor one, the difference representing a little smaller decline and a little better rally in each of five or six swings.

This exactly describes what will occur all through the market during the next bear period, whenever that period There will be a sifting of the better from the worse, visible enough at a distance, but not conspicuous at any particular stage in the process.

comes.

Where there is a great change in the value of a stock it will advance in a bear period. The market as a whole declined from 1881 to 1885, but in that period Manhattan, while participating in most of the market swings, went from the neighborhood of 30 to the neighborhood of par, because the increased earnings of the company increased value steadily and largely during that time.

The practical lesson is that a stock operator should not deal in stocks unless he thinks he knows their value, nor unless he can watch conditions so as to recognize changes in value as they come along. He should then have at least a conviction as to what stocks are above their value and what are below their value at a given time. If the main tendency of the market is downward, he should sell stocks which he believes to be above their value when they are very strong, taking them in on the next general decline. In buying for a rally, he should invariably take the stocks that are below their value, selling them also when a moderate profit is shown.

When the market appears in a doubtful position it is sometimes wise to sell short a stock that is conspicuously above its value and buy a stock which is conspicuously below its value, believing that one will protect the other until the position of the general market becomes clear. It was formerly very popular for traders to be long of Northwest and short of St. Paul, usually with good results.

During the past year (1901-2) there have been operators who have aimed to be long of Manhattan and short of either Metropolitan or Brooklyn on the same line of rea

son. The general method of operating such an account is to trade for the difference; that is, supposing a transaction to have been started with the two stocks 10 points apart-the account is closed when they are, say, 15 points apart, assuring 5 points net profit. It is all, however, a part of the same general law. Stocks fluctuate together, but prices are controlled by values in the long run.

CHAPTER XVII.

*CONCERNING DISCRETIONARY ACCOUNTS.

A correspondent writes: "I inclose herewith a circular in which the sender asks me to give him a discretionary account promising large returns and claiming great success in past operations. A man in the market ought to be able to do better for me than I could do for myself at a distance. Is this party reliable, and do you consider his scheme safe?"

We get this letter in some form very often and have answered it many times, but it is difficult to make people see the truth. Outsiders want to make money and they believe that people in Wall Street know what the market is going to do, hence that the only question involved in discretionary accounts is the honesty of the men who run them.

The fact is that people in Wall Street, even those who get very near the center of large operations, do not know what the market is going to do with any regularity or certainty. The more they actually know, the less confident they become, and the large operators who try to make markets are, in most cases, the least confident of anybody because they know so well the variety and extent of the difficulties which may be encountered.

People who trade in stocks can set down as a fundamental proposition the fact that any man who claims to *Dow's Theory.

know what the market is going to do any more than to say that he thinks this or that will occur as a result of certain specified conditions is unworthy of trust as a broker. Any man who claims that he can take discretionary accounts and habitually make money for his customers, is a fraud; first, because he knows when he makes such statements that he cannot do it regularly or with certainty, and, second, because if he could, he would surely trade for himself and would scorn working for 1% commission when he could just as well have the whole amount made.

The governors of the Stock Exchange will not permit a member of that body to advertise that he will take discretionary accounts, and any Stock Exchange member who stated that he was endeavoring to build up a business by discretionary trading for customers would lose caste with his fellow-members. It would be considered that he was either lacking in honesty or in judgment.

We do not say that Stock Exchange houses never take a discretionary account. They sometimes do, but they take them unwillingly in very limited amounts, only for people with whom they have very confidential relations and who understand speculation sufficiently to expect losses and failures quite as frequently as profits. It is safe to say that Stock Exchange houses regard the acceptance of a discretionary account as a rather serious demand upon personal friendship, and this not because they do not wish to see their friends make money, but because they know too well that a discretionary account often means the loss of both money and friends.

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