America always has been a land of promise. Whatever the course of our economy in the years immediately ahead, it is likely that opportunities for investment will be both nu­merous and attractive. Energetic new companies will emerge, looking for venture capital. Solid old companies will come forth with exciting new products. One industry or another will enjoy a boom period relative to the rest. And, of course, there will be casualties, too. There inevitably are.

For the observant investor this activity, properly evaluated and properly timed, will bring rewards. There will be chances to buy stocks before they have called attention to themselves and begun to rise, or to buy a Blue Chip, temporarily out of favor, at a depressed price. There will be stock splits, dividend increases, new issues, mergers, spin-offs, as well as the tidal rise and fall of stock prices—all of this characteristic of the restless life of the market as a reflection of American business.

If you have never invested before, you are bound to be tempted.

Whether or not you yield will depend on your answer to the first hard question about investing: Can you afford it?

It is a lonely question and only you can answer it, for it involves not only how much money you feel able to invest, but what kind of person you are. Actually, it is several questions wrapped into one. You are asking, first, whether your financial condition permits you to invest; second, whether you can assume the risk implicit in stock investment; and, third, whether the market is a safe place for you to be.

Let's take them one at a time.

Your Financial Position:

One point should be made clear at the outset: you don't have to be wealthy to invest. Among outsiders you can hear it said that stock ownership is a rich man's game. This can mean any of several things: that the market is too complicated for the little man, that brokers aren't interested in small orders, that only the person who can lose a bundle without feeling it should invest. However persuasive these arguments, they are all untrue.

The fact is—according to a recent New York Stock Ex­change Survey—that almost half of all shareowners are in the $5,000—$10,000 a year income bracket. The median income of the 3,860,000 people who have become stock­holders since 1956 is $6,900.

This would seem to suggest that an understanding of market operations is not too difficult to acquire, and that an attentive, interested broker is not too hard to find. It can also be assumed that these are shareowners with a fair ap­preciation of the value of a dollar and in no position to laugh off losses.

The goals a small investor can hope to achieve and the pattern of investment possible within the limits of a modest income will be outlined further on. The conclusion to be reached here is that investment is not a matter of enlarging a fortune you already possess, but of making available some money, however small the amount, to start with.

Regardless of your salary or income level, investment is possible if three conditions can be met:

1. If you are assured of a steady income.
2. If you are meeting your current running expenses and obligations.
3. If you have a cash reserve with which to meet un­foreseen emergencies.

These conditions are, first of all, safeguards made neces­sary by the inescapable fact that stock prices fluctuate. Your judgment of when to buy, when to sell, and how long to hold should never be dictated by outside circumstances. Investment should be undertaken only with funds you can honestly and legitimately earmark as extra. With a regular income and your monthly bills paid, you know where you stand and what amount can be put aside, in reserve, for any investment opportunity that arises. Or, of course, for emer­gencies. A sudden demand for ready cash—to pay a hospital bill, an insurance premium, or your income tax—should come, if possible, from your reserve, not from cashing in your investments. Whether your stocks are up or down, you are likely to take a loss—on the downswing because you may be selling at less than you paid, on the upswing because you may be selling at less than the potential.
A reserve also enables you to pick and choose. The fact that you have a few hundred dollars lying idle does not automatically mean the time is ripe to buy stocks. There's no hurry. As the professionals say, "The market is always there." If the trend of the market isn't to your liking, or the price of a stock is higher than you want to pay, a reserve allows you the luxury of waiting for a more favor­able situation.

Finally, a reserve permits investment over a period of time rather than all at once. As you learn more about the market, you will hear both sides of this argument. Some experts feel you should back what seems to be a good situation with all the investment funds at your command. Others will warn against getting greedy, and advise partial investment here and there, at different times, to spread the risk. This is not the place to discuss the merits of these tech­niques. The point is to give yourself the flexibility of moving either way your judgment dictates.

Remember: your income need not be large, so long as it is regular and enables you to put aside a surplus after you have taken care of your bills and the possibility of trouble.

The surplus need not be large, either. Saving, as has been said many times, is a matter of regularity. No one considers $5 too small an amount to put into a savings bank; don't worry if that's all you can save each week for your accumul­ating investment reserve. In most markets, brokers usually can suggest a number of sound, solid stocks, offering liberal yields, that sell for less than $20 per share.

There is no rule about the number of shares an investor must buy. If you can afford a single share (plus commis­sions), a broker will get it for you. As a matter of fact, through the Monthly Investment Plan (See Chapter 11) you can buy a fraction of a share, although the Plan requires a minimum investment of $40 every three months.

Do not feel that small amounts limit you to second-grade merchandise. There are top-notch companies in every invest­ment category—utilities, foods, railroads, electronics—selling at moderate prices. And stock splits often bring issues previ­ously selling at $100 or more per share within the small investor's range. In recent years, Gulf Oil, Eastman Kodak, American Telephone and Telegraph, El Paso Natural Gas, and Canada's Aluminium Ltd. have split from 2- to 5-to-l with a consequent lowering of the per-share cost. It is not necessary to dabble in risky "penny stocks" or speculative issues to find an investment at your price.

If, in these terms, you can afford to invest, there is now a second area of decision for you to evaluate. This is

Your Personal Situation:

Your age, the state of your health, the number of dependents you support, the kind of job you have, whether you are a man or a woman, what kind of goals you have set for yourself—all these, and more, are factors which will bear on your decision whether or not to invest.

There is no rule, no prescription governing these factors, either singly or in combination. Again, the decision is yours. It is well to wonder, however, whether your personal situa­tion contains any elements which might conflict with your freedom, need, or desire to invest.

There is, for instance, no age more appropriate than an­other for investment. But it is conceivable that a young man might find family obligations, such as a new house, absorb­ing all his resources, that a middle-aged man might prefer to invest surplus funds in his business, and that an elderly man might feel he is too far along for the amount he is able to invest to bring him any significant return.

On the other hand, a young man, if he is able to invest at all regularly, can look forward to a fairly considerable estate in 30 or 40 years. A middle-aged man who finds the premiums for a new insurance policy higher than he feels like paying might decide that investments might help cushion the requirements of the years past 60. And an elderly man, with family responsibilities and obligations behind him, might decide that a sturdy stock returning a comfortable 5 or 6 per cent is better than the interest rate he can get at a savings bank.

As these, examples indicate, age—or any other single fac­tor—immediately involves other considerations. Good health helps guarantee steadiness of income. Poor health suggests the need for a larger-than-usual emergency cash reserve. A number of dependents may mean that there is nothing left over for investment, or that the surplus should be invested more conservatively than in stocks, or that the surplus, with reinvested dividends, could provide a college fund in 15 years. The kind of job you have is important only in so far as it relates to steadiness of income. If you operate on a system of incentives, bonuses, and options of one sort or another, you may wish for more stability than stocks offer, in the kind of investment you undertake. If you have a year-in, year-out salary level, stocks may be just the thing to give you that wished-for extra edge.

Or it may be just the opposite. As a bonus man you may have learned to live comfortably with the prospect that one week may be up and the next one down. And, as a steady Joe, you may find it more alarming than it's worth to have the price and value of your holdings vary.

Whether you are a man or a woman will not have much to do with your readiness to invest. For, surprising as it may seem, the Stock Exchange survey referred to earlier showed that there are more women shareholders than men. Out of the 12.5 million total, nearly 6.4 million, or 52.5 per cent, are women. Naturally, a good many of them are shareholders in name only; their husbands have bought the securities or willed them. But for many others, investment has become a normal and acceptable way to put money to work. There is no telling, either, how many women, having inherited stocks, have since taken a lively interest in investment as part of the responsibility of preserving their capital. Certainly brokers will tell you that women customers are no longer the rarity they once were.

The kind of goals you have will very often be bound up in just such things as whether you are young or old, in busi­ness or retired, childless or the chief of a tribe; and the achievement of many of them will require money. If that is so, investment is worth serious consideration. Some people, of course, may prefer to invest in books, or paintings, or travel, and for them the attention that must be paid to in­vestment, or the attractiveness of the financial reward may just not be worth their while.

The story is told of the two salesmen who met in the club car on the train. "How's business?" asked the first. "Oh, very good," said the second, "and yours?" "Fine, fine," said the first. "Got orders for a thousand gross last week. I sell buttons." "Really," said the second. "I've had one order in the last three years." "You call that good?" said the first. "Well," answered the other, "you see, I sell suspension bridges."

Like the salesmen, the investor must have a clear notion of his goals and expectations, must realize that what is normal and acceptable to someone else might not be what he would choose for himself.

The Kind of Person You Are:

Consideration of your goals and their relation to investment brings up the final point of personal evaluation: yourself. For your goals are necessarily a reflection of your temperament and personality.

Go beyond your goals and see if you can pin down the traits and characteristics they stem from. Are your goals— and you—realistic? How do you regard money, and how do you handle it? Are you easy-come, easy-go? Or do you count the pennies? Are decisions involving money difficult for you to make? Are you on top of your budget, or always running to keep up?

These are generalized questions, and there are no abso­lutely right answers. Gamblers should stay out of the market, but, on the other hand, tight-fistedness is no virtue, either. An overly cautious or conservative temperament may well react too slowly to changing conditions in the market, and thus miss out on opportunities.

The value in knowing yourself and how you are likely to respond in a variety of financial situations is quickly ap­parent to the stockholder. As has already been said—and will be said again—there are risks as well as rewards in owning stocks. Almost any kind of personality can count profits with ease. But it requires a certain rigor, a certain fortitude to face up to the adverse situations that may rise to smite you. Will you panic if a stock begins to falter and slide down­hill? Will you dig your heels in stubbornly and ride an ill-advised purchase to the bottom? Can you reconcile yourself to taking a small loss in order to avoid a bigger one? Can you content yourself with a modest profit? Are you likely to get itchy and desert a stock whose performance is steady but not spectacular?

In a famous pronouncement, still quoted in Wall Street, the elder Morgan stared at a questioner who wanted to know what stock prices would do and said, "They will fluctuate." The statement is as sage as it is obvious. Continuous and largely unpredictable movement is the one certainty any in­vestor can start with. Relative to this movement, the in­vestor is a reasonably constant factor. His opinions may change, but his viewpoint will always be his own; he will always have bis individual perspective by which to judge what the wild waves of the market are saying.

If he is aware of himself and the basis for his standards in financial operations, he will be better able to handle bis investment problems, better able to make the knotty choices and decisions which confront him, and thereby assure himself greater chances of success.

Is It Safe to Invest? You feel yourself financially able and personally qualified to invest. You can meet the conditions of reasonable stability, reasonable flexibility, _and reasonable caution. But nagging doubt remains. Wouldn't you really be better off with your extra cash in a savings account? Or a piece of real estate? In short, is it really safe to invest?

Well, how much safety do you require? Since there are no absolutely sure things anywhere, safety must be looked at as a matter of degree. There are no guarantees of success in stock ownership, no guarantees against loss. Even the thoughtful, conscientious investor can be taken to the cleaners.
It should be remembered, however, that investment in stocks is a way of sharing in the profit potential of Ameri­can industry. Is the American economy safe? It seems to be. Since 1900 it has been rising in productivity at an average rate of 4 per cent per year. Our Gross National Product is now nearly $480 billion. By 1965, according to quite con­servative estimates, it is expected to rise 30 per cent to some $535 billion. A few hard-headed stargazers among our econ­omists feel it may go as high as $600 billion and perhaps to $700 billion by 1970. (In the early Thirties it was only $56 billion—less than the 1959 Federal budget.) Should these peaks in fact be reached, or even approached, the likely result would be an unexampled level of national prosperity.

For corporations, prosperity is reflected in earnings. For stockholders, it is reflected in a larger share of these earnings through increased dividends, or in capital gains—a rise in the value of the stock hi the open market owing to the pressure of investors who anticipate further earnings by the corporation and wish to get aboard.

This generally upward trend is, in fact, the course the market has taken in this century. [In only 29 years—from 1930 to the end of 1959—the value of stocks listed on the New York Stock Exchange has zoomed from $49 billion to more than $307 billion.]

Of course, none of this means that the economy is im­pervious to setbacks or depressions. We have had them before and, chances are, we will have them again. An economy is a subtle and, to a considerable extent, still un­known combination of forces which produces prosperity only when a certain balance is maintained among them. Until all the factors establishing the balance are under­stood and controlled, dislocations can and will occur.

It also follows that depression is pervasive. Stock values are a sensitive—and sometimes nervous—barometer of eco­nomic weather, but they are not the only gauge affected in times of stress. The bottom has been known to fall out of the real-estate market. And insurance companies and savings institutions, both of which invest heavily in real estate, mortgages, and securities to obtain the earnings they pay out in interest, cannot escape the consequences of a national depression either.

In their pleasure at seeing banks raise their interest rate on savings to 3¼per cent, as many have done in the past few years, people are inclined to forget that there was a time when banks paid 4 per cent. But somewhere along the line, in response to economic factors and the available return on investment, there was a decline to a 2 per cent rate from which we are only now emerging. What price safety?

If you believe in the essential safety of the American economy, if you have faith in the ability of American busi­ness to flourish in the future as it has in the past, investment as a technique for making your extra money make money is safe.

Is the Market Safe? This question, still asked and still wondered about, assumes that there is something inherently perilous about a stock exchange. There isn't. An exchange is simply an agency, a market where buyers and sellers can meet—through their brokers—to complete a transaction. An exchange—the market—is a complex and turbulent place, as we shall see in Chapter 5, but it exists on the traffic of investors. When the pace is hot, the exchange boils. But when action is light, it languishes.

An exchange does not set prices. It does not issue stock. It does not, for itself, buy or sell a single share. It is a service, an accommodation, in a sense a kind of clearing house. It is an operating enterprise, an institution, but it does not dictate the action that takes place within its precincts, any more than Comiskey Park determines whether the White Sox win or lose.

Its operations will be described in greater detail further along, but to make the point about the limited though es­sential role it plays, this much can be said here. Since it does not issue stock, it can handle only those shares already in existence and listed. Of the outstanding shares in any particular company, only a small percentage is changing hands at any one time. The rest—the majority of it—is held by individuals and institutions who happen not to want to sell. If, therefore, a man in Des Moines wishes to buy 100 shares, he must find a seller. This he accomplishes through his broker and, eventually, through the facilities of the ex­change. For on the floor, at the trading post, the buyer's broker will find a broker with an order to sell. If they can get together on price—and in the refined and fluid mechanics of exchange operation they usually can—a market is made.

These transactions are conducted under regulations rig­orously enforced by the exchange's board of governors and executive staff—and ultimately supervised by the Securities and Exchange Commission in Washington.

But what about 1929? For anyone who lived through the great market crash of this century, or has heard of it, this question is still likely to lurk in the subconscious.

Economists and historians by now generally agree that the collapse of the market and of securities values in 1929 was basically a reflection of underlying weaknesses in the economy. The fact was that stock values were not an accurate indi­cator of business conditions. The epic proportions of the disaster resulted from an unprecedented wave of optimistic speculation in stocks at a time when it was least warranted. When, for reasons still undiscovered by motivational research­ers, the bubble finally burst, and Americans' buoyant faith that there was pie in the sky for all stockholders evaporated, the gap between reality and dreams was enormous. The downhill slide was long, steep, and agonizing.
Was the market innocent? In its role as agent, arranging purchases and sales on demand, it was. The automobile salesman cannot keep his customer from driving 90 miles per hour. On the other hand, it has long since become clear that exchange regulations in 1929 were far too loose. The practices that were permitted, if not encouraged, accentu­ated the feverish performance of the market and provided no means for braking the drop or for stimulating a recovery.

The best evidence that operations were far from ideal is the long and continuing effort that has since been made, particularly by the New York Stock Exchange, to tighten and improve the standards of doing business. Nothing less than high-caliber performance is now permitted by the Ex­change and its members. And this has put heavy pressure on the less well-known and less highly organized regional ex­changes to measure up.

On the New York Stock Exchange, margin-maintenance re­quirements are now stiffer. Customers' loans, while available, are far less easy to come by, unless your credit is gilt-edged. Speculative ventures, if anyone should ask, are gravely dis­couraged. The raids, corners, and inside deals that ruined stockholders in years gone by are now virtually impossible and have disappeared. Stockholders are urged to educate themselves about the market and about the securities they buy. Moderation and good sense have replaced pursuit of the quick and piratical buck as the guiding principles of investment.

The market, as such, is safe.

Are Stocks Safe? As an investment category, yes. All sorts of prudent and conservative institutions—colleges, pension funds, foundations, trust departments—invest in stocks.

There is, technically, greater risk in common stocks than in preferred stocks or bonds because the latter two have prior claims on the earnings and assets of the issuing com­pany. But as any experienced investor can tell you, there are many not-unusual situations in which a common stock can be viewed as a better—safer—investment than the issues ahead of it. Or, take the common stocks of corporations like General Electric and Union Carbide. These, as it happens, are the only issues on the companies' books. Who would argue that the bonds of even a first-class railroad, for example, were necessarily safer?

Safety also depends, to an extent, on the price at which the stock was bought. A company may be solid as a rock, but eager investors may have bid its stock to an unrealistically high level in terms of the per-share earnings likely to be attained. If a quarterly or year-end earnings statement does not bear out the optimism of the eager buyers, they may begin to unload. The man who has bought near the top and wants to hang on may see a dismaying depreciation in his holdings, even though, by all investment standards, he does own a good, safe stock.

The point is, some stocks are safer than others, and the value of all stocks may shift and vary and thereby alter tem­porarily their safety—the possibility of cashing them at the price paid—for the investor.

It is not hard to find a safe stock, if by that you mean one representing a lively, alert, efficient company that is unlikely to collapse and fail. While not every stock listed on the New York Stock Exchange is a daisy, the mere fact that it has met the requirements for listing says much in its favor. For one thing, to obtain listing a company must agree to report its financial condition regularly. This alone makes it possible to evaluate the company's performance and prospects, and thus estimate whether its stock is a good buy.

This in not to say that unlisted stocks or stocks carried on other exchanges are chancy. As you can quickly discover, some rather fine companies are not on the so-called Big Board—the New York Stock Exchange. The Great Atlantic and Pacific Tea Company, Humble Oil, and Creole Petroleum are listed on the American Stock Exchange. Such represent­ative companies as Anheuser Busch, Eli Lilly, and Time, Inc. are unlisted, and traded only in the over-the-counter market. Few insurance companies and no banks—both quite stable stock categories—are listed on the New York Stock Exchange.

Still and all, the new investor will be wise to confine his dealings to stocks that are relatively well-known and have a ready market. For out of the estimated 5,000 public, stock-issuing corporations in the United States there are, inescap­ably, some dogs. They do not have to be thieving and corrupt. Poor management, wobbly financing, and an inability to keep pace wth the times in production and distribution are reason enough for the investor to avoid them.

Here, too, may be mentioned the "penny stocks," which have enjoyed an unfortunate vogue in recent years. These glitter like a prize in a shooting gallery, but they promise something for nothing, and this is no premise for a smart in­vestor to accept. Many are out-and-out swindles. Others are legitimate enough, but rank as the wildest sort of speculation; double-0 on the roulette wheel, or a mare in the Kentucky Derby will come home a winner more frequently than these babies. For the man who can only be called the ignorant in­vestor, they have a certain attraction. The small investment— or bet—of $100 may purchase 500 or 1,000 shares which make a man feel big, whereas the same amount buys only a fraction more than one share of American Tel and Tel, which is discouraging and makes a man feel small. Furthermore, a penny stock only has to rise a penny to double in value; AT&T has to go to around 160; and with the cunning of the ignor­ant, even penny-stock investors seem to know that the rate of movement—up or down—is swifter among low-priced stocks than high. And finally—and this is the most insidious argu­ment of all—the penny-stock buyer persuades himself that the amount of money he puts up isn't too important; after all, he's riding a long shot.

What is wrong with all of this is that at no point does value enter into the calculation. Anyone who does not con­sider the worth of what he is buying is a gambler, not an in­vestor. The sorry result is that a few bad gambles can sour an otherwise sane person on the true value of investment.

Beyond this, safety is largely a matter of sanity. There are many ways of examining a stock and of judging the time to buy it or sell it. All of them are available to the average in­vestor. Learn them and use them. You will never get stuck with a poor stock masquerading as a safe one.

Hedging Against Inflation: One of the big arguments in favor of stocks bears on another aspect of safety. This is the fact that stocks may frequently act as a hedge against inflation.

Inflation, according to the classic definition, is the economic condition resulting in a rise in prices and a drop in the pur­chasing power of the dollar. In effect, goods are scarcer than money. Thus, through the operation of the forces of supply and demand, goods become more expensive. Dollars, rela­tively more plentiful, become cheaper—more of them are needed to buy this item or that.

In the United States, inflation has been at work for some time. It is not runaway inflation. Our productivity (goods) is managing to stay fairly well abreast of our prosperity (money). Still and all, since 1939 the Consumer's Price In­dex—a means of measuring the fluctuation in the prevailing prices of certain basic household commodities—-has jumped from 99.4 to 195.7, almost a 100 per cent rise. In the same period, the dollar's value has dwindled from 100 cents to 47.3 cents—value, of course, representing what the dollar will buy.

In a fluid situation like this, safety of investment takes on a new dimension. Many conventional ways to save—through a savings account, an annuity, a Government bond held to maturity—can practically guarantee safety of principal. You will always get out the same number of dollars you put in. But there is no assurance as to how much those dollars will buy.

Stocks cannot guarantee that the amount you have invested will be returned to you, safe and sound. But when dollars are plentiful and goods bring a fat price, it is possible that a company in whose earnings you have a share will be dis­tributing dividend dollars more liberally. They may be cheaper, 47.3-cent dollars because inflation is at work. But because there are more of them, they may take up the slack in purchasing power.

For example, from 1947 to the end of 1955 the dollar lost 20 per cent of its value. If, during the same period, that dollar had been invested in the 480 stocks making up the Standard and Poor's stock price average, it would have appreciated 66 per cent. In other words, due to inflation the dollar was worth only 80 cents, but through investment it was worth nearly $1.33.

In fairness it must be said that inflation has many rami­fications and that not all companies do well enough to pay out the number of dollars needed to compensate for the drop in purchasing power. But a judicious mixture of stocks and bonds offers a fair measure of protection either way.