In the vocabulary of investment, "speculation" is a nasty word. It suggests gambling, insecurity, long shots, luck, and similar improprieties. For old campaigners it stirs up mem­ories of the 1929 unpleasantness, as damp weather tweaks the rheumatic joint. And, worst of all, it seems synonymous with money lost. For every speculator who pulls a coup, we hear, there are 99 who live to rue their recklessness, to be­moan the hard-earned dollars foolishly and irretrievably cast down the drain.

The New York Stock Exchange labors long and hard to encourage a sober, sensible attitude in investors. Conscientious brokers steer their customers away from situations bearing a speculative tinge. The literature of investment inveighs against empty-headed avarice, blind faith, and other vagrant impulses that lead the innocent into ill-starred ventures.

If fear breeds caution, all well and good. For speculation can be extremely hazardous, particularly for the new inves­tor, which means in most cases the person who can least afford it. And certainly speculation, as it involves cheap, shadowy gold-mining or uranium stocks, is little better than throwing dice or picking horses.

But speculation is a term of many dimensions, and it is useful for investors to understand them, rather than simply bow to the taboo. By the more conservative canons of Wall Street, for instance, investment in anything except the highest-grade bonds is speculation. This is strict interpretation of the dictionary definition of the word as an undertaking in which a large risk is borne in the hope of a large profit. In this sense, almost any common stock, dependent as it is on net earnings, entails some risk, some speculation.

This is fairly rigid doctrine, however. It is a premise of this book that with care and attention the investor can find satis­factory common stocks as free of risk as any other form of property in an uncertain world. It then comes down to a question of the investor's objective. The investor, by and large, is in for the long pull. The speculator, characteristically, is a short-term, quick-turnover man. He is interested in speculative situations and makes use of speculative techniques. Many of them are commonplace. All of them are legal. But they usually require more capital than the new investor can bring to a transaction and they invariably demand shrewd judgment, complete familiarity with market procedures, and consider­able nicety of touch in the timing of purchases and sales. In expert hands, they are useful tools for the creation of wealth. In the hands of the novice, they are—as Samuel Goldwyn said of the H-bomb—dynamite. They should be understood—and avoided.

Buying on Margin

Perhaps the most familiar speculative technique is buying on margin, which is utilizing credit, in the form of a loan, to acquire more stock than your cash-in-hand will purchase. Let's say, for instance, that you have $4,500 and are interested in a stock selling at $50. Ordinarily, of course, the most you could buy would be 90 shares. Through margin buying, how­ever, you could borrow an additional $500 from your broker and get 100 shares.

Is this good? Well, it's not bad. The 10 extra shares give you an increased equity, 10 more shares on which to realize a market gain. You will also get perhaps $20 or $30 in addi­tional yearly dividends. You have saved $20.50 in fees and commissions, since the cost of a round lot is only $44, while a 90-share odd lot is $64.50—$42 for the broker and $22.50 (¼-point or $.25 a share) to the odd-lot dealer. And, finally, your $500 is obtained on a call-loan basis, which means 4- to 6-per cent interest (depending on how big and active your account is) and no particular payoff date. Even at 6 per cent, your interest charge would be only $30 a year, an amount quite possibly covered by the dividends received on the extra shares acquired.

The advantages of margin buying, while interesting, are not in this instance impressive. This is because the so-called "margin requirement"—the amount of cash the buyer must put up—is determined by the Federal Reserve Board and at present is pegged at 90 per cent. In other words, you can borrow from your broker no more than 10 per cent of the dollars involved in any single transaction. The margin rate is variable, and is used by the Board to help maintain the stability of the market. At the higher end of the scale, margin acts as a brake on speculative or inflationary tendencies. At the lower end, it represents a loosening of credit and acts as a spur and an encouragement to investment when money is scarce.

The lowest rate ever permitted by the Board was 40 per cent, which was in effect between 1937 and 1945. Here, of course, was a period that began with two recession years, picked up briefly, and then was arrested by World War II. Taxes rose, capital was elusive, and profits were restricted. To coax money into the market place, a low cash requirement and a high borrowing capacity were allowed.

By 1946, however, conditions had changed. The postwar boom was beginning. Money was plentiful, goods were scarce, and the inflationary pressures were building. For thirteen months, from January, 1946, to February, 1947, the Board held the margin requirement at 100 per cent.

At lower rates, margin buying becomes quite attractive. If you had had your $4,500 to invest during the 40-per cent period, you could have borrowed the other 60 per cent— $6,750—and acquired 225 shares of $50 stock, instead of 90. On a $2 return, your dividends would be $450 a year, rather than $180. But more important, if there were a 10-point rise in the stock to 60, your 225 shares would bring $13,500. Paying back your $6,750 loan and subtracting your original $4,500 investment, you would have a profit of $2,250 (less commissions). The same 10 points on 90 shares would in­crease their value to $5,400, or only $900 more than you started with.

A fat capital gain like this is the real point of margin buying. A 10-point rise is not too difficult to find in a bull market. It is quite possible for the speculator to be in and out before the interest on his borrowings amounts to more than a few dollars. In such cases, he has had virtually a free ride.

Dividends are not to be sneezed at, but they do not rep­resent a sufficient return to compensate for the risk of margin buying. This is particularly true in times like the past year or so, when yields have been low. In the example we have been using, for instance, the $2 return on the $50 stock is 4 per cent. If the interest rate on your call loan is also 4 per cent, there is no dividend profit in the shares bought on margin. Should the return be $3, or 6 per cent, and the call-loan rate only 3 per cent, your prospects brighten a bit. Dividends on 225 shares would then total $675, while the interest would be only $202. Your net would be $473, or 175 per cent more than you could get from 90 shares.

Nonetheless, a favorable ratio between dividends and in­terest is principally an edge that helps to maximize profits and minimize the costs of getting them.

This is also why margin buying is best done with an appreciable amount of money. The man who has $450 to invest in $50 stock can get nine shares—and by margin buy­ing at a 90 per cent rate can acquire one more. Even in the liberal days of 40-per cent margin, he could increase his nine shares only to 22 or 23. Considering the proportionately smaller profits, and the inevitably higher commissions because of the ¼-point that must be paid the odd-lot dealer, the small margin transaction just doesn't make sense. (Furthermore, the New York Stock Exchange insists that you have a mini­mum balance in your margin account, over and above what you owe, at all times).

The need for funds becomes clearer when you consider the bleak other side of margin buying: margin maintenance in the event of a market drop. The margin maintenance re­quirement these days (1960) is 25 per cent. This is a New York Stock Exchange ruling, not a concern of the Federal Reserve. What it means is that the broker will demand more cash from you if your stocks sink to the point where your equity, minus the money you have borrowed, is less than 25 per cent of your stock's market value.

To simplify the arithmetic, we'll assume a margin rate of 50 per cent. You have $4,000 and you borrow $4,000 in order to buy 200 shares of stock selling at $40. Unfortunately, it turns out, you bought near the top, the market suffers a technical reaction, and several institutional investors decide simultaneously to adjust their portfolios and sell an aggregate of 60,000 shares of your little wonder. Very depressing. In fact, 10 points worth of depression. Your stock is now at $30 and your investment is worth $6,000. If you paid off your loan, you'd still have $2,000, which is still on the safe side of $1,500—or 25 per cent of the current value of $6,000.

Well, there's some unsettling foreign news in the next day or so, and a number of little fellows rush in to sell before they get hurt—and your stock sags 4 more points. Now it's at 26, and your investment is worth $5,200. Pay off the loan, and you're only $1,200 ahead. But 25 per cent of $5,200 is $1,300. Out goes the call from your broker. He wants and must have $100 from you in order to restore the 25-per cent margin. If you get it up, you're safe until the stock drops some more. If you don't, he will sell you out. Since, in most cases, he holds your stock as collateral for your loan, it is not hard for him to do this. If the market hasn't plunged further while you were explaining your lack of $100, he will realize $5,200 on the sale, from which he will deduct his $4,000 loan and accrued interest, and his commission of $44.20, thereby leaving you with something over $1,100 from your venture, or a loss of $2,900.

It could be worse. The most happy fella who got 225 shares on 40-per cent margin would be on the verge of trouble with the first 10-point drop. At $40, his shares would be worth $9,000. With his $6,750 loan paid off, his equity would be $2,250. Since 25 per cent of $9,000 is also $2,250, slippage of even one more point would require a margin call.

The fellow who was stuck for 90-per cent margin, how­ever, is well protected. His $50 stock can drop to $10—a fan­tastic 80 per cent—without his being squeezed for more margin. For at $10, his 100 shares are worth $1,000, and since he borrowed only $50, he is still comfortably ahead of the 25-per cent margin of $250.

Thus, another fact to remember about margin buying: the easier the credit, the bigger the profit on the up side, but the quicker trouble looms on the down side.

This was perhaps the bitterest lesson of the 1929 crash. For in the several years that culminated with Black Tuesday, speculators were not only permitted to buy freely on margin, but to "pyramid" their speculations, as well. The margin requirement was not controlled in those days. The rate was pretty much whatever your broker said it was. Twenty per cent was not uncommon. You could do even better if your broker was accommodating. Many were.

Suppose in those giddy days you had $1,000. With a mere 20 per cent margin requirement, this would be enough to buy $5,000 worth of stock. The great Bull Market of the Twenties, of course, was never going to come down, so in due time your stock would run up 20 points—we'll say to 70 —and your holding would now be worth $7,000. By cashing in, you could pay off your $4,000 loan and be $3,000 to the good, a quite handsome 200 per cent profit. In the heady atmosphere of the Twenties, however, this was small potatoes. Any sensible broker would let the loan ride, and apply your $3,000 toward a margin purchase (at 20 per cent) of $15,000 worth of stock.

Now you have some 215 shares of stock at 70, and, of course, it sails off into the blue, finally hitting 100. You now have $21,500 worth of stock, or a net profit, after meeting the $12,000 loan, of $9,500. A sturdy sum like this now entitles you to a margin purchase of $47,500 worth of stock, and when it gains another 20 points .

These were the so-called paper profits that curled and blackened and fell to ashes when the lightning struck. It was a fabulous and foolish performance. Think of being able to acquire nearly $50,000 worth of stock in a matter of weeks on a cash investment of $1,000! The men who started with $10,000 had nearly half a million. The big boys who plunged in with $100,000 had nearly $5 million. All on paper, of course. For of that nearly $5 million, some $3,800,000 represented margin credit.

A few got out in time and found themselves legitimate millionaires, or close to it. Most of the hundreds of thou­sands of margin speculators didn't. When the landslide came, the inexorable process went into reverse. In those days, there was no margin maintenance requirement. Everything de­pended on the broker's judgment of the market and his cus­tomer. Big customers, with apparently adequate resources and enviable bundles of Blue Chips, might survive a drop or two without a margin call. Later, if things got rough and the broker's own financial stability was threatened, everyone got calls. Some brokerages weathered the Crash just fine. Others, which extended too much credit too far, went under. You can see why, when you consider the plight of the multi-millionaire in terms of today's 25-per cent requirement. A slump of even five points, to 95, would shrink the millionaire's holding to about $4.5 million, which would leave him only $712,500 after paying off his $3.8 million loan. But 25 per cent of the new market value is $1,125,000. The $700,000 equity is not enough. Out goes a margin call for over $400,000!

Again, some may have had it, but the tragedy of the times was that the vast majority was in over its head. Few stayed within their resources, so that when the thin, shrill screams for margin were heard, the amounts were just as prepos­terously impossible for the big man as for the little. And, of course, when the Crash came, prices dove not 5 and 10 points, but 40, 50, 80, and 100.

The brokers were panicked as quickly as their customers. As call after call was answered only by speculators' low moans, the brokers threw the stock on the market in a vain effort to retrieve the enormous sums they had so blithely loaned. This accelerated the plunge and brought fresh disaster to those who had so far been able to stem the tide. In the end, as we know, only those lucky enough or foresighted enough to get out and stay out before the dam broke escaped the deluge.

There were other problems involved in the Crash, but margin buying—and abuses thereof—is remembered as the blackest-hearted villain of the piece.

Today, because of the extremely tight control exercised by the Federal Reserve Board, and the equally stiff margin-main­tenance rule imposed by the New York Stock Exchange, margin buying is limited, and pyramiding impossible. Any time money gets free and easy, and the total of brokers' loans (today a statistic scrupulously compiled and frequently reported) seems a little high, the flow of margin credit can be choked off to any degree the Federal Reserve thinks wise.

Properly utilized, margin buying can be a technique for increasing one's holdings at a faster than normal rate. But it takes a shrewd analyst of market behavior to spot a likely trend; it requires some cash in reserve in order to meet possible margin calls; and it is worked best by an operator who knows when he's had enough.

Selling Short

Most money is made in the market through the rise of stock prices. But it is also possible to profit through their fall. This is accomplished by judicious use of the curious and ingenious procedure of "selling short," perhaps the most familiar and least understood of market techniques.

The purpose of the short sale is simple enough. The specu­lator feels that the market is too high and that a particular stock is due for a drop. He therefore sells 100 shares of it at, let's say, 70. His judgment is confirmed. In a week or two the stock drops to 60. He buys back in and has himself a 10-point profit, less commissions. Short-swing traders look for oppor­tunities like this all the time.

If you were the speculator in this case, and began with 100 shares of stock in your hands, the train of events would be perfectly clear. You have 100 shares. You sell them and receive cash. The market drops. You buy back 100 shares with cash received from the sale, but at a lower price. You end up with 100 shares plus a profit.

The confusing thing about the short sale is that it reverses normal trading procedure by enabling the seller to dispose of stock before he has acquired it. At the outset he has nothing but a conviction that the market is about to fall—and a stable, well-established account with his broker. Accordingly, he enters an order to sell, say, 100 shares at 70. This nets him $7,000, less commissions.

Trading regulations, however, require that stock be de­livered. Someone somewhere is paying out $7,000 to buy these shares, and he expects a certificate, properly endorsed, in his hands within four business days.

There are two ways the short seller can provide the stock. The less likely is to buy back in the same day, so that the shares he acquires can be endorsed over to the person to whom, earlier, he sold. It has to be the same day in order to make delivery within the stipulated four-day period. But this assumes that the drop in the stock required for a short-sale profit will occur in a matter of hours. Unless the market is in full retreat, or the speculator is dealing with several thousand shares and content with a profit of a point or less, this would be cutting things pretty fine.

The usual way is for the short seller's broker to borrow the stock from one of several sources. He may get it from another of his customers, from one of the brokerage partners, or from the inventory of the brokerage house itself. The borrowed certificate is transferred to the buyer, thereby satisfying the short seller's obligation to deliver. The short seller now sits back, if he is an old hand (if he is new to the short sale he sits on the edge of his chair), and waits for his stock to descend.

It may take a while, maybe a couple of weeks. It depends on the amount of drop he wants and the rate of market activity. Generally, because declines are usually of shorter duration than rises, the bear makes his profit faster than the bull. A real, long wait, of course, is nerve-racking for the market is rarely static, and if the anticipated downward pres­sure doesn't develop, an upward trend may. This results in the undignified picture of "shorts scrambling to cover," which will be discussed a little further on.

To make the point, let's assume that the short seller is reasonably clairvoyant, and that his stock does indeed drop. Ten days or two weeks later it has sagged to 60. He now enters an order to buy. He pays out $6,000, acquires 100 shares of stock to return to the lender, and comes out of the deal $1,000 ahead.

The curious sequence of events that enables the short seller to start without stock and end up without stock, but to profit handsomely nonetheless, would be impossible without the accommodating lender of stock. What's in it for him? For the individual lender very little, for the brokerage house or its partners quite a lot. The brokerage firm is happy to make the loan because it receives the proceeds of the short sale, which is money it can use in the course of its daily credit operations without having to borrow, at interest, from a bank. The proceeds are collateral for the loan of stock to the short seller, who will end up with a credit or debit depending on the way his short transaction ultimately works out.

The individual customer gains by lending his stock only if, in the event the issue is scarce, a premium of $1 or $2 per day per 100 shares is charged for the loan. Such premiums are split between the lender and the brokerage house. Other­wise, it is purely a courtesy. No one has to loan stock, and many investors who are long see no reason to make things easy for the shorts who represent a contrary pressure. None­theless, customers opening margin accounts are requested by their brokers to sign a lending agreement at the same time, and many of them do. This permits the broker to lend the customer's stock and acquire interest-free funds from the short sale. Since the margin trader is himself a beneficiary of the firm's credit facilities, he is inclined to be generous about loaning stock. In any event, there is no possibility of loss. The lender is entitled to any dividends declared or rights issued while his stock is on loan, so that his holding is in no way impaired.

The high risk inherent in the short sale rests on the fact that at some point the short has to make good on the bor­rowed stock. The loan transaction is on a call basis; after any reasonable time, either party can demand the return of his stake in the deal. Unlike the investor who is "long" (owns, has, holds) stock, the short may be pinched by time. The bull may be hoping for a rise, but if it doesn't come, he can afford to wait. The bearish short seller must get his price decline before too long or find himself in a squeeze. Not because the lender suddenly becomes impatient for his stock, although that can happen. But because stocks that don't drop may well begin to rise. Now begin the short's nightmares. Instead of drifting down to 60, the stock he has sold at 70 climbs briskly up to 80, maybe higher. At this point, all hope of a decline may have vanished, and it may be the better part of valor to buy in, return the stock to the lender, and retire with a $1,000 loss, thankful that it wasn't worse.

Acquiring stock to meet the conditions of a short-sale loan is called covering, whether done at a profit or a loss. In the bad old days, as suggested in Chapter 5, there were titanic struggles between bear and bull pools, seeking by manipula­tion to drive prices up or down. Bear raids frequently were successful, particularly at the end of long upward trends that finally encouraged little fellows to jump in and join the fun. The newcomers, happily clutching their overpriced stock, would suddenly find the value melting away under waves of short selling. When the price had plummeted far enough, the shorts would cover, making a fortune on the losses of the bulls. Often enough, the precipitate decline would lead in­vestors to dump their stock in panic, thereby depressing the market further and making shares more easily available to the shorts ready to cover. If the bulls controlled enough stock to hold the line, as happened several times when Commodore Vanderbilt was at the helm, the shorts soon found themselves in desperate straits. They could cover only at ruinous prices, frequently prices they themselves bid up as they twisted and turned to buy back in.

These conditions are almost impossible to duplicate today. Pools or combines seeking to manipulate or rig the market are outlawed, and, in any event, the volume of stock out­standing in most issues is far too vast for any group to affect or control. Further, Exchange rules fence in the bear raider by permitting short sales only on "up ticks"—at a price higher than the last preceding quotation—or on a "zero-plus tick," the same price, if the last preceding quote was higher than the one before. If the price of a stock is 52 and the last previous sale was made at 52½,a short sale would be prohibited. If, however, the price advanced from 52 to 52⅛ —an "up tick"—a short sale could be accepted. This rule, of course, prevents the acceleration of a downwind trend. Finally, as pointed out in Chapter 6, the wise operator today hedges against contrary and unexpected rises with stop orders that (usually) will sell him out automatically before the damage is too great.

How much short selling is there? Probably both more and less than you think. The New York Stock Exchange has been keeping monthly tabs on the so-called "short interest" since mid-1931. It knows the total number of shares the speculators are short and the significant short interest in any particular issue. On any given day, the total may be several millions of shares. This, of course, is a cumulative figure rep­resenting the short sales over a period of time, not the action of that one day.

The Exchange figures are not precise enough to chart exactly how well the shorts have done, but some periodic dips suggest that there was some profit-taking during the '57 set­back. The volume, in any event, is currently up. In July, 1958, it was 6,087,260 shares, the highest total in 27 years. Is this too much? The Exchange is quick to point out that the volume of all shares listed has also risen, so that the ratio is actually declining. In July, 1958, only one share had been sold short for every 803 shares listed, whereas in De­cember, 1952, when short interest was only 1,570,986 shares, the ratio was one to 1,775. An even more dramatic relation­ship: On December 31, 1931, the short interest was 2,842,072 shares; on January 15, 1958, it was almost identical—2,832,-740 shares. Yet the 1931 total meant that one out of every 464 shares listed has been sold short, whereas by 1958 it was only one in 1,727.

Although these comparisons suggest that the short interest is relatively insignificant, they might not tell the whole story. For it is also known that the volume of stock that changes hands in the course of a day, a month, or a year is only a fraction of the shares listed. Exchange statistics on turnover since 1950 indicate that only about 16 per cent of the listed shares are traded. And an unknewn percentage of these are shares that are traded several times. In other words, short in­terest as a percentage of shares traded, rather than of shares listed, will reach a considerably higher figure. In 1956, when the year's trading volume was 556,300,000 shares, the short interest on December 14, very close to the year's end, was 2,450,761 shares. This is a ratio of one to 227. The ratio to shares listed was 1:1,821.

As a rule of thumb, it is considered that short selling is within bounds if the total on the monthly reporting date is about equal to the month's average daily trading volume. On this basis, short selling was on the high side during  1958.

Perhaps even more important than the numerical total of short selling is a discussion of its purpose and function. For the short sale is still viewed suspiciously by many people un­familiar with the market. The sale of something you don't own somehow seems faintly disreputable. And the whole notion of greedily anticipating declines, when all the rest of us want our stocks to wax strong and go up and up and up, seems downright subversive.

But is it? Consider that if it were not for the short-sale technique, most of us odd-lot buyers would be unable to invest. Think back to Chapter 5, and the outline of the odd-lot dealer's performance. All trading, remember, must be done in round lots of 100 shares. If a group of scattered small orders to sell, totaling 120 shares, comes his way, the odd-lotter must go short 80 shares on his own account in order to execute the required 200-share sale. Since buy and sell orders frequently do not match, the odd-lot dealer is long and short stock many times in the course of a day. And a "good thing, too.

This is going short "technically." The odd-lot dealer is not speculating, but enabling the market to operate fluidly. So, too, is the specialist, when he must sell short in order to supply  stock when he is confronted by numerous buying orders matched by only a few selling orders. This activity accounts for a considerable proportion of the short selling at any given time.

Even speculative short selling has a rationale, however, over and above the profit motive. In a feverishly rising market, the bear is a cold dash of healthy skepticism. In a slumping market, he represents a reserve of buying power. In neither case is the short interest likely to be large enough to have a governing influence, but both of these counteractive forces help to steady the market and keep it from swinging to extremes. The market of the past decade, for instance, has been largely optimistic and inflationary. Prices in many cases have outstripped values. To the extent that short selling has bucked the trend and checked the upward spiral, it has prob­ably performed a service. Likewise, when prices take a tumble, it is the bears who enter the market. They don't have to worry about getting in at the bottom. Unlike the bull, who could buy in too high during a descent, the bear already has his selling price and knows his profit at any point along the line. He can cover his short sale with confidence and, incidentally, provide the market with some buy orders to reverse the downward trend. Many bears would probably be surprised to hear themselves described as saviors of the market, but the fact remains that by running contrary to the tide they help to keep it from becoming a flood.

Special Situations

Aside from speculative techniques for buying or selling stock, there are intriguing opportunities which arise from time to time to tempt the investor with a little money burning a hole in his pocket. These are known as "special situations." A special situation is a development within a corporation that has a profit potential if certain events come to pass. Usually it involves some readjustment of the corporate structure, and is therefore completely unrelated to the action of the market. What makes special situations attractive is the fact that the possible profit is often a known factor at the outset, as is the procedure necessary to realize it. This reduces the speculator's problem to an estimate of the likelihood of a happy ending, and the length of time it will take to achieve it. Usually, too, the securities involved are selling at a discount because of the complications of the situation, so the odds are also known: the difference between the discount and the potential payoff.

The principal hazard, of course, is that the anticipated events will not occur. Often they require court orders, ref­eree's decisions, or stockholder approvals, which may run counter to expectations. If they do, the venture may well be a total loss. And even a satisfactory conclusion may take such a long time that the profit, on an annual basis, is pretty meager.

In short, the special situation is somewhat like sunken treasure. Everyone knows there will be a rich reward for the fellow who can seize it. But everyone also knows that it lies full fathom five, and that the costs of salvaging it may not be worth the effort.

The classic special situations are corporate reorganizations, mergers, liquidations, spin-offs, realizations on undervalued assets or cumulative preferred stocks with arrearages, and, rarely, a legal suit. Here are examples of each.

Reorganization: This is an attempt to perpetuate or bail out an insolvent or failing corporation by realigning its capital structure. Old securities, too burdensome for the earning power of the corporation to support, are called in and ex­changed for new ones, which presumably will stabilize its finances. Usually some debts or obligations are defaulted, others extended into the future. New securities received are less than face value of old ones turned in, although prospects are improved by giving the firm a long-term opportunity to prosper. For example, in 1947, when the Chicago, Rock Island & Pacific underwent reorganization, its 4½per cent Series A Bonds were selling at $523.75 each. The new capital structure provided that each bondholder should receive in exchange $107.96 in First 4 Bonds, $217.96 in General In­come Convertible 4½Bonds, $139.43 in convertible pre­ferred stock, $200.76 in common stock, and $115 in cash. Value of the total package: $781.11, a capital gain of 68 per cent on the price of the bond exchanged. Obviously, $781 represented an improvement, although not a gain, for the unhappy bondholder who bought at $1,000, but for the special-situation speculator it was a tidy sum. In 1948, the new preferred paid $20 on the arrearages accumulated since 1944, and a $5 regular dividend which was maintained until the issue was called and converted in 1955. The common has also paid regular dividends since 1948. The speculator would not have known ahead of time how well he would do. But the prospect of reorganization was clear enough, and an analysis of the road's potential might have suggested that at a discount price of $523 per bond, the chances of profit were good, after the Rock Island had, as they say, "gone through the wringer." And so, indeed, they proved to be.

Merger:

This is the combination of two (or more) corpora­tions into a single entity. Since the assets, capital structure, and stock prices of each are likely to differ, an equitable ex­change must be figured out for the stockholders of the com­pany being absorbed. When Foremost Dairies merged with Golden State Co. in California, in 1954, Golden State share­holders were given one share of stock in the new corporation for each Golden State share held. In addition, they got 4/50 of a share of Foremost's 4½ per cent preferred stock, or $3.50, on the basis of the preferred's market value of $44. The common stocks were close in price: Foremost was at $26, Golden State at $25.75. Nonetheless, the $.25 difference, plus the $3.50, meant that Golden State's stockholders bene­fited by a capital appreciation of 15 per cent.

Shareholders in the Brooklyn Trust Co., or special-situation speculators who got aboard in time, did even more brilliantly in 1951, when a merger with Manufacturer's Trust was com­pleted. Brooklyn Trust common ranged in price from $165 a share down to $140, when the Korean War began. With the merger, however, the stock leaped to $236, an increase rang­ing between $71 and $96 per share.

Liquidation:

When a corporation goes out of existence, the assets remaining after all outstanding obligations have been met are distributed to the stockholders in order of priority. Creditors are satisfied first, and then the bondholders, whose investment, you will remember, represents a loan to the com­pany, not participating ownership. If there is anything left after this, it is distributed to the preferred stockholders and, finally, the common shareowners. Usually, the distribution is negligible; if the corporation were swollen with assets, there probably would be no need for a liquidation. Sometimes, how­ever, special conditions exist which make investment in a failing or bankrupt company exceedingly profitable.

Between 1948 and 1953, when Standard Gas and Electric was dissolved under the Public Utility Holding Act, the prospects of a liberal settlement spurred a rise in the price of the $6 preferred from a low of $86 to a high of $201, an increase of 134 per cent. Furthermore, in the split-up of Standard's holdings, each share of the preferred received 4.4 shares of Wisconsin Public Service, 2.6 shares of Oklahoma Gas & Electric, and 1.8 shares of Duquesne Light, a cluster worth— in early 1959—more than $250.

In the case of the L. H. Gilmer Co., liquidation proceedings developed a special situation whereby a tax refund of $4.40 per share would be allowed. Until that point, holders of Gilmer common were faced with a net loss of $1 per share, for the stock was selling at $11, and realizable assets totaled only $10. Now a profit of $3.40 per share was guaranteed, or 31 per cent on the investment.

Spin-off: Occasionally, a corporation will distribute to its stockholders some assets it has acquired or developed. This is known as a spin-off.

Panhandle Eastern Pipe Line, for instance, created the Hugoton Production Co. in 1948 by assigning it title to certain of Panhandle's undeveloped oil and gas lands, and giving it operating funds of $657,000 in cash. For this, Panhandle got 100 per cent of Hugo ton's stock. Hugoton's stock hence­forward was carried as a Panhandle asset, and its earnings contributed to the earnings Panhandle paid its stockholders. A year or so later, however, Panhandle decided to spin-off Hugoton. It gave stockholders a share of Hugoton for every two shares of Panhandle they owned. Hugoton (over the counter) is now more than $70 a share!

The spin-off is different from the capital distribution in cash, or the stock dividend, in that it usually involves a piece of something new, something additional, something extra. Had Standard Gas & Electric stayed in business, its distribu­tion of the three utility stocks would have been a spin-off. Delhi Oil, the central corporation of the sprawling empire of Clint Murchison, the Texas wheeler-dealer, has spun-off one after another of the enterprises Murchison has bought, created, brought to self-sufficiency, and moved out of.

Undervalued Assets or Earnings: Situations in this area are generally bargains that others have overlooked. For one reason or another, the price of the stock involved is con­siderably lower than its actual value. For instance, in 1950, the common stock of the First National Bank of New Jersey was  selling at less than  $100  a  share,  although its book value was $215 per share. In other words, the bank's tangible assets, after deduction of all debts, liabilities, and preferred-share obligations, amounted to $215 per share. The investor, in effect, could buy $215 for about $100.

The catch, of course, was that, although the bank seemed worth more dead than alive, it had no intention of liquidating. The sag in price below book value was simply due to a disap­pointing earnings performance, and, consequently, dividends that did not warrant a price of more than $100.

The following year was a prosperous one for banks. First National, with a healthy wad of capital to invest in expanding business, raised its per-share earnings from $7.80 to $18.18. The market price promptly climbed to $150, a handsome profit of 50 per cent for anyone who bought at $100.

A little study of annual reports will disclose other possibili­ties in "cash-rich" companies. Ordinarily, however, the spec­ulator must tread sure-footedly, for large unused cash funds, or book values in excess of market prices are often the mark of static, unenterprising companies. Assets locked up in a vault represent a certain reserve strength, but are of greater value if put to work to help the company grow and expand its earning power. Book value, you will find, is losing favor as a standard of evaluation, because it reveals little or nothing about earning power (except in the cases of public utility companies and financial institutions, whose liquid assets are their earning power). The average investor has little chance of capitalizing on book values unless, as in the case of First National, they are used to increase earnings.

Book value is meaningful today primarily to the financial entrepreneurs who comb the lists for a dormant, stodgy little company, quietly buy control of it, and then declare them­selves enormous dividends out of the idle cash reserves. If you have a diploma from this school of financial sharpshoot-ing, however, you should be writing your own guide to in­vestment.

Another form of undervalued asset is the sideline invest­ment of a company in securities, land, mineral rights, or sub­sidiaries. More dramatically—and more properly—these are known as "hidden assets." They are not a secret, but fre­quently they are carried at cost, which does not reflect their actual or potential value. Northern Pacific Railway's oil-land leases in the fabulous Williston Basin of North Dakota, Union Pacific's Sun Valley interests,  El  Paso Natural  Gas'  Rare Metals Corp., a uranium prospecting subsidiary, Inland Steel's Steep Rock ore bodies in Ontario—all these are typical "hidden" values which could contribute appreciably to the value of the parent stocks. But when?

Arrearages on Cumulative Preferreds:
 
For common stock­holders, a dividend passed is a dividend gone. But for holders of cumulative preferreds, a company's obligation continues. And for the speculator who manages to jump in at the right time, the profit at payoff time can be tremendous. A notable case is that of Curtis Publishing Co. (Saturday Evening Post, Holiday), whose $7 cumulative preferred in 1947 was in arrears nearly $57 a share. Depressed by this performance, the market price of the stock was down to $56 a share. From this point on, however, Curtis began to pay off the accumula­tion. By 1955, regular and back dividends of $120 had been paid, and, encouraged by this performance, the market price of the stock had risen to about $107 per share. For the investor who bought in about 1940, this was a long haul simply to stay even. But the speculator who got aboard in 1947 doubled his investment and received twice the usual amount of dividends.

Picking the time to buy such situations requires a sensi­tivity that few of us develop. There are, possibly, still some opportunities in cumulative preferreds, but which ones will behave as nicely as Curtis is hard to say. It is something of a general rule that opportunities in cumulative preferreds are richest at the start of a boom period, rather than after it is well advanced. Dividends are passed because the dollars just haven't been earned to pay them—a symptom of depression or recession. When the times and the earnings picture improve, the number of preferreds in arrears begins to shrink. In 1947, for instance, some 30 issues were in arrears a total of $860 million. Early in 1958, the number had dwindled to eighteen, totaling about $159 million. By January, 1960, it was nine issues, totaling $28.1 million. But if arrearages continue to mount, even in prosperous periods, the prospects become progressively dimmer.

Listed Domestic Preferred Stock Issues in Arrears
As of January 1, 1960*

Approximate Arrearage Issue	Per Share	Amount	Market Price 12/31/59	Cash Dividends Paid in 1959
Dividends Accrued for Less than 10 Years
Amalgamated Leather Co.-6%cv. Pfd.	$9.75	$243,750	$40½	nil
Chicago & Eastern  Illinois-A	2.00	150,000	31	$2.00
Fairbanks Whitney-$1.60cv.  pfd.	1.20	444,000	24⅛	2.40
Lehigh Valley Inds.-$3 1st..pfd.	3.38	753,080	26¼	nil
N.Y.,N.H. & Hartford-5% "A"	5.00	2,453,725	11¾	nil
Van Norman Inds-cv.  Pfd.	0.39	101,674	27⅝	nil
Dividends Accrued for 10 Years or More
InternafI Rys. of C.A.-5% cum.	54.75	5,475,000	63	nil
Reis (Root.)  & Co-$1.25  pfd.	13.75	1,562,715	89¾	nil
Virginia-Carolina Chem.-6% Part.	79.50	16,937,634	84½	nil

* Includes all dividend declarations made in 1959.

A final point: if prospects get too dim, reorganization or liquidation loom. These, too, are possibilities for the spe­cialist in situations. But when?

Court Decisions:

Litigation occasionally resolves a suit favorably for the stockholders by awarding tax refunds, patent rights, land titles, or other items which improve the company's earning capacity. When the SEC ordered Electric Bond & Share, a utility holding company, to relinquish control of a number of utilities some years ago, the stockholders received for each 100 shares owned: 21.6 shares of United Gas, 3.75 shares of Texas Utilities, 2.85 shares of Middle South Utilities, 2.2 shares of Florida Power & Light, 2.2 shares of Montana Power, 2 shares of Washington Water Power, and 1.6 shares of Carolina Power & Light. By early 1959, this package was worth about $1,763, while Ebasco itself, now a catchall con­sulting firm and investment trust, was worth $35 a share.

These, then, are some of the possibilities in special situa­tions. As has been pointed out along the way, the hazard to the speculator is two-fold: his timing may be off, or, worse, his information may be wrong. In the former case, his situa­tion may resolve itself, but only after such a lapse of time that the profit on an annual basis is, in fact, less profitable than normal dividends from a high-yield stock or normal ap­preciation of a good growth issue. In the latter case, the special situation may simply turn out to be a notable bust. The reorganization leaves nothing for the common share­holders, the merger doesn't come off, the liquidation realizes less than the investment, the court rules against the company. This happens, too. In fact, it happens more often than not Which is what makes special situations so terribly special.

Options: Puts and Calls

Aside from dealings in stock itself, there are two speculative techniques that involve privileges to buy or sell. One of these is the option—"puts," "calls," "spreads," and "straddles." The other is rights and warrants.

The option is a contract to buy or sell stock at a certain price at a later date. It is somewhat like a commodity future, very much like the option a builder takes on a piece of land or a buyer on a house. The builder may want a certain tract of land, but does not wish to pay the full purchase price until he learns whether local zoning regulations will permit him to build the kind of house he has in mind or whether he can finance the number of houses he wants to erect. Ac­cordingly, for a certain sum he buys an option on the land, which says that within 30, or 60, or 90 days he can have the tract at a stipulated price. If all goes well, he buys the land at the expiration of the option. If it doesn't, he simply lets the option lapse.

So with "put" and "call" options. A put is a contract that for a certain fee permits you to sell 100 shares of a selected stock at a certain price in the future. A call permits you to buy. These contracts are not handled on the floor of the Ex­change, but can be arranged by your broker with a member of the Put and Call Brokers and Dealers Association. Ad­vertisements of firms specializing in puts and calls can be found in the financial section of your newspaper. Here are some samples from ads of the week this chapter was written. A 30-day call in Chrysler at a price of 56Vi could be had for $275. A 90-day call in Parke Davis Chemical at 39 could be had for $387.50. A 10-month call in Scott Paper at 73 3/4 was offered for $1,825. Or a six-month put ia Royal Dutch Shell at 43¼ would cost $350.

Well, let's spend $275 and buy a call option on 100 shares of Chrysler for 30 days. (There is an additional $10 bite for Federal and state taxes on each 100 shares of a call contract, nothing extra on a put contract.) The price specified in the contract is 56½ This means that at any time within the 30 days we have the privilege of buying 100 shares of Chrysler at 56½, or $5,650. If we have calculated the market shrewdly, we may, during the month, see Chrysler hit 64. At that point, we may exercise our option and demand that the dealer give us the 100 shares at 56½. Meanwhile, we also ask our broker to sell 100 Chrysler short. So, we get $6,400 from the sale and pay $5,650 for the purchase, for a gross profit of $750, a net profit of about $385 after deducting the price of the option and some $90 in commissions for the purchase and the sale. Not great, but not bad considering the small amount of capital actually involved. For a man with only $275, a gain of $385 is handsome.

Now, if the market had backed off instead, and Chrysler had dropped, say, to 54, the option would simply be allowed to lapse. So, we would be out the $275 we had put up, but on the other hand, anyone who had bought at 56*6 would have a paper loss of $250, too.

Let's say, instead, that we'd bought the put in Royal Dutch for six months at 43¼. This would cost $350. The objective here, of course, would be a drop in price. If at any point Royal Dutch slumped, say, to 35, we would exercise our option, sell to the dealer at 43¼, and acquire the stock for delivery by asking our broker to buy at 35. Gross profit: $825. Net: about $398.

What about that expensive call on Scott Paper? The price of a ten-month contract at 73¾ is $1,825. Just to break even on the call, Scott would have to rise 18¼ points to 92, and to cover some $95 in commissions, it would have to move up another point as well. To make a meaningful profit over the life of the contract, Scott should probably shoot 10 points beyond that, to 103. What now? Canst foretell the future? Is there 30 points in Scott between now and then? The week the call was offered, Scott had spurted to 84. Does it promise another 19 points?

Perhaps the safer course would be to buy a straddle. This is a combination put and call. It is written on one stock, on one price, and for one period of time. In short, a straddle on Chrysler would give us the privilege of buying or selling the stock at 56Vi during the 30-day span of the contract. This way we stand to gain whether Chrysler rises or falls. As a matter of fact, both the put and call can be exercised, if the stock falls and rises profitably within 30 days. Of course, it had better rise and fall drastically, because a straddle, com­bining two contracts, costs almost twice as much as a put or call alone.

Another refinement of the option contract is the spread, which is similar to a straddle, except that it specifies two prices. The call is pegged a certain agreed-upon distance above the market at the time the contract is written. The put is established the same distance below. As with the straddle, the spread can be exercised both ways, depending on the logic of the situation. It also costs proportionately more than a single option.

Options are a fairly specialized bit of business. As can be seen, the advance or decline in market price must be con­siderable for any significant profit to be realized. Contracts can be written fairly close to the market for as little as $137.50, or the equivalent of 1⅜ points on 100 shares. But, of course, the price of the contract reflects the extent of the chance taken. In order to offer you a chance to buy Scott Paper at 73¾ ten months away, the seller's price must reflect the gain he (and you) think it is possible to make. He is very probably wrong to think that a powerful, active, profitable company like Scott will linger around 73 for ten months. But what is a reasonable or likely gain? Ten points? Fifteen? Fifteen would be very nice. Most investors would be happy to have 100 shares appreciate $1,500 in less than a year. Perhaps the seller of the option figures 15 is entirely possible, so he protects himself by upping the premium to 18¼—$1,825. If the stock doesn't do better than that, you'll have to let your option lapse, and the seller of the option will be $1,825 to the good.

The point is that as a method of investment options leave much to be desired. Few brokers would recommend them above outright stock purchase or, if your funds are limited, a piecemeal purchase like the Monthly Investment Plan. The option has value primarily for the professional trader who uses it as an adjunct to his transactions, and to the profes­sional or institutional seller of the option.

For make no mistake, options are almost always sold by pros and bought by the public. The Put and Call Dealer is simply a broker, seeking to maintain a market in his specialty.

The trader, who enjoys floor privileges and does not have to pay commissions, is free to utilize options in a number of ways to protect gains or hedge losses. For instance, suppose that as a professional you had bought duPont at 210 and spent a worrisome week watching it move sideways instead of streaking skyward, as you had expected. Maybe you got in at a peak. Maybe a decline is in order before the next advance. As a smart trader, one thing you could do is buy a put contract at around your purchase price. This might cost $350. Then, if the stock advanced as you hoped, perhaps to 230, you could sell, deduct the $350 from your $2,000 profit, and consider the premium a relatively cheap form of insurance. For had the stock declined to 190, you could have exercised the put and sold to the holder of your con­tract at 210. (You would use the shares you held at 190 to satisfy your put contract to sell at 210.) You would simply have recouped your investment—at a cost of $350—but you would be $1,650 ahead of the man who had bought and endured the slide unprotected.

Of course, the other alternative would be to shrug, con­sider the drop a loss on paper only, and wait however long it took for the stock to come back. But that is not the pro­fessional's way. He is usually in for the short swing. He needs his capital for new opportunities as they arise, day by day.

For institutional investors, the option is an almost fool­proof money-making device. This is primarily because the size of the institutional portfolio permits multiple transactions, so that it becomes almost immaterial whether the option is exercised or not. Suppose you are managing a large fund containing several thousand shares of a stock bought at 40. To keep things simple, we'll say that this is also the current market price. You sell a call option on 100 shares at 40, dated six months and 10 days ahead. This is the point at which long-term capital-gains tax advantages apply and is, therefore, the most frequently used time period for options. Your premium on this option is $700.

Immediately, you are $700 ahead. Or, figuring it another way, the cost of your stock has been reduced seven points to 33.

If the buyer of the option allows it to lapse, the premium can be regarded either as an extra dividend, in the sense that it is income accrued through the possession of stock, or as a return of capital, permanently reducing the cost price of the stock to 33. Another lapsed option under similar circum­stances would reduce the cost price to 26, and another to 19.

Sooner or later, of course, an option may be exercised. But sale of the stock at the price specified by the call option will not be costly to your fund. First of all, you will not have committed all of your holding to options; if there is a rise, you will benefit by it on all shares except those called. Or, if you have been fortunate enough to sell several options on it along the way, you will have reduced your cost to such a point that even a sale at 40 represents a good profit. To say it another way, a $700 premium on stock at 40 is the equivalent of selling at 47. A second premium increases the equivalent price to 54. Even a very solid appreciation for the buyer of the option may be a smaller profit than you have already realized on your several transactions—all of which, incidentally, are taxable at capital-gains rates.

The same process operates with the put. At some point you may have to acquire stock, but the premiums gathered along the way will so reduce the cost that it will not matter whether you pay more than the prevailing market.

These advantages available to the professional do not make the option any less satisfactory to the average buyer. If he picks a good stock and it rises sufficiently, his call will yield him a profit when exercised. The other side of the picture simply shows that the seller is virtually shockproof and therefore understandably eager to sell options. The average investor is better off concentrating on long-term in­vestments and leaving esoteric specialties to the specialists.

Rights and Warrants

When a corporation decides to issue additional stock to finance any one of a number of corporate ambitions, it fre­quently offers the shares first to its present stockholders. There is a principle involved here. Your 100 shares, or 50, or 10, represent a certain proportion of all stock outstanding. It may be an infinitesimal amount (10 shares of General Motors is .000000036 per cent of the 277.7 million shares outstand­ing), but it represents your share of voting control and of earnings, and should not be diluted. Accordingly, you are entitled to your proportional share of any new stock issued, so that your degree of ownership is maintained.

The corporation also knows that new stock, vastly increas­ing the current supply on the market, is likely to depress the price. (Sometimes even the announcement of a forthcom­ing issue will weaken the market price of existing shares.) For your sake and its own, it wants to minimize this effect. So new stock is usually offered at a discount, a point or 2 or more below the prevailing market price, to facilitate sale. If it is a lively and attractive stock, this discount makes it quite desirable and generally counteracts the depression.

In due time and in an orderly manner, the corporation announces all this to you. Ten million shares are outstanding. You own 100. One million more are about to be issued. Of these, you are entitled to 10, to preserve your equity. The price of the stock is 25. The 10 new shares are offered to you at 23. Do you want them? If so, enclosed is a card giving you "rights" to 10 shares. Rights, for flexibility, are nu­merous. For 10 shares, you might get 200 rights, for 100 shares 2,000. Properly endorsed and accompanied by a check for $230, your rights will stake your claim to a 10-share certificate, "when issued." If your company does not hear from you within a certain period of time, usually a matter of weeks, your rights will lapse.

To this point, the new stock is unavailable to outsiders. They, too, however, might like to get a few shares of this fine stock at a discount, and a market develops in rights. If you don't want any more stock, you can endorse your rights over to your broker, who then offers them on the floor of the Exchange, just like stock in being. Value is es­tablished by competitive bidding, although it would not be likely to rise above the amount of the discount. Otherwise, it would then be cheaper to buy existing stock at the market.

The purchaser of the rights now owns the privilege of buying 10 shares at a discount—and if that isn't enough, he can stay in the market, buying rights until he has accum­ulated from several sources options on 100 shares, or however many he wishes.

So far, the operation is completely routine. But students of the market know that certain patterns usually develop around an issuance of rights and that, if they move fast, there are profits to be made. One technique is to sell one's present   holdings   immediately   after   an   issue   of   rights   is announced, hoping thereby to capitalize on the maximum spread between the old stock and the discounted new stock. Having sold, the speculator then waits to see whether the market in rights declines. Usually it does, usually about in the middle of the period. (Enlivened interest plus a scarcity of rights keeps the market up at the beginning of the period. The pressure of unwanted rights after the company has ac­tually issued them often depresses the price later.) At this point, the speculator buys rights, thereby subscribing to his same holdings again, at the discount price. This would mean selling your 10 shares at 25, thus grossing $250. Pur­chase of rights for, say, $10 would permit subscribing to 10 shares at $23. Rights plus new stock would cost $10 less than the proceeds of your sale, a 4 per cent profit.

Rights also offer opportunities for arbitrage, which is acting on differentials that arise, usually in different markets, by selling high in one place while buying low in another. In so far as rights are concerned, arbitrage usually works this way. Assume the old stock is selling at $50 "ex-rights" (without the rights privilege). The new stock will be offered at $45. If the rights can be obtained at less than $5 per share, there is a profit potential. Remember, rights are numerous. In this case, it takes 20 rights to subscribe to one share. The market price of each right, therefore, will be fractional. Usually they are traded in 32nds or 64ths.

Now, the stock opens a trading day at 50, and someone is willing to sell his rights at 15/64ths, or a fraction over $.24 each. Twenty rights will cost $4.87. The discounted stock is $45. There is a spread of $.13 a share, or about 1/8-point, between the market price of the old stock and the cost of rights plus new stock. At this point, if he can move fast enough, and in sufficient volume, the arbitrageur sells the old stock short at $50 and buys 2,000 rights at 15/64ths. He makes $5,000 on the sale and will cover with stock (and rights) costing $4,987.50.

In the course of a busy trading day, this can be a nerve-racking procedure. The stock may move up to 50½or 51 or 52, or sag to 49 3/4. The rights will fluctuate with the stock. For the cost of rights plus new stock should never exceed the current price of the old. But all these price ad­justments are subject to human reaction times, and the tiny spread that gives him an edge is what the arbitrageur fights for. Small as it is, the profit is a known quantity. With frequent transactions, the arbitrageur can make a nice bundle.

Of course, by taking a short position, the arbitrageur feels some pressure to acquire rights entitling him to the shares he will use to cover. So if the supply of rights dries up, the arbitrageur may lose his differential in bidding up the price of the rights he needs.

This, as can be seen, is entirely a professional gambit, first, because it requires faster action than the average investor could get by telephoning his broker, and second, because the spreads are so slight they would almost certainly be con­sumed by the commissions involved. Still, due in large part to the arbitrageurs, the spread between the value of rights and the price of the existing stock is kept to a minimum, thus helping to maintain a stable market.

Warrants are somewhat similar to rights, but offer a pur­chase period considerably longer than that of rights. The warrant is a long-term - sometimes a perpetual—call on stock at a fixed price. Since conditions can change rather more drastically over the long life of a warrant than over the short span of a right, the speculative possibilities—up or down—are enormous. Atlas Corporation warrants sold at $.25 in 1942 and by 1946 were worth $12.50—an apprecia­tion of 5,000 per cent.

Warrants are not too frequently encountered. They are not regarded as a very impressive way for a corporation to acquire new funds.

In any event, speculations in rights and warrants are tech­nical specialties. The occasionally fantastic profits made through shrewd utilization of them may suggest to the inex­perienced that they offer easy pickings. Not so. For the new investor they are an interesting by-product of market activity, but techniques to know about—and scrupulously avoid.