ABSTRACT
The kind of stocks we want: the speculator’s viewpoint The specications of the kind of stock we want to chart are fairly simple, and they are few. We want a stock that will enable us to make a prot through trading operations. That means a stock whose price will move over a wide enough range to make trading worthwhile. There are those who are concerned mainly with safety of principal and the assurance of income from a stock. For them, there are (EN9: or were) stocks that afford a considerable degree of stability. You may (and probably will) want to keep a substantial part of your total capital in stocks of this type. They move in a narrow price range. They are extremely resistant to downside breaks in the market. They are also (and necessarily) unresponsive to fast upside moves in the market as a whole. These stocks are highly desirable for the conservative investor. They are not, however, the most suitable issues for trading operations, because their swings are small, and commissions would tend to diminish the narrow trading prots that could be taken. Also, they do not make the sharp, clear chart patterns of the more speculative issues, but move in rounding, sluggish undulations. (EN9: These remarks reflect a bygone time. The described stocks by and large went the way of the Dodo. When T can disappear from the market as a factor there is no place to hide, except in bonds, which, when stagnant, only lose real value at the rate of inflation and loss of purchasing power of the dollar. And even bonds should be subject to frequent reevaluation using the tools described in this book.) (For illustrations in this chapter, see Figures 20.1 through 20.4.)
To amplify this comment and explain a bit about what underlies what we are doing, let us assume a certain company has two issues of stock, a preferred and a common. Because (we will assume) the concern has a certain steady minimum prot that it has earned for years, sufcient to pay the preferred dividend, the continuance of these dividends seems practically assured. But the dividends on the preferred are xed at, let us say, 6%. Now the common stock gets all that is left. In one year, there may be $0.50 a share for the common stockholders. The next year, there may be $2.00 a share or four times as much. In a case like this, if there are no other factors, you would expect the preferred stock to sell at a fairly steady price without much change, whereas the common stock is subject to a “leverage” and might shoot up to four times its former value. The more speculative issues represent either a business that is, by its nature, uncertain as to net prot from year to year, where the volume of business or the prot margin uctuates widely, or one in which the majority of the “sure” net prot has been sheared off for the benet of senior obligations. There are also other factors that affect the speculative swing of a stock, and, as a result, one issue may be very sensitive and another extremely conservative, and between them there would be all shades and degrees of sensitivity or risk. It is enough here to note briey that the nature of the business itself does not always account for the habits of the stock, because the other factors may be very important. But most stocks have a fairly well-dened “swing” power, and you can usually determine by past performance how a stock will behave in the future as to the extent of its swing. (EN9: Or we might say, short-term volatility and long-term range.)
Incidentally, for short-term trading (EN9: amusing in the modern context; by short-term trading Magee means trading of trends of shorter length than Dow Waves), we are thinking about the habits of the stock that are only partly determined by the business it represents. Purchase of stock in one company that has a somewhat uncertain or uctuating prot record may be more conservative than purchase of a highly leveraged stock of another company whose basic business is steadier and more conservative. We will take up the matter of determining these risk constants a little later.
