CHAPTER VI. WHAT STOCKS NOT TO BUY
A great deal more can be said about stocks you should not buy than about stocks you should buy, because the list is very much larger.
Stocks not listed on the New York Stock Exchange, as a rule, should not be bought by a careful speculator, but as stated in the previous chapter, there are exceptions to that rule. Billions of dollars have been lost in the past by buying stocks that have become worthless. A few years ago a list of defunct securities was compiled, and it took two large volumes in which to enumerate them. New ones have been added to them every year. Therefore, it is very important that you should give careful thought to the subject of what stocks not to buy.
Nearly all promotion stocks (stocks in new companies) are a failure. An extremely small percentage of them are very successful, and the successful ones are referred to in the advertising of the new ones; but, on the basis of average, the chances are you will lose your money entirely in promotion stocks. We believe that most of the promotion companies are started in perfectly good faith, although some of them are swindles from the beginning; but no matter how honest and well meaning the organizers are, the chances of success are against them. Therefore, we say that promotion stocks should not be bought by the ordinary man who is looking for a good speculation, because his chances of making a large profit with a minimum risk are very much better when he buys stocks listed on the New York Stock Exchange and uses good judgment in doing so.
Among the listed stocks there are many you should not buy. First of all, eliminate them by classes. Do not buy the classes of stocks that are selling too high now. You may say that there are some exceptions in all classes. That may or may not be so, but in any event, you have a better chance of profiting by confining most of your purchases to the classes of stocks that are in the most favorable position.
As a rule, when stocks are first listed, they sell much higher than they do a short time afterwards. Of course, that is not always true. It is more likely to be true when a stock is listed during a very active market, when prices are more easily influenced by publicity. The high price of it is usually due to the fact that publicity is given to it, and as soon as the effect of this publicity wears off, the market price of the stock declines.
It is a good rule never to buy stocks that brokers urge you to buy. Your own common sense ought to tell you that a stock that is advertised extensively by brokers is likely to sell up in price while the advertising is going on and will drop in price just as soon as the advertising stops.
Many people notice that and they think they can profit by buying when the advertising starts and sell out when they get a good profit, but the majority of them lose money. The stock may not respond to the advertising, or if it does go up, they may wait too long before selling. Those who do sell and make 200% or 300% profit in a very short time are almost sure to lose it all in an effort to repeat the transaction. Many of those who read this know it is true from their own experience.
You should leave such stocks strictly alone. You may win once or twice, but you are sure to lose if you keep it up. As a rule stocks of this kind have very little value and the brokers who boost them make their own money from the losses of their foolish followers.