Some of those most familiar with the subject at tribute the ebb and flow of business to psychological causes. Others emphasize the action of certain forces of nature, which, they say, determine the crop yield and thus affect values. Still others, and by far the greatest number, emphasize the structure of modern life, the interdependence of its various elements, and the complexity of business organization. Perhaps the most painstaking and voluminous analysis of the sub ject is that of Professor Wesley C. Mitchell in his "Business Cycles." He believes that crises have no regular period of recurrence, that business cycles do not always pass without interruption thru the same round of prosperity, crisis and depression, that there are many variations in intensity, and that no two periods show exactly the same combination of ele ments. There are diversities due to influences that arise from other than business causes, among which are the weather, earthquakes, war, epidemics and tariff changes.
To buy stocks solely because a graph indicates a certain cyclical movement is like putting the cart be fore the horse. One should go below the surface, analyze the reasons for the cycle, and study the nu merous exceptions. Professor Mitchell gives the fol lowing opinion on the subject : There is scarcely one of the suggestions made for better ing or extending the indices of business conditions but calls to mind various obstacles which hinder the getting of trust worthy data—the reluctance of private interests to divulge information, the diversity of business practices in various trades and sections of the country, the continual changes going forward in business organization, the alterations in the relative importance, and still more in the kinds and qualities, of manufactured products, the technical puzzles of statis tical classification and averaging. .
That is, business is too vast to be reduced to a formula. The world is constantly changing, and the changes make it impossible to forecast the future ac curately with only the past to judge by.
9. Management and character of the company.— If we consider the third great class of intrinsic factors, i.e., the company itself, it will be found that the price movements of many stocks, even whole groups of stocks, have little or no relation to any other influences. Thus, the shares of Standard Oil companies have gone up, during good times and bad, simply because of superlatively good management and an ever increas ing demand for the products, whether times were pros perous or dull. On the other hand, express company stocks have declined for several years because in this industry the government regulation of rates and the installation of a parcels post service had reduced profits.
Usually even those stocks that are rising and falling because of the condition of the companies themselves, feel, to some extent at least, the great market move ments which affect all securities. An extreme case of unusual, tho temporary, conditions, is that cited in a newspaper during the bull domination of the market in 1916.
If the speculator in stocks last week had taken no thought of intervention in Mexico, German submarines, Presidential politics, international diplomacy or the grand strategy of the war, but had bothered his mind with nothing more than the humdrum things of life he would have fared better than any of the wiseacres. 'Were his mind on sugar, he could have converted the demand for the necessity into a profit of 13 points in the stock of the South Porto Rico Sugar Com pang. Shirts would have given him a profit of 7 points thru the medium of the Manhattan Shirt Company.
In the same strain the article continues with illus trations of how given the upward trend of the market, the speculator, by means of the corporation stocks mentioned, could have drawn profits from collars, tea, tobacco, automobiles and other commodities.
10. must not be assumed that any branch of knowledge concerning the movement of stock prices is complete as regards the temporary or minor movements. This statement applies just as much to the man who considers himself an authority on a particular corporation as it does to amateurs who try to "play the market" by means of "tape-reading" or the use of a chart.
11. Potential may be well to amplify the statement that prices depend as much on potential or anticipated profits as on present or actual ones. It is often said that future earnings rather than pres ent dividends make prices. In the previous chapter, reference was made to the Wall Street maxim that for a stock to be a good investment it must be a good speculation. Of course this is only another way of saying, what has already been emphasized, that the stock market acts as a barometer. Speculators at tempt to anticipate, to foresee. The very meaning of the word speculation indicates that prices depend more upon future than upon present conditions. It is the future of which the speculator seeks to take advan tage. President Noble of the New York Stock Ex change, in the letter from which we have already quoted, writes as follows: We are told by one conservative publication that the prof its upon which these violent changes in price are based have not yet been secured. Speculation is always an act of an ticipation, and if profits were secured and big dividends established investors would take these properties out of the market and speculation would disappear.