It follows, from these considerations, that stock prices often seem to act in a contrary manner. They decline as a result of good news and rush up when there is news of strikes and other supposed calamities. This is simply because the market discounts the future.
The various influences that have been described in teract and produce a complex which is the price level of the moment. Now one set of influences seems to predominate, now another. One stock appears to react to this influence, another. stock to that. Even where there is a close correspondence between intrinsic values, or earning power, and an upward movement of prices, it must not be inferred that values and prices change simultaneously or in unison.
Altho, as has been noted, the prices of stocks are influenced by a multitude of complicated influences, it is safe to lay down the general principle that values tend to fix prices for periods of time long enough to eliminate temporary disturbances. Price and value continually tend to approach each other. The exact real value, the absolute intrinsic value, nearly always remains intangible, indefinable and unascertainable.
But as the stock market represents the largest and best single body of collective opinion obtainable in regard to business, we find that the line of prices is never long or very far apart from that of values. Thus, during the period 1897 to 1902, the lowest prices of twenty railway stocks were less than 42, while the highest average price rose to nearly 118 on May 1, 1901. The difference between the lowest and the highest for the period was 76, which represented an increase of 180 per cent. Mr. Pratt uses this as an illustration in substantiation of his principle that this upward movement of stock corresponds very accu rately to every possible test of value. He points out, for example, that during this same period the banks increased their clearings by 175 per cent. Further more, the value of the railroads, as represented by their surplus earnings available for dividends after all fixed charges and operating expenses had been paid, increased about as fast as the price. According to the reports of the Interstate Commerce Commission, the net earnings increased from $492 to $1,190 per mile, or approximately 140 per cent, while the divi dends actually paid out increased from $484 to $725 per mile. This comparison shows that the increase in
surplus earnings available for dividends was not so much less than the increase in price as reflected on the New York Stock Exchange.
12. Classification of price of the best known classifications of price movements is that of Charles H. Dow, one of the founders of the Wall Street Journal, who was himself credited with being a very successful speculator. This classification is based on the principle, generally accepted as sound, that in the long run prices are governed by the in trinsic value of the security, and the variations are the result of extraneous influences. Dow's cldssification is threefold: L—The "primary movement"—governed by in trinsic values,—which is the most powerful of the three.
2.—The "secondary movement," or the "swing"— governed by manipulation, by current reports and by the market machinery.
3.—The "tertiary movement"; in other words, the daily fluctuations in the market, which are caused by the most trifling circumstances—rumor, the operations of room traders or some other similar influence.
The "swing" may continue for weeks or even months. Prices of securities may be artificially in flated or depressed by the operations of a powerful syndicate, or clique, the members of which have cre ated unnatural conditions in carrying out a policy for which they have banded together.
Mr. Dow claims that the primary movement, or that based on value, lasts the longest and is ultimately the controlling factor in speculation, as it is in invest ment. The only speculators who have had any long continued success in the market are those who follow the primary movement. They disregard daily fluc tuations and carry their securities with a very heavy margin, or pay for them outright, waiting for the real value of the property to be reflected in the price of the security. Those who gamble upon the daily fluc tuations or who stake their hopes upon the success of manipulative efforts sooner or later come to grief.