The Market and Valuation of Stock Prices

From The Stock Market Barometer by William P. Hamilton, published in 1922

Continued from..."Water" in the Barometer.

Stock Profits and Income Tax

Conversely, a bull market starts with stocks much below their real value, certain to be helped in anticipation by the general improvement in the country's business which the stock market foresees and discounts: In the long advance values will be gradually overtaken, and toward the close of the advance an uninformed public, incapable of recognizing the bargains which were offering when the movement started, is buying on prospects only. Experienced traders in Wall Street say that when the elevator boy and the shoeblack are asking for bull tips on the market it is time to sell and go fishing. When I sailed for Europe early in October, 1919, to report on financial conditions in Britain and Germany, the market was in the last sanguine stage of a long bull movement. The inflation bull argument then was most curious. It was that the people who had large profits would not sell, and could not sell, because in turning those paper profits into cash they would show such a large earning of income for the year that the tax-gatherer would take a prohibitive share of the profits. We analyzed this fallacy in the smoking saloon of the Mauretania and at least some of the business men on board concluded to divide up with Uncle Sam. The argument was preposterous in itself, because it pictured the most vulnerable kind of bull account that it would be possible to conceive. It was glaringly up to be shot at, and the poorest marksman could fill it full of holes. Rough seas stove in five of the Mauretania's lifeboats, and put the wireless apparatus out of commission for the last three days of that voyage. When we arrived at Cherbourg we learned that the stock market itself had begun to free the bulls of stocks from the embarrassment of paying excessive income tax. They had not much to worry about in that respect by the end of the year, for the paper profits had been rapidly extinguished.

Well-Distributed Holdings

There is no way of permanently holding up artificial prices created by an overbought market. One great protection to the public is in widely distributed stock ownership. When a single group in Wall Street owns practically all of the stock in a property like Stutz Motor, that group can call the market price anything it chooses. It will not be the "market" price because there will be no real market. Abraham Lincoln pointed out long ago that you could not talk five legs onto a dog by renaming its tail. All the stocks in the average have shared in the wide and healthy distribution of securities. The average holding of Pennsylvania (which has the greatest capitalization of any of the railroads in our average) or of the five and a half million shares of United States Steel common is nothing near one hundred shares for each holder. So far as the public is concerned, there is, indeed, safety in numbers.

"Valuation"and Market Prices

To the inquirer quoted at the beginning of this article, who asks; "What about water?" we may answer, well, what about it? He cannot show us, any water in the averages. We may go further and tell him that he cannot show us any water, at prices and not at the nominal par, in the whole Stock Exchange list. For the railroads, no valuation which could be instituted by Congress and carried out by a committee of the Interstate Commerce' Commission could begin to compare with the market prices of the securities themselves, taken in a normal month of a normal year, with the prices not inflated on overestimated prospects or deflated by forced liquidation, brought about largely to protect unsalable securities and warehouse receipts not associated with the railroads or the standard industrial companies in any way.

Every scrap of intelligence and knowledge available, uninfluenced in any real degree by manipulation, has been brought to bear in the adjustment of the stock market prices. Reproduction value, real estate value, franchises, right of way, good will - everything else - have been brought into the free-market estimate in a way which no valuation committee appointed by Congress could ever attain. The Interstate Commerce Commission's valuation of a railroad has merely historical worth - if it has any. As a true estimate of the property, if the method of fixing it were commonly just, it is out of date the moment it is printed, or, indeed, months before it is printed. But the Stock Exchange price records the value from day to day, from month to month, from year to year, from bull market to bear market, from one of Jevons's cycle states to another; and the bankers of America and any other civilized country accept that valuation and advance real money on it, without reference to the arbitrary estimate of the Interstate Commerce Commission.

Previous..."Water" in the Barometer. Next...Buying Stocks on Values.

From The Stock Market Barometer by William P. Hamilton, published in 1922