Buying Stocks on Values

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

Continued from...The Market and Valuation of Stock Prices.

The Fetish of Watered Stock

It is astonishing to what depths of foolishness the fetish of watered stock has carried this country. The capitalization in stocks and bonds of its railroads, alleged to represent water, is not one-fifth that of the railroads of the British Islands, mile for mile. It is less per mile than that of any European country or of any government or privately owned railroad in Britain's self-governing colonies. I am not afraid to go on record with the statement that the American railroads are uneconomically undercapitalized, on their real value. The charge of watered stock made against the listed industrial corporations is equally absurd. The stock market had far more than squeezed out the water in that capitalization at the Stock Exchange prices current in 1921. It had squeezed blood.

As this is written, United States Steel common is selling under $80 a share. But stringent analysis of an industrial corporation offering the most exhaustive figures of any like company in the world gives a book value to the common stock of $261 a share. In the twenty years of its history it has put upwards of a billion dollars into the property in new construction, and so little is this watered in the capital that this new investment out of earnings is represepted in property account by only $275,000,000. The quick assets, largely cash, are over $600,000,000 alone, something like $120 a share with the whole concern scrapped. Where is the water? A common stock capital of $550,000,000 looks large, but it is only relatively large. Was not Morgan right if he called this intelligently anticipated growth? If his spirit could revisit the pale glimpses of the moon, surely he would be astonished at his own moderation.

And yet the distribution of the United States Steel common and preferred stocks, made in the major swing of a great bull market, was brought about largely by the most stupendous manipulation the market ever saw, under the direction of the late James R. Keene. And what was the end of that manipulation? It was to sell the common stock at fifty and the preferred stock at par. If the people who bought at those prices put the stock away after paying for it, would they have anything to regret even at the low market prices of August, 1921, attained after a major bear swing of unusually long duration?

Buying on Values

Probably some one will charge me with writing a bull argument about Steel common, because I set this simple illustration before the public. There again we have the inveterate prejudice against Wall Street. The facts I have stated are of record, accessible to anybody, perfectly well known to some of the people at least who were selling Steel common in 1921. But they were selling the stock because they needed the money, at a time when most of us needed money. When the Rothschild of the days of Waterloo, a week before the result of that battle was known, was buying British consols at fifty-four, a friend asked him how he could buy with such confidence on an outlook so uncertain. He said that if the outlook were certain consols would not be selling at fifty-four. He knew that with that uncertainty they must necessarily be selling below their value. Everybody needed money at the same time, and he was one of the few people who had any. I suppose no one will ever know how Russell Sage did it, but he could lay his hands upon more real money in a panic than anybody in Wall Street. He believed in quick and liquid assets, short-time paper maturing all the time, call loans and deposits-everything which could be turned into cash, not to hoard but to buy freely when people who had lost sight of values were selling.

A Story of Russell Sage

All sorts of stories are told of Russell Sage and his extraordinary frugality. That is not exactly the word I would use; nor would I call it miserliness, for he was anything but a miser. I remember the last time I ever saw him, when I was a young reporter, or at least a younger reporter. I was trying to find out something about a railroad property in which he was dominant with another financier of nation wide notoriety, or reputation. Lying is a word which is seldom used (or needed) in Wall Street, and it would be better to say that the other financier had given me information calculated to let me deceive myself if I was not exceptionally wide-awake. With the idea, therefore, of seeing if Mr. Sage's terminological inexactitude would differ from his comrade's, with enough significance to enable me to deduce something from the points upon which the two fairy tales did not agree, I went over to see Sage, who was always accessible to the newspaper men.

He greeted me in the most friendly way, as indeed he did anybody whose visit had nothing to do with money. I put my question and he rapidly changed the subject. He said: "Do you know anything about suspenders?" I was exasperated, but I replied modestly that I did not know any more about them than any other wearer. "What do you think of these?" said Uncle Russell, handing me over a pair certainly inferior to those worn by reporters, who are not, or certainly were not at that time, given to undue extravagance in such an article of attire. "What about them?" I asked. "Well, what do you think of them?" said Sage; "I gave thirty-five cents for those." Perhaps I was a little vindictive, having failed to secure even the poor information I had come to seek. I said: "You were robbed. You can get better in Hester Street for a quarter." Sage looked at me doubtfully. "I don't believe it," he said. But he was really troubled. It was not the difference of ten cents, and I would not have sworn to the Hester Street quotation. It was the principle of the thing. His judgment of values had been impugned.

Values and Averages

And there you have it. The things in which Russell Sage dealt had value. He had to know those values, and it was by knowing them when they had ceased to be apparent to other people that he died worth more than $70,000,000. The stock market barometer shows present and prospective values. It is necessary in reading it to judge whether a long movement has carried the average prices below that line or above it. In looking back over the various analyses of the stock market as a guide to general business, published in The Wall Street Journal since Charles H. Dow died, at the end of 1902, I find a typical instance of the application of the averages which may seem remarkable to the reader, although I regard it as the merest common sense. There is no one so unpopular as the man who is always telling you that he "told you so," but the illustration is impersonal.

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