Chapter 8 - Long Shot Speculation-Purchase Of Promotional Shares In Hope Of Great Gains

America is a nation of optimists. Most of us are willing to "take a chance" on a gaudy speculation if it appeals to us, even though we don't really know much about it. It's the hope of "getting in on the ground floor" of another Amerada, Ampex, IBM, or Texas Instruments that causes so many of us to get starry-eyed about some promotional stock selling at 50¢ a share.

Now there's nothing wrong with this zeal to make a fortune. America grew great because its citizens have ever been willing to take long risks in hope of great gain. The trouble is that most people enter these long-shot speculations without investigation. They're willing to buy shares in almost any new company merely because it's in an exciting and highly popular business, such as electronics, boating, plastics, or automation. They're buying on imagination instead of information.

Now this is all wrong. Even with all the facts at hand you can "get stuck" or buy into a company headed nowhere. But you do owe it to yourself to get all the information you can about the venture before plunging. Just a swift review of the primary facts will steer you away from many. What, then, are the facts you should have? What are the critical things to look for in a new enterprise?

The first thing to consider is the product or service to be offered. Is it in the mainstream of a rapidly growing demand? And is that demand likely to last? In 1955-1956 over four hundred uranium companies were launched. Their shares were feverishly snapped up by speculators, and swift market gains of 500%, 1000% and more were recorded in many of these radioactive issues. Yet where are they today? Not more than a dozen of these atomic hopefuls of a few years back survived or succeeded. So examine, and try to appraise product or service demand and the durability thereof. The "horse collar" is unlikely to stage a comeback!

Growing Industrial Sectors

In the 1960's, the attractive "demand" areas seem j to be in electronics, automation, photography, boating, j motels, boatels, bowling, drugs, appliances, new metals and alloys, automatic vending, stereo and hi-fi, consumer finance, publishing, scientific instrumentation, and packaged foods. So, if you seek speculation with unusual growth potential, look among the foregoing. Merely investing in a promising industry, however, is not enough. In a bright, hopeful company just starting out, there are three more things you must look for. The first is money. At least half of all new ventures fold up because they run out of capital. Be sure the money raised for this "dreamboat" you're looking at will carry it for the first two years. The worst sort of new venture is "operation rathole," where the management always needs "just a few thousand more" to stay alive.

Next after money comes management. At least ten per cent of all new companies are started by crackpots with some advanced and perhaps highly functional idea, designed plan, or patent. Such innovaters may have the best idea in the world, but they’ll fail with it because they don't know how to run a business: to manufacture, to control costs, to merchandise, to finance, to follow up orders or leads, or to keep correct records and accounts. So check on the men who are going to run this new business. Are they solvent financially? Have they had adequate practical or technical background and experience, preferably with a major company in a kindred line? Is there a plan for a balanced organization including competent accounting? So many promotions fail because the key man is too much of a specialist. He may be a wizard salesman but a poor production man. He may know sales promotion but have no idea about cost controls. These diverse talents can, of course, be bought or hired, but often the business founder insists on running a one-man band. That can be fatal.

The third important thing to look for in a new company is superiority of product or service. The new wares offered should be advanced, unusual and ahead of the field. Equally in products, attractive appearance, outstanding performance, durability and freedom from service or repair are vital. In mining and mineral enterprises, the quality and quantity of ore bodies or indicated mineral reserves are vitally important. It doesn't do much good to have a gold mine assaying $300 to the ton if the ore will shortly run out.

Finally, you have two more things to think about if you're really serious about speculation in a romantic new company. First, can you afford to lose everything you put in? And not even miss the money? And, secondly, make sure the company is not so overcapitalized that your chance of gain is small. Prefer a relatively small number of shares outstanding so that if unusual earnings do materialize the earnings on a per "share basis can rise rapidly. The thing most likely to make your stock soar is the existence or prospect of an upsurge in per share net earnings.

On the record, the chances of a new company's growing from zero to great substance are not better than one in a hundred. But this kind of speculation is exciting; it add zest to your life and it can indeed make a fortune for you if you're lucky enough to invest in the right company. Such classy blue chips as Amerada, Texas Instruments, Zenith, IBM, Litton Industries, Ampex, Louisiana Land, Minnesota Mining, and Outboard Marine all sold at one time for below $5 a share. All of them at the outset were regarded as risky promotions.

So while the percentage chances that a $1 stock will advance dazzlingly and make you rich are mighty slim, there is no reason why you shouldn't risk a few dollars in an attractive venture so long as you can afford it. Remember to check up on the new shares along the lines outlined; and be sure you're dealing with a reputable broker. Merely a tip such as, "I hear the big investment trusts are buying Apelike Electronics," is no excuse or reason for you to stake your hard-earned dollars without the slightest investigation.

Resume

1. Promotional stocks are untried and risky, with thin markets and usually meager or non-existent earnings.

2. Buy them only if you can afford a total loss.

3. Make sure the company you invest in has enough money to last for two years; and a management that knows what it's doing.

4. The company should provide an advanced or superior product or service in a growing industry.

5. Luck is probably more important here than the most detailed investment analysis.

6. Prefer promotional companies with relatively small amounts of stocks outstanding.

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