Be very shrewd

The investor has two powerful enemies:

• market psychology and
• the uncertainties of the future.

His essential ally is:

• a low price.

General rules to follow:

Avoid secondary stock for investment if it sells at a full price. (That is, unless it is selling at a substantially less than indicated by his calculation of the value of the enterprise.)

• When a secondary stock is popular - because of some substantial improvement in its position and prospects - it is practically never a sound purchase for investment.
• On the contrary, the investor who bought it when it was unpopular and the price was low should now be strongly moved to sell it despite the promising development.
• This is his chance to cash in on his earlier shrewdness. It should not be missed.

There will be a number of individual instances in which this important principle will seem to work out poorly, because the company will continue to forge ahead and the average price of the future will be much higher than the level at which the investor sold.

• Such occurrences, while very possible, are exceptional and delusive.
• If they did not happen the market would never go to its extemes. They resemble the cases of large winnings at roulette, without which encouragement there would be no customers for the wheel.
• It would be too easy to supply examples from the past of secondary stocks that rose too far on favourable developments and then cound a much lower average level.

When a security is popular the relationship of its price to indicated value is an entirely different matter than when the same or a similar security is unpopular.

• The stock market often departs from a rational valuation of the securities it deals in, and is often prone to go to extremes in the direction of optimism and pessimism on the flimsiest of foundations.