A Scientific Formula In Operation

Abstract

PROGRAMS FOR SPECULATION are often based not on buying when stocks are cheap and selling when they are dear, but on buying when they appear to be headed for higher prices (whether they are then cheap or dear) and selling when they appear to be headed for lower prices (whether they are then or cheap). But such speculative programs are never correctly described as formula plans. Formula plans, almost without exception, differ from such speculative programs in that they look to a more distant future than do the speculative programs; and, because they look to a more distant future, they are primarily interested in values rather than in mere market movements-which are, at times, completely divorced from values. When the followers of a formula plan decide to sell stocks, they do so not because the formula indicates that prices are already heading downward, but because it indicates that they have reached a level which, in the not too distant future, will be considered to have been too high from a value standpoint. This high price level may, of course, seem, at the time it occurs, not at all too high from the standpoint of such a criterion as yield, which is based on the mathematical assumption that present rates of dividend will continue, if not ad infinitum, at least so far into the future as to make changes thereafter completely irrelevant from a present value standpoint. The history of stock prices shows that shares do not continue to be too dear in this manner for any very extended period. They inevitably fall back into a relatively more reasonable price position-and usually far below a reasonable price position, down to a level that is as relatively cheap as the higher level had been dear. And the essence of virtually all formula plans is to outline a method by which at least some profit (with little risk) may be realized from those changes in price that succeed excessively high or excessively low prices-relative to values. All the better formula plans give recognition to the long-term or secular upward movement of stock prices.