See the colored sections below for the key points also covered in Straker’s Work
A New Idea for Speculators
Applying the Principles of "Dynamic Symmetry" to the Stock Market
By EDSON BEERS
How many people do you know who have successfully handled their investments in recent years? How many economists can you point to who have been right in their business forecasts? How many statisticians, how many counseling organisations and other experts can you list as having successfully forecast the market? The list is pretty small, isn't it? Did you ever wonder why? Did you ever stop to think that out of all the literally millions of man-hours of effort that go into the study and analysis of securities, markets, trends and conditions comes not much more than a turgid flow of mouth filling words that are just about as effective in solving your and my investment problems as have been the Roosevelt Administration efforts (sic) to balance the budget.
Why is that so? These men are sincere. This array of economists, statisticians, financial writers and security specialists are intelligent, hard working and honest. They are doing their best. Why then does that best fall so far short of the least of our investment information advisory needs?
Do you know why? Their premises are fallacious. These men almost universally are basing their work on faulty assumptions. How can they build a successful structure of forecasting on a foundation that won't stand up?
Must Apprehend True Nature of Things
We cannot hope to succeed at anything unless we know the true nature of that thing. How far would Columbus, Copernicus, Da Vinci, Washington and Ford have gone had each not recognized the true nature of his particular problem?
Does the farmer plant corn in September and expect to harvest it in January? Do we look for apples in June and strawberries in December? What electrician would use rope to wire a house? What plumber burlap for pipe? Would you use biscuits on your roof or tin in your windows? Of course not.
We know about these things by experience, by study and research. What a world of confusion we would live in did we not know the true nature of the many things that go to make life not only easy and pleasant but actually livable and possible.
But when we come to the stock market we act like the foolish farmer or the stupid plumber. We wander in a maze of inaccurate information, silly superstition and baffling bewilderment that must be fundamentally wrong. Why else would we not accumulate more worthwhile information? Why else is there no progress in economic and financial comprehension? How else can you account for the perfectly wretched record of forecasting except on the grounds that the fundamental beliefs on which forecasting has been attempted have been wrong?
What is the true nature of the market? It is simply this. The stock market is a living thing, a vital entity, a living, pulsating, vibrant organism. It responds to the laws of growth, development and enfoldment as accurately, as faithfully, as certainly as any organic matter. The same principles that govern the growth of plants, trees, beasts and men rule the stock market. The same laws that govern growth, motion, electricity and musical sounds apply to the stock market and other phenomena rooted in mass attitudes and actions.
Well, suppose that is so. What does it mean? What does it signify?
In the first place, it means that we can abandon the never-ending, everlasting fruitless search for cause and effect relationships. It means that we need not look farther than the market itself for the answers to our investment problems.
Secondly, it means that we have at hand a large body of information, knowledge, principles and law that we can bring to bear on our problem. We do not have to start from scratch and slowly and painfully build up, assort, analyze, study and weigh our data and evidence. Motion is still motion whether it is in a planet, an electron, a train, the price of a stock or commodity, or the rise or fall of a public idea. Forces may be no more than mental concepts, but they are quite as useful, quite as measurable, qualitatively, quantitatively and directionally, in markets and other social phenomena as in the physical fields of light, heat, electricity and sound.
Thirdly, it means that the problem of the markets is primarily mathematical. This must be so for the principles that govern physical phenomena, the laws of motion and those of biology can be expressed mathematically.
It follows further from this premise that since the market is a living organism we, as men, individually or in groups, by government, for instance, can have as little effect upon the course of the market as we have upon any other natural phenomena. We can no more stop a bear market than we can prevent a snow storm. We can no better induce a bull market than we can the sunshine.
Dynamic Symmetry
Required reading for all students of the market should be "The Elements of Dynamic Symmetry", by Jay Hambidge. Hamidge's interest was in art and in the orderly and correlating arrangement of the parts that go to make up a pleasing whole. Hambidge was searching for the secret to the exquisite beauty of Greek architecural, sculptural and other artistic forms, a secret that had defied solution these many centuries. He found it in dynamic symmetry, a symmetry of areas rather than of lines, a symmetry of motion rather than of rest.
He shows how fully conscious the Greeks must have been of the mathematical laws governing growth because their artisitic forms so accurately conformed to these laws.
Hambidge contrasts "static" with "dynamic" symmetry. Static symmetry is that simple symmetry which is relatively fixed. It is that arrangement of units of form about a center such as occurs in a snow crystal. It is also found in diatoms, radiolaria, flowers, and seed pods. Dynamic symmetry, in contrast, is that type of orderly arrangement of members of an organism found in shells, or the arrangement of leaves on a plant or in the structure of the human figure. It is a symmetry suggestive of life and movement.
The mathematical key to dynamic symmetry is found in a curve long known to mathematicians and variously called the "logarithmic spiral", the "geometrical spiral", the "proportional spiral" and the "equiangular spiral." This spiral contains an inherent law of proportion, namely, any three radii vectors, equiangular distance apart, bear the relationship that the middle one is a mean proportional to the other two. The curve may be expressed by the peculiar and unusual series of whole numbers 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.
This is a summation series, each term is composed of the sum of the two preceding terms. It is also a geometric progression; each term divided by the previous yields the same ratio. This is more readily apparent when the more exact numbers 118, 191, 309, 500, 809, 1,309, 2,118, 3,427, 5,545, 8,972, 14,517, etc., are used rather than the whole numbers.
This series exhibits a number of curious relationships. Any term divided by the previous term equals 1.618. Any term divided into a third term equals 2.618, the square of 1.618, into a forth term the cube of 1.618, etc. Powers of 1.618 divided by two produce the summation series. The square of 1.618 equals 1.618 plus 1 or 2.618. The quantity .618 plus .618 squared equals 1. There are many more.
Everyone knows that stock price movements tend to be symmetrical, recurrent and periodic, but the dynamic nature of time cycles and price ranges has not been generally appreciated. This summation series 1, 2, 3, 5, 8, 13, etc., explains away many apparent inconsistencies and otherwise baffling situations.
Observe how well the series hit many of the pivotal turning points in time when applied to the 1932 bottom: (D J ind 40.56)
No. of mos.
from bottomDate Dow-Jones ind. average
(high or low for month)3 Sept., 1932 81.39 High 5 Nov., 1932 68.87 High 8 Feb., 1933 49.68 Low 13 July, 1933 110.53 High 21 Mar., 1934 106.37 High 34 Apr., 1935 95.95 Low 55 Jan., 1937 183.17 High
Again, in the market since the March, 1937, top: (D J ind 195.59)
No. of mos.
from topDate Dow-Jones ind. average
(high or low for month)3 June, 1937 163.31 Low 5 Aug., 1937 190.38 High 8 Nov., 1937 112.54 Low 13 Apr., 1938 100.95 Low 21 Dec., 1938 155.03 High 34 Jan., 1940 53.29 High 55 Oct., 1941 .....
If you will count off this series by days, by weeks, or by months, starting with important tops or bottom, you will find it a valuable guide to probable turning dates.
Nature abounds in pleasing symmetry, in dynamic symmetry, the fluid symmetry of life and of motion, and we find it pleasing because we, ourselves, are in harmony with that symmetry. The same principles that govern the construction of shells, leaves, plants, trees, birds and animals have entered in to our own construction, have made our skeleton, muscles, flesh and form. We call those things beautiful that are made like ourselves. We call those artists great who can reproduce those natural forms of which we are a part.
Music is not noise when it conforms to the laws of proportion. We delight in and thrill to music for the same reason that truly natural forms appeal to our vision. The rythmic cadences and harmonious chords awake their sympathetic response in us because we, ourselves, are examples of the same scheme of architecture that built the musical composition.
But these same laws of proportion, these same principles of growth, this same scheme of architecture are all at work in the market.
We know how cell growth proceeds by halving and doubling. We know how the amoeba, a simple one cell organism splits in two, the two into four, the four into eight, etc. We know that in music octaves are obtained by doubling or halving vibrations per second. The same principle is at work in the market.
Observe how often stocks double in price or cut their price in two. Observe how often the Dow-Jones industrial average has doubled or halved its level. This average rose to 80, from 40, in 1932; to 110, from 50, in 1933, and from 95 in 1935 to 196 in 1937. The 1937 high was about half the 1929 high of 386 and the 1938 low of 97 was about half the 1937 high.
Observe the geometric series 3, 6, 12, 24, 48, 96, 192, 386 and see how well it marks off the movements of this average.
We have long heard of one-half and two-third reactions. Some claim the fraction should be five-eighths. The right figure is 61.8%, the primary relationship in the summation series 2, 3, 5, 8, etc.
A Concept
Think of the market as an electrical current following the line of least resistance through a magnetic field created by points of energy generation spread regularly in the plane of time and price; each point sends out periodic waves as when pebbles are successfully thrown into water. Where the waves cross, symmetrical (static as well as dynamic) patterns are formed and the market flows in these patterns.
The result is the same as would be caused by a collection of pendulums swinging up and down along the price scale. The pendulums vary in amplitude (the distance traveled in one stroke), vary in period (the time required for a complete cycle) and vary in the angle at which they swing (not all swing perpendicular to a horizontal price line - that is, why the market comes down faster than it goes up).
This may sound pretty complicated but you will find the concept relatively simple and thoroughly practicable once you put it to use.
It becomes readily apparent why the "technicians", those who use charts and market behavior as a basis for their forecasts, have the edge on those who use more "fundamental" factors and reasoning. It is because the market lives, because life is a machine, and because life processes are mechanistic that recurrent, periodic, and symmetrical patterns are so evident in market behavior.
Dow did a wonderful piece of pioneer work in developing his theory; his disciple Hamilton made valuable contributions as have such men as Rhea and Collins, but we can take the further step or utilizing this dynamic concept of the market and thereby secure greater accuracy of time and level in our forecasting and project our forecasts over much longer periods.
A forecast (based on these principles), submitted to Barron's in June, 1935, and published in that magazine in the issue of April the 12th 1937, needs no apology. The forecast was for:
- A bull market (began March, 1935) into October, 1936.
- A minor bear swing into October, 1937.
- A period of improvement reaching boom proportions in 1939 or 1940.
- A panic and depression culminating in 1943.
This forecast has worked reasonably well to date, but now requires some modification, as appears in this conclusion.
The Outlook
The same article mentioned the natural division of economic history into time periods of around 34 months and traced the periods from August, 1921 into July, 1932. Bringing this up to date we have:
- September, 1929-July, 1932, 34 months -- Steady liquidation and deflation. (Sowing the seeds for the New Deal).
- July, 1932-May, 1935, 34 months -- Timid capital, lack of confidence, vacillating markets. (A period of adjustment to the New Deal).
- May, 1935-March, 1938, 34 months -- The Roosevelt recovery and collapse.
- March, 1938-January, 1941, 34 months -- Another period of timid capital, lack of confidence and subdued markets.
- January, 1941-November, 1943, 34 months -- Armament boom inflation and relapse.
This is not a new bear market. Rather have we been seeing the winding up of the period of preparation prior to a new bull market. The Dow-Jones industrial-share level called for on the initial rise (not far off) is 165. After a sizable reaction the market should then begin its real climb up to the 300 level.
But what about the war? How about the defense effort, the billions to be spent, the heavy taxes? Suppose Britain is overcome. What then? Can stocks sell higher with such great uncertainties hanging over them?
I suppose the vast majority of investors will choose to continue a process self-torture with that kind of thinking. Maybe Schopenhauer was right in saying, "Every man takes the limits of his own field of vision for the limits of the world."
As for me, I will take my chances with the pendulums of dynamic symmetry.
A most important investment principle is that cash (or its equivalent) is sometimes a more attractive holding than stocks.
By this time the prudent investor should have shifted from volatile stocks to stable investments (good grade preferreds) to be prepared to re-enter the speculative markets later this year, probably some time between July and October.
Reasons are lacking for changing the broad financial outlook outlined in June, 1935. These called for:
- A bull market (began March, 1935) into October, 1936;
- A minor bear swing into October, 1937;
- A period of improvement reaching boom proportions in 1939 or 1940;
- A panic and depression culminating in 1943.
For five months now we have witnessed the procession of tops in individual stocks and groups so characteristic of the distributive process. Many of the leaders of the 1935-36 bull swing reached their peak last November, but the market was given an appearance of strength during the winter months by rotation of activity in such groups as the coppers, steels and rails - typical tail-enders.
The June, 1935, forecast stated, "The well-advised investor, who held the best stocks from July, 1932, into February, 1931, then shifted into bonds, should by now have shifted into second-grade stocks to hold into the fall of 1936. If the foregoing schedule works out, he should then shift to more stable investment for a period of seven months to a year, and then be prepared to shift to thoroughly speculative issues."
Seven months from November, 1936, would be June, 1937, twelve months November, 1937. A buying opportunity some time between June and November appears a reasonable expectation. Duration of the recession will, of course, depend on the rate of decline. A recession to around the 160 level appears not-unreasonable expectation in view of the 100-point advance since early 1935.
Manifestly the best time for making selections for the next bull swing will be after the market has experienced the major portion of its recession, but it is perhaps not too early to consider likely candidates for purchase.
The next bull market, to begin later this year, should be fully as profitable as the two already witnessed in this recovery cycle (July, 1932-February, 1934 and March, 1935-November 1936) but proper selections will be highly necessary for profitable results. The search for likely issues should be among the more speculative shares, especially among those representative of companies in industries which for one reason or another have not yet joined the prosperity procession.
1935 SELECTION
Price Price Price Appreciation Am. Smelting... 44 93 90 104% Chrysler Corp... 49 130 118 141 Johns-Manville... 50 121 131 162 West'house Elec 52 153 135 160 Average appreciation April 7, 1937, 142%. Average appreciation Oct. 17, 1936, 154%
- October prices are given because Mr. Beers in 1935 stated that the stocks he then recommended should be held only until October, 1936.
Four suitable candidates are the following:
Issue Recent Price Electric Bond & Share 21 Southern Pacific 56 United Aircraft 28 U. S. Industrial Alcohol 39
Each of these companies is the dominant enterprise in its industry. Electric Bond and Share is the outstanding holding (and investing) company in the utility field; Southern Pacific, measured by first track mileage, the largest transportation system in the country; United Aircraft is one of the world's largest aircraft manufacturers; U. S. Industrial Alcohol is the dominant domestic alcohol producer.
These companies have thus far failed to participate in any large way in reviving prosperity, largely because of forces without the control of management, Electric Bond and Share because of political pressure, Southern Pacific because of difficulties common to the railroad industry; United Aircraft because of the infancy of the industry; U. S. Industrial Alcohol because of industry readjustments brought about by prohibition repeal and subsequent competition. These restrictions promise to dissolve in more or less degree over the next several years.
These four stocks well qualify under the 11 "stockholder demands" outlined in the June, 1935, article. All of the companies are in good financial position; all are reasonably well seasoned; number of shares outstanding is in each case reasonable. (Electric Bond and Share with 5,270,000 shares is slightly over the 5,000,000-share maximum.) Each of the stocks has some kind of leverage; none of the companies faces prospects of labor or raw-material difficulties. Consumer resistance to high prices is not a factor in the outlook.
All the stocks are medium-priced. (Southern Pacific is the only one above the 50 maximum.) Earnings in each case have been nominal in recent years. (Southern Pacific, which earned $3.84 last year, is an exception, but this stock, because of the territory served by the road, the substantial capital ahead of the common, and the company's wide interest in lumber, land, coal, steamship, oil, traction, mining and power companies, could show substantially higher earnings over the next several years.) None of the shares pays a dividend except United Aircraft (50 cents last year). All the companies possess good management.
These shares sold several times their recent prices in 1929. Electric Bond and Share sold for the equivalent of 567, Southern Pacific at 1571/2, U. S. Industrial Alcohol at 2436/8 and, although comparable figures are not available for the present United Aircraft stock, the parent-company shares, the old United Aircraft, sold as high as 162.
Seldom is a stock worth buying for an extended swing unless it shows prospects of doubling in value. Each of these stocks could easily double or better over the next several years; their average performance should compare favorably with that of the Dow-Jones averages.
In his earlier article Mr. Beers explains his market philosophy from which the forecast, repeated in the foregoing article, was developed, and enumerates the qualifications he requires of specific securities.
Throughout creation, there are eternal, everlasting laws of mathematical sequence.
Every created thing carries its own mathematics along with it. In other words, all things respond to the laws of their species. The stock market moves in accordance with its own set of laws: business activity responds to its set of laws; credit conditions are governed by their own laws; electrons, atoms, molecules, individuals, families, nations, the world, the solar system, the universe, all are and move because of perfectly definite, in many cases mathematically demonstrable laws.
All motion is the result of force.
The stock market is the resultant of many forces, but there are three dominant: A constant push downward (gravitational), a steady push to the right (time) and a variable force upward (manifestation of the will to buy - psychological). Since the first is a constant the laws governing the second and third forces will suffice - laws of time and laws of mass psychology.
This is logical, too, because these are the two most inflexible and nearly fixed immutable factors entering into any and all economic situations. Men are today dominated in their business actions by the primary emotions of greed and fear just as they have been for many thousands of years (psychology), and a year is only a few seconds different today than it was several thousand years ago (time).
It is vital that the investor have as a foundation a philosophy of investment that will be truly fundamental to his operations, that will not have to be modified with every superficial change in the political, financial and business situation, that will not have to be changed for inflations, wars, earthquakes or dust storms.
Space does not permit of expounding stock-market laws at length, but here are a few:
Law of Post-war Sequences: Developed and expounded by Colonel Ayres, the Law of Postawar Sequences has no exception in modern times. The sequence is a war boom, a sharp, short primary postwar deflation, a long period of reconstruction and urban prosperity, a severe and enduring secondary post-war deflation, a long period of prosperity. Commodity prices attained peak levels of war inflation in 1815, 1864 and 1920. The foregoing sequence was carried out in every case. In 1830, or 15 years after the peak inflation of that time, the nation emerged from the severe and prolonged secondary post-war depression. In 1879, or 15 years after the peak inflation, the nation emerged from the secondary postwar deflation. Fifteen years after the 1920 inflation is the year 1935. The law involves time and mass psychology.
Rule of 7-8 Year Cycles: There is a regular seven to eight year cycle in business and market activity. This is not a law because it cannot be phrased as to eliminate variations. It is a fact though that British business for the past 240 years shows average cycles from top to top and bottom to bottom of eight years. It was seven years from the bottom of 1896 to the panic of 1903; seven years from the panic of 1907 to the panic of 1914; seven years from 1914 to the panic of 1921, eight years to the peak of 1929; seven years from 1929 suggests 1936 as an intermediate peak; seven or eight years from 1932 suggests 1939 or 1940 as the peak of the current inflation.
Law of Three Times and Out: It is a psychologial law that human nature in mass makes three efforts, can stand only three failures. Result in market is three approaches to top - three approaches to bottom. Three declines remove the timid and fearful, leaving only courageous holders - no one is left to sell. Conversely, three rises use up all the hopeful capital. No buyers are left. In the anticipated rises from 1932 to 1939-40 expect three rises: 1932-1934; 1935-1936; 1937-1939 or 1940.
Law of 30-35 Months: Economic history divides into 30 to 35 month chunks of time. It appears to require two and one-half years to three years for a group of people to become accustomed to a change. No exceptions back to 1860. Recent divisions were:
- August, 1921~July, 1924: 35-months. A period of hesitant, rising and declining markets, timid capital, political uncertainty at home and abroad.
- July, 1924-March, 1927: 32-months. Return of confidence, rapid expansion of business, universal prosperity and rising markets.
- March, 1927-September, 1929: 30-months. Rapidly rising markets, credit inflation resulting from easy money situation created by the Federal Reserve Board in its efforts to return Europe to the gold standard.
- September, 1929-July, 1932: 34 months. Steady liquidation and deflation.
Thirty months from July, 1932, was January, 1935; and 35 months June 1935. The past three years have been characterized by timid capital, lack of confidence, vacillating markets. A change was to be expected in the period January-June, 1935. The market turned in March, 1935. The background changed in May with the Supreme Court decisions. Expect two and one-half to three years expanding business, increasing prosperity, higher markets.
Several dozen laws of measurement of time and psychology as they apply to the stock market are in back of the forecast at the beginning of this article. Application of the laws as we move into 1939-40 may justify minor changes in expectations, but the odds, mathematically calculated, are heavily in favor of the forecast.
The stock buyer becomes a partner in the enterprise into which he buys. What should he demand of this partnership?
- Strong financial position.
- A seasoned company.
- A reasonable number of shares outstanding. (under 5,000,000).
- Prior capital (leverage).
- No potential labor difficulties.
- No raw-material problems.
- No consumer resistance to a high-priced product;
- A reasonable price (50 or under),
- A favorable outlook for the industry beware of companies with several years of profit behind the,.
- A low or no dividend.
- GOOD MANAGEMENT.
Speculation - Members on the New York Stock Exchange during the week of March 13 traded 6,874,405 shares for their own account, or 21.25% of total Exchange transactions, becoming to compilations of the SEC. In week of March 6 members traded 7,066,373 shares for their own account, or 21.39%, against 19.70% in the previous week.