Feeling Safe With Open-End Stocks
When the phrase open-end was first used, apparently it meant merely that a company was continuing to issue additional shares of its stock, and to redeem shares, and that the total number of shares outstanding might rise or fall. But the meaning of open-end has grown to include all of the laws, regulations, and customs that distinguish what are now the principal group of American investment companies from the older type called closed-end, as well as from other corporations aside from investment companies. Open-end is a legal expression; mutual fund is the popular label with the same meaning.

Poor advice and erratic, emotional behavior result in stock market and investment losses, regardless of how good your advice was. Poor advice can come from friends, brokers or advisory services who just happen to get it wrong. Obviously, it is impossible to detect just how poor the advice is until it is too late, and guarding against it is virtually impossible—unless it is disregarded altogether.

Emotionalism is another matter. Carefully controlled classroom experiments in speculative behavior have shown that, even when relieved of paying commissions on numerous transactions and of the emotional involvement of handling real money, people tend to chalk up heavier losses than gains very much as they do in actual investing. Furthermore, the lack of correlation between speculative success and intelligence or professional investment experience, suggests that some set of as-yet-unknown emotional factor is at work.

Donald I. Rogers, Business and Financial editor of the New York Herald Tribune, quoted an unnamed broker to the effect that many investors lose money intentionally (on an unconscious level) in order to assuage deep feelings of guilt. Whether this is so, the fact is that few investors are really successful in the market. They tend to buy a stock on the crest of its rise, hold it while it goes down, and sell in disgust either before it recovers or when it rises barely enough to produce a slim profit.

Investing In Large, But Not Big Companies
Because so much is said and written about the giants, an investor may easily fail to notice the other large companies. But a major feature of American business organization is the numerous corporations, each one large compared to the average, but small alongside the giants.

The progression from constant-ratio formulas to variable ratios is completely logical. Once an investor understands the principles of constant-ratio planning, he might well wonder about the feasibility of adding some flexibility to a formula by increasing the ratio of common stocks when the market is low, and cutting back when the market is high, thus maximizing purchases of stock at low prices and minimizing risks at high levels.

This is precisely what the variable-ratio plans attempt to do. Understanding the objective is easy attaining it is somewhat less so. There have undoubtedly been more variable-ratio plans invented than any other type, and a high percentage of them have wound up in the ashcan. Some worked extraordinarily well over a period of time, and then became worthless because of changing conditions in the market. Others were obsolete almost as soon as devised. But variable ratios are by no means dead. On the contrary, at the present time there are probably more formulas of this type in use than any other.

The idea of increasing or decreasing the proportion of stocks (as the market crosses a predetermined point or moves into or out of a fixed “zone”) applies to all variable-ratio formulas. The 50-50 proportion specified at the median can be changed, according to the needs and tastes of the investor, with other proportionate changes up and down the scale. For example, an investor willing to build more risk into his plan might fix a 65 percent proportion of stocks at the median, ranging from 35 percent at high market levels to 95 percent at the lows.

Stocks And Corporations
Corporations have a large amount of power in today’s society, but even large corporations occasionally listen to their smaller stockholders—particularly if a number of them band together and start singing the same tune.

The fact that some formulas have wound up in the junk heap after they proved inadequate to predict market conditions has led some observers to conclude that the whole idea must have been poor from the start. This is like saying that because the great majority of automobile companies have folded over the years, the automobile must therefore be a failure.

Many of the earlier formulas were, in fact, poorly devised, resting on inflexible, illogical and fallacious assumptions. Even some of these, however, performed their function well for some time. Many of the basic faults that afflicted the earlier methods have been recognized, and present-day techniques are considerably improved. The reasons behind the early fallacies will be explored more fully in other sections of this book, but it should be pointed out that they did have, the virtue of pointing the way toward better use of the formula idea.

In answering the inquiry of whether formulas “work” certainly a fair question on the part of an investor who may want to subject a large part of his funds to a formula’s dictates we must first ask what we mean by saying that any investment technique “works.”

Investing In Large, But Not Big Companies
Because so much is said and written about the giants, an investor may easily fail to notice the other large companies. But a major feature of American business organization is the numerous corporations, each one large compared to the average, but small alongside the giants.

The main vogue for formulas began in the late thirties, and was primarily a reaction to the market declines of 1929-32 and 1937-38. Naturally, the market analysts who first worked with formulas were more interested in building protection against declines than profiting from advances, and they understandably assumed that the severity of future drops in market prices could match these two earlier periods.

It is almost impossible to resist the temptation to forecast stock prices, and it is difficult for a formula investigator to know at any particular time whether he is making a forecast on the basis of available facts or whether he is allowing his optimism or pessimism of the moment to dominate his efforts. In 1949, for example, one investigator wrote about the original Keystone plan whose weakness has turned out to be too low a secular growth rate more recent stock-price fluctuations gives us some cause to question the assumption that the trend will be as strongly upward in the future as it appears to have been over the entire period from 1897 to 1946. If this commentator had been writing either three years earlier or three years later, it is doubtful that he would have made such a criticism.1

Whether or not any particular investor should use a formula is, of course, a matter of individual judgment. Some formulas, such as the Genstein Plan, require a fair amount of calculation, and many people are unwilling to discipline themselves to set aside time to manage their investments.

Benefits Of A Monthly Investment Plan
One of the simplest, most effective, and most popular methods of buying stock is to start a Monthly Investment Plan, or MIP. Started in 1954, the MIP now has more than 93,000 accounts in force, and new ones are being written at the rate of about 180 a day.

Somewhat similar to the constant-dollar plan is the constant-ratio formula. It is one of the oldest formulas in existence, having been used as long as 20 years ago. More important, it still stands up today, and is widely used, despite the drastic changes which have taken place in the market.

It fulfills, perhaps better than any other formula, the basic theoretical requirements of formula investing.

Here is how it works: The total investment fund is divided into two equal portions, one half to be invested in stocks, the other in bonds. As the market rises, stocks are sold and bonds are bought to restore the 50-50 relationship. If the market goes down, the reverse procedure is followed, bonds being sold and stocks bought to return to the 50-50 ratio.