Philip L. Carret (1)

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Philip L. Carret was one of the early proponents of "value" investing, one of the forms of fundamental analysis.  He wrote a series of articles for Barron's, a weekly financial publication, in 1926.  Those articles became a book, The Art of Speculation, which was first published in 1930.  One of Mr. Carret's many claims to fame was his founding in 1928 of the Fidelity Mutual Trust (now the Pioneer Fund), one of only five investment trusts (now we call them mutual funds) on Wall Street at the time.  The Pioneer Fund continues today, making it the third oldest mutual fund on Wall Street.  Like the Pioneer Fund, Mr. Carret had one of the longest careers on Wall Street, remaining active in the markets for more than 70+ years.  He was one of the few people on Wall Street who experienced first hand the market crashes of both 1929 and 1987.  At the time he wrote his articles in 1926, the term "speculation" had some of the same negative connotations that still exist today.  This is what he had to say:

What, after all, is speculation?  The redoubtable Webster gives a number of definitions.  Among them we find (1) "mental view of anything in its various aspects; intellectual examination"; (2) "the act or practice of buying land or goods, etc., in expectation of the rise of price and of selling them at an advance."  To the second he added the complacent observation that "a few men have been enriched but many have been ruined by speculation."  According to Webster, the motive is the test by which we must distinguish between an investment and a speculative transaction.  The man who bought United States Steel at 60 in 1915 in anticipation of selling at a profit is a speculator according to Webster, though he may have changed his mind about selling and added the stock to his list of permanent investments.  On the other hand, the gentleman who bought American Telephone at 95 in 1921 to enjoy the dividend return of better than 8% is an investor, though he may have succumbed to the temptation of a 10-point profit a few weeks later.  Although the outcome of the transaction may contradict the original intention of the party chiefly interested, it is obviously impossible to omit the factor of motive in defining speculation.

Mr. Carret maintained that speculation is just a point on the investment spectrum.  He provided the following insight:

Your articles deal with speculative investment rather than with speculation," said an astute observer of both fields of activity when he had read the greater part of this book in serial form.  To this charge the writer was forced to plead guilty.  After all it is by no means easy to draw the line between investment and speculation, between speculation and gambling.  If one is to discuss the topic of speculation and perhaps thereby induce some readers to attempt it who might otherwise have left speculation alone, it is much more helpful to the average reader, much less dangerous to the reader who might misinterpret what he reads, to discuss that sort of speculation which is on the borderland of investment than the more dangerous and less useful type of speculation which borders on gambling.  Perhaps the best sort of speculation, and the kind that is most likely to be successful, is that which regards it as the business management of a fund.  What does the manager of a business do?  He controls men, materials and money, seeking to handle them in such a way that the business will produce a profit.  Conceiving the speculator as manager of a business it will be seen that he also controls men, materials and money.  The money is the starting point of his business, the materials are the securities which he buys and sells, the men are the directors and managers of the companies in whose securities he invests.

We will return to Mr. Carret's classic on investing in the next blog to learn about his twelve precepts for the speculative investor.  The sixth printing of The Art of Speculation by Philip L. Carret, published in 1995 by Fraser Publishing Company, remains in print today.

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