notion.” This is due to the failure or inability of the trader to
take a broad view of the entire situation. Some particular point in
the complex conditions which usually control prices, appeals to him
strongly and impresses him as certain to have its effect on the market.
He acts on this single idea. The idea may be all right, but other
counterbalancing factors may prevent it from having its natural effect.
You encounter these “notions” every day in the Street. You meet a
highly conservative individual and ask him what he thinks of the
situation. “I am alarmed at the rapid spread of radical sentiment,” he
replies. “How can we expect capital to branch out into new enterprises
when the profits may be swept away at any moment by socialistic
legislation?”
You say mildly that the crops are good, the banking situation sound,
business active, etc. But all this produces no impression upon him. He
has sold all his stocks and has his money in the banks. (He is also
short a considerable line, but he doesn’t tell you this). He will not
buy again until the public becomes “sane.”
The next man you talk with says: “We cannot have much decline with the
present good crop prospect. Crops lie at the basis of everything. With
nine billions of new wealth coming out of the ground and flowing into
the channels of trade, we are bound to have prosperous conditions for
some time to come.”
You speak of radicalism, adverse legislation, high cost of living,
etc.; but he thinks these are relatively unimportant compared with that
$9,000,000,000 of new wealth. Of course, he is long of stocks.
“To make the worse appear the better reason,” said Mr. Socrates, some
little time ago. It is too bad we can’t have Socrates’ comments on Wall
Street. The Socratic method applied to the average speculator would
produce amusing results.
Beware of saying, “This is the most important factor in the situation,”
unless the action of the market shows that others agree with you. Every
human mind has its own peculiarities, so presumably yours has, though
you can’t see them plainly; but the stock market is the meeting of many
minds, having every imaginable peculiarity. However important some
single factor in the situation may appear to you, it is not going to
control the movement of prices regardless of everything else.
An exaggerated example of “getting a notion” is seen in the so-called
“hunch.” This term appears to mean, when it means anything, a sort of
sudden welling up of instinct so strong as to induce the trader to
follow it regardless of reason. In many cases, the “hunch” is nothing
more than a strong impulse.
Almost any business man will say at times, “I have a feeling that we
ought not to do this,” or “Somehow I don’t like that proposition,”
without being able to explain clearly the grounds for his opposition.
Likewise the “hunch” of a man who has watched the stock market for
half a lifetime may not be without value. In such a case it doubtless
represents an accumulation of small indications, each so trifling or so
evasive that the trader cannot clearly marshal and review them even in
his own mind.
Only the experienced trader is entitled to a “hunch.” The novice, or
the man who is not closely in touch with technical conditions, is
merely making an unusual ass of himself when he talks about a “hunch.”
The successful trader gradually learns to study his own psychological
characteristics and allow to some extent for his customary errors of
judgment. If he finds that he is generally too hasty in reaching a
conclusion, he learns to wait and reflect further. After making his
decision, he withdraws it and lays it up on a shelf to ripen. He makes
only a part of his full commitment at the moment when he feels most
confident, holding the remainder in reserve.
If he finds that he is usually overcautious, he eventually learns to be
a little more daring, to buy a part of his line while his mind is still
partially enveloped in the mists of doubt.
Most of the practical suggestions which can be offered are necessarily
of a somewhat negative character. We can point out the errors to be
avoided much more successfully than we can lay out a course of positive
action. But the following summary may be useful to the active trader:
(1) Your main purpose must be to keep the mind clear and well balanced.
Hence, do not act hastily on apparently sensational information; do not
trade so heavily as to become anxious; and do not permit yourself to be
influenced by your position in the market.
(2) Act on your own judgment, or else act absolutely and entirely on
the judgment of another, regardless of your own opinion. “Too many
cooks spoil the broth.”
(3) When in doubt, keep out of the market. Delays cost less than losses.
(4) Endeavor to catch the trend of sentiment. Even if this should
be temporarily against fundamental conditions, it is nevertheless
unprofitable to oppose it.
(5) The greatest fault of ninety-nine out of one hundred active traders
is being bullish at high prices and bearish at low prices. Therefore,
refuse to follow the market beyond what you consider a reasonable
climax, no matter how large the possible profits that you may appear to
be losing by inaction.
The field covered by these chapters is to a great extent new. As it
becomes more thoroughly cultivated, it may be possible to speak with
more scientific definiteness. In the meantime, the author hopes that
his comments and suggestions may be of some service in helping readers
to avoid unwise risks and to apply sound principles of analysis to the
investment or speculative situation.
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Transcriber’s Notes
pg 17 Changed: to fight the advance by by selling short
to: to fight the advance by selling short
pg 111 Changed: His own mental attitute, then, is a most important
to: His own mental attitude, then, is a most important