Retired business men suffering from _ennui_, have often had recourse to
the stock market as a means of stimulating their emotions and expanding
their fortunes; with the result, in the first of these purposes they
have usually succeeded beyond their expectations, while in the second
they have met with uncharted obstacles. Some years ago when many of
the great trusts were in process of formation a well known Pittsburgh
magnate sold out his business to the United States Steel Corporation
and later bought a home in New York and turned his attention to
stock speculation. After plunging into a boiling market and buying
thousands of shares at top prices, the trend eventually changed and he
found himself on the crest of a tobogganing market with more than a
hundred thousand shares of speculative stocks. At length when the pace
threatened both his fortune and his peace of mind, in a fit of disgust
he dumped his holdings overboard and proceeded to damn the market, the
broker and everything else, including himself for being such an unlucky
simpleton.
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“My dear Mr. Blank,” said his broker, “you are possibly quite justified
in all your abuse, except that of yourself, to whom you really should
apologize, since you do yourself a great injustice. You have had six
months’ experience in this game at an expense of a little less than
two millions of dollars, whereas at the pace you began you were due to
lose at least five times that amount but for your rare judgment and
cool-headedness.”
“But why in hell didn’t you tell me all this before?” inquired
the irate customer. To which the broker calmly replied, “It’s my
business to _take_ orders; not to give directions to a man of your
understanding.”
When the American Hide and Leather Company was formed a number of years
ago, a prominent Boston leather merchant of my acquaintance, sold
his business to the new organization for a round million dollars in
preferred stock and bonds, and in the course of the next few years of
more or less restless inoccupation he devoted himself to a systematic
study of investment securities and general stock market conditions. The
panic of 1907, when values were almost entirely lost sight of in the
mad scramble to liquidate stocks, afforded a rare opportunity to view
the follies of reckless speculation, and our astute leather merchant
was quick to observe the importance of this salutary lesson. The
recovery that followed was almost magical, and many who bought stocks
at the low prices doubled their money in a few months. Then following
this sharp recovery there was the natural setback when speculators
undertook to convert their new wealth into cash. And this too proved a
wholesome lesson to our new apprentice in the game of high finance. For
some years he had held to the conservative practice of investing only
in non-speculative bonds, but this proved to be a slow and monotonous
process of enlarging his fortune; furthermore it was devoid of the
exciting thrills experienced by those who make fortunes overnight. He
thought the funds of widows and orphans ought properly to be invested
in gilt edge bonds and mortgages, but for a man of his business
sagacity, in the prime of life, to content himself with merely cashing
his coupons every six months was to decline into a state of innocuous
desuetude--a condition into which he was determined not to retrograde.
To launch one’s bark into the rapidly shifting currents of fortune in
the stock market and attempt to steer an even course is one of the
surest preventives of _ennui_, and after deliberately weighing and
analysing conditions from every conceivable angle our erstwhile leather
merchant concluded that cutting a few coupons now and then was too
tame an occupation for a man of his acumen and ambition. He informed
his friends that after years of careful study of the “game,” he was
convinced that the reason why people lost, was that while in theory
they all had the right ideas, they all used wrong formulas in practice.
He declared that the “public,” so-called, always “bought at the top and
sold at the bottom”--a commonplace in stock market parlance, though not
necessarily true. Also that the inclination of all speculators is to
venture out beyond their depth, i. e., to buy more stocks than they
can pay for, or protect by ample margin. This indiscretion he thought
to be especially characteristic of those with but small capital, whose
eagerness for large gains outstripped their conservatism and exposed
them to the perils of abrupt and unexpected reactions and panics. He
had never bought more hides and leather than he could pay for, either
with his own funds or with money easily borrowed from banks; he would
never buy more stocks or bonds than he could pay for, or protect with
sufficient margin to carry them through the severest depression.
He was a self-made man; he had entered his firm as errand boy, and by
sheer force of perseverance, ambition and intellect he rose steadily
in usefulness and power until he became sole proprietor of the whole
establishment. His prestige and the bulk of his fortune had been made
in buying and storing goods when the markets were glutted and prices
were low, and holding them till the markets were bare and prices were
high. After accumulating large stores it sometimes required a year or
more of patient waiting for the readjustment of trade conditions;
but never had there been a time when during a given cycle, prices had
not been abnormally low and also abnormally high. He reckoned his
twenty-five years of this sort of training as a singularly qualifying
element of success in buying and selling stocks. This undertaking,
like dealing in hides and leather, required forethought, discretion,
patience and courage. There was scarcely a two-year period in any
decade wherein stocks in general could not be bought reasonably cheap;
nor was there a similar period when at some time during the twenty-four
months they could not be sold at fairly high prices. Statistics proved
this to be almost infallibly true; statistics likewise proved that
the preponderance of failures in his own line of business could be
traced to injudicious purchases of large stores of merchandise at high
prices, with resultant inventory losses. As a merchant he had learned
that buying and selling leather and hides at a profit was a matter of
forecasting future conditions in the light of past events; and as a
student of stock market conditions he learned that a recovery of values
_always_ follows a prolonged slump in the price of stocks, and that
sure success awaits those who pick the right psychological moments to
buy and sell.
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In due time this retired merchant secured a desk in a brokerage office
and undertook to study the stock market systematically at close range,
and to reduce some of his theories to actual practice. He did not
launch into this new venture as one would plunge into a cold bath;
he patiently watched the action of the market from day to day, until
stocks declined to a point where it seemed safe to begin buying on a
scale down. Meanwhile he continued to study stock market charts and
conditions--charts with double bottoms, double tops, pyramids and all
such enlightening information--about past performances. At length he
bought a few hundred shares of selected stocks, depositing bonds as
margin--ample margin of fifty points or more. Prices reacted a little
further, and in keeping with his motto, which was--“Buy on the decline,
when the public is getting out, and sell on the rise when the public
is getting in,” he increased his holdings at every two or three points
decline. In the course of time the market faced about, stocks began
to recover, and in a few weeks he had the satisfaction of seeing his
plans work out successfully in experiment, with a net gain of enough to
cover interest on his investment for more than four years. According
to precedent a temporary reaction was due; therefore, like most wary
beginners, he sold out and cashed in his profits. In his exhaustive
study of stock market psychology he had learned that while it is the
practice of inexperienced traders to take small profits on stocks in
a rising market, it is also their custom to buy the stocks back again
at much higher figures, instead of waiting for prices to decline. This
was one of the danger pits charted on his course of action; one of the
many against which he had built up mental fortifications, strong enough
in seasons of peace and calm, but in most people easily destructible by
the baffling influences of stock market speculation.
Although a beginner in practice, he was a veteran in theory, for prior
to entering the financial arena he had made hundreds of imaginary
purchases and sales, nearly always at a profit. Moreover he had
discovered that one may play both sides of the market, apparently with
equal safety, and that the biggest “killings” are said to be made on
the “short” side. By selling “short” on bulges and “covering” (i. e.,
buying the stock in to cover the sale) on reactions, it was possible
not only to make money both ways, but also to avoid the tedium of
waiting inertly for opportune occasions to buy at bargain-prices.
From the experience of others he derived a valuable lesson, namely,
that investors and traders are always too eager to keep their capital
constantly employed; that they are prone to hold stubbornly to one
position, either long or short; and that the wellnigh irresistible
impulse to get back into the market after selling out, whether at a
profit or a loss, has probably been the ruination of more speculators
than any other one cause. Playing the market both ways seemed a sure
means of forestalling this error.