Another incident occurs to me, which is so typical of those who become
infected with the stock market microbe that it seems worth relating.
A few years ago a young friend appealed to me for advice as to the
best method of investing about $10,000 surplus which he had taken out
of his business the previous year with a view to placing it out at
interest. I recommended several preferred industrial and railroad
securities which seemed reasonably safe as a business man’s investment,
and suggested that he put about twenty per cent. of the amount in each
of five different stocks. He knew nothing about buying securities, so
I introduced him to a reputable firm of bankers and brokers, and in
addition to warning him to buy no more than he could pay for in full, I
cautioned the head of the firm not to encourage, or even to permit, him
to speculate on margin. He bought twenty shares each of five investment
stocks, and a few weeks later he informed me, quite excitedly, that
already his purchases showed a profit of more than six hundred dollars;
also that inasmuch as the market was “going higher” he thought he ought
to double his holdings. The mistake I had made in advising him to buy
stocks, instead of non-speculative bonds, was now plainly evident; but
I could do no more than caution him to stick to his own business and
leave the stock market to others. He insisted that he could see no
harm in buying a few more shares and margining them fifty points or
more with the stocks he then owned; that it would not distract him in
the least from his business, nor would it subject him to any risk or
anxiety. My counter argument that stocks, having already advanced to a
high average level, were as likely to decline as they were to advance
further, was totally unconvincing. My young friend had caught the
speculative infection; which, like typhoid fever and smallpox, must run
its course. It can be treated, and sometimes mitigated, but not cured;
in some cases not even by bankruptcy.
About four months later, on returning home after a few weeks’ absence,
I received a telephone call from the head of the brokerage firm,
informing me that the young man had sold out all his investment
securities, and was in a raging fever of speculation; that he was
buying and selling all sorts of highly speculative stocks in lots of
from a hundred to five hundred shares, and that he spent two or three
hours a day watching the ticker. He paid no heed to repeated warnings,
and threatened to take his account to some other office if his orders
were not executed as given. “What am I to do?” the broker asked in
despair. “This young daredevil will probably be in bankruptcy in less
than six months.”
On the losing side there are at least three distinct classes to be
found at all times in stock market circles: one class who know nothing
about the market, except what they read or hear; they are guided by
floating rumors, the advice of well-meaning friends, and the spumous
counsel of market tipsters. There is another class who arbitrarily
suppose they have learned everything there is to know about the
market; they possess a large store of cynicism and skepticism, and
their market maneuvers are guided by a monumental self-sufficiency
that would be a valuable asset in trading but for the fact that it
is worthless. There is a third class who, although they really know
the practices, theories, precedents and possibilities of the game,
are not temperamentally qualified to utilize this knowledge in their
transactions.
Of course every banking and brokerage firm has a few customers
who go into the market and buy stocks and bonds during seasons of
depression and afterwards pay no attention to the daily or weekly
fluctuations until prices reach a stage where it seems advisable to
sell out; then they dispose of their holdings and leave the market to
the traders until bargain day comes round again. But the foregoing
examples symbolize the mental attitude and customary procedure of an
overwhelming majority of the trading public. This being true, one may
draw from them some idea of how important a part psychology plays
in the destinies of those who speculate. It would be erroneous to
suppose that the characters who play these rôles are shallow-brained
dolts because their actions (judged by results) appear nonsensical
to the rational and composed mind. On the contrary, the speculative
element represents for the most part men of uncommon shrewdness and
foresight; men of studious and analytical minds; men who are, or have
been, masters of every situation in their own professions or commercial
vocations, even though most of them act like children when they get
tangled up in the meshes of stock speculation.
Nor should it be imagined that the stock market is primarily a guessing
game, or a game of chance; or even an unbeatable game; or that it is
run by a gang of swindlers or mountebanks. Gamesters and swindlers
may play at it, but the game itself is as straight and legitimate as
any business pursuit. As a matter of fact it is one of the fairest and
most open games ever played; a game in which every participant, man
or woman, rich or poor, old or young, has an equal chance. The fact
that most people resort to mere guessing and gambling in their stock
transactions does not make it necessary to qualify this statement;
neither is the truth of the assertion altered by the fact that certain
individuals and organized cliques of traders manipulate stocks, both
up and down, with utter disregard of basic values, and in this way set
cleverly baited traps for other traders who imagine themselves wise
enough to pluck the bait and get away without springing the trap. A
trader or investor in stocks is not obliged to participate in these
machinations, any more than one who goes to a circus is obliged to
bet on the shell games and other tricky money-making devices that are
sometimes run in conjunction with traveling menageries, but are no part
of the main performance.
[Illustration]
A person who buys a piece of improved real estate for less than half
of its actual worth is reasonably sure he has a bargain; but if he
afterwards sells it at a fair price, and later buys it back again at a
much higher figure, he is gambling that for some reason or other it is
going to be worth more, either actually or fictitiously. Nor is it ever
unsafe to buy good stocks at figures away below their intrinsic worth.
The element of gambling does not enter the undertaking until the market
price has risen above the investment value; then if the owner refuses
to sell, or buys more (as the speculator usually does) he is gambling
on the uncertain event that some individual or clique is going to pay
him more than the stock is worth. When one buys a stock, either for
investment or speculation, its value cannot be permanently affected by
the action of other traders, and no individual or group of individuals
can euchre an investor out of his stock except by his own free will.
The man with a hundred dollars has the same relative chance for making
money as the man with a million; but the difficulty is that the one
with the smaller amount is ambitious to make equally as much as the one
with the million; therefore he resorts to gambling on thin margins; and
not being content with ordinary risks he plays a long chance shot. If
he wins, instead of withdrawing the original capital, with perhaps a
little more, he usually stakes the whole amount on every venture until
it is lost.
Viewing the stock market calmly in the perspective, it is not a
question whether stocks will rise or fall; of that there is not the
slightest doubt. They rise and decline with the same certainty that the
sun rises and sets, though of course with less regularity. The only
question is, how _far_ they will go in either direction.
[Illustration]
The action of the stock market much resembles that of a troubled sea,
which is always uneasy, rolling and tumbling about as if undermined by
some volcanic force. The prices of stocks are periodically rising and
falling, and one might as well undertake to fight the ocean tide as
to contest the course of the stock market when once in full swing in
either direction; for the market, unlike the tide, has no prescribed
boundaries. There are times--indeed most of the time--when it is much
wiser to sit by in the capacity of an interested observer, than to
plunge in and become a struggling participant, with the chance of being
carried out beyond one’s depth. Theoretically, there seems to be no
reason why the stock market should not move along at a fairly even
pace, except in case of some unexpected crisis; but practically, it is
either abnormally high or unreasonably low most of the time. Stocks,
like food, clothing and all human necessities, are more or less subject
to the laws of supply and demand; and when the traders and investors
throughout the country become convinced that it is time to buy stocks,
a bull market is sure to ensue; then when everybody has acquired all
they want--and some of them more--and they make up their minds to sell,
it is only natural that values should recede; which they do, usually
to somewhere near the low point from where they began to rise. This
process of sliding up and down the scale is repeated year after year,
and age after age.
No one has ever been able satisfactorily to explain why the prices
of all stocks, both good and poor, and even gilt edge bonds, keep an
almost even pace in the backward and forward swings, but they do;
and thousands of people who have placed their savings in securities
that are as sound and safe as a savings bank have viewed with alarm
the crumbling market values of their investments, wondering what has
happened to their particular stocks or bonds, and if the slumping
prices foreshadow a reduction in dividends, or if interest will be
defaulted on coupons. Investors who own bonds or good dividend paying
stocks need not be troubled over these capricious changes; but others
of a more venturesome or speculative bent are forever wondering when
they ought to get in or out. Of this latter class it is the best
guessers who win.