When the whole country becomes pervaded with an epidemic of bullishness
the action of speculators is always directed by sentiment rather than
judgment; and a market that is swept along by excited emotions is
always dangerous,--dangerous to go short of and dangerous to be long
of. Hysterical “bulls” care nothing whatever about the earnings or
dividend returns on a stock; the only note to which they attune their
actions is the optimistic slogan, “It’s going up!” and the higher it
goes the more they buy, and the more their ranks are swelled by new
recruits. A herd of stampeded cattle (cows no less than bulls) will
rush blindly into a river, or butt their brains out against stone
walls, trees or other obstructions; they also stampede every critter
that happens along their path; and anyone who has ever witnessed a
panic in a theater or auditorium, or in the stock market, need not be
told that under such circumstances men are but little saner than cattle.
And speaking of sentiment, it is remarkable to what extent the combined
business and financial structures of the country are swayed to and fro
by this giant motive power. Like the biblical wind that bloweth where
it listeth, and man heareth the sound thereof but knoweth not whence it
cometh or whither it goeth, sentiment springs up from comparatively
trifling or unknown sources and after playing its havoc, vanishes as
suddenly and mysteriously as it came. In a bear market a train wreck,
or the death of some financier, or an earthquake in Europe, will put
the market off to the aggregate extent of hundreds of millions; whereas
one of the greatest bull markets in history found its chief impetus in
the most universally devastating war the world has ever known.
THERE IS BUT ONE WAY TO BEAT THE STOCK MARKET; THERE ARE MANY WAYS OF
BEING BEATEN BY IT
It is admitted by the most sagacious financiers that the only sure
way of making money trading in the stock market is to get in and out
at opportune times, and to stay out most of the time. As against this
there are numerous ways of losing money. Among these, one method in
particular is quite popular among a class of traders who although too
clever and conservative to buy stocks at “top” prices, have not the
patience to wait for “bottom” prices. When values begin to crumble
after the top has been reached in a bull market there must be a set
of “carriers,” or supports, onto which stocks can be dumped on the
way down. The market does not collapse like a ten-story card house;
it generally goes down gradually for a while, one or two flights at a
time, and finds steadying props every now and then which sustain it
for brief periods. For instance, a certain stock paying $5 a share
annually has been hoisted by degrees from $75 up to $150 a share.
When it descends to $140 a few wise traders who have been impatiently
waiting for a reaction will buy it because it looks cheap at $140
after having sold at $150; then at $130 another lot of traders who are
a little wiser and more patient than the first lot buy it because it
looks much cheaper than it did even at $140; and so on down it finds
these temporary supports, until at length it gets back to $75, or
perhaps lower, where it is accumulated by a few shrewd investors and
bargain hunters whose attention has been attracted to the market by
front page newspaper headlines announcing that the stock market is in a
state of complete prostration. They go on about their business and pay
no particular attention to the market until the price has recovered
to a point where the stock, returning $5 a share, is no longer “paying
its board,” when they sell out at a good profit, and _stay_ out while
the speculators carry it on up as far as they like. When the stock was
at the bottom price those who bought it on a scale from $140 down were
either so overloaded or pessimistic--probably both--that they were
unable to buy more and thus reduce their average to a reasonable cost.