It may be set down as an axiomatic truth that no one can learn the art
of making money in the stock market by reading statistics, charts,
precedents, theoretical disquisitions and instructions. Of course it is
not needful, nor would it be any more practicable than it is necessary,
to set forth any fixed rules or maxims governing one’s procedure in
any other line of business or any other profession, since no one
could use them advantageously without the requisite qualifications,
such as adaptability, shrewdness and practice. Hundreds of different
combinations of cards are laid out in books of instructions on auction
bridge, with explicit directions as to how to bid and play the hands,
yet nobody ever heard of a good bridge player being made solely from
book instruction. One reason is that there are actually millions of
combinations of cards. Also in stock trading there is an indefinite
number of needful “don’ts” which the most resourceful person can
neither contemplate nor anticipate. Every stock market cycle shatters
some precedent; every era produces new phenomena. Everyone who has ever
studied a book of instructions on how to play golf knows how impossible
it is to take up any golf club and make it perform according to
schedule. A firm stance, feet well apart, body under full control, the
right knee stiff, the left arm almost rigid as it follows the right in
a low backward swing; and most important of all, the eye firmly fixed
on the ball, while the club whips through the air, and after lifting
the ball, follows on through, carrying both arms forward to their
full length, and many other things which I never could do, and cannot
now recall; all these directions the would-be player will learn as he
knows his A, B, C’s; but in his intense eagerness to swat the ball he
disregards most, or all, of the stated essentials, and at the moment
of impact, while his club is ploughing up the sod two or three inches
behind the ball, his eyes are cast heavenward in fervent anticipation
of watching its flight. Likewise the speculator figures his profits
long before they materialize. The most important thing in golf, and the
hardest thing to learn, is to keep the eye on the ball while in the
act of hitting it; and the hardest thing to learn in stock trading is
to keep the eye _off_ the market, hold firmly and patiently to good
resolutions, _and not try to get rich too quickly_. Both look to be
easy, but--
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Reducing the whole problem to its simplest form, the stock exchange
is a well-organized and honestly conducted market-place where anyone
may sell or buy investment or speculative securities, at whatever
price anybody else is willing to pay or accept for them. There is no
more mysticism about the exchange itself than there is about a book
auction room, or any other auction room where articles of merchandise
are offered at an upset price, or auctioned off to the highest bidder.
A man who buys stocks or bonds for investment is not gambling with
anybody that they will go up or down; he buys them because he wants
to invest his money and get interest or dividends on it. If a stock
bought at $100 a share, paying seven per cent. annually in dividends,
should increase in market value to $150 it is obvious that the rate
of interest on the total capital is correspondingly reduced, and that
whereas his original $10,000 brought a return of seven per cent., the
capital of $15,000 is earning a net return of only four and six tenths
per cent. Under such conditions it is oftentimes wise to sell out and
reinvest the money in other securities which bring a larger net return;
or if stocks in general are too high, put the money in the bank and
wait for lower prices. The $5000 gain in capital will surely more than
cover interest on the original $10,000 investment during the time one
has to wait for good buying opportunities.
This reminds me that some years ago, when Calumet & Hecla Mining stock
was selling at $850 a share, on which amount it netted only a small
dividend return, I asked a friend (who owned a large amount of the
stock) why he didn’t sell it and reinvest in other securities. My
argument was that the stock having already declined from $1000 a share,
would probably go much lower, considering that the earning capacity
of the mine was in all probability as great as it ever would be;
therefore the chances were more in favor of a decrease than an increase
in earnings and dividends. To all of which he readily assented, but
in view of the fact that he had bought the stock at $50 a share it
was paying a very high rate of interest on his original investment;
and for sentimental reasons he preferred to keep it,--which he did.
Such instances are not at all uncommon; nor is it uncommon to hear
intelligent business men remark that they know they ought to sell
certain investment securities, because the market price has risen out
of all proportion to the income yield, but other good securities are
all so high that they really don’t know what to put their money in. The
chances are probably a hundred to one that if the money were put in the
bank and allowed to rest a while at three per cent. interest, it could
within a few months be reinvested in the same securities, or other
equally good ones, at a net gain of three to five years’ interest, or
even more. This is not stock gambling; it is merely business prudence.