Traders and investors too often become stubbornly insistent on
recouping their stock market losses in the same identical securities
in which they lost their money. After having lost a large sum of money
there is undoubtedly a special gratification in seeing it return
by the same channel through which it escaped, but the enjoyment of
this peculiar satisfaction is hardly commensurate with the risk that
many people run in attaining it. In discussing this point some years
ago with a friend who owned a thousand shares of stock in a bankrupt
railway company which had cost him $50 a share, and was then selling
at $15 a share, with a fifty to one chance that the road would go into
receivership, I argued that while the loss of $35,000 was a large
and bitter pill to swallow, the chances were that it would not be
made smaller or more palatable by the inevitable receivership, and
that he might as well salvage what he could from the wreckage of his
investment. After all, there were dozens of really _good_ stocks that
had declined more than $35 a share; stocks that would eventually “come
back” when the market turned about; whereas with his stock there was
a probable assessment of $10 to $15 a share staring him in the face,
and after paying that, the stock was likely to sell at a figure less
than the assessment to be paid, judging by past performance of the
stocks of other companies in receivership. The road was tremendously
over-bonded, over-capitalized, encumbered with every conceivable
sort of debt, and not earning its fixed charges. He vehemently
declared,--“No, I’ll be damned if I’ll allow those thieves to do me out
of that money; they shall pay it all back, and more with it!” He held
tenaciously to his resolution, the road fell into receivership, and a
few months later he could have bought the stock in the open market at
two dollars a share less than he had paid in on the assessment.
A favorite and amusing pastime with a multitude of traders is to
cajole themselves into believing that when some stock they own becomes
increasingly active after a considerable advance, the renewed activity
is a sure indication that “bankers and insiders” are accumulating it
for a still further advance. It is well to remember, however, that
bankers and insiders do most of their accumulating before the rise
begins, and while the outside public is doing its accumulating the
bankers and insiders are quietly supplying the stocks. It is quite
clear that if the insiders pursued the same tactics as the public they
would soon be relegated to the ranks of the outsiders.
It is a common saying, even among veteran traders, that such and such
a stock “is a good buy, but you must watch it closely.” To _watch_ a
stock after buying it is about the most foolish thing one can do. To
watch it go down is certainly no pleasure, and if it goes up it doesn’t
need watching. The time to watch it is before buying. In order to limit
one’s loss on a purchase it is a simple matter to put in an “open stop
loss” order somewhere under the cost price; and no amount of diligent
“watching” will prevent it from going down. On the other hand, to
insure one’s profit, if the price goes up, nothing more is required
than to put in a “G. T. C.” (good till cancelled), selling order at
whatever figure above the cost price the purchaser is willing to accept
as his profit.
There is probably no more popular fallacy among traders than the
one which presupposes that great “pools” and combinations formed to
manipulate certain stocks are either made up of officers and directors
of the corporations concerned, or else that such pools base their
operations upon valuable inside information from some head official.
This may be true in rare instances; but generally speaking the
directors and officers of the companies know nothing whatever of the
pool operations in their stocks, and when they do know they usually
frown on such schemes. Anyone who stops to consider knows that the
market prices of the company’s securities are of far less concern to
the officials than the matter of conducting their business operations
at a profit. If the company’s earnings are good, it is clear that this
fact will soon enough manifest itself in the demand for the securities,
without any abortive or clandestine efforts; and if the earnings are
poor, it would obviously be beneath the dignity of the officials to
deceive the public through pool operations or pool affiliations. A more
simple plan would be to utilize their “inside information” by quietly
selling the stock.
I recall a particular instance, a few years ago, when there were some
tremendous pool operations in the common stock of one of America’s
largest industrial corporations, and after the stock had been bid up
ten or a dozen points it was reported that a “managing director”
of the company had assured one of the pool members that it had been
tacitly agreed among the directors to declare a fifty per cent. stock
dividend at the next board meeting. The public instantly took the bit
in its teeth, and inside of a week the stock advanced fifteen points
more, which doubtless afforded the clique an auspicious occasion for
unloading its holdings, bought at much lower figures. About that
time I happened to be in New York, and while lunching one day with
the chairman of the board of directors at his club he told me that
the matter of a stock dividend had not even been discussed among the
directors, and that in his opinion there was no likelihood of any
change in the dividend policy for at least a year,--which proved to be
true.