THE PIT-FALLS.
[Sidenote: HIDDEN FORCES OPPOSED TO THE SPECULATOR.]
There are perhaps very few speculators of the haphazard type who take
the trouble to find out the extent and power of the hidden forces that
are arrayed against them in the markets. Every stock, it should be
remembered, has either a small or large market to itself. In some stocks
it is possible any time of the day to deal at ⅟₁₆ price,[35] while in
others there may be a difference of 1, 2, 3, or even 5 per cent. under
certain circumstances, between the buying and the selling price. A
speculator operating in a stock in which he can always deal at a close
price is able to undo his bargain with only a trifling loss probably, if
he finds out at once that he has operated under some misapprehension; but
if he has bought a stock the purchase price of which is say 35, and if he
wants to sell he can only get 34, he has incurred a loss of 1 per cent.,
besides the commission, before he can cancel the bargain. This belongs
obviously to the alphabet of the business, but the haphazard speculator
seldom learns his alphabet until the use of it is no longer of any value.
[Sidenote: THE “TURN.”]
A broker, it may be said, should warn his client before putting him into
a stock the price of which is wide; but unfortunately such warnings
do not increase the number of commissions, and, apart from that, if a
speculator does not take the trouble to inform himself accurately upon
such a point, placing no reliance upon the advice of any one, he deserves
to lose his money. Some markets are so small that a speculator once in,
is what is called “roasted” before he is let out again. A particular
man very often is the only dealer in the market in a certain stock of
which perhaps the supply is also very limited. Under such circumstances
a haphazard speculator who may chance to have observed some rather
violent fluctuations thinks there is a good opportunity to make some
money, and he sells a little bear of a couple of thousand pounds nominal
of stock. The round sum, and the channel through which the sale comes,
helps the jobber to read the operation. The decoy-duck in the shape of
the fluctuations in price, lures two or three more sportsmen on to the
dangerous ground, and when they want to get out the price is put up
against them, and they are quietly mulcted of £50 each, without a chance
of getting even a sight of their enemy, or any value for their money but
experience.
[Sidenote: THE DANGER OF TAKING ADVICE.]
A speculator who consults a not over-scrupulous broker as to the best
thing to buy for the rise, runs the risk of taking some stock off the
broker’s hands that he is desirous to get rid of. It is far better that a
broker should not be exposed to such a temptation, and a speculator will
do well to make it one of his maxims to put no trust in any one when he
is engaged in a business in which it is the object of everybody with
whom he comes in contact to make something out of him.
[Sidenote: A DISINTERESTED OPINION.]
Supposing a broker is not directly interested in any particular stock
when a client who is in doubt what to do consults him; it does not then
follow that the client can depend upon getting absolutely disinterested
opinions. The broker may have just put some other clients into a certain
stock, and with a view to his own advantage, by helping to make money for
them, he will lean probably to some extent in the direction of advising
others to purchase the same stock.
[Sidenote: ALL THE EGGS IN ONE BASKET.]
There is an old saying that it is unadvisable to have all your eggs
in one basket, a saw that is constantly quoted among both _bona fide_
investors, as well as among speculators. A broker is not desirous that
his clients who speculate should be interested very largely in one stock.
He prefers to have the liability spread over the market, for obvious
reasons. If a client fancies a particular stock, or has good reasons
for believing it is about to improve, and he goes to his broker with a
view to increase his stake, he will not receive the same encouragement
as if he selected something else. The influence thus brought to bear
arises from selfish motives, and proves again that the client should keep
his own counsel. If he have no decided views himself, it is certain he
had better do nothing, for speculation thus entered upon is doubly and
childishly haphazard.
[Sidenote: TRAPS FOR THE PUBLIC.]
[Sidenote: THE PUBLIC AS SPECULATORS ARE BULLS BY NATURE.]
[Sidenote: A Case of Roasting the Bulls.]
[Sidenote: A Cut off the Loaf and Pass it on.]
The more organized methods of speculation which prevail in these times,
cause the public to be mulcted of their money in a much more wholesale
manner than was the case formerly. They are now driven like sheep, or
rather enticed into a pen, and there mercilessly squeezed until they
are glad, like some of the players at Homberg have been, to have their
third-class fare paid home. A number of brokers or jobbers, or both, in
the markets will be instructed to run a stock up, after a goodly number
of bears have been decoyed in by a gently falling price from day to
day, seasoned with unfavourable reports. Those who are able to command
a sight of the jobber’s books, know of course exactly the position of
affairs, and the price is rigged until the weak speculators for the fall
are simply frightened in. This is done upon even a more extensive scale
in the opposite direction, for the simple reason that the general public
as speculators, are bulls by nature. Bear operations seem to go against
the grain of the average man who acquires a first taste for speculation,
probably by possessing some amount of stock which improves in price after
he has bought. Money thus easily made, as it seems to be, out of nothing,
encourages other purchases with a view to resale before the settling day
arrives. Thus small figures grow to large ones; and small profits, in
frequent attempts to multiply them, usually end in large losses. A good
stock, or the shares of a good company, that has long been discredited
from a cause which may be suddenly removed, has frequently been used
for literally flaying the public when they have rushed in as bulls. A
memorable case in point was the rigging of the shares of the Erie Railway
Company. Upon the occasion of the assassination of Fisk, jun., the shares
were run up and the public enticed in by daily advancing figures far
above the actual merits of the shares, from a dividend point of view.
Numbers of persons were induced to believe the price would range high
from that moment. The quotation subsequently declined, and one by one
the unhappy bulls were disgusted into taking their losses, whilst those
who had rigged the market were following them down as bears, and making
a fine thing out of the affair. The same game was played with the public
when Jay Gould was ousted from the presidency of the Company, when the
price was run up to 57½, and gradually went back, even as low at one
time as to 28, afterwards recovering to about 50. As compared with the
professional tricksters who manage these riggings of the markets, even
the best of the outside speculators, who have had long experience and
think they can stand on one side and profit by the gullibility of the
public, discover themselves frequently the wrong way, when the course of
the market for some time at length reveals unmistakably the drift of the
experts behind the scenes. The man who must speculate should be early in,
and early out, being contented with a cut off the loaf and pass it on;
for it is the profits missed that ruin the speculator.
[Sidenote: SHORT PERIODS IN AND LONG ONES OUT.]
There is scarcely a more important point to which to draw attention, than
that of being contented to watch for an opportunity. It is fatal to the
success of a speculator to be always with stock open in the markets. The
casual observer must be well aware[36] that now and again a small panic
occurs, and the general level of values is knocked down perhaps two,
three, or on serious occasions as much as four per cent., according to
the inflated state of particular stocks at the time. A speculator who has
twenty or thirty thousand pounds nominal of stock open at such a time,
stands in a moment to lose eight or twelve hundred pounds at a blow.
With such a contingency always hanging over him, it must be evident to
the prudent man that in order not to expose himself more than he can
possibly help to such a catastrophe, which may happen at any moment,
he should operate, be contented with a moderate profit, and close.[37]
The obvious advantage of looking on for comparatively long periods, and
having commitments for short periods is, that the chances will be much
more in favour of the speculator when a panic causes a heavy fall. He
is then free to buy at prices which are sure to be unduly depressed,
and instead of the dreary waiting to recover from losses incurred, he
makes in a very short time probably a handsome profit, again retiring
to avoid the reaction that follows a sharp recovery, to await a similar
favourable opportunity. To be overtaken, with large amounts of stock open
for the rise, by a panic which engulphs a speculator’s money and upsets
his judgment at the same time, is among the least excusable faults when
committed by the man who starts upon any system. The haphazard speculator
is almost sure to have accounts open when a panic takes place, because he
is, as a rule, in a fever lest he shall miss a rise, and is, therefore,
never contented unless he is “in the swim,” and hence the severe handling
he gets by never seeing the cataract until he is half way to the bottom.