SPECULATION WITH CAPITAL.
[Sidenote: RESTORING THE BALANCE OF ADVANTAGES.]
It is in the nature of free trade, that whatever mathematical advantage
is to be obtained at all is more accessible to the rich speculator
than to the poor one. The rich player consequently can make himself
the stronger one, and the operator with capital has advantage over the
operator without.[38] So far, however, as it is worth while to exercise
at all the natural skill in Stock Exchange speculation, which one
individual may possess beyond another, there can be no doubt that a less
rich, but very skilful operator, would very materially, if not quite, in
the long run, restore the balance of advantages which was against him
at the start. As the haphazard speculator always must enter the lists
at a disadvantage or on unequal terms, it follows that the exercise of
any amount of skill will only bring him somewhat nearer to, or at best
slightly beyond, holding his own; and in that he would fail in the long
run. If he lay down all the machinery necessary to success in ordinary
business, he virtually passes the limit which defines pure speculation
by reducing the risks to such a minimum that they are no more than the
percentage which is an inevitable element in all mercantile transactions.
[Sidenote: THE NECESSITY OF SOME CAPITAL.]
That it is absolutely necessary that a speculator should possess capital
may be illustrated from several points of view, and although we may
become, perhaps, tedious by repetition, as in Chapter III., for instance,
when speaking of the temperament of a speculator, the time spent in
double reflections by the uninitiated may prevent shipwreck, at least
in the first stages. A man who is going to operate on a large scale
will be equally dishonest if he have not a large capital, as a small
speculator who has no more than his £300 a year out of which to save up
if he loses more than he can pay. It seems hardly necessary to state that
a speculator who operates in the Stock markets and loses without having
anything of his own wherewith to pay, inflicts just the same loss upon
the broker who does the business for him, as he would upon a butcher of
whom he purchased a leg of mutton, consumed it, and then declared he had
no money. It is really, however, necessary to make this statement, clear
as is the truth of it, because speculators, as a rule, do not realize
the liability in the same way. There are differences in degrees of
tangibility in these matters, no doubt, and hence the morally injurious
effects of speculation and all kinds of gambling. A leg of mutton is a
solid substance, and the fact of consuming it not only impresses the
circumstance upon the mind, but upon the body too, in the shape of the
recollection that the body benefited by the food. By the aid of the
remembrance of the benefits that grow out of the consumption of the leg
of mutton, the liability to pay for it becomes realizeable in a high
degree, and no man allows himself to dream of escaping from it. It is
not so in the same degree with a liability incurred by “time bargain”
speculation, because what represents exactly the same tangible substance,
was never fully, or even partially, realized as such.
[Sidenote: CAPITAL TO EXPEND IN FEINTS.]
[Sidenote: LA HAUTE FINANCE.]
All large speculators are well known. If they try to operate through
other persons in order to deceive, the truth leaks out some time or
other. Large orders are very difficult of execution, unless the broker is
either of very good standing himself, or hints at the source from which
he receives his instructions. Unless, therefore, it can be shown that
the real operator has a very broad pecuniary back, an attempt to buy or
sell large amounts of stock through brokers is difficult. It is sometimes
necessary to have capital to throw away in feints, before the speculator
commences his operations, just as a general may find it expedient to
throw away a quantity of ammunition, and even the lives of some of his
soldiers, to draw off attention from the real attack. A speculator who
contracts to bring out a new loan, unless the security he has to offer
is of the highest class, runs considerable risk of losing his money, as
he has, as a rule, to pay something down to the borrower as a guarantee
of good faith, and to allow him also to taste the ready cash, as some
immediate consideration for entering upon business, which, if successful,
is of all business the most remunerative. This kind of speculation
belongs to _la haute finance_.
A supply of ready money is essential to the speculator in all markets,
and it is marvelous that there can be so many persons who have to grope
their way by the aid of bitter experience through the thick darkness of
their ignorance to such a shining light of truth as this. And the full
realization of this truth is, in most cases, only obtained at an expense
which renders it impossible to repeat the experiment.
[Sidenote: THE BEST OF ALL CHANCES FOR SPECULATOR WITH CAPITAL.]
[Sidenote: THE MOST LEGITIMATE FORM OF SPECULATION, PAWNING THE STOCK.]
After a severe commercial collapse, like that of 1866 for instance, all
securities are low in price, holders of them have been compelled to
realize through the _debacle_ which has for the time destroyed credit,
turned profits into losses, and frightened everybody into hoarding the
precious metals. When things are beginning to mend, and a resurrection
of industries takes place, the tide of the national profits begins to
turn, and, rippling back into innumerable channels where securities of
all sorts have laid high and dry and neglected, again floats them into
notice. Just as when there is no use for the plough the oxen are idle,
so when the great industries of a nation are stagnant, floating capital
lies idle, and is cheap. In such times the speculator of good judgment,
with ten or twenty thousand pounds can make money without much risk if
he is satisfied to watch the general recovery of prices up to a certain
level, and then realize. We will suppose money at 3 per cent., and the
best English railway stocks some thirty per cent. below the value they
will reach when the country is in the full tide of prosperity. He selects
one hundred thousand pounds worth of the leading stocks, yielding at the
price at which he purchased them, 6 per cent. At different banks where
he keeps accounts for the purpose, he pawns the stock, and gets loans
within 10 per cent. of the market value, which amount to eighty thousand
pounds. The ten thousand pounds he has himself, which enables him to take
the stock off the market. In this way he is virtually the possessor for
the time of this amount of stock, and he profits by the rise in value at
the rate of one thousand pounds for every one per cent. Apart from this
advantage he benefits to the extent of the difference between the yield
on the money value of the stocks, and the interest with which the bankers
debit him on the eighty thousand pounds; and so long as circumstances are
favourable and the value of money does not rise and remain above the rate
which the stocks yield, he enjoys an income from that source with a fair
prospect in a year or so of doubling his ten thousand pounds.
Very large amounts of money are known to have been made in 1870, 1871,
and 1872, in English railway, and also in various other stocks, in this
way in the London market, when money was poured in from France and the
Continent generally on the outbreak of the Franco-German war. Bankers,
moreover, were aware that the large amounts placed with them for safe
keeping might be called for at any time, and sound Stock Exchange
securities, upon which loans could be made from fortnight to fortnight,
were very much in favour. In consequence of such operations as that
referred to, prices were found upon several occasions to be very much
inflated, resulting in some mischief and not a few failures.
[Sidenote: WHEN TO BEGIN AND WHEN TO LEAVE OFF.]
In speculation of this nature, there is a time to begin and a time to
leave off. When stocks have attained a reasonably high level of value
as a result of the recovery of a country’s industry, the chances for
the speculator to profit by a continuous rise are of course gone, and he
seeks in other directions to turn his capital to account; but the example
we have given illustrates perhaps the most legitimate of all forms of
speculation in Stocks, provided always the operator knows his business,
and allows a sufficient margin for contingencies.
[Sidenote: TEST OF A SPECULATOR’S PECUNIARY POSITION.]
The marked difference between Stock Exchange business and other kinds is,
that it is the custom to pay cash for all bargains when the settlement
takes place. Special delays may be agreed to between persons who know
each other well, but it is quite the exception, and certainly should
remain so, for credit is already quite sufficiently extended throughout
all branches of trade and commercial affairs. The one thing that keeps
a tight rein on Stock Exchange operators is the test of their position
which lies in fortnightly cash settlements.[39] The very nature of the
business affords such facilities for incurring very large liabilities
by extensive operations in various securities, that if settlements by
bill accommodation were permitted, extending over two or three months as
in trade, hopeless confusion would soon be the result, apart from the
temptation which an insolvent broker or jobber would lie under further
to involve himself so long as he could get the credit. The remarkably
few failures that take place among stock-jobbers and brokers, when it
is considered how much risk they run, and to what a limited extent they
can make themselves aware, in time to avoid complications, of their
clients’ actual means, reflects much credit upon them as a class. At
the same time it must be admitted that the custom of frequent cash
settlements, by testing the actual position of all concerned, is the
best possible safe-guard against operators getting out of their depth;
and although business generally would be very seriously curtailed if the
custom prevailed in all branches of commerce when distance did not make
it impossible, there can be no doubt that a vast deal of mischief and
dishonesty would be nipped in the bud.