IN THAT RESPECT IS SPECULATION USEFUL IN MARKETS GENERALLY?
[Sidenote: SPECULATION FOR THE RISE, WHICH IS BOTH LEGITIMATE AND OF
BENEFIT TO THE COMMUNITY.]
[Sidenote: SPECULATION FOR THE FALL, WHICH IS BOTH LEGITIMATE AND OF
BENEFIT TO THE COMMUNITY.]
[Sidenote: A REASONABLE RELATIVE VALUE FOR ALL COMMODITIES.]
The remarks upon speculation in the foregoing chapters may, perhaps, lead
the reader to infer that our object has been to enter upon a crusade
against all speculators, _guerre à mort_. Such an impression would not be
a correct one, and this chapter is intended, just in conclusion, to show
why. Speculation in the sense of buying for cash or on ordinary credit
what the purchaser has very good reason for knowing is uncommonly cheap,
and what he believes will, ere long, improve in price, does not come
under the category of speculation such as that to which the foregoing
remarks refer. There is hardly an individual who buys anything who is not
at times more or less of a speculator, and he has a perfect right so to
be under given conditions, and his being so under such conditions is a
direct benefit also to the community. For instance, take a very homely
article which will serve for an illustration, bacon. Supposing bacon,
through some passing influence, were to fall considerably in price,
very large purchases would at once be made on speculation, because it
is an article almost certain to be directly consumed in a proportion
greater than the production could be increased. Large quantities would
be taken off the market by both retail and wholesale dealers, who would
store it in anticipation of a recovery in value. They probably would
not want it for immediate use, and would be induced to run the risk of
the operation turning out profitable by reason of its being suddenly so
much cheaper than they had been accustomed to buy it. They would, in one
word, speculate in bacon, just as some people speculate in stocks after a
heavy fall. Unless something had happened to permanently depreciate the
value of bacon this rush of buyers, the great majority of whom would soon
settle their operations by cash payments, would speedily cause at least
a partial recovery in value, which might be followed by a further rise
or relapse according to circumstances. Whether anything serious had been
at work to depreciate value or not, the innumerable interests that would
have suffered by the decline in value would thus be protected at least
for a time by the speculative operations referred to. The price would be
kept up above what it would have been in the absence of such speculative
operations, while either the real or fictitious agency at work in
causing a fall were discovered and analysed. So in a converse sense, if
for some reason or other the price of corn were driven up very rapidly
several shillings per quarter above the value ruling at a particular
period, without holders of large stocks being able to discover sufficient
cause, many of them would hurry to market and sell what was still even
unthrashed. They would be so tempted by the very high price that they
would speculate upon such a high quotation being followed by a low one,
and they would sell all they could manage to deliver in a given time.
The speculator in the bacon would be playing in a legitimate sense the
part of the bull, and the speculator in corn that of the bear. It will be
admitted that there is what we know as a reasonable price for all things,
and that it is better for all concerned that a reasonable relative
value is maintained for all articles than that anything becomes either
extravagantly dear or so cheap that it is worth no one’s while to produce
it. Every article of those consumed by mankind in their several stations
has its fitting place either as a necessity or as a luxury. A necessity
for some reason may in course of time become a luxury, while, what is
much oftener the case, luxuries may by degrees come under the category
of necessities. The value of the one or the other may in relation to
other necessities or luxuries change, but it will probably change only
gradually, and during the process of change there will be a reasonable
relative value for such articles. It is important then in order to
satisfy the rational desires of all members of the community that the
reasonable relative values of all commodities should, if disturbed by
any cause, remain so as short a time as possible. The undue inflation
or depression of prices will be counteracted by speculative operations
such as we have referred to, and in that sense, speculation is directly
of immense benefit, as it is one limb of a body of law which administers
justice silently but surely to any one who has left one weak point in
his armour when attempting by violent or fraudulent means to snatch a
profit by unjustifiably raising or depressing prices. The one condition,
however, of such speculation being of direct benefit in keeping prices at
a level which is in accord with the existing state of supply in relation
to the demand at any period is, that the speculative operations shall
partake as nearly as possible of the nature of _bona fide_ operations.
The great benefit which is caused by the one kind of speculation is the
antithesis of the evil which results from the system of “time-bargain”
speculation as practised in all markets. The one kind of speculation is
the legitimate advantage taken of being able to buy any article cheap, or
to sell any commodity that is dear, whereas the other is nothing better
than pitch and toss in disguise.
The kind of speculation which is of benefit to the community may be
termed corrective speculation, as implying a restoration of prices,
through its agency, to a reasonable relative level. Such speculation
would come from buyers who had good reason to know that what they bought
they would be able again to sell, and that its purchase speculatively was
simply the supply of their ordinary requirements in anticipation, owing
to a favourable opportunity having presented itself. In proportion as
speculation proceeds from simply time-bargain operators will the price
be driven up or down, according to circumstances to an injurious degree,
as compared with a corrective degree, the influence of the one set of
speculators doing good and that of the other set harm.
[Sidenote: THE THREE CLASSES INTO WHICH SPECULATORS MAY BE DIVIDED.]
Speculators may be divided into three classes which about embraces all
the phases of speculation. First, we have the legitimate speculator
who spends all or some of his surplus capital in taking off the market
what he believes will give him a gain by holding it for some time.
That is the legitimate speculator who is a benefit to the community as
a leveller up of prices. Then we have the legitimate speculator of the
same stamp, with a difference that he is a leveller down of prices, and
is equally of service to society by immediately throwing on the market
all the stock of a certain article he may hold of be able to get for
the purpose, when it rises to a price above what he calculated on being
able to obtain, and which his experience told him was an unusually high
figure. Such speculators as these not only do not hurt themselves, but
directly benefit themselves by speculating, and in so doing protect the
interests of their neighbours and the community at large. Such as these
this book is not written for. We are concerned with those who, classified
as illegitimate speculators, and reckless speculators, which, second
term may have to be moved a point or two according to circumstances, are
over the border-line, whose _dictum_ is “Heads I win, tails you lose.”
The illegitimate speculator is the one who starts with a small capital
and with some method, with the idea of increasing it upon a system of
incurring risks which, in the ordinary course of the market he may
operate in, will enable him in case he has wrongly calculated the course
of prices, to pay his losses and go on again. His intention is never
_bona fide_ sale or _bona fide_ purchase. The reckless speculator is the
man who with little more than he stands up in makes a great pretence,
imposes upon the weak and credulous, enters the Stock markets and
operates to right and left up to the hilt so far as he may be trusted. So
long as he may enjoy a run of luck he rakes in the coin; when it turns
he leaves his dupes to pay and goes up the country, as they say of the
native Indian merchants when the telegraph announces to them that the
goods shipped to Europe for which they have drawn, will leave a loss.
We have then one class of speculators which is of direct use and value
in all markets, while the other two, the nature of whose operations we
have endeavoured to lay bare, cause an infinite deal of mischief, and
get in ninety-nine cases out of a hundred no good for themselves in the
long run, whether their transactions are entered upon carelessly, and are
allowed simply to take their chance, or an attempt be made to achieve
success by some exercise or skill.
FOOTNOTES
[1] In speaking of taking profits, the question arises, what is a
profit? Some people might say a profit is ½ per cent., and others 10 per
cent. Now, of course, it is impossible to give an exact answer to this
question. As a general rule, a transaction should not be made unless
the chances of a gain are greater than the chances of a loss, but there
may occasions occur when it would be advisable to take a small profit.
All depends on the condition and temper of the market; but one rule I
found to work well, and would recommend to every speculator, namely,
that at the moment when a doubt arises in your mind, and you begin to
ask yourself whether you ought to take your profit or not, then do not
lose one moment’s time, but take your profit, because you can never make
a very serious mistake by doing so, while you might possibly make a very
serious one by refusing it.
[2] Where it says “for the account,” it applies to the custom of the
London Stock Exchange, where all the buying and selling is for the
account, say generally the middle or end of the month.
H. W. R.
[3] According to this principle, operations conducted on options are more
certain to result in profits in the long run than margin operations. If
I assume to make a profit in only one out of every three operations,
and each option costs me 1¼ per cent., I will make a profit, if the
third option only yields me a profit of more than 3¾ per cent., which is
nothing unusual.
H. W. R.
[4] This depends whether it is a bull or a bear market.
H. W. R.
[5] See definitions of these terms, page 20.
[6] Operators means here, what is called in New York, “Insiders” and
members of the Stock Exchange.
H. W. R.
[7] I consider this most important, and maintain that “options enable
the operator to hold out for the event, or at least for a long time,
especially if the process is once or oftener repeated.”
H. W. R.
[8] Very important.
H. W. R.
[9] This hardly applies to the New York market. The so-called larger
operators and traders take here the place of the London jobber.
[10] The settlement does not exist in the New York market.
[11] Contango is equal to New York carrying charges—in New York so much
per cent. per annum, fixed daily; in London a certain sum from one
settling day until the next.
H. W. R.
[12] Equal here to borrowing stock flat, or even paying for the use of it.
H. W. R.
[13] Backwardation is equal to the paying for the use of borrowed stock
at the New York Stock Exchange.
H. W. R.
[14] In New York, “flat.”
H. W. R.
[15] Called “straddle” in New York.
H. W. R.
[16] In London all options are for a fixed date; at New York they are
generally made so that the option can be exercised at any time during the
pending of the contract.
[17] This may be true in a certain sense, but if options are considered
as an insurance feature, it is generally expected and hoped that they may
not have to be exercised, and will simply answer the purpose of insurance
and margin.
[18] This does not apply to the New York market.
H. W. R.
[19] In London all options are made at about the current market price,
and the premium paid varies with the character of the stock and length
of time, while in New York puts, calls, or spreads are generally so
much above or below the market price, and the premium consequently much
smaller than at London. The only exception here is the “straddle.”
H. W. R.
[20] This is not considered so in New York, where we generally expect a
so-called “January rise,” which, however, sometimes does not come; and
also sometimes expect a bear market in the fall of the year, when money
is employed to move crops, which, however, also very often disappoints
the operator.
[21] Somewhat superstitious. I have often observed it just the other way,
although generally a very dull market is expected during the hot summer
months.
H. W. R.
[22] This about corresponds with our spring and fall trade, when the
newspapers teem with interviews with prominent merchants and bankers.
H. W. R.
[23] Of course, this applies, in a general way, more to the London than
to the New York Stock Exchange.
H. W. R.
[24] This applies also to the New York market in so far as that after a
large bull speculation there will be heavy realizations, and after a bear
campaign or attack the covering process will take place.
[25] This applies to the so-called “lottery loans.”
H. W. R.
[26] Letter to “_Spectator_,” of October 4th, 1873, Saxon-les-Bains: a
Study in the Psychology of Gambling.
[27] In New York we have now any number of “bucket shops,” which
certainly deserve the name of “gambling hells.”
H. W. R.
[28] To a certain degree the agricultural industry of the United
States takes the place of the manufacturing industries in England.
Our manufacturing industries, however, are not unworthy of serious
consideration.
H. W. R.
[29] I do not think that this has been done yet in this country,
principally because the necessary charter cannot be obtained, unless
companies similar to the Oregon Transcontinental may be classed as such.
H. W. R.
[30] The generally large increase in speculation in the United States and
all the incidents connected therewith are too well known, and too fresh
in the minds of the reader, to need enumeration here.
H. W. R.
[31] This is now generally done for the customer by his broker, who
endeavors to collect, as far as possible, reliable information and
statistics for the benefit of his clients.
H. W. R.
[32] This also applies to important changes or other matters affecting
all kinds of corporate property, &c.
H. W. R.
[33] These remarks apply with the same force, if not more so, to grain,
provisions, cotton, petroleum, &c.
H. W. R.
[34] I think his remark is worthy of serious consideration.
H. W. R.
[35] At the New York Exchange nothing less than ⅛.
H. W. R.
[36] Even such fluctuations are considered as unworthy of consideration
in American railroad stocks, where fluctuations of 10 per cent, and even
more, within a comparatively short time, are of frequent occurrence.
H. W. R.
[37] Or through Options at least insure himself against loss.
H. W. R.
[38] In Options, however, the poorer speculator virtually borrows, for a
fair consideration, the capital and credit of the rich operator.
H. W. R.
[39] As said before, the settlement in New York is daily.
H. W. R.
[40] All these experiences happen also in the New York Stock market, only
in different form, such as railroad wars, law-suits, injunctions, &c.
H. W. R.
[41] Point.
H. W. R.
[42] Sometimes also for the purpose of encouraging first a following, and
to unload later on.
H. W. R.
[43] Government Securities.
H. W. R.
[44] The usage at the New York Stock Exchange is different.
H. W. R.
[45] The real type of the London Jobber does not, however, exist in the
New York Stock market.
H. W. R.
* * * * *
OPINION AS TO VALIDITY OF “PUTS,” “CALLS,” &c.
Law Offices of SIMON STERNE,
29 William Street,
NEW YORK, July 24th, 1886.
H. W. ROSENBAUM, ESQ., 60 Exchange Place, New York,
DEAR SIR:
You ask my opinion as to time contracts known as “puts,”
“calls,” and “straddles” or “spreads,” in relation to stocks,
bonds, etc. The inquiry is prompted by the apprehension that
such contracts may be regarded by the law as of a gambling
character, and therefore not enforceable.
Contracts partake of the nature of wagers only when there is no
intention either to deliver or to receive the goods, stocks,
or bonds, which form the subject matter of the contract. That
in point of fact and as a matter of local custom, differences
are sometimes paid on the settlement of time contracts instead
of delivery being actually made, does not affect the original
transaction, and does not invalidate it. So long as there was
not a clear intention, either express or implied, that the
things themselves were not, under any circumstances, either to
be called for or to be delivered, and so long as the holder
of the “call” has the right to demand the actual delivery of
the stocks or bonds mentioned in the contract, or the holder
of the “put” has the right to insist upon the actual delivery
of the stocks, bonds or merchandise represented by the “put,”
the transaction can, in no sense, be considered a gambling one
or partake of the nature of a wager, although, instead of the
actual delivery, differences may and sometimes are, as a matter
of compromise, accepted for convenience, at the time when the
contract is to be enforced.
This practice of paying differences is, as I understand it,
much rarer, however, than the actual delivery of the stocks or
bonds mentioned in the contract. The courts have of late years,
with great uniformity, dealt with these contracts with the
disposition to uphold and maintain them, and have discredited
the defence of their being of the nature of a wager, and have
held the contracting parties to their agreements in the same
manner as in every other contract for which a reasonable
consideration had passed.
The decision of the Courts of this State, of Massachusetts,
Pennsylvania and Illinois, and in the Federal tribunals, where,
in one form or another, these contracts have been the subject
matter of examination, have been so uniform in that direction
that we can now regard this as settled law.
It was only in the infancy of those larger and more complicated
mercantile transactions incident upon the development of the
modern industrial world, that doubts as to the moral aspect
of these contracts could arise. Political science proves, and
the law has followed the conclusion, that these time contracts
now form a necessary part and perform a conservative function
in the economy of a fully developed commercial life. They
are an as yet undeveloped form of insurance of values to a
purchaser, for which the purchaser pays a fair equivalent, and
in process of time such insurances must perform a larger and
more important function in the purchase of commodities or of
representatives of value which have a tendency to fluctuate
largely in price.
For a time it was supposed that the ordinary policy of fire
insurance partook of the nature of a bet, and there was doubt
as to whether the Courts would enforce contracts of insurance,
because it looked as though the insurer was saying to a man who
wanted to have his house insured against fire, “I will bet you
the value of you house that it does not burn down.” But we have
long since departed from this infantile mode of looking at the
situation and have learned to regard insurance as one of the
conservative elements of modern civilized life, by which heavy
losses are evenly distributed instead of coming with crushing
effect upon the persons suffering the misfortune.
The capitalist who sells a “put” or a “call” performs precisely
the same function as an insurer. He receives an equivalent
therefor, and it is a means by which he can turn the securities
in his hands with an intermediate profit, without serious
risk, except that in the case of a “call” he may be compelled
to change the character of his securities, or replace the
securities which he has called from him, and in the case of a
“put” he may be compelled to re-acquire the securities that
he has parted with; but, distributed over a very large mass,
and through different classes, of securities, these “calls”
and “puts” will balance themselves and leave, if intelligently
pursued, a resultant profit to the operator in the “puts” and
“calls,” with a prevention of disaster to the purchaser of the
privileges, as against excessive fluctuations in the market.
Respectfully yours,
SIMON STERNE.
* * * * *
H. W. ROSENBAUM,
60 EXCHANGE PLACE, NEW YORK,
Broker and Dealer in Options on Bonds and Stocks
Besides the usual Options (Puts, Calls and Spreads) with prices
fixed at a certain distance from the market price of the Stocks
or Bonds, I devote especial attention to the negotiation of
Options (Puts, Calls and Straddles), with price fixed at the
current market price of the Stocks, etc., which latter class of
Options my experience has proven to be the most advantageous
and ultimately cheapest.
I will also contract _Insurances against loss_ on purchases or
short sales of Stocks or Bonds, made through me, during periods
ranging from one week to sixty days, and in quantities of from
100 shares ($10,000 Bonds), upwards.
The Premiums to be paid for such Insurance range from $112.50
per 100 shares upwards, according to length of time and
character of security, and cover the whole loss which the
speculator may incur on this transaction.
Circulars, Rates and Information furnished on application.
H. W. ROSENBAUM, 60 Exchange Place, New York.