Chapter I: Part 1

Transcriber’s Notes:

Text enclosed by underscores is in italics (_italics_).

Additional Transcriber’s Notes are at the end.

* * * * *

THE PSYCHOLOGY OF SPECULATION

* * * * *

THE PSYCHOLOGY OF SPECULATION

THE HUMAN ELEMENT IN STOCK MARKET
TRANSACTIONS

BY
HENRY HOWARD HARPER

WITH
ILLUSTRATIONS BY HAYDON JONES

PRIVATELY PRINTED

BOSTON--MDCDXXVI

* * * * *

COPYRIGHT 1926 BY
HENRY HOWARD HARPER
_All rights reserved_

* * * * *

BOOKS BY THE SAME AUTHOR

Booklovers, Bibliomaniacs and Book Clubs
Bob Hardwick
A Journey in South-eastern Mexico
The Stumbling Block
Random Verses
The Codicil
The Unexpected Hodgkins
The Story of a Manuscript
Byron’s Malach Hamoves
The Tides of Fate
The Devils’ Nest
Library Essays
Highlights of Foreign Travel

(_All of the above are out of print_)

The Torch Press
CEDAR RAPIDS, IOWA

THE PURPOSE OF THIS BOOK

There are many persons who, although knowing a great deal about the stock market, do not realize that the reason why they cannot “beat” it, is that they know too little about themselves. There are others who know their limitations well enough to let this monster problem alone. As it is important that one should learn to swim before plunging into deep water, so it is well to know some of the dangers of the stock market before delving into it.

It is not the purpose of this book to dissuade anyone from buying and selling securities, but merely to point out some of the stumbling blocks and handicapping influences that speculators, and even investors, are sure to encounter.

H. H. H.

* * * * *

THE PSYCHOLOGY OF SPECULATION

THE HUMAN ELEMENT IN STOCK MARKET TRANSACTIONS

The stock market literature of the past thirty years would make a vast library in itself--one that would provide reading for a lifetime. Perhaps there is no other subject, apart from the eternal topic of love, in which more people are vitally concerned, either directly or indirectly. Since most of the country’s wealth and commerce is controlled by corporations whose securities are listed on the various stock exchanges, the price fluctuations, which often reach the daily aggregate of hundreds of millions of dollars, either in loss or enhancement of value, are necessarily a matter of general concern. In 1925 the stock transactions on the New York Stock Exchange alone amounted to the stupendous and unprecedented total of well over 452,000,000 shares, while the sales of listed bonds totaled more than $3,398,000,000. These figures, of course, do not include the unknown billions of dollars worth of securities bought and sold on a dozen or more other exchanges and through private channels.

In addition to the large daily grist of “Market Opinions,” many books and pamphlets are written which purport to be “Guides to Traders,” or up-to-date recipes for “Beating Wall Street.” They set forth an exhaustive array of statistics, instructions and warnings; they furnish elaborately charted plans indicating many of the pitfalls of speculation; they tell how to avoid these, how to buy, what to buy, when to buy and how to make money; but while the theories advanced are oftentimes sound and easily comprehended, very few people profit by them, because when once caught in the maelstrom of stock speculation the average man becomes more or less mesmerized, and at critical moments his conservatism, his resolutions and his theories all take flight. Under the discomposing influence of a rapid succession of changing values and alternating impulses he loses his perspective, is incapable of calm reasoning, and is likely to do precisely the opposite of what he had intended doing. Like a piece of driftwood in a swirling stream, his actions are controlled less by personal instigation than by the currents about him. Therefore to write, however intelligently, or to read, however studiously, about how to make money in the stock market is largely wasted effort in imparting, also in acquiring, information that does not adequately inform. Not that the instructor’s premises are faulty, or that the reader is deficient in understanding; but that the difficulties which necessarily attend the application of the scheme of operations subsisting in the mind of the author are so perplexing and disconcerting that the disciple becomes incapable of adhering to sound basic principles. And it must be perfectly obvious to anyone that even the teacher himself is not a master, but merely an expounder, of his own principles; for otherwise he would be a capitalist instead of a professional scribbler. Notwithstanding the many excellent books which have been written on the subject, the real secret of stock market success still remains (and probably always will remain) locked up in the bosoms of a few who are too busy to write, and too rich to feel the need of writing.

THE PERNICIOUS INFLUENCE OF THE STOCK TICKER

The individual who trades or invests in stocks will do well to keep away from the stock ticker; for the victim of “tickeritis” is no more capable of reasonable and self-composed action than one who is in the delirium of typhoid fever. The gyroscopic action of the prices recorded on the ticker-tape produces a sort of mental intoxication, which foreshortens the vision by involuntary submissiveness to momentary influences. It also produces on some minds an effect somewhat similar to that which one feels after standing for a considerable time intently watching the water as it flows over Niagara Falls. Dozens of people, without any suicidal intentions, have been drawn into this current and dashed on the rocks below. And thousands daily are influenced by the stock ticker to commit the most fatuous blunders.

As a camera fails to record a true picture if placed in too close juxtaposition to the object, so in studying the ticker-tape one is restricted to a close-up view of conditions, resulting in a distorted gauge of values; for the figures recorded often mislead and confuse the attentive observer; in fact it frequently happens that the price fluctuations result from a wave of hysteria among a coterie of traders, and bear but little analogy to the true value of the stocks. To illustrate this point more explicitly, the stock of almost any conservatively capitalized and well managed concern paying six dollars annually in dividends has an investment value of from $85 to $100 a share; but in the ups and downs of the market the stock gets buffeted about on the exchange in obedience to the varying sentiments of traders, sometimes selling as low as $50, and at other times as high as $150, without any change whatever in the company’s earnings, its prospects, or its management. (These matters will be dealt with a little farther on, and exemplified by showing their effects upon the mentalities of various types of speculators.) It does not follow that one who keeps in touch with the stock market by telephone, or through the daily papers, will find his path free from thorns and snares; but he will at least have a more open perspective than one who submits to the influence of the ticker.

Any intelligent trader may reason out exactly what he ought to do under certain specific conditions; but in the quickly shifting and uncertain process of determining values he loses his mental poise; and experience proves that anyone whose reasoning faculties become confounded is apt to be affected by some form of hysteria, and will frequently do the opposite of what he would do under normal conditions.

The most copious and the most unreliable financial writers are the market “tipsters” who write daily letters of advice to an army of subscribers, and claim to have more or less positive knowledge of what certain stocks or groups of stocks are going to do marketwise. They often profess to have definite “inside information,” which any subscriber may receive at a stated price, ranging anywhere from $10 a month upward. These false financial prophets, who lead a horde of blind followers, should not be confused with reputable bureaus and statistical experts who base their opinions and their advice to clients upon a logical analysis of general conditions.

Henry Fielding wrote a whole essay to prove that a man can write more informingly on topics of which he has some knowledge than on matters that he knows nothing about. He believed also that mankind is more agreeably entertained by example than by precept; therefore it is not the purpose of this discourse to teach anybody anything, unless perchance something may be gained by example or suggestion. There are four subjects on which advice, however good, is generally wasted,--politics, stock speculation, religion, and love; for in these matters grown-ups rarely follow the advice of others, and when they do, if they profit by it they take all the credit to themselves, whereas if they lose they always blame the adviser. Such are the inexorable and universal laws of human nature.

Anyone may relate his own stock market experiences, or those of others--perhaps to the surprise or enlightenment of his audience. He may even venture his opinions on the subject; but for anybody to assume that he can continuously operate an unfailing system of making money on stock or grain exchanges would be equivalent to asserting that he could invert the fundamental laws of psychology, or that he could beat the game at Monte Carlo by scientific methods. Many have tried both, to their sorrow.

And still, hundreds of thousands of people continue to play at gambling tables, and hundreds of thousands speculate in stocks. There are many persons who gamble moderately all their lives, just as some drink moderately all their lives, with no resultant harm; while with others both of these inhibited practices become fixed and ruinous vices. Since trading in stocks has the appearance of being an easy way of making money, it is one of the most alluring pursuits of modern times; and from this very fact, although legalized for all, it is susceptible of becoming one of the most dangerous habits known. It is dangerous for the confirmed addict not only because he is apt to lose, but for the reason that it distracts his attention from business in daytime and frequently destroys his rest at night. But as it would be folly to advise people not to embark in commercial pursuits because statistics show that upwards of ninety per cent. of business ventures result in failure, so it would be useless to caution people not to trade in stocks because it is a hazardous undertaking in which a peculiar sort of sagacity and self-control are the only safeguards against certain disaster.

Most people of sturdy mentality are unwilling to admit that they could be made easy subjects of hypnotic influences, and would scout the idea that mere business transactions in securities could effect any undue subversion of their equipoise. The average human mind is, however, incapable of maintaining its equilibrium under the strain of great excitement; and no amount of knowledge, either inherent or acquired, no amount of experience, however dearly bought, will enable one always to think intelligently or act wisely under highly nerve-racking conditions. It is said that persons who become disoriented in a forest will almost invariably go in the wrong direction (I have done so myself on two different occasions); and that in an effort to salvage goods from a burning house they will throw mirrors and other fragile articles out a third-story window and carry pillows downstairs.

THE DISCONCERTING EFFECT OF SUDDEN LOSSES AND GAINS

There are but few things more unbalancing to the mind than the act of suddenly winning or losing large sums of money. A few years ago at Monte Carlo I was in company with a friend, a well known man of affairs who while there played at roulette nearly every day, merely as a pastime. He was of mature age, naturally methodical, conservative, temperate and cool-headed. He made it an unalterable rule to limit his losses to $200 at any one sitting, and on losing this amount he always stopped playing. His bets were usually limited to two dollars on the numbers, and never doubled except for one turn of the wheel when his number won. He generally played three numbers at a time; never more than four. For ten consecutive sittings luck was against him and each time he had lost his stake of $200. I saw him get up and leave the room, apparently in a state of disgust. An hour or so later I discovered him at a roulette table in another room stacking his chips in piles on a dozen or more numbers. Now and again when he exceeded the limit the watchful croupier reduced his bets and pushed a few disks back to him. In addition to betting on the numbers he was staking a thousand franc note on one of the three columns, another thousand on the colors, and a like amount on the center dozen. In one run he lost seventeen consecutive bets on red, of a thousand francs each. His eyes were bloodshot, his fingers twitched, and plainly he was under the strain of great agitation. He continued to play for three hours or so, when all of a sudden he got up, stood for a moment looking dazedly about, then left the table. He afterwards told me that he lost twenty thousand dollars; and that he hadn’t the slightest recollection of anything that happened during the play, nor did he realize the amount he was betting. In this connection, it is a fact not generally known, that many rich men sign printed cards of instructions to the proprietor of a certain well known gambling club in the South, directing him to stop their play and refuse them further credit beyond a certain specified sum on any one day or evening of play, and refusing to become responsible beyond that amount. If men who trade in the stock market were to impose like restrictions upon their transactions the losses would in many cases be greatly minimized.

RETIRED BUSINESS MEN IN THE STOCK MARKET

Retired business men suffering from _ennui_, have often had recourse to the stock market as a means of stimulating their emotions and expanding their fortunes; with the result, in the first of these purposes they have usually succeeded beyond their expectations, while in the second they have met with uncharted obstacles. Some years ago when many of the great trusts were in process of formation a well known Pittsburgh magnate sold out his business to the United States Steel Corporation and later bought a home in New York and turned his attention to stock speculation. After plunging into a boiling market and buying thousands of shares at top prices, the trend eventually changed and he found himself on the crest of a tobogganing market with more than a hundred thousand shares of speculative stocks. At length when the pace threatened both his fortune and his peace of mind, in a fit of disgust he dumped his holdings overboard and proceeded to damn the market, the broker and everything else, including himself for being such an unlucky simpleton.

“My dear Mr. Blank,” said his broker, “you are possibly quite justified in all your abuse, except that of yourself, to whom you really should apologize, since you do yourself a great injustice. You have had six months’ experience in this game at an expense of a little less than two millions of dollars, whereas at the pace you began you were due to lose at least five times that amount but for your rare judgment and cool-headedness.”

“But why in hell didn’t you tell me all this before?” inquired the irate customer. To which the broker calmly replied, “It’s my business to _take_ orders; not to give directions to a man of your understanding.”

When the American Hide and Leather Company was formed a number of years ago, a prominent Boston leather merchant of my acquaintance, sold his business to the new organization for a round million dollars in preferred stock and bonds, and in the course of the next few years of more or less restless inoccupation he devoted himself to a systematic study of investment securities and general stock market conditions. The panic of 1907, when values were almost entirely lost sight of in the mad scramble to liquidate stocks, afforded a rare opportunity to view the follies of reckless speculation, and our astute leather merchant was quick to observe the importance of this salutary lesson. The recovery that followed was almost magical, and many who bought stocks at the low prices doubled their money in a few months. Then following this sharp recovery there was the natural setback when speculators undertook to convert their new wealth into cash. And this too proved a wholesome lesson to our new apprentice in the game of high finance. For some years he had held to the conservative practice of investing only in non-speculative bonds, but this proved to be a slow and monotonous process of enlarging his fortune; furthermore it was devoid of the exciting thrills experienced by those who make fortunes overnight. He thought the funds of widows and orphans ought properly to be invested in gilt edge bonds and mortgages, but for a man of his business sagacity, in the prime of life, to content himself with merely cashing his coupons every six months was to decline into a state of innocuous desuetude--a condition into which he was determined not to retrograde. To launch one’s bark into the rapidly shifting currents of fortune in the stock market and attempt to steer an even course is one of the surest preventives of _ennui_, and after deliberately weighing and analysing conditions from every conceivable angle our erstwhile leather merchant concluded that cutting a few coupons now and then was too tame an occupation for a man of his acumen and ambition. He informed his friends that after years of careful study of the “game,” he was convinced that the reason why people lost, was that while in theory they all had the right ideas, they all used wrong formulas in practice. He declared that the “public,” so-called, always “bought at the top and sold at the bottom”--a commonplace in stock market parlance, though not necessarily true. Also that the inclination of all speculators is to venture out beyond their depth, i. e., to buy more stocks than they can pay for, or protect by ample margin. This indiscretion he thought to be especially characteristic of those with but small capital, whose eagerness for large gains outstripped their conservatism and exposed them to the perils of abrupt and unexpected reactions and panics. He had never bought more hides and leather than he could pay for, either with his own funds or with money easily borrowed from banks; he would never buy more stocks or bonds than he could pay for, or protect with sufficient margin to carry them through the severest depression.

He was a self-made man; he had entered his firm as errand boy, and by sheer force of perseverance, ambition and intellect he rose steadily in usefulness and power until he became sole proprietor of the whole establishment. His prestige and the bulk of his fortune had been made in buying and storing goods when the markets were glutted and prices were low, and holding them till the markets were bare and prices were high. After accumulating large stores it sometimes required a year or more of patient waiting for the readjustment of trade conditions; but never had there been a time when during a given cycle, prices had not been abnormally low and also abnormally high. He reckoned his twenty-five years of this sort of training as a singularly qualifying element of success in buying and selling stocks. This undertaking, like dealing in hides and leather, required forethought, discretion, patience and courage. There was scarcely a two-year period in any decade wherein stocks in general could not be bought reasonably cheap; nor was there a similar period when at some time during the twenty-four months they could not be sold at fairly high prices. Statistics proved this to be almost infallibly true; statistics likewise proved that the preponderance of failures in his own line of business could be traced to injudicious purchases of large stores of merchandise at high prices, with resultant inventory losses. As a merchant he had learned that buying and selling leather and hides at a profit was a matter of forecasting future conditions in the light of past events; and as a student of stock market conditions he learned that a recovery of values _always_ follows a prolonged slump in the price of stocks, and that sure success awaits those who pick the right psychological moments to buy and sell.

In due time this retired merchant secured a desk in a brokerage office and undertook to study the stock market systematically at close range, and to reduce some of his theories to actual practice. He did not launch into this new venture as one would plunge into a cold bath; he patiently watched the action of the market from day to day, until stocks declined to a point where it seemed safe to begin buying on a scale down. Meanwhile he continued to study stock market charts and conditions--charts with double bottoms, double tops, pyramids and all such enlightening information--about past performances. At length he bought a few hundred shares of selected stocks, depositing bonds as margin--ample margin of fifty points or more. Prices reacted a little further, and in keeping with his motto, which was--“Buy on the decline, when the public is getting out, and sell on the rise when the public is getting in,” he increased his holdings at every two or three points decline. In the course of time the market faced about, stocks began to recover, and in a few weeks he had the satisfaction of seeing his plans work out successfully in experiment, with a net gain of enough to cover interest on his investment for more than four years. According to precedent a temporary reaction was due; therefore, like most wary beginners, he sold out and cashed in his profits. In his exhaustive study of stock market psychology he had learned that while it is the practice of inexperienced traders to take small profits on stocks in a rising market, it is also their custom to buy the stocks back again at much higher figures, instead of waiting for prices to decline. This was one of the danger pits charted on his course of action; one of the many against which he had built up mental fortifications, strong enough in seasons of peace and calm, but in most people easily destructible by the baffling influences of stock market speculation.

Although a beginner in practice, he was a veteran in theory, for prior to entering the financial arena he had made hundreds of imaginary purchases and sales, nearly always at a profit. Moreover he had discovered that one may play both sides of the market, apparently with equal safety, and that the biggest “killings” are said to be made on the “short” side. By selling “short” on bulges and “covering” (i. e., buying the stock in to cover the sale) on reactions, it was possible not only to make money both ways, but also to avoid the tedium of waiting inertly for opportune occasions to buy at bargain-prices. From the experience of others he derived a valuable lesson, namely, that investors and traders are always too eager to keep their capital constantly employed; that they are prone to hold stubbornly to one position, either long or short; and that the wellnigh irresistible impulse to get back into the market after selling out, whether at a profit or a loss, has probably been the ruination of more speculators than any other one cause. Playing the market both ways seemed a sure means of forestalling this error.

STOCK MARKET TRANSACTIONS APART FROM GAMBLING

The thought of becoming a stock “gambler” was farthest from this man’s mind; for gambling in any form was contrary to his code of ethics. But buying and selling legitimate commodities could not be construed as gambling; therefore stocks and bonds, being legitimate commodities, could be bought and sold without doing violence to the most sensitive conscience. In order to gamble, one must “risk or stake something on an uncertain event;” which is popularly regarded as a vice, and is made legally wrong because it is said to be injurious to the public morals. It also is morally wrong to gamble, because if you win you deprive your fellow-being of something without giving any adequate return. Our friend contended that stocks bought at figures below their intrinsic value are so sure to advance, that the transaction does not come within the given definition of the word _gamble_; also that the same rule applies to stocks sold at prices far above their worth, no matter whether for long or short account. He reasoned that if he gained by selling a stock short, although someone was apt to be the loser, he had no means of knowing who that someone was, therefore he assumed no moral responsibility in prudently acquiring money in a businesslike way, even at the expense of some indefinite person who had been foolish enough to risk it. If the act of selling stocks which one does not own is regarded by some as being unethical in the strictest sense, it is at least sanctioned by general custom. All sorts of goods are sold for future delivery, even before they are manufactured; and our erstwhile merchant had often sold leather for forward delivery, while it was still in process of tanning; hence he had no scruples against selling stocks in anticipation of being able to buy and deliver them later.

It is generally conceded that the public is always arrayed on the “long” side (that is, the buying side) of the market; it is also universally admitted, at least by those who know, that the so-called “public” always bears the brunt of stock market losses; therefore our friend decided that he would act the part of wisdom and go “short” of the same number of shares that he had previously bought and sold,--the idea being that before selling his long stock he convinced himself that approximately the top prices had been reached, in which case the market would naturally react. But for some inexplicable reason it failed to run true to his expectations; that is, the probable course deducible from charts and precedents. Per contra, the prices continued stubbornly to rise. When he had lost all his profits he backed his judgment by his actions, and doubled his short sales; and at five points higher he doubled again, for a break was long overdue. Being short upwards of three thousand shares in a rapidly rising market is a tremendous mental strain, even for a seasoned trader; and naturally our novice became somewhat nervous. Some stock market wiseacre--one or more of which class are usually to be found lounging about every brokerage office--consolingly remarked that while stocks have a certain fixed bottom, they have no top; which increased his anxiety.

After studying charts and various compilations of figures and facts about earnings and past market performances, he concluded that Bethlehem Steel, selling at $45 a share, was not worth half that price; also that Studebaker at $35 was much too high. After an extended inquiry into the past and prospective earnings of these two companies he sold short a thousand shares of each; but instead of reacting they steadily maintained their upward course with the rest of the list. His broker called for more margin, and he put up another hundred thousand in bonds. He was advised to “cover” and go “long,” but he stood firmly by his convictions--and the charts.

“That’s why the public all lose,” he declared; “they get ‘cold feet’ and shift positions at the wrong time.” From a personal friend who was a director of the new General Motors Corporation he got an “inside tip” that that stock, selling at $82, was too high, so he added a few hundred shares of it to his short account. Meantime the country’s commerce and the entire group of stocks, moved forward with the steady even tread of an army on parade.

THE STOCK MARKET PRODUCES A NEW PHENOMENON--TURNS WORLD-WIDE DISASTER INTO LOCAL PROSPERITY

At this time (1915) the major portion of the civilized world was embroiled in a mad turmoil, employing every known device and resource in destroying human life and every form of physical property. With the very foundations of civilization thus disrupted, and our own country on the verge of being drawn into a deadly combat in which the most humane and enlightened nations of the earth were reverting to the practices of ancient barbarism, it is not strange that our merchant friend should have argued that it was a most unpromising situation upon which to construct investment values and business prosperity. It was inconsistent, inconceivable and seemingly impossible that stocks, even good stocks, could continue to advance in the face of such demoralizing conditions. When war was first declared, even before England became involved, the stock market was thrown into such a violent state of panic that it became necessary to close the stock exchange for several months; yet now when the clouds of disaster were at their darkest and hung menacingly over the whole of civilization this country alone was indulging in a riotous exhibition of prosperity such as had never been dreamed of. The market tipsters, the financial editors of newspapers, the brokers’ letters and all stock market literature, with but few exceptions, were crowing loud and boastfully for still higher prices, and after the whole group of stocks had risen in unison for a time, some individual stock was singled out every day or so, pushed into the forefront and skyrocketed to dizzying heights. The brokers and all the customers were delirious with joy and excitement. The stock brokers were all bulls, the traders were bulls, the tipsters and rumor-mongers were bulls--even the office boys who called the quotations from the tickers were bulls, and shouted vociferously when some special stock jumped a point or more from the previous quotation; and it seemed to our trader that in calling out the advancing prices special emphasis was always given to the particular stocks he was short of. He was literally beset with bullish exultation and bullish news from everywhere. The noisy enthusiasm in the board-room rankled in his ears and rasped on his over-wrought nerves. He felt as one could imagine a tiny lone bear would feel in the center of a great arena, surrounded by a cordon of cavorting bulls. To him it seemed that he was the only bear on earth. There might be others, but they were too cleverly sequestered to admit of sharing his misery with them.

NOBODY LOVES A BEAR

In a bear market a discouraged bull is at least not despised; he may find a sympathetic sufferer; but in a bull market no one ever wastes any compassion on a bear, or admits sympathetic kinship with him. He is popularly regarded as a pessimist, a destroyer of values, a discordant note, an uninvited guest at a banquet. If it be a true saying that “misery loves company,” it must follow that wretchedness is accentuated by noncommunion with fellow-sufferers; in which case it may be said that the situation of a bear in a rousing bull market represents the _ne plus ultra_ of hopeless desolation.

At length it became a mooted question whether to “sit tight” and wait for the boisterous storm to blow over, or cover his shorts, buy more stocks and go with the tide. Heretofore he had maintained a stolid attitude, born of self-confidence, inspired by a triumphant business career, and supported by precedent and every reasonable prophecy. The traders had simply gone mad and were rushing headlong to their ruin, as they had often done before. History was merely repeating itself. It was a time for sound cool-headed judgment, and he stood firm in the determination not to lose his head and join in any such reckless carousal. But the more he reasoned and studied the charts, the more unprecedented and obstinate the market became. One thing he failed to consider was, that the favorite caprice of the stock market is to violate precedent, and to do the thing least to be expected of it. The newspapers gave front page double-column headings to business improvement and stock market news--the enormous demand for textiles, increased prices for all commodities, easy money conditions, all labor disputes amicably adjusted, and the stage all set for the greatest era of prosperity the world had ever known. The financial columns of the newspapers literally teemed with bullish interviews with financiers and bullish reports in all lines of trade and finance. There was scarcely a discordant note in the rush and rhythm of progress; and when one was faintly sounded the general din instantly smothered it. Even the great cataclysm in Europe was now construed as an additional bull point, because our factories were all running night and day to supply the armies with equipment and provisions. It was argued that the more they fought the more supplies they would need, and the more money we would make in furnishing them; also that the more ships the Germans torpedoed the greater demand there would be upon our shipyards to replace them. The nation had indeed gone prosperity mad, while the rest of the world was going to destruction--certainly an irregular and puzzling phenomenon. Occasionally when some veteran writer piped a note of warning to stock speculators, it was met with a new outburst of bullish demonstration, and the market swept on like a conflagration in a city built of tinderwood. Stocks that had lain dormant for months suddenly came to life and became the favorites of powerful cliques; corporations that had never earned their fixed charges were said to be piling up enormous surpluses, the railroads and steamship lines were glutted with traffic, the factories, steel foundries and ammunition plants were running night shifts, banks and millionaires were said to be buying everything for control, whole fleets of grain-laden ships were going abroad and the farmers were simply wallowing in wealth; the retail stores were jammed with eager customers, labor was all employed at high wages, and Big Business was rushing with all the force of an avalanche along Prosperity Highway, without a danger signal in sight.

Gradually, though manifestly, it became evident that to resist such a tremendous momentum was as expensive as it was exasperating; and his hitherto fond illusions of greater wealth were dispelled by a terrifying reality. But a man who has been right all his life is not easily convinced that he is wrong in a market position that seems justified by common sense and fundamental conditions. And yet, however steadfast human resolution may be, it is wellnigh impossible to maintain a fixed attitude in opposition to such a cumulative and overwhelming force. The sensation of being short in a rampant bull market has been pictured as similar to that of being chained by the heels to a rising balloon, without any idea of the height to which the gas will carry it--not a cheery picture for the contemplation of one who is bearishly disposed. It is therefore easy to understand how likely one is under these “third degree” operations to lose his mental bearings, his nerve--and his money. A trader who is long of stocks knows to a certainty how much he can lose on any given number of shares; but on the short side there is no limit to what one may lose, even on a few hundred shares. The loss of a definite sum, whatever the amount may be, can be borne with equanimity by a man of nerve; but to maintain a short position in a bull market gives one about as uneasy a feeling as it would to have a number of outstanding promissory notes with the amounts left blank for some unknown person to fill in. It keeps one in a constant state of fear, and fear knows no limitations; it contemplates and magnifies every baneful possibility.

However, this man of iron nerve, this erstwhile dominant figure in the leather trade who had ridden for a quarter of a century with his feet firmly in the stirrups, was not to be easily unhorsed. At the close of a turbulent day he took account of stock and decided to “cover” (buy in) all the dividend paying stocks he was short of, and to sell an equal number of additional shares in the non-dividend paying issues, such as Bethlehem Steel, General Motors and Studebaker. The reckoning showed a paper loss of a quarter of his million dollar capital, but he bore it courageously, determined to recover it by adopting the safer course of “shorting” only such stocks as had never paid dividends, and perhaps never would. Therefore he sold more Bethlehem Steel, at $80, $90, $100, $150 and $200 a share. He sold Studebaker again at $75, $100 and $150, and more General Motors at $100, $150, $200; and a hundred shares at every fifty points advance until it reached $500. Those who knew him in the board room said that throughout this ordeal he maintained the most inflexible nerve they had ever known; but at the close of the market on that memorable day in 1915 when Bethlehem Steel touched $600 a share he collapsed in a state of nervous prostration and was taken home in an ambulance. He did not live to see General Motors sell at $850 a share (on October 25, 1916) and Bethlehem Steel at $700 a share (on November 18, 1916). Long before these figures were reached his million dollar capital had vanished and he had crossed the bar into the Great Beyond. His widow was left almost penniless and he was buried at the expense of his Lodge. Shortly before passing away he remarked sorrowfully to a friend at the bedside,--“In the past year I’ve suffered every torment known to the demons of hell. My only grain of comfort is that it’s all over now and I have nothing more to lose.”

From this tragic experience it is obvious that there is but little comfort or profit to be gained on the short side of a protracted bull market; and the natural inference must be that the “long” side of such a market is as felicitous and profitable for bulls as the short side is discomforting and unprofitable for bears. In theory it is, but in practice there are comparatively few who make large gains, and fewer still who “get away” with them. It has been authoritatively stated by the head of the world’s largest gambling emporium that it is impossible for any human being to beat the roulette wheel for any considerable length of time; and that human nature is so constituted that nearly all of those who make large winnings continue to play until they have lost all their gains, and perhaps more. In the first place, there are thirty-six numbers, with a single and double zero,[1] on the wheel; if a player places a dollar on each of these he stakes $38. He must inevitably win on some one of the numbers or one of the zeros, whereupon he collects $35, together with the dollar risked on the successful number, making a sure loss of two dollars, which is the house’s fixed percentage. If a player wagers a dollar on one number, with an even break of luck he is due to win $35 (and also to get his dollar back) once in thirty-eight plays. At this rate, for every $3800 risked he is due to lose $200. Players often stake as high as two to three thousand dollars, or even more, on every spin of the wheel; from which it will be seen that with average luck, at this rate of play one will lose more than a thousand dollars an hour. It is said to be a proven fact that the chances are so much against the player, that a roulette wheel can be run at a profit, even if the percentage in favor of the house is entirely eliminated. This is due to the fact that the excitement of play causes a certain confusion of mind, and players are prone to do the wrong thing; for instance, double their bets when in an adverse run of luck and “pinch” them when luck is running favorably. Or, on the other hand, players who have pressed their advantage and doubled in a run of favorable luck will continue stubbornly to plunge long after their luck has changed. Precisely the same psychology applies to trading in stocks.

FOOTNOTE:

[1] At Monte Carlo the roulette wheels have only one cipher, but at the end of each turn of the wheel the person (or persons) playing on the winning number usually contributes a disk (or one thirty-fifth of the amount won) to the croupier’s “box,” which amounts to about the same thing as having two ciphers, without this customary gratuity. It is said that one-half of the amount of these voluntary contributions goes to the corporation, and the other half pays for the entire upkeep of the establishment, including the salaries of the croupiers and other attaches. The same disks are used by all players, and a winner who persistently ignores the “box” is not apt to be favored by the croupier when another player claims his winning bet, as often happens.

FRENZIED SPECULATION IS THE RANKEST FORM OF GAMBLING; IT IS A PERILOUS INDULGENCE

An enormous percentage of stock market speculators become victims of over-confidence after a series of successful trades. Their buoyant spirits increase with every new success, until at length they throw discretion to the winds, extend their risks far beyond the margin of safety, and at the infallible turn of the market they find themselves in difficulty, like foolish fishes that get stranded on the beach at high tide. It is a fact, as inexplicable as it is true, that men with a fair amount of gray matter in their heads, who would flout the idea of paying $50 a share for a particular stock, will later borrow money from a broker at from six to eight per cent. to buy the same stock all the way up from $100 to $150 a share on the slenderest permissible margin; and, instead of proportioning the margin of safety to the increased carrying risk they narrow it by continuing to buy as the prices advance. Also there are many who after selling their stocks at a handsome profit will buy them back at twenty, fifty, eighty, or a hundred points higher, and with much less timidity than they felt when they first bought them at low figures. Prosperity in the stock market seems to encourage optimism, rashness and impatience in about the same degree that adversity discourages enterprise and aspiration. But there is far greater danger in excessive optimism than in excessive pessimism, for the reason that optimists are inclined to back their hopeful views by indiscriminate purchases of stocks at high prices, while pessimists are seldom disposed to back their views at all. The risks incurred in buying stocks on a “thin” margin are so manifest that it seems almost as platitudinous to mention them as it would be to remark that children endanger their lives when they congregate on thin ice.

THE DANGERS OF INVERTED PYRAMIDS

It was a wise custom of the ancients to build their pyramids with the big end on the ground; but modern builders of pyramids in the stock market have reversed this time-honored practice, and most of them build their stock pyramids with the heavy end up; therefore they invariably topple over after reaching a certain height. For example, when a certain stock known as Lake Copper was selling at $5 a share a trader bought five hundred shares, expecting to double his money on it, as the stock was “tipped” to go up to $10. When it reached that figure, instead of selling he bought another hundred, and put in an order to sell the whole lot at $15 a share. Before it reached his selling price he cancelled the order and raised it to $25; again cancelling it and buying another hundred at $25. By this time he was convinced that it would go to $50. He bought five hundred more at $40, then the stock dropped back, and fearing he might lose all his gains he sold a thousand shares at $30. Although he had lost $5000 on the last five hundred shares he still had a profit of $4500, less commission, after deducting the full cost of the two hundred shares still remaining. The stock recovered to $50, and encouraged by the “street” gossip about rich ore bodies being uncovered, with accompanying reports that the stock would be cheap at $75, he bought back at $50 the thousand shares he had sold at $30. At $60 he sold five hundred shares, which he afterwards repurchased, with five hundred more, at $75. By this time the speculators had discovered that the mine was one of the richest prospects in the Lake region; it was rumored that the company’s stock was being bought for control by a large mining company whose property it joined, and the stock was “tipped” for $150. Many surmised it to be another Calumet & Hecla, which had sold at $12 a share, and afterwards at $1000. From here on up he “pyramided,” buying a hundred shares at every point advance, and wisely protecting his profits with “stop loss” orders a few points under the market price. Once the market reacted and five hundred shares of his stock were sold on “stop,” after which the price quickly recovered, and being assured that the stock had been hammered down for the sole purpose of “shaking him out,” he bought back the five hundred shares at five points higher than he had sold it. To prevent another similar _coup_ he cancelled all stop loss orders and took his chances in the open market, confident that he could not be beaten as long as he was trading on “velvet” with an original investment risk of only $2500. When the stock reached $85 someone half convinced him that it was time to cash in his profits, and he put in an order to sell the whole lot at $90, including the additional shares he should buy on the scale order up to that point. When the price approached $90 he cancelled the selling order and put it in at $100. Later the price reached $94.50, and he had thirty-two hundred shares, on which he could have cashed in a fortune. But what was the use cashing in then, when he was in a fair way to making half a million, or even more? After reaching $94.50 the stock began to decline, and here the top-heaviness of the pyramid commenced to manifest itself, for with every downward point he was losing $3200. When the price got down to $75 his broker demanded that he either put up more margin or lighten his load by selling a thousand shares or so. The stock continued to go down, and again the broker called on him for more margin. Soon after putting up all the money he had, and all he could borrow, the broker was obliged to close out the account to protect himself. The stock afterwards went down to ninety cents a share.

THE LURE OF THE COPPER BOOM--AND BOGUS SECURITIES

Of course the speculator who buys stock in a new copper mine is simply taking a gambler’s chance that ore will be found in paying quantities. Most of those who have submitted to this enticement in the past thirty years do not need to be reminded of the hazards attending such risks. I recall that about twenty-five years ago, when the “copper fever” was raging throughout the country--and in Boston especially it was highly infectious--a half-page advertisement appeared in one of the leading Boston newspapers, relating in graphic terms the discovery of the most remarkable copper mining prospect that had ever come to light. The chief mining engineer of one of the largest and best known copper mines in the United States--a man of wide experience and vast knowledge in the mining business--while prospecting somewhere in the West came upon what seemed to him the richest deposits of copper ore he had ever seen. These ore bodies were said to be located in a large mountain, conveniently near a railroad, and by tunneling into the side of the mountain the ore could be trammed out, dumped onto the cars and hauled to a smelter a few miles away. The mining engineer (whose full name was given) had immediately resigned his position, organized a stock company, known as the Occidental Copper Mining Company--into which he admitted a number of personal friends--bought the property, and began tunneling operations on his own capital and what he had raised among his friends through the sale of stock in the new corporation. Having exhausted their funds and desiring to continue exploration work--which became more and more promising--the directors had sold a block of treasury stock, the par value of which was one dollar a share. The latest reports showed that the work was progressing satisfactorily under the personal direction of the engineer who had discovered the mine, and that stockholders might expect dividend returns inside of a year or so. The advertisement was inserted, not by a stock-jobbing firm or underwriting syndicate, but by a well known wholesale and retail grocery and provision company, who claimed that after fully investigating matters they had bought a large block of the stock, twenty thousand shares of which they would distribute among their customers at the par value of one dollar per share. I called on the president of the grocery company, who said his firm thought so well of the prospect that they had bought twenty thousand shares as a speculative investment, and a like amount to distribute among their customers. He represented that although the shares were easily worth $5 each he considered it good advertising for his company to sell them at par, $1; and with a view to extending the benefits as widely as possible he preferred to dispose of the stock in small lots. He cheerfully gave me the names and addresses of the directors of the new mining company and suggested that, if interested, I might write to them. One was a physician of good repute, another was general auditor of the Chicago, Milwaukee & St. Paul Railway Co., another was a western lawyer of prominence, and so on. I wrote to each of these three, telling them of my interest in the matter, also asking for a candid expression of their opinions about the property. Each of them sent me a personally written reply, substantially corroborating what information I already had, and saying that they had given their names and their financial support to the company solely upon the recommendation of the mining engineer, whom they knew personally and trusted implicitly. Further than that they knew nothing, but were willing to take a gamble on his judgment. After receiving the second of these three letters I hurried to the office of the grocery and provision company, and to my great disappointment, found that they had only a few hundred shares left. When I told the president that I would take the entire lot at his price, one dollar per share, he shook his head. He said the stock was going rapidly in five, ten, and twenty share lots, and that in justice to their other customers and friends he did not think it fair to let me have more than one hundred shares at most. But finally he yielded to my persuasive argument, that inasmuch as he had only a few hundred shares left he might as well let me have them all and thus finish the whole transaction at once, saving himself the bother of peddling them out piecemeal.

Nothing further transpired until, some months later, I received a circular from the mining company reporting good progress with development work; also stating that owing to further need of funds to continue this work the directors had concluded to make another offering of treasury stock at the same reduced price at which they had sold the previous block, namely, _at five cents a share_! In the aggregate the advertising feature was probably more advantageous to the customers than it was to the grocery company (which soon afterwards went bankrupt); for although the purchasers, including myself, lost every dollar of their investment, it doubtless served as a warning (which in my case it certainly did) that prevented much greater losses in other swindling schemes.