Chapter II: Part 2

The task of preparing the prospectuses of the thousands of fake copper mining propositions and oil schemes that have been foisted on the public in the past twenty-five years, and made to appear especially attractive by a price of from five cents to one dollar a share, has developed some of the most remarkable inventive geniuses of modern times. Their advertisements and arguments have been so convincing that the contrary persuasions of bankers and brokers have been absolutely unavailing with friends and customers who have given orders to buy the stocks; and against their enticements there is positively no remedy short of experience. The tempting baits of every imaginable variety offered by the promoters and dispensers of these bogus stocks have been the means of filching hundreds of millions of hard-earned money from credulous people, who are misled to suppose they are getting in on the “ground floor” of a modern Aladdin’s Cave before it is opened to the public. But it always has been so, and probably it always will be. It would be as useless to warn the general public, or even particular individuals, against these alluring ground-floor propositions as it would be to warn a flock of goslins to keep out of a mud puddle. It’s like admonishing a boy against a hundred kinds of mischief; he will surely find some act of deviltry not included in the list, and his defence will be that you didn’t tell him not to do _that_. And this argument is the more unanswerable because you well remember having used the same stratagem yourself.

THE PERILS OF OVER-ACQUISITIVENESS--THE HUMAN ELEMENT IN SPECULATION

Reverting again to the characteristic bent of speculators who trade on the constructive side of the market, some years ago a man of my acquaintance bought a hundred shares of Union Pacific at $120 a share, just for “a turn of a few points,” as he expressed it. Within a few days he sold it at $125, making a net gain of $500, less commission,--equal to more than five years’ interest at six per cent. on the $1500 he put up as margin. Someone afterwards convinced him that he was silly to have sold out at $125, because the stock was sure to go to $150; therefore he bought it back at $130, and at $135 he took on another hundred. The stock dropped back to $125, and on hearing from someone else that it was likely to go down to par he sold the two hundred shares at a net loss of $1500 and commissions. About that time somebody discovered that the Company was likely to distribute its large surplus, consisting of Baltimore & Ohio stock and other securities, and the stock rebounded to $135, at which figure my friend repurchased the two hundred shares he had sold at $125. At $139 he bought two hundred more, which, in a spasm of fright, he sold when the price suddenly dipped down to $133. Later, at $140, he recovered his nerve, also the last two hundred shares he had sold at a loss. At $160 the stock looked cheaper than it had at $120, and having a safe margin of profit to trade on he bought five hundred more. At $170 it was reported that Harriman (who controlled the road) was buying the stock, and encouraged by the entry of such distinguished company my friend plunged in and bought a thousand shares more. When the stock got to about $190 it was noised about that the great railroad magnate had completed his purchases, so the price went down a few points, again frightening our trader into taking a loss on three hundred shares he had bought at $189. But concurrently some wise tipster had discovered that the price had been depressed purposely, to enable other “inside interests” to accumulate a large line, and in a short time the price climbed to $200. By this time my affluent friend was becoming somewhat disturbed and confused, but lured by the prospect of greater gains he managed to regain his composure, and bought five hundred shares more; figuring that as long as he was trading on profits he had everything to gain, and nothing to lose. From here on the stock maintained a fairly steady upward course, and not to be outdone by the greedy “insiders” he bought three hundred shares at every point advance until the price reached $212, when he had accumulated fifty-one hundred shares. The net paper profit of well over $100,000 looked exceedingly tempting, and acting upon his own judgment, seconded by the good advice of his broker, he wisely closed out the entire lot, invested the net proceeds in government bonds, bade good-bye to the market, and planned a three months’ excursion to Europe. So far, so good; but--

“U. P.” (along with other stocks) continued its upward course, accompanied by much excitement and jubilation among the “longs” with an equal measure of apprehension and despondency among the hard-squeezed “shorts.” When our trader was preparing for his departure he happened to read a review by some stock market wizard who reported that according to “late inside information” a dividend of $100 a share in securities would be declared on Union Pacific, and that the stock would pay $10 a share in annual dividends; consequently at $250 a share it would be cheap. Whereupon my friend, who occupied the uncomfortable position of a “sold out bull,” became wretchedly aware that he had dropped out of the race long before the course was completed, and by doing so he had thrown away a grand opportunity of making nearly $200,000 more.

It may here be explained that the mental attitude of a “sold out bull” toward a rising market is much the same as that of a bulldog chained in his kennel while a dog fight is going on outside. A speculator may stand by and view with unruffled complacency the most enormous profits of others in securities that he never owned, but if one of his own pet stocks continues to advance after he has sold out, it not only reflects the error of his judgment, but the remorse he suffers in contemplating the additional sum he _might_ have made dampens all the pleasure of reflecting upon the profit he actually _did_ make.

Reluctant to admit such a costly blunder in judgment, determined not to be surpassed by his fellow-traders, and flushed with the victory of his recent exploit, when Union Pacific was selling at about $215 this “sold out bull” put in an unlimited order to buy five thousand shares. When his broker on the floor of the exchange began bidding for this amount of stock the crowd instantly surmised that some big operator was being “squeezed” on the short side, and before the purchase was completed the price had jumped to $219, the highest point it ever reached. After steadying itself for a while at around this figure it took a downward plunge, and a few weeks later our trader who had retired from the market with upwards of $100,000 profit, closed out the last hundred shares, saving a little less than the $1500 he originally put up as margin. His escape from utter financial ruin was largely due to the insistent advice of his broker that he should steadily lighten his load on the way down, rather than try to protect the whole lot by putting up additional margin.

The man who made this play in Union Pacific was a college graduate, and a veteran trader, with twenty years of hard-bought experience and a good family name behind him. While his experience, together with the advice of his broker, saved him from a heavy loss it might easily be supposed that the former alone would have prevented him from falling into the common error of novices. From which it may be observed that in stock speculation, as in other pursuits, wisdom and the ability to master one’s own impulses are sometimes late in arriving at full maturity. Indeed a broker who for upwards of thirty years has held a position of outstanding prominence on the floor of the New York Stock Exchange--a man who often handles a hundred thousand shares or more in a single day--once admitted to me that while he generally made money for clients who entrusted him with optional orders, yet he regularly lost more than half his enormous commissions trading on his own account. Which calls to mind a wise saying of the old Greek philosopher Heraclitus, five hundred years B.C.--“Many men have no wisdom regarding those things with which they come in contact; nor do they learn by experience.”

The man who made the splurge in Lake Copper was a daring young Lochinvar who came out of the West, with only a moderate sum of money, but an ample store of ambition; and although enjoying a large practice in an honorable profession, he occasionally took what he called a “flyer” in the market. For some years he was kept pretty busy clearing up the results of his miscalculations in this adventure, which I imagine was his last “flyer.” I have remarked that “experience” might reasonably have been counted upon to safeguard the man in the Union Pacific deal against the error of over-acquisitiveness; and seeing it did not, it would seem that the very _in_experience of our other trader should have made him less daring. From which we may conclude that in stock trading, all speculators, whether experienced or inexperienced, are subject to those inscrutable laws of psychology which Nature herself seems to have designed for the discomfiture of those who play at the wheel of Fortune.

THEY ALL RESOLVE, BUT THEY ALL GO BACK

One often hears the stock trader’s sad lament,--“If I ever get even, I’ll get out and _stay_ out!” But I never knew one of this class who ever got “out even” and I never heard of one who stayed out if he did get out even. If they get out, leaving a dollar in, they go back after it; if they get out a few dollars ahead, they go back for more; in any case they all go back. They wouldn’t be content to stay out of the market any more than a little shorn lamb would be content to stand overnight uncomplainingly in a blustering March storm, outside the open gateway to a sheepfold where his brother lambs were snugly housed.

A NEW KNIGHT-ERRANT IN SPECULATION

Another incident occurs to me, which is so typical of those who become infected with the stock market microbe that it seems worth relating. A few years ago a young friend appealed to me for advice as to the best method of investing about $10,000 surplus which he had taken out of his business the previous year with a view to placing it out at interest. I recommended several preferred industrial and railroad securities which seemed reasonably safe as a business man’s investment, and suggested that he put about twenty per cent. of the amount in each of five different stocks. He knew nothing about buying securities, so I introduced him to a reputable firm of bankers and brokers, and in addition to warning him to buy no more than he could pay for in full, I cautioned the head of the firm not to encourage, or even to permit, him to speculate on margin. He bought twenty shares each of five investment stocks, and a few weeks later he informed me, quite excitedly, that already his purchases showed a profit of more than six hundred dollars; also that inasmuch as the market was “going higher” he thought he ought to double his holdings. The mistake I had made in advising him to buy stocks, instead of non-speculative bonds, was now plainly evident; but I could do no more than caution him to stick to his own business and leave the stock market to others. He insisted that he could see no harm in buying a few more shares and margining them fifty points or more with the stocks he then owned; that it would not distract him in the least from his business, nor would it subject him to any risk or anxiety. My counter argument that stocks, having already advanced to a high average level, were as likely to decline as they were to advance further, was totally unconvincing. My young friend had caught the speculative infection; which, like typhoid fever and smallpox, must run its course. It can be treated, and sometimes mitigated, but not cured; in some cases not even by bankruptcy.

About four months later, on returning home after a few weeks’ absence, I received a telephone call from the head of the brokerage firm, informing me that the young man had sold out all his investment securities, and was in a raging fever of speculation; that he was buying and selling all sorts of highly speculative stocks in lots of from a hundred to five hundred shares, and that he spent two or three hours a day watching the ticker. He paid no heed to repeated warnings, and threatened to take his account to some other office if his orders were not executed as given. “What am I to do?” the broker asked in despair. “This young daredevil will probably be in bankruptcy in less than six months.”

On the losing side there are at least three distinct classes to be found at all times in stock market circles: one class who know nothing about the market, except what they read or hear; they are guided by floating rumors, the advice of well-meaning friends, and the spumous counsel of market tipsters. There is another class who arbitrarily suppose they have learned everything there is to know about the market; they possess a large store of cynicism and skepticism, and their market maneuvers are guided by a monumental self-sufficiency that would be a valuable asset in trading but for the fact that it is worthless. There is a third class who, although they really know the practices, theories, precedents and possibilities of the game, are not temperamentally qualified to utilize this knowledge in their transactions.

Of course every banking and brokerage firm has a few customers who go into the market and buy stocks and bonds during seasons of depression and afterwards pay no attention to the daily or weekly fluctuations until prices reach a stage where it seems advisable to sell out; then they dispose of their holdings and leave the market to the traders until bargain day comes round again. But the foregoing examples symbolize the mental attitude and customary procedure of an overwhelming majority of the trading public. This being true, one may draw from them some idea of how important a part psychology plays in the destinies of those who speculate. It would be erroneous to suppose that the characters who play these rôles are shallow-brained dolts because their actions (judged by results) appear nonsensical to the rational and composed mind. On the contrary, the speculative element represents for the most part men of uncommon shrewdness and foresight; men of studious and analytical minds; men who are, or have been, masters of every situation in their own professions or commercial vocations, even though most of them act like children when they get tangled up in the meshes of stock speculation.

Nor should it be imagined that the stock market is primarily a guessing game, or a game of chance; or even an unbeatable game; or that it is run by a gang of swindlers or mountebanks. Gamesters and swindlers may play at it, but the game itself is as straight and legitimate as any business pursuit. As a matter of fact it is one of the fairest and most open games ever played; a game in which every participant, man or woman, rich or poor, old or young, has an equal chance. The fact that most people resort to mere guessing and gambling in their stock transactions does not make it necessary to qualify this statement; neither is the truth of the assertion altered by the fact that certain individuals and organized cliques of traders manipulate stocks, both up and down, with utter disregard of basic values, and in this way set cleverly baited traps for other traders who imagine themselves wise enough to pluck the bait and get away without springing the trap. A trader or investor in stocks is not obliged to participate in these machinations, any more than one who goes to a circus is obliged to bet on the shell games and other tricky money-making devices that are sometimes run in conjunction with traveling menageries, but are no part of the main performance.

A person who buys a piece of improved real estate for less than half of its actual worth is reasonably sure he has a bargain; but if he afterwards sells it at a fair price, and later buys it back again at a much higher figure, he is gambling that for some reason or other it is going to be worth more, either actually or fictitiously. Nor is it ever unsafe to buy good stocks at figures away below their intrinsic worth. The element of gambling does not enter the undertaking until the market price has risen above the investment value; then if the owner refuses to sell, or buys more (as the speculator usually does) he is gambling on the uncertain event that some individual or clique is going to pay him more than the stock is worth. When one buys a stock, either for investment or speculation, its value cannot be permanently affected by the action of other traders, and no individual or group of individuals can euchre an investor out of his stock except by his own free will. The man with a hundred dollars has the same relative chance for making money as the man with a million; but the difficulty is that the one with the smaller amount is ambitious to make equally as much as the one with the million; therefore he resorts to gambling on thin margins; and not being content with ordinary risks he plays a long chance shot. If he wins, instead of withdrawing the original capital, with perhaps a little more, he usually stakes the whole amount on every venture until it is lost.

Viewing the stock market calmly in the perspective, it is not a question whether stocks will rise or fall; of that there is not the slightest doubt. They rise and decline with the same certainty that the sun rises and sets, though of course with less regularity. The only question is, how _far_ they will go in either direction.

The action of the stock market much resembles that of a troubled sea, which is always uneasy, rolling and tumbling about as if undermined by some volcanic force. The prices of stocks are periodically rising and falling, and one might as well undertake to fight the ocean tide as to contest the course of the stock market when once in full swing in either direction; for the market, unlike the tide, has no prescribed boundaries. There are times--indeed most of the time--when it is much wiser to sit by in the capacity of an interested observer, than to plunge in and become a struggling participant, with the chance of being carried out beyond one’s depth. Theoretically, there seems to be no reason why the stock market should not move along at a fairly even pace, except in case of some unexpected crisis; but practically, it is either abnormally high or unreasonably low most of the time. Stocks, like food, clothing and all human necessities, are more or less subject to the laws of supply and demand; and when the traders and investors throughout the country become convinced that it is time to buy stocks, a bull market is sure to ensue; then when everybody has acquired all they want--and some of them more--and they make up their minds to sell, it is only natural that values should recede; which they do, usually to somewhere near the low point from where they began to rise. This process of sliding up and down the scale is repeated year after year, and age after age.

No one has ever been able satisfactorily to explain why the prices of all stocks, both good and poor, and even gilt edge bonds, keep an almost even pace in the backward and forward swings, but they do; and thousands of people who have placed their savings in securities that are as sound and safe as a savings bank have viewed with alarm the crumbling market values of their investments, wondering what has happened to their particular stocks or bonds, and if the slumping prices foreshadow a reduction in dividends, or if interest will be defaulted on coupons. Investors who own bonds or good dividend paying stocks need not be troubled over these capricious changes; but others of a more venturesome or speculative bent are forever wondering when they ought to get in or out. Of this latter class it is the best guessers who win.

SOME SIGNS ARE COMPREHENDIBLE; OTHERS ARE HARD TO INTERPRET

It has been wisely observed by one who is more famous for the wisdom of his writings than for the amount of money he has made in speculation, that when a market reaches the top there is no visible sign to indicate it; that on the contrary, at this critical point, everything seems to indicate much higher prices. Also the majority of traders, tipsters, financial editors, and even the brokers themselves, are apt to be most bearishly disposed when the market is at its lowest point. This same authority declares that when the “cats and dogs,” that is, the poorest and most neglected stocks in the list, begin to advance it is time for holders of securities to cash in their profits. It might be further observed that when plums get ripe and the melon season is on, it is a sure indication that summer is well advanced; likewise when, after a long season of bullish anticipation, the stock market “plums” are being distributed, and the “melon-cutting” process is in full swing--when the favorite “mystery” stocks have disgorged their “hidden assets,” and begin to sell ex-rights, ex-dividend, ex-merger and ex-mystery, it is a pretty sure sign that the “bulls” are running short of provender, and that the “bears” are about due for their inning. A man who accumulates large paper profits in speculation and fails to “cash in” until a large part, or all, of his gains have been dissipated in the process of deflation which inevitably follows every boom, is comparable to one who plants a field of grain and refuses to harvest it at maturity, hoping that the ripened kernels will get a little larger. Many a speculator has been brought to grief by an insatiate greed for that coveted topmost point, instead of being content to sell at a good profit and leave the possibility of a small gain to the individual who buys his stock.

When the plums are gone and the bulls go hence,
We’ll sharpen our claws and jump the fence.

]

NONE ARE SO BLIND AS THOSE WHO REFUSE TO SEE--NONE SO FOOLISH AS THOSE WHO SCOFF AT WISE COUNSEL

While there are various danger signals which indicate the culmination of a bull market, just as there are others which mark the final stages of a bear market, it must not be supposed that these signals stand out like so many red lights placed in front of a ditch at the roadside; on the contrary they are of the most deceptive and decoying nature to all except experienced and dispassionate observers. And even the best judges are frequently deceived. On this point one of the most reliable financial writers in the country says: “Not all of the economic indicia ever turn together at any peak or bottom in the securities markets. Always the case is that some of the indicia disclose the change, while others do not. The public usually keeps on expecting a bull movement to continue, no matter how unreasonably high stocks may sell. This persistence of bullish sentiment greatly facilitates distribution by wealthy holders.” This timely note of warning was written early in January of the present year, when a great bull market after running about two years was at the boiling-over point; but very few bullish traders ever pay any attention to such counsel; nor would they if the danger signals stood out like beacon lights along a treacherous shore. A few days later the following bit of good advice was issued by a Boston broker:

“For fifteen months this country has enjoyed clear skies, politically, economically and financially. Washington Irving begins his essay on the Mississippi Bubble with the phrase, ‘There was not a cloud on the horizon,’ and then goes on to state that the prudent mariner takes cognizance of such ideal conditions and prepares for the inevitable change. Today, after fifteen months of national sunshine and cloudless skies in all directions, we believe it behooves a man of affairs to take counsel with himself relative to his investment and speculative position. Many business men who should have learned better by past experience, still take the business situation as a guide to their stock market operations in spite of the fact that all stock exchange history shows that the market turns up long before a period of business depression has run its course and likewise turns down six months or more before prosperity comes to a pause.”

Speculators can usually find an abundance of literary food suited to their particular tastes, as witness the following, issued by a prominent market forecaster simultaneously with the above: “We wish you to keep in mind that the biggest speculation yet witnessed in the present bull market is still to come. Now that the reactionary trend in the market has been definitely halted, you can look with assurance for higher prices in many issues in the near future. Continue to pick up our favorites as outlined in our letters, as we expect them to prove features.” Most of the “favorites” were then selling at figures far above their intrinsic worth, and many of them have since fulfilled the prediction that they would “prove features,” for soon afterwards they declined anywhere from ten to fifty points.

The active participants in a market that has run a long course in either direction are wont to become so intoxicated with affluence, or downcast with adversity--depending on which side they have been operating--that they give little heed to the matter of interpreting signs which forecast future events, particularly if these signs controvert their own opinions. A man driving an automobile at a sixty-mile-an-hour pace does not stop to read signs by the roadway; and no more does a trader bother with warnings when a prolonged series of stock market victories has blurred his vision to everything but prosperity. As every unfamiliar noise or object tends to aggravate fear in those who are frightened in the dark, so every concurrent happening stimulates courage and recklessness in those who become emboldened by stock market success. Paradoxical though it may seem, many things which are construed bearishly in a falling market are regarded as bullish in a rising market; and signs which portend higher prices in the mind of a bull are equally significant of lower prices to the mind of a bear. In other words, both bulls and bears often derive their opposing opinions from the same identical hypothesis. These strange anomalies are not mere theories, they are attested stock market facts.

For example, in a bear market some years ago the stock of the Amalgamated Copper Company was depressed several points in one day on the report that the dividend was to be reduced. Next day the report was denied and upon supposedly good authority it was stated that the regular dividend had been earned and would be declared. Whereupon the traders--who were mostly bearish--argued that a declaration of the regular dividend would be a bear argument, because it ought to be reduced and if the usual amount were declared it would be only for the purpose of furnishing artificial market support to the stock; consequently it was again depressed a dozen points or more. Later when the trend of prices had turned upward this stock advanced sharply on the report that the dividend was to be increased. Although the report met with prompt denial, the stock was nevertheless bid up several points more on the theory that if the dividend were not increased it at least ought to be, and if only the regular declaration were made, that would be evidence of a commendable policy of conservatism.

EVEN THE STOCK MARKET HAS ITS FARCICAL SIDE

Some of the stock market philosophies and inventions are quite amusing to the unsophisticated onlooker. When the Amalgamated Copper Company and the Anaconda Copper Company were under separate management a clique of traders became interested in advancing the market price of the latter stock, and forthwith the tipsters and rumor-mongers circulated a report that Amalgamated was buying Anaconda for control. This device proved a profitable asset for the pool members, who were thereby enabled to sell out their holdings at much higher prices. When this was accomplished and the story had become threadbare, another ingenious story was circulated, to the effect that the Anaconda Company was now seeking control of Amalgamated, whereupon that stock in its turn became the favorite of traders, who succeeded in lifting the price high enough to let the pool unload its holdings at a handsome profit. While these two monster companies were performing the act of trying to swallow each other the traders greatly enjoyed the comedy, in consideration of which they contributed generously toward swelling the purses of the promoters. The final outcome was that the great Anaconda succeeded in devouring its competitor, which appears still to be in process of digestion--or rather indigestion,--judging from the internal agonies expressed in the market action of the stock.

SPECULATORS ARE SLAVES OF SENTIMENT

When the whole country becomes pervaded with an epidemic of bullishness the action of speculators is always directed by sentiment rather than judgment; and a market that is swept along by excited emotions is always dangerous,--dangerous to go short of and dangerous to be long of. Hysterical “bulls” care nothing whatever about the earnings or dividend returns on a stock; the only note to which they attune their actions is the optimistic slogan, “It’s going up!” and the higher it goes the more they buy, and the more their ranks are swelled by new recruits. A herd of stampeded cattle (cows no less than bulls) will rush blindly into a river, or butt their brains out against stone walls, trees or other obstructions; they also stampede every critter that happens along their path; and anyone who has ever witnessed a panic in a theater or auditorium, or in the stock market, need not be told that under such circumstances men are but little saner than cattle.

And speaking of sentiment, it is remarkable to what extent the combined business and financial structures of the country are swayed to and fro by this giant motive power. Like the biblical wind that bloweth where it listeth, and man heareth the sound thereof but knoweth not whence it cometh or whither it goeth, sentiment springs up from comparatively trifling or unknown sources and after playing its havoc, vanishes as suddenly and mysteriously as it came. In a bear market a train wreck, or the death of some financier, or an earthquake in Europe, will put the market off to the aggregate extent of hundreds of millions; whereas one of the greatest bull markets in history found its chief impetus in the most universally devastating war the world has ever known.

THERE IS BUT ONE WAY TO BEAT THE STOCK MARKET; THERE ARE MANY WAYS OF BEING BEATEN BY IT

It is admitted by the most sagacious financiers that the only sure way of making money trading in the stock market is to get in and out at opportune times, and to stay out most of the time. As against this there are numerous ways of losing money. Among these, one method in particular is quite popular among a class of traders who although too clever and conservative to buy stocks at “top” prices, have not the patience to wait for “bottom” prices. When values begin to crumble after the top has been reached in a bull market there must be a set of “carriers,” or supports, onto which stocks can be dumped on the way down. The market does not collapse like a ten-story card house; it generally goes down gradually for a while, one or two flights at a time, and finds steadying props every now and then which sustain it for brief periods. For instance, a certain stock paying $5 a share annually has been hoisted by degrees from $75 up to $150 a share. When it descends to $140 a few wise traders who have been impatiently waiting for a reaction will buy it because it looks cheap at $140 after having sold at $150; then at $130 another lot of traders who are a little wiser and more patient than the first lot buy it because it looks much cheaper than it did even at $140; and so on down it finds these temporary supports, until at length it gets back to $75, or perhaps lower, where it is accumulated by a few shrewd investors and bargain hunters whose attention has been attracted to the market by front page newspaper headlines announcing that the stock market is in a state of complete prostration. They go on about their business and pay no particular attention to the market until the price has recovered to a point where the stock, returning $5 a share, is no longer “paying its board,” when they sell out at a good profit, and _stay_ out while the speculators carry it on up as far as they like. When the stock was at the bottom price those who bought it on a scale from $140 down were either so overloaded or pessimistic--probably both--that they were unable to buy more and thus reduce their average to a reasonable cost.

THE STOCK EXCHANGE IS A MONUMENT OF BUSINESS INTEGRITY

It is a popular belief with many people that the stock exchanges are highly prejudicial to the public interest and to public safety; as if they actually manufacture stocks, fix their price, and sell them to the public. It is also believed by many persons--even by men with enough brains to buy and sell securities--that whatever they lose on their transactions is gained by the stock exchange or the broker through whom they trade; and that the brokers on the floor of the exchange plan out each day’s campaign and manipulate the stocks with utter disregard of the outside world. Furthermore, it is commonly supposed by a certain class of uninformed people that stock exchanges create panics and financial depressions; that they are licensed evils, feeding and fattening upon the credulity of an innocent public. Nothing could be farther from the truth; nothing could disclose a more profound ignorance of existent facts than for one to adhere to any or all of these fallacious beliefs. The stock exchange itself has no more control over the price of securities than it has over the ocean tides. It is merely an auction room where anyone may send in orders to sell stocks and bonds, either at a certain asking price, or “at market” to the highest bidder. On the other hand anyone may put in either a limited or “at market” bid for whatever securities he wants, provided they are on the list admitted for trading; and no securities are so admitted without being passed upon by a committee of competent judges whose duty it is thoroughly to investigate every company before admitting its securities to the board. The great value of this service to both traders and investors is plainly evident. The people who run the exchange have no other privileges, prerogatives or authority than to buy and sell securities on their own account, or to act as buying and selling agents for the public, and to execute their orders precisely in accordance with given directions. The interests of the public are safeguarded by every known precautionary device, and if a broker makes a mistake he stands the loss, regardless of what the amount may be. In this connection, those who have stood in the visitors’ gallery of the New York Stock Exchange on a busy day have been induced to wonder how it is possible for the brokers to avoid errors under such seemingly chaotic conditions as exist there. To the onlooker it resembles a riotous mob scene in a modern cinema, and one might easily mistake it for a place where a lot of frantic men are trying to buy insurance on a sinking ship, instead of dealing in gilt edge securities which are not immediately perishable. A benevolent sweet-natured old lady who stood for a time looking down upon this wild confusion was asked what she thought of it. “I think it’s all very interesting,” she said. Then after some reflection she added: “But my husband never told me that we are in a financial panic. And even so, why should the men get so angry with one another?”

No matter what anyone may say or think to the contrary, there is no business or profession on earth in which a higher degree of honor and business integrity prevails than among the brokers on the floor of the New York Stock Exchange; and there is no business or profession in which sharp and unethical practices among its members are more quickly detected, or more promptly and summarily dealt with. And by way of passing comment it may be remarked that the going price of $150,000 for a membership on the New York Stock Exchange would seem to imply that the brokerage business is no less profitable than it is honorable. In its certificates of membership the New York Stock Exchange declares itself to be “An institution whose history dates back to 1792, and whose rules and regulations have been formulated for the purpose of maintaining high standards of honor among its members, and for promoting and inculcating just and equitable principles of trade.” And it is required of every member that in every particular he live up to these principles. It is a place where a nod of the head or a lifted finger consummates transactions involving millions of dollars. In ordinary business affairs a deal wherein only a few dollars are concerned is signed, sealed, witnessed and sworn to before a notary; but here contracts involving millions are ratified by a mere gesture, and never questioned by either party.

Every buyer or seller of stocks is a free agent to do as he pleases, and if he gets hoodwinked through the stock exchange it is generally because in trying to outwit or undo somebody else he overreaches himself and falls into his own snare. The only percentage against him is what he pays in commissions and taxes on his trades; and the only chances against him are his own blunders in judgment; these, indeed, are likely to prove a sufficient handicap. Every corporation whose securities are listed on the stock exchange is obliged to make a full and comprehensive report to the exchange at least once a year, and these reports can be found in any brokerage office; they are always open to public inspection, and no one need buy any stock or bond without first satisfying himself regarding the nature of the industry, capitalization, earnings, management and other details. Moreover, if at any time a purchaser becomes dissatisfied with his investment and wishes to get his money back or change into something else, there is always a ready market for the stock. It may be more, or it may be less, than he paid for it, but in either case it can be quickly converted into cash.

The investor in stock market securities may equip himself, free of cost, with full information concerning every listed security; what the company’s earnings have been over a period of years, how much stock and how many bonds are outstanding, the highest and lowest prices at which the stock has ever sold, and all such matters in the fullest detail. He therefore enters “the game,” as the stock market is oftentimes called, with his eyes open, and the cards all faced up on the table. But if he deviates from sound principles and resorts to dabbling in stocks that he knows nothing about, except from hearsay among traders and market tipsters, and undertakes to guess the maneuvers of cliques who are manipulating them, he has no one to blame but himself for indulging in such an expensive folly.

BOOKS TEACH WISDOM, BUT EXPERIENCE IS A MORE PRACTICAL INSTRUCTOR

It may be set down as an axiomatic truth that no one can learn the art of making money in the stock market by reading statistics, charts, precedents, theoretical disquisitions and instructions. Of course it is not needful, nor would it be any more practicable than it is necessary, to set forth any fixed rules or maxims governing one’s procedure in any other line of business or any other profession, since no one could use them advantageously without the requisite qualifications, such as adaptability, shrewdness and practice. Hundreds of different combinations of cards are laid out in books of instructions on auction bridge, with explicit directions as to how to bid and play the hands, yet nobody ever heard of a good bridge player being made solely from book instruction. One reason is that there are actually millions of combinations of cards. Also in stock trading there is an indefinite number of needful “don’ts” which the most resourceful person can neither contemplate nor anticipate. Every stock market cycle shatters some precedent; every era produces new phenomena. Everyone who has ever studied a book of instructions on how to play golf knows how impossible it is to take up any golf club and make it perform according to schedule. A firm stance, feet well apart, body under full control, the right knee stiff, the left arm almost rigid as it follows the right in a low backward swing; and most important of all, the eye firmly fixed on the ball, while the club whips through the air, and after lifting the ball, follows on through, carrying both arms forward to their full length, and many other things which I never could do, and cannot now recall; all these directions the would-be player will learn as he knows his A, B, C’s; but in his intense eagerness to swat the ball he disregards most, or all, of the stated essentials, and at the moment of impact, while his club is ploughing up the sod two or three inches behind the ball, his eyes are cast heavenward in fervent anticipation of watching its flight. Likewise the speculator figures his profits long before they materialize. The most important thing in golf, and the hardest thing to learn, is to keep the eye on the ball while in the act of hitting it; and the hardest thing to learn in stock trading is to keep the eye _off_ the market, hold firmly and patiently to good resolutions, _and not try to get rich too quickly_. Both look to be easy, but--

Reducing the whole problem to its simplest form, the stock exchange is a well-organized and honestly conducted market-place where anyone may sell or buy investment or speculative securities, at whatever price anybody else is willing to pay or accept for them. There is no more mysticism about the exchange itself than there is about a book auction room, or any other auction room where articles of merchandise are offered at an upset price, or auctioned off to the highest bidder. A man who buys stocks or bonds for investment is not gambling with anybody that they will go up or down; he buys them because he wants to invest his money and get interest or dividends on it. If a stock bought at $100 a share, paying seven per cent. annually in dividends, should increase in market value to $150 it is obvious that the rate of interest on the total capital is correspondingly reduced, and that whereas his original $10,000 brought a return of seven per cent., the capital of $15,000 is earning a net return of only four and six tenths per cent. Under such conditions it is oftentimes wise to sell out and reinvest the money in other securities which bring a larger net return; or if stocks in general are too high, put the money in the bank and wait for lower prices. The $5000 gain in capital will surely more than cover interest on the original $10,000 investment during the time one has to wait for good buying opportunities.

This reminds me that some years ago, when Calumet & Hecla Mining stock was selling at $850 a share, on which amount it netted only a small dividend return, I asked a friend (who owned a large amount of the stock) why he didn’t sell it and reinvest in other securities. My argument was that the stock having already declined from $1000 a share, would probably go much lower, considering that the earning capacity of the mine was in all probability as great as it ever would be; therefore the chances were more in favor of a decrease than an increase in earnings and dividends. To all of which he readily assented, but in view of the fact that he had bought the stock at $50 a share it was paying a very high rate of interest on his original investment; and for sentimental reasons he preferred to keep it,--which he did. Such instances are not at all uncommon; nor is it uncommon to hear intelligent business men remark that they know they ought to sell certain investment securities, because the market price has risen out of all proportion to the income yield, but other good securities are all so high that they really don’t know what to put their money in. The chances are probably a hundred to one that if the money were put in the bank and allowed to rest a while at three per cent. interest, it could within a few months be reinvested in the same securities, or other equally good ones, at a net gain of three to five years’ interest, or even more. This is not stock gambling; it is merely business prudence.

WHIMS AND FALLACIES IN SPECULATION

Traders and investors too often become stubbornly insistent on recouping their stock market losses in the same identical securities in which they lost their money. After having lost a large sum of money there is undoubtedly a special gratification in seeing it return by the same channel through which it escaped, but the enjoyment of this peculiar satisfaction is hardly commensurate with the risk that many people run in attaining it. In discussing this point some years ago with a friend who owned a thousand shares of stock in a bankrupt railway company which had cost him $50 a share, and was then selling at $15 a share, with a fifty to one chance that the road would go into receivership, I argued that while the loss of $35,000 was a large and bitter pill to swallow, the chances were that it would not be made smaller or more palatable by the inevitable receivership, and that he might as well salvage what he could from the wreckage of his investment. After all, there were dozens of really _good_ stocks that had declined more than $35 a share; stocks that would eventually “come back” when the market turned about; whereas with his stock there was a probable assessment of $10 to $15 a share staring him in the face, and after paying that, the stock was likely to sell at a figure less than the assessment to be paid, judging by past performance of the stocks of other companies in receivership. The road was tremendously over-bonded, over-capitalized, encumbered with every conceivable sort of debt, and not earning its fixed charges. He vehemently declared,--“No, I’ll be damned if I’ll allow those thieves to do me out of that money; they shall pay it all back, and more with it!” He held tenaciously to his resolution, the road fell into receivership, and a few months later he could have bought the stock in the open market at two dollars a share less than he had paid in on the assessment.

A favorite and amusing pastime with a multitude of traders is to cajole themselves into believing that when some stock they own becomes increasingly active after a considerable advance, the renewed activity is a sure indication that “bankers and insiders” are accumulating it for a still further advance. It is well to remember, however, that bankers and insiders do most of their accumulating before the rise begins, and while the outside public is doing its accumulating the bankers and insiders are quietly supplying the stocks. It is quite clear that if the insiders pursued the same tactics as the public they would soon be relegated to the ranks of the outsiders.

It is a common saying, even among veteran traders, that such and such a stock “is a good buy, but you must watch it closely.” To _watch_ a stock after buying it is about the most foolish thing one can do. To watch it go down is certainly no pleasure, and if it goes up it doesn’t need watching. The time to watch it is before buying. In order to limit one’s loss on a purchase it is a simple matter to put in an “open stop loss” order somewhere under the cost price; and no amount of diligent “watching” will prevent it from going down. On the other hand, to insure one’s profit, if the price goes up, nothing more is required than to put in a “G. T. C.” (good till cancelled), selling order at whatever figure above the cost price the purchaser is willing to accept as his profit.

There is probably no more popular fallacy among traders than the one which presupposes that great “pools” and combinations formed to manipulate certain stocks are either made up of officers and directors of the corporations concerned, or else that such pools base their operations upon valuable inside information from some head official. This may be true in rare instances; but generally speaking the directors and officers of the companies know nothing whatever of the pool operations in their stocks, and when they do know they usually frown on such schemes. Anyone who stops to consider knows that the market prices of the company’s securities are of far less concern to the officials than the matter of conducting their business operations at a profit. If the company’s earnings are good, it is clear that this fact will soon enough manifest itself in the demand for the securities, without any abortive or clandestine efforts; and if the earnings are poor, it would obviously be beneath the dignity of the officials to deceive the public through pool operations or pool affiliations. A more simple plan would be to utilize their “inside information” by quietly selling the stock.

I recall a particular instance, a few years ago, when there were some tremendous pool operations in the common stock of one of America’s largest industrial corporations, and after the stock had been bid up ten or a dozen points it was reported that a “managing director” of the company had assured one of the pool members that it had been tacitly agreed among the directors to declare a fifty per cent. stock dividend at the next board meeting. The public instantly took the bit in its teeth, and inside of a week the stock advanced fifteen points more, which doubtless afforded the clique an auspicious occasion for unloading its holdings, bought at much lower figures. About that time I happened to be in New York, and while lunching one day with the chairman of the board of directors at his club he told me that the matter of a stock dividend had not even been discussed among the directors, and that in his opinion there was no likelihood of any change in the dividend policy for at least a year,--which proved to be true.

PROBLEMS DEFYING PRESENT SOLUTION ARE BETTER DEFERRED TO THE FUTURE