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Title: The Theory of Stock Exchange Speculation

Author: Arthur Crump

Editor: Henry W. Rosenbaum

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Language: English

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*** START OF THE PROJECT GUTENBERG EBOOK THE THEORY
OF STOCK EXCHANGE SPECULATION ***

THE THEORY
OF
STOCK EXCHANGE
SPECULATION.

BY
ARTHUR CRUMP.

With Preface and Annotations by
H. W. ROSENBAUM.

New York:
H. W. ROSENBAUM.
1887.

Copyright, 1886.
By H. W. ROSENBAUM.

Jones Printing Co. Press,
47 Broad St., New York.

PREFACE.
Some years ago I came across a book, called “Crump’s Theory of Stock
Speculation,” which had gone through several editions in England; and the
practical wisdom expressed therein impressed me so forcibly that ever since
then I formed the project of publishing an American edition.
The reader may be astonished that, as a broker, I desire to give such a
book a larger circulation than it possessed heretofore, as the natural
conclusion would be that it might injure my business. I feel, however, that it
is not so, and think that a broker loses nothing by doing his duty in warning
his clients against danger, and showing them the pitfalls.
I do not quite agree with the author of the book on every point, especially
when he seeks to convey the impression that it would seem almost
impossible that any profit could be derived from Stock Exchange
speculation. During my long experience I have seen many speculators
accumulate large fortunes, and I believe that when speculation is conducted
by a clear-headed man, as a matter of business and not as a matter of
amusement, it offers great chances.
Where the strength of Mr. Crump’s work lies is in his showing what
attributes of character a man must possess to be successful, and with these
attributes a man must prove successful in stock speculation as well as in any
other business. Condensed, these attributes are: first, a clear head; second,
capital; and third, patience.
I do not agree with Mr. Crump, that a speculator, to be successful, must
be a hard-hearted, selfish man. I found it different with most of the
prominent men in Wall Street. Of course, if a Gould or a Vanderbilt buys up
a whole railroad, he cannot very well take many people into his confidence;
but these men are not what is generally called speculators—they are
generals or diplomats, and they are not different in their actions from
generals in warfare or diplomats in politics.
Outside of this class, I found generally, when I asked one of the
prominent speculators for his opinion of the market, that he gave me his

true and candid opinion of the future of the market; and the probabilities are
that, if even not acting on this opinion at that very moment, his general
policy was based on such a forecast of the market’s condition.
The strength of the successful speculator lies in his observing the
important principle set forth by Mr. Crump on page 60 of his work.
“Speculators never set sufficient value on the importance of avoiding a loss
—they think only of the profits.” As it is with our money affairs when we
say, “Look after the pence; the pounds will take care of themselves,” so it is
with speculation. Look after the losses; the profits will take care of
themselves. Never refuse a profit, is a golden motto for speculators, which
unhappily few of them, in their greediness, have the courage to adopt. The
observance of this rule is the main cause of the success of the best
speculators, and the non-observance is the cause of failure of even their
confidential friends.
Very few fortunes have been made in Wall Street at one stroke. Fortunes
which were made in that way were generally lost again in a very short time.
Most of the long, lasting, and solid fortunes were made by a gradual
accumulation of profits extending over a great many years. The beginnings
of these were sometimes quite small, and, as the capital increased, larger
operations were entered into.[1]
Another cause of failure is the habit of taking larger risks than the means
of speculators warrant. They naturally become nervous when they begin to
see their capital dwindle away, and then begin, what is called in Wall Street,
to “chip out.” Now this is the curse of the speculator, not so much on
account of the loss, as on account of the demoralization it will lead him
into. Of course, big losses ought to be avoided, but at the same time well
based and matured operations may sometimes be temporarily upset by a
temporary manipulation of the market, or by some accidents which however
right themselves in a few days, and cannot seriously interrupt the natural
course of the market. In such a market a nervous speculator may “chip out”
a fortune, and still be right in his views as to general conditions.
I think it is better to make one loss of 5 per cent. or so, when you know
you are wrong, than to make three or five losses of 1 per cent. each, when
you do not know whether you are wrong or right, and in this connection Mr.
Crump has very much undervalued the importance of options.

Options, if considered in their proper light, are the most important
adjunct to speculation. They will enable the speculator to bridge over many
difficulties, and furnish capital to speculators who know how to use them.
I do not say this simply because I am a broker in options, but because it is
my honest conviction that options are cheap at almost any price, when a
speculator has occasion to use them. If money is lost by buyers of options,
it is because many of them are bought by people who have not sufficient
reasons for doing so, and after the option has been bought, the owner does
not know what to do with it. I have, for example, known people to be bulls
on Lake Shore, and then go and spend money for a put in Western Union. Is
it any wonder that men who do business on such principles lose money?
That many stock brokers object to options is natural. They look out for
commissions, and greatly prefer to buy and sell several times a day on stop
orders or on margins, even if customers lose money thereby, rather than see
them make money two or three times a year, through operations extended
over periods of two or three months each.
I do not mean to say that all stock brokers are of this kind, but if
speculators recall their own experience, they will undoubtedly remember
how often their broker said to them, “Cut your losses,” if the transaction
was against them, while, if the transaction showed a profit, the advice was,
“Taking profits will never make any man poorer.” All these things make
commissions for the broker, and this is the object of his business.
Another reason for the unwillingness of some brokerage houses to
encourage speculation against options must be found in the fact that a great
many of them have not sufficiently large capital to enter upon large
transactions without any other margin than the option. Although I
acknowledge that it is hardly fair to ask a broker to do an unlimited amount
of business based on options alone, the fact, nevertheless, exists that the
strongest houses have always been glad to encourage trading against
options, and only the more insignificant houses are opposed to it.
A well planned and matured operation, looking far ahead, backed by
ample capital and patience, is the only way to make a fortune at the Stock
Exchange, and prudence demands that in case the speculator’s idea should
have been wrong, he should have a safe way for a retreat open. Options will

fulfill all these demands; and no matter how expensive, if the speculator can
afford it, it is the only way of speculating in a safe and reasonable manner.
There are some people who are under the impression that they know
everything already, and have nothing to learn, and such may be amused, but
not benefited, by reading this book; others, however, who are inclined to
speculate (and there are and always will be many of them) cannot fail to
derive great benefit from the perusal of Mr. Crump’s interesting work, and I
hope I may put money in some people’s pockets or save others from ruin by
sending this book forth among the American people.
H. W. Rosenbaum.
New York, Nov., 1886.

The last chapter in Mr. Crump’s book, entitled “Outside Criticism on the
Causes of Disturbance in the Money Market,” has been omitted in this
edition, as it relates simply to questions about the policy of the Bank of
England in regard to regulating the discount rate, and a controversy and
correspondence on this point between Mr. Crump and Mr. Bonamy Price.
As this whole question is of no practical value or interest to the American
reader, I thought it expedient to omit the whole matter.
H. W. R.

CONTENTS.
PAGE

CHAPTER I.
Technical Terms Explained.
1. Jobbers and Brokers 19
2. The Bull 19
3. The Bear 19
4. Contango 20
5. Backwardation 24
6. Options 26
7. The “Put and Call” Option 26
8. The “Put” Option 26
9. The “Call” Option 26
10. The Fortnightly Settlement 27
11. Speculation by Members of the House 28
CHAPTER II.
The Importance of Special Knowledge regarding the Regularly Recurring
Causes that influence the Markets.
1. The Temper of the Public 32
2. Meteorological Influences 32
3. A Favorable Period of the Year 35
4. Causes affecting the Value of English Railway Stocks 36
5. The Course to pursue at the Turn of the Half-year 36
6. Second Half of the Year more favorable for Bear Operations 37
7. Activity among Buyers 39
8. The Bull Speculator’s Great Chance 39
9. The great importance of being now and again altogether Clear
of the Markets 40
10. The Movement of Prices near the Settlements 41

CHAPTER III.
The Right Temperament for a Professional Speculator.
1. Cool-headedness an indispensable Condition of Success 43
2. The Uselessness of Haphazard Speculation 45
3. Accurate Foresight 45
4. The Cool Man, or Professional Speculator 46
5. Observance of the daily published Telegrams from abroad 46
6. The Selfishness and Hard-heartedness of the Professional
Speculator 48
7. The Non-professional or Haphazard Speculator 50
8. The Misfortune of Early Gains 55
9. Very few Failures made Public 57
10. Greediness involves Loss 60
11. Keeping one’s own Counsel 60
CHAPTER IV.
The Increase of Speculation in Stocks and Shares.
1. Stock Exchange Gambling increases in Europe, while Public
Gaming-Houses are on the decline 62
2. Speculation an Out-growth of prosperous times 63
3. Commercial prosperity unhealthily fostered by Illegitimate
Speculation 64
4. The Influence of Trade Profits upon the Stock Markets 64
5. An increase in the amount of Trade Profits realized, causes an
Increase in the number of Securities 65
6. Speculation by Established Companies 66
7. The Demoralization caused by Temporary Success 66
8. The New Era in Speculation 67
9. Collapse through Over-speculation in Austria 67
10. Increase in the number of Members of the London Stock
Exchange 68
CHAPTER V.
Modern Influences upon the Markets.

1. A Fixed Line of Action 71
2. Closer Uniformity of Values in all Markets through the
Development of the Telegraph System 72
3. A speculator cannot hope to succeed in any degree, unless his
arrangements are as complete as those of a man engaged
in bona fide business 73
4. The Diminution of Gluts in all Markets 73
5. Modern conditions render it more difficult than formerly for
Small Mercantile Houses to succeed 73
6. Every Commercial Revulsion destroys Houses of a
Speculative character, and throws the good business into
the hands of the large sound Establishments 75
7. The Extension of Long-wire Telegraphy 78
8. Money Famines should henceforth be as improbable of
occurrence as Corn Famines 78
9. Advantages derived from opening up communications with the
Corn-growing Provinces of Russia 80
10. The Growth of Wealthy Monetary Centres 82
11. Private Cipher Telegrams as exterior influences upon Prices 83
12. The Altered Character of interior influences upon Prices 84
13. The Creation of Securities to meet the Demand 84
14. Getting behind the Scenes 85
15. The Difficulty of “Cutting” a Loss 85
CHAPTER VI.
Cacoëthes Operandi.
1. Waiting for Extremes 87
2. Reaction generally more rapid after a Sharp Rise 88
3. What Not To Do 90
4. Special Information 90
5. Much Money only obtainable as a certainty by Hard Work 90
6. An Average Instance of Haphazard Speculation 91
CHAPTER VII.
The Pit-falls.

1. Hidden Forces Opposed to the Speculator 94
2. The Turn 95
3. The Danger of taking Advice 95
4. A Disinterested Opinion 96
5. All the Eggs in One Basket 96
6. Traps for the Public 97
7. The Public as Speculators are Bulls by Nature 97
8. A Case of Roasting the Bulls 98
9. A Cut off the Loaf and Pass it on 98
10. Short Periods in, and Long ones out 99
CHAPTER VIII.
Speculation With Capital.
1. Restoring the Balance of Advantages 100
2. The Necessity of Some Capital 101
3. Capital to expend in Feints 102
4. La haute Finance 102
5. The Best of all Chances for a Speculator with Capital 103
6. The most Legitimate Form of Speculation, Pawning the Stock 104
7. When to Begin and when to Leave Off 105
8. Test of a Speculator’s Pecuniary Position 105
CHAPTER IX.
Speculation Without Capital.
1. A Familiar Case 107
2. Bitter Experience 108
3. The Question of Seeing it Out 108
CHAPTER X.
The “Tip” to Buy or Sell.
1. A Friendly “Tip” 110
2. Unloading at other People’s Expense 111
3. The Qualified “Tip” 111
4. The Unqualified “Tip” 112
5. “Tips” worked by Syndicates 112

CHAPTER XI.
Speculation by Machinery.
1. Machinery in existence for directing Human Volition 114
2. The Patrician Investor 115
3. Administering Shares to the Public 116
CHAPTER XII.
The Shifting of Speculation from the Higher to the Lower Classes of
Securities.
1. Speculation in Consols as a Hedge 120
2. Speculation has Changed its Venue 121
3. Increase of the Indebtedness of the States of the World 121
4. The Fluctuations in the Price of Government Stocks 121
5. High Class Stocks more firmly held than formerly 122
CHAPTER XIII.
The Short “Turns,” or who makes the Profits?
1. The “Turn,” a known quantity always against the Speculator 124
2. The “Turn,” a Loss in going into, and also in coming out of the
Market 125
3. The difference in the character of the “Turn,” as compared
with former times 125
4. Special Danger of Speculating in a Stock that is quoted very
wide 127
5. The “Turn,” the Income of the Jobber 128
CHAPTER XIV.
In what respect is Speculation useful in Markets generally?
1. Speculation for the Rise, which is both Legitimate and of
Benefit to the Community 129
2. Speculation for the Fall, which is both Legitimate and of
Benefit to the Community 130
3. A Reasonable Relative Value for all Commodities 131
4. The Three Classes into which Speculators may be divided 132

INTRODUCTION.
Our object in writing this book is to endeavour to show to persons who
may contemplate trying their hand at Stock Exchange speculation, the
improbability of their hopes being realized. Much mischief and trouble
would be avoided, and a deal of money saved, if, before entering upon such
a dangerous career under the most favorable circumstances as that of a
speculator, a study were made of the difficulties such an occupation
involves, and also of the chances against the operator, considered as one
individual versus the Stock markets. It is melancholy to think of the vast
sums of money that are invested in the most serious sense of the word,
annually by Stock Exchange speculators in the purchase of a sorrowful
experience. It seems to be in the nature of things, that numbers of people
must come to grief in their early struggles, through an obstinate
determination to trust complacently in their own ingenuity, in preference to
profiting by the experience of others. A mountain climber who disclaims the
aid of a guide, and is subsequently fished out of a crevasse, can expect no
other epitaph, even from his friends, than that he has paid the deserved
penalty of extreme temerity and folly. There are probably many guides who
can ensure a safe passage over most mountain defiles, but he would be a
bold man who guaranteed to pilot a young speculator through the Stock
markets, and bring him out to a certainty with a profit.
If a speculator asks the advice of what we will term “an old hand,” and it
is in his interests to tell him what he really thinks, he will say: “Leave it
alone.”
Why so many people will never be convinced except by their own
personal experience is, that they cannot believe what others say of things
that are hidden.
“Hereof experience hath informed reason, and time hath made those
things apparent which were hidden,” says Sir W. Raleigh.

“But apt the mind or fancy is to rove
Uncheck’d, and of her roving is no end,
Till warn’d, or by experience taught, she learns
That not to know at large of things remote
From use, obscure and subtle, but to know
That which before us lies in daily life
Is the prime of wisdom,”

says Milton; and

“But if you’ll prosper, mark what I advise,
Whom age and long experience render wise,”

says Pope.
Stock Exchange speculation is very deceitful to the eye, and also to the
ear. In some respects its associations are like those of a morass, under
whose smooth and inviting surface are hidden the remains of unwary
travellers. Those who are new to the business see only the glittering surface,
and hear only of the fortunes made by stock brokers. People seldom tell of
their losses.
Individuals who are tempted, not only by curiosity, but by a love of
excitement, and more than all in this case by the love of gain, go into the
markets and lose their money, and quit the place with much the same
feelings as the man who paid a penny to see a horse with his tail where his
head ought to be.
“If we hope for things of which we have not thoroughly considered the
value, our disappointment will be greater than our pleasure in the fruition of
them,” wrote Addison.
The most brilliant good fortune which may result from the operations of
a speculator generally fall below his anticipations, when the operations are
reduced to figures. It appears that the imagination gets, as it were, diseased
by feeding on the contemplation of very rapid gains; and that whatever may
be the reality of a hypothetical gain, the mind gets bewildered and fails to
estimate as an element of loss, the surrounding husks in which the fruit is
enclosed. One forgets that every tangible advantage, in whatever form

obtained in this life, has to be got out of a shell. What, then, must be the
speculator’s feelings when the balance is on the wrong side of the account?
It has been suggested that the abolition of “time-bargains” would
materially, if not quite, prevent much of the mischief that results from
speculation; but it is no more possible entirely to do away with the custom
of “time-bargains” than it is to abolish credit in other kinds of business. It
may be readily conceded that a very large number of those who are ruined
or greatly injured by Stock Exchange speculation, would never operate at
all if they were called upon even to make a deposit before the purchase was
effected. But when it is considered that to abolish “time-bargains” would be
to ruin at once half the brokers in existence, the difficulty of effecting what
from one point of view would be a most salutary change of custom, will be
understood. In our day money is so closely employed that a fortnight is not
too long to get the funds together, when, for some good reason or other, a
change of investment has been determined on. It is often that such a transfer
gives rise to a course of speculation that ends in disaster. A purchase
effected for the account[2] with the view of changing from one stock to
another leaves at the end of the fortnight, we will suppose, a handsome
profit. The buyer of the stock takes it, and postpones the intended change of
investment, thinking he shall get rich sooner by such an operation as that,
than by simply transferring his money to another security that promised a
better yield per cent. He has another try, expecting the same good fortune.
In the end he loses as usual on balance, which he would not probably have
done if he had bought and sold for money, finishing the operation on the
same day. This is what often causes loss to people who can afford to lose, if
they stop soon enough. The great mischief is done by the facilities afforded
by “time-bargains” to operators who have a little money, just sufficient to
enable them to keep afloat as speculators in fair weather. The first serious
disturbance that violently agitates prices sweeps them away in a shoal.
The question which a sensible speculator will ask himself before he
begins to operate is, What are the risks incurred of losing his all at one
stroke? De Morgan, in his book on probabilities, says in Chapter V., on the
risks of loss or gain, “A man should not hazard his all on any terms; but in
ventures the loss of one of which would not be felt, we may suppose the
venturer able to make a large number of the same kind; in which case the
common notions of mankind reinforced by the results of theory, tell us that

the sum risked must be only such a proportion of the possible gain as the
mathematical probability of gaining it is of unity. For instance: suppose I
am to receive a shilling if a die, yet to be thrown, give an ace; in the long
run, an ace will occur one time out of six, or I shall lose five times for every
time which I gain. I must, therefore, make one gain compensate the outlay
of six ventures, or one-sixth of a shilling is what I may give for the
prospect, one time with another. But one-sixth is the probability of throwing
the ace. Principle—Multiply the sum to be gained by the fraction which
expresses the chance of gaining it, and the result is the greatest sum which
should be given for the chance.”[3] “A man should not hazard his all on any
terms.” Does a man who enters upon a career of speculation take the trouble
to consider at starting whether or not his first operation places him in a
position in which he hazards his all? There is not probably one speculator in
a hundred who ever thinks of it at all. We will suppose a man to be worth
£200 in cash as his all, applicable to the payment; of losses. It may safely be
stated that numbers of speculators open accounts with a less sum, in fact a
considerable proportion of speculative operations are entered upon in reality
without any funds at all; misfortunes in other vocations being frequently
followed by gambling in the Stock markets. A speculator with £200 to pay
losses with is in this position if he buys, for instance, for the rise £5,000 of
any English railway stock; a fall of 5 per cent., which even in two or three
days is nothing very extraordinary, carries him £50 “under water.” What can
he reckon upon on the other side, by keeping the account open, that is a
mathematical certainty like the occurrence of an ace one time out of six in
the long run in throwing the die? If he be exposed to such a loss at any
moment as that mentioned, the risk is an absurd one to run if there is not at
least an equal chance of a similar rise, and several times £250 in reserve.
But all experienced in Stock Exchange fluctuations know that upward
movements are, as a rule, gradual, a rise of 1 per cent. being considered as a
profit which a speculator should without hesitation take, while a fall all
round in a market of two or three per cent. in a day is of more common
occurrence.[4] It may here, perhaps, be retorted that if a fall of 5 per cent. is
nothing very extraordinary to happen in a few days, while a rise is, as a
rule, gradual, why not speculate for the fall? The answer is, that the public
are very seldom indeed bears. It goes against the grain. Speculation with the
public, as a body, is a fair weather game. When the most potent influences
are affecting the Stock markets downwards, ordinary people hold aloof. We

shall go more into detail with reference to this peculiarity farther on. That it
is so is a fact, and it is easily accounted for. When you are dealing with a
die, a hexagonal body, you know that it must fall on one of its six sides, and
that each side to a certainty will have its turn, and therefore a
mathematician is able, from there being a limitation set to the risk incurred,
to estimate to a fraction what amount a thrower of the die can afford to
venture, five times out of six, on the chances of the ace turning up, so that
in the long run he will not lose. A game of die-throwing for money,
conducted by one of two players upon principles based upon the doctrine of
probabilities, and upon conditions to give him a certain profit, can only be
continued for a short time, as the absurdity of it becomes speedily evident
to the other player, and play ends. Those with whom outside speculators
deal in the Stock markets get all the profit also in the long run, much upon
the same system that professional bettors on horse-racing always win in the
long run by backing the field. In the die-throwing gambling there is no
mystery, at least very little for the ordinary understanding. A person of
average intelligence who is quite unable to comprehend that it is a
mathematical certainty that a die will show the ace upwards, in the long run,
one time in six, can be got by simple observations to see that in a great
number of throws the ace will have appeared about as often as once in six
throws. The fact of his losing his money through betting that it would not be
so would, in any case, bring the truth home to him. The case, however, of
speculation in the Stock markets is very different. Although so large a
proportion of speculators speedily lose their money, a large proportion of
them also, when quitting the arena through want of capital to go on with,
seem to entertain a strong conviction that money is to be made at it. There is
very frequently an impression left that if this and that, and the other, had
been done instead of what was done, the result would have been otherwise.
They regret that their purse was not longer that they might try again, feeling
sure that with such a rich experience they would avoid the mistakes that had
landed them losers. The Stock Exchange speculator has an innumerable
number of influences arrayed against him, at least one-half of which he
never sees at all until, like the sunken snag, which sinks the steamer without
any warning, one or other of them wrecks his fortunes before he is aware of
his danger.
A speculative operator has a very dangerous basis upon which to lay the
foundations of the argument by which he endeavours to justify himself, and

it is this. He says to himself: “there are only two ways for a price to move—
up and down.” At first sight the chances seem to be as much in his favour as
against, and he thinks the failure of others to make a profit must have been
the result of mistakes made by them, which he will avoid. But does it occur
to such an one that if there were any easy and certain method of making
money by speculating in stocks everybody who had a little capital would at
once commence to speculate? Speculation in the Stock markets has almost
irresistible attractions as a mere amusement, quite apart from its being a
kind of occupation which is the most luxurious and exciting mode of
making money. It must be evident therefore from the comparatively few
persons who habitually speculate, that large numbers are simply driven
away from the markets through a conviction that such a vocation must end
in disaster. The dangers of Stock Exchange speculation are made apparent
when, as a species of gambling, it is compared with the games of chance,
whose evil effects upon the community have been at last recognised by the
abolition of the tables at Hombourg, Ems, Baden Baden, &c. The
conductors of the Bank at the Palais Royal were fully alive to the necessity
of limiting the stakes, and also as regards the number of persons with whom
they would play at once. Governments are stepping in by degrees to
suppress gaming houses, and it would have been more to the credit of
Germany if the tables at the above-mentioned places had been done away
with while the effects of the golden stream from beyond the Rhine were as
yet unfelt by the comparatively poor exchequer at Berlin. The interference
of a government is shown again by our own legislature having declared that
A should not insure the life of B, unless it can be shown that A has some
pecuniary interest in B’s continuing to live. The law, however, is for the
most part evaded. Such systems are therefore looked upon as bad; but
because it is difficult for governments to define in Stock Exchange
gambling where bona fide business ends and the gambling begins, the most
injurious of all games of chance is played year after year upon an increasing
scale. At the first beginning of prosperity with a comparatively poor
community, gambling springs up in these times in stocks and shares. As a
result of such operations Vienna went half mad in the first half of 1873,
which was followed shortly after by a financial crash and the suicides of
certain bankers at Posen. Older communities, which have passed through
the only crucible which in this life teaches people that if money is to be
made rapidly the process must be attended with a proportionately large risk,

are observed, as time goes on, to be less exposed to the headlong financial
panics such as that in which the speculation at Vienna lately culminated.
Commercial revulsions of one sort or another, and of greater or less
violence, will probably occur during all time at intervals, wherever
commerce is carried on, but the gradual fashioning of laws with the view to
confine the injurious effects of over-speculation and over-trading within
limited areas, as for instance the limited liability acts, will more and more
render it possible to stand between the dupe and the financial sharper, and
also to observe the gathering together for harm of the dangerous influences,
so that they may be provided against in time, or checked at an early stage of
the disease. Among the operators at younger commercial centres there is a
more feverish desire to gain, but the efforts to satisfy it are not kept in check
in the same degree as in places where memories of disaster cluster in
traditions among the people, and inspire the growth of prudence, almost as
if it were an instinct.
Farther on we shall call attention to the way in which an outside
speculator on the Stock markets is handicapped with turns, commissions,
and contangoes.[5]
Very few persons, if any, will be found to dispute the statement that
speculation on the Stock Exchange is gambling. The highest mathematical
authorities maintain that there are but two conditions under which gambling
can be prudently followed as an amusement, viz.: small stakes, and equal
play.
The ordinary gambler in the Stock market is no better off, as regards his
chance of winning, than a player against a bank, which can only make
certain of winning against all comers in the long run by the protection of a
mathematical advantage. In the case of a bank established as a gaming-
house the initial condition of existence has always been in the long run
either bankruptcy to itself, or ruin to the individual players. As the banks
have always flourished, the players, in the long run, must always have been
losers.
A gaming-bank is an institution with limited means offering to play all
who enter; or, in other words, it is limited means against unlimited means.
The Stock Exchange occupies a parallel position to that of the bank, and
the operators[6] in the markets are protected in such a way that the outside

player at speculation must in the long run lose, or no one would be found to
take up his challenge. It must be obvious that supposing an outside
speculator had any advantage when speculation in stocks and shares were
first practised, and through such an inequality of terms he was on the
average the gainer, experience would soon show the necessity of rectifying
such a state of things, and what would be tantamount to the mathematical
advantage secured to the gaming-bank would be speedily arrayed against
him.
The number of people who play publicly at games of chance is very
small compared with the number of people who gamble in mercantile
transactions. And whereas the former are diminishing, partly from
compulsion, as in the case of Germany of late, and partly through the more
enlightened state of the human understanding as regards the immorality of
this kind of amusement, the latter appear to multiply in proportion to the
general increase of wealth, the ever enlarging fields in which public
securities are dealt in and commercial transactions are negotiated, and also
in proportion to the facilities afforded for speculation generally. The latter
part of this sentence should, however, be qualified by the remark that the
spread of wealth enables younger and less experienced persons to engage in
speculation in a larger proportion as compared with the whole community
than formerly. The difficulty of living and the ambition not to fall below the
standard maintained by the well-to-do, tempt numbers of young men to
endeavour to increase their income by speculation. And moreover as
regards Stock Exchange speculation it is unfortunately much against the
interest of the stock broker to make public the failure of his clients, hence it
is seldom that the wholesome warning of publicity deters others from
entering the arena.
Outsiders entering upon speculation with professional dealers in the
Stock markets make two mistakes on the threshold. Firstly, they commence
upon unequal terms, the effects of which adventitious favourable influences
have never more than compensated for, in the long run. Secondly,
supposing the terms were permitted to be equal, the outsiders’ stakes would
be too large a proportion of their means. The losses incurred by speculators
as a body have always been upon such a scale as to dispose of the theory
advocated by some persons that the mere charges of commission,
contangoes, and the “turn” are the only obstacles to success.

Now, if the playing of public games of hazard are on the decline from the
interference of the State on moral grounds, the question arises: are there any
considerations applying to Stock Exchange gambling, which, as a game,
raises it above other games of chance, and entitles it to special privileges?
Does the outside haphazard speculator stand a better chance as against the
Stock Exchange, than a player at Rouge et noir against the bank? The
answer must be No. Exactly the same considerations apply to commercial
speculations as to other games of chance in which no absolute certainty
exists. Mathematicians lay it down as a law, that if any possible event which
cannot frequently occur in a game of chance, but which is, nevertheless, a
part of the nature of the game, if a bet or stake be made upon the recurrence
of that event in a proportion to some large gain which it is agreed that event
shall secure, then prudence demands that the game shall be often played;
and if this be impossible it shall not be played at all. Here we come to the
crux of the whole question of Stock Exchange speculation. Unless a
speculator, handicapped as we shall show he is to start with, has enough
means to enable him to hold out for the arrival of the event, the occurrence
of which is absolutely necessary to his keeping above water, he should not
speculate at all.[7]
What is the one event constituting the benefit for which the speculator
operates? it will be asked. The answer is, the greatest fluctuation in the
direction favorable to him which may be caused by any one of the many
influences that may spring into action at any time. This is part of the
mystery which allures people on. If you tell persons who are throwing a die
that the six will turn up once in six times in the long run, they can form
some estimate of their chance of winning. But until a Stock Exchange
speculator has been roughly undeceived, his understanding gets entangled
so that what he sees clearly only at first, is what is in his favour, because his
first interest is to discover that. What is against him, he disregards until he
has discovered it has undermined him, and all goes together.
In cases where the public play against a bank, it is so managed that the
bank has a better chance than the players. It is so managed that a
considerable succession of losses can be sustained against the good luck of
any comer. One side always secures to itself the benefits of the long run.
The haphazard speculator stands at the same disadvantage as the player
against the bank. His position is always relatively inferior. When the

balance is nothing, as worked out by the following rule as stated by De
Morgan, then the play is equal:—“Multiply each gain or loss by the
probability of the event on which it depends; compare the total result of the
gains with that of the losses: the balance is the average required, and is
known by the name of the mathematical expectation.”
It must stand to reason that an outside speculator plays upon unequal
terms, otherwise it could not be worth the while of the other side to engage
him. As well might we expect a man to set up a shop and sell his goods at a
loss. Then we come a step farther, and ask if it be any use for a Stock
Exchange speculator to operate if the terms be equal? If such numbers of
persons find themselves induced, by the estimate they are enabled to form
of the chances in their favor, to play on terms more favourable to their
antagonists than to themselves, their prospects would seem to be much
improved if the terms were made equal. Although the position of the
speculator be improved to the extent of the terms being equal, it is
absolutely indispensable that the operations be kept open for a considerable
time[8] in order to secure the mathematical expectation which can have no
existence except through continuity. With the play in favour of the gambler,
he stands no chance even of holding his own, unless he makes sure of being
able to continue over such a number of trials, or during such a period of
time, as will give him the benefit of an average of the ups as well as the
downs of fortune.
As at cards so at Stock Exchange speculation, there must be two kinds of
luck, ill-luck and good-luck, as the changes of fortune which are worth
while taking account of. A man speculates, gets his turn of good luck and
pockets his gain, treating the money as if it were ore from a mine, or
something added to the realized wealth of the world, a pure plus as
compared with a plus leaving a minus. For every profit made by a
speculator, and for every realized profit made by a bona fide investor, there
must be a corresponding loss. The man who in his turn is a winner, must
also in his turn be a loser, and what he was plus when he won, he must be
minus when he loses.
If the manager of gaming-tables secures to himself a mathematical
advantage only sufficient to cover the expenses, he will infallibly be ruined
at last. It may be in one year or in five, or ten, but ruined he must be. But he

provides adequately against this, and in the long run those who play with
him must be ruined. So it is with Stock Exchange speculators.
It is the character of negative events to lay less firmly hold of the mind
than positive ones. The minds of Stock Exchange speculators are like other
people’s minds. A speculator will often attribute a certain movement in
prices to an influence which happened to be exercised at a particular
moment, and he contents himself with the apparent connection of the two,
and looks no farther. On another occasion, when operating in the same way,
immediately upon the recurrence of the same influence he is bewildered to
find prices move in an opposite direction. This comes from being satisfied
with any solution which lies on the surface, and chances to catch the eye. It
used to be supposed that comets were the cause of hot weather, and the
theory was considered to be well founded, because more comets were seen
during the summer months than at other seasons of the year. Hot and
cloudless weather is most favourable for seeing comets, but they are no
more productive of hot weather than is hot weather of them. This
circumstance being fixed upon by one class of theorisers, shows how an
event which is positive lays hold of the mind of any person who may be
interested in certain effects and is in search of the causes. It is of great
importance, in endeavouring to connect certain effects with specific causes,
to mark carefully two distinct things, first, the occurrence of an event, and,
secondly, our observation of it. Many entirely wrong deductions as to the
causes of fluctuations in the value of money, and in the prices of Stock
Exchange securities, are made from negligence in this respect.
As every rule has its exception, so in speculation are there a few
professional experts who succeed at it as a business. What is contained in
these pages is not for the expert, who is well able to take care of himself,
but for the ordinary haphazard operator. The professional speculator, who
has the right sort of head, sufficient capital, patience, perseverance,
coolness, and a business-like aptitude for laying down the elaborate
machinery that is necessary for mercantile success, may succeed. In the
following chapters it is our intention always to make this reservation, and in
speaking of the speculator, who must always lose in the long run, we refer
to the ordinary run of men, whom we will designate as haphazard
speculators.

THE THEORY
OF
STOCK EXCHANGE
SPECULATION.

CHAPTER I.
TECHNICAL TERMS EXPLAINED.

The members of the Stock Exchange are of two Jobbers and
descriptions, jobbers and brokers. The jobber[9] deals in Brokers
stocks and shares, either as a buyer or seller, at the
market prices. The broker deals with the jobber, and is paid a commission
by his principal for transacting the business between the two.
A bull is a speculator who buys for the settlement[10] The Bull.
with a view of selling at some future date at a higher
price, and gaining by the difference.
A bear is a speculator who hopes to gain by the The Bear.
reverse operation. He sells for the settlement, hoping to
buy back at a cheaper price, and gain by the difference.
Contango[11] means continuation charge; for instance: Contango.
if a bull operator has £2,000 Brighton railway stock
open for the account, of which there are two in a month, one in the middle
and one at the end, and the settlement which is to take place, say in the
middle of the month, is approaching without the price having advanced as
much as he supposed it would at the time when he bought, he wishes to
carry over or keep the stock open for another fortnight. For this
accommodation he must pay the jobber in the House of whom the stock has
been bought, a certain rate per cent. to allow the speculator to continue a
bull of the stock, instead of paying the money and taking it off the market.
The contango rates depend upon different circumstances. Sometimes,
instead of having to pay any contango, a bull will get something paid to
him. If the stock is very scarce, and the jobber finds it difficult to deliver to
purchasers, he will be glad to carry over a bull account for nothing, and
may be he will pay a consideration to postpone delivery for a fortnight.[12]
On the other hand, if the stock is very plentiful when the settling day
arrives, if the sellers have been numerous, and the deliveries are large, the
jobber will prefer delivering the stock to the bull speculator to continuing it

to the next account, because he wants money to pay those who have sent
their stock to market. Under these circumstances the contango rate may be
¼ per cent. on the money price of £20,000 nominal stock for the fortnight,
or it may reach a much higher figure, even exceeding one per cent. for the
fortnight, but such a rate is seldom charged.
The contango rates depend very much upon the state of the money
market, and hence the fluctuation in the price of public securities in
sympathy with the rise and fall in the value of money.
It has become more of a custom with bankers to lend money to the Stock
Exchange than was the case formerly; one reason being that, through the
more enlightened management of the Bank of England of late years, the
changes in the rate of discount are made more in obedience to the varying
condition of the money market as a whole, as reflected in the Bank return,
than was the case in former years, when the directors would come down to
the City some Thursday afternoon to put up their terms when there was very
little available money left upon which to obtain the increased charge. In
other words, the value of money changes more frequently than it used to,
and bankers, desiring to act at all times in view of contingencies, find it
very convenient to lend their surplus balances for a fortnight upon easily
convertible securities with a good margin. Moreover the risks attending
bills of exchange are avoided. The contango rates at the settlement may rise
suddenly through unexpected demands upon bankers arising out of a
bullion drain, and a fall in the foreign exchanges, which compels them to
refuse to continue their loans upon stock. Such stock must then be turned
out upon the market, and, if there happen simultaneously to be more
deliveries than there is stock taken off the market, the contango rates will
rule high.
It may be here observed that the contango charge is an item in the cost of
speculation which the haphazard operator seldom takes into account at all;
yet, if speculation be engaged in upon a large scale, the item of contango
charges may become a formidable one, and, when added to the commission
charged by the broker, takes so much out of the possible advance in price
which may take place in the period of, say, two accounts, or the space of
one month, that it requires no great experience to show that the game is not
worth the candle, taking one operation with another.

Take a case in point:—A speculator buys £5,000 Turkish 5% ’65 stock at
£50, for which he engages to pay £2,500 on the settling day, which is the
last of the three account days. He pays ⅛ commission to the broker, or £6
5s. When the settlement arrives, we will suppose he has been very lucky,
and has got a rise of ½ per cent. in the price, which is a good advance for a
class of stock which investors do not like, but nevertheless is speculated in
a good deal. How does the account to be rendered to him stand, with 6 per
cent. contango for carrying over the transaction?

Dr.
£ s. d.
5000 Turks. 5% at 50 2500 0 0
Commission ⅛% 6 5 0
Balance 18 15 0
2,525 0 0
Cr.
£ s. d.
5000 Turks. 5% at 50½ 2525 0 0
2,525 0 0

The operation so far is successful, and the speculator, taking courage
from his success, awaits a further advance. He is not disappointed, we will
suppose, and the stock continues to rise, to give him the favourable start
which is so frequently the cause of his future troubles and losses. During
the next account the stock gains a further ¼ per cent., and he credits himself
mentally with an additional £12 10s. Here is a gain of £37 10s. minus the
selling commission, which is generally charged when the stock is not
bought and sold in the same account, and also minus the contango. This
second commission, which is usually charged when a speculative account is
kept open for a month, is frequently left out of the calculation by novices.
Supposing, then, towards the close of the second account, there occurs a
relapse of ⅝ per cent., making the price really ⅜ lower, which is a very
reasonable hypothesis, as stocks do not always move in one direction,—
how does the account to be rendered at the next settlement stand? We have
—

Dr.
£ s. d.
5000 Turks. 5% at 50½ 2525 0 0
Int. 6% 15 days 6 4 6
Commission 6 5 0
2,537 9 6
To Balance £12 9 6
Cr.
£ s. d.
By Balance 18 15 0
5000 Turks. 5% at 50⅛ 2506 5 0
Balance 12 9 6
2,537 9 6

It becomes apparent, in examining this account, the extreme danger the
speculator was in just at the period immediately preceding the relapse, and
forcibly demonstrates the importance of acting upon the soundest of
maxims in “time bargain” operations, which is, never to refuse a profit. We
have been supposing the speculator to have been “running the stock,” as the
saying is, for nearly a month, during which period it had been advancing in
price. At the same time he had been incurring expense to have the chance of
making a profit by such advance. After carrying over the transaction, he had
incurred the certain loss in any case of the two commissions and the
contango charge, which make together the sum of £18 14s. 6d. It seems
almost incredible that, under such circumstances, he should still hold on
when he could close with a profit of £18 15s.; instead of which he closes
with a loss of £12 9s. 6d., after having commenced to operate with just as
reasonable a prospect of a fall of ½ per cent., and another on the top of it of
¼. On the other hand, everything went as well as can ever be expected on a
series of operations, and yet he finishes with a loss. The charges, to begin
with, kill the profit, to say nothing of the “turns” of the dealers, and the
risks of the fluctuations in price.
Backwardation[13] is the term for the charge paid by Backwardation.
the speculator for the fall. The word itself implies that
the charge is for holding back a transaction, as directly opposed to that for

which a contango is paid. The one is to carry forward, and the other to carry
backward. A speculator who sells for the fall, and thereby makes himself a
bear, must pay something if he wishes to keep the transaction open; just as
the bull must, unless exceptional circumstances are influencing the market.
When the settlement arrives, a bear must either deliver what he has sold, or
pay the backwardation demanded for postponing delivery; which, in other
words, is the price paid for obtaining the stock elsewhere. If the supply of
stock should chance to be large, he will find it very easy to continue his
bear account, because the stock he has sold is not wanted. Under such
circumstances, the position of the bear speculator comes to be the exact
antithesis of that in which the bull finds himself at the settlement when the
stock he has bought is scarce. In both cases the charges recede until either
the transactions are carried over “even,”[14] that is to say, for nothing, or it
may be the speculator receives a consideration. As in all other markets, it is
a question of paying or receiving, and the one or the other depends upon the
relation which the demand bears to the supply. As we shall have occasion
farther on to speak more minutely upon bear speculations, we shall not
pursue the subject at any length here; suffice it to say that the public, as
speculators, do not understand selling for the fall. It goes against the grain.
Speculating at all is associated, in the minds of nearly all people, with fine
sunshiny weather, and a settled state of the political atmospheres of one’s
own and neighbouring states. The time to speculate for the fall is when
growling despatches are being exchanged between nations whose prosperity
has reached a zenith where nothing more is to be had, except by quarreling;
when the exchanges are adversing, and there is a drain of gold setting in and
the biting winds and sleet of chill October fill everybody with pessimist
views; when the reports of shipwrecks and hurricanes at sea fill the minds
of Oriental merchants with alarm for the safety of their galleons, and there
is an uneasy general impression creeping over the public mind that it is
perhaps prudent, under the circumstances, to hold less in securities, and to
have a larger balance at the bank. Yet, when the very air seems to whisper
coming difficulties and disturbances, and the time is ripe for speculating for
the fall, such is the weakness of the human character that the opportunity
presented is seldom discerned until the return of sunshine, and the blowing
over of the storm has shown the inutility of being wise after the event.
Speculation by “options” is of all methods of Options.
speculating the most prudent, as it is the most sensible,

for all parties concerned. It resembles in some degree the The “Put and
lottery-ticket mode of gambling. The indefinite mischief Call” Option.
that is caused by speculation which allows the operator
to incur unlimited risk on credit is prevented by the system of options,
inasmuch as a fixed payment must be made by the speculator at the time the
option account is opened. There are three kinds of options. First, is the “put
and call,”[15] which means to take or to deliver stock at a fixed price at a
future date, for which a certain sum is paid on the day the bargain is entered
into.
The second is the “put,” which means the option of The “Put” Option.
delivering a specified amount of stock at a fixed date,
the price and the day of delivery being agreed upon at the time the money is
paid.
The third description of option is the “call,” which The “Call”
means an operation exactly the opposite of the “put.” It Option.
is the option of claiming a specified amount of stock at a
future fixed date, such date, together with the price, to be agreed upon at the
time the option money is paid. The sum of money that is paid for options
fluctuates in sympathy with the changes in the value of public securities,
and also depends upon the amount of business doing. An option may be
done from day to day, or from account to account. The option money is paid
by the principal to the broker at the time the transaction is effected. When
the option expires, the person who has paid the money declares whether he
buys, sells, or does nothing.[16]
Years of experience of this mode of speculating have only shown, as with
other kinds of speculation, that the option money once paid is hardly ever
recovered. We have taken the trouble to inquire of those who have been for
as many as thirty years in the markets, and such is their experience.[17]
The Stock Exchange settling days are in the middle The Fortnightly
and at the end of each month. Each fortnightly Settlement.
settlement occupies three days; the first is the carrying
over or contango day, the second is the name or ticket-day, and the third is
the day for paying the differences, or the amount of money for stock or
shares to be taken off the market. The settlement in Consols is monthly, and
near the commencement. The extent of the business transacted in the Stock

markets has been very accurately measured since the establishment of the
Clearing House. All transactions being settled by cheques, the increase in
the Clearing House totals on a Stock Exchange settling day correctly
indicates the amount of money which has passed between buyers and
sellers.[18]
Speculation inside the Stock Exchange by members of Speculation by
the House does not present many features which entitle Members of the
it to comment apart from the speculation as it is House.
practised by the public outside. It is natural to suppose
that members of the Stock Exchange are better able to operate in stocks and
shares, with a view to profit by speculation than the public who, as a rule,
are ignorant of the art they endeavour to practise until all they have left is
some bitter experience. Those whose daily business it is to be in the Stock
markets must of course know that the outside public are always dropping
their money, and in this respect the conviction comes nearer home to them
that the play is not worth the candle. There are speculators who are
members of the Stock Exchange, but we believe it is but a very small
minority that troubles itself with speculation as the principal means by
which the profits are made. As a rule, it may be laid down that a dealer who
goes out of his market to speculate is just as likely to lose his money as an
outside haphazard speculator. Each stock, and each description of shares,
has its history, and is influenced more or less by special causes, as well as
by general causes. Each stock, therefore, requires to be constantly watched,
after it has been studied, and its peculiar characteristics well ascertained.
When it is said that these stocks and shares are numbered not by tens, or by
hundreds, but by thousands, it is easy to understand that no one man can
master the special knowledge concerning each, which however every jobber
who understands his business should do, within the limit of those in which
he usually deals. Consequently, a jobber devotes himself to a few
descriptions which circumstances or inclination may cause him to select. He
confines himself to a particular market, where he is to be found; and if he
speculates now and then, apart from the necessities of his business, and to
satisfy a desire for a little excitement, or because some special view of the
course of events encourages him to try his luck, it is, as a rule, in the stocks
in which he is accustomed to deal.

It may be of interest to some persons to contrast the terms used in
England with those employed by stock-brokers and jobbers across the
Atlantic, and we append those in use on the New York Stock Exchange,
with explanations. The inventive resource which is so characteristic of the
American, crops up in the terms used in their Stock markets, as in the case
of the “put and call” option with us, which the Yankee cannot be satisfied
with, but must invent the vulgar synonym of “straddles,” which is certainly
expressive of the pair of operations in one. The mania for getting rich by
making short cuts and royal roads engenders apparently an impatience of
terms which contain a single syllable or letter that is unnecessary, however
hallowed by time, and hence, “put and call” is superseded by “straddles.”
[19]
The “put” is a contract by which, during a fixed time, usually thirty
days, a seller for a consideration agrees to take from a buyer of a “put” a
stock at a given price, generally several per cent below the market value.
The “call” is an operation of a directly opposite nature, being a contract
by which for a consideration a seller of a “call” undertakes to deliver to a
buyer a certain stock at a given price, generally several per cent. above the
market value.
To “put up a margin” signifies to deposit with your brokers a sum of
money, as a rule 10 per cent. of the par value of a stock, as security against
failure to meet losses.
To buy “long” is the equivalent of our term “bull.”
To sell “short” is the equivalent of our term “bear.”
To “corner” a stock is to purchase all that can be obtained and make it
very scarce, and also more than can be obtained, in order to run the price
up, and “roast,” as the saying is in the London market, the speculative
sellers; but the “cornering,” as we understand the meaning of the word,
would seem to apply more to the speculative sellers who are “roasted” than
to the stock which may be selected for the operation.
“Clique,” “pool,” or “ring” are less expressive, and in consequence of
other associations, are less happy terms than our equivalent syndicate,
which in English financial circles can be mistaken for nothing else than a
combination of speculative capitalists which is formed either to divide a
loan amongst them and unload their portions upon the public as

opportunities may occur, or to “wash” a stock up and down, getting what
they can out of the unwary public during the operation. Gold “rings” on the
other side of the Atlantic, and foreign loan syndicates on this, must by this
time almost have had their day. Each new era of prosperity requires and
generally witnesses a new set of ingenious devices to throw dust in the eyes
of investors, while the new race of Autolycuses are going through all the
old tricks.
In London, settlements take place twice a month, but in Broad Street
sales are made for either cash or “regular.” In the first case purchases have
to be settled the same day before 2.15 p.m., and in the second on the
following day. Time contracts correspond to our time bargains, and have
about the same conditions attaching to them, with the exception that the rate
of interest charged, answering to our contango, is generally 6 per cent.,
unless otherwise stipulated, and is not influenced by a varying standard
such as our Bank rate.
The word “shrinkage” for depreciation is a neat term with which the
small catalogue may be euphoniously terminated.

CHAPTER II.
THE IMPORTANCE OF SPECIAL KNOWLEDGE
REGARDING THE REGULARLY RECURRING CAUSES
THAT INFLUENCE THE MARKETS.

If a speculator has not closely studied the special The Temper of the
causes that influence the Stock markets at regularly Public.
recurring intervals, he has not learned the alphabet of his
business. We shall endeavour to pass in review some of these. First of all,
there is the temper of the public. Many persons have puzzled over the
causes which will at one time combine to produce activity among buyers of
stocks, and at another dead stagnation; and it is a very interesting study,
albeit somewhat difficult of correct analysis.
There are periods of the year when the temper of Meteorological
investors tends to sulkiness, in sympathy with a fall of Influences.
the mercury. Dull and disagreeable weather, as a rule,
adversely affects the Stock markets more or less, according to the extent of
counteracting influences. If we take the beginning of a year, in January
investors will usually be found in a conservative frame of mind, with which
speculators will sympathise as they perceive it; for it may safely be said that
unless the public can be calculated upon to follow their lead, it is useless for
professional speculators to stir up the markets. In the first month of the year
capitalists are in more or less of a stay-at-home mood; and now so many
buyers of securities live on a line of railway, they take as many holidays as
they can well find excuse for.[20]
A speculator should have a good aneroid barometer, that has a good big
indicator, hung up in his hall, and he would not be very far wrong if he were
to buy and sell according to the indications given by this instrument that it
was going to be good or bad weather. Most people are like any one you may
chance to single out of a crowd, from a physical point of view.[21] The
change from fair to foul weather will have the same effect upon a crowd as
upon that one man. Foggy, wet, and cheerless weather sends people to their

homes with a contented mind, if they feel they can hold their own until the
return of sunshine; just as a storm causes navigators to run for a harbour, or
seek the nearest shelter from its fury. When buyers keep away from the
markets, prices droop with their own weight, and, from the mere absence of
any buying at all, will often fall as regards value, out of all proportion to the
extent of the sales. Such a period is a very good one to turn round and buy,
as there is sure to be a nearly corresponding recovery with a favourable
change in the weather.
Unless there are special causes at work, during the A Favourable
first month of the year the Stock markets are usually as Period of the
hard and inelastic as the frozen earth outside. At Year.
Christmas-time people make up their accounts for the
year, and most of them, having gained less than the total pictured by their
imagination, are more or less out of humour, and disinclined to enter upon
commitments outside the limits of their business proper. At such a period,
therefore, a speculator may look for fluctuations which as a rule will not
occur. As February creeps on, if circumstances are generally favourable for
trade, so that the newspapers can dish up their daily fare with sauces that
encourage their readers to look on the future with hopefulness, losses that
are written off will begin to assume less harrowing proportions, and the old
inclination to launch out will come to the front.[22] The professional
speculative element in the community sniffs this movement on the part of
the public with the accuracy of a pointer that has found his bird, and they
commence to draw the credulous by fictitious prices, now and then
unloading to be ready when the relapse comes, to commence anew when
another favourable opportunity offers. As the spring comes in, with its
delights and young verdure, and cheering early sun-rays, which draw the
notes of the lark and the linnet, the disposition becomes more general to
disregard those strict lines of prudence which the bleak winds of autumn
and the shorter days of an aging year, mark out so prominently for
observation. At a period of the year when spring is merging in early
summer, with all its pleasant prospects of pleasure to come, it is quite
natural to suppose that a desire should arise to make money, by which
everything could be made smooth and delightful during the most enjoyable
part of the year. Then again, as the half-year wears on, there are the
dividends to look forward to, which is always an inducement to buyers; the
great cities are filling with pleasure seekers, the import and export trade

with foreign climes is in full activity after the liberation of whole fleets of
vessels which have lain frozen up in northern parts during the winter. The
young corn is beginning to clothe the naked furrow, and the various fruits of
the earth are appearing, which only to read and hear of is to fill the eye with
a sense of plenty that half converts a Tory Stock Exchange operator into an
ultra-radical speculator. Under fairly favourable circumstances, the course
of general business during the first half of the year is more active than
during the second six months. The Parliamentary session is in full swing,
and large numbers of people congregate in the capital towns of all European
states to transact business, no small part of which is the investment of their
surplus profits in public securities. When a new year is fairly on its legs, say
in March, if war or such like causes do not interfere with the natural course
of events, between that month and the end of June, a speculator for the rise
should find, on an average, his greatest opportunities. In the London market
more especially is it so, on account of the effect produced on the money
market by the collection of the revenue, which always keeps the Bank of
England’s reserve at a comparatively higher figure during the period named,
a circumstance of considerable importance. In the first half of the year also
there is more floating capital spread out, and more disposition to extend
credit to catch the profits that are to be gathered when the nations of the
earth are enticed into activity and movement, both for business and
pleasure, by genial weather and long days.
As regards some stocks, there will be no need to make Causes affecting
a special study of causes which affect the dividend; but the Value of
this is not the case with railway stocks. A speculator in EStocks
nglish Railway
.
railway stocks must watch the course of trade, the
colonial produce, the Manchester and Liverpool markets, and note the
character of the business doing in the great staples of Industry. Upon the
profitable nature of these trades depend very much the traffic receipts of
railways. A speculator devoting his attention especially to railway stocks
will, of course, analyze the reports of the various companies, carefully
noting the weekly published traffic receipts. Then, again, there are the
northern iron and coal districts, the operations in which affect the price of
railway stocks in two ways which are obvious. A speculator who operates
solely in railway stocks should be posted from hour to hour in such matters,
or he will be assuredly “hung up,” as the saying is, with stock on which he
has made a loss.

Whether there be any more rise or not left in public The Course to
securities as a body after the turn of the half-year,—we pursue at the Turn
are speaking from a bull point of view, as that is the way of the Half-year.
in which the public, in ninety-nine cases out of a
hundred, operate,—we should always recommend a speculator to pack up
his traps and go right away, whether he has won or lost on balance. If he has
lost, which will probably be the case, there is all the more reason for not
continuing, for he is as certain then as the day dawns, to increase it by going
in heavily, or “plunging,” as it is termed. If he retires from the scene, and
permits his nerves to recover, he will return to be “cleaned” out in a more
wholesome frame of mind, which will enable him finally to quit such
haunts without probably resorting to such desperate measures as might have
been adopted, had his coffers been emptied all at once under a July sun.
At all events, the most methodical and prudent speculator, who manages
to amuse himself, and by extreme care, like good whist players, leaves off
at the end of six months about even, would not dispute the wisdom of
closing his book when all the world was going away for their holidays.
As the first half of the year is favourable for the bull Second Half of
speculator, so the second half is more likely to favour the Year more
the operations of the bear. When people have had their FBavourable for
ear Operations.
outing and spent their money, they return to business,
and to think of the necessity of prudently providing the comforts needful in
the chilly autumn and cold winter. Business begins to slacken in many
important branches with the approach of that period of the year when the
days and nights come to be of equal length all over the earth, except just
under the pole. There may be a good deal of money about at such periods,
and yet very little investment business going on in the stock markets. It
should be remembered that large extra accumulations of money at the great
centres very often mean, in fact, generally, an unprofitable state of trade;
and when the foreign shipments leave no profit, from the great merchant
princes down through every link in the chain to the labourer at thirty
shillings a week, the effect is felt, and there being no profits, there is
obviously nothing in the shape of surplus gain to invest. On the contrary,
most people wish to sell. In the later months of the year locomotion for
nearly all purposes begins to diminish both as regards business and
pleasure, which affects the receipts of the railway companies. If there

should have been a bountiful harvest, an important favourable influence
may thus be exercised; but even as regards this, it has been evident for
many years past that the harvest question in England is of comparatively
diminishing importance, and there is every prospect that much of the land
now under corn will return by degrees to its primitive state, and will pay
better as pasture for fattening beasts.[23]
As we spoke of the Bank of England becoming temporarily rich, by the
accumulation of revenue early in the year, so it becomes, as a rule, poor in
the autumn. People are getting more used to this ebb and flow in
Threadneedle Street, and the trouble it caused when Mr. Lowe first begun
experimenting is not now experienced to the same extent; but still it is one
of the elements which is disadvantageous, and to be kept in view by the
speculator as a regularly recurring adverse influence.
It is, of course, of the last importance to keep a watch over the foreign
exchanges, as these are affected more or less at certain periods when the
imports and exports of special kinds of produce and manufactures are
active.
Other influences which occur with machine-like regularity will be
referred to as occasion may require, and we now proceed to go more into
detail.
We will take activity among buyers:—It is clear that Activity among
active buying in any market arises from a strong demand Buyers.
from persons who desire to purchase for reasons known
The Bull
to themselves. A strong bona fide demand for securities Speculator’s
means that the public is making money, as they do not Great Chance.
enter the Stock markets as bona fide purchasers, unless
they have surplus monies which they desire to invest and TImportance
he great
of
put by in the form of savings. Now, a speculator who is being now and
watching for an opportunity to buy should keep in view again altogether
one set of circumstances as favourable to his operations clear of the
Markets.
in the same way that a seller should watch for an
opposite combination of causes as favourable for The Movement of
speculative sales. A bull speculator should know that his PSrices near the
ettlements.
great opportunity occurs after securities generally have
been driven down in price by a severe commercial crisis, which has

compelled holders of stocks upon a large scale to realize. In other words,
when prosperity is beginning to revive after a prolonged stagnation, and the
prices of stocks are very low, the bull speculator’s great chance occurs.
When the great industries of a nation seem to rise as from the grave, and
where lifelessness and inactivity ruled before the blows of the hammer
resound and the blast furnace roars, a new life springs through the arteries
of the commercial system, and the result is a rise in public securities. The
solid rise in the price of stocks is that caused by the hard money-buying by
a public that is well to do. At such a time the bull speculator should be in
the van, for then the golden harvest prepared for his special sickle invites
the reaper. Every trade gets its turn to a certainty. We will say, during a
period of prosperity, a general recovery of the sounder stocks to a level at
which they yield on the money invested 4½ per cent. per annum, takes two
years from the time the advance had fairly set in. During that two years is
the bull speculator’s opportunity. If he does not make money then, he never
will. Now we come more to the minutiæ: “Any jackass can take a profit, but
it requires a devilish clever fellow to cut a loss,” is a well-worn expression
in the city of London, but there never was a truer one. During the two years
of recovery in prices to which we have referred, there will be a great
number of small periods of time when the bull speculator should be out of
the markets altogether. To decide when those periods are to be is his pons
asinorum. After he has once realized the importance of having his accounts
open ready for the periodical waves to carry him in and land his profit, the
difficulty is to get him to realize the importance of keeping out while the
water sweeps back, carrying with it the greedy speculators, who were not
content to take their profits. After every great rise comes a fall, and the
secret of such success as is possible lies in the buyer getting out at or near
the top and in again at the bottom. It is obvious that a speculator must watch
for the ever-changing circumstances to reveal themselves and act
accordingly. We will suppose nothing extraordinary happens, such as a war,
famine, or pestilence, but that the influences during the two years are of the
ordinary type. There are the settlements. As a fortnightly settlement
approaches, prices as a rule move more or less in an opposite direction to
that which they have taken for some days previous, the extent being in
proportion to the foregoing movement. For instance, if for the first week of
an account prices have fallen heavily for some reason, such as a sharp
bullion drain and a sudden rise in the value of money, there will almost to a

certainty be a recovery, because a heavy fall is generally occasioned largely
by bear speculators, who will begin to buy back as the account approaches,
causing a recovery in values. If a speculator, therefore, is out of the markets
when a fall is taking place, he is almost sure to make money by buying at
the reduced figures as an account approaches.[24]
Then among minor influences, which are regularly recurring, are the
“drawings” attached to most foreign stocks, and to all that have been issued
for many years past. When a drawing approaches, other things not being
unfavourable, there will probably be some buying for the chance of getting
a bond or two drawn, and the price will improve.[25]

CHAPTER III.
THE RIGHT TEMPERAMENT FOR A PROFESSIONAL
SPECULATOR.

A man who wins by haphazard speculation, who chances to operate
successfully until he has filled his pockets, and retires with his gains from
so fascinating an arena, is one in a hundred. Any one who knows anything
of Stock Exchange speculation will confirm the statement that, to the
ordinary run of men, the game is not worth the candle. There are, however,
conditions under which speculation, in a market where ten or fifty thousand
pounds can be lost in half-an-hour, may, under given conditions, be
systematically practised profitably. First, and most important perhaps of all
these conditions, is the temperament of the speculator, upon which we
propose to speak in this chapter.
A man who is excitable and easily led away from a set Cool-headedness
purpose will, if he go deep into speculation, be soon an Indispensable
involved in hopeless ruin. A method of proceeding that C ondition of
Success.
has been formed by a careful judgment which has
provided for all contingencies, once adopted, should be adhered to as a rule.
To be able to follow this advice it is necessary that a speculator should
possess a coolness that is not affected by the excitement into which others
are thrown by unexpected events; that he should cultivate the art of
concealing the dissatisfaction felt on sustaining a loss, which is read at once
in the face of a nervous or excitable man; and that he should have the power
of calling forth emotions which are the opposite of those commonly
manifested under given circumstances. In speaking of the conditions under
which speculation may be successfully pursued as a business, it must be
understood that we are referring to the one man in the hundred—the
professional operator—who will frequently in the elaboration of his
arrangements find it necessary to be in the markets himself, gaining what
advantage he can by personally dealing either as a jobber or a broker. It is
obvious that, when a man enters a market with a view to doing business, his
object is to transact it upon the most favourable terms for himself. He

confronts those who are prepared to deal with him either way, that is, to buy
or to sell. According as he “opens” to the dealers, or, in other words,
indicates what he wants to do, the dealers will make their prices. If he be a
buyer, they will try to get him to pay as high price as possible and vice
versa. His business therefore, if he be really a buyer, is to try to look as if he
were a seller. He may enter the market under a variety of influences. He
may know from private sources, for certain, that a stock is about to improve
much, and he may intend to buy as much as he can get at a fixed limit as
regards price. If he is anxious to operate largely, and possess but a poor
control over his countenance, the probabilities are that he will be read at
once, and the market be immediately raised above his limit if he attempt to
buy any considerable sum. In the same way, if being a broker, he is
instructed to get a client out of a large amount of stock for any particular
reason, the suspicion of which he is not able to conceal, the price will be
lowered to him in an instant, unless it be an easy market to deal in, or by
chance an opposite influence springs up at the moment to improve the price.
Ninety-nine men out of a hundred when they are made stock-brokers are
comparatively young, who make a start for themselves after having been
many years clerks. These men are eager for profit, and commence at once to
go through a course of training which daily saps from their physical powers
the very element upon which a cool temperament rests. The hurry-scurry,
wear and tear strain upon the nerves which is involved in running from one
client to another for orders, deprives a man by degrees of those qualities, if
he ever possessed them, which are indispensable to the professional
speculator. A man whose daily bread for his wife and family depends upon
the execution of a certain amount of business, must of necessity manifest
some degree of eagerness to do the business intrusted to him, and that
eagerness keeps up a strain upon the nerves, and through them upon his
physical powers, which weakens the capacity of forming very rapidly a
correct judgment, and renders the intelligence liable to become confused
under circumstances when to lose the head for a moment may involve a
certain loss of money. Professional speculators are consequently very
seldom men engaged in the business of dealing in stocks and shares for
others, as the kind of labour is incompatible with the maintenance of the
cool temperament which is necessary to success.

There is nothing like unsystematic speculation to The Uselessness of
destroy the cool temperament of a man. A loss incurred Haphazard
through hasty ill-matured operations renders him Speculation.
impatient to recover it, which probably leads to its being
doubled. If he chance to recover the loss, instead of pausing to reflect upon
the surprise created in himself by a result only feverishly hoped for, he goes
on blindly tempting fortune, only to experience ups and downs which
unsettle his judgment more and more, until he begins to “plunge,” when all
is soon over.
Any one who has moved about at all amongst Accurate
financial experts, and has closely observed them, must Foresight.
have noticed that they seem to be men far above the
average as regards penetrative intelligence, appearing to possess that calm
precision of judgment, which, as a rule, is only secured by the deliberations
of many persons. Men who have amassed a great deal of money, by their
own unaided intelligence, have been men of steady accurate foresight, men
who have possessed a large capacity of judging what the public will do in
the Stock markets under certain circumstances. A great speculator must
make it his study to gather into a focus the various effects that are likely to
arise under a given transformation of circumstances, analyze them, set one
against the other, and calculate out the effect that will be caused when their
forces are spent.
We will now suppose we are watching the speculator The cool Man, or
of the cool calculating temperament, and also the Professional
excitable man who is always acting on new ideas, Speculator.
which, he thinks, will occur to no one else until he has
made money out of them. The cool man sits quietly down and reasons with
himself, and arrives at the conclusion that what is indispensable to him as
ground work is, first, some capital, a sum proportioned to the contemplated
extent of his operations. Without this to commence with, speculating under
any conditions is about as sensible, and about as likely to be followed by
the desired result, as attempting to ferry people across a deep stream
without the aid of a boat. Secondly, early information is equally necessary
from all other markets where the securities are dealt in in which he
contemplates speculating. To render such information as far as possible
trustworthy, a branch house in the cities where there are important bourses

is desirable. These two portions of the machinery are absolutely
indispensable, if success in large operations is to be the rule and not the
exception; and the man with the cool temperament will probably owe his
success as much to the judgment which showed the necessity of these
accessories, as to the well and timely directed operations which, based upon
them, result in profit.
With the necessary capital and machinery duly Observance of the
prepared for instant action when a good opportunity daily published
occurs, the cool man plants himself in a prominent TAelegrams broad.
from

position from which he can discern at once the small
cloud on the horizon which warns of the coming storm. The telegrams in
the daily press, as they rise above such hypothetical horizon, are the
harmless or otherwise little clouds which our speculator will scan, making a
note of any which may seem to deserve attention for any special reason, on
account of the effect they may be calculated to have upon the public mind.
Well-conducted journals only admit into their columns telegrams from
trusted correspondents, or from the public companies who supply them, and
whose interest it is to adopt every precaution against imposition. An
important telegram in a high class journal standing on its merits will always
produce more or less effect, and it is of much consequence, but in the
second rank, in the chain of machinery necessary to insure success for the
speculator, that he be posted hourly throughout the day in the telegraphic
news which reaches the seat of his operations. Side by side with this
telegraphic intelligence which appears in the press, the speculator will
receive private telegrams in cipher from his correspondents abroad, and
according to his skill and intelligence in reading between the lines of the
two, and judging of the probable course of events by their light, will he be
able to operate profitably or not.
Pure speculation as a business, the sole object of which is to gain money,
is, from the point of view of risk, removed far out of the ordinary path in
which men labour for profit. Only a small percentage of men desire, even if
they thought they possessed the required exceptional qualities, to gain their
living in such a way. Most men reason that life is short, and that to spend it
always in an atmosphere of excitement, under circumstances which keep up
a constant destructive mental strain, is a mode of gaining money that
involves too heavy sacrifices. The speculator who deliberately selects that

calling must consequently be a man peculiarly constituted. He is generally a
man of rather singular habits of thought, who thinks it quite legitimate to
start a Juggernaut, and drive it over the crowd, if thereby he can do it
profitably. Perfectly legitimate processes of working a market with him,
would be considered little better than cheating by the ordinary run of men.
He employs systematically all sorts of devices for getting the better of
others who are ignorant and less sharp in foreseeing events than he. He does
not scruple to lay traps, and drive the public into them, by plying them with
fictitious telegrams, if he can get them published, and by forming
syndicates to “rig” the markets. He partakes, indeed, a good deal of the
nature of the bandit, who prepares the way for forcing concession to his
demands by firing a volley into the carriage of the traveller to whom he is
going to give the choice of his money or his life.
If he intends to buy a large amount of stock, which he The Selfishness
knows is going to rise, he throws off the cloak of secrecy and Hard-
when he enters the market to sell, and depresses the heartedness
Professional
of the

price as a preliminary feint, so that the contemplated Speculator.
rigging of the price may be as little encumbered by bulls
as possible. When it is known in a market that a great speculator is selling,
weak bulls are speedily frightened out, and when he has such an object in
view it is his “game” to intimidate with all the force of his prestige and the
power of his capital. Such a man must have a concrete hardness of
indifference through which nothing can penetrate to his heart. It is as
necessary to the success of his operations that he possess no more regard for
the feelings or pockets of other people than a hungry tiger would for him if
he were airing himself unconcernedly in a Bengal jungle. He has a purpose
in view, just as a surgeon has when the amputation of a leg has been
decided upon. The speculator’s sole aim in the operation is the profit,
towards which he cuts his way, regardless of the nature of the obstacles to
be overcome, just as the knife is plunged into the flesh, severing the
arteries, muscles, and sinews that surround the bone which it is the object to
reach and saw through.
For a man to tread a path in which he must systematically not only
disregard the interest of other people, but deliberately calculate upon the
weaknesses of human nature which characterize the crowd, in order to work
upon them for his own ends, it is obvious that he must be constituted in a

quite exceptional manner, and not in a way that it is at all desirable that
others should attempt to imitate. If uninitiated people who enter the arena in
which some of the professional speculators flourish, were to spend some
months in gathering information and in close observance of the modus
operandi, so far as they can get to see and hear, many of them would soon
be persuaded that they were utterly useless at such work, and would retire,
thanking their stars they had been sensible enough to look on at the game
before hazarding anything themselves. From the very fact that but few are
successful as professional speculators, it can be safely argued that but few
are competent to engage in the business at all, even when educated in all the
tricks and deceptions necessary as collateral aids to the machinery which
we have shown, and shall show more in detail, to be a sine qua non. Those
qualities which have, more particularly in the past, characterized the
successful diplomatist are also of the utmost importance to the speculator.
Successful diplomatists in all times, with few exceptions, have been men
who have never scrupled to resort to finessing, chicanery, and the ruse de
guerre in every form under cover of a saintly innocence that would shame
the devil. Deception in all its forms will be found in the armoury of the
professional speculator, and the weapons, two-edged, are employed with a
laboured precision of which a glimpse by the outsiders is occasionally to be
obtained because it is impossible completely to conceal the fringes of the
organisation by which his gains are netted.
We now turn to the non-professional speculator, and The Non-
what a pitiable plight is that in which these gentlemen in professional or
ninety-nine cases out of one hundred ultimately find H aphazard
Speculator.
themselves. The members of the Stock Exchange liken
their place of gathering in Capel Court to a barn, and themselves to fowls
inside it, who repair thither every day to pick up the golden grain thrown in
by the public. This description is not exaggerated, and the more marvellous
does it become as one reflects upon the subject. Many and many is the man
that has toiled and earned a fortune to produce him a competence for the
rest of his days, who has been lured into that fatal vortex, in very many
cases because industry had become a habit with him, and he found
retirement irksome. “I amuse myself with a little jobbing in the stock
markets, just to have some object for going up to town twice a week,” he
says to a friend in the train, with whom he chances to be travelling. Such is
the beginning of more sorrow in respectable households than the world has

any idea of. Many a pensive countenance furrowed by the Stock Exchange,
carries in its deep lines the index to a heavy volume of lugubrious family
history, which, partly from shame, is sealed but to the few who must know
its contents. Prosperity brings wealth in its train, and people put by at first
their gains, until a taste for the excitement of dabbling in the markets grows
into a thirst, and from that into a mania, which is generally the frontier to be
repassed with empty money-bags, and a sad heart, by a wiser, if not a better
man. It is not so easy to be good on nothing after one has had £5,000 a year,
and hence a deal of the mischief that results from the foundering of Stock
Exchange speculators.
The haphazard man, who is the antithesis of the professional speculator,
will generally be found as differently constituted as are the results of his
operations. The man who makes a study and business of speculating,
investigating every detail that it seems necessary to probe until he has
adapted it to the rest of his machinery, will be found to be a hard-grained
man, sailing very close to the wind, while your persistently haphazard man
is mostly a person of flabby character, and no less flabby mind, as easily
frightened off a line that he has set himself to follow, in the innocence of a
heart that expands with a delusive consciousness of possessing power, as a
stray rabbit. Such a class of man is to be found by hundreds in the haunts of
the Stock markets, and they are always fidgetting in and out, first as little
bulls, and then as little bears, disappearing after a sharp panic like flies from
a joint of meat that is rudely disturbed by the shop-boy, with the important
difference that whereas the flies always get something, the speculators
invariably drop their money.
The following letter which appeared in the Spectator of the 4th October,
1873, struck us as being a propos, as regards a portion of it, of this part of
our subject. It affords another instance of the success which follows the trial
of a haphazard speculator’s “scientific plan.” In playing against a public
bank the gambler should know in these times that the science of
mathematics has been already employed on the side of the managers, and is
arrayed against him as a fixed law, working on the side of the croupier,
whether he wills it or not:—

“A friend of mine who was not with us, but who had had
many weeks’ experience at Monaco, had communicated a

little plan for an all but moral certainty of winning, which
was founded on the most scientific principles, but the only
defect of which was that the banks gave one no conceivable
means of carrying it into practice—a defect, indeed, which I
believe he himself had verified by leaving Monaco a loser,
in spite of his scientific plan. His idea was this:—It is
obvious that even where,—say at roulette,—the chance of
the next ‘odd’ or ‘even’ is precisely one in two, or one-half,
the chance of a run of any given eight results in a specified
order,—such as odd, odd, even, odd, odd, even, even, even,
—will be only one in 2 × 2 × 2 × 2 × 2 × 2 × 2 × 2, or one in
256. If, then, my friend bethought himself, you could but
steadily stake your money so as to stake it against the arrival
of this highly improbable compound event, you would be
sure to win. I quite agreed in this extremely sagacious
principle, but the difficulty, unfortunately, was in the
application of the theory. The bank gives you no chance at
all of staking your money against any complex event. It
admits only of your staking it in favour of or against the
simple elements of this compound event. And, unfortunately,
though it always remains highly improbable that any
specified run of eight will take place, as you can only stake
your money time by time on each single one of the eight
component elements of the event, and as, in each of them
separately, the chance is one in two, and not one in 256, it is
simply impossible by the rules of the game so to play as to
have the chances in your favour. I did, indeed, think of
requesting the bank to let me stake on the result of two or
three successive twirls of the roulette table, instead of on one
at a time, but since my French was extremely bad, hardly
adequate to protesting against the accidental raking up of my
money when I had actually won, and since, had it been
better, I had no hope that the authorities would comply with
a request so very unsafe for themselves,—the drift of which,
indeed, the croupiers might hardly have caught at the first
suggestion, but would certainly have suspected,—I

reluctantly abandoned my friend’s scientific receipt for
winning, and was contented to lose.
“The gamblers of our party were but three in number, and
all firm of purpose not to exceed the small risk we had
prescribed for ourselves of 125 francs each. I was the eldest
and rashest of the three, my money being soonest gone,
though not for two or three hours, and it was never for a
moment doubtful but that I should be a loser in the end. My
companions were both cooler and cannier in their play. They
did not, like me, precipitately put down their money before
the croupiers had raked up the stakes lost by the previous
catastrophe. They did not stretch over other players so
awkwardly as I did,—indeed, the croupiers had to rebuke me
mildly, by begging me to use a rake; and then, when I did
use the rake, I managed to knock the most desperate gambler
in the room about the head with it, and draw forth a fierce
remonstrance, which made me recall with uncomfortable
vividness that there was a pistol-practising ground (‘Tir-au
pistolet’) in the garden of the hotel, which would readily
furnish the instruments for a meeting, wherein I should
hardly have come off with a mere moral lesson. Indeed, I
felt clear, after watching my companions,—one of them a
shrewd counsel, learned in the law, the other a cool,
sagacious Cantab, who came out high in the Tripos the other
day,—that neither of them had the true gambling instinct as
strongly as I, though so far as their experience went, it
seemed to confirm my own. And what was that experience?
This chiefly,—that I was distinctly conscious of partially
attributing to some defect or stupidity in my own mind every
venture on an issue that proved a failure; that I groped about
within me for something in me like an anticipation or
warning (which, of course, was not to be found) of what the
next event was to be, and generally hit upon some vague
impulse in my own mind which determined me; that
whenever I succeeded, I raked up my gains with a half-
impression that I had been a clever fellow, and had made a
judicious stake, just as if I had really moved a skilful move

at chess; and that when I failed, I thought to myself, ‘Ah, I
knew all the time I was going wrong in selecting that
number, and yet I was fool enough to stick to it,’ which, of
course was a pure illusion, for all that I did really know was
that the chance was even, or much more than even, against
me. But this illusion followed me throughout. I had a sense
of deserving success when I succeeded, and of having failed
through my own wilfulness, or wrong-headed caprice of
choice, when I failed. When, as not unfrequently happened, I
put a coin on the corner between four numbers, receiving
eight times my stake if any of the four numbers turned up, I
was conscious of an honest glow of self-applause. I could
see the same flickering impressions around me. One man,
who was a great winner, evidently thought exceedingly well
of his own sagacity of head, and others also, for they were
very apt to follow his lead as to stakes, and looked upon him
with a sort of temporary and provisional, though purely
intellectual respect. But what quite convinced me of the
strength of this curious fallacy of the mind, was that when I
heard that the youngest of my companions had actually
come off a slight winner, having at the last moment retrieved
his previous losses by putting his sole remaining two-franc-
piece out of a hundred and twenty-five francs he was willing
to risk, on the number which represented his age, and gained
in consequence thirty-two times his stake, my respect for his
shrewdness distinctly rose, and I became sensible of obscure
self-reproaches for not having made use of like arbitrary
reasons for the selection of the various numbers on which I
had staked my money during the period of my own play. It
was true that there was no number high enough, sad to say,
for that which would have represented my own age, so that I
could not have staked on that,—but then, why not have
selected numbers whereon to stake that had some real
relation to my own life, the day of the month which gave me
birth, or the number of the abode in which I work in town?
Evidently, in spite of the clearest understanding of the
chances of the game, the moral fallacy which attributes luck

or ill-luck to something of capacity or gift, or incapacity and
deficiency, in the individual player, must be profoundly
ingrained in us. I am convinced that the shadow of merit and
demerit is thrown by the mind over multitudes of actions
which have no more possibility of either wisdom or folly in
them than—granted, of course, the folly of gambling at all—
the selection of the particular chance on which you win or
lose. When you win at one time, and lose at another, the
mind is almost unable to realize steadily that there was no
reason accessible to yourself why you won and why you lost.
And so you invent—what you know perfectly well to be a
fiction—the conception of some sort of inward divining rod
which guided you right when you used it properly, and failed
only because you did not attend adequately to its indications.
“Such is the experience which I carried away with me
from amidst the objectionable smells, the unsavoury
company, the malignant gnats, the haggard revelry, and the
general moral squalor of Saxon-les-Bains; and when my
wife reproached me, with triumphant references to her own
warnings, for the missing five pounds, I replied, what I
really feel,—though I know I shall never convince her of it,
—that my experience was not dearly bought. Is it the only
case in which the fiction that we ourselves have earned—
whether good or evil fortune—forces itself with absurd
tenacity upon us? Luther himself could hardly have desired a
better proof than this of the pranks which the imagination
plays us when dealing with that sense of merit and demerit,
so closely bound up with our human egotism. We give
ourselves credit, and get credit, I suspect, for a vast deal
more both of wisdom and folly in life than we deserve. Are
nine-tenths of the prizes and the blanks of life at all more
ascribable to any fine selective purpose or deficiency thereof
in him who draws them, than my losses, or my friend the
Cantab’s sudden retrieval of his loss? Yet I still look upon
that able and thoughtful youth with a deep sense of respect
for his cleverness in retrieving his losses, and on myself with
a melancholy consciousness that, like ‘Traddles’ in ‘David

Copperfield,’ my native awkwardness of mind must have
been the cause of my very moderate reverses.—I am, Sir,
&c.,
“An Instructed Gambler.”[26]

The greatest misfortune that can happen to the The Misfortune of
haphazard speculator is for him to make money the first early gains.
two or three “accounts.” He will, in such a case, in the
first place believe himself to possess some uncommon luck, or a
shrewdness for selecting a security that was about to move in the direction
he had reckoned upon. The operations of the most stupid speculator are
frequently attended with such results, just as they might also be on his first
essay at pitch-and-toss. Such incipient luck, by drawing forth the
commendations of others, especially of the brokers—who do not generally
err on the side of warning the individual against the dangers which beset
such a path—builds up in him a false estimate of his powers. Early success
associates his mind with the gains and not with the losses, and the latter are
incurred subsequently with a light heart, as a sort of accident that will be
sponged out by the results of the next throw.
A case came under our notice of the extreme danger of good luck
attending a first operation, but it was in another market. A Spaniard had
settled in London with his wife and family, and had entered into partnership
with another gentleman. Much money had been made in iron, and prices
had attained to an unprecedented figure (it was in 1872). He bought on pure
speculation 30,000 tons, and cleared £6,000 profit. Elated with such
success, his next operation was a purchase of 40,000 tons. The price fell £1
a ton. He lost all his own and his partner’s money, and fled from the country
leaving his family destitute.
But when two or three losses have been incurred the confidence becomes
somewhat shaken, especially after a large operation has been attempted, so
as to recover the losses on several smaller ones at one coup, and has failed.
Then some sort of a system will be tried, but the bad judgment which has
landed the haphazard speculator so far without his having perceived the
necessity of machinery and a system, will prevent his adhering to any set
purpose. Such a man acts on this information and on that, led away by the
plausibility of a wiser head possessed by a person who goes about like a big
fish in the deep waters, disposing of the smaller fry for his own purposes.
To dig to the bottom of the question without Very Few Failures
attempting further to widen it, what are the chances made public.

against the haphazard speculator? If we ask ourselves

whether we have known personally any individuals who have succeeded as
haphazard speculators, we must reply emphatically in the negative. It
occurs to us on making this observation that we have heard of one
individual, who may be described as a haphazard speculator who did get
clear off with £100,000, and we believe it to be correct. Everything he
touched chanced to go the right way until one morning he raised his hat to
his friends and the members who were in the markets at the time, and bid
them farewell. He was a solitary instance of a man with sufficient strength
of character to say to himself, “Thus far shalt thou go and no farther,” and
he adhered to it. Many had made as much before, but they could never stop
until it was all lost again. How is it so little is heard of those who venture
and fail, for the practice would be greatly discouraged if the failures always
came to light. All concerned are interested in keeping such matters quiet for
obvious reasons. The broker who does the business for the speculator can
measure his means pretty well at the outset, and takes care to keep his client
informed so that he may persuade him to diminish his commitments if the
times are not promising. The business is remunerative enough to make it
worth while to run some risk, and as the client will have always something,
at least, to meet his losses with, the broker is generally prepared for
accidents. The speculator will, for his own sake, keep his misfortunes to
himself, and so the new men come on, never knowing how many have gone
irretrievably into the gulf before them until they have passed the fatal
barrier of actual experience from which, in all but a very few cases, there
are vestigia nulla retrorsum.
The chances are overwhelmingly against the class of speculator with
whom we are now dealing, for the following reasons: He has no money, as
a rule, worthy of the name of capital, and consequently if he is caught deep
in by any of the thousand and one accidents that may burst like a thunder-
clap on the top of the markets any hour of any day in the week, he is unable
to “see it out,” as the saying goes. Not being able to take his stock off the
market, the settling day occurs before a sufficient recovery takes place, and
he is done for. Where there is an exposure to such a catastrophe, that may
happen at any moment and sweep away the entire fund, it is obvious that
the game is not worth the shadow of a candle-end, to say nothing of the
substance. Yet this is the common condition of the haphazard speculator. He
stands at the edge of a precipice knowing that a puff of wind will blow him
over, and that it may come at any moment.

Supposing, for the sake of argument, we put such a possibility of accident
out of the question, and imagine the haphazard speculator not to be exposed
to the contingency of such a collapse, what do we find in the second rank of
chances against him? In the first place his attention, as a rule, will be drawn
to a stock by, we will say, its upward movement. He thinks to himself,
“That stock has been getting up, why shouldn’t I have some of it?” and he
buys, allured as are many others who wait to buy of those who have rigged
the market up to a certain price, and then send the tip round to buy. The
haphazard man thus assists probably the professional and systematic
speculator to unload. He has got in at the top, and only sees his mistake by
getting out at the bottom. Secondly, he very seldom pauses after having
taken the decision to operate, owing to some special circumstance, to reflect
upon the minor surroundings which are very necessary to keep in view.
What are these? To buy on the eve of a settlement is a mistake, as a rule. In
Stock Exchange speculation the exceptions are of the utmost importance, as
for instance—When there has been a very sharp fall in the middle of an
account, and it is known that the depression has been due to any
considerable extent to bear operations, there will nearly always be a
recovery on the eve of the account, caused by the bears taking their profits.
The converse will also necessitate an operation of an exceptional nature, as
when values have been driven up to a high point in an account by the bulls,
to sell would be the line to take as the account approached, because the
bulls might be reckoned on to take their profits in the same way. As a rule,
however, prices tend to droop as the settlement approaches, owing to sales.
The haphazard speculator is always very much discouraged when he has to
pull up a loss, he should consequently avoid as much as possible incurring
it. If he does not keep these important influences in mind, he will assuredly
have to pay for the negligence.
Then there is the fatal blunder made by almost every Greediness
inexperienced speculator, of never being satisfied with a Involves Loss.
moderate profit. If he buys, and the price rises ½, he
cannot make up his mind to take it, but must wait for ¾; when it has
reached that he must have 1 per cent.; and when that rise has been attained
to, he wants another ⅛ or ¼ to cover the commission. Like the dog, in
attempting to grasp the shadow of his bone, he loses all. This is of daily
occurrence in numerous instances, and is one of the fatal weaknesses bound
up in the frailty of human nature, from which only the strongest and coolest

temperaments are able to emancipate themselves. Speculators never set
sufficient value upon the importance of avoiding a loss: they think only of
the profits. As it is with our money affairs when we say, Look after the
pence, the pounds will take care of themselves; so it is with speculators,
look after the losses, the profits will take care of themselves. “Never refuse
a profit,” is a golden motto for the speculator, which unhappily few of them
in their greediness have the courage to adopt.
In parting company, for the present, with the Keeping one’s own
haphazard speculator, to whom we have yet more to say Counsel.
worthy of his attention, we would strongly recommend
him if he finds it impossible to leave it alone altogether, to keep his own
counsel. Do not listen to what other people have to recommend. People who
are engaged in commerce in all its multifarious ramifications, care only for
themselves, and for no other single soul; it is at all times consequently idle
to put any other construction upon advice to buy a certain stock, tendered
apparently, with the most benevolent motives, than that it is to serve
directly, or indirectly, the purpose of him who recommends the purchase. In
business every one is for himself, and, as the saying is, “the devil take the
hindmost.” A man who takes to speculating, and has not enough stability of
character to lay down certain principles for his guidance, to be rigidly
adhered to as a rule, or is possessed of an excitable temperament, had better
flee from the thought of engaging in so dangerous a vocation, for his
ventures will assuredly result in the speedy dissipation of his inheritance, be
it large or small.
Note.—I made, purposely, no comments on this very interesting and important chapter, and trust
all the terms will be as readily understood by the New York speculator as by the London speculator.
H. W. R.

CHAPTER IV.
THE INCREASE OF SPECULATION IN STOCKS AND
SHARES.

The excitement which most men feel in gambling in Stock Exchange
one shape or another leads to its being practised to a Gambling
very large extent, in spite of legal prohibition and the increases in
Europe while
vigilance of detectives. Public betting houses have been public Gaming-
suppressed, and it seems that betting on horse-racing has Houses are on the
diminished; while on the continent, as governments have Decline.
found themselves able to fill the national exchequer in a
legitimate manner, Homburg, Baden-Baden, Ems, and the like, are no
longer the chosen resort of rouge-et-noir players; but the vice has only
broken out in other places, the results of which will be probably far more
disastrous at Berlin, Frankfort and Vienna, in their respective Stock
markets, as time goes on, than ever followed the play in the gilded saloons
at the places mentioned.[27]
If it be conceded that playing for money, to which end Speculation an
speculation likewise in any other commodity than stocks Out-growth of
and shares is simply the means, produces a pleasurable prosperous times
sensation in a man, and that very few men do not
experience it some time or other, who have the opportunity of calling it
forth, the greater number of men whose position enables them to gamble,
will probably do it. At every rise and fall in a country’s prosperity there is a
flow and ebb in the tide of speculation, not only in stocks and shares, but in
all markets. We refer now to that class of speculation which is an
excrescence of prosperous times. A merchant’s business is at all times more
or less of a speculative nature, it cannot be otherwise; but this is very
different from the speculation of outsiders in commodities which they know
nothing about. Many persons would, no doubt, think it strange that there
should be a feverish speculation sometimes carried on in such an article as
pepper. Yet syndicates are occasionally formed for quietly buying up this
article, and ascertaining the exact amount in stock, and the probable

quantity that will reach the market by ship within a given time. When the
syndicate has complete command of the supply, they commence to “rig” the
market, or put the price up, then put the public in and let it down again. In
the stock markets the bona fide operations, as compared with the
speculative, are probably as 1 to 20 at most, and in the colonial produce and
other markets the proportion is only something more. It may be imagined,
therefore, to what an extent the speculative operations in an article like
pepper may be carried when it is considered that the weekly deliveries for
consumption amount to 250 tons.
One inevitable evil attending all forms of commercial Commercial
prosperity is that they are built up in so large a degree Prosperity
upon a basis of unremunerative speculation. Such a unhealthilyfostered by
foundation only serves as a sufficient support to the Illegitimate
superstructure, while the pressure upon it does not pass a Speculation.
certain limit. If, for example, it be accepted as proved
that one Stock Exchange transaction in twenty is bona fide, it is obvious
that when the speculation in those markets shrinks up for the time, which it
is sure to do when it has had its run, a number of stock brokers whose
business has been established by reason of the increase of speculative
operations must fail, unless they have made enough money during the
period of unusual activity to be able to live through the period of stagnation
that intervenes before the next revival. And after every commercial
revulsion a large number of them do fail, and it is not easy to estimate the
mischief that is occasioned by the shock that is communicated to trade and
production by the sudden and complete stoppage of these extra streams of
expenditure.
There are great foci whence proceed currents of The Influence of
profit. The currents of profit may be traced to the great Trade Profits
the Stock
seats of the national industries. The money made, for upon Markets.
example, by the great cotton and iron manufacturers of
this country, distributes itself in a hundred streams from Lancashire and
Yorkshire, to keep within the bounds of two counties.[28] The larger currents
flow into the pockets of two classes, those who are very rich, and those who
are moderately so; while the smaller streams trickle into the cottages of the
labourer and artisan. The wealthy direct their new gains as they flow in, into
the markets for public securities, and the gains of the labourers follow to

some extent in the same direction at a slower pace, through the lower
middle class, whose profits increase by the augmented consumption of all
the primary articles, in which weekly wages are laid out. In both cases the
currents of profit starting from the great foci of production, spread,
embracing all classes of the community, like the winter’s snows gathered in
their wealth in the mountain heights, which are loosened by the summer sun
to flow over and irrigate the grateful plains below, and are again gathered
up to a large extent for distribution through the Stock Exchanges of Europe.
When this volume of profit begins to be felt in the An Increase in the
Stock markets, the harvest time for the professional Amount of Trade
speculator commences, and with the increase in the Pcauses rofits realised,
an Increase
amount of the profits of the nation the number of in the Number of
securities increases also. The public securities quoted in Securities.
the bourses of Europe at the present time amount to
thousands of millions sterling more than existed a quarter of a century ago.
Side by side with this increase in Stocks and Shares has the speculation in
them increased also. Such has been the growth, indeed, of speculation that
several joint stock companies have been formed, which are nothing more
nor less than syndicates of speculators who have invited the public to join
them in buying up a number of securities and making a profit by selling
them at enhanced values. A few skilful Stock Exchange practitioners at the
head of these concerns have, in many instances, made an excellent business
out of the operations, by systematically raising the necessary capital and
taking the securities off the market, which practically illustrates in broad
daylight the legitimate method by which speculation may be pursued as a
business, as we have already stated in Chapter III.
The fact of speculation having come to be practised Speculation by
by established companies, where before it was a kind of Established
business that it was considered necessary to pursue as Companies.
secretly as possible, proves how strong is the tendency
of the age in which we live to make royal roads to wealth.[29]
Speculation, as we know it in our time, is a very different affair from
what it was fifty, and even thirty, years ago. Value in all markets in our day
is unsettled with the lightning flash that laughs at the bed of the Atlantic as
no better than a span of space, while the forces that close in on all sides,

representing demand and supply, with a responsive thunder-clap, adjust the
new level as each market grasps in a moment the cause of the disturbance.
One of the great evils which follow upon the increase The
of speculation is the demoralisation it brings in its train. Demoralisation
Money easily made is very often as easily lost, after caused by
Temporary
which it is difficult to rekindle that healthy desire to Success.
work which is fostered by the acquirement of
moderately increasing gains through close application to business. Money
that cost but little trouble to procure is generally carelessly spent, which, as
a rule, does more harm than good to him that gained it.
The commencement of a new era in speculation dates The New Era in
from November 13th, 1851, when a telegraph cable was Speculation.
successfully laid across the straits of Dover, and the
opening and closing prices of the funds in Paris were known at the London
Stock Exchange within business hours. From that day one European bourse
after another has joined hands, and the political shock which affects one
market, henceforth acts through the electric wires, more or less upon all,
according to the extent to which the same securities are dealt in at different
cities.
Side by side with the acquirement of means by the Collapse through
masses of those European states which up to a Over-speculation
comparatively recent date have been poor, has in Austria.
speculation as a business grown, and it has been making
rapid strides from the breaking out of the civil war in America, when the
augmented price of cotton laid the foundations for the manufacture of this
staple in parts of Austria and Prussia, where it has taken root, and according
to all accounts flourishes in successful competition as regards certain
descriptions of cotton fabrics with the mills of Lancashire. New seats of
production have been created, and new currents of profit have found for
themselves centres for investment. The sharp little panic which broke out on
the Vienna bourse in April, 1873, was due to the too heavy superstructure of
the new, and much too rapid, speculation, reared recklessly upon very
slender foundations. There, in a city comparatively innocent of such
collapses, might be seen the demoralisation which follows upon hastily and
too easily acquired riches. The effect of the financial crash, which was
mended up in a few weeks so that a spread of the crisis was for the time

arrested, was such, however, upon the nerves of all classes of the
community, that the journals had leaders written in such desponding
phrases, that readers at a distance from the scene were inclined to believe
that the capital of Austria was about forever to be blotted out from the roll
of financial centres. Some little sympathetic effect was produced at Berlin,
where considerable inflation also existed as a consequence of the activity in
commercial affairs, which followed the large war indemnity payments made
by France. There is, in fact, on all sides evidence that the speculation not
only in stocks and shares, but in all commodities throughout Europe, has
been carried on for several years past, on a scale which was temporarily
checked by the Franco-German war, far exceeding anything ever known or
heard of before.
Trustworthy figures give the best and surest estimate of the increase in
the business of the chief Stock markets of Europe, and where we find the
stock brokers and jobbers have increased in number we may safely
conclude that the business that is transacted in the Stock markets has
increased also.[30]
In the London Stock Exchange we find the number of Increase in the
stock brokers and jobbers has increased as follows. We number of
Members of the
start from the year following the great collapse of 1866, London Stock
when the ranks were perhaps somewhat thinned: Exchange.

The number of Members of the London Stock Exchange
1867 was 1,261
in
Ditto 1868 1,297
Ditto 1869 1,356
Ditto 1870 1,433
Ditto 1871 1,442
Ditto 1872 1,620
Ditto 1873 1,706

The number of members has increased as follows: From 1867 to 1868, an
increase of 36; from 1868 to 1869, of 59; from 1869 to 1870, of 77; from
1870 to 1871, of 9; the diminished increase during this period being no
doubt traceable to the Franco-German war; from 1871 to 1872 an increase
of 178; and from 1872 to 1873, of 86. It is evident in the increase from

1871 to 1872 that the intention of many persons to become members during
1870 and 1871 was only postponed until the storm raging on the Continent
had passed over. In fact it very soon became apparent from the transfer of
business, especially of a financial nature, to London, that as soon as the war
was concluded the increase in the London Stock Exchange operations
would be larger than would otherwise have been the case, as in fact it
turned out, to speak only of the loan operations of France and Prussia. It
may with tolerable certainty be argued that new stock brokers and new
jobbers in the early part of their career depend very much upon speculative
commission business, and the above figures, therefore, afford ample
evidence of the increase of speculation in these markets.
What are the further obvious deductions from the large increase of
speculation in public securities thus suggested, to confine ourselves to one
kind of market? If the business of the Stock markets were reduced within
safe and legitimate limits, that is, was confined to operations of a bona fide
investment nature, it is certain that no more than one-tenth, it might be one-
twentieth, of the brokers would be required to execute properly all the
orders that come into the markets. It follows, therefore, assuming this
estimate to be approximately accurate, in the first place that the number of
really sound stock brokers, who have a steady legitimate business, upon
which pure speculation is an excrescence not particularly encouraged or
liked, is small compared with the entire body; secondly, that by far the
greater number depend very much for their means of support upon purely
speculative “time bargains;” and thirdly, that a crying evil of the whole
system is that speculators encourage the establishment of new brokers, who
when established are very often compelled, perhaps against their
inclination, to encourage in their turn gambling, or there would soon be an
end of them. It is thus evident that a large proportion of the brokers in all
markets where speculation is carried on to a large extent, must be always
living on the crust of a volcano, in imminent peril of destruction from the
moment the tide of prosperity, which carried them into their apparently
secure and prosperous position, begins to turn.

CHAPTER V.
MODERN INFLUENCES UPON THE MARKETS.

Unless a speculator, whether in the Stock markets or any other market, is
prepared to lay down all the elaborate machinery, without which, in these
times, it is utterly hopeless to attempt to achieve favourable results in any
degree, he must inevitably in the long run lose his money.[31]
The times are very much changed since the head of a A Fixed Line of
great financial establishment, long since gone to his rest, Action.
set sail from the shores of France as soon as he was well
assured that Wellington was over-powering the legions of Napoleon in
1815, hastened to London, and bought up all the Consols he could lay his
hands on, and thereby realised a considerable fortune for himself and his
heirs at one coup. Here is a memorable case in point as illustrating the
necessity of laying down a systematic plan of operations and by sheer hard
work, and at the risk of life and limb, carrying it out to a successful issue.
The ordinary speculator is not to be found with these qualities of dogged
perseverance in elaborating a plan of operations, and keeping to strict
principles of action from the outset, never allowing his mind to be diverted
from his system except under certain special circumstances, for which a
margin has been allowed. The electric wire has changed matters very
materially in this respect. There is more ease in these times as regards
individual locomotion for the operator who has keenly to watch the
fluctuations in all markets; he has silent, but at the same time gigantic
forces, at his disposal, which he can exercise in pretty nearly any quarter of
the globe where there is need for them; but it cuts both ways—he can make
a fortune in an hour, or less time, and lose it with the same rapidity, beyond
hope of recall should the second line of judgment condemn the action of the
first.
All the markets of the world are regulated to a greater Closer uniformity
nicety as regards value since the more complete of Values in all
Markets through
development of railroads and of the telegraph system. the Development
Each great article of commerce has its head quarters in

its respective country, and value from that point is of the Telegraph
System.
regulated at all the minor stations where it is dealt in, to
use a metaphor, in the same way that the right time is A Speculator
flashed through the electric wire to the principal clocks cannot hope to
in England at one o’clock from the Observatory at succeed in any
Degree unless his
Greenwich. It is the custom consequently for all the Arrangements are
leading merchants and dealers to be supplied by as Complete as
of a Man
telegram with the prices current of those articles dealt in those
engaged in Bona
in all other markets, in which they are mainly interested. Fide Business.
To compete with those who make a steady profit by
buying and selling in obedience to bona fide orders, a speculator must at
least have his arrangements on a par with the non-speculator, if even then
he can expect to hold his own without a still more elaborate and costly
system of obtaining information, as his necessary profits can in most cases
only be secured by his being in a position to anticipate a coming change.
Whatever be the operations of speculators who The Diminution of
employ little or no capital of their own, or the nature of Gluts in all
the transactions of those who risk what they have Markets.
belonging to them by consigning goods of various Modern
descriptions to distant markets in the future, there can Conditions render
never be the same gluts that have characterized the it more difficult
than formerly for
trading of former times. It would, indeed, seem that the Small Mercantile
commerce of the world must by degrees be carried on Houses to
more and more by a smaller number of powerful Succeed.
merchants, relatively to the increase of populations and
the growth of commerce, and less and less by a greater number of small
weak houses. The nature of the system which is growing up under the new
order of things will preclude from serious competition any but those who
can afford from the commencement to start upon somewhat the same
principles of action as those who already carry on and regulate the trade of
the world. What chance, for instance, can a man have who starts in the
Manchester goods trade, with a view to shipments to the great foreign and
colonial markets, unless he can be in a position, by means of his telegraphic
information from all the necessary quarters, not only to avoid sending from
Manchester, goods to any particular quarter where the market is
unfavourable, but also to divert a shipment already on the passage from its

intended destination to some other point where, in the meantime, prices
have risen?
As the system by which the interchange of commodities is effected
becomes more and more perfected, and as the division of labour settles
itself down into a well-defined science by the good and skilful workmen
concentrating their efforts, and by the bad and unfit labourers being forced
to abandon what they are unsuited for, so will the demand for all the great
luxuries and necessities of life be supplied more completely on the joint
stock principle. We see this in all directions growing up under our eyes.
Wherever a large demand exists for any service, such, for instance, as
transport, or for any article of use or consumption, there will the means of
supplying both be organized. We have seen it in armies, in fleets, and in the
government of countries for centuries; and we have been watching it for
forty years in, perhaps, the most astonishing instance there is, viz., in
railways. Formerly everybody drove in his own coach about the country,
now nobody does. We have seen it for years past in banking, which, from
the nature of the business, would be the most easily reformed upon the joint
stock principle. It has also been working and making inroads upon
commercial houses with a force which in the end will be irresistible, and
which from year to year makes it more difficult for small firms with small
capitals, to hold their own against the larger organisations, just as it is out of
the question for any private person now to start a bank.
The incalculable mischief that is caused in Every Commercial
commercial affairs at certain periods, arises for the most Revulsion
Houses
part from the operations of comparatively small houses, destroys
of a Speculative
which have insufficient capital to enable them to lay Character, and
down the necessary machinery for duly informing throws the Good
themselves upon all the needful points about which they B usiness into the
Hands of the
should be accurately posted with untiring continuity. In a Large, Sound
great commercial city a thoroughly experienced banker Establishments.
or money-lender can say very nearly by heart the names
of the merchant houses who are known to be beyond all question good for
any amount for which they may write their signature. Starting from this
nucleus, circles may be drawn defining the various degrees of credit which
may be allowed to commercial houses, until a supposed outermost and
largest ring of all is reached, which includes the shaky, struggling, poor

establishments. Those whose knowledge and experience in such matters is
very great could so classify all traders. Now, it must be evident that when
the chaos which follows a violent commercial revulsion begins to be
transformed into order, the business which the withdrawal of confidence is
sure to throw as much as possible upon the centre or nucleus of firms which
are comparatively unaffected by any revulsion, will commence gradually to
work outwards again, overflowing ring after ring of the supposed lines
which we suggest as defining the degrees of stability. This ebb and flow of
the tide of credit, so to speak, is the result of competition, and of the
fluctuations in commercial affairs, and must always recur with greater or
less force and rapidity. It is an automatic working of the laws of commercial
affairs which characterizes all markets. As the nature of a large proportion
of mercantile business must partake more and more of the speculative
character to keep pace with the keener competition of greater capitals
employed by a larger number of first-class firms, so must the machinery
requisite for each individual firm under the altered circumstances through
which prices are affected in all markets become more elaborate. If this view
be correct it would seem to follow that the important business of the world
must be more and more settling itself into the hands of large capitalists; and
that although new houses in all departments of trade will always be starting
in proportion to the aggregate growth of the commerce of the world, the
large and strong firms will increase in a greater ratio, and the number of the
small ones will tend to diminish.
Before the invention of the telegraph, a house of straw could paint up its
name, make a show with a few thousand pounds, and enter into very large
commitments for good or for bad, as it might turn out. Shipments to a large
extent could be made, and if all turned out well, a house might thus, by a
stroke of luck, be established to occupy, perhaps, an eminent position. On
the other hand, if the first operations resulted in ruin, it was worth the risk,
and a fresh start was made probably somewhere else under a new title. Such
instances being multiplied in all the great commercial centres, it is easy to
understand how markets could be glutted, prices raised to a fictitious level,
and all the links forged into the chain which snaps at once, when the tension
upon credit has gone beyond a certain point. Matters however are changed
in this respect, and are changing from day to day. So small is the expense of
obtaining information, compared with the risk of signing a contract with a
house of straw, or of doubtful respectability, that the electric wire serves

accurately enough for the purpose of ascertaining the position of a new
customer who may present himself at a large establishment to do business.
A most salutary effect is thus in process of being worked out. The great
thing in commercial affairs is to keep out the weak speculative element, and
to drive them into subordinate positions to work their way up in a legitimate
manner, to become principals. The means of obtaining information now is
so considerable, that if a man signally fails, almost the only hope for him is
to change his name. In some instances this has been done, and followed by
astonishing success, although the way it was achieved would, perhaps,
hardly bear close investigation.
So far, we have referred more particularly to the altered character of
modern influences upon commercial markets, and we have done so because
the changed conditions which affect the value of one commodity in the
markets of the world more or less affect all; but, as we are specially writing
with reference to Stock markets, we only propose to touch upon other
markets in passing.
The net work of telegraphic communication, in The Extension of
Europe at least, is now, in the year 1874, so far complete Long Wire
that, when a pressure of business is felt by the sub- Telegraphy.
marine telegraphic companies, the complaints of delay
are not frequent. The long wires are also multiplying rapidly. The progress
that has been made in telegraphy was made known to many for the first
time by the circumstances being published, that the Shah of Persia’s first
minister at Teheran was aroused out of his sleep early one morning, during
the visit of his royal master to England, to reply to a message which, to the
minister’s astonishment, he discovered had a few minutes previously been
dispatched by Dr. Siemens, an operator who had been expressly established
for the use of the Shah in Buckingham Palace.
We are of opinion that the complete communication Money Famines
that is now established between the commercial and should henceforth

monetary markets of Europe will tend gradually, if not be as improbable
of Occurrence as
rapidly, which is very probable, to diminish the effects Corn Famines.
of what we understand by commercial crises. The
opinion embodied in this sentence which was written Advantages
derived from
before the American financial crisis of 1873 broke out, Opening Up
has been corroborated by the great assistance afforded Communications

by the Atlantic cable in mitigating the immediate effects with the Corn-
growing Provinces
of the first symptoms upon the public mind, and in at of Russia.
once confining the disorder within limits which would
probably have been impossible in the absence of telegraphic
communication. The main reason why we have suffered from monetary
panics so severely during the first three quarters of the present century has
been from the absence of rapid communication with other monetary and
commercial centres, as well as from the absence of large auxiliary monetary
centres holding a good average supply of cash, to be lent out on good
security to the highest bidder for the time. The facilities which now exist for
applying the over-plus of grain at one centre of population to satisfy the
deficiency at another, has done away with famines. The late exception of
Persia proves the rule. Corn is a commodity, and money is a commodity.
What applies to one, as regards demand and supply, applies also to the
other. A strange nervousness still exists in some quarters about the amount
of the Bank reserve, fears being entertained that it will be found too small
when the time of pressure comes. Persons who are so loud in their protests
at reductions in the Bank rate can never have been buyers of money
themselves, or, in other words, sellers of bills. To keep the value of money
the smallest fraction above what is actually necessary at the time, by the
capricious exercise of a brief authority, is to commit an act of unwarrantable
injustice, and to rob the needy. We say if the Bank directors maintain a
higher rate of discount than is necessary, they rob the needy, and compel
holders of bills to pay an illegitimately high rate of discount. It is urged in
defence of this nervousness, that the attractive power of a higher rate is
slow, and that the till may be exhausted before the required supply arrives.
As and when it may be necessary the Bank should raise or lower its rate,
maintaining a reserve which is sufficient at all times if it be about one-third
of the liabilities. To speculate upon the future, is to attempt to discount
influences which may never be felt. To maintain for a day a higher rate than
is necessary, is to tax the public for private ends, to reinstate Protection, and
to disregard sound economic principles. To illustrate what we mean, take
the case of bread famines. Almost the only nation that has suffered from the
worst kind of bread famine of late years, has been one altogether outside the
pale of civilization. At the period referred to, the telegraph was only seen in
Persia, because it was necessary to use the territory for putting up telegraph-
poles to carry a through wire to India. As we write, there is not a steam-

whistle to be heard in that country, which is somewhat astonishing,
considering that it is so near to us and that it is twice as big as France;
although it must be said, in justice to His Majesty the Shah, that he has
already seen the benefits to be derived from coming out of his dominions
himself, and by letting civilizers in, with carte blanche powers, to transform
his dominions from a condition, as regards production, which may well
shame the representative of an ancient line of kings. With the exception of
countries situated as Persia is, with reference to obtaining supplies from
other nations, no considerable centre of population need suffer from bread
famine in our time, unless under circumstances which no human foresight
can prevent. This very important fact was recognized when the first great
foreign railway loans were offered for subscription in England. It was seen
that by enabling Russia to make railways from the great corn-growing
districts of her Baltic provinces to ports to which vessels could gain access
during the winter, we should, in case of need, be able to supply ourselves
from this source. We have not yet had special occasion to prove the
inestimable value of those lines of railway, but one thing is quite certain
that, whatever some authorities may say as to the impolicy of lending
largely to foreign powers to assist them in constructing strategic railways,
for reasons beyond the one given, England never made a better business
than by lending Russia some of her surplus capital. Whether or not we have
now lent sufficient is another matter.
A hunger crisis arises from a scarcity of bread, and a monetary crisis
from a scarcity of money, or what represents it perhaps too largely at some
centres, credit. There are stores of corn kept in larger or smaller quantities
by all civilized nations, and famines have arisen in former times, not only
from the absence of sufficiently rapid communication making the surplus
supply of one centre available for the deficiency of another, but from the
failure of production. It is tolerably certain, however, that at all times while
human beings have existed there has always been enough food grown for
every living creature, if it could have been distributed according to the
varying wants of different populations. Now that this can be effectually
done, famines are unknown except in lands whose people are such lie-a-bed
tories that they prefer to sit in the sackcloth and ashes of barbarism and
want, to humanising the body and soul by the regenerating influence of
modern civilization.

Money is as much a necessity as bread in the world. Indeed, it is of more;
for bread alone carries a man a very little way, according to modern notions,
whereas money is the lever that lifts every obstacle from the path. It would
seem quite reasonable, therefore, to infer that when the same means have
been established for making the surplus at one monetary centre available to
supply the deficiency at another, with the rapidity which is proportioned to
the more sudden pecuniary requirements that are developed than is the case
with corn, the very serious and prolonged disturbances which have been
experienced in the past from such a cause would gradually be prevented in
the future.
Apart from the single question of rapid telegraphic The Growth of
communication, there is another matter deserving of as Wealthy
much consideration, which is the increase in the number M onetary
Centres.
of large monetary and commercial centres. Of late years
the growth of wealthy centres has been rapid, and the reservoirs of
unemployed money have thus been increased so that a deficiency at one
could be supplied from another at a price. Diseases of the body break out
here and there in the world at different periods, and other centres of
population get warning, and by quarantine and strict sanitary measures, its
spread, as in the case of cholera, is checked. Speculation is a disease of the
mind, and like diseases of the body which arise from indulgence,
carelessness, and neglect, it in the same way comes to a crisis at places
where greed of money, folly, and commercial debauchery hurry people into
extravagances and luxury that are sure to result in a general eruption. The
growing wealth of continental states is an important feature in the altering
character of Europe, from a financial point of view, as we near the last
quarter of the nineteenth century. As monetary centres, both Berlin and
Vienna have been taking a much more prominent part since the Franco-
German war than there was any prospect of their doing before the transfer
of so much wealth to Germany by the war indemnity payments. At the same
time, London has risen higher, and to a level of still greater importance even
than she had occupied before as a trade centre. In proportion as other such
centres are growing in influence with their reserves of floating capital and
credit is London shored-up, so to speak, against the violence of a
commercial crisis by the growth of subsidiary monetary centres, which
form the second line of defence. Such a second line of defence against a
sudden collapse of credit, such as we have experienced several times during

this century, is of the utmost importance to a centre like London, where the
existence of an elaborate system of book-credits causes such an economy of
the currency.
Among exterior modern influences is the rapidity with Private Cipher
which the large professional speculators obtain cipher Telegrams as
telegrams, informing them of important events that EInfluencesxterior
upon
transpire abroad which are calculated to influence prices Priors.
in all markets. The effect of the rapidity with which such
events are thus made known is that, whatever influence they may be
calculated to exercise upon certain values, it will almost always have been
discounted before the ordinary haphazard speculator gets to know anything
about it. Close observers will be able to confirm this by having remarked
that all political information is, as a rule, known sooner at the Stock
Exchange than anywhere else.[32] So it is with all news that is likely to
affect prices that are quoted in the public prints. Many a man has gone
quietly up to the city some morning after studying his newspaper telegrams
and bought or sold some stock on speculation, under the impression he was
stealing into the enemy’s camp while the foe was asleep. On looking closer
into the matter—of course when it is too late—he discovers that the
information he has been so cunningly operating upon is already, for many
hours, perhaps half a day, a matter of history.
What is the altered character of the interior The Altered
influences? One, and perhaps the most, important, is, Character of
that syndicates of powerful speculators act in IInterior nfluences upon
conjunction with the dealers in the markets. There are Prices.
distinct markets for certain stocks and certain classes of
stocks, and the jobbers confine themselves more or less The Creation of
Securities to Meet
to dealing in a few descriptions. In a wealthy community the Demand.
there will probably always be a large number who
cannot control a restless desire to be operating in the Getting Behind
markets, who must now and again try their hands at the Scenes.
speculation, as circumstances seem to present favourable The Difficulty of
opportunities. There are periods in the prosperity of “Cutting” a Loss.
every community when individuals are known to have
made profits in their business, and in the natural course of things seek
investments for their gains. Securities at such times are created on a great

scale to suit the taste and appetite of the public. In the first stages of the
creation of new securities considerable profits are made by bona fide
investors, which in course of time attracts the attention of speculators
without means, who think that they have but to venture and they also will
gain. After a time inflation sets in; and we may here ask the speculator if it
ever occurs to his mind that understandings exist between the syndicates of
professional speculators and the dealers, whereby the former get to know to
what extent the public have bought by seeing the jobbers’ books? It is easy
to see the power a syndicate with large means may exercise by such a
system as this, even in a large market, supposing they could get to see the
books only of the larger jobbers. We will suppose, for instance, the public
can be induced to buy a certain stock largely on some fictitious information.
If, at the close of each of three or four days buying for the rise, it was
ascertained by an examination of the jobbers’ books that accounts were
open in a stock to the extent of half a-million of money by over a hundred
different purchasers, it becomes evident that there is a tree of ripe fruit
grown as it were by magic, and the syndicate has nothing to do but to pluck
it. Out of a hundred buyers at least a third would probably rush out and take
their loss at the first indication of their being on the wrong scent. One of the
great faults which characterises all speculators, with very few exceptions, is
that they cannot summon courage to “cut a loss” at once. The object of
buying was to gain, and the mind is associated with a profit in connection
with a rise on the transaction, and it is very difficult to change about, and
gain, in a negative sense, by not losing more. It is upon this weakness of
speculators individually, in not being able to “cut a loss,” that bands of
marble-hearted riggers lure the public into holes, and squeeze their purses
before they let them out. With such tenacity do speculators hold on to a
stock, hoping for a recovery when they have made a loss, that they will
leave it as a man drops into the sea from a burning ship, only when he is
singed by the flames. Many speculators on discovering they are on the
wrong tack gather themselves up pour mieux sauter, and turn round and sell
for the fall, believing they shall be quick enough to catch it and swim with
the downward stream before it is spent. In the greater number of cases, such
speculators watch the fall far enough to be sure they are right in their view
of the way the price is going, and then they “get in.” What is the usual
result? Hesitation in the second operation has caused them to miss the mark,

and the account is closed with a loss on both transactions; the speculator
having bought at or near the top, and sold at or near the bottom.

CHAPTER VI.
CACOETHES OPERANDI.

The bane of nearly all speculators of the soft-grained Waiting for
type—by which we mean men whose will and judgment Extremes.
bends this way and that, like a reed that nods allegiance
Reaction
to any quarter of the world according to the blow of the generally more
wind—is, that they are for ever on the itch to do Rapid after a
something. There is no getting them to wait for an Sharp Rise.
opportunity. There are two sorts of opportunities, and the
distinction between them is important. The speculator feels much more at
home in availing himself of one than of the other. The man who can wait for
extremes is the one who will have the best chance of making extreme
profits, provided he can be fairly sure of a good grasp of the duration of
passing influences. One kind of opportunity is after a sharp fall in prices. As
we have before remarked, most speculators feel more at ease in operating
for the rise, and consequently know best what they are about after a fall in
prices, and they make themselves bulls. The other kind is after a well
sustained rise. But it has been generally observed that speculators sell bears
of stock with more timidity than they buy bulls. One reason, no doubt,
beyond that referred to is, that they have a feeling in their own minds that in
selling for the fall they are going against the current, which on the surface
seems to be a rash proceeding. But in being able to combat this feeling lies
one of the main elements of success. It is out of the public that successful
speculators make their money, and consequently there must be the greater
chance of losing by following the lead of the public. Of the two
opportunities therefore of which a speculator can avail himself with the
most advantage, that of looking on at a rise and opening a bear account at
the new prices is, under ordinary circumstances, the most worth his
attention, as the reaction is generally more rapid after a sharp rise than after
a fall, owing to there being more new interests engaged in causing it. A
rapid rise is promoted largely by speculators whose operations for purposes
of enticing the public to buy, may be compared to the exertions of a horse in
a great race that is entered to make the running for the favourite. Those

speculators are more anxious, as a rule, to realize their profits as bulls, off
high figures, than they are to close bear accounts; for, when a panic has
driven prices down, some time will elapse before confidence revives, and in
the meantime it may be renewed.
A person who cannot withstand the itching desire to have an interest in
something or other, is almost sure to be a man of that soft texture of
character that yields to influences that are unworthy of serious attention,
and he will consequently be led into error and loss probably oftener than
not, and his operations will end in failure. It must be obvious to every
reflecting mind, that so dangerous a game as Stock Exchange speculation,
or speculation which partakes of the same nature, in another commodity,
entered into, if it be only partly to satisfy a craving for some sort of
excitement, is a very unwholesome pastime.[33]
Of all occupations Stock Exchange Speculation is the last to be thought
of as an amusement for the man who wishes for some light kind of business
that can be done with an off-hand air, and without any of the drudgery that
is the real power in money-making. And yet there is no doubt that a large
proportion who feed the ever copiously flowing stream of profits that the
members of the Stock Exchange are diligently gathering from day to day,
are persons who, having nothing better to do, are drawn by an insatiable
desire for some occupation into the ranks of the haphazard speculators.
Once fairly entangled in the meshes of loss, the struggles to recover it are
usually attended by worse disasters.
It may also be shown that a desire to satisfy a craving for a class of
excitement which partakes somewhat of the nature of sober business, in its
earlier stages at least, allows admission to the mind of an element which
makes havoc with the judgment, and consequently forms an ingredient in
the nature of a speculator, which is almost sure to bring him sooner or later
to grief. Before a man enters upon the business of speculation, he ought, if
he is to have a fair chance, to clear his reasoning powers from any such
unwholesome encumbrances as even the faintest desire for excitement.
Every step a speculator takes should be, as far as possible, as deliberate as if
he knew perfectly well that the slightest miscalculation would certainly
involve him in loss.
What Not to Do.

In engaging in speculative commitments, the great difficulty that presents
itself is not so much what to buy or sell, as what not to buy or sell. When to
do something, and when to do nothing. Here lies a problem, the solution of
which costs such a number of speculators their money and their peace of
mind afterwards, to say nothing of the chronic dyspepsia that afflicts them
until they are forced to quit the field.
If the time a man spends in finding out the mistake he Special
has made in selecting this or that stock haphazard for Information.
speculative purposes, were devoted to obtaining some
Much Money only
special information about one particular stock which he Obtainable as a
might have good reason for believing was worth Certainty by Hard
attention, his chances of making money would much Work.
improve.[34] This plan is adopted by the more sensible
speculators who sufficiently understand the difficulties of the business to
recognize the importance of laying down certain principles of action.
Money cannot be made for a continuance with any degree of certainty
without hard work. When this proposition is demonstrated, which it
undoubtedly can be, the whole question of speculation as an occupation, a
pastime, or a business, call it what we will, resolves itself into this, that
unless a man devotes the same hard work to it that is necessary to earn a
fortune in any other calling, plus the possession of an intellect of a special
order and considerably above the average, he must be a fool to speculate at
all.
In order to bring more forcibly home to the mind of a An Average
man who may know nothing of Stock Exchange matters, Instance of
the wisdom of imprinting upon his understanding the H aphazard
Speculation.
uselessness, in the long run, of playing at what is
nothing better than pitch-and-toss, we will just sketch a case in point as an
instance:—Supposing a speculator to enter the office of a stock broker. He
has, perhaps, some hazy ideas about the future financial condition of Spain,
for example. He has noticed the stock has fallen to 19¾, and this seems to
be very low for a country which has so far struggled against the corruption
of its rulers, and the laziness and apathy of its population as a body, and has
managed for a long time, by hook or by crook, to meet the exterior coupons
by paying them in other people’s cash. The probabilities certainly must be,
he thinks, in favour of their paying another half-year’s interest, if after that

the deluge of national insolvency should flood the land. He contents himself
with gathering to a focus the intelligence that stands from morning to
morning in the telegram columns, and comes to the conclusion that
something will turn up to supply the exchequer with another loan to meet
the next dividend, and in that case the stock must at once jump up to 22 at
least, perhaps to 25, as there would then be six months to turn round in.
Now, what we submit is, that to speculate deliberately upon such a system
as this, is not far removed from insanity; and yet it will be acknowledged by
those conversant with the modus operandi of the haphazard speculator, that
his plan of attack is based, for the most part, upon this absurd system of
guess work, no serious trouble being taken to estimate the extent of the
forces opposed. Some fanatical faith is placed in the doctrine of chances
that the fluctuation wished for will occur, and he shuts his eyes and waits.
To sit at home and guess at what the present or future financial condition of
any country may be, and to risk your money under such conditions, is worse
than reckless.
Supposing, on the other hand, the hypothetical speculator, instead of
acting upon the impression made on his mind, by superficial influences,
were to start for Spain and take the trouble to get behind the stock, so to
speak. In one week, if he occupied a position in life sufficiently high to
enable him to get trustworthy information, he would be in a position almost
certainly to know whether there was a chance of such an event coming off,
as for instance, the next coupon being paid. This would be at least a
business-like way of setting out on a speculating expedition, a method of
proceeding such as is pursued by a syndicate of speculators who propose to
purchase a foreign mining property, for example. A man of sense who buys
anything, the value of which depends upon a set of circumstances operating
at a distant spot, naturally proceeds thither, or satisfies himself through
some trusty agent that such circumstances exist, or that they do not. If he be
contented to buy twenty thousand Spanish Stock at twenty, on the chances
of the power that is, or may be, from one week to another, being able to pay
the dividend, because so far they have just managed to do so, he would be
deserving of no sympathy if he found himself in a couple of weeks with his
stock at 17, and his banker’s balance less by six hundred pounds.
The reason why so much money is lost by this loose mode of proceeding
is, because haphazard speculation possesses a peculiar charm for certain

loose natures, which are roused into a pleasureful excitement by running
risks. They defend the viciousness of their lazy amusement by saying to
themselves that the chances must at least be as much for them as against
them, inasmuch as there are but two ways for the price to go—up and
down. Many a man who has fed and encouraged this itching sensation,
which can only be appeased by having passed through the excitement of
running a certain risk, finds himself so bound by its spell that in very many
cases nothing short of absolute ruin succeeds in quenching his thirst for
such excitement.

CHAPTER VII.
THE PIT-FALLS.

There are perhaps very few speculators of the Hidden Forces
haphazard type who take the trouble to find out the Opposed to the
extent and power of the hidden forces that are arrayed Speculator.
against them in the markets. Every stock, it should be
remembered, has either a small or large market to itself. In some stocks it is
possible any time of the day to deal at ⅟₁₆ price,[35] while in others there
may be a difference of 1, 2, 3, or even 5 per cent. under certain
circumstances, between the buying and the selling price. A speculator
operating in a stock in which he can always deal at a close price is able to
undo his bargain with only a trifling loss probably, if he finds out at once
that he has operated under some misapprehension; but if he has bought a
stock the purchase price of which is say 35, and if he wants to sell he can
only get 34, he has incurred a loss of 1 per cent., besides the commission,
before he can cancel the bargain. This belongs obviously to the alphabet of
the business, but the haphazard speculator seldom learns his alphabet until
the use of it is no longer of any value.
A broker, it may be said, should warn his client before The “Turn.”
putting him into a stock the price of which is wide; but
unfortunately such warnings do not increase the number of commissions,
and, apart from that, if a speculator does not take the trouble to inform
himself accurately upon such a point, placing no reliance upon the advice of
any one, he deserves to lose his money. Some markets are so small that a
speculator once in, is what is called “roasted” before he is let out again. A
particular man very often is the only dealer in the market in a certain stock
of which perhaps the supply is also very limited. Under such circumstances
a haphazard speculator who may chance to have observed some rather
violent fluctuations thinks there is a good opportunity to make some money,
and he sells a little bear of a couple of thousand pounds nominal of stock.
The round sum, and the channel through which the sale comes, helps the
jobber to read the operation. The decoy-duck in the shape of the

fluctuations in price, lures two or three more sportsmen on to the dangerous
ground, and when they want to get out the price is put up against them, and
they are quietly mulcted of £50 each, without a chance of getting even a
sight of their enemy, or any value for their money but experience.
A speculator who consults a not over-scrupulous The Danger of
broker as to the best thing to buy for the rise, runs the Taking Advice.
risk of taking some stock off the broker’s hands that he
is desirous to get rid of. It is far better that a broker should not be exposed
to such a temptation, and a speculator will do well to make it one of his
maxims to put no trust in any one when he is engaged in a business in
which it is the object of everybody with whom he comes in contact to make
something out of him.
Supposing a broker is not directly interested in any A Disinterested
particular stock when a client who is in doubt what to do Opinion.
consults him; it does not then follow that the client can
depend upon getting absolutely disinterested opinions. The broker may have
just put some other clients into a certain stock, and with a view to his own
advantage, by helping to make money for them, he will lean probably to
some extent in the direction of advising others to purchase the same stock.
There is an old saying that it is unadvisable to have all All the Eggs in
your eggs in one basket, a saw that is constantly quoted one Basket.
among both bona fide investors, as well as among
speculators. A broker is not desirous that his clients who speculate should
be interested very largely in one stock. He prefers to have the liability
spread over the market, for obvious reasons. If a client fancies a particular
stock, or has good reasons for believing it is about to improve, and he goes
to his broker with a view to increase his stake, he will not receive the same
encouragement as if he selected something else. The influence thus brought
to bear arises from selfish motives, and proves again that the client should
keep his own counsel. If he have no decided views himself, it is certain he
had better do nothing, for speculation thus entered upon is doubly and
childishly haphazard.
The more organized methods of speculation which Traps for The
prevail in these times, cause the public to be mulcted of Public.
their money in a much more wholesale manner than was

the case formerly. They are now driven like sheep, or The Public as
rather enticed into a pen, and there mercilessly squeezed Speculators are
until they are glad, like some of the players at Homberg Bulls by nature.
have been, to have their third-class fare paid home. A A Case of Roasting
number of brokers or jobbers, or both, in the markets the Bulls.
will be instructed to run a stock up, after a goodly
number of bears have been decoyed in by a gently A Cut off the Loaf
and Pass it on.
falling price from day to day, seasoned with
unfavourable reports. Those who are able to command a sight of the
jobber’s books, know of course exactly the position of affairs, and the price
is rigged until the weak speculators for the fall are simply frightened in.
This is done upon even a more extensive scale in the opposite direction, for
the simple reason that the general public as speculators, are bulls by nature.
Bear operations seem to go against the grain of the average man who
acquires a first taste for speculation, probably by possessing some amount
of stock which improves in price after he has bought. Money thus easily
made, as it seems to be, out of nothing, encourages other purchases with a
view to resale before the settling day arrives. Thus small figures grow to
large ones; and small profits, in frequent attempts to multiply them, usually
end in large losses. A good stock, or the shares of a good company, that has
long been discredited from a cause which may be suddenly removed, has
frequently been used for literally flaying the public when they have rushed
in as bulls. A memorable case in point was the rigging of the shares of the
Erie Railway Company. Upon the occasion of the assassination of Fisk,
jun., the shares were run up and the public enticed in by daily advancing
figures far above the actual merits of the shares, from a dividend point of
view. Numbers of persons were induced to believe the price would range
high from that moment. The quotation subsequently declined, and one by
one the unhappy bulls were disgusted into taking their losses, whilst those
who had rigged the market were following them down as bears, and making
a fine thing out of the affair. The same game was played with the public
when Jay Gould was ousted from the presidency of the Company, when the
price was run up to 57½, and gradually went back, even as low at one time
as to 28, afterwards recovering to about 50. As compared with the
professional tricksters who manage these riggings of the markets, even the
best of the outside speculators, who have had long experience and think
they can stand on one side and profit by the gullibility of the public,

discover themselves frequently the wrong way, when the course of the
market for some time at length reveals unmistakably the drift of the experts
behind the scenes. The man who must speculate should be early in, and
early out, being contented with a cut off the loaf and pass it on; for it is the
profits missed that ruin the speculator.
There is scarcely a more important point to which to Short Periods in
draw attention, than that of being contented to watch for and Long ones
an opportunity. It is fatal to the success of a speculator to out.
be always with stock open in the markets. The casual
observer must be well aware[36] that now and again a small panic occurs,
and the general level of values is knocked down perhaps two, three, or on
serious occasions as much as four per cent., according to the inflated state
of particular stocks at the time. A speculator who has twenty or thirty
thousand pounds nominal of stock open at such a time, stands in a moment
to lose eight or twelve hundred pounds at a blow. With such a contingency
always hanging over him, it must be evident to the prudent man that in
order not to expose himself more than he can possibly help to such a
catastrophe, which may happen at any moment, he should operate, be
contented with a moderate profit, and close.[37] The obvious advantage of
looking on for comparatively long periods, and having commitments for
short periods is, that the chances will be much more in favour of the
speculator when a panic causes a heavy fall. He is then free to buy at prices
which are sure to be unduly depressed, and instead of the dreary waiting to
recover from losses incurred, he makes in a very short time probably a
handsome profit, again retiring to avoid the reaction that follows a sharp
recovery, to await a similar favourable opportunity. To be overtaken, with
large amounts of stock open for the rise, by a panic which engulphs a
speculator’s money and upsets his judgment at the same time, is among the
least excusable faults when committed by the man who starts upon any
system. The haphazard speculator is almost sure to have accounts open
when a panic takes place, because he is, as a rule, in a fever lest he shall
miss a rise, and is, therefore, never contented unless he is “in the swim,”
and hence the severe handling he gets by never seeing the cataract until he
is half way to the bottom.

CHAPTER VIII.
SPECULATION WITH CAPITAL.

It is in the nature of free trade, that whatever Restoring the
mathematical advantage is to be obtained at all is more Balance Of
accessible to the rich speculator than to the poor one. Advantages.
The rich player consequently can make himself the
stronger one, and the operator with capital has advantage over the operator
without.[38] So far, however, as it is worth while to exercise at all the natural
skill in Stock Exchange speculation, which one individual may possess
beyond another, there can be no doubt that a less rich, but very skilful
operator, would very materially, if not quite, in the long run, restore the
balance of advantages which was against him at the start. As the haphazard
speculator always must enter the lists at a disadvantage or on unequal terms,
it follows that the exercise of any amount of skill will only bring him
somewhat nearer to, or at best slightly beyond, holding his own; and in that
he would fail in the long run. If he lay down all the machinery necessary to
success in ordinary business, he virtually passes the limit which defines
pure speculation by reducing the risks to such a minimum that they are no
more than the percentage which is an inevitable element in all mercantile
transactions.
That it is absolutely necessary that a speculator should The Necessity of
possess capital may be illustrated from several points of Some Capital.
view, and although we may become, perhaps, tedious by
repetition, as in Chapter III., for instance, when speaking of the
temperament of a speculator, the time spent in double reflections by the
uninitiated may prevent shipwreck, at least in the first stages. A man who is
going to operate on a large scale will be equally dishonest if he have not a
large capital, as a small speculator who has no more than his £300 a year
out of which to save up if he loses more than he can pay. It seems hardly
necessary to state that a speculator who operates in the Stock markets and
loses without having anything of his own wherewith to pay, inflicts just the
same loss upon the broker who does the business for him, as he would upon

a butcher of whom he purchased a leg of mutton, consumed it, and then
declared he had no money. It is really, however, necessary to make this
statement, clear as is the truth of it, because speculators, as a rule, do not
realize the liability in the same way. There are differences in degrees of
tangibility in these matters, no doubt, and hence the morally injurious
effects of speculation and all kinds of gambling. A leg of mutton is a solid
substance, and the fact of consuming it not only impresses the circumstance
upon the mind, but upon the body too, in the shape of the recollection that
the body benefited by the food. By the aid of the remembrance of the
benefits that grow out of the consumption of the leg of mutton, the liability
to pay for it becomes realizeable in a high degree, and no man allows
himself to dream of escaping from it. It is not so in the same degree with a
liability incurred by “time bargain” speculation, because what represents
exactly the same tangible substance, was never fully, or even partially,
realized as such.
All large speculators are well known. If they try to Capital to Expend
operate through other persons in order to deceive, the in Feints.
truth leaks out some time or other. Large orders are very
La Haute Finance.
difficult of execution, unless the broker is either of very
good standing himself, or hints at the source from which
he receives his instructions. Unless, therefore, it can be shown that the real
operator has a very broad pecuniary back, an attempt to buy or sell large
amounts of stock through brokers is difficult. It is sometimes necessary to
have capital to throw away in feints, before the speculator commences his
operations, just as a general may find it expedient to throw away a quantity
of ammunition, and even the lives of some of his soldiers, to draw off
attention from the real attack. A speculator who contracts to bring out a new
loan, unless the security he has to offer is of the highest class, runs
considerable risk of losing his money, as he has, as a rule, to pay something
down to the borrower as a guarantee of good faith, and to allow him also to
taste the ready cash, as some immediate consideration for entering upon
business, which, if successful, is of all business the most remunerative. This
kind of speculation belongs to la haute finance.
A supply of ready money is essential to the speculator in all markets, and
it is marvelous that there can be so many persons who have to grope their
way by the aid of bitter experience through the thick darkness of their

ignorance to such a shining light of truth as this. And the full realization of
this truth is, in most cases, only obtained at an expense which renders it
impossible to repeat the experiment.
After a severe commercial collapse, like that of 1866 The Best of all
for instance, all securities are low in price, holders of Chances for
them have been compelled to realize through the debacle SCpeculator
apital.
with

which has for the time destroyed credit, turned profits
into losses, and frightened everybody into hoarding the The most
precious metals. When things are beginning to mend, Legitimate Form
of Speculation,
and a resurrection of industries takes place, the tide of Pawning the
the national profits begins to turn, and, rippling back Stock.
into innumerable channels where securities of all sorts
have laid high and dry and neglected, again floats them into notice. Just as
when there is no use for the plough the oxen are idle, so when the great
industries of a nation are stagnant, floating capital lies idle, and is cheap. In
such times the speculator of good judgment, with ten or twenty thousand
pounds can make money without much risk if he is satisfied to watch the
general recovery of prices up to a certain level, and then realize. We will
suppose money at 3 per cent., and the best English railway stocks some
thirty per cent. below the value they will reach when the country is in the
full tide of prosperity. He selects one hundred thousand pounds worth of the
leading stocks, yielding at the price at which he purchased them, 6 per cent.
At different banks where he keeps accounts for the purpose, he pawns the
stock, and gets loans within 10 per cent. of the market value, which amount
to eighty thousand pounds. The ten thousand pounds he has himself, which
enables him to take the stock off the market. In this way he is virtually the
possessor for the time of this amount of stock, and he profits by the rise in
value at the rate of one thousand pounds for every one per cent. Apart from
this advantage he benefits to the extent of the difference between the yield
on the money value of the stocks, and the interest with which the bankers
debit him on the eighty thousand pounds; and so long as circumstances are
favourable and the value of money does not rise and remain above the rate
which the stocks yield, he enjoys an income from that source with a fair
prospect in a year or so of doubling his ten thousand pounds.
Very large amounts of money are known to have been made in 1870,
1871, and 1872, in English railway, and also in various other stocks, in this

way in the London market, when money was poured in from France and the
Continent generally on the outbreak of the Franco-German war. Bankers,
moreover, were aware that the large amounts placed with them for safe
keeping might be called for at any time, and sound Stock Exchange
securities, upon which loans could be made from fortnight to fortnight,
were very much in favour. In consequence of such operations as that
referred to, prices were found upon several occasions to be very much
inflated, resulting in some mischief and not a few failures.
In speculation of this nature, there is a time to begin When to Begin
and a time to leave off. When stocks have attained a and when to Leave
reasonably high level of value as a result of the recovery off.
of a country’s industry, the chances for the speculator to
profit by a continuous rise are of course gone, and he seeks in other
directions to turn his capital to account; but the example we have given
illustrates perhaps the most legitimate of all forms of speculation in Stocks,
provided always the operator knows his business, and allows a sufficient
margin for contingencies.
The marked difference between Stock Exchange Test of a
business and other kinds is, that it is the custom to pay Speculator’s
cash for all bargains when the settlement takes place. PPecuniary
osition.
Special delays may be agreed to between persons who
know each other well, but it is quite the exception, and certainly should
remain so, for credit is already quite sufficiently extended throughout all
branches of trade and commercial affairs. The one thing that keeps a tight
rein on Stock Exchange operators is the test of their position which lies in
fortnightly cash settlements.[39] The very nature of the business affords such
facilities for incurring very large liabilities by extensive operations in
various securities, that if settlements by bill accommodation were
permitted, extending over two or three months as in trade, hopeless
confusion would soon be the result, apart from the temptation which an
insolvent broker or jobber would lie under further to involve himself so
long as he could get the credit. The remarkably few failures that take place
among stock-jobbers and brokers, when it is considered how much risk they
run, and to what a limited extent they can make themselves aware, in time
to avoid complications, of their clients’ actual means, reflects much credit
upon them as a class. At the same time it must be admitted that the custom

of frequent cash settlements, by testing the actual position of all concerned,
is the best possible safe-guard against operators getting out of their depth;
and although business generally would be very seriously curtailed if the
custom prevailed in all branches of commerce when distance did not make
it impossible, there can be no doubt that a vast deal of mischief and
dishonesty would be nipped in the bud.

CHAPTER IX.
SPECULATION WITHOUT CAPITAL.

We will now suppose a familiar case of a speculator A Familiar Case.
following in the path of so many wise persons who have
gone before to their ruin in the process of applying some Bitter Experience.
nostrum, which was to make their fortune in a week. The
The Question of
fortnightly settlements on the Stock Exchange take place Seeing it out.
about the middle and end of each month. We will
suppose a young speculator, full of ideas upon such subjects, and having
just sufficient knowledge of the different stocks to make believe that he
knows a great deal, gets introduced to a broker, who on ascertaining that he
has two or three hundred pounds available, intimates his willingness to
execute his orders. The speculator buys £5,000 Turkish 5 per cents of 1865,
£5,000 Spanish 3 per cents and £5,000 Egyptian 7 per cents of 1868, being
told that these are easy markets to deal in. We will assume these bargains
are done in the middle of an account. On the day of the purchases the
several stocks rise ¼ to ½ per cent., and he goes home a happy man with his
contracts in his pocket, reckoning the gain he has already made, and sleeps
like a top. He rises with a light heart next morning to devour his money
article and breakfast simultaneously, eagerly searching in the list for his
friends the Turkish, Spanish and Egyptian Stocks. The rise reported to him
by his broker the evening before is confirmed in his newspaper, and he is in
the act of laying it down when his eye catches a telegram, headed “Defeat
and resignation of the French Government.” His little experience has
already taught him that the leading foreign stocks are largely dealt in on the
Continent, and here comes a sinking of the heart number one. The breakfast
is left unfinished, and he hurries to the city to find the Stock Markets open
very flat all around on selling orders from Paris. The ¼ to ½ per cent. profit
had disappeared, and an additional 1 per cent. into the bargain; so that
instead of standing to gain £30 or £40, he stands to lose £150. A conference
with the broker is somewhat encouraging, as he laughs over the matter, and
assures his client that “they are bound to rally.” Another day passes and
there is no rally. Several days go by, and disorders in the streets are reported

from Paris, causing further sales in the London market, and our friend sees
a loss of £300 on his three purchases.[40] The “carrying over” day arrives
without any recovery having taken place, but the broker is still cheerful,
being himself a man of some means, although suffering from the prevalent
disease of a great weakness for commissions, which has often caused him
heavy losses through negligence in ascertaining the means of his clients. “It
is only a question of seeing it out, sir,” he says, an observation which
disperses with a lightning flash the ignorance under which our friend had
hitherto labored with regard to the necessity of available capital, or in still
plainer terms, ready cash. He goes away to turn this awkward dilemma in
which he finds himself, over in his mind. Seeing it out, is, of course,
waiting for a recovery. In the meantime he must pay his differences, which
amount to £50 more than he possesses.
This one case in point tells the whole tale, and it is therefore superfluous
to take up time and space with other instances. If legitimate trading
business, in which the risk of loss is so reduced as to enable a man to earn a
living at it, cannot be carried on without adequate capital, how is it possible
that pure speculation can be successfully practised in which the conditions
are reversed, and at which experience shows that no one can succeed except
the professional expert, and only then in some cases under circumstances to
which we have before referred?

CHAPTER X.
THE “TIP” TO BUY OR SELL.

A fool and his money are soon parted, is an old saw, A Friendly “Tip.”
and it is in a high degree applicable to the inexperienced
speculator who operates in the markets on a friendly Unloading at
Other People’s
“tip.”[41] It is marvellous to think how many persons Expense.
daily and hourly are misled by the same snare and
delusion. If a man, who starts off in an excited state to instruct his broker in
consequence of having received the “tip” to buy a certain stock, pauses for
one moment to reflect, he can hardly fail to doubt the disinterestedness of
the communication. Take an example:—In the first place a man who gives a
“tip” to another to buy some of a certain stock, must have some motive for
so doing. No human being wanders about with, what he makes out to be,
valuable information to distribute gratis among his friends. One might as
well expect the girls who sell oranges, combs, umbrella-rings, and collar-
studs, in Lombard Street, to give them away for nothing, as expect to obtain
disinterested and genuine “tips” from some wandering philanthropist. Such
a person was never heard of, and never will be. If a man gives the “tip” to
buy a certain stock it is because he wants to “unload” at other people’s
expense,[42] and that is not what is generally understood by philanthropy.
The system of sending round the “tip” to buy or sell, has become very
general in all markets, and it is certain that a vast deal of mischief is done
by it. The common practice is for a number of persons to band together, and
put the price of a certain article or stock up by buying a large quantity and
making it scarce. When the higher price has been maintained for some little
time, so that it meets the public eye in price currents, the process of putting
the public in is commenced. When this benevolent operation has been
sufficiently worked, and the “tip” has been administered to a number of
poor dupes, the price is let down. Those who have advised their friend to
buy, begin to sell and deliberately rob them, in return for the misplaced
confidence.

There is a distinction between the qualified and the The Qualified
unqualified “tip.” One man is a shade more honest than “Tip.”
another, and does not exactly wish to charge his
conscience with having deceived a friend with regard to a certain event. He
merely suggests on general grounds that such a stock is going up. If he can
get the person to whom the suggestion is made to act on such general
advice, he achieves his purpose without exposing himself to be saddled
with direct responsibility in case the result should be unfavourable. There
are numbers of such persons who daily administer “tips,” not only to their
friends, but to strangers who will not trouble themselves to go farther to
obtain any confirmation. Such an important communication coming from
credited quarters, is of course looked upon as a valuable secret to be acted
on silently and immediately.
The unqualified “tip” comes from the individual who The Unqualified
intends from the first to drive his horse full of armed “Tip.”
men into the town, vi et armis, without too much
parleying at the gates. He assumes an optimism of manner, and displays
such a degree of confidence as shall override any rising objection, gets a
promise to act on his advice, and passes on before the person to be made a
tool of has time, or can summon courage, absolutely to refuse.
Then there are “tips,” worked by syndicates, which is “Tips” Worked by
a more elaborate affair. The extent of the increased area Syndicates.
over which it is intended to operate depends upon the
magnitude of the amount to be unloaded, the quality of the security, and the
necessity for reaching a certain class of individuals. A vast deal of the
rubbish that is shot away from the great financing centres is carefully and
eagerly laid hold off by clergymen, and teachers male and female. As a rule,
these good people seldom pause to reflect that what is so studiously brought
under their notice in their rural retreats, is almost sure to lack a market
anywhere else. Is it at all likely that so much trouble would be taken to
recommend investments to people, by means of prospectuses delivered by
the postman, if the statements contained in such prospectuses were really as
true as they profess to be? In large cities there are innumerable agents for all
country districts always on the look out for sound remunerative
investments, and there is no need to recommend them to people’s attention
by thrusting them upon them at their own houses. Such a process of

advertising is obviously to net the unwary, who are ignorant of what
constitutes good security. The “tip” of a syndicate is passed on, so to speak,
for a consideration, in proportion to the amount bought by the clients of the
persons employed.
This branch of the subject can be almost indefinitely elaborated, but it
may be concluded by one remark, which contains the pith of the whole
thing, as applicable to speculation. Speculation as practised by the
multitude is no better, in any market, than pitch and toss, and it is only by
the aid of experience and more native skill, that some in the long run will
lose less than others. One golden rule with reference to “tips,” no matter
from whom they proceed, or by what alleged incontrovertible facts they are
supported, is this: when you are told to buy go and sell.

CHAPTER XI.
SPECULATION BY MACHINERY.

Everything, in these times, is done by machinery, and Machinery in
there is consequently no need for astonishment at Existence for
finding that machinery is in existence for directing D irecting Human
Volition.
human volition. Such mechanism has for a long time
been in working order, although it is scarcely realized by The Patrician
the community as a body. The most accomplished Investor.
professional speculators make it their business to study
the peculiar tendencies of people who have any money over and above what
they immediately require for necessities. Firms, with numbers of clerks,
exist in our day, who have forty, fifty, and as many sixty thousand names of
people duly registered in their books, with their place of abode, duration of
residences, means, style of living, trade, or profession, and other particulars,
enabling a judgment to be formed of the kind of investment which is likely
to suit them. These names are all duly marshalled under different heads, and
when a certain kind of undertaking is to be brought before the notice of the
public, in the form of a prospectus, that class of people for whom it is
thought a suitable investment, have one sent to them by post. Experience
has shown that it is unwise to scatter prospectuses broadcast over the
country, trusting to some portion of them bringing applications. A wholesale
scattering of prospectuses among a class of people who are not at all likely
to read them even, will injure the credit of the scheme for which it is
desired to raise the capital in proportion to the number of prospectuses that
are thus wasted. As in everything else, in business great care must be taken
to offer the right sort of investment to the persons addressed. A man, for
instance who lives in a fine house in a country parish, owns land, and
moves among the patricians of the district, would not think of looking at a
new undertaking, if he knew a prospectus had come by the same post to a
man who touches his hat to him, and lives in a small way outside the gates
of the great man’s estate. A man who is higher up in life than his
neighbour’s endeavours, as a rule, to mark the distinction by having
everything that belongs to him of a superior type. The man of high degree

would consider himself insulted if he were classed indiscriminately with the
man of low degree, in sending out twenty thousand prospectuses of a new
mine. People are very touchy in such matters, and therefore, in catering for
the public, as regards investments, great discrimination is necessary. The
different classes of investors must be passed through the speculator’s
machine like the threshed corn, and when the husks and dust have been
winnowed from the solid grain, he proceeds to classify them, and, as far as
possible, learn their taste in the matter of investments.
When joint-stock banking came into vogue, promoters Administering
of the new undertakings that were destined gradually to Shares to the
supersede private banks, and have superseded all but Public.
those that have exceptionally deep roots, and partners
left who are very tenacious of ancient customs, were very tentative in their
mode of proceeding. As with all new things for which the public require to
be educated, companies established on the share system had in the
beginning to be brought forward gently and quietly, so as not to startle
people. Persons are easily scared when asked to become partners in a bank,
in the sense of taking much responsibility and sharing but to a small extent
in what are understood to be the honors of such a position. The finessing
which was at first necessary to accustom the public to joint-stock
undertakings was gradually followed by a thirst for shares, because all such
concerns for a considerable time were associated with a premium.
Individual promoters worked at the business of building up joint-stock
schemes, then it grew to syndicates, and now we have wealthy firms, with
large machinery, whose whole time and staff are devoted to hunting about
the world for powers to bring out foreign loans, for concessions for making
railways, docks, harbours, gasworks, and the like. When they have procured
one or the other, they fix the amount of capital, cut it up into shares, and
administer them to the public, by much the same process as the Strasburgers
enlarge the livers of their geese. Instead of people being asked politely by
an advertisement to become shareholders in a new concern, the axiom of
the supply creating a demand is acted upon in these times, and a man finds
in his letter-box an investment especially suited to his taste and means, at
the precise moment when his half-yearly dividends are falling due. The
economy of capital is thus being pushed to its extremest limits, through the
development of a system by which one man makes it his anxious business
to see that his neighbour’s interest on his capital shall scarcely have been

passed to his credit at the bank before it is snatched away to fructify in
some scheme for benefiting mankind in one or other of the four quarters of
the globe.
Investments provided by machinery can be done on a very large scale,
and when successful are as a consequence very profitable. But
unfortunately it is a kind of avocation that is pretty nearly sure to be
followed by many unscrupulous persons, who will resort to all kinds of
deceit and trickery, in giving a false and dazzling hue to projects that should
never have seen the light. Moreover, the great difficulty that individuals
find in ascertaining the truth of statements, and the authenticity of facts,
causes them too frequently to take for granted what should be always
viewed with more or less suspicion, unless the people who vouch for such
facts are of the most undoubted standing and respectability; and, as we have
remarked, it is seldom that such persons will lend their names to anything
of the kind. During a season of great prosperity the promotion of new
companies is sure to be largely overdone, and great will be the losses
suffered; but there is sure to be more good done in the world by the
dissemination of capital in new parts of the earth that would otherwise lie
for the most part unproductive, than there is harm done through the
misapplication or loss of a part of it. Many people bewail and lament over
the failure of a bank, a discount house, or joint-stock concern now and
again, and when a commercial crisis takes place one would think the world
was coming to an end, as indeed the Viennese thought when they had a
sharp lesson for their money-greed, early in 1873; but a little sensible
reflection will show that calms and storms alternate in every variety of form
on the earth, and are not confined to seas whose strands occasionally
strewed with the produce of a foreign clime is only an indication of the
miscarriage of a minute portion of the benefits which, in fair weather, are
conveyed by the inhabitants of one land to those of another.
The fact remains, however, that speculation by machinery, or in other
words, the modern system of cramming the public with securities
wholesale, may be attended with a good deal of mischief, and although it is
too much to say that people who launch new undertakings upon such a
system are necessarily unscrupulous, there are strong reasons for looking
very closely at securities known to proceed from the offices of firms whose
business it professedly is to make money by manufacturing stocks and

shares wholesale, and forcing them upon the public. In the first place, such
a business requires a great deal of money to carry it on, and a good deal of
risk must be run, and money paid out of pocket, before there is a chance of
seeing anything back again. Under such circumstances private enterprises
are sought to be purchased at a small price, and sold to the public at a very
large one, so as to secure a considerable margin, the only object of the
speculators by machinery being to fill their own pockets.
It is astonishing what faith people put in printed certificates, got up in a
style which resembles documents of real value. A sheet of thin paper
resembling that of a bank note, with a large impressed stamp of a
corporation upon it, and filled in with the magic word sterling, is, as a rule,
sufficient dust thrown in the eyes of the general public to send them home
satisfied to make no further inquiries until collapse reveals the sham that
has been prepared for them. Ordinary people go to market and make an
elaborate fuss over a joint of meat before paying their money, seeing that it
is to a Shylockian nicety of weight, but when they invest a hundred pounds
in a mine, there have been cases in which they hardly knew where the
property was,—or even if it existed at all. It is very wonderful that such an
incomprehensible degree of confidence is placed in concoctors of
companies, and it is the knowledge that the general public is so ludicrously
gullible that encourages the formation of joint-stock concerns upon often
the most flimsy bases.

CHAPTER XII.
THE SHIFTING OF SPECULATION FROM THE HIGHER
TO THE LOWER CLASSES OF SECURITIES.

Compared with what there used to be in bygone years Speculation in
there is now next to no speculation in Consols at all. Consols as a
Merchants and bankers once upon a time used to Hedge.
speculate in the Funds[43] as a hedge. But things have
changed, and such a method of providing against a mercantile loss, which
might be brought about by the same cause that would depress Consols, has
gone out of fashion, doubtless owing in some degree to there being other
modes of protecting themselves against risks which both merchants and
bankers must for all time incur.
The maxim which is adopted by all prudent speculators in the markets,
by which we mean the dealers in the Stock Exchange, who in the nature of
their business must to some extent speculate, or they would lose business, is
to sell when things are dear, and buy when they are cheap, and pay no
attention at all to reports. Men who have had years of experience, know
how to estimate at their just value the on dits that are for ever floating about
their ears. Right or wrong, there is no money in them in the long run, and it
is with the long run that operators should have to do.
One reason why speculation in Consols has been Speculation has
reduced to a minimum is, that speculation has of late Changed its
Venue.
years changed its venue. The stock markets now are the
field of operations for dealers in the stocks of all nations Increase of the
and all climes. There are a few countries whose names Indebtedness of
the States of the
are still withheld from Wetenhall’s list, among which
World.
China may be mentioned, but they are few. The extent to
which the world has been borrowing within the last The Fluctuations
quarter of a century may be judged of from the fact that in the Price of
Government
the indebtedness of the States of the world has increased Stocks.
from 1851 to 1873 by £2,218,000,000, the proportion of

which belonging to Europe is £1,500,000,000. People have become used to
making larger profits, by which we mean that all the world lives better and
makes larger incomes than they used to. Consequently they do not care to
speculate in stocks unless the fluctuations are somewhat considerable and
frequent. The quieter attitude of England towards foreign states for many
years past, and the absence of any internal disturbances worth mentioning,
has produced much more steadiness in Government securities than was the
case earlier in the century. There is not much exaggeration in the remark
that a fluctuation of two per cent. in a day in Consols is now witnessed once
in a life-time. The process of getting in and getting out of a stock, as a
speculation, cannot be profitable when the fluctuations are so small and
infrequent. Speculation consequently has shifted from the Consol market,
and from the market where the highest class of securities is dealt in, to
departments of the Stock Exchange where a bull or a bear stands to make
something in a reasonable period, if he chance to be operating the right way.
It may be supposed that speculation for this reason has decreased in extent.
The contrary is the fact, speculators having simply taken up new ground, as
they found it useless for any purpose to speculate in stocks in which the
fluctuations were so small.
One of the reasons why speculation in high-class High Class Stocks
securities has more or less ceased is obviously because more Firmly held
Consols and such like stocks are more firmly held than than Formerly.
they used to be when the country was oftener engaged in
wars, or disturbed by semi-revolutionary agitations. Then again, the very
fact of high-class stocks remaining at a uniformly high level of price, causes
a certain class of investors to buy them for simply absolute security’s sake.
There are numbers of people who hold Consols because they are perfectly
certain their £3 odd per cent. per annum will always be paid. They never
trouble themselves about the price of the stock, and continue entirely
apathetic whether the price rises to 120 or falls to 50. It stands to reason
that, as the country grows in wealth, so do the holders of these high-class
stocks increase in number, and as such securities are purchased largely for
permanent holding, and purely as a means of providing income, so is
steadiness imparted to the price, which tends consequently to be less and
less disturbed in the absence of exceptionally adverse influences. There are
always large numbers of persons in a country like England who are retiring
from active life to live on an income, derived through the medium of public

securities of one form or another, which is hereafter to be a purchasing
power dependent upon the labour of others. One man does his share of
work in the world, and in the process he provides for his future wants
through the medium of saved capital. There can be no doubt that if the
English national debt were to be paid off there would be a considerable
commotion among those holders of Consols who would be satisfied with
nothing else half as well. While the times in which we live therefore,
continue quiet, the credit of the Government is firmly maintained, and the
savings of the people are large, there will be always more buyers than
sellers of high-class securities while the return for the money is not less
than about 3 per cent. Buyers would in most cases probably prefer to look
in other directions than pay anything over par for Consols. The fluctuations
under such circumstances are consequently very small, and there is nothing
literally but a bare bone for a speculator to pick, which is not worth the
commission, and he migrates into other markets.

CHAPTER XIII.
THE SHORT “TURNS,” OR, WHO MAKES THE PROFITS?

Although we have already alluded to this question of The “Turn” a
“turns,” in referring to the forces, so to speak, in the known Quantity
markets which are arrayed against the speculator, we always against the
Speculator.
have thought it advisable, subsequently, to give it a
separate chapter. The “turn” is a known quantity about which there is no
doubt, and in which there is no element of chance to be reckoned upon
according to any doctrine of probabilities, as sometimes favouring one side,
and sometimes the other. The “turn” may be described in brief as the
income of the jobber, or in other words that fractional part of the whole sum
which, if a buyer of some stock, he gets by its sale in excess of what he
pays—and if he be on the other hand, a seller, the “turn” is that proportional
part of the whole sum which he gets in excess on buying back the stock, in
order to square his book. Supposing the two operations of a purchase and a
sale proceed first from a bull speculator, and secondly from a bear; the
jobber in the one case covers himself as soon as he can by a purchase of the
stock sold by the first operation, and by the sale of an amount equal to that
bought by the second operation.
The “turn” comes in the second rank of obstacles The “Turn” a Loss
which stand between the speculator and the goal, or on Going Into and
in Coming
profit, which it is his aim to reach, and is the most also Out of the
formidable of the fixed and, it may be said, inevitable, Market.
elements arrayed against him at the start. When a
speculator enters the markets, therefore, he has to do his share of keeping
both the broker and the jobber, and that not only when he commences his
operations, but also when he finishes. There is the “turn” to be paid on
going in, and also on coming out. The same may be said of the broker, only
under certain circumstances. It is customary for a broker to charge no
second commission on closing an operation, if it be done in the same
account as that in which the operation was commenced. As speculators,
however, especially the haphazard kind, are never contented to take small

profits, and get out of the markets, they almost invariably pay a second
commission. Thus there may be said to be two double fixed quantities,
which are piled up against a speculator at the start.[44]
If there be any difference in the character of the “turn” The Difference in
as compared with former times, it must be allowed that the Character of
“Turn” as
there is a point in favour of the speculator: whether it be thecompared with
more apparent than real, owing to the growth of other Former Times.
adverse influences is another matter. But it is certain that
the “turn” is not so great in these times as it used to be, Special Danger of
Speculating in a
and it comes from the increase of competition by the Stock that is
larger number of jobbers in the markets, just as quoted very wide.
commissions in all businesses have dwindled down from
two and three per cent., and in some cases much more, to ¼ and ½, and in
the Stock markets to ⅟₁₆ and even a ⅟₃₂. It should, however, be remarked
that, owing to the great increase in the number of transactions, the jobber
makes more in these times by the smaller “turns” than he did formerly out
of the large ones, the increase being in a greater ratio than the diminution in
the amount of the single “turn.” Moreover the public, as it is to be hoped
should be the case with the growth of intelligence and the spread of
education and wealth, decline to buy stocks when very wide prices are
quoted to them from the jobbers. It stands to reason that the jobbers rather
enjoy dealing in stocks where there is a good deal of cover for them to play
with their prey. A difference of two or three per cent. between the buying
and selling price affords the jobber much more scope in fixing the “turn” he
is to get out of a transaction. The wide quotations between a buying and
selling price are no doubt to some extent a legitimately justifiable defence
against the sudden and perhaps violent fluctuations to which an indifferent
security is exposed, and it is on this account the price is made wide. As the
public, however, get to know and understand that a stock which is quoted
say 35 to 38, as compared with one that is quoted 85 ⁵⁄₁₆ to ⁷⁄₁₆ is in
proportion to the difference between the extremes of the two figures, a
worse security, so they instinctively avoid any operations at all where there
is no knowing from one moment to the other whether their property is
worth one per cent. more or less. In fact many young operators have been
electrified to find that, having purchased on speculation some stock of the
character of that quoted above at 35 to 38, and wishing to get out of the

bargain, for some reason or other, there was a difference between the
buying and the selling price of actually as much as that indicated, viz.: 3 per
cent. Ruinous mistakes by the unwary are thus made. They fancy very
naturally that a stock which is subject to violent fluctuations, and which is
seen to fall and rise two or three per cent. in a day, is a fine field to operate
in; but the compensation which is in all things, soon reveals itself here in
the manner described, so that the speculator stands perhaps even less
chance of making a profit off a widely fluctuating security than he would by
one that moved to a smaller extent over or under a central point of value
from which there was not so much movement.
Then again, a jobber is willing to take a much smaller “turn” on a
transaction which he can depend upon closing in his own book at any
moment, at probably only a fractional difference in price from that at which
he opened it. A speculator wishes, for instance, to buy £10,000 Consols for
the rise at 92½. At the time the transaction is done the jobber knows he can
any moment square his book as far as that operation is concerned, within a
trifle of the same figure, and he is accordingly satisfied with a small “turn.”
On the other hand, a stock that fluctuates violently may leave a buyer of
it a loss of one or two per cent. before he has entered the operation in his
book. The consequence is that a speculator proposing to buy for the rise
£2,000 of a stock which is quoted in the markets at 35 to 38, will have
probably to pay 38 or near about that for it, for the simple reason that the
jobber who sells knows that a widely-quoted stock is liable to unusual
movements in both directions, and he protects himself accordingly, by
declining to sell except at the higher figure, or to buy except at or below the
lowest. The difference may even be wider than in this hypothetical case.
The stock may recently have become very much depreciated in value,
which carries with it the obvious suggestion that it may fall still further
indefinitely, short of the bottom, for reasons which have so far contributed
to depress it. Under such circumstances, unless the jobbers in the markets
have limits at which to buy such a security, they probably will refuse to
purchase from an outside seller, or from anybody, at any price, unless it
come within the range of a fancy figure. With stocks, therefore, that are
liable to sudden and considerable changes in value, the “turn” assumes
dimensions in proportion, and speculation in such securities is
correspondingly dangerous.

For every operation that a speculator enters upon, he The “Turn” the
contributes to the income of the jobber. Although this Income of the
statement is perhaps not literally accurate, inasmuch as Jobber.
the jobber may sometimes have to sacrifice his “turn,”
and even more, in selling stocks which he has bought in the course of his
business, or in buying back stock which he has sold, it is sufficiently
accurate as demonstrating the position of the speculator. Whether or not
subsequent circumstances deprive the jobber of the turn he considers
himself in the ordinary course of events to have secured, the speculator has
in any case paid it, which is all we are concerned to show.[45]

CHAPTER XIV.
IN THAT RESPECT IS SPECULATION USEFUL IN
MARKETS GENERALLY?

The remarks upon speculation in the foregoing Speculation for
chapters may, perhaps, lead the reader to infer that our the Rise, which is
Legitimate
object has been to enter upon a crusade against all both and of Benefit to
speculators, guerre à mort. Such an impression would the Community.
not be a correct one, and this chapter is intended, just in
conclusion, to show why. Speculation in the sense of Speculation for
the Fall, which is
buying for cash or on ordinary credit what the purchaser both Legitimate
has very good reason for knowing is uncommonly and of Benefit to
cheap, and what he believes will, ere long, improve in the Community.
price, does not come under the category of speculation A Reasonable
such as that to which the foregoing remarks refer. There Relative Value
is hardly an individual who buys anything who is not at for all
times more or less of a speculator, and he has a perfect Commodities.
right so to be under given conditions, and his being so
under such conditions is a direct benefit also to the community. For
instance, take a very homely article which will serve for an illustration,
bacon. Supposing bacon, through some passing influence, were to fall
considerably in price, very large purchases would at once be made on
speculation, because it is an article almost certain to be directly consumed
in a proportion greater than the production could be increased. Large
quantities would be taken off the market by both retail and wholesale
dealers, who would store it in anticipation of a recovery in value. They
probably would not want it for immediate use, and would be induced to run
the risk of the operation turning out profitable by reason of its being
suddenly so much cheaper than they had been accustomed to buy it. They
would, in one word, speculate in bacon, just as some people speculate in
stocks after a heavy fall. Unless something had happened to permanently
depreciate the value of bacon this rush of buyers, the great majority of
whom would soon settle their operations by cash payments, would speedily

cause at least a partial recovery in value, which might be followed by a
further rise or relapse according to circumstances. Whether anything serious
had been at work to depreciate value or not, the innumerable interests that
would have suffered by the decline in value would thus be protected at least
for a time by the speculative operations referred to. The price would be kept
up above what it would have been in the absence of such speculative
operations, while either the real or fictitious agency at work in causing a fall
were discovered and analysed. So in a converse sense, if for some reason or
other the price of corn were driven up very rapidly several shillings per
quarter above the value ruling at a particular period, without holders of
large stocks being able to discover sufficient cause, many of them would
hurry to market and sell what was still even unthrashed. They would be so
tempted by the very high price that they would speculate upon such a high
quotation being followed by a low one, and they would sell all they could
manage to deliver in a given time. The speculator in the bacon would be
playing in a legitimate sense the part of the bull, and the speculator in corn
that of the bear. It will be admitted that there is what we know as a
reasonable price for all things, and that it is better for all concerned that a
reasonable relative value is maintained for all articles than that anything
becomes either extravagantly dear or so cheap that it is worth no one’s
while to produce it. Every article of those consumed by mankind in their
several stations has its fitting place either as a necessity or as a luxury. A
necessity for some reason may in course of time become a luxury, while,
what is much oftener the case, luxuries may by degrees come under the
category of necessities. The value of the one or the other may in relation to
other necessities or luxuries change, but it will probably change only
gradually, and during the process of change there will be a reasonable
relative value for such articles. It is important then in order to satisfy the
rational desires of all members of the community that the reasonable
relative values of all commodities should, if disturbed by any cause, remain
so as short a time as possible. The undue inflation or depression of prices
will be counteracted by speculative operations such as we have referred to,
and in that sense, speculation is directly of immense benefit, as it is one
limb of a body of law which administers justice silently but surely to any
one who has left one weak point in his armour when attempting by violent
or fraudulent means to snatch a profit by unjustifiably raising or depressing
prices. The one condition, however, of such speculation being of direct

benefit in keeping prices at a level which is in accord with the existing state
of supply in relation to the demand at any period is, that the speculative
operations shall partake as nearly as possible of the nature of bona fide
operations. The great benefit which is caused by the one kind of speculation
is the antithesis of the evil which results from the system of “time-bargain”
speculation as practised in all markets. The one kind of speculation is the
legitimate advantage taken of being able to buy any article cheap, or to sell
any commodity that is dear, whereas the other is nothing better than pitch
and toss in disguise.
The kind of speculation which is of benefit to the community may be
termed corrective speculation, as implying a restoration of prices, through
its agency, to a reasonable relative level. Such speculation would come
from buyers who had good reason to know that what they bought they
would be able again to sell, and that its purchase speculatively was simply
the supply of their ordinary requirements in anticipation, owing to a
favourable opportunity having presented itself. In proportion as speculation
proceeds from simply time-bargain operators will the price be driven up or
down, according to circumstances to an injurious degree, as compared with
a corrective degree, the influence of the one set of speculators doing good
and that of the other set harm.
Speculators may be divided into three classes which The Three Classes
about embraces all the phases of speculation. First, we into which
have the legitimate speculator who spends all or some of Sbepeculators
Divided.
may

his surplus capital in taking off the market what he
believes will give him a gain by holding it for some time. That is the
legitimate speculator who is a benefit to the community as a leveller up of
prices. Then we have the legitimate speculator of the same stamp, with a
difference that he is a leveller down of prices, and is equally of service to
society by immediately throwing on the market all the stock of a certain
article he may hold of be able to get for the purpose, when it rises to a price
above what he calculated on being able to obtain, and which his experience
told him was an unusually high figure. Such speculators as these not only
do not hurt themselves, but directly benefit themselves by speculating, and
in so doing protect the interests of their neighbours and the community at
large. Such as these this book is not written for. We are concerned with
those who, classified as illegitimate speculators, and reckless speculators,

which, second term may have to be moved a point or two according to
circumstances, are over the border-line, whose dictum is “Heads I win, tails
you lose.” The illegitimate speculator is the one who starts with a small
capital and with some method, with the idea of increasing it upon a system
of incurring risks which, in the ordinary course of the market he may
operate in, will enable him in case he has wrongly calculated the course of
prices, to pay his losses and go on again. His intention is never bona fide
sale or bona fide purchase. The reckless speculator is the man who with
little more than he stands up in makes a great pretence, imposes upon the
weak and credulous, enters the Stock markets and operates to right and left
up to the hilt so far as he may be trusted. So long as he may enjoy a run of
luck he rakes in the coin; when it turns he leaves his dupes to pay and goes
up the country, as they say of the native Indian merchants when the
telegraph announces to them that the goods shipped to Europe for which
they have drawn, will leave a loss.
We have then one class of speculators which is of direct use and value in
all markets, while the other two, the nature of whose operations we have
endeavoured to lay bare, cause an infinite deal of mischief, and get in
ninety-nine cases out of a hundred no good for themselves in the long run,
whether their transactions are entered upon carelessly, and are allowed
simply to take their chance, or an attempt be made to achieve success by
some exercise or skill.

FOOTNOTES
[1] In speaking of taking profits, the question arises, what is a profit? Some
people might say a profit is ½ per cent., and others 10 per cent. Now, of course,
it is impossible to give an exact answer to this question. As a general rule, a
transaction should not be made unless the chances of a gain are greater than the
chances of a loss, but there may occasions occur when it would be advisable to
take a small profit. All depends on the condition and temper of the market; but
one rule I found to work well, and would recommend to every speculator,
namely, that at the moment when a doubt arises in your mind, and you begin to
ask yourself whether you ought to take your profit or not, then do not lose one
moment’s time, but take your profit, because you can never make a very serious
mistake by doing so, while you might possibly make a very serious one by
refusing it.
[2] Where it says “for the account,” it applies to the custom of the London
Stock Exchange, where all the buying and selling is for the account, say
generally the middle or end of the month.
H. W. R.
[3] According to this principle, operations conducted on options are more
certain to result in profits in the long run than margin operations. If I assume to
make a profit in only one out of every three operations, and each option costs me
1¼ per cent., I will make a profit, if the third option only yields me a profit of
more than 3¾ per cent., which is nothing unusual.
H. W. R.
[4] This depends whether it is a bull or a bear market.
H. W. R.
[5] See definitions of these terms, page 20.
[6] Operators means here, what is called in New York, “Insiders” and
members of the Stock Exchange.
H. W. R.
[7] I consider this most important, and maintain that “options enable the
operator to hold out for the event, or at least for a long time, especially if the
process is once or oftener repeated.”
H. W. R.
[8] Very important.
H. W. R.
[9] This hardly applies to the New York market. The so-called larger operators
and traders take here the place of the London jobber.

[10] The settlement does not exist in the New York market.
[11] Contango is equal to New York carrying charges—in New York so much
per cent. per annum, fixed daily; in London a certain sum from one settling day
until the next.
H. W. R.
[12] Equal here to borrowing stock flat, or even paying for the use of it.
H. W. R.
[13] Backwardation is equal to the paying for the use of borrowed stock at the
New York Stock Exchange.
H. W. R.
[14] In New York, “flat.”
H. W. R.
[15] Called “straddle” in New York.
H. W. R.
[16] In London all options are for a fixed date; at New York they are generally
made so that the option can be exercised at any time during the pending of the
contract.
[17] This may be true in a certain sense, but if options are considered as an
insurance feature, it is generally expected and hoped that they may not have to
be exercised, and will simply answer the purpose of insurance and margin.
[18] This does not apply to the New York market.
H. W. R.
[19] In London all options are made at about the current market price, and the
premium paid varies with the character of the stock and length of time, while in
New York puts, calls, or spreads are generally so much above or below the
market price, and the premium consequently much smaller than at London. The
only exception here is the “straddle.”
H. W. R.
[20] This is not considered so in New York, where we generally expect a so-
called “January rise,” which, however, sometimes does not come; and also
sometimes expect a bear market in the fall of the year, when money is employed
to move crops, which, however, also very often disappoints the operator.
[21] Somewhat superstitious. I have often observed it just the other way,
although generally a very dull market is expected during the hot summer
months.
H. W. R.
[22] This about corresponds with our spring and fall trade, when the
newspapers teem with interviews with prominent merchants and bankers.
H. W. R.
[23] Of course, this applies, in a general way, more to the London than to the
New York Stock Exchange.

H. W. R.
[24] This applies also to the New York market in so far as that after a large
bull speculation there will be heavy realizations, and after a bear campaign or
attack the covering process will take place.
[25] This applies to the so-called “lottery loans.”
H. W. R.
[26] Letter to “Spectator,” of October 4th, 1873, Saxon-les-Bains: a Study in
the Psychology of Gambling.
[27] In New York we have now any number of “bucket shops,” which
certainly deserve the name of “gambling hells.”
H. W. R.
[28] To a certain degree the agricultural industry of the United States takes the
place of the manufacturing industries in England. Our manufacturing industries,
however, are not unworthy of serious consideration.
H. W. R.
[29] I do not think that this has been done yet in this country, principally
because the necessary charter cannot be obtained, unless companies similar to
the Oregon Transcontinental may be classed as such.
H. W. R.
[30] The generally large increase in speculation in the United States and all
the incidents connected therewith are too well known, and too fresh in the minds
of the reader, to need enumeration here.
H. W. R.
[31] This is now generally done for the customer by his broker, who
endeavors to collect, as far as possible, reliable information and statistics for the
benefit of his clients.
H. W. R.
[32] This also applies to important changes or other matters affecting all kinds
of corporate property, &c.
H. W. R.
[33] These remarks apply with the same force, if not more so, to grain,
provisions, cotton, petroleum, &c.
H. W. R.
[34] I think his remark is worthy of serious consideration.
H. W. R.
[35] At the New York Exchange nothing less than ⅛.
H. W. R.
[36] Even such fluctuations are considered as unworthy of consideration in
American railroad stocks, where fluctuations of 10 per cent, and even more,
within a comparatively short time, are of frequent occurrence.

H. W. R.
[37] Or through Options at least insure himself against loss.
H. W. R.
[38] In Options, however, the poorer speculator virtually borrows, for a fair
consideration, the capital and credit of the rich operator.
H. W. R.
[39] As said before, the settlement in New York is daily.
H. W. R.
[40] All these experiences happen also in the New York Stock market, only in
different form, such as railroad wars, law-suits, injunctions, &c.
H. W. R.
[41] Point.
H. W. R.
[42] Sometimes also for the purpose of encouraging first a following, and to
unload later on.
H. W. R.
[43] Government Securities.
H. W. R.
[44] The usage at the New York Stock Exchange is different.
H. W. R.
[45] The real type of the London Jobber does not, however, exist in the New
York Stock market.
H. W. R.

OPINION AS TO VALIDITY OF “PUTS,”
“CALLS,” &c.
Law Offices of Simon Sterne,
29 William Street,
New York, July 24th, 1886.
H. W. Rosenbaum, Esq., 60 Exchange Place, New York,
Dear Sir:
You ask my opinion as to time contracts known as “puts,” “calls,” and
“straddles” or “spreads,” in relation to stocks, bonds, etc. The inquiry is
prompted by the apprehension that such contracts may be regarded by the
law as of a gambling character, and therefore not enforceable.
Contracts partake of the nature of wagers only when there is no intention
either to deliver or to receive the goods, stocks, or bonds, which form the
subject matter of the contract. That in point of fact and as a matter of local
custom, differences are sometimes paid on the settlement of time contracts
instead of delivery being actually made, does not affect the original
transaction, and does not invalidate it. So long as there was not a clear
intention, either express or implied, that the things themselves were not,
under any circumstances, either to be called for or to be delivered, and so
long as the holder of the “call” has the right to demand the actual delivery
of the stocks or bonds mentioned in the contract, or the holder of the “put”
has the right to insist upon the actual delivery of the stocks, bonds or
merchandise represented by the “put,” the transaction can, in no sense, be
considered a gambling one or partake of the nature of a wager, although,
instead of the actual delivery, differences may and sometimes are, as a
matter of compromise, accepted for convenience, at the time when the
contract is to be enforced.
This practice of paying differences is, as I understand it, much rarer,
however, than the actual delivery of the stocks or bonds mentioned in the
contract. The courts have of late years, with great uniformity, dealt with
these contracts with the disposition to uphold and maintain them, and have

discredited the defence of their being of the nature of a wager, and have
held the contracting parties to their agreements in the same manner as in
every other contract for which a reasonable consideration had passed.
The decision of the Courts of this State, of Massachusetts, Pennsylvania
and Illinois, and in the Federal tribunals, where, in one form or another,
these contracts have been the subject matter of examination, have been so
uniform in that direction that we can now regard this as settled law.
It was only in the infancy of those larger and more complicated
mercantile transactions incident upon the development of the modern
industrial world, that doubts as to the moral aspect of these contracts could
arise. Political science proves, and the law has followed the conclusion, that
these time contracts now form a necessary part and perform a conservative
function in the economy of a fully developed commercial life. They are an
as yet undeveloped form of insurance of values to a purchaser, for which
the purchaser pays a fair equivalent, and in process of time such insurances
must perform a larger and more important function in the purchase of
commodities or of representatives of value which have a tendency to
fluctuate largely in price.
For a time it was supposed that the ordinary policy of fire insurance
partook of the nature of a bet, and there was doubt as to whether the Courts
would enforce contracts of insurance, because it looked as though the
insurer was saying to a man who wanted to have his house insured against
fire, “I will bet you the value of you house that it does not burn down.” But
we have long since departed from this infantile mode of looking at the
situation and have learned to regard insurance as one of the conservative
elements of modern civilized life, by which heavy losses are evenly
distributed instead of coming with crushing effect upon the persons
suffering the misfortune.
The capitalist who sells a “put” or a “call” performs precisely the same
function as an insurer. He receives an equivalent therefor, and it is a means
by which he can turn the securities in his hands with an intermediate profit,
without serious risk, except that in the case of a “call” he may be compelled
to change the character of his securities, or replace the securities which he
has called from him, and in the case of a “put” he may be compelled to re-
acquire the securities that he has parted with; but, distributed over a very

large mass, and through different classes, of securities, these “calls” and
“puts” will balance themselves and leave, if intelligently pursued, a
resultant profit to the operator in the “puts” and “calls,” with a prevention
of disaster to the purchaser of the privileges, as against excessive
fluctuations in the market.
Respectfully yours,
SIMON STERNE.

H. W. ROSENBAUM,
60 EXCHANGE PLACE, NEW YORK,
Broker and Dealer in Options on Bonds and
Stocks
Besides the usual Options (Puts, Calls and Spreads) with prices fixed at a
certain distance from the market price of the Stocks or Bonds, I devote
especial attention to the negotiation of Options (Puts, Calls and Straddles),
with price fixed at the current market price of the Stocks, etc., which latter
class of Options my experience has proven to be the most advantageous and
ultimately cheapest.
I will also contract Insurances against loss on purchases or short sales of
Stocks or Bonds, made through me, during periods ranging from one week
to sixty days, and in quantities of from 100 shares ($10,000 Bonds),
upwards.
The Premiums to be paid for such Insurance range from $112.50 per 100
shares upwards, according to length of time and character of security, and
cover the whole loss which the speculator may incur on this transaction.
Circulars, Rates and Information furnished on application.

H. W. ROSENBAUM,
60 Exchange Place, New York.

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