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Title: The psychology of speculation
The human element in stock market transactions

Author: Henry Howard Harper

Illustrator: Haydon Jones

Release date: May 18, 2024 [eBook #73647]

Language: English

Original publication: Boston: privately printed, 1926

Other information and formats: www.gutenberg.org/ebooks/73647

Credits: Tim Lindell, Craig Kirkwood, and the Online Distributed
Proofreading Team at https://www.pgdp.net (This book was
produced from images made available by the HathiTrust
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*** START OF THE PROJECT GUTENBERG EBOOK THE
PSYCHOLOGY OF SPECULATION ***

CONTENTS
The Purpose of This Book
The Human Element in Stock Market Transactions
The Pernicious Influence of the Stock Ticker
The Disconcerting Effect of Sudden Losses and Gains
Retired Business Men in the Stock Market
Stock Market Transactions Apart from Gambling
The Stock Market Produces a New Phenomenon—
turns World-wide Disaster Into Local Prosperity
Nobody Loves a Bear
Frenzied Speculation is the Rankest Form of
Gambling; It is a Perilous Indulgence
The Dangers of Inverted Pyramids
The Lure of the Copper Boom—and Bogus Securities
The Perils of Over-acquisitiveness—the Human
Element in Speculation
They All Resolve, But They All Go Back
A New Knight-errant in Speculation
Some Signs are Comprehendible; Others Are Hard to
Interpret
None are so Blind As Those Who Refuse to See—
none So Foolish as Those Who Scoff at Wise
Counsel
Even the Stock Market Has Its Farcical Side
Speculators are Slaves of Sentiment
There is but One Way to Beat the Stock Market; There
are Many Ways of Being Beaten by it
The Stock Exchange is a Monument of Business
Integrity

Books Teach Wisdom, But Experience is a More
Practical Instructor
Whims and Fallacies in Speculation
Problems Defying Present Solution are Better
Deferred to the Future

THE PSYCHOLOGY OF SPECULATION

THE
PSYCHOLOGY OF
SPECULATION

THE HUMAN ELEMENT IN STOCK MARKET
TRANSACTIONS

BY
HENRY HOWARD HARPER

WITH
ILLUSTRATIONS BY HAYDON JONES

PRIVATELY PRINTED

BOSTON—MDCDXXVI

COPYRIGHT 1926 BY
Henry Howard Harper
All rights reserved

BOOKS BY THE SAME AUTHOR

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

(All of the above are out of print)

The Torch Press
CEDAR RAPIDS, IOWA

THE PURPOSE OF THIS BOOK
There are many persons who, although knowing a great deal about the stock
market, do not realize that the reason why they cannot “beat” it, is that they
know too little about themselves. There are others who know their
limitations well enough to let this monster problem alone. As it is important
that one should learn to swim before plunging into deep water, so it is well
to know some of the dangers of the stock market before delving into it.
It is not the purpose of this book to dissuade anyone from buying and
selling securities, but merely to point out some of the stumbling blocks and
handicapping influences that speculators, and even investors, are sure to
encounter.
H. H. H.

THE
PSYCHOLOGY OF SPECULATION

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

In addition to the large daily grist of “Market Opinions,” many books and
pamphlets are written which purport to be “Guides to Traders,” or up-to-
date recipes for “Beating Wall Street.” They set forth an exhaustive array of
statistics, instructions and warnings; they furnish elaborately charted plans
indicating many of the pitfalls of speculation; they tell how to avoid these,
how to buy, what to buy, when to buy and how to make money; but while
the theories advanced are oftentimes sound and easily comprehended, very
few people profit by them, because when once caught in the maelstrom of
stock speculation the average man becomes more or less mesmerized, and
at critical moments his conservatism, his resolutions and his theories all
take flight. Under the discomposing influence of a rapid succession of
changing values and alternating impulses he loses his perspective, is
incapable of calm reasoning, and is likely to do precisely the opposite of
what he had intended doing. Like a piece of driftwood in a swirling stream,
his actions are controlled less by personal instigation than by the currents
about him. Therefore to write, however intelligently, or to read, however
studiously, about how to make money in the stock market is largely wasted
effort in imparting, also in acquiring, information that does not adequately
inform. Not that the instructor’s premises are faulty, or that the reader is

deficient in understanding; but that the difficulties which necessarily attend
the application of the scheme of operations subsisting in the mind of the
author are so perplexing and disconcerting that the disciple becomes
incapable of adhering to sound basic principles. And it must be perfectly
obvious to anyone that even the teacher himself is not a master, but merely
an expounder, of his own principles; for otherwise he would be a capitalist
instead of a professional scribbler. Notwithstanding the many excellent
books which have been written on the subject, the real secret of stock
market success still remains (and probably always will remain) locked up in
the bosoms of a few who are too busy to write, and too rich to feel the need
of writing.

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

As a camera fails to record a true picture if placed in too close juxtaposition
to the object, so in studying the ticker-tape one is restricted to a close-up
view of conditions, resulting in a distorted gauge of values; for the figures
recorded often mislead and confuse the attentive observer; in fact it

frequently happens that the price fluctuations result from a wave of hysteria
among a coterie of traders, and bear but little analogy to the true value of
the stocks. To illustrate this point more explicitly, the stock of almost any
conservatively capitalized and well managed concern paying six dollars
annually in dividends has an investment value of from $85 to $100 a share;
but in the ups and downs of the market the stock gets buffeted about on the
exchange in obedience to the varying sentiments of traders, sometimes
selling as low as $50, and at other times as high as $150, without any
change whatever in the company’s earnings, its prospects, or its
management. (These matters will be dealt with a little farther on, and
exemplified by showing their effects upon the mentalities of various types
of speculators.) It does not follow that one who keeps in touch with the
stock market by telephone, or through the daily papers, will find his path
free from thorns and snares; but he will at least have a more open
perspective than one who submits to the influence of the ticker.
Any intelligent trader may reason out exactly what he ought to do under
certain specific conditions; but in the quickly shifting and uncertain process
of determining values he loses his mental poise; and experience proves that
anyone whose reasoning faculties become confounded is apt to be affected
by some form of hysteria, and will frequently do the opposite of what he
would do under normal conditions.
The most copious and the most unreliable financial writers are the market
“tipsters” who write daily letters of advice to an army of subscribers, and
claim to have more or less positive knowledge of what certain stocks or
groups of stocks are going to do marketwise. They often profess to have
definite “inside information,” which any subscriber may receive at a stated
price, ranging anywhere from $10 a month upward. These false financial
prophets, who lead a horde of blind followers, should not be confused with
reputable bureaus and statistical experts who base their opinions and their
advice to clients upon a logical analysis of general conditions.

Henry Fielding wrote a whole essay to prove that a man can write more
informingly on topics of which he has some knowledge than on matters that
he knows nothing about. He believed also that mankind is more agreeably
entertained by example than by precept; therefore it is not the purpose of
this discourse to teach anybody anything, unless perchance something may

be gained by example or suggestion. There are four subjects on which
advice, however good, is generally wasted,—politics, stock speculation,
religion, and love; for in these matters grown-ups rarely follow the advice
of others, and when they do, if they profit by it they take all the credit to
themselves, whereas if they lose they always blame the adviser. Such are
the inexorable and universal laws of human nature.
Anyone may relate his own stock market experiences, or those of others—
perhaps to the surprise or enlightenment of his audience. He may even
venture his opinions on the subject; but for anybody to assume that he can
continuously operate an unfailing system of making money on stock or
grain exchanges would be equivalent to asserting that he could invert the
fundamental laws of psychology, or that he could beat the game at Monte
Carlo by scientific methods. Many have tried both, to their sorrow.
And still, hundreds of thousands of people continue to play at gambling
tables, and hundreds of thousands speculate in stocks. There are many
persons who gamble moderately all their lives, just as some drink
moderately all their lives, with no resultant harm; while with others both of
these inhibited practices become fixed and ruinous vices. Since trading in
stocks has the appearance of being an easy way of making money, it is one
of the most alluring pursuits of modern times; and from this very fact,
although legalized for all, it is susceptible of becoming one of the most
dangerous habits known. It is dangerous for the confirmed addict not only
because he is apt to lose, but for the reason that it distracts his attention
from business in daytime and frequently destroys his rest at night. But as it
would be folly to advise people not to embark in commercial pursuits
because statistics show that upwards of ninety per cent. of business ventures
result in failure, so it would be useless to caution people not to trade in
stocks because it is a hazardous undertaking in which a peculiar sort of
sagacity and self-control are the only safeguards against certain disaster.
Most people of sturdy mentality are unwilling to admit that they could be
made easy subjects of hypnotic influences, and would scout the idea that
mere business transactions in securities could effect any undue subversion
of their equipoise. The average human mind is, however, incapable of
maintaining its equilibrium under the strain of great excitement; and no
amount of knowledge, either inherent or acquired, no amount of experience,
however dearly bought, will enable one always to think intelligently or act

wisely under highly nerve-racking conditions. It is said that persons who
become disoriented in a forest will almost invariably go in the wrong
direction (I have done so myself on two different occasions); and that in an
effort to salvage goods from a burning house they will throw mirrors and
other fragile articles out a third-story window and carry pillows downstairs.

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

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

“My dear Mr. Blank,” said his broker, “you are possibly quite justified in all
your abuse, except that of yourself, to whom you really should apologize,
since you do yourself a great injustice. You have had six months’ experience
in this game at an expense of a little less than two millions of dollars,
whereas at the pace you began you were due to lose at least five times that
amount but for your rare judgment and cool-headedness.”
“But why in hell didn’t you tell me all this before?” inquired the irate
customer. To which the broker calmly replied, “It’s my business to take
orders; not to give directions to a man of your understanding.”

When the American Hide and Leather Company was formed a number of
years ago, a prominent Boston leather merchant of my acquaintance, sold
his business to the new organization for a round million dollars in preferred
stock and bonds, and in the course of the next few years of more or less
restless inoccupation he devoted himself to a systematic study of
investment securities and general stock market conditions. The panic of
1907, when values were almost entirely lost sight of in the mad scramble to
liquidate stocks, afforded a rare opportunity to view the follies of reckless
speculation, and our astute leather merchant was quick to observe the
importance of this salutary lesson. The recovery that followed was almost
magical, and many who bought stocks at the low prices doubled their
money in a few months. Then following this sharp recovery there was the
natural setback when speculators undertook to convert their new wealth into
cash. And this too proved a wholesome lesson to our new apprentice in the
game of high finance. For some years he had held to the conservative
practice of investing only in non-speculative bonds, but this proved to be a
slow and monotonous process of enlarging his fortune; furthermore it was
devoid of the exciting thrills experienced by those who make fortunes
overnight. He thought the funds of widows and orphans ought properly to
be invested in gilt edge bonds and mortgages, but for a man of his business
sagacity, in the prime of life, to content himself with merely cashing his
coupons every six months was to decline into a state of innocuous
desuetude—a condition into which he was determined not to retrograde. To
launch one’s bark into the rapidly shifting currents of fortune in the stock
market and attempt to steer an even course is one of the surest preventives
of ennui, and after deliberately weighing and analysing conditions from
every conceivable angle our erstwhile leather merchant concluded that
cutting a few coupons now and then was too tame an occupation for a man
of his acumen and ambition. He informed his friends that after years of
careful study of the “game,” he was convinced that the reason why people
lost, was that while in theory they all had the right ideas, they all used
wrong formulas in practice. He declared that the “public,” so-called, always
“bought at the top and sold at the bottom”—a commonplace in stock market
parlance, though not necessarily true. Also that the inclination of all
speculators is to venture out beyond their depth, i. e., to buy more stocks
than they can pay for, or protect by ample margin. This indiscretion he
thought to be especially characteristic of those with but small capital, whose

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

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

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

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

reached, in which case the market would naturally react. But for some
inexplicable reason it failed to run true to his expectations; that is, the
probable course deducible from charts and precedents. Per contra, the prices
continued stubbornly to rise. When he had lost all his profits he backed his
judgment by his actions, and doubled his short sales; and at five points
higher he doubled again, for a break was long overdue. Being short
upwards of three thousand shares in a rapidly rising market is a tremendous
mental strain, even for a seasoned trader; and naturally our novice became
somewhat nervous. Some stock market wiseacre—one or more of which
class are usually to be found lounging about every brokerage office—
consolingly remarked that while stocks have a certain fixed bottom, they
have no top; which increased his anxiety.
After studying charts and various compilations of figures and facts about
earnings and past market performances, he concluded that Bethlehem Steel,
selling at $45 a share, was not worth half that price; also that Studebaker at
$35 was much too high. After an extended inquiry into the past and
prospective earnings of these two companies he sold short a thousand
shares of each; but instead of reacting they steadily maintained their upward
course with the rest of the list. His broker called for more margin, and he
put up another hundred thousand in bonds. He was advised to “cover” and
go “long,” but he stood firmly by his convictions—and the charts.
“That’s why the public all lose,” he declared; “they get ‘cold feet’ and shift
positions at the wrong time.” From a personal friend who was a director of
the new General Motors Corporation he got an “inside tip” that that stock,
selling at $82, was too high, so he added a few hundred shares of it to his
short account. Meantime the country’s commerce and the entire group of
stocks, moved forward with the steady even tread of an army on parade.

THE STOCK MARKET PRODUCES A NEW
PHENOMENON—TURNS
WORLD-WIDE DISASTER
INTO LOCAL PROSPERITY
At this time (1915) the major portion of the civilized world was embroiled
in a mad turmoil, employing every known device and resource in
destroying human life and every form of physical property. With the very
foundations of civilization thus disrupted, and our own country on the verge
of being drawn into a deadly combat in which the most humane and
enlightened nations of the earth were reverting to the practices of ancient
barbarism, it is not strange that our merchant friend should have argued that
it was a most unpromising situation upon which to construct investment
values and business prosperity. It was inconsistent, inconceivable and
seemingly impossible that stocks, even good stocks, could continue to
advance in the face of such demoralizing conditions. When war was first
declared, even before England became involved, the stock market was
thrown into such a violent state of panic that it became necessary to close
the stock exchange for several months; yet now when the clouds of disaster
were at their darkest and hung menacingly over the whole of civilization
this country alone was indulging in a riotous exhibition of prosperity such
as had never been dreamed of. The market tipsters, the financial editors of
newspapers, the brokers’ letters and all stock market literature, with but few
exceptions, were crowing loud and boastfully for still higher prices, and
after the whole group of stocks had risen in unison for a time, some
individual stock was singled out every day or so, pushed into the forefront
and skyrocketed to dizzying heights. The brokers and all the customers
were delirious with joy and excitement. The stock brokers were all bulls,
the traders were bulls, the tipsters and rumor-mongers were bulls—even the
office boys who called the quotations from the tickers were bulls, and
shouted vociferously when some special stock jumped a point or more from
the previous quotation; and it seemed to our trader that in calling out the
advancing prices special emphasis was always given to the particular stocks
he was short of. He was literally beset with bullish exultation and bullish

news from everywhere. The noisy enthusiasm in the board-room rankled in
his ears and rasped on his over-wrought nerves. He felt as one could
imagine a tiny lone bear would feel in the center of a great arena,
surrounded by a cordon of cavorting bulls. To him it seemed that he was the
only bear on earth. There might be others, but they were too cleverly
sequestered to admit of sharing his misery with them.

NOBODY LOVES A BEAR
In a bear market a discouraged bull is at least not despised; he may find a
sympathetic sufferer; but in a bull market no one ever wastes any
compassion on a bear, or admits sympathetic kinship with him. He is
popularly regarded as a pessimist, a destroyer of values, a discordant note,
an uninvited guest at a banquet. If it be a true saying that “misery loves
company,” it must follow that wretchedness is accentuated by
noncommunion with fellow-sufferers; in which case it may be said that the
situation of a bear in a rousing bull market represents the ne plus ultra of
hopeless desolation.
At length it became a mooted question whether to “sit tight” and wait for
the boisterous storm to blow over, or cover his shorts, buy more stocks and
go with the tide. Heretofore he had maintained a stolid attitude, born of self-
confidence, inspired by a triumphant business career, and supported by
precedent and every reasonable prophecy. The traders had simply gone mad
and were rushing headlong to their ruin, as they had often done before.
History was merely repeating itself. It was a time for sound cool-headed
judgment, and he stood firm in the determination not to lose his head and
join in any such reckless carousal. But the more he reasoned and studied the
charts, the more unprecedented and obstinate the market became. One thing
he failed to consider was, that the favorite caprice of the stock market is to
violate precedent, and to do the thing least to be expected of it. The
newspapers gave front page double-column headings to business
improvement and stock market news—the enormous demand for textiles,
increased prices for all commodities, easy money conditions, all labor
disputes amicably adjusted, and the stage all set for the greatest era of
prosperity the world had ever known. The financial columns of the
newspapers literally teemed with bullish interviews with financiers and
bullish reports in all lines of trade and finance. There was scarcely a
discordant note in the rush and rhythm of progress; and when one was
faintly sounded the general din instantly smothered it. Even the great
cataclysm in Europe was now construed as an additional bull point, because
our factories were all running night and day to supply the armies with
equipment and provisions. It was argued that the more they fought the more

supplies they would need, and the more money we would make in
furnishing them; also that the more ships the Germans torpedoed the greater
demand there would be upon our shipyards to replace them. The nation had
indeed gone prosperity mad, while the rest of the world was going to
destruction—certainly an irregular and puzzling phenomenon. Occasionally
when some veteran writer piped a note of warning to stock speculators, it
was met with a new outburst of bullish demonstration, and the market swept
on like a conflagration in a city built of tinderwood. Stocks that had lain
dormant for months suddenly came to life and became the favorites of
powerful cliques; corporations that had never earned their fixed charges
were said to be piling up enormous surpluses, the railroads and steamship
lines were glutted with traffic, the factories, steel foundries and ammunition
plants were running night shifts, banks and millionaires were said to be
buying everything for control, whole fleets of grain-laden ships were going
abroad and the farmers were simply wallowing in wealth; the retail stores
were jammed with eager customers, labor was all employed at high wages,
and Big Business was rushing with all the force of an avalanche along
Prosperity Highway, without a danger signal in sight.
Gradually, though manifestly, it became evident that to resist such a
tremendous momentum was as expensive as it was exasperating; and his
hitherto fond illusions of greater wealth were dispelled by a terrifying
reality. But a man who has been right all his life is not easily convinced that
he is wrong in a market position that seems justified by common sense and
fundamental conditions. And yet, however steadfast human resolution may
be, it is wellnigh impossible to maintain a fixed attitude in opposition to
such a cumulative and overwhelming force. The sensation of being short in
a rampant bull market has been pictured as similar to that of being chained
by the heels to a rising balloon, without any idea of the height to which the
gas will carry it—not a cheery picture for the contemplation of one who is
bearishly disposed. It is therefore easy to understand how likely one is
under these “third degree” operations to lose his mental bearings, his nerve
—and his money. A trader who is long of stocks knows to a certainty how
much he can lose on any given number of shares; but on the short side there
is no limit to what one may lose, even on a few hundred shares. The loss of
a definite sum, whatever the amount may be, can be borne with equanimity
by a man of nerve; but to maintain a short position in a bull market gives
one about as uneasy a feeling as it would to have a number of outstanding

promissory notes with the amounts left blank for some unknown person to
fill in. It keeps one in a constant state of fear, and fear knows no limitations;
it contemplates and magnifies every baneful possibility.

However, this man of iron nerve, this erstwhile dominant figure in the
leather trade who had ridden for a quarter of a century with his feet firmly
in the stirrups, was not to be easily unhorsed. At the close of a turbulent day
he took account of stock and decided to “cover” (buy in) all the dividend
paying stocks he was short of, and to sell an equal number of additional
shares in the non-dividend paying issues, such as Bethlehem Steel, General
Motors and Studebaker. The reckoning showed a paper loss of a quarter of
his million dollar capital, but he bore it courageously, determined to recover
it by adopting the safer course of “shorting” only such stocks as had never
paid dividends, and perhaps never would. Therefore he sold more
Bethlehem Steel, at $80, $90, $100, $150 and $200 a share. He sold
Studebaker again at $75, $100 and $150, and more General Motors at $100,
$150, $200; and a hundred shares at every fifty points advance until it
reached $500. Those who knew him in the board room said that throughout

this ordeal he maintained the most inflexible nerve they had ever known;
but at the close of the market on that memorable day in 1915 when
Bethlehem Steel touched $600 a share he collapsed in a state of nervous
prostration and was taken home in an ambulance. He did not live to see
General Motors sell at $850 a share (on October 25, 1916) and Bethlehem
Steel at $700 a share (on November 18, 1916). Long before these figures
were reached his million dollar capital had vanished and he had crossed the
bar into the Great Beyond. His widow was left almost penniless and he was
buried at the expense of his Lodge. Shortly before passing away he
remarked sorrowfully to a friend at the bedside,—“In the past year I’ve
suffered every torment known to the demons of hell. My only grain of
comfort is that it’s all over now and I have nothing more to lose.”
From this tragic experience it is obvious that there is but little comfort or
profit to be gained on the short side of a protracted bull market; and the
natural inference must be that the “long” side of such a market is as
felicitous and profitable for bulls as the short side is discomforting and
unprofitable for bears. In theory it is, but in practice there are comparatively
few who make large gains, and fewer still who “get away” with them. It has
been authoritatively stated by the head of the world’s largest gambling
emporium that it is impossible for any human being to beat the roulette
wheel for any considerable length of time; and that human nature is so
constituted that nearly all of those who make large winnings continue to
play until they have lost all their gains, and perhaps more. In the first place,
there are thirty-six numbers, with a single and double zero,[1] on the wheel;
if a player places a dollar on each of these he stakes $38. He must
inevitably win on some one of the numbers or one of the zeros, whereupon
he collects $35, together with the dollar risked on the successful number,
making a sure loss of two dollars, which is the house’s fixed percentage. If
a player wagers a dollar on one number, with an even break of luck he is
due to win $35 (and also to get his dollar back) once in thirty-eight plays.
At this rate, for every $3800 risked he is due to lose $200. Players often
stake as high as two to three thousand dollars, or even more, on every spin
of the wheel; from which it will be seen that with average luck, at this rate
of play one will lose more than a thousand dollars an hour. It is said to be a
proven fact that the chances are so much against the player, that a roulette
wheel can be run at a profit, even if the percentage in favor of the house is
entirely eliminated. This is due to the fact that the excitement of play causes

a certain confusion of mind, and players are prone to do the wrong thing;
for instance, double their bets when in an adverse run of luck and “pinch”
them when luck is running favorably. Or, on the other hand, players who
have pressed their advantage and doubled in a run of favorable luck will
continue stubbornly to plunge long after their luck has changed. Precisely
the same psychology applies to trading in stocks.

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

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

THE DANGERS OF INVERTED PYRAMIDS

It was a wise custom of the ancients to build their pyramids with the big end
on the ground; but modern builders of pyramids in the stock market have
reversed this time-honored practice, and most of them build their stock
pyramids with the heavy end up; therefore they invariably topple over after
reaching a certain height. For example, when a certain stock known as Lake
Copper was selling at $5 a share a trader bought five hundred shares,
expecting to double his money on it, as the stock was “tipped” to go up to
$10. When it reached that figure, instead of selling he bought another
hundred, and put in an order to sell the whole lot at $15 a share. Before it
reached his selling price he cancelled the order and raised it to $25; again
cancelling it and buying another hundred at $25. By this time he was
convinced that it would go to $50. He bought five hundred more at $40,
then the stock dropped back, and fearing he might lose all his gains he sold
a thousand shares at $30. Although he had lost $5000 on the last five
hundred shares he still had a profit of $4500, less commission, after
deducting the full cost of the two hundred shares still remaining. The stock
recovered to $50, and encouraged by the “street” gossip about rich ore
bodies being uncovered, with accompanying reports that the stock would be

cheap at $75, he bought back at $50 the thousand shares he had sold at $30.
At $60 he sold five hundred shares, which he afterwards repurchased, with
five hundred more, at $75. By this time the speculators had discovered that
the mine was one of the richest prospects in the Lake region; it was
rumored that the company’s stock was being bought for control by a large
mining company whose property it joined, and the stock was “tipped” for
$150. Many surmised it to be another Calumet & Hecla, which had sold at
$12 a share, and afterwards at $1000. From here on up he “pyramided,”
buying a hundred shares at every point advance, and wisely protecting his
profits with “stop loss” orders a few points under the market price. Once the
market reacted and five hundred shares of his stock were sold on “stop,”
after which the price quickly recovered, and being assured that the stock
had been hammered down for the sole purpose of “shaking him out,” he
bought back the five hundred shares at five points higher than he had sold
it. To prevent another similar coup he cancelled all stop loss orders and took
his chances in the open market, confident that he could not be beaten as
long as he was trading on “velvet” with an original investment risk of only
$2500. When the stock reached $85 someone half convinced him that it was
time to cash in his profits, and he put in an order to sell the whole lot at $90,
including the additional shares he should buy on the scale order up to that
point. When the price approached $90 he cancelled the selling order and put
it in at $100. Later the price reached $94.50, and he had thirty-two hundred
shares, on which he could have cashed in a fortune. But what was the use
cashing in then, when he was in a fair way to making half a million, or even
more? After reaching $94.50 the stock began to decline, and here the top-
heaviness of the pyramid commenced to manifest itself, for with every
downward point he was losing $3200. When the price got down to $75 his
broker demanded that he either put up more margin or lighten his load by
selling a thousand shares or so. The stock continued to go down, and again
the broker called on him for more margin. Soon after putting up all the
money he had, and all he could borrow, the broker was obliged to close out
the account to protect himself. The stock afterwards went down to ninety
cents a share.

THE LURE OF THE COPPER BOOM—AND
BOGUS SECURITIES
Of course the speculator who buys stock in a new copper mine is simply
taking a gambler’s chance that ore will be found in paying quantities. Most
of those who have submitted to this enticement in the past thirty years do
not need to be reminded of the hazards attending such risks. I recall that
about twenty-five years ago, when the “copper fever” was raging
throughout the country—and in Boston especially it was highly infectious
—a half-page advertisement appeared in one of the leading Boston
newspapers, relating in graphic terms the discovery of the most remarkable
copper mining prospect that had ever come to light. The chief mining
engineer of one of the largest and best known copper mines in the United
States—a man of wide experience and vast knowledge in the mining
business—while prospecting somewhere in the West came upon what
seemed to him the richest deposits of copper ore he had ever seen. These
ore bodies were said to be located in a large mountain, conveniently near a
railroad, and by tunneling into the side of the mountain the ore could be
trammed out, dumped onto the cars and hauled to a smelter a few miles
away. The mining engineer (whose full name was given) had immediately
resigned his position, organized a stock company, known as the Occidental
Copper Mining Company—into which he admitted a number of personal
friends—bought the property, and began tunneling operations on his own
capital and what he had raised among his friends through the sale of stock
in the new corporation. Having exhausted their funds and desiring to
continue exploration work—which became more and more promising—the
directors had sold a block of treasury stock, the par value of which was one
dollar a share. The latest reports showed that the work was progressing
satisfactorily under the personal direction of the engineer who had
discovered the mine, and that stockholders might expect dividend returns
inside of a year or so. The advertisement was inserted, not by a stock-
jobbing firm or underwriting syndicate, but by a well known wholesale and
retail grocery and provision company, who claimed that after fully
investigating matters they had bought a large block of the stock, twenty
thousand shares of which they would distribute among their customers at

the par value of one dollar per share. I called on the president of the grocery
company, who said his firm thought so well of the prospect that they had
bought twenty thousand shares as a speculative investment, and a like
amount to distribute among their customers. He represented that although
the shares were easily worth $5 each he considered it good advertising for
his company to sell them at par, $1; and with a view to extending the
benefits as widely as possible he preferred to dispose of the stock in small
lots. He cheerfully gave me the names and addresses of the directors of the
new mining company and suggested that, if interested, I might write to
them. One was a physician of good repute, another was general auditor of
the Chicago, Milwaukee & St. Paul Railway Co., another was a western
lawyer of prominence, and so on. I wrote to each of these three, telling them
of my interest in the matter, also asking for a candid expression of their
opinions about the property. Each of them sent me a personally written
reply, substantially corroborating what information I already had, and
saying that they had given their names and their financial support to the
company solely upon the recommendation of the mining engineer, whom
they knew personally and trusted implicitly. Further than that they knew
nothing, but were willing to take a gamble on his judgment. After receiving
the second of these three letters I hurried to the office of the grocery and
provision company, and to my great disappointment, found that they had
only a few hundred shares left. When I told the president that I would take
the entire lot at his price, one dollar per share, he shook his head. He said
the stock was going rapidly in five, ten, and twenty share lots, and that in
justice to their other customers and friends he did not think it fair to let me
have more than one hundred shares at most. But finally he yielded to my
persuasive argument, that inasmuch as he had only a few hundred shares
left he might as well let me have them all and thus finish the whole
transaction at once, saving himself the bother of peddling them out
piecemeal.
Nothing further transpired until, some months later, I received a circular
from the mining company reporting good progress with development work;
also stating that owing to further need of funds to continue this work the
directors had concluded to make another offering of treasury stock at the
same reduced price at which they had sold the previous block, namely, at
five cents a share! In the aggregate the advertising feature was probably
more advantageous to the customers than it was to the grocery company

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

THE PERILS OF OVER-ACQUISITIVENESS—
THE
HUMAN ELEMENT IN SPECULATION
Reverting again to the characteristic bent of speculators who trade on the
constructive side of the market, some years ago a man of my acquaintance
bought a hundred shares of Union Pacific at $120 a share, just for “a turn of
a few points,” as he expressed it. Within a few days he sold it at $125,
making a net gain of $500, less commission,—equal to more than five
years’ interest at six per cent. on the $1500 he put up as margin. Someone
afterwards convinced him that he was silly to have sold out at $125,
because the stock was sure to go to $150; therefore he bought it back at
$130, and at $135 he took on another hundred. The stock dropped back to
$125, and on hearing from someone else that it was likely to go down to par
he sold the two hundred shares at a net loss of $1500 and commissions.
About that time somebody discovered that the Company was likely to
distribute its large surplus, consisting of Baltimore & Ohio stock and other
securities, and the stock rebounded to $135, at which figure my friend
repurchased the two hundred shares he had sold at $125. At $139 he bought
two hundred more, which, in a spasm of fright, he sold when the price
suddenly dipped down to $133. Later, at $140, he recovered his nerve, also
the last two hundred shares he had sold at a loss. At $160 the stock looked
cheaper than it had at $120, and having a safe margin of profit to trade on
he bought five hundred more. At $170 it was reported that Harriman (who
controlled the road) was buying the stock, and encouraged by the entry of
such distinguished company my friend plunged in and bought a thousand
shares more. When the stock got to about $190 it was noised about that the
great railroad magnate had completed his purchases, so the price went down
a few points, again frightening our trader into taking a loss on three hundred
shares he had bought at $189. But concurrently some wise tipster had
discovered that the price had been depressed purposely, to enable other
“inside interests” to accumulate a large line, and in a short time the price
climbed to $200. By this time my affluent friend was becoming somewhat
disturbed and confused, but lured by the prospect of greater gains he
managed to regain his composure, and bought five hundred shares more;

figuring that as long as he was trading on profits he had everything to gain,
and nothing to lose. From here on the stock maintained a fairly steady
upward course, and not to be outdone by the greedy “insiders” he bought
three hundred shares at every point advance until the price reached $212,
when he had accumulated fifty-one hundred shares. The net paper profit of
well over $100,000 looked exceedingly tempting, and acting upon his own
judgment, seconded by the good advice of his broker, he wisely closed out
the entire lot, invested the net proceeds in government bonds, bade good-
bye to the market, and planned a three months’ excursion to Europe. So far,
so good; but—
“U. P.” (along with other stocks) continued its upward course, accompanied
by much excitement and jubilation among the “longs” with an equal
measure of apprehension and despondency among the hard-squeezed
“shorts.” When our trader was preparing for his departure he happened to
read a review by some stock market wizard who reported that according to
“late inside information” a dividend of $100 a share in securities would be
declared on Union Pacific, and that the stock would pay $10 a share in
annual dividends; consequently at $250 a share it would be cheap.
Whereupon my friend, who occupied the uncomfortable position of a “sold
out bull,” became wretchedly aware that he had dropped out of the race
long before the course was completed, and by doing so he had thrown away
a grand opportunity of making nearly $200,000 more.
It may here be explained that the mental attitude of a “sold out bull” toward
a rising market is much the same as that of a bulldog chained in his kennel
while a dog fight is going on outside. A speculator may stand by and view
with unruffled complacency the most enormous profits of others in
securities that he never owned, but if one of his own pet stocks continues to
advance after he has sold out, it not only reflects the error of his judgment,
but the remorse he suffers in contemplating the additional sum he might
have made dampens all the pleasure of reflecting upon the profit he actually
did make.
Reluctant to admit such a costly blunder in judgment, determined not to be
surpassed by his fellow-traders, and flushed with the victory of his recent
exploit, when Union Pacific was selling at about $215 this “sold out bull”
put in an unlimited order to buy five thousand shares. When his broker on
the floor of the exchange began bidding for this amount of stock the crowd

instantly surmised that some big operator was being “squeezed” on the
short side, and before the purchase was completed the price had jumped to
$219, the highest point it ever reached. After steadying itself for a while at
around this figure it took a downward plunge, and a few weeks later our
trader who had retired from the market with upwards of $100,000 profit,
closed out the last hundred shares, saving a little less than the $1500 he
originally put up as margin. His escape from utter financial ruin was largely
due to the insistent advice of his broker that he should steadily lighten his
load on the way down, rather than try to protect the whole lot by putting up
additional margin.
The man who made this play in Union Pacific was a college graduate, and a
veteran trader, with twenty years of hard-bought experience and a good
family name behind him. While his experience, together with the advice of
his broker, saved him from a heavy loss it might easily be supposed that the
former alone would have prevented him from falling into the common error
of novices. From which it may be observed that in stock speculation, as in
other pursuits, wisdom and the ability to master one’s own impulses are
sometimes late in arriving at full maturity. Indeed a broker who for upwards
of thirty years has held a position of outstanding prominence on the floor of
the New York Stock Exchange—a man who often handles a hundred
thousand shares or more in a single day—once admitted to me that while he
generally made money for clients who entrusted him with optional orders,
yet he regularly lost more than half his enormous commissions trading on
his own account. Which calls to mind a wise saying of the old Greek
philosopher Heraclitus, five hundred years B.C.—“Many men have no
wisdom regarding those things with which they come in contact; nor do
they learn by experience.”
The man who made the splurge in Lake Copper was a daring young
Lochinvar who came out of the West, with only a moderate sum of money,
but an ample store of ambition; and although enjoying a large practice in an
honorable profession, he occasionally took what he called a “flyer” in the
market. For some years he was kept pretty busy clearing up the results of
his miscalculations in this adventure, which I imagine was his last “flyer.” I
have remarked that “experience” might reasonably have been counted upon
to safeguard the man in the Union Pacific deal against the error of over-
acquisitiveness; and seeing it did not, it would seem that the very

inexperience of our other trader should have made him less daring. From
which we may conclude that in stock trading, all speculators, whether
experienced or inexperienced, are subject to those inscrutable laws of
psychology which Nature herself seems to have designed for the
discomfiture of those who play at the wheel of Fortune.

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

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

heed to repeated warnings, and threatened to take his account to some other
office if his orders were not executed as given. “What am I to do?” the
broker asked in despair. “This young daredevil will probably be in
bankruptcy in less than six months.”
On the losing side there are at least three distinct classes to be found at all
times in stock market circles: one class who know nothing about the
market, except what they read or hear; they are guided by floating rumors,
the advice of well-meaning friends, and the spumous counsel of market
tipsters. There is another class who arbitrarily suppose they have learned
everything there is to know about the market; they possess a large store of
cynicism and skepticism, and their market maneuvers are guided by a
monumental self-sufficiency that would be a valuable asset in trading but
for the fact that it is worthless. There is a third class who, although they
really know the practices, theories, precedents and possibilities of the game,
are not temperamentally qualified to utilize this knowledge in their
transactions.
Of course every banking and brokerage firm has a few customers who go
into the market and buy stocks and bonds during seasons of depression and
afterwards pay no attention to the daily or weekly fluctuations until prices
reach a stage where it seems advisable to sell out; then they dispose of their
holdings and leave the market to the traders until bargain day comes round
again. But the foregoing examples symbolize the mental attitude and
customary procedure of an overwhelming majority of the trading public.
This being true, one may draw from them some idea of how important a
part psychology plays in the destinies of those who speculate. It would be
erroneous to suppose that the characters who play these rôles are shallow-
brained dolts because their actions (judged by results) appear nonsensical to
the rational and composed mind. On the contrary, the speculative element
represents for the most part men of uncommon shrewdness and foresight;
men of studious and analytical minds; men who are, or have been, masters
of every situation in their own professions or commercial vocations, even
though most of them act like children when they get tangled up in the
meshes of stock speculation.
Nor should it be imagined that the stock market is primarily a guessing
game, or a game of chance; or even an unbeatable game; or that it is run by
a gang of swindlers or mountebanks. Gamesters and swindlers may play at

it, but the game itself is as straight and legitimate as any business pursuit.
As a matter of fact it is one of the fairest and most open games ever played;
a game in which every participant, man or woman, rich or poor, old or
young, has an equal chance. The fact that most people resort to mere
guessing and gambling in their stock transactions does not make it
necessary to qualify this statement; neither is the truth of the assertion
altered by the fact that certain individuals and organized cliques of traders
manipulate stocks, both up and down, with utter disregard of basic values,
and in this way set cleverly baited traps for other traders who imagine
themselves wise enough to pluck the bait and get away without springing
the trap. A trader or investor in stocks is not obliged to participate in these
machinations, any more than one who goes to a circus is obliged to bet on
the shell games and other tricky money-making devices that are sometimes
run in conjunction with traveling menageries, but are no part of the main
performance.

A person who buys a piece of improved real estate for less than half of its
actual worth is reasonably sure he has a bargain; but if he afterwards sells it
at a fair price, and later buys it back again at a much higher figure, he is
gambling that for some reason or other it is going to be worth more, either
actually or fictitiously. Nor is it ever unsafe to buy good stocks at figures
away below their intrinsic worth. The element of gambling does not enter

the undertaking until the market price has risen above the investment value;
then if the owner refuses to sell, or buys more (as the speculator usually
does) he is gambling on the uncertain event that some individual or clique is
going to pay him more than the stock is worth. When one buys a stock,
either for investment or speculation, its value cannot be permanently
affected by the action of other traders, and no individual or group of
individuals can euchre an investor out of his stock except by his own free
will. The man with a hundred dollars has the same relative chance for
making money as the man with a million; but the difficulty is that the one
with the smaller amount is ambitious to make equally as much as the one
with the million; therefore he resorts to gambling on thin margins; and not
being content with ordinary risks he plays a long chance shot. If he wins,
instead of withdrawing the original capital, with perhaps a little more, he
usually stakes the whole amount on every venture until it is lost.
Viewing the stock market calmly in the perspective, it is not a question
whether stocks will rise or fall; of that there is not the slightest doubt. They
rise and decline with the same certainty that the sun rises and sets, though
of course with less regularity. The only question is, how far they will go in
either direction.

The action of the stock market much resembles that of a troubled sea, which
is always uneasy, rolling and tumbling about as if undermined by some
volcanic force. The prices of stocks are periodically rising and falling, and

one might as well undertake to fight the ocean tide as to contest the course
of the stock market when once in full swing in either direction; for the
market, unlike the tide, has no prescribed boundaries. There are times—
indeed most of the time—when it is much wiser to sit by in the capacity of
an interested observer, than to plunge in and become a struggling
participant, with the chance of being carried out beyond one’s depth.
Theoretically, there seems to be no reason why the stock market should not
move along at a fairly even pace, except in case of some unexpected crisis;
but practically, it is either abnormally high or unreasonably low most of the
time. Stocks, like food, clothing and all human necessities, are more or less
subject to the laws of supply and demand; and when the traders and
investors throughout the country become convinced that it is time to buy
stocks, a bull market is sure to ensue; then when everybody has acquired all
they want—and some of them more—and they make up their minds to sell,
it is only natural that values should recede; which they do, usually to
somewhere near the low point from where they began to rise. This process
of sliding up and down the scale is repeated year after year, and age after
age.
No one has ever been able satisfactorily to explain why the prices of all
stocks, both good and poor, and even gilt edge bonds, keep an almost even
pace in the backward and forward swings, but they do; and thousands of
people who have placed their savings in securities that are as sound and safe
as a savings bank have viewed with alarm the crumbling market values of
their investments, wondering what has happened to their particular stocks or
bonds, and if the slumping prices foreshadow a reduction in dividends, or if
interest will be defaulted on coupons. Investors who own bonds or good
dividend paying stocks need not be troubled over these capricious changes;
but others of a more venturesome or speculative bent are forever wondering
when they ought to get in or out. Of this latter class it is the best guessers
who win.

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

Chorus of the bears:—

When the plums are gone and the bulls go hence,

We’ll sharpen our claws and jump the fence.

NONE ARE SO BLIND AS THOSE WHO
REFUSE TO
SEE—NONE SO FOOLISH AS THOSE WHO
SCOFF AT WISE COUNSEL
While there are various danger signals which indicate the culmination of a
bull market, just as there are others which mark the final stages of a bear
market, it must not be supposed that these signals stand out like so many
red lights placed in front of a ditch at the roadside; on the contrary they are
of the most deceptive and decoying nature to all except experienced and
dispassionate observers. And even the best judges are frequently deceived.
On this point one of the most reliable financial writers in the country says:
“Not all of the economic indicia ever turn together at any peak or bottom in
the securities markets. Always the case is that some of the indicia disclose
the change, while others do not. The public usually keeps on expecting a
bull movement to continue, no matter how unreasonably high stocks may
sell. This persistence of bullish sentiment greatly facilitates distribution by
wealthy holders.” This timely note of warning was written early in January
of the present year, when a great bull market after running about two years
was at the boiling-over point; but very few bullish traders ever pay any
attention to such counsel; nor would they if the danger signals stood out like
beacon lights along a treacherous shore. A few days later the following bit
of good advice was issued by a Boston broker:
“For fifteen months this country has enjoyed clear skies, politically,
economically and financially. Washington Irving begins his essay on the
Mississippi Bubble with the phrase, ‘There was not a cloud on the horizon,’
and then goes on to state that the prudent mariner takes cognizance of such
ideal conditions and prepares for the inevitable change. Today, after fifteen
months of national sunshine and cloudless skies in all directions, we believe
it behooves a man of affairs to take counsel with himself relative to his
investment and speculative position. Many business men who should have
learned better by past experience, still take the business situation as a guide
to their stock market operations in spite of the fact that all stock exchange
history shows that the market turns up long before a period of business

depression has run its course and likewise turns down six months or more
before prosperity comes to a pause.”
Speculators can usually find an abundance of literary food suited to their
particular tastes, as witness the following, issued by a prominent market
forecaster simultaneously with the above: “We wish you to keep in mind
that the biggest speculation yet witnessed in the present bull market is still
to come. Now that the reactionary trend in the market has been definitely
halted, you can look with assurance for higher prices in many issues in the
near future. Continue to pick up our favorites as outlined in our letters, as
we expect them to prove features.” Most of the “favorites” were then selling
at figures far above their intrinsic worth, and many of them have since
fulfilled the prediction that they would “prove features,” for soon
afterwards they declined anywhere from ten to fifty points.
The active participants in a market that has run a long course in either
direction are wont to become so intoxicated with affluence, or downcast
with adversity—depending on which side they have been operating—that
they give little heed to the matter of interpreting signs which forecast future
events, particularly if these signs controvert their own opinions. A man
driving an automobile at a sixty-mile-an-hour pace does not stop to read
signs by the roadway; and no more does a trader bother with warnings when
a prolonged series of stock market victories has blurred his vision to
everything but prosperity. As every unfamiliar noise or object tends to
aggravate fear in those who are frightened in the dark, so every concurrent
happening stimulates courage and recklessness in those who become
emboldened by stock market success. Paradoxical though it may seem,
many things which are construed bearishly in a falling market are regarded
as bullish in a rising market; and signs which portend higher prices in the
mind of a bull are equally significant of lower prices to the mind of a bear.
In other words, both bulls and bears often derive their opposing opinions
from the same identical hypothesis. These strange anomalies are not mere
theories, they are attested stock market facts.
For example, in a bear market some years ago the stock of the
Amalgamated Copper Company was depressed several points in one day on
the report that the dividend was to be reduced. Next day the report was
denied and upon supposedly good authority it was stated that the regular
dividend had been earned and would be declared. Whereupon the traders—

who were mostly bearish—argued that a declaration of the regular dividend
would be a bear argument, because it ought to be reduced and if the usual
amount were declared it would be only for the purpose of furnishing
artificial market support to the stock; consequently it was again depressed a
dozen points or more. Later when the trend of prices had turned upward this
stock advanced sharply on the report that the dividend was to be increased.
Although the report met with prompt denial, the stock was nevertheless bid
up several points more on the theory that if the dividend were not increased
it at least ought to be, and if only the regular declaration were made, that
would be evidence of a commendable policy of conservatism.

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

SPECULATORS ARE SLAVES OF SENTIMENT
When the whole country becomes pervaded with an epidemic of bullishness
the action of speculators is always directed by sentiment rather than
judgment; and a market that is swept along by excited emotions is always
dangerous,—dangerous to go short of and dangerous to be long of.
Hysterical “bulls” care nothing whatever about the earnings or dividend
returns on a stock; the only note to which they attune their actions is the
optimistic slogan, “It’s going up!” and the higher it goes the more they buy,
and the more their ranks are swelled by new recruits. A herd of stampeded
cattle (cows no less than bulls) will rush blindly into a river, or butt their
brains out against stone walls, trees or other obstructions; they also
stampede every critter that happens along their path; and anyone who has
ever witnessed a panic in a theater or auditorium, or in the stock market,
need not be told that under such circumstances men are but little saner than
cattle.
And speaking of sentiment, it is remarkable to what extent the combined
business and financial structures of the country are swayed to and fro by
this giant motive power. Like the biblical wind that bloweth where it listeth,
and man heareth the sound thereof but knoweth not whence it cometh or
whither it goeth, sentiment springs up from comparatively trifling or
unknown sources and after playing its havoc, vanishes as suddenly and
mysteriously as it came. In a bear market a train wreck, or the death of
some financier, or an earthquake in Europe, will put the market off to the
aggregate extent of hundreds of millions; whereas one of the greatest bull
markets in history found its chief impetus in the most universally
devastating war the world has ever known.

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

THE STOCK EXCHANGE IS A MONUMENT
OF
BUSINESS INTEGRITY
It is a popular belief with many people that the stock exchanges are highly
prejudicial to the public interest and to public safety; as if they actually
manufacture stocks, fix their price, and sell them to the public. It is also
believed by many persons—even by men with enough brains to buy and
sell securities—that whatever they lose on their transactions is gained by
the stock exchange or the broker through whom they trade; and that the
brokers on the floor of the exchange plan out each day’s campaign and
manipulate the stocks with utter disregard of the outside world.
Furthermore, it is commonly supposed by a certain class of uninformed
people that stock exchanges create panics and financial depressions; that
they are licensed evils, feeding and fattening upon the credulity of an
innocent public. Nothing could be farther from the truth; nothing could
disclose a more profound ignorance of existent facts than for one to adhere
to any or all of these fallacious beliefs. The stock exchange itself has no
more control over the price of securities than it has over the ocean tides. It
is merely an auction room where anyone may send in orders to sell stocks
and bonds, either at a certain asking price, or “at market” to the highest
bidder. On the other hand anyone may put in either a limited or “at market”
bid for whatever securities he wants, provided they are on the list admitted
for trading; and no securities are so admitted without being passed upon by
a committee of competent judges whose duty it is thoroughly to investigate
every company before admitting its securities to the board. The great value
of this service to both traders and investors is plainly evident. The people
who run the exchange have no other privileges, prerogatives or authority
than to buy and sell securities on their own account, or to act as buying and
selling agents for the public, and to execute their orders precisely in
accordance with given directions. The interests of the public are
safeguarded by every known precautionary device, and if a broker makes a
mistake he stands the loss, regardless of what the amount may be. In this
connection, those who have stood in the visitors’ gallery of the New York
Stock Exchange on a busy day have been induced to wonder how it is

possible for the brokers to avoid errors under such seemingly chaotic
conditions as exist there. To the onlooker it resembles a riotous mob scene
in a modern cinema, and one might easily mistake it for a place where a lot
of frantic men are trying to buy insurance on a sinking ship, instead of
dealing in gilt edge securities which are not immediately perishable. A
benevolent sweet-natured old lady who stood for a time looking down upon
this wild confusion was asked what she thought of it. “I think it’s all very
interesting,” she said. Then after some reflection she added: “But my
husband never told me that we are in a financial panic. And even so, why
should the men get so angry with one another?”
No matter what anyone may say or think to the contrary, there is no
business or profession on earth in which a higher degree of honor and
business integrity prevails than among the brokers on the floor of the New
York Stock Exchange; and there is no business or profession in which sharp
and unethical practices among its members are more quickly detected, or
more promptly and summarily dealt with. And by way of passing comment
it may be remarked that the going price of $150,000 for a membership on
the New York Stock Exchange would seem to imply that the brokerage
business is no less profitable than it is honorable. In its certificates of
membership the New York Stock Exchange declares itself to be “An
institution whose history dates back to 1792, and whose rules and
regulations have been formulated for the purpose of maintaining high
standards of honor among its members, and for promoting and inculcating
just and equitable principles of trade.” And it is required of every member
that in every particular he live up to these principles. It is a place where a
nod of the head or a lifted finger consummates transactions involving
millions of dollars. In ordinary business affairs a deal wherein only a few
dollars are concerned is signed, sealed, witnessed and sworn to before a
notary; but here contracts involving millions are ratified by a mere gesture,
and never questioned by either party.
Every buyer or seller of stocks is a free agent to do as he pleases, and if he
gets hoodwinked through the stock exchange it is generally because in
trying to outwit or undo somebody else he overreaches himself and falls
into his own snare. The only percentage against him is what he pays in
commissions and taxes on his trades; and the only chances against him are
his own blunders in judgment; these, indeed, are likely to prove a sufficient

handicap. Every corporation whose securities are listed on the stock
exchange is obliged to make a full and comprehensive report to the
exchange at least once a year, and these reports can be found in any
brokerage office; they are always open to public inspection, and no one
need buy any stock or bond without first satisfying himself regarding the
nature of the industry, capitalization, earnings, management and other
details. Moreover, if at any time a purchaser becomes dissatisfied with his
investment and wishes to get his money back or change into something else,
there is always a ready market for the stock. It may be more, or it may be
less, than he paid for it, but in either case it can be quickly converted into
cash.
The investor in stock market securities may equip himself, free of cost, with
full information concerning every listed security; what the company’s
earnings have been over a period of years, how much stock and how many
bonds are outstanding, the highest and lowest prices at which the stock has
ever sold, and all such matters in the fullest detail. He therefore enters “the
game,” as the stock market is oftentimes called, with his eyes open, and the
cards all faced up on the table. But if he deviates from sound principles and
resorts to dabbling in stocks that he knows nothing about, except from
hearsay among traders and market tipsters, and undertakes to guess the
maneuvers of cliques who are manipulating them, he has no one to blame
but himself for indulging in such an expensive folly.

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

and patiently to good resolutions, and not try to get rich too quickly. Both
look to be easy, but—

Reducing the whole problem to its simplest form, the stock exchange is a
well-organized and honestly conducted market-place where anyone may
sell or buy investment or speculative securities, at whatever price anybody
else is willing to pay or accept for them. There is no more mysticism about
the exchange itself than there is about a book auction room, or any other
auction room where articles of merchandise are offered at an upset price, or
auctioned off to the highest bidder. A man who buys stocks or bonds for
investment is not gambling with anybody that they will go up or down; he
buys them because he wants to invest his money and get interest or
dividends on it. If a stock bought at $100 a share, paying seven per cent.
annually in dividends, should increase in market value to $150 it is obvious
that the rate of interest on the total capital is correspondingly reduced, and
that whereas his original $10,000 brought a return of seven per cent., the
capital of $15,000 is earning a net return of only four and six tenths per
cent. Under such conditions it is oftentimes wise to sell out and reinvest the
money in other securities which bring a larger net return; or if stocks in
general are too high, put the money in the bank and wait for lower prices.
The $5000 gain in capital will surely more than cover interest on the
original $10,000 investment during the time one has to wait for good
buying opportunities.
This reminds me that some years ago, when Calumet & Hecla Mining stock
was selling at $850 a share, on which amount it netted only a small
dividend return, I asked a friend (who owned a large amount of the stock)
why he didn’t sell it and reinvest in other securities. My argument was that
the stock having already declined from $1000 a share, would probably go
much lower, considering that the earning capacity of the mine was in all
probability as great as it ever would be; therefore the chances were more in
favor of a decrease than an increase in earnings and dividends. To all of
which he readily assented, but in view of the fact that he had bought the
stock at $50 a share it was paying a very high rate of interest on his original
investment; and for sentimental reasons he preferred to keep it,—which he
did. Such instances are not at all uncommon; nor is it uncommon to hear
intelligent business men remark that they know they ought to sell certain
investment securities, because the market price has risen out of all
proportion to the income yield, but other good securities are all so high that
they really don’t know what to put their money in. The chances are
probably a hundred to one that if the money were put in the bank and

allowed to rest a while at three per cent. interest, it could within a few
months be reinvested in the same securities, or other equally good ones, at a
net gain of three to five years’ interest, or even more. This is not stock
gambling; it is merely business prudence.

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

supplying the stocks. It is quite clear that if the insiders pursued the same
tactics as the public they would soon be relegated to the ranks of the
outsiders.
It is a common saying, even among veteran traders, that such and such a
stock “is a good buy, but you must watch it closely.” To watch a stock after
buying it is about the most foolish thing one can do. To watch it go down is
certainly no pleasure, and if it goes up it doesn’t need watching. The time to
watch it is before buying. In order to limit one’s loss on a purchase it is a
simple matter to put in an “open stop loss” order somewhere under the cost
price; and no amount of diligent “watching” will prevent it from going
down. On the other hand, to insure one’s profit, if the price goes up, nothing
more is required than to put in a “G. T. C.” (good till cancelled), selling
order at whatever figure above the cost price the purchaser is willing to
accept as his profit.
There is probably no more popular fallacy among traders than the one
which presupposes that great “pools” and combinations formed to
manipulate certain stocks are either made up of officers and directors of the
corporations concerned, or else that such pools base their operations upon
valuable inside information from some head official. This may be true in
rare instances; but generally speaking the directors and officers of the
companies know nothing whatever of the pool operations in their stocks,
and when they do know they usually frown on such schemes. Anyone who
stops to consider knows that the market prices of the company’s securities
are of far less concern to the officials than the matter of conducting their
business operations at a profit. If the company’s earnings are good, it is
clear that this fact will soon enough manifest itself in the demand for the
securities, without any abortive or clandestine efforts; and if the earnings
are poor, it would obviously be beneath the dignity of the officials to
deceive the public through pool operations or pool affiliations. A more
simple plan would be to utilize their “inside information” by quietly selling
the stock.
I recall a particular instance, a few years ago, when there were some
tremendous pool operations in the common stock of one of America’s
largest industrial corporations, and after the stock had been bid up ten or a
dozen points it was reported that a “managing director” of the company had
assured one of the pool members that it had been tacitly agreed among the

directors to declare a fifty per cent. stock dividend at the next board
meeting. The public instantly took the bit in its teeth, and inside of a week
the stock advanced fifteen points more, which doubtless afforded the clique
an auspicious occasion for unloading its holdings, bought at much lower
figures. About that time I happened to be in New York, and while lunching
one day with the chairman of the board of directors at his club he told me
that the matter of a stock dividend had not even been discussed among the
directors, and that in his opinion there was no likelihood of any change in
the dividend policy for at least a year,—which proved to be true.

PROBLEMS DEFYING PRESENT SOLUTION
ARE
BETTER DEFERRED TO THE FUTURE
A matter of present and future importance in connection with many
investment and speculative stocks, involving as it does questions on which
there is a wide diversity of opinion, is the modern practice of increasing the
outstanding shares of corporations by splitting them up into fractions, or by
declaring liberal stock dividends. Many of the large companies have
recently doubled and quadrupled their shares, and some have issued as high
as nine new shares for one, on somewhat the same principle as the
Government will issue ten one dollar notes in exchange for a ten dollar bill.
And in several instances the fractional shares have been split a second, and
even a third time. In past years when there were only a few listed securities
it was possible for any well informed person in financial circles to tell the
par value and the approximate book value of all the leading stocks, but the
good old-fashioned methods are no longer in vogue; there are now 1,045
stocks listed on the New York Stock Exchange alone, representing almost
every imaginable industry, from steam locomotives to lunch counters, and
under the new capital readjustment process it takes a professional
statistician to keep up with the changes and determine what stocks are
actually worth. But whatever their value may be, it is at least certain that
there is not enough money in the world to cash them all in at anywhere near
their present market price. Nowadays it is not unusual for industrial
companies to have from five to ten million or more shares outstanding. The
lately devised and much over-worked practice of splitting stocks up into
small fractions, avowedly for the convenience of traders, savors strongly of
the old worn-out custom of “baiting” the public with low-priced issues,
ranging from $1 a share upward. As long as we are riding on the crest of the
wave of prosperity there appears to be no imminent danger in such
inflation, but when business slackens, as it always has periodically in the
past—— However, the optimists contend that these problems are too far in
the future to worry about. Furthermore it is not the design of this article to
criticise abuses, or to prognosticate future difficulties that seem likely to
grow out of them. It is true that some of the companies, notwithstanding the

tremendous increase in their capital structures, have not weakened their
resources by increasing their cash disbursements. In 1921 the stock of the
Standard Oil Company of New Jersey was paying $5 a year in dividends
and selling at $124.50 per share. In 1922 it was boosted up to $250.50 a
share on the report that shareholders were to receive four new shares for
one. After this split-up was accomplished and the authorized common stock
increased to 25,000,000 shares,—not dollars, but shares!—more than
20,000,000 of which have been issued, in addition to $200,000,000 of
preferred stock, the same conservative dividend policy was continued, and
the new stock received, and still receives, only one dollar a share annually
in dividends. The market price of the new stock went down to a fraction
below $31, whence it afterwards recovered to about $46, at which figure it
pays a trifle over 2%, or about one half the net return on U. S. Government
bonds; and the only visible change in the stockholder’s position is that if he
wishes to sell his stock it costs about five times what it did before; in other
words, to buy and sell the equivalent of one hundred shares of the old stock
it now costs $154 in commission and tax—more than eighteen months’
income on a hundred shares of the present stock. Possibly there are
mathematicians who can figure out some sort of compensating advantage to
the stockholder, but I never could.

To sum up the whole situation in a word, those who would make money
speculating in the stock market should first understand that it requires as
much caution and business acumen as any other money-making enterprise,
plus some knowledge of the psychological handicaps; also plus the rare
faculty of maintaining a complete mastery over one’s impulses, emotions
and ambitions under the most heroic tests of human endurance. All
speculations, and even the most conservative investments, have some slight
element of risk; all lines of business are more or less a gamble; marriage is
a gamble; political preferment is a gamble; in fact nearly everything in life,
including our very existence, is an uncertainty; yet people are not thereby
discouraged from entering into any and all of these ventures. Those who
look only for certainties have far to search and little to find in this world.

Transcriber’s Notes:
New original cover art included with this eBook is granted to the public domain.
The Table of Contents was created by the transcriber and placed in the public domain.
The one footnote has been moved to the end of its chapter.
Illustrations have been moved to paragraph breaks near related content, except for the
frontispiece.
Variations in spelling and hyphenation were retained as they appear in the original
publication, except that obvious typographical errors have been corrected.

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