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+*** START OF THE PROJECT GUTENBERG EBOOK 75570 ***
+
+
+
+
+
+  Transcriber’s Note
+  Italic text displayed as: _italic_
+
+
+
+
+  PSYCHOLOGY
+  OF THE
+  STOCK MARKET
+
+  By G. C. Selden
+
+  Author of “Trade Cycles,” “What Makes the Market?”
+  Etc.
+
+  TICKER PUBLISHING COMPANY
+  2 RECTOR STREET
+  NEW YORK
+
+
+
+
+PREFACE
+
+
+This book is based upon the belief that the movements of prices on the
+exchanges are dependent to a very large degree on the mental attitude
+of the investing and trading public. It is the result of years of
+study and experience as fellow at Columbia University, news writer,
+statistician, on the editorial staff of THE MAGAZINE OF WALL STREET,
+etc.
+
+The book is intended chiefly as a practical help to that considerable
+part of the community which is interested, directly or indirectly, in
+the markets; but it is hoped that it may also have some scientific
+value as a preliminary discussion in a new field, where opportunities
+for further research seem almost unlimited.
+
+  G. C. SELDEN.
+
+New York, May 28, 1912.
+
+
+
+
+  Copyright, 1912
+  Ticker Publishing Company
+
+
+
+
+CONTENTS.
+
+
+     I. The Speculative Cycle                                          9
+
+    II. Inverted Reasoning and Its Consequences                       27
+
+   III. “They”                                                        39
+
+    IV. Confusing the Present with the Future—Discounting             55
+
+     V. Confusing the Personal with the General                       71
+
+    VI. The Panic and the Boom                                        87
+
+   VII. The Psychology of Scale Orders                               101
+
+  VIII. The Mental Attitude of the Individual                        109
+
+
+
+
+I—The Speculative Cycle
+
+
+Most experienced professional traders in the stock market will
+readily admit that the minor fluctuations, amounting to perhaps five
+or ten dollars a share in the active speculative issues, are chiefly
+psychological. They result from varying attitudes of the public mind,
+or, more strictly, from the mental attitudes of those persons who are
+interested in the market at the time.
+
+Such fluctuations may be, and often are, based on “fundamental”
+conditions—that is, on real changes in the dividend prospects of
+the stocks affected or on variations in the earning power of the
+corporations represented—and again they may not. The broad movements of
+the market, covering periods of months or even years, are always the
+result of general financial conditions; but the smaller intermediate
+fluctuations represent changes in the state of the public mind, which
+may or may not coincide with alterations in basic factors.
+
+To bring out clearly the degree to which psychology enters into the
+stock market problem from day to day, it is only necessary to reproduce
+a conversation between professional traders such as may be heard almost
+any day in New street or in the neighboring cafés.
+
+“Well, what do you know?” says one trader to the other.
+
+“Just covered my Steel,” is the reply. “Too much company. Everybody
+seems to be short.”
+
+“Everybody I’ve seen thinks just as you do. Each one has covered
+because he thinks everybody else is short—still the market doesn’t
+rally much. I don’t believe there’s much short interest left, and if
+that’s the case we shall get another break.”
+
+“Yes, that’s what they all say—and they’ve all sold short again
+because they think everybody else has covered. I believe there’s just
+as much short interest now as there was before.”
+
+It is evident that this series of inversions might be continued
+indefinitely. These alert mental acrobats are doing a succession of
+flip-flops, each one of which leads up logically to the next, without
+ever arriving at a final stopping-place.
+
+The main point of their argument is that the state of mind of a man
+short of the market is radically different from the state of mind of
+one who is long. Their whole study, in such a conversation, is the
+mental attitude of those interested in the market. If a majority of the
+volatile class of in-and-out traders are long, many of them will hasten
+to sell on any sign of weakness and a decline will result. If the
+majority are short, they will buy on any development of strength and an
+advance may be expected.
+
+The psychological aspects of speculation may be considered from
+two points of view, equally important. One question is, What effect
+do varying mental attitudes of the public have upon the course of
+prices? How is the character of the market influenced by psychological
+conditions?
+
+A second consideration is, How does the mental attitude of the
+individual trader affect his chances of success? To what extent, and
+how, can he overcome the obstacles placed in his pathway by his own
+hopes and fears, his timidities and his obstinacies?
+
+These two points of view are so closely involved and intermingled
+that it is almost impossible to consider either one alone. It will be
+necessary to take up first the subject of speculative psychology as a
+whole, and later to attempt to draw conclusions both as to its effects
+upon the market and its influence upon the fortunes of the individual
+trader.
+
+As a convenient starting point it may be well to trace briefly the
+history of the typical speculative cycle, which runs its course
+over and over, year after year, with infinite slight variations but
+with substantial similarity, on every stock exchange and in every
+speculative market of the world—and presumably will continue to do so
+as long as prices are fixed by the competition of buyers and sellers,
+and as long as human beings seek a profit and fear a loss.[1]
+
+Beginning with a condition of dullness and inactivity, with small
+fluctuations and very slight public interest, prices begin to rise, at
+first almost imperceptibly. No special reason appears for the advance,
+and it is generally thought to be merely temporary, due to small
+professional operations. There is, of course, some short interest in
+the market, mostly, at this time, of the character sometimes called
+a “sleeping” short interest. An active speculative stock is never
+entirely free from shorts.
+
+As there is so little public speculation at this period in the cycle,
+there are but few who are willing to sell out on so small an advance,
+hence prices are not met by any large volume of profit-taking. The
+smaller professionals take the short side for a turn, with the idea
+that trifling fluctuations are the best that can be hoped for at the
+moment and must be taken advantage of if any profits are to be secured.
+This class of selling brings prices back almost to their former dead
+level.
+
+Soon another unostentatious upward movement begins, carrying prices a
+trifle higher than the first. A few shrewd traders take the long side,
+but the public is still unmoved and the sleeping short interest—most of
+it originally put out at much higher figures—still refuses to waken.
+
+Gradually prices harden further and finally advance somewhat sharply.
+A few of the more timid shorts cover, perhaps to save a part of their
+profits or to prevent their trades from running into a loss. The fact
+that a bull turn is coming now penetrates through another layer of
+intellectual density and another wave of traders take the long side.
+The public notes the advance and begins to think some further upturn
+is possible, but that there will be plenty of opportunities to buy on
+substantial reactions.
+
+Strangely enough, these reactions, except of the most trifling
+character, do not appear. Waiting buyers do not get a satisfactory
+chance to take hold. Prices begin to move up faster. There is a halt
+from time to time, but when a real reaction finally comes the market
+looks “too weak to buy,” and when it starts up again it often does so
+with a sudden leap that leaves would-be purchasers far in the rear.
+
+At length the more stubborn bears become alarmed and begin to cover
+in large volume. The market “boils,” and to the short who is watching
+the tape, seems likely to shoot through the ceiling at almost any
+moment. However firm may be his bearish convictions, his nervous system
+eventually gives out under this continual pounding, and he covers
+everything “at the market” with a sigh of relief that his losses are no
+greater.
+
+About this time the outside public begins to reach the conclusion that
+the market is “too strong to react much,” and that the only thing to
+do is to “buy ’em anywhere.” From this source comes another wave of
+buying, which soon carries prices to new high levels, and purchasers
+congratulate themselves on their quick and easy profits.
+
+For every buyer there must be a seller—or, more accurately, for every
+one hundred shares bought one hundred shares must be sold, as the
+actual number of _persons_ buying at this stage is likely to be much
+greater than the number of _persons_ selling. Early in the advance the
+supply of stocks is small and comes from scattered sources, but as
+prices rise, more and more holders become satisfied with their profits
+and willing to sell. The bears, also, begin to fight the advance by
+selling short on every quick rise. A stubborn professional bear will
+often be forced to cover again and again, with a small loss each time,
+before he finally locates the top and secures a liberal profit on the
+ensuing decline.
+
+Those selling at this stage are not, as a rule, the largest holders.
+The largest holders are usually those whose judgment is sound enough,
+or whose connections are good enough, so that they have made a good
+deal of money; and neither a sound judgment nor the best advisers are
+likely to favor selling so early in the advance, when much larger
+profits can be secured by simply holding on.
+
+The height to which prices can now be carried depends on the underlying
+conditions. If money is easy and general business prosperous a
+prolonged bull movement may result, while strained banking resources
+or depressed trade will set a definite limit to the possible advance.
+If conditions are bearish, the driving of the biggest shorts to cover
+will practically end the rise; but in a genuine bull market the advance
+will continue until checked by sales of stocks held for investment,
+which come upon the market only when prices are believed to be unduly
+high.
+
+In a sense, the market is always a contest between investors and
+speculators. The real investor, looking chiefly to interest return,
+but by no means unwilling to make a profit by buying low and selling
+high, is ready, perhaps, to buy his favorite stock at a price which
+will yield him six per cent. on his investment, or to sell at a price
+yielding only four per cent. The speculator cares nothing about
+interest return. He wants to buy before prices go up and to sell short
+before they go down. He would as soon buy at the top of a big rise at
+any other time, provided prices are going still higher.
+
+As the market advances, therefore, one investor after another sees
+his limit reached and his stock sold. Thus the volume of stocks to
+be carried or tossed from hand to hand by bullish speculators is
+constantly rolling up like a snowball. On the ordinary intermediate
+fluctuations, covering five to twenty dollars a share, these sales by
+investors are small compared with the speculative business. In one
+hundred shares of a stock selling at 150, the investor has $15,000; but
+with this sum the speculator can easily carry ten times that number of
+shares.
+
+The reason why sales by investors are so effective is not because of
+the actual amount of stock thrown on the market, but because this stock
+is a permanent load, which will not be got rid of again until prices
+have suffered a severe decline. What the speculator sells he or some
+other trader may buy back tomorrow.
+
+The time comes when everybody seems to be buying. Prices become
+confused. One stock leaps upward in a way to strike terror to the heart
+of the last surviving short. Another appears almost equally strong, but
+slips back unobtrusively when nobody is looking, like the frog jumping
+out of the well in the arithmetic of our boyhood. Still another churns
+violently in one place, like a side-wheeler stuck on a sand-bar.
+
+Then the market gives a sudden lurch downward, as though in danger
+of spilling out its unwieldy contents. This is hailed as a “healthy
+reaction,” though it is a mystery whom it can be healthy for, unless it
+is the shorts. Prices recover again, with everybody happy except a few
+disgruntled bears, who are rightly regarded with contemptuous amusement.
+
+Curiously, however, there seems to be stock enough for all comers, and
+the few cranks who have time to bother with such things notice that
+the general average of prices is now rising very slowly, if at all. The
+largest speculative holders of stocks, finding a market big enough to
+absorb their sales, are letting go. And there are always stocks enough
+to go around. Our big capitalists are seldom entirely out of stocks.
+They merely have more stocks when prices are low and fewer when prices
+are high. Moreover, long before there is any danger of the supply
+running out, plenty of new issues are created.
+
+When there is a general public interest in the stock market, an immense
+amount of realizing will often be absorbed within three or four days or
+a week, after which the deluge; but if speculation is narrow, prices
+may remain around top figures for weeks or months, while big holdings
+are fed out, a few hundred shares here and a few hundred there, and
+even then a balance may be left to be thrown over on the ensuing
+decline at whatever prices can be obtained. Great speculative leaders
+are far from infallible. They have often sold out too soon and later
+have seen the market run away to unexpected heights, or have held on
+too long and have suffered severe losses before they could get out.
+
+In this selling the bull leaders get a good deal of undesired help from
+the bears. However wary the bulls may be in concealing their sales,
+their machinations will be discovered by watchful professionals and
+shrewd chart students, and a considerable sprinkling of short sales
+will be put out within a few points of the top. This is one of the
+reasons why the long swings in active speculative stocks are smaller
+in proportion to price than in inactive specialties of a similar
+character—contrary to the generally received impression. It is rare
+that any considerable short interest exists in the inactive stocks.
+
+Once the top-heavy load is overturned, the decline is usually more
+rapid than the previous advance. The floating supply, now greatly
+increased, is tossed about from one speculator to another at lower
+and lower prices. From time to time stocks become temporarily lodged
+in stubborn hands, so that part of the shorts take fright and cover,
+causing a sharp upturn; but so long as the load of stocks is still on
+the market the general course of prices must be downward.
+
+Until investors or big speculative capitalists again come into the
+market, the load of stocks to be carried by ordinary speculative bulls
+increases almost continually. There is no lessening of the floating
+supply of stock certificates in the Street, and there is a gradual
+increase in the short interest; and of course the bulls have to carry
+these short sales as well as the actual certificates, since for every
+seller there must be a buyer, whether the sale be made by a short or
+a long. Shorts cover again and again on the sharp breaks, but in most
+cases they put out their lines again, either higher or lower, as
+opportunity offers. On the average, the short interest is largest at
+low prices, though there are likely to be periods during the decline
+when it will be larger than at the final bottom, where buying by shorts
+often helps to avert panicky conditions.
+
+The length of this decline, like the extent of the preceding advance,
+depends on fundamental conditions; for both investors and speculative
+capitalists will come into the market sooner if all conditions are
+favorable than they will in a stringent money market or when the future
+prospects of business are unsatisfactory. As a rule, buyers do not
+appear in force until a “bargain day” appears. This is when, in its
+downward course, the heavy load of stocks strikes an area honeycombed
+with stop loss orders. Floor traders seize the opportunity to put out
+short lines and a general collapse results.
+
+Here are plenty of stocks to be had cheap, and shrewd operators—large
+and small, but mostly large or on the way to become so—are busy
+picking them up. The fixed limits of many investors are also reached
+by the sharp break, and their purchases disappear, to be seen in the
+Street no more until the next bull turn.
+
+Many shorts cover on such a break, but not all. The sequel to the
+“bargain day” is a big short interest which has overstayed its market,
+and a quick rally follows; but when the more urgent shorts get relief,
+prices sag again and fall into that condition of lethargy from which
+this consideration of the speculative cycle started.
+
+The movements described are substantially uniform, whether the cycle be
+one covering a week, a month, or a year. The big cycle includes many
+intermediate movements, and these movements in turn contain smaller
+swings. Investors do not participate to any extent in the small swings,
+but otherwise the forces involved in a three-point turn up and down are
+substantially the same as those which appear in a thirty-point cycle,
+though not so easy to identify.
+
+The fact will at once be recognized that the above description is, in
+essence, a story of human hopes and fears; of a mental attitude, on
+the part of those interested, resulting from their own position in the
+market, rather than from any deliberate judgment of conditions; of an
+unwarranted projection by the public imagination of a perceived present
+into an unknown though not wholly unknowable future.
+
+Laying aside for the present the influence of fundamental conditions on
+prices, it is our task to trace out both the causes and the effects of
+these psychological elements in speculation.
+
+
+FOOTNOTES:
+
+[1] The writer discussed this subject rather fully in the _Quarterly
+Journal of Economics_, Vol. XVI, No. 2. The article will also be found
+extensively summarized and quoted in Vol. VII of “Modern Business,”
+edited by Joseph French Johnson, Dean of New York University School of
+Commerce.
+
+
+
+
+II—Inverted Reasoning and its Consequences
+
+
+It is hard for the average man to oppose what appears to be the general
+drift of public opinion. In the stock market this is perhaps harder
+than elsewhere; for we all realize that the prices of stocks must, in
+the long run, be controlled by public opinion. The point we fail to
+remember is that public opinion in a speculative market is measured in
+dollars, not in population. One man controlling one million dollars has
+double the weight of five hundred men with one thousand dollars each.
+Dollars are the horse-power of the markets—the mere number of men does
+not signify.
+
+This is why the great body of opinion appears to be bullish at the top
+and bearish at the bottom. The multitude of small traders must be, as a
+plain necessity, long when prices are at the top, and short or out of
+the market at the bottom. The very fact that they _are_ long at the top
+shows that they have been supplied with stocks from some source.
+
+Again, the man with one million dollars is a silent individual. The
+time when it was necessary for him to talk is past—his money now does
+the talking. But the one thousand men who have one thousand dollars
+each are conversational, fluent, verbose to the last degree; and among
+these smaller traders are the writers—the newspaper and news bureau
+men, and the manufacturers of gossip for brokerage houses.
+
+It will be observed that the above course of reasoning leads us to the
+conclusion that most of those who write and talk about the market are
+more likely to be wrong than right, at least so far as speculative
+fluctuations are concerned. This is not complimentary to the “moulders
+of public opinion,” but most seasoned newspaper readers will agree
+that it is true. The press reflects, in a general way, the thoughts of
+the multitude, and in the stock market the multitude is necessarily, as
+a logical deduction from the facts of the case, likely to be bullish at
+high prices and bearish at low.
+
+It has often been remarked that the average man is an optimist
+regarding his own enterprises and a pessimist regarding those of
+others. Certainly this is true of the professional trader in stocks.
+As a result of the reasoning outlined above, he comes habitually to
+expect that nearly every one else will be wrong, but is, as a rule,
+confident that his own analysis of the situation will prove correct. He
+values the opinions of a few persons whom he believes to be generally
+successful; but aside from these few, the greater the number of the
+bullish opinions he hears, the more doubtful he becomes about the
+wisdom of following the bull side.
+
+This apparent contrariness of the market, although easily understood
+when its causes are analyzed, breeds in professional traders a peculiar
+sort of skepticism—leads them always to distrust the obvious and to
+apply a kind of inverted reasoning to almost all stock market problems.
+Often, in the minds of traders who are not naturally logical, this
+inverted reasoning assumes the most erratic and grotesque forms, and it
+accounts for many apparently absurd fluctuations in prices which are
+commonly charged to manipulation.
+
+For example, a trader starts with this assumption: The market has had
+a good advance; all the small traders are bullish; somebody must have
+sold them the stock which they are carrying; hence the big capitalists
+are probably sold out or short and ready for a reaction or perhaps for
+a bear market. Then if a strong item of bullish news comes out—one,
+let us say, that really makes an important change in the situation—he
+says, “Ah, so this is what they have been bulling the market on! It has
+been discounted by the previous rise.” Or he may say, “They are putting
+out this bull news to sell stocks on.” He proceeds to sell out any long
+stocks he may have or perhaps to sell short.
+
+His reasoning may be correct or it may not; but at any rate his selling
+and that of others who reason in a similar way, is likely to produce
+at least a temporary decline on the announcement of the good news.
+This decline looks absurd to the outsider and he falls back on the old
+explanation, “All manipulation.”
+
+The same principle is often carried further. You will find professional
+traders reasoning that favorable figures on the steel industry, for
+example, have been concocted to enable insiders to sell their Steel; or
+that gloomy reports are put in circulation to facilitate accumulation.
+Hence they may act in direct opposition to the news and carry the
+market with them, for the time at least.
+
+The less the trader knows about the fundamentals of the financial
+situation the more likely he is to be led astray in conclusions of this
+character. If he has confidence in the general strength of conditions
+he may be ready to accept as genuine and natural, a piece of news which
+he would otherwise receive with cynical skepticism and use as a basis
+for short sales. If he knows that fundamental conditions are unsound,
+he will not be so likely to interpret bad news as issued to assist in
+accumulation of stocks.
+
+The same reasoning is applied to large purchases through brokers known
+to be associated with capitalists. In fact, in this case we often hear
+a double inversion, as it were. Such buying may impress the observer in
+three ways:
+
+1. The “rank outsider” takes it at face value, as bullish.
+
+2. A more experienced trader may say, “If they really wished to get
+the stocks they would not buy through their own brokers, but would
+endeavor to conceal their buying by scattering it among other houses.”
+
+3. A still more suspicious professional may turn another mental
+somersault and say, “They are buying through their own brokers so as to
+throw us off the scent and make us think someone else is using their
+brokers as a blind.” By this double somersault such a trader arrives at
+the same conclusion as the outsider.
+
+The reasoning of traders becomes even more complicated when large
+buying or selling is done openly by a big professional who is known
+to trade in-and-out for small profits. If he buys 50,000 shares,
+other traders are quite willing to sell to him and their opinion of
+the market is little influenced, simply because they know he may sell
+50,000 the next day or even the next hour. For this reason great
+capitalists sometimes buy or sell through such big professional
+traders in order to execute their orders easily and without arousing
+suspicion. Hence the play of subtle intellects around big trading of
+this kind often becomes very elaborate.
+
+It is to be noticed that this inverted reasoning is useful chiefly at
+the top or bottom of a movement, when distribution or accumulation is
+taking place on a large scale. A market which repeatedly refuses to
+respond to good news after a considerable advance is likely to be “full
+of stocks.” Likewise a market which will not go down on bad news is
+usually “bare of stocks.”
+
+Between the extremes will be found long stretches in which capitalists
+have very little cause to conceal their position. Having accumulated
+their lines as low as possible, they are then willing to be known
+as the leaders of the upward movement and have every reason to be
+perfectly open in their buying. This condition continues until they are
+ready to sell. Likewise, having sold as much as they desire, they have
+no reason to conceal their position further, even though a subsequent
+decline may run for months or a year.
+
+It is during a long upward movement that the “lamb” makes money,
+because he accepts facts as facts, while the professional trader is
+often found fighting the advance and losing heavily because of his
+over-development of cynicism and suspicion.
+
+The successful trader eventually learns when to invert his natural
+mental processes and when to leave them in their usual position.
+Often he develops a sort of instinct which could scarcely be reduced
+to cold print. But in the hands of the tyro this form of reasoning
+is exceedingly dangerous, because it permits of putting an alternate
+construction on any event. Bull news either (1) is significant of a
+rising trend of prices, or (2) indicates that “they” are trying to make
+a market to sell on. Bad news may indicate either a genuinely bearish
+situation or a desire to accumulate stocks at low prices.
+
+The inexperienced operator is therefore left very much at sea. He
+is playing with the professional’s edged tools and is likely to cut
+himself. Of what use is it for him to try to apply his reason to stock
+market conditions when every event may be doubly interpreted?
+
+Indeed, it is doubtful if the professional’s distrust of the obvious
+is of much benefit to him in the long run. Most of us have met those
+deplorable mental wrecks, often found among the “chairwarmers” in
+brokers’ offices, whose thinking machinery seems to have become
+permanently demoralized as a result of continued acrobatics. They are
+always seeking an “ulterior motive” in everything. They credit—or
+debit—Morgan and Rockefeller with the smallest and meanest trickery and
+ascribe to them the most artful duplicity in matters which those “high
+financiers” wouldn’t stoop to notice. The continual reversal of the
+mental engine sometimes deranges its mechanism.
+
+Probably no better general rule can be laid down than the brief one,
+“Stick to common sense.” Maintain a balanced, receptive mind and avoid
+abstruse deductions. A few further suggestions may, however, be offered:
+
+If you already have a position in the market, do not attempt to bolster
+up your failing faith by resorting to intellectual subtleties in the
+interpretation of obvious facts. If you are long or short of the
+market, you are not an unprejudiced judge, and you will be greatly
+tempted to put such an interpretation upon current events as will
+coincide with your preconceived opinion. It is hardly too much to say
+that this is the greatest obstacle to success. The least you can do is
+to avoid inverted reasoning in support of your own position.
+
+After a prolonged advance, do not call inverted reasoning to your aid
+in order to prove that prices are going still higher; likewise after a
+big break do not let your bearish deductions become too complicated. Be
+suspicious of bull news at high prices, and of bear news at low prices.
+
+Bear in mind that an item of news usually causes but _one_ considerable
+movement of prices. If the movement takes place before the news comes
+out, as a result of rumors and expectations, then it is not likely
+to be repeated after the announcement is made; but if the movement
+of prices has not preceded, then the news contributes to the general
+strength or weakness of the situation and a movement of prices may
+follow.
+
+
+
+
+III—“They”
+
+
+If a man entirely unfamiliar with the stock market should spend several
+days around the Exchange listening to the conversation of all sorts of
+traders and investors, in order to pick up information about the causes
+of price movements, the probability is that the most pressing question
+in his mind at the end of that time would be “Who are ‘They?’”
+
+Everywhere he went he would hear about Them. In the customers’ rooms
+of the fractional lot houses he would find young men trading in
+ten shares and arguing learnedly as to what They were to do next.
+Tape readers—experts and tyros alike—would tell him that They were
+accumulating Steel, or distributing Reading. Floor traders and members
+of the Exchange would whisper that they were told They were going to
+put the market up, or down, as the case might be. Even sedate investors
+might inform him that, although the situation was bearish, undoubtedly
+They would have to put the market temporarily higher in order to unload
+Their stocks.
+
+This “They” theory of the market is quite as prevalent among successful
+traders as among beginners—probably more so. There may be room for
+argument as to why this is so, but as to the fact itself there is no
+doubt. Whether They are a myth or a definite reality, many persons are
+making money by studying the market from this point of view.
+
+If you were to go around Wall street and ask various classes of traders
+who They are, you would get nearly as many different answers as the
+number of people interviewed. One would say, “The house of Morgan”;
+another, “Standard Oil and associated interests”—which is pretty broad,
+when you stop to think of it; another, “The big banking interests”;
+still another, “Professional traders on the floor”; a fifth, “Pools
+in the various favorite stocks, which act more or less in concert”;
+a sixth might say, “Shrewd and successful speculators, whoever and
+wherever they are”; while to the seventh, They may typify merely active
+traders as a whole, whom he conceives to make prices by falling over
+each other to buy or to sell.
+
+Indeed, one writer of no small attainments as a student of market
+conditions believes that the entire phenomena of the New York stock
+market are under the control of some one individual, who is presumably,
+in some way or other, the representative of great associated interests.
+
+It seems obviously impossible to trace to its source, tag and identify
+any sort of permanent controlling power. The stock markets of the
+world move pretty much together in the broad cyclical swings, so that
+such a power would have to consist of a world-wide association of
+great financial interests, controlling all of the principal security
+markets. The average observer will find it difficult to masticate and
+swallow this proposition.
+
+The effort to reduce the science of speculation and investment to
+an impossible definiteness or an ideal simplicity is, I believe,
+responsible for many failures. A. S. Hardy, the diplomat, who was
+formerly a professor of mathematics and wrote books on quaternions,
+differential calculus, etc., once remarked that the study of
+mathematics is very poor mental discipline, because it does not
+cultivate the judgment. Given fixed and certain premises, your
+mathematician will follow them out to a correct conclusion; but in
+practical affairs the whole difficulty lies in selecting your premises.
+
+So the market student of a mathematical turn of mind is always seeking
+a rule or a set of rules—a “sure thing” as traders put it. He would not
+seek such rules for succeeding in the grocery business or the lumber
+business; he would, on the contrary, analyze each situation as it arose
+and act accordingly. The stock market presents itself to my mind as a
+purely practical proposition. Scientific methods may be applied to any
+line of business, from stocks to chickens, but this is a very different
+thing from trying to reduce the fluctuations of the stock market to a
+basis of mathematical certainty.
+
+In discussing the identity of Them, therefore, we must be content to
+take obvious facts as we find them without attempting to spin fine
+theories.
+
+There are three senses in which this idea of “Them” has some foundation
+in fact. First, “They” may be and often are roughly conceived of as
+the floor traders on the Stock Exchange who are directly concerned
+in making quotations, pools formed to control certain stocks, or
+individual manipulators.
+
+Floor traders exercise an important influence on the immediate movement
+of prices. Suppose, for example, they observe that offerings of Reading
+are very light. Declines do not induce liquidation and only small
+offerings of stock are met on advances. They begin to feel that, in
+the absence of unexpected cataclysms, Reading will not decline much.
+The natural thing for them to do is to begin buying Reading on all soft
+spots. Whenever a few hundred shares are offered at a bargain, floor
+traders snap up the stock.
+
+As a result of this “bailing out” of the market, Reading becomes
+scarcer still, and traders, being now long, become more bullish. They
+begin to “mark up prices.” This is not difficult, since they are, for
+the time being, practically unanimous in a desire for higher prices.
+Suppose the market is 161⅛ bid, offered at 161¼. They find that only
+100 shares are for sale at ¼, and 200 are offered at ⅜. As to how
+much stock may be awaiting bids at ½ or higher, they cannot be sure,
+but can generally make a shrewd guess. One or more traders take these
+offerings, of perhaps 500 shares, and make the market ½ bid. The other
+floor traders are not willing to sell at this trifling profit, and a
+wait ensues to see whether any outside orders are attracted by the
+movement of the price, and if so, whether they are buying or selling
+orders. If a few buying orders come in, they are filled, perhaps at ⅝
+and ¾. If selling appears, the floor traders retire in good order, take
+the offerings at lower prices, and try it again the next day or perhaps
+the next hour. Eventually, by seizing every favorable opportunity, they
+engineer an upward move of perhaps two or three points without taking
+any more stock than they want.
+
+If such a movement attracts a following, it may easily run ten points
+without any real change in the prospects of the Reading road—though
+the prospects of the road may have had something to do with making the
+stock scarce before the movement started. On the other hand, if large
+offerings of stock are encountered at the advance, the boomlet is
+ignominiously squelched and the floor traders make trifling profits or
+losses.
+
+Pools are not so common as most outsiders believe. There are many
+difficulties and complications to be overcome before a pool can be
+formed, held together, and operated successfully, as we had ample
+opportunity to observe not long ago in the case of Hocking Coal &
+Iron. But if a definite pool exists in any stock, its operations are
+practically a reproduction, on a larger scale and under a binding
+agreement, of the methods employed by floor traders over a smaller
+range and in a mere loose and voluntary association resulting from
+their common interests. And the individual manipulator is only a pool
+consisting of one person.
+
+Second, many conceive “Them” as an association of powerful capitalists
+who are running a campaign in all the important speculative stocks
+simultaneously. It is safe to say that no such permanent and united
+association exists, though it would be hard to prove such a statement.
+But there have been many times when a single great interest was
+practically in control of the market for a time, other interests being
+content to look on, or to participate in a small way, or to await a
+favorable chance to take the other side.
+
+The “Standard Oil crowd,” the “Gates crowd,” the “Morgan interests,”
+and Harriman and his associates, will at once occur to the reader
+as having been, at various times in the past, in sole control of
+an important general campaign. At present the great interests are
+generally classified into three divisions—Morgan, Standard Oil, and
+Kuhn-Loeb.
+
+A definite agreement among such interests as these would be impossible,
+except for limited and temporary purposes. This is perhaps not so much
+because these high financiers couldn’t trust each other, as it is
+because each so-called interest consists of a loosely bound aggregation
+of followers of all sorts and varieties, having only one thing in
+common—control of capital. Such an “interest” is not an army, where
+the traitor can be court-martialed and shot; it is a mob, and has to
+be led, not driven. True, the known traitor might be put to death,
+financially speaking, but in stock market operations the traitor
+cannot, as a rule, be known. Unless his operations are of unusual size,
+he can successfully cover his tracks.
+
+From this second point of view, “They” are not always active in the
+market. Great campaigns can only be undertaken with safety in periods
+when the future is to a certain extent assured. When the future is in
+doubt, when various confusing elements enter into the financial and
+political situation, leading financiers may be quite content to confine
+their stock market operations to individual deals, and to postpone the
+inauguration of a broad campaign until a more solid foundation exists
+for it.
+
+Third, “They” may be conceived simply as speculators and investors in
+general—all that miscellaneous and heterogeneous troop of persons,
+scattered over the whole world, each of whom contributes his mite to
+the fluctuations of prices on the Stock Exchange. In this sense there
+is no doubt about the existence of Them, and They are the court of
+last resort in the establishment of prices. To put it another way,
+these are the “They” who are the ultimate consumers of securities. It
+is to Them that everybody else is planning, sooner or later, directly
+or indirectly, to sell his stocks.
+
+You can lead the horse to water, but you can’t make him drink. You or
+I or any other great millionaire can put up prices, but you can’t make
+Them buy the stocks from you, unless They have the purchasing power
+and the purchasing disposition. So there is no doubt that here, at any
+rate, we have a conception of Them which will stand analysis without
+exploding.
+
+In cases where a general campaign is being conducted, the “They” theory
+of values is of considerable help in the accumulation or distribution
+of stocks. In fact, in the late stages of a bull campaign the argument
+most frequently heard is likely to be something as follows: “Yes,
+prices are high and I can’t see that future prospects are especially
+bullish—but stocks are in strong hands and They will have to put them
+higher to make a market to sell on.” Some investors make a point of
+dumping over all their stocks as soon as this veteran war-horse of the
+news brigade is groomed and trotted out. Likewise, after a prolonged
+bear campaign, we hear that somebody is “in trouble” and that They
+are going to break the market until certain concentrated holdings are
+brought out.
+
+All this is very likely to be nothing but dust thrown in the eyes of
+that most gullible of all created beings—the haphazard speculator. When
+prices are so high in comparison with conditions that no sound reason
+can be advanced why they should go higher, a certain number of people
+are still induced to buy because of what They are going to do. Or,
+at least, if the public can no longer be induced to buy in any large
+volume, it is prevented from selling short for fear of what They may do.
+
+The close student of the technical condition of the market—by which is
+meant the character of the long and short interests from day to day—is
+pretty sure to base his operations to a considerable extent on what
+he thinks They will do next. He has in mind Them as described in the
+first classification above—floor traders, pools and manipulators. He
+gets a good deal of help from this conception, crude as it may appear
+to be—largely, no doubt, because it serves to distract his mind from
+current news and gossip, and to prevent him from being too greatly
+influenced by the momentary appearance of the market.
+
+When the market looks weakest, when the news is at the worst, when
+bearish prognostications are most general, is the time to buy, as
+every schoolboy knows; but if a man has in mind a picture of a flood
+of stocks pouring out from the four quarters of the globe, with no
+buyers, because of some desperately bad news which is just coming over
+the ticker, it is almost a mental impossibility for him to get up the
+courage to plunge in and buy. If, on the other hand, he conceives that
+They are just giving the market a final smash to facilitate covering a
+gigantic line of short stocks, he has courage to buy. His view may be
+right or wrong, but at least he avoids buying at the top and selling at
+the bottom, and he has nerve to buy a weak market and sell a strong one.
+
+The reason for the haziness of the “They” conception in the average
+trader’s mind is that he is only concerned with Them as They manifest
+Themselves through the stock market. As to who They are he feels a mild
+and detached curiosity; but as to Their manifestations in the market
+he is vitally and financially interested. It is on the latter point,
+therefore, that he concentrates his thoughts.
+
+But inasmuch as definite, painstaking analysis of a situation is always
+better than a hazy general notion of it, the trader or investor would
+do much better to rid his mind of Them. The word “They” means nothing
+until it has an antecedent; and to use it continually without having
+any antecedent in mind is slipshod language, which stands for slipshod
+thinking. They, in the sense of the big banking interests, may be
+working directly against Them in the sense of individual manipulators;
+the manipulator, again, may be trying to trap Them in the sense of
+floor traders.
+
+A genuine knowledge of the technical condition of the market cannot
+be summed up in any offhand declaration about what They are going
+to do. You cannot determine the attitude toward the market of every
+individual who is interested in it, but you can roughly classify the
+sources from which buying and selling are likely to come, the motives
+which are likely to actuate the various classes, and the character of
+the long interest and short interest. In brief, after enough study and
+observation, you can always have in mind some kind of an antecedent
+for Them, and must have it, if you base your operations on technical
+conditions.
+
+
+
+
+IV—Confusing the Present with the Future—Discounting
+
+
+It is axiomatic that inexperienced traders and investors, and indeed
+a majority of the more experienced as well, are continually trying
+to speculate on past events. Suppose, for example, railroad earnings
+as published are showing constant large increases in net. The novice
+reasons, “Increased earnings mean increased amounts applicable to the
+payment of dividends. Prices should rise. I will buy.”
+
+Not at all. He should say, “Prices _have risen_ to the extent
+represented by these increased earnings, unless this effect has been
+counterbalanced by other considerations. Now what next?”
+
+It is a sort of automatic assumption of the human mind that present
+conditions will continue, and our whole scheme of life is necessarily
+based to a great degree on this assumption. When the price of wheat is
+high farmers increase their acreage because wheat-growing pays better;
+when it is low they plant less. I remember talking with a potato-raiser
+who claimed that he had made a good deal of money by simply reversing
+the above custom. When potatoes were low he had planted liberally; when
+high he had cut down his acreage—because he reasoned that other farmers
+would do just the opposite.
+
+The average man is not blessed—or cursed, however you may look at
+it—with an analytical mind. We see “as through a glass darkly.” Our
+ideas are always enveloped in a haze and our reasoning powers work in
+a rut from which we find it painful if not impossible to escape. Many
+of our emotions and some of our acts are merely automatic responses to
+external stimuli. Wonderful as is the development of the human brain,
+it originated as an enlarged ganglion, and its first response is still
+practically that of the ganglion.
+
+A simple illustration of this is found in the enmity we all feel toward
+the alarm clock which arouses us in the morning. We have carefully set
+and wound that alarm and if it failed to go off it would perhaps put
+us to serious inconvenience; yet we reward the faithful clock with
+anathemas.
+
+When a subway train is delayed nine-tenths of the people waiting on the
+platforms are anxiously craning their necks to see if it is coming,
+while many persons on it who are in danger of missing an engagement
+are holding themselves tense, apparently in the effort to help the
+train along. As a rule we apply more well-meant, but to a great extent
+ineffective, energy, physical or nervous, to the accomplishment of an
+object, than analysis or calculation.
+
+When it comes to so complicated a matter as the price of stocks, our
+haziness increases in proportion to the difficulty of the subject and
+our ignorance of it. From reading, observation and conversation we
+imbibe a miscellaneous assortment of ideas from which we conclude that
+the situation is bullish or bearish. The very form of the expression
+“the situation is bullish”—not “the situation will soon become
+bullish”—shows the extent to which we allow the present to obscure the
+future in the formation of our judgment.
+
+Catch any trader and pin him down to it and he will readily admit that
+the logical moment for the highest prices is when the news is most
+bullish; yet you will find him buying stocks on this news after it
+comes out—if not at the moment, at any rate “on a reaction.”
+
+Most coming events cast their shadows before, and it is on this that
+intelligent speculation must be based. The movement of prices in
+anticipation of such an event is called “discounting,” and this process
+of discounting is worthy a little careful examination.
+
+The first point to be borne in mind is that some events cannot be
+discounted, even by the supposed omniscience of the great banking
+interests—which is in point of fact, more than half imaginary. The San
+Francisco earthquake is the standard example of an event which could
+not be foreseen and therefore could not be discounted; but an event
+does not have to be purely an “act of God” to be undiscountable. There
+can be no question that our great bankers have been as much in the
+dark in regard to some recent Supreme Court decisions as the smallest
+“piker” in the customers’ room of an odd-lot brokerage house.
+
+If the effect of an event does not make itself felt before the event
+takes place, it must come after. In all discussion of discounting we
+must bear this fact in mind in order that our subject may not run away
+with us.
+
+On the other hand an event may sometimes be overdiscounted. If the
+dividend rate on a stock is to be raised from four to five per cent.,
+earnest bulls, with an eye to their own commitments, may spread rumors
+of six or seven per cent., so that the actual declaration of five per
+cent. may be received as disappointing and cause a decline.
+
+Generally speaking, every event which is under the control of
+capitalists associated with the property, or any financial condition
+which is subject to the management of combined banking interests, is
+likely to be pretty thoroughly discounted before it occurs. There is
+never any lack of capital to take advantage of a sure thing, even
+though it may be known in advance to only a few persons.
+
+The extent to which future business conditions are known to “insiders”
+is, however, usually overestimated. So much depends, especially in
+America, upon the size of the crops, the temper of the people, and the
+policies adopted by leading politicians, that the future of business
+becomes a very complicated problem. No power can drive the American
+people. Any control over their action has to be exercised by cajolery
+or by devious and circuitous methods.
+
+Moreover, public opinion is becoming more volatile and changeable
+year by year, owing to the quicker spread of information and the rapid
+multiplication of the reading public. One can easily imagine that some
+of our older financiers must be saying to themselves, “If I had only
+had my present capital in 1870, or else had the conditions of 1870 to
+work on today!”
+
+A fair idea of when the discounting process will be completed may
+usually be formed by studying conditions from every angle. The great
+question is, when will the buying or selling become most general and
+urgent? In 1907, for example, the safest and best time to buy the sound
+dividend-paying stocks was on the Monday following the bank statement
+which showed the greatest decrease in reserves. The markets opened down
+several points under pressure of liquidation, and standard issues never
+sold so low afterward. The simple explanation was that conditions had
+become so bad that they could not get any worse without utter ruin,
+which all parties must and did unite to prevent.
+
+Likewise in the Presidential campaign of 1900, the lowest prices
+were made on Bryan’s nomination. Everyone said at once, “He can’t be
+elected.” Therefore his nomination was the worst that could happen—the
+point of time where the political news became most intensely bearish.
+As the campaign developed his defeat became more and more certain, and
+prices continued to rise in accordance with the general economic and
+financial conditions of the period.
+
+It is not the discounting of an event thus known in advance to
+capitalists, that presents the greatest difficulties, but cases where
+considerable uncertainty exists, so that even the clearest mind and
+the most accurate information can result only in a balancing of
+probabilities, with the scale perhaps inclined to a greater or less
+degree in one direction or the other.
+
+In some cases the uncertainty which precedes such an event is more
+depressing than the worst that can happen afterward. An example is a
+Supreme Court decision upon a previously undetermined public policy
+which has kept business men so much in the dark that they feared to
+go ahead with any important plans. This was the case at the time of
+the Northern Securities decision in 1904. “Big business” could easily
+enough adjust itself to either result. It was the uncertainty that was
+bearish. Hence the decision was practically discounted in advance, no
+matter what it might prove to be.
+
+This was not true to the same extent of the Standard Oil and American
+Tobacco decisions of 1911, because those decisions were an earnest of
+more trouble to come. The decisions were greeted by a temporary spurt
+of activity, based on the theory that the removal of uncertainty was
+the important thing; but a sensational decline started soon after
+and was not checked until the announcement that the Government would
+prosecute the United States Steel Corporation. This was deemed the
+worst that could happen for some time to come, and was followed by a
+considerable advance.
+
+More commonly, when an event is uncertain the market estimates the
+chances with considerable nicety. Each trader backs his own opinion,
+strongly if he feels confident, moderately if he still has a few
+doubts which he cannot down. The result of these opposing views may
+be stationary prices, or a market fluctuating nervously within a
+narrow range, or a movement in either direction, greater or smaller in
+proportion to the more or less emphatic preponderance of the buying or
+selling.
+
+Of course it must always be remembered that it is the dollars that
+count, not the number of buyers or sellers. A few great capitalists
+having advance information which they regard as accurate, may more than
+counterbalance thousands of small traders who hold an opposite opinion.
+In fact, this is a condition very frequently seen, as explained in a
+previous chapter.
+
+Even the operations of an individual investor usually have an effect
+on prices pretty accurately adjusted to his opinions. When he believes
+prices are low and everything favors an upward movement, he will strain
+his resources in order to accumulate as heavy a load of securities as
+he can carry. After a fair advance, if he sees the development of some
+factor which _might_ cause a decline—though he doesn’t really believe
+it will—he thinks it wise to lighten his load somewhat and make sure of
+some of his accumulated profits. Later when he feels that prices are
+“high enough,” he is a liberal seller; and if some danger appears while
+the level of quoted values continues high, he “cleans house,” to be
+ready for whatever may come. Then if what he considers an unwarranted
+speculation carries prices still higher, he is very likely to sell a
+few hundred shares short by way of occupying his capital and his mind.
+
+It is, however, the variation of opinion among different men that has
+the largest influence in making the market responsive to changing
+conditions. A development which causes one trader to lighten his line
+of stocks may be regarded as harmless or even beneficial by another,
+so that he maintains his position or perhaps buys more. Out of a
+world-wide mixture of varying ideas, personalities and information
+emerges the average level of prices—the true index number of investment
+conditions.
+
+The necessary result of the above line of reasoning is that not only
+probabilities but even rather remote possibilities are reflected in the
+market. Hardly any event can happen of sufficient importance to attract
+general attention which some process of reasoning cannot construe as
+bullish and some other process interpret as bearish. Doubtless even
+our old friend of the news columns to the effect that “the necessary
+activities of a nation of ninety million souls create and maintain a
+large volume of business,” may influence some red-blooded optimist
+to buy 100 Union; but the grouchy pessimist who has eaten too many
+doughnuts for breakfast will accept the statement as an evidence of
+the scarcity of real bull news and will likely enough sell 100 Union
+short on the strength of it.
+
+It is the overextended speculator who causes most of the fluctuations
+that look absurd to the sober observer. It does not take much to make
+a man buy when he is short of stocks “up to his neck.” A bit of news
+which he would regard as insignificant at any other time will then
+assume an exaggerated importance in his eyes. His fears increase in
+geometrical proportion to the size of his line of stocks. Likewise the
+overloaded bull may begin to “throw his stocks” on some absurd story of
+a war between Honduras and Roumania, without even stopping to look up
+the geographical location of the countries involved.
+
+Fluctuations based on absurdities are always relatively small. They
+are due to an exaggerated fear of what “the other fellow” may do.
+Personally, you do not fear a war between Honduras and Roumania; but
+may not the rumor be seized upon by the bears as an excuse for a raid?
+And you have too many stocks to be comfortable if such a break should
+occur. Moreover, even if the bears do not raid the market, will there
+not be a considerable number of persons who, like yourself, will fear
+such a raid, and will therefore lighten their load of stocks, thus
+causing some decline?
+
+The professional trader, following this line of reasoning to the limit,
+eventually comes to base all his operations for short turns in the
+market not on the facts but on what he believes the facts will cause
+others to do—or more accurately, perhaps, on what he _sees_ that the
+news _is_ causing others to do; for such a trader is likely to keep his
+finger constantly on the pulse of buying and selling as it throbs on
+the floor of the Exchange or as recorded on the tape.
+
+The non-professional, however, will do well not to let his mind stray
+too far into the unknown territory of what others may do. Like the
+“They” theory of values, it is dangerous ground in that it leads
+toward the abdication of common sense; and after all, others may not
+prove to be such fools as we think they are. While the market is likely
+to discount even a possibility, the chances are very much against _our_
+being able to discount the possibility profitably.
+
+In this matter of discounting, as in connection with most other stock
+market phenomena, the most useful hint that can be given is to avoid
+all efforts to reduce the movement of prices to rules, measures, or
+similarities and to analyze each case by itself. Historical parallels
+are likely to be misleading. Every situation is new, though usually
+composed of familiar elements. Each element must be weighed by itself
+and the probable result of the combination estimated. In most cases
+the problem is by no means impossible, but the student must learn to
+look into the future and to consider the present only as a guide to
+the future. Extreme prices will come at the time when the news is most
+emphatic and most widely disseminated. When that point is passed the
+question must always be, “What next?”
+
+
+
+
+V—Confusing the Personal with the General
+
+
+In a previous chapter the fact has been mentioned that one of the
+greatest difficulties encountered by the active trader is that of
+keeping his mind in a balanced and unprejudiced condition when he is
+heavily committed to either the long or short side of the market.
+Unconsciously to himself, he permits his judgment to be swayed by his
+hopes.
+
+A former large speculator on the Chicago Board of Trade, after being
+short of the market and very bearish on wheat for a long time, one
+day surprised all his friends by covering everything, going long a
+moderate amount, and arguing violently on the bull side. For two days
+he maintained this position, but the market failed to go up. He then
+turned back to the short side, and had even more bear arguments at his
+tongue’s end than before.
+
+To a certain extent he did this to test the market, but still more to
+test himself—to see whether, by changing front and taking the other
+side, he could persuade himself out of his bearish opinions. When even
+this failed to make any real change in his views, he was reassured and
+was ready for a new and more aggressive campaign on the short side.
+
+There is nothing peculiar about this condition. While it is especially
+difficult to maintain a balanced mind in regard to commitments in the
+markets, it is not easy to do so about anything that closely touches
+our personal interests. As a rule we can find plenty of reasons for
+doing what we very much want to do, and we are still more prolific with
+excuses for not doing what we don’t want to do. Most of us change the
+old sophism “Whatever is, is right” to the more directly useful form
+“Whatever I want is right.” To many readers will occur at once the
+name of a man prominent in public life who seems very frequently to act
+on this motto.
+
+If Smith and Jones have a verbal agreement, which afterwards turns
+out to be greatly to Jones’ advantage, Smith’s recollection is that
+it was merely a loose understanding which could be cancelled at any
+time, while Jones remembers it to have been a definite legal contract,
+perfectly enforceable if it had only been written. Talleyrand said that
+language was given us for the purpose of concealing thought. Likewise
+many seem to think that logic was given us for the purpose of backing
+up our desires.
+
+Few persons are so introspective as to be able to tell where this bias
+in favor of their own interests begins and where it leaves off. Still
+fewer bother to make the effort to tell. To a great extent we train our
+judgment to lend itself to our selfish interests. The question with us
+is not so much whether we have the facts of a situation correctly in
+mind, as whether we can “put it over.”
+
+When it comes to buying and selling stocks, there is no such thing as
+“putting it over.” The market is relentless. It cannot be budged by our
+sophistries. It will respond exactly to the forces and personalities
+which are working upon it, with no more regard for our opinions than
+if we couldn’t vote. We cannot work for our own interests as in other
+lines of business—we can only fit our interests to the facts.
+
+To make the greatest success it is necessary for the trader to forget
+entirely his own position _in_ the market, his profits or losses, the
+relation of present prices to the point where he bought or sold, and to
+fix his thoughts upon the position _of_ the market. If the market is
+going down the trader must sell, no matter whether he has a profit or a
+loss, whether he bought a year ago or two minutes ago.
+
+How far the average trader is from attaining this point of view is
+quickly seen from his conversation, and it is also true that a great
+deal of the literature of speculation absolutely fails to reach this
+conception.
+
+“You have five points profit—you had better take it,” advises the
+broker. Perhaps so, if you know nothing about the market; but if you
+understand the market the time to take your profit is when the upward
+movement shows signs of culminating, regardless of your own deal.
+
+“Stop your losses; let your profits run” is a saying which appeals to
+the novice as the essence of wisdom. But the whole question is _where_
+to stop the losses and _how far_ to let the profits run. In other
+words, what is the _market_ going to do? If you can tell this your
+personal losses and profits will take care of themselves.
+
+Here is a man who has done a great deal of figuring and has proved to
+his own satisfaction that seven points is the correct profit to take
+in Union Pacific, while losses should be limited to two and one-half
+points. Nothing could be more foolish than these arbitrary figures. He
+is trying to make the market fit itself around his own trades, instead
+of adapting his trades to the market.
+
+In any broker’s office you will notice that a large part of the talk
+concerns the profits and losses of the traders. Brown had a profit of
+ten points and then let it get away from him. “Great Scott!” says his
+wise friend. “What do you want? Aren’t you satisfied with ten points
+profit?” The reply should be, though it rarely is, “Certainly not, if I
+think the market is going higher.”
+
+“Get them out with a small profit,” I once heard one broker say to
+another. “If you don’t they will hang on and take a loss. They never
+get profit enough to satisfy them.” A good policy, probably, if neither
+the broker nor his customer had any real knowledge of the market; but
+mere nonsense for the trader who aims to be in the slightest degree
+scientific.
+
+The fact is that the more a trader allows his mind to dwell upon his
+own position in the market the more likely it is that his judgment
+will become warped so that his mind is blind to those considerations
+which do not fall in with his preconceived opinion.
+
+Until you try it, you have almost no idea of the extent to which you
+may be rendered unreasonable by the mere fact that you are committed
+to one side of the market. “In the market, to be consistent is to be
+stubborn,” some one has said; and it is true that the man of strong
+will and logical intellect is often less successful than the more
+shallow and volatile observer, who is ready to whiffle about like the
+weathercock at any suspicion of a change in the wind. This is because
+the strong man has in this instance embarked upon an enterprise where
+he cannot use his natural force and determination—he can employ only
+his faculties of observation and interpretation. Yet in the end the
+man of character will be the more permanently successful, because he
+will eventually master his subject more thoroughly and attain a more
+judicial attitude.
+
+The more simple-minded, after once committing themselves to a position,
+are thereafter chiefly influenced and supported by the illusions of
+hope. They bought, probably, as a result of some bullish development.
+If prices have advanced, they find that the market “looks strong,” a
+good deal of encouraging news comes out on the tickers, and they hope
+for large profits. After five points in their favor, they hope for ten,
+and after ten they look for fifteen or twenty.
+
+On the other hand, if prices decline they charge it to “manipulation,”
+“bear raids,” etc., and expect an early recovery. Much of the bear news
+appears to them to be put out maliciously, in order to cause prices to
+decline further. It is not until the decline begins to cause a painful
+encroachment upon their capital that they reach the point of saying,
+“If ‘they’ can depress prices like this in the face of a bullish
+situation, what is the use of fighting them? By a flood of short
+sales, they can put prices down as much as they like”—or something of
+the sort.
+
+Such traders are suffering merely from youth, or lack of sound business
+sense, or both. They have a considerable period of study before them,
+if they persist until they get permanently profitable results. Most of
+them, of course, do not persist.
+
+A much more intelligent class, many of whom are properly to be
+considered as investors, do not allow their position in the market
+to blind them so far as current news or statistical developments are
+concerned, but do permit themselves to become biased in regard to the
+most important factor of all—the effect of a change in the price level.
+
+They bought stocks in the expectation of an improved situation. The
+improved situation comes and prices rise. Nothing serious in the way
+of bear news appears. On the contrary, bull news continues plentiful.
+Under these conditions they see no reason for selling.
+
+Yet there may be a most important reason for selling—namely, that
+prices have risen sufficiently to counterbalance the improved
+situation—and they would see and appreciate this fact if they were in
+the position of an uninterested observer.
+
+One of the principal reasons why investors of this class allow
+themselves to become confused as to the influence of the price level is
+because a bull market nearly always goes unreasonably high before it
+culminates. The investor has perhaps, in several previous instances,
+sold out at what he thought was a fair price level, only to see the
+public run away with the market to a point where his profits would have
+been doubled if he had held on.
+
+It is in such cases that an expert knowledge of speculation is
+essential. If the investor has not this knowledge, and cannot obtain
+the dependable advice of one who has it, then he must content himself
+with more moderate profits and forego the expectation of getting the
+full benefit of the advance. But with a fair knowledge of speculative
+influences, he can fix his mind on the development of the campaign,
+regardless of his own holdings, and can usually secure a larger profit
+than if he depended merely upon ordinary business “common sense.”
+
+The mistake is made when, without any expert knowledge of speculation,
+he permits himself to hold on in the hope of higher prices after a
+level has been reached which has fairly discounted improved business
+conditions.
+
+Not one trader in a thousand ever becomes so expert or so seasoned as
+to entirely overcome the influence his position in the market exerts
+upon his judgment. That influence appears in the most insidious and
+elusive ways. One of the principal difficulties of the expert is in
+preventing his active imagination from causing him to see what he is
+looking for just because he is looking for it.
+
+An example will make this clear. The expert has learned from
+experience, let us say, that the appearance of “holes” in the market
+is a sign of weakness. By a “hole” is meant a condition of the market
+where it suddenly and unaccountably refuses to take stock. A few
+hundred shares of an active stock are offered for sale. Sentiment is
+generally bullish, but there is no buyer for that stock. Prices slip
+quickly down half a point or a point before buyers are found. This, in
+an active stock, is unusual; and although the price may recover, the
+professional does not forget this treacherous failure of the market to
+accept moderate offerings. He considers it a sign of an “over-bought”
+market.
+
+Now suppose the trader has calculated that an advance is about to
+culminate and has taken the short side in anticipation of that event.
+He suspects that the market is over-bought, but is not yet sure of it.
+Under these circumstances any little dip in the price will perhaps look
+to him like a “hole,” even though under other conditions he would
+not notice it or would think nothing about it. He is looking for the
+development of weakness and there is danger that his imagination may
+show him what he is looking for even though it isn’t there!
+
+The same remarks would apply to the detection of accumulation or
+distribution. If you want to see distribution after a sharp advance,
+you are very likely to see it. If you have sold out and want to get a
+reaction on which to repurchase, you will see plenty of indications
+of a reaction. Indeed, it is a sort of proverb in Wall Street that
+there is no bear so bearish as a sold out bull who wants a chance to
+repurchase.
+
+In the study of so-called “technical” conditions of the market,
+a situation often appears which permits a double construction.
+Indications of various kinds are almost evenly balanced; some things
+might be interpreted in two different ways; and a trader not already
+interested in the market would be likely to think it wise to stay out
+until he could see his way more clearly.
+
+Under such circumstances you will find it an almost invariable rule
+that the man who was long before this condition arose will interpret
+technical conditions as bullish, while the man who was and remains
+short, sees plain indications of technical weakness. Somewhat amusing,
+but true.
+
+In this matter of allowing the judgment to be influenced by personal
+commitments, very little of a constructive or practically helpful
+nature can be written, except the one word “Don’t.” Yet when the
+investor or trader has come to realize that he is a prejudiced
+observer, he has made progress; for this knowledge keeps him from
+trusting too blindly to something which, at the moment, he calls
+judgment, but which may turn out to be simply an unusually strong
+impulse of greed.
+
+It has often been noted by stock market writers that since the great
+public is bearish at the bottom and bullish at the top, it could make
+its fortune and beat the multi-millionaires at their own game by
+simply reversing itself—buying when it feels like selling and selling
+when it feels like buying. Tom Lawson, in the heyday of his publicity,
+seems to have had some sort of dream of the public selling back to
+Standard Oil capitalists the stocks which it had bought from them and
+thus bringing everything to smash in a heap—the philanthropic Thomas,
+doubtless, being first properly short of the market.
+
+This wrongheadedness of the public no longer exists to the same
+extent as formerly. A great number of small investors buy and sell
+intelligently and there has been a most noticeable falling off in the
+gambling class of trade—much to the satisfaction of everyone, except,
+perhaps, the brokers who formerly handled such business.
+
+It remains true, nevertheless, that the very moment when the market
+looks strongest, is likely to be near the top, and just when prices
+appear to have started on a straight drop to the zero point is usually
+near the bottom. The practical way for the investor to use this
+principle is to be ready to sell at the moment when bull sentiment
+seems to be most widely distributed, and to buy when the public in
+general seem most discouraged. It is especially important for him to
+bear this principle in mind in taking profits on previous commitments,
+as his own interests are then identified with the current trend of
+prices.
+
+In a word, the trader or investor who has studied the subject enough
+to be reading this book, probably could not make profits by reversing
+himself, even if such a thing were possible; but he can endeavor to
+hold himself in a detached, unprejudiced frame of mind, and to study
+the psychology of the crowd, especially as it manifests itself in the
+movement of prices.
+
+
+
+
+VI—The Panic and the Boom
+
+
+Both the panic and the boom are eminently psychological phenomena.
+This is not saying that fundamental conditions do not at times warrant
+sharp declines in prices and at other times equally sharp advances.
+But the panic, properly so-called, represents a decline greater than
+is warranted by conditions, usually because of an excited state of the
+public mind, accompanied by exhaustion of resources; while the term
+“boom” is used to mean an excessive and largely speculative advance.
+
+There are some special features connected with the panic and the boom
+which are worthy of separate consideration.
+
+It is really astonishing what a hold the fear of a possible panic has
+upon the minds of many investors. The memory of the events of 1907 has
+undoubtedly operated greatly to lessen the volume of speculative trade
+from that time to the present (April, 1912). Panics of equal severity
+have occurred only a few times in the entire history of the country,
+and the possibility of such an outbreak in any one month is smaller
+than the chance of loss on the average investment through the failure
+of the company. Yet the specter of such a panic rises in the minds of
+the inexperienced whenever they think of buying stocks.
+
+“Yes,” the investor may say, “Reading seems to be in a very strong
+position, but look where it sold in 1907—at $70 a share!”
+
+It is sometimes assumed that the low prices in a panic are due to a
+sudden spasm of fear, which comes quickly and passes away quickly.
+This is not the case. In a way, the operation of the element of fear
+begins when prices are near the top. Some cautious investors begin to
+fear that the boom is being overdone and that a disastrous decline
+must follow the excessive speculation for the rise. They sell under the
+influence of this feeling.
+
+During the ensuing decline, which may run for years, more and more
+people begin to feel uneasy over business or financial conditions,
+and they liquidate their holdings. This caution or fearfulness
+gradually spreads, increasing and decreasing in waves, but growing a
+little greater at each successive swell. The panic is not a sudden
+development, but is the result of causes long accumulated.
+
+The actual bottom prices of the panic are more likely to result from
+necessity than from fear. Those investors who could be frightened out
+of their holdings are likely to give up before the bottom is reached.
+The lowest prices are usually made by sales for those whose immediate
+resources are exhausted. Most of them are taken by surprise and could
+raise the money necessary to carry their stocks if they had a little
+time; but in the stock market, “time is the essence of the contract,”
+and is the very thing that they cannot have.
+
+The great cause of loss in times of panic is the failure of the
+investor to keep enough of his capital in liquid form. He becomes “tied
+up” in various undertakings so that he cannot realize quickly. He may
+have abundant property, but no ready money. This condition, in turn,
+results from trying to do too much—greed, haste, excessive ambition, an
+oversupply of easy confidence as to the future.
+
+It is noticeable in panic times that a period arrives when nearly every
+one thinks that stocks are low enough, yet prices continue downward to
+a still lower level. The result is that many investors, after thinking
+that they have “loaded up” near the bottom, find that it was a false
+bottom, and are finally forced to throw over their holdings on a
+further decline.
+
+This is due to the fact mentioned above, that final low prices are the
+result of necessities, not of opinions. In 1907, for example, every one
+of good sense knew perfectly well that stocks were selling below their
+value—the trouble was that investors could not get hold of the money
+with which to buy.
+
+The moral is that low prices, after a prolonged bear period, are not
+in themselves a sufficient reason for buying stocks. The key to the
+situation lies in the _accumulation of liquid capital_, which is
+most quickly evidenced by a rapid recovery of the excess of deposits
+over loans in the New York clearing house banks (excluding the trust
+companies, in which loans are more varied). This subject, however,
+takes us outside our present field.
+
+It is to a great extent because the last part of the decline in a
+panic has been caused not by public opinion, or even by public fear,
+but by necessity, arising from absolute exhaustion of available funds,
+that the first part of the ensuing recovery takes place without any
+apparent reason.
+
+Traders say, “The panic is over, but stocks cannot go up much under
+such bearish conditions as now exist.” Yet stocks can and do go up,
+because they are merely regaining the natural level from which they
+were depressed by “bankrupt sales,” as we would say in discussing dry
+goods.
+
+Perhaps the word “fear” has been overworked in the discussion of stock
+market psychology. It is only the very few who actually sell their
+stocks under the direct influence of the emotion of fear. But a feeling
+of caution strong enough to induce sales, or even a fixed belief that
+prices must decline, constitutes in itself a sort of modification of
+fear, and has the same result so far as prices are concerned.
+
+The effect of this fear or caution in a panic is not limited to the
+selling of stocks, but is even more important in preventing purchases.
+It takes far less uneasiness to cause the intending investor to delay
+purchases than to precipitate actual sales by holders. For this reason,
+a small quantity of stock pressed for sale in a panicky market may
+cause a decline out of all proportion to its importance. The offerings
+may be small, but nobody wants them.
+
+It is this factor which accounts for the rapid recoveries which
+frequently follow panics. Waiting investors are afraid to step in front
+of a demoralized market, but once the turn appears, they fall over each
+other to buy.
+
+The boom is in many ways the reverse of the panic. Just as fear
+keeps growing and spreading until the final crash, so confidence and
+enthusiasm keep reproducing each other on a wider and wider scale until
+the result is a sort of hilarity on the part of thousands of men, many
+of them comparatively young and inexperienced, who have “made big
+money” during the long advance in prices.
+
+These imaginary millionaires appear in a small swarm during every
+prolonged bull market, only to fall with their wings singed as soon
+as prices decline. Such speculators are, to all practical intents and
+purposes, irresponsible. It is their very irresponsibility which has
+enabled them to make money so rapidly on advancing prices. The prudent
+man gets only moderate profits in a bull market—it is the man who
+trades on “shoe-string margins” who gets the biggest benefit out of the
+rise.
+
+When such mushroom fortunes have accumulated, the market may fall
+temporarily into the hands of these daredevil spirits, so that
+almost any recklessness is possible for the time. It is this kind of
+buying which causes prices to go higher after they are already high
+enough—just as they go lower in a panic after they are plainly seen to
+be low enough.
+
+When prices get above the natural level, a well-judged short interest
+begins to appear. These shorts are right, but right too soon. In a
+genuine bull market they are nearly always driven to cover by a
+further rise, which is, from any common sense standpoint, unreasonable.
+A riot of pyramided margins drives the sane and calculating short
+seller temporarily to shelter.
+
+A psychological influence of a much wider scope also operates to help
+a bull market along to unreasonable heights. Such a market is usually
+accompanied by rising prices in all lines of business and these rising
+prices always create, in the minds of business men, the impression that
+their various enterprises are more profitable than is really the case.
+
+One reason for this false impression is found in stocks of goods on
+hand. Take the wholesale grocer, for example, carrying a stock of goods
+which inventories $10,000 in January, 1909. On that date Bradstreet’s
+index of commodity prices stood at 8.26. In January, 1910, Bradstreet’s
+index was 9.23. If the prices of the various articles included in
+this stock of groceries increased in the same ratio as Bradstreet’s
+list, and if the grocer had on hand exactly the same things, he would
+inventory them at about $11,168 in January, 1910.
+
+He made an additional profit of $1,168 during the year without any
+effort, and probably without any calculation, on his part. But this
+profit was only apparent, not real; for he could not buy any more
+with the $11,168 in January, 1910, than he could have bought with the
+$10,000 in January, 1909. He is deceived into supposing himself richer
+than he really is, and this false idea leads to a gradual growth of
+extravagance and speculation in every line of business and every walk
+of life.
+
+The secondary results of this delusion of increased wealth because of
+rising prices, are even more important than the primary results. Our
+grocer, for example, decides to spend this $1,168 for an automobile.
+This helps the automobile business. Hundreds of similar orders induce
+the automobile company to enlarge its plant. This means extensive
+purchases of material and employment of labor. The increased demand
+resulting from a similar condition of things in all departments of
+industry produces, if other conditions are favorable, a still further
+rise in prices; hence at the end of another year the grocer perhaps has
+another imaginary profit, which he spends in enlarging his residence or
+buying new furniture, etc.
+
+The stock market feels the reflection of all this increased business
+and higher prices. Yet the whole thing is psychological, and sooner or
+later our grocer must earn and save, by hard work, economical living
+and shrewd calculation, the amount he has paid for his automobile or
+furniture.
+
+Again, rising stock prices and rising commodity prices react on each
+other. If the grocer, in addition to his imaginary profit of $1,168
+sees a ten per cent. advance in the prices of various securities
+which he holds for investment, he is encouraged to still larger
+expenditures; and likewise if the capitalist notes a ten per cent.
+advance in the stock market, he perhaps employs additional servants and
+enlarges his household expenditures so that he buys more groceries.
+Thus the feeling of confidence and enthusiasm spreads wider and wider
+like ripples from a stone dropped into a pond. And all of these
+developments are faithfully reflected by the stock market barometer.
+
+The result is that, in a year like 1902 or 1906, the high prices
+for stocks and the feverish activity of general trade are based, to
+an entirely unsuspected extent, on a sort of pyramid of mistaken
+impressions, most of which may be traced, directly or indirectly, to
+the fact that we measure everything in money and always think of this
+money-measure as fixed and unchangeable, while in reality our money
+fluctuates in value just like iron, potatoes, or “Fruit of the Loom.”
+We are accustomed to figuring the money-value of wheat, but we get a
+headache when we try to reckon the wheat-value of money.
+
+When a fictitious situation like this begins to go to pieces, the
+stock market, fulfilling its function of barometer, declines first,
+while general business continues active. Then the “money sharks of
+Wall Street” get themselves roundly cursed by the public and there is
+a widespread desire to wipe them off the earth in summary fashion.
+The stock market never finds itself popular unless it is going up;
+yet its going down undoubtedly does far more to promote the country’s
+welfare in the long run, for it serves to temper the crash which must
+eventually come in general business circles and to forewarn us of
+trouble ahead so that we may prepare for it.
+
+It is generally more difficult to distinguish the end of a stock market
+boom than to decide when a panic is definitely over. The principle
+of the thing is simple enough, however. It was an oversupply of
+liquid capital that started the market upward after the panic was
+over. Similarly it is exhaustion of liquid capital which brings the
+bull movement to an end. This exhaustion is shown by higher call
+money rates, loss of the excess of deposits over loans in New York
+clearinghouse banks, a steady rise in commercial paper rates, and a
+sagging market for high-grade bonds.
+
+
+
+
+VII—The Psychology of Scale Orders
+
+
+The observer of market conditions soon comes to know that there are
+two general classes of minds whose operations are reflected in prices.
+These classes might be named the “impulsive” and the “phlegmatic.”
+
+The “impulsive” operator says, for example, “Conditions, both
+fundamental and technical, warrant higher prices. Stocks are a
+purchase.” Having formed this conclusion, he proceeds to buy. He does
+not try or expect to buy at the bottom. On the contrary he is perfectly
+willing to buy at the top so far, provided he sees prospects of a
+further advance. When he concludes that conditions have turned bearish,
+or that the advance in prices has overdiscounted previous conditions,
+he sells out.
+
+The “phlegmatic” type of investor, on the other hand, can hardly ever
+be persuaded to buy on an advance. He reasons, “Prices frequently
+move several points against conditions, or at least against what the
+conditions seem to me to be. The sensible thing for me to do is to take
+advantage of these contrary movements.”
+
+Hence when he believes stocks should be bought he places an order to
+buy on a scale. His thought is:
+
+“It seems to me stocks should advance from these prices, but I am not
+a soothsayer, and prices have often declined three points when I felt
+just as bullish as I do now. So I will place orders to buy every half
+point down for three points. These speculators are a crazy lot and
+there is no knowing what passing breeze might strike them that would
+cause a temporary decline of a few points.”
+
+Among large capitalists, and especially in the banking community, the
+“phlegmatic” type naturally predominates. Such men have neither the
+time nor the disposition to watch the ticker closely and they nearly
+always disclaim any ability to predict the smaller movements of prices.
+They are entirely ready, nevertheless, to take advantage of these small
+fluctuations when they occur, and having plenty of capital, they can
+easily accomplish this by buying or selling on a scale.
+
+As a matter of fact, the market is usually full of scale orders, and
+the knowledge of this and of the way in which such orders are handled
+is decidedly helpful in judging the tone and technical position of the
+market from day to day.
+
+The two types of operators above described are always working against
+each other. The buying or selling of the “impulsive” trader tends to
+force prices up or down, while the scale orders of the “phlegmatic”
+class tend to oppose any movement.
+
+For example, let us suppose that banking interests believe conditions
+to be fundamentally sound and that the general trend of the market
+will be upward for some time to come. Orders are therefore placed by
+various persons to buy stocks every point down, or every half, quarter,
+or even eighth point down.
+
+On the other hand, the active floor traders find that, owing to some
+temporary unfavorable development, a following can be obtained on the
+bear side. They perceive the presence of scale orders, but they think
+stocks enough will come out on the decline to fill the scale orders and
+leave a balance over.
+
+To put it another way, the floating supply of stocks has become, at
+the moment, larger than can comfortably be tossed about from hand to
+hand by the in-and-out class of traders. The market must decline until
+a part of this floating supply is absorbed by the scale orders which
+underlie current prices.
+
+These conditions produce what is commonly called a “reaction.” Once
+this surplus floating supply of stocks is absorbed by standing orders,
+the market is ready to start upward again. If the general trend is
+upward, far less resistance will be encountered on the advance than
+was met on the reaction; hence prices rise to a new high level. Then
+profit-taking sales will be met, on limited or scale orders at various
+prices, and as the market advances the floating supply will gradually
+increase until it again becomes unwieldy and another reaction is
+necessary.
+
+Eventually a level is reached, or some change in conditions appears,
+which causes these scale buying orders to be partially or entirely
+withdrawn, and selling orders to be substituted on a scale up. The bull
+market will not go much further after this change takes place. It has
+now become easier to produce declines than advances. The situation is
+the reverse of that described above, and a bear market follows.
+
+Commonly there is a considerable period around top prices when scale
+buying orders are still found on declines, but profit-taking sales are
+also met on advances, so that the market is kept fluctuating within
+comparatively narrow limits for a month or more. In fact, it is likely
+to be kept on this level so long as public buying continues greater
+than public selling. This is sometimes called “distribution.” A similar
+period of “accumulation” often occurs after a bear market has run its
+course, and before any important advance appears.
+
+A close watch of transactions, or a study of continuous quotations as
+published in certain newspapers, often enables the experienced trader
+to discover when the most important of these scale orders are withdrawn
+or reversed.
+
+A bull market which is full of scale buying orders encounters
+“support,” so-called, on declines. Bears are timid about driving down
+prices, because they are continually “losing their stocks.” They say
+that “very little stock comes out on declines”; hence there is a
+certain appearance of caution in the way the market goes down, and
+the activity of trade shows, in a broad way, a falling off at lower
+prices. On the advances, however, a following is obtained and activity
+increases.
+
+Toward the end of the bull market a change is noticeable. Prices go
+down easily and on larger transactions, while advances are sluggish and
+opposition is met at higher levels where profit-taking orders have been
+placed. The very day when scale buying orders in a stock are withdrawn
+can oftentimes be distinguished.
+
+In a bear market, “pressure” appears in place of “support.” The scale
+orders are mostly to sell as the market rises. Only a small following
+of purchasers is obtainable on advances, hence the activity of
+business, in a general way, falls off as prices go up. The end of the
+bear market is marked by the reappearance of “support” and the removal
+of “pressure,” so that prices rebound quickly and sharply from declines.
+
+The common assumption is that this “support” or “pressure” is supplied
+by “manipulators.” But it is quite as likely to result from the scale
+operations of hundreds of different persons, whose mental make-up
+prevents them from buying or selling in the “impulsive” way.
+
+
+
+
+VIII—The Mental Attitude of the Individual
+
+
+In previous chapters we have seen that many, if not most, of
+the eccentricities of speculative markets, commonly charged to
+manipulation, are in fact due to the peculiar psychological conditions
+which surround such markets. Especially, and more than all else
+together, these erratic fluctuations are the result of the efforts
+of traders to operate, not on the basis of facts, nor on their own
+judgment as to the effect of facts on prices, but on what they believe
+will be the probable effect of facts or rumors on the minds of other
+traders. This mental attitude opens up a broad field of conjecture,
+which is not limited by any definite boundaries of fact or common sense.
+
+Yet it would be foolish to assert that assuming a position in the
+market based on what others will do is a wrong attitude. It is
+confusing to the uninitiated, and first efforts to work on such a plan
+are almost certain to be disastrous; but for the experienced it becomes
+a successful, though of course never a certain, method. A child’s first
+efforts to use a sharp tool are likely to result in bloodshed, but the
+same tool may trace an exquisite carving in the hands of an expert.
+
+What, then, should be the mental attitude of the intelligent buyer and
+seller of securities?
+
+The “long pull” investor, buying outright for cash and holding for a
+liberal profit, need only consider this matter enough to guard against
+becoming confused by the vagaries of public sentiment or by his own
+inverted reasoning processes. He will get the best results by keeping
+his eye single to two things: Facts and Prices. The current rate of
+interest, the earning power of the corporations whose stocks he buys,
+the development of political conditions as affecting invested capital,
+and the relation of current prices to the situation as shown by these
+three factors—these constitute the most important food for his mind to
+work upon.
+
+When he finds himself wandering off into a consideration of what “They”
+will do next, or what effect such and such events may have on the
+sentiment of speculators, he cannot do better than to bring himself up
+with a short turn and sternly bid himself “Back to common sense.”
+
+For the more active trader the situation is different. He need not be
+entirely unregardful of values or fundamental conditions, but his prime
+object is to “go with the tide.” That means basing his operations to a
+great extent on what others will think and do. His own mental attitude,
+then, is a most important part of his equipment for success.
+
+First, the trader must be a _reasoning optimist_. A more horrible fate
+can scarcely be imagined than the shallow pessimism of many market
+habitués, whose minds, incapable of grasping the larger forces beneath
+the movements of prices, take refuge in a cynical disbelief in pretty
+much everything that makes life worth living.
+
+Owing to the nature of the business, however, this optimism must be of
+a somewhat different character from that which brings success in other
+lines. As a general thing optimism includes the persistent nourishing
+of hope, an aggressive confidence, the certainty that you are right,
+a firm determination to accomplish your end. But you cannot make the
+stock market move your way by believing that it will do so. Here is one
+case, at any rate, where New Thought methods cannot be directly applied.
+
+In the market you are nothing but a chip on the tide of events.
+Optimism, then, must consist in believing, not that the tide will
+continually flow your way, but that you will succeed in floating with
+the tide. Your optimism must be, in a sense, of the intellect, not of
+the will. An optimism based on determination would, in this case,
+amount to stubbornness.
+
+Another quality that makes for success in nearly every line of business
+is enthusiasm. For this you have absolutely no use in the stock
+market. The moment you permit yourself to become enthusiastic, you are
+subordinating your reasoning powers to your beliefs or desires.
+
+Enthusiasm helps you influence other men’s minds, but in the market you
+do not desire to do this (unless you happen to be a big bull leader).
+You wish to keep your mind as clear, cool and unruffled as the surface
+of a mountain lake on a calm day. Any emotion—enthusiasm, fear, anger,
+depression—will only cloud the intellect.
+
+Doubtless it would be axiomatic to warn the trader against
+stubbornness. It cannot be assumed that any operator would consciously
+permit himself to become stubborn. The trouble arises in drawing the
+line between, on the one hand, persistence, consistence, pursuit of
+a definite plan until conditions change; and, on the other, stubborn
+adherence to a course of action which subsequent events have proved to
+be erroneous.
+
+A day in the country, with the market forgotten, or if necessary
+forcibly ejected from the thoughts, will often enable the trader to
+return with a clarified mind, so that he can then intelligently convict
+or acquit himself of the vice of stubbornness. Sometimes it may become
+necessary to close all commitments and remain out of the market for a
+few days.
+
+One of the most common errors might be described as “getting a
+notion.” This is due to the failure or inability of the trader to
+take a broad view of the entire situation. Some particular point in
+the complex conditions which usually control prices, appeals to him
+strongly and impresses him as certain to have its effect on the market.
+He acts on this single idea. The idea may be all right, but other
+counterbalancing factors may prevent it from having its natural effect.
+
+You encounter these “notions” every day in the Street. You meet a
+highly conservative individual and ask him what he thinks of the
+situation. “I am alarmed at the rapid spread of radical sentiment,” he
+replies. “How can we expect capital to branch out into new enterprises
+when the profits may be swept away at any moment by socialistic
+legislation?”
+
+You say mildly that the crops are good, the banking situation sound,
+business active, etc. But all this produces no impression upon him. He
+has sold all his stocks and has his money in the banks. (He is also
+short a considerable line, but he doesn’t tell you this). He will not
+buy again until the public becomes “sane.”
+
+The next man you talk with says: “We cannot have much decline with the
+present good crop prospect. Crops lie at the basis of everything. With
+nine billions of new wealth coming out of the ground and flowing into
+the channels of trade, we are bound to have prosperous conditions for
+some time to come.”
+
+You speak of radicalism, adverse legislation, high cost of living,
+etc.; but he thinks these are relatively unimportant compared with that
+$9,000,000,000 of new wealth. Of course, he is long of stocks.
+
+“To make the worse appear the better reason,” said Mr. Socrates, some
+little time ago. It is too bad we can’t have Socrates’ comments on Wall
+Street. The Socratic method applied to the average speculator would
+produce amusing results.
+
+Beware of saying, “This is the most important factor in the situation,”
+unless the action of the market shows that others agree with you. Every
+human mind has its own peculiarities, so presumably yours has, though
+you can’t see them plainly; but the stock market is the meeting of many
+minds, having every imaginable peculiarity. However important some
+single factor in the situation may appear to you, it is not going to
+control the movement of prices regardless of everything else.
+
+An exaggerated example of “getting a notion” is seen in the so-called
+“hunch.” This term appears to mean, when it means anything, a sort of
+sudden welling up of instinct so strong as to induce the trader to
+follow it regardless of reason. In many cases, the “hunch” is nothing
+more than a strong impulse.
+
+Almost any business man will say at times, “I have a feeling that we
+ought not to do this,” or “Somehow I don’t like that proposition,”
+without being able to explain clearly the grounds for his opposition.
+Likewise the “hunch” of a man who has watched the stock market for
+half a lifetime may not be without value. In such a case it doubtless
+represents an accumulation of small indications, each so trifling or so
+evasive that the trader cannot clearly marshal and review them even in
+his own mind.
+
+Only the experienced trader is entitled to a “hunch.” The novice, or
+the man who is not closely in touch with technical conditions, is
+merely making an unusual ass of himself when he talks about a “hunch.”
+
+The successful trader gradually learns to study his own psychological
+characteristics and allow to some extent for his customary errors of
+judgment. If he finds that he is generally too hasty in reaching a
+conclusion, he learns to wait and reflect further. After making his
+decision, he withdraws it and lays it up on a shelf to ripen. He makes
+only a part of his full commitment at the moment when he feels most
+confident, holding the remainder in reserve.
+
+If he finds that he is usually overcautious, he eventually learns to be
+a little more daring, to buy a part of his line while his mind is still
+partially enveloped in the mists of doubt.
+
+Most of the practical suggestions which can be offered are necessarily
+of a somewhat negative character. We can point out the errors to be
+avoided much more successfully than we can lay out a course of positive
+action. But the following summary may be useful to the active trader:
+
+(1) Your main purpose must be to keep the mind clear and well balanced.
+Hence, do not act hastily on apparently sensational information; do not
+trade so heavily as to become anxious; and do not permit yourself to be
+influenced by your position in the market.
+
+(2) Act on your own judgment, or else act absolutely and entirely on
+the judgment of another, regardless of your own opinion. “Too many
+cooks spoil the broth.”
+
+(3) When in doubt, keep out of the market. Delays cost less than losses.
+
+(4) Endeavor to catch the trend of sentiment. Even if this should
+be temporarily against fundamental conditions, it is nevertheless
+unprofitable to oppose it.
+
+(5) The greatest fault of ninety-nine out of one hundred active traders
+is being bullish at high prices and bearish at low prices. Therefore,
+refuse to follow the market beyond what you consider a reasonable
+climax, no matter how large the possible profits that you may appear to
+be losing by inaction.
+
+The field covered by these chapters is to a great extent new. As it
+becomes more thoroughly cultivated, it may be possible to speak with
+more scientific definiteness. In the meantime, the author hopes that
+his comments and suggestions may be of some service in helping readers
+to avoid unwise risks and to apply sound principles of analysis to the
+investment or speculative situation.
+
+
+
+
+_THE MAGAZINE OF WALL STREET_
+
+_Articles by practical, authoritative writers discuss each month_:
+
+
+ =Business and Investment Conditions=—the future, not the past.
+
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+
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+
+ =Bargains in Stocks=—as indicated by earning power.
+
+ =Railroad and Industrial Reports=—analyzed and interpreted.
+
+ =Digest of Investment News=—condensed from all authentic sources.
+
+ =The Market Outlook=—factors beneath the surface of current events.
+
+ =Cotton and Grain=—articles by practical students of the situation.
+
+ =Inquiries=—a suggestive department of answers by conservative
+ authorities.
+
+ =Dividend Calendar=—showing in advance when books close.
+
+ =Scientific Methods of Investment=—explained in special articles.
+
+ =Analyses of Trader’s Accounts, etc.=—showing right and wrong methods.
+
+
+  25c. a Copy—$3.00 a Year
+  TICKER PUBLISHING COMPANY
+  2 Rector St., New York
+
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+
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+
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+
+
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+
+CONTENTS:—PRINCIPLES OF PRICE MOVEMENTS; the fundamental basis of
+market changes, by Thos. F. Woodlock, Member N. Y. Stock Exchange—A
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+& Co.—METHODS OF FORECASTING THE MARKET; by Roger W. Babson, the
+eminent statistician—TAKING AN INVESTMENT POSITION; by Henry Hall, the
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+a principle which shows when stocks are scarce—A STOP ORDER METHOD;
+successfully used by an experienced trader—HOW TO JUDGE THE MARKET FROM
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+
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+
+
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+  (formerly The Ticker and Investment Digest)
+  2 Rector St.       New York
+
+
+
+
+The Most Important Factor in Trading or Investing is a Knowledge of
+
+The Trend
+
+
+It is better to know which way the general market is likely to swing
+than to know earnings, dividends or fundamentals.
+
+The tape gives very definite indications as to the immediate future.
+
+Our Trend Letter, written from the tape, contains this information.
+
+ Issued every Thursday with additional special letters whenever a
+ change occurs. Condensed “collect” night letter given by wire to
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+
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+
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+
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+
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+
+
+Price, $1.00 net; $1.45 postpaid
+
+THE TICKER PUBLISHING CO.
+
+2 Rector Street, New York
+
+
+
+
+  Transcriber’s Notes
+
+  pg 17 Changed: to fight the advance by by selling short
+             to: to fight the advance by selling short
+
+  pg 111 Changed: His own mental attitute, then, is a most important
+              to: His own mental attitude, then, is a most important
+
+
+
+*** END OF THE PROJECT GUTENBERG EBOOK 75570 ***
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+      Psychology of the Stock Market | Project Gutenberg
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+<div style='text-align:center'>*** START OF THE PROJECT GUTENBERG EBOOK 75570 ***</div>
+
+<div class="figcenter" style="width: 85%">
+<img src="images/cover.jpg" alt="">
+</div>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter">
+<div class="pageborder">
+<h1>PSYCHOLOGY<br>
+<span class="fs70">OF THE</span><br>
+STOCK MARKET</h1>
+</div>
+<br>
+<br>
+
+<p class="center no-indent fs150 wsp">By G. C. Selden</p>
+
+<p class="center no-indent fs90 wsp">Author of “Trade Cycles,” “What Makes the Market?”
+Etc.</p>
+<br>
+<br>
+
+<p class="center no-indent wsp lh"><span class="smcap fs150">Ticker Publishing Company</span><br>
+2 RECTOR STREET<br>
+NEW YORK
+</p>
+</div>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter">
+<h2 class="nobreak" id="PREFACE">PREFACE</h2>
+</div>
+
+<p class="drop-cap"><span class="upper-case">This</span> book is based upon the belief that the
+movements of prices on the exchanges
+are dependent to a very large degree on the
+mental attitude of the investing and trading
+public. It is the result of years of study and
+experience as fellow at Columbia University,
+news writer, statistician, on the editorial staff
+of <span class="smcap">The Magazine of Wall Street</span>, etc.</p>
+
+<p>The book is intended chiefly as a practical
+help to that considerable part of the community
+which is interested, directly or indirectly,
+in the markets; but it is hoped that it
+may also have some scientific value as a preliminary
+discussion in a new field, where opportunities
+for further research seem almost
+unlimited.</p>
+
+<p class="right">
+<span class="smcap">G. C. Selden.</span><br>
+</p>
+
+<p>New York, May 28, 1912.</p>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter">
+<p class="center no-indent fs80">
+Copyright, 1912<br>
+Ticker Publishing Company
+</p>
+</div>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter">
+<h2 class="nobreak" id="CONTENTS">CONTENTS.</h2>
+</div>
+
+<table class="autotable lh">
+<tr>
+<td class="tdr">I.</td>
+<td class="tdl">The Speculative Cycle</td>
+<td class="tdr"><a href="#Page_9">9</a></td>
+</tr>
+<tr>
+<td class="tdr">II.</td>
+<td class="tdl">Inverted Reasoning and Its Consequences</td>
+<td class="tdr"><a href="#Page_27">27</a></td>
+</tr>
+<tr>
+<td class="tdr">III.</td>
+<td class="tdl">“They”</td>
+<td class="tdr"><a href="#Page_39">39</a></td>
+</tr>
+<tr>
+<td class="tdr">IV.</td>
+<td class="tdl">Confusing the Present with the Future—Discounting</td>
+<td class="tdr"><a href="#Page_55">55</a></td>
+</tr>
+<tr>
+<td class="tdr">V.</td>
+<td class="tdl">Confusing the Personal with the General</td>
+<td class="tdr"><a href="#Page_71">71</a></td>
+</tr>
+<tr>
+<td class="tdr">VI.</td>
+<td class="tdl">The Panic and the Boom</td>
+<td class="tdr"><a href="#Page_87">87</a></td>
+</tr>
+<tr>
+<td class="tdr">VII.</td>
+<td class="tdl">The Psychology of Scale Orders</td>
+<td class="tdr"><a href="#Page_101">101</a></td>
+</tr>
+<tr>
+<td class="tdr">VIII.</td>
+<td class="tdl">The Mental Attitude of the Individual</td>
+<td class="tdr"><a href="#Page_109">109</a></td>
+</tr>
+</table>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter">
+<p><span class="pagenum" id="Page_9">[Pg 9]</span></p>
+
+<h2 class="nobreak" id="IThe_Speculative_Cycle">I—The Speculative Cycle</h2>
+</div>
+
+<p class="drop-cap"><span class="upper-case">Most</span> experienced professional
+traders in the stock market will
+readily admit that the minor
+fluctuations, amounting to perhaps five
+or ten dollars a share in the active
+speculative issues, are chiefly psychological.
+They result from varying attitudes
+of the public mind, or, more
+strictly, from the mental attitudes of
+those persons who are interested in the
+market at the time.</p>
+
+<p>Such fluctuations may be, and often
+are, based on “fundamental” conditions—that
+is, on real changes in the
+dividend prospects of the stocks affected
+or on variations in the earning
+power of the corporations represented—and
+again they may not. The broad
+movements of the market, covering
+periods of months or even years, are
+always the result of general financial<span class="pagenum" id="Page_10">[Pg 10]</span>
+conditions; but the smaller intermediate
+fluctuations represent changes in
+the state of the public mind, which
+may or may not coincide with alterations
+in basic factors.</p>
+
+<p>To bring out clearly the degree to
+which psychology enters into the stock
+market problem from day to day, it is
+only necessary to reproduce a conversation
+between professional traders
+such as may be heard almost any day
+in New street or in the neighboring
+cafés.</p>
+
+<p>“Well, what do you know?” says one
+trader to the other.</p>
+
+<p>“Just covered my Steel,” is the reply.
+“Too much company. Everybody
+seems to be short.”</p>
+
+<p>“Everybody I’ve seen thinks just as
+you do. Each one has covered because
+he thinks everybody else is short—still
+the market doesn’t rally much.
+I don’t believe there’s much short interest
+left, and if that’s the case we
+shall get another break.”</p>
+
+<p>“Yes, that’s what they all say—and<span class="pagenum" id="Page_11">[Pg 11]</span>
+they’ve all sold short again because
+they think everybody else has covered.
+I believe there’s just as much short
+interest now as there was before.”</p>
+
+<p>It is evident that this series of inversions
+might be continued indefinitely.
+These alert mental acrobats are doing
+a succession of flip-flops, each one of
+which leads up logically to the next,
+without ever arriving at a final stopping-place.</p>
+
+<p>The main point of their argument is
+that the state of mind of a man short
+of the market is radically different from
+the state of mind of one who is long.
+Their whole study, in such a conversation,
+is the mental attitude of those interested
+in the market. If a majority
+of the volatile class of in-and-out traders
+are long, many of them will hasten
+to sell on any sign of weakness and
+a decline will result. If the majority
+are short, they will buy on any development
+of strength and an advance may
+be expected.</p>
+
+<p>The psychological aspects of speculation<span class="pagenum" id="Page_12">[Pg 12]</span>
+may be considered from two points
+of view, equally important. One question
+is, What effect do varying mental
+attitudes of the public have upon the
+course of prices? How is the character
+of the market influenced by psychological
+conditions?</p>
+
+<p>A second consideration is, How does
+the mental attitude of the individual
+trader affect his chances of success?
+To what extent, and how, can he overcome
+the obstacles placed in his pathway
+by his own hopes and fears, his
+timidities and his obstinacies?</p>
+
+<p>These two points of view are so
+closely involved and intermingled that
+it is almost impossible to consider
+either one alone. It will be necessary
+to take up first the subject of speculative
+psychology as a whole, and later
+to attempt to draw conclusions both
+as to its effects upon the market and
+its influence upon the fortunes of the
+individual trader.</p>
+
+<p>As a convenient starting point it may
+be well to trace briefly the history of<span class="pagenum" id="Page_13">[Pg 13]</span>
+the typical speculative cycle, which
+runs its course over and over, year after
+year, with infinite slight variations but
+with substantial similarity, on every
+stock exchange and in every speculative
+market of the world—and presumably
+will continue to do so as long as
+prices are fixed by the competition of
+buyers and sellers, and as long as human
+beings seek a profit and fear a loss.<a id="FNanchor_1" href="#Footnote_1" class="fnanchor">[1]</a></p>
+
+<p>Beginning with a condition of dullness
+and inactivity, with small fluctuations
+and very slight public interest,
+prices begin to rise, at first almost imperceptibly.
+No special reason appears
+for the advance, and it is generally
+thought to be merely temporary, due to
+small professional operations. There
+is, of course, some short interest in the
+market, mostly, at this time, of the
+character sometimes called a “sleeping”<span class="pagenum" id="Page_14">[Pg 14]</span>
+short interest. An active speculative
+stock is never entirely free from shorts.</p>
+
+<p>As there is so little public speculation
+at this period in the cycle, there
+are but few who are willing to sell out
+on so small an advance, hence prices
+are not met by any large volume of
+profit-taking. The smaller professionals
+take the short side for a turn,
+with the idea that trifling fluctuations
+are the best that can be hoped for at
+the moment and must be taken advantage
+of if any profits are to be secured.
+This class of selling brings prices back
+almost to their former dead level.</p>
+
+<p>Soon another unostentatious upward
+movement begins, carrying prices a
+trifle higher than the first. A few
+shrewd traders take the long side, but
+the public is still unmoved and the
+sleeping short interest—most of it originally
+put out at much higher figures—still
+refuses to waken.</p>
+
+<p>Gradually prices harden further and
+finally advance somewhat sharply. A
+few of the more timid shorts cover, perhaps<span class="pagenum" id="Page_15">[Pg 15]</span>
+to save a part of their profits or
+to prevent their trades from running
+into a loss. The fact that a bull turn
+is coming now penetrates through another
+layer of intellectual density and
+another wave of traders take the long
+side. The public notes the advance and
+begins to think some further upturn
+is possible, but that there will be plenty
+of opportunities to buy on substantial
+reactions.</p>
+
+<p>Strangely enough, these reactions, except
+of the most trifling character, do
+not appear. Waiting buyers do not get
+a satisfactory chance to take hold.
+Prices begin to move up faster. There
+is a halt from time to time, but when
+a real reaction finally comes the market
+looks “too weak to buy,” and when it
+starts up again it often does so with a
+sudden leap that leaves would-be purchasers
+far in the rear.</p>
+
+<p>At length the more stubborn bears
+become alarmed and begin to cover in
+large volume. The market “boils,” and
+to the short who is watching the tape,<span class="pagenum" id="Page_16">[Pg 16]</span>
+seems likely to shoot through the ceiling
+at almost any moment. However
+firm may be his bearish convictions, his
+nervous system eventually gives out under
+this continual pounding, and he
+covers everything “at the market” with
+a sigh of relief that his losses are no
+greater.</p>
+
+<p>About this time the outside public
+begins to reach the conclusion that the
+market is “too strong to react much,”
+and that the only thing to do is to “buy
+’em anywhere.” From this source
+comes another wave of buying, which
+soon carries prices to new high levels,
+and purchasers congratulate themselves
+on their quick and easy profits.</p>
+
+<p>For every buyer there must be a
+seller—or, more accurately, for every
+one hundred shares bought one hundred
+shares must be sold, as the actual number
+of <em>persons</em> buying at this stage is
+likely to be much greater than the number
+of <em>persons</em> selling. Early in the
+advance the supply of stocks is small
+and comes from scattered sources, but<span class="pagenum" id="Page_17">[Pg 17]</span>
+as prices rise, more and more holders
+become satisfied with their profits and
+willing to sell. The bears, also, begin
+to fight the advance by selling short
+on every quick rise. A stubborn professional
+bear will often be forced to
+cover again and again, with a small
+loss each time, before he finally locates
+the top and secures a liberal profit on
+the ensuing decline.</p>
+
+<p>Those selling at this stage are not,
+as a rule, the largest holders. The largest
+holders are usually those whose
+judgment is sound enough, or whose
+connections are good enough, so that
+they have made a good deal of money;
+and neither a sound judgment nor the
+best advisers are likely to favor selling
+so early in the advance, when much
+larger profits can be secured by simply
+holding on.</p>
+
+<p>The height to which prices can now
+be carried depends on the underlying
+conditions. If money is easy and general
+business prosperous a prolonged
+bull movement may result, while<span class="pagenum" id="Page_18">[Pg 18]</span>
+strained banking resources or depressed
+trade will set a definite limit to the
+possible advance. If conditions are
+bearish, the driving of the biggest
+shorts to cover will practically end the
+rise; but in a genuine bull market the
+advance will continue until checked by
+sales of stocks held for investment,
+which come upon the market only
+when prices are believed to be unduly
+high.</p>
+
+<p>In a sense, the market is always a
+contest between investors and speculators.
+The real investor, looking chiefly
+to interest return, but by no means unwilling
+to make a profit by buying low
+and selling high, is ready, perhaps, to
+buy his favorite stock at a price which
+will yield him six per cent. on his investment,
+or to sell at a price yielding
+only four per cent. The speculator
+cares nothing about interest return.
+He wants to buy before prices go up
+and to sell short before they go down.
+He would as soon buy at the top of a<span class="pagenum" id="Page_19">[Pg 19]</span>
+big rise at any other time, provided prices
+are going still higher.</p>
+
+<p>As the market advances, therefore,
+one investor after another sees his limit
+reached and his stock sold. Thus the
+volume of stocks to be carried or tossed
+from hand to hand by bullish speculators
+is constantly rolling up like a
+snowball. On the ordinary intermediate
+fluctuations, covering five to
+twenty dollars a share, these sales by
+investors are small compared with the
+speculative business. In one hundred
+shares of a stock selling at 150, the
+investor has $15,000; but with this sum
+the speculator can easily carry ten
+times that number of shares.</p>
+
+<p>The reason why sales by investors
+are so effective is not because of the
+actual amount of stock thrown on the
+market, but because this stock is a permanent
+load, which will not be got
+rid of again until prices have suffered
+a severe decline. What the speculator
+sells he or some other trader may buy
+back tomorrow.</p>
+
+<p><span class="pagenum" id="Page_20">[Pg 20]</span></p>
+
+<p>The time comes when everybody
+seems to be buying. Prices become
+confused. One stock leaps upward in
+a way to strike terror to the heart of
+the last surviving short. Another appears
+almost equally strong, but slips
+back unobtrusively when nobody is
+looking, like the frog jumping out of
+the well in the arithmetic of our boyhood.
+Still another churns violently in
+one place, like a side-wheeler stuck on
+a sand-bar.</p>
+
+<p>Then the market gives a sudden
+lurch downward, as though in danger
+of spilling out its unwieldy contents.
+This is hailed as a “healthy reaction,”
+though it is a mystery whom it can be
+healthy for, unless it is the shorts.
+Prices recover again, with everybody
+happy except a few disgruntled bears,
+who are rightly regarded with contemptuous
+amusement.</p>
+
+<p>Curiously, however, there seems to
+be stock enough for all comers, and
+the few cranks who have time to
+bother with such things notice that<span class="pagenum" id="Page_21">[Pg 21]</span>
+the general average of prices is now
+rising very slowly, if at all. The largest
+speculative holders of stocks, finding
+a market big enough to absorb
+their sales, are letting go. And there
+are always stocks enough to go around.
+Our big capitalists are seldom entirely
+out of stocks. They merely have more
+stocks when prices are low and fewer
+when prices are high. Moreover, long
+before there is any danger of the supply
+running out, plenty of new issues
+are created.</p>
+
+<p>When there is a general public interest
+in the stock market, an immense
+amount of realizing will often be absorbed
+within three or four days or a
+week, after which the deluge; but if
+speculation is narrow, prices may remain
+around top figures for weeks or
+months, while big holdings are fed out,
+a few hundred shares here and a few
+hundred there, and even then a balance
+may be left to be thrown over on
+the ensuing decline at whatever prices
+can be obtained. Great speculative<span class="pagenum" id="Page_22">[Pg 22]</span>
+leaders are far from infallible. They
+have often sold out too soon and later
+have seen the market run away to unexpected
+heights, or have held on too
+long and have suffered severe losses
+before they could get out.</p>
+
+<p>In this selling the bull leaders get a
+good deal of undesired help from the
+bears. However wary the bulls may
+be in concealing their sales, their machinations
+will be discovered by watchful
+professionals and shrewd chart students,
+and a considerable sprinkling of
+short sales will be put out within a
+few points of the top. This is one of
+the reasons why the long swings in
+active speculative stocks are smaller
+in proportion to price than in inactive
+specialties of a similar character—contrary
+to the generally received impression.
+It is rare that any considerable
+short interest exists in the inactive
+stocks.</p>
+
+<p>Once the top-heavy load is overturned,
+the decline is usually more
+rapid than the previous advance. The<span class="pagenum" id="Page_23">[Pg 23]</span>
+floating supply, now greatly increased,
+is tossed about from one speculator to
+another at lower and lower prices.
+From time to time stocks become temporarily
+lodged in stubborn hands, so
+that part of the shorts take fright and
+cover, causing a sharp upturn; but so
+long as the load of stocks is still on
+the market the general course of prices
+must be downward.</p>
+
+<p>Until investors or big speculative
+capitalists again come into the market,
+the load of stocks to be carried by ordinary
+speculative bulls increases almost
+continually. There is no lessening
+of the floating supply of stock certificates
+in the Street, and there is a
+gradual increase in the short interest;
+and of course the bulls have to carry
+these short sales as well as the actual
+certificates, since for every seller there
+must be a buyer, whether the sale be
+made by a short or a long. Shorts
+cover again and again on the sharp
+breaks, but in most cases they put out
+their lines again, either higher or lower,<span class="pagenum" id="Page_24">[Pg 24]</span>
+as opportunity offers. On the average,
+the short interest is largest at low
+prices, though there are likely to be
+periods during the decline when it will
+be larger than at the final bottom,
+where buying by shorts often helps to
+avert panicky conditions.</p>
+
+<p>The length of this decline, like the
+extent of the preceding advance, depends
+on fundamental conditions; for
+both investors and speculative capitalists
+will come into the market sooner
+if all conditions are favorable than they
+will in a stringent money market or
+when the future prospects of business
+are unsatisfactory. As a rule, buyers
+do not appear in force until a “bargain
+day” appears. This is when, in its
+downward course, the heavy load of
+stocks strikes an area honeycombed
+with stop loss orders. Floor traders
+seize the opportunity to put out short
+lines and a general collapse results.</p>
+
+<p>Here are plenty of stocks to be had
+cheap, and shrewd operators—large
+and small, but mostly large or on the<span class="pagenum" id="Page_25">[Pg 25]</span>
+way to become so—are busy picking
+them up. The fixed limits of many investors
+are also reached by the sharp
+break, and their purchases disappear,
+to be seen in the Street no more until
+the next bull turn.</p>
+
+<p>Many shorts cover on such a break,
+but not all. The sequel to the “bargain
+day” is a big short interest which
+has overstayed its market, and a quick
+rally follows; but when the more
+urgent shorts get relief, prices sag
+again and fall into that condition of
+lethargy from which this consideration
+of the speculative cycle started.</p>
+
+<p>The movements described are substantially
+uniform, whether the cycle
+be one covering a week, a month, or a
+year. The big cycle includes many
+intermediate movements, and these
+movements in turn contain smaller
+swings. Investors do not participate to
+any extent in the small swings, but otherwise
+the forces involved in a three-point
+turn up and down are substantially the
+same as those which appear in a thirty-point<span class="pagenum" id="Page_26">[Pg 26]</span>
+cycle, though not so easy to identify.</p>
+
+<p>The fact will at once be recognized
+that the above description is, in essence,
+a story of human hopes and
+fears; of a mental attitude, on the part
+of those interested, resulting from their
+own position in the market, rather than
+from any deliberate judgment of conditions;
+of an unwarranted projection
+by the public imagination of a perceived
+present into an unknown though not
+wholly unknowable future.</p>
+
+<p>Laying aside for the present the influence
+of fundamental conditions on
+prices, it is our task to trace out both
+the causes and the effects of these
+psychological elements in speculation.</p>
+
+
+<div class="footnotes"><h3>FOOTNOTES:</h3>
+
+<div class="footnote">
+
+<p><a id="Footnote_1" href="#FNanchor_1" class="label">[1]</a> The writer discussed this subject rather fully in
+the <cite>Quarterly Journal of Economics</cite>, Vol. XVI, No. 2.
+The article will also be found extensively summarized
+and quoted in Vol. VII of “Modern Business,” edited
+by Joseph French Johnson, Dean of New York University
+School of Commerce.</p>
+
+</div>
+</div>
+
+
+<hr class="chap x-ebookmaker-drop">
+<p><span class="pagenum" id="Page_27">[Pg 27]</span></p>
+
+<div class="chapter">
+<h2 class="nobreak" id="IIInverted_Reasoning_and_its">II—Inverted Reasoning and its
+Consequences</h2>
+</div>
+
+<p class="drop-cap"><span class="upper-case">It</span> is hard for the average man to oppose
+what appears to be the general
+drift of public opinion. In the
+stock market this is perhaps harder
+than elsewhere; for we all realize that
+the prices of stocks must, in the long
+run, be controlled by public opinion.
+The point we fail to remember is that
+public opinion in a speculative market
+is measured in dollars, not in population.
+One man controlling one million
+dollars has double the weight of five
+hundred men with one thousand dollars
+each. Dollars are the horse-power
+of the markets—the mere number of
+men does not signify.</p>
+
+<p>This is why the great body of opinion
+appears to be bullish at the top and
+bearish at the bottom. The multitude
+of small traders must be, as a plain<span class="pagenum" id="Page_28">[Pg 28]</span>
+necessity, long when prices are at the
+top, and short or out of the market at
+the bottom. The very fact that they
+<em>are</em> long at the top shows that they
+have been supplied with stocks from
+some source.</p>
+
+<p>Again, the man with one million dollars
+is a silent individual. The time
+when it was necessary for him to talk
+is past—his money now does the talking.
+But the one thousand men who
+have one thousand dollars each are
+conversational, fluent, verbose to the
+last degree; and among these smaller
+traders are the writers—the newspaper
+and news bureau men, and the manufacturers
+of gossip for brokerage
+houses.</p>
+
+<p>It will be observed that the above
+course of reasoning leads us to the conclusion
+that most of those who write
+and talk about the market are more
+likely to be wrong than right, at least
+so far as speculative fluctuations are
+concerned. This is not complimentary
+to the “moulders of public opinion,”<span class="pagenum" id="Page_29">[Pg 29]</span>
+but most seasoned newspaper readers
+will agree that it is true. The press
+reflects, in a general way, the thoughts
+of the multitude, and in the stock market
+the multitude is necessarily, as a
+logical deduction from the facts of the
+case, likely to be bullish at high prices
+and bearish at low.</p>
+
+<p>It has often been remarked that the
+average man is an optimist regarding
+his own enterprises and a pessimist regarding
+those of others. Certainly this
+is true of the professional trader in
+stocks. As a result of the reasoning
+outlined above, he comes habitually to
+expect that nearly every one else will
+be wrong, but is, as a rule, confident
+that his own analysis of the situation
+will prove correct. He values the opinions
+of a few persons whom he believes
+to be generally successful; but
+aside from these few, the greater the
+number of the bullish opinions he
+hears, the more doubtful he becomes
+about the wisdom of following the bull
+side.</p>
+
+<p><span class="pagenum" id="Page_30">[Pg 30]</span></p>
+
+<p>This apparent contrariness of the
+market, although easily understood
+when its causes are analyzed, breeds
+in professional traders a peculiar sort
+of skepticism—leads them always to
+distrust the obvious and to apply a
+kind of inverted reasoning to almost
+all stock market problems. Often, in
+the minds of traders who are not naturally
+logical, this inverted reasoning
+assumes the most erratic and grotesque
+forms, and it accounts for many
+apparently absurd fluctuations in prices
+which are commonly charged to manipulation.</p>
+
+<p>For example, a trader starts with
+this assumption: The market has had
+a good advance; all the small traders
+are bullish; somebody must have sold
+them the stock which they are carrying;
+hence the big capitalists are probably
+sold out or short and ready for a
+reaction or perhaps for a bear market.
+Then if a strong item of bullish news
+comes out—one, let us say, that really
+makes an important change in the<span class="pagenum" id="Page_31">[Pg 31]</span>
+situation—he says, “Ah, so this is what
+they have been bulling the market on!
+It has been discounted by the previous
+rise.” Or he may say, “They are putting
+out this bull news to sell stocks
+on.” He proceeds to sell out any long
+stocks he may have or perhaps to sell
+short.</p>
+
+<p>His reasoning may be correct or it
+may not; but at any rate his selling
+and that of others who reason in a
+similar way, is likely to produce at
+least a temporary decline on the announcement
+of the good news. This
+decline looks absurd to the outsider
+and he falls back on the old explanation,
+“All manipulation.”</p>
+
+<p>The same principle is often carried
+further. You will find professional
+traders reasoning that favorable figures
+on the steel industry, for example,
+have been concocted to enable insiders
+to sell their Steel; or that gloomy reports
+are put in circulation to facilitate
+accumulation. Hence they may act in
+direct opposition to the news and carry<span class="pagenum" id="Page_32">[Pg 32]</span>
+the market with them, for the time at
+least.</p>
+
+<p>The less the trader knows about the
+fundamentals of the financial situation
+the more likely he is to be led astray
+in conclusions of this character. If he
+has confidence in the general strength
+of conditions he may be ready to accept
+as genuine and natural, a piece of
+news which he would otherwise receive
+with cynical skepticism and use as a
+basis for short sales. If he knows that
+fundamental conditions are unsound,
+he will not be so likely to interpret bad
+news as issued to assist in accumulation
+of stocks.</p>
+
+<p>The same reasoning is applied to
+large purchases through brokers known
+to be associated with capitalists. In fact,
+in this case we often hear a double inversion,
+as it were. Such buying may
+impress the observer in three ways:</p>
+
+<p>1. The “rank outsider” takes it at
+face value, as bullish.</p>
+
+<p>2. A more experienced trader may
+say, “If they really wished to get the<span class="pagenum" id="Page_33">[Pg 33]</span>
+stocks they would not buy through
+their own brokers, but would endeavor
+to conceal their buying by scattering
+it among other houses.”</p>
+
+<p>3. A still more suspicious professional
+may turn another mental somersault
+and say, “They are buying
+through their own brokers so as to
+throw us off the scent and make us
+think someone else is using their brokers
+as a blind.” By this double somersault
+such a trader arrives at the same
+conclusion as the outsider.</p>
+
+<p>The reasoning of traders becomes
+even more complicated when large
+buying or selling is done openly by a
+big professional who is known to trade
+in-and-out for small profits. If he buys
+50,000 shares, other traders are quite
+willing to sell to him and their opinion
+of the market is little influenced,
+simply because they know he may sell
+50,000 the next day or even the next
+hour. For this reason great capitalists
+sometimes buy or sell through such big
+professional traders in order to execute<span class="pagenum" id="Page_34">[Pg 34]</span>
+their orders easily and without arousing
+suspicion. Hence the play of subtle
+intellects around big trading of this
+kind often becomes very elaborate.</p>
+
+<p>It is to be noticed that this inverted
+reasoning is useful chiefly at the top
+or bottom of a movement, when distribution
+or accumulation is taking
+place on a large scale. A market which
+repeatedly refuses to respond to good
+news after a considerable advance is
+likely to be “full of stocks.” Likewise
+a market which will not go down on
+bad news is usually “bare of stocks.”</p>
+
+<p>Between the extremes will be found
+long stretches in which capitalists have
+very little cause to conceal their position.
+Having accumulated their lines
+as low as possible, they are then willing
+to be known as the leaders of the upward
+movement and have every reason
+to be perfectly open in their buying.
+This condition continues until they are
+ready to sell. Likewise, having sold as
+much as they desire, they have no
+reason to conceal their position further,<span class="pagenum" id="Page_35">[Pg 35]</span>
+even though a subsequent decline may
+run for months or a year.</p>
+
+<p>It is during a long upward movement
+that the “lamb” makes money,
+because he accepts facts as facts, while
+the professional trader is often found
+fighting the advance and losing heavily
+because of his over-development of
+cynicism and suspicion.</p>
+
+<p>The successful trader eventually
+learns when to invert his natural mental
+processes and when to leave them
+in their usual position. Often he
+develops a sort of instinct which could
+scarcely be reduced to cold print. But
+in the hands of the tyro this form of
+reasoning is exceedingly dangerous, because
+it permits of putting an alternate
+construction on any event. Bull news
+either (1) is significant of a rising
+trend of prices, or (2) indicates that
+“they” are trying to make a market
+to sell on. Bad news may indicate
+either a genuinely bearish situation or
+a desire to accumulate stocks at low
+prices.</p>
+
+<p><span class="pagenum" id="Page_36">[Pg 36]</span></p>
+
+<p>The inexperienced operator is therefore
+left very much at sea. He is playing
+with the professional’s edged tools
+and is likely to cut himself. Of what
+use is it for him to try to apply his
+reason to stock market conditions when
+every event may be doubly interpreted?</p>
+
+<p>Indeed, it is doubtful if the professional’s
+distrust of the obvious is of
+much benefit to him in the long run.
+Most of us have met those deplorable
+mental wrecks, often found among the
+“chairwarmers” in brokers’ offices,
+whose thinking machinery seems to
+have become permanently demoralized
+as a result of continued acrobatics.
+They are always seeking an “ulterior
+motive” in everything. They credit—or
+debit—Morgan and Rockefeller with
+the smallest and meanest trickery and
+ascribe to them the most artful duplicity
+in matters which those “high financiers”
+wouldn’t stoop to notice. The
+continual reversal of the mental engine
+sometimes deranges its mechanism.</p>
+
+<p>Probably no better general rule can<span class="pagenum" id="Page_37">[Pg 37]</span>
+be laid down than the brief one, “Stick
+to common sense.” Maintain a balanced,
+receptive mind and avoid abstruse
+deductions. A few further suggestions
+may, however, be offered:</p>
+
+<p>If you already have a position in
+the market, do not attempt to bolster
+up your failing faith by resorting to
+intellectual subtleties in the interpretation
+of obvious facts. If you are
+long or short of the market, you are
+not an unprejudiced judge, and you will
+be greatly tempted to put such an interpretation
+upon current events as will
+coincide with your preconceived opinion.
+It is hardly too much to say that
+this is the greatest obstacle to success.
+The least you can do is to avoid inverted
+reasoning in support of your
+own position.</p>
+
+<p>After a prolonged advance, do not
+call inverted reasoning to your aid in
+order to prove that prices are going
+still higher; likewise after a big break
+do not let your bearish deductions become
+too complicated. Be suspicious<span class="pagenum" id="Page_38">[Pg 38]</span>
+of bull news at high prices, and of bear
+news at low prices.</p>
+
+<p>Bear in mind that an item of news
+usually causes but <em>one</em> considerable
+movement of prices. If the movement
+takes place before the news comes out,
+as a result of rumors and expectations,
+then it is not likely to be repeated after
+the announcement is made; but if the
+movement of prices has not preceded,
+then the news contributes to the general
+strength or weakness of the situation
+and a movement of prices may
+follow.</p>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter">
+<p><span class="pagenum" id="Page_39">[Pg 39]</span></p>
+
+<h2 class="nobreak" id="IIIThey">III—“They”</h2>
+</div>
+
+<p class="drop-cap"><span class="upper-case">If</span> a man entirely unfamiliar with the
+stock market should spend several
+days around the Exchange listening
+to the conversation of all sorts of
+traders and investors, in order to pick
+up information about the causes of price
+movements, the probability is that the
+most pressing question in his mind at the
+end of that time would be “Who are
+‘They?’”</p>
+
+<p>Everywhere he went he would
+hear about Them. In the customers’
+rooms of the fractional lot houses
+he would find young men trading in
+ten shares and arguing learnedly as
+to what They were to do next. Tape
+readers—experts and tyros alike—would
+tell him that They were accumulating
+Steel, or distributing Reading.
+Floor traders and members of the Exchange
+would whisper that they were<span class="pagenum" id="Page_40">[Pg 40]</span>
+told They were going to put the market
+up, or down, as the case might be. Even
+sedate investors might inform him that,
+although the situation was bearish, undoubtedly
+They would have to put the
+market temporarily higher in order to
+unload Their stocks.</p>
+
+<p>This “They” theory of the market is
+quite as prevalent among successful
+traders as among beginners—probably
+more so. There may be room for argument
+as to why this is so, but as to the
+fact itself there is no doubt. Whether
+They are a myth or a definite reality,
+many persons are making money by
+studying the market from this point of
+view.</p>
+
+<p>If you were to go around Wall street
+and ask various classes of traders who
+They are, you would get nearly as many
+different answers as the number of people
+interviewed. One would say, “The
+house of Morgan”; another, “Standard
+Oil and associated interests”—which is
+pretty broad, when you stop to think of
+it; another, “The big banking interests”;<span class="pagenum" id="Page_41">[Pg 41]</span>
+still another, “Professional traders on the
+floor”; a fifth, “Pools in the various favorite
+stocks, which act more or less in
+concert”; a sixth might say, “Shrewd and
+successful speculators, whoever and
+wherever they are”; while to the seventh,
+They may typify merely active traders
+as a whole, whom he conceives to make
+prices by falling over each other to buy
+or to sell.</p>
+
+<p>Indeed, one writer of no small attainments
+as a student of market conditions
+believes that the entire phenomena of the
+New York stock market are under the
+control of some one individual, who is
+presumably, in some way or other, the
+representative of great associated interests.</p>
+
+<p>It seems obviously impossible to trace
+to its source, tag and identify any sort
+of permanent controlling power. The
+stock markets of the world move pretty
+much together in the broad cyclical
+swings, so that such a power would have
+to consist of a world-wide association of
+great financial interests, controlling all of<span class="pagenum" id="Page_42">[Pg 42]</span>
+the principal security markets. The average
+observer will find it difficult to
+masticate and swallow this proposition.</p>
+
+<p>The effort to reduce the science of
+speculation and investment to an impossible
+definiteness or an ideal simplicity
+is, I believe, responsible for many failures.
+A. S. Hardy, the diplomat, who was
+formerly a professor of mathematics and
+wrote books on quaternions, differential
+calculus, etc., once remarked that the
+study of mathematics is very poor mental
+discipline, because it does not cultivate
+the judgment. Given fixed and certain
+premises, your mathematician will follow
+them out to a correct conclusion; but in
+practical affairs the whole difficulty lies
+in selecting your premises.</p>
+
+<p>So the market student of a mathematical
+turn of mind is always seeking a
+rule or a set of rules—a “sure thing” as
+traders put it. He would not seek such
+rules for succeeding in the grocery business
+or the lumber business; he would,
+on the contrary, analyze each situation as
+it arose and act accordingly. The stock<span class="pagenum" id="Page_43">[Pg 43]</span>
+market presents itself to my mind as a
+purely practical proposition. Scientific
+methods may be applied to any line of
+business, from stocks to chickens, but
+this is a very different thing from trying
+to reduce the fluctuations of the stock
+market to a basis of mathematical certainty.</p>
+
+<p>In discussing the identity of Them,
+therefore, we must be content to take
+obvious facts as we find them without
+attempting to spin fine theories.</p>
+
+<p>There are three senses in which this
+idea of “Them” has some foundation in
+fact. First, “They” may be and often
+are roughly conceived of as the floor
+traders on the Stock Exchange who are
+directly concerned in making quotations,
+pools formed to control certain stocks, or
+individual manipulators.</p>
+
+<p>Floor traders exercise an important influence
+on the immediate movement of
+prices. Suppose, for example, they observe
+that offerings of Reading are very
+light. Declines do not induce liquidation
+and only small offerings of stock are met<span class="pagenum" id="Page_44">[Pg 44]</span>
+on advances. They begin to feel that, in
+the absence of unexpected cataclysms,
+Reading will not decline much. The natural
+thing for them to do is to begin buying
+Reading on all soft spots. Whenever
+a few hundred shares are offered at a
+bargain, floor traders snap up the stock.</p>
+
+<p>As a result of this “bailing out” of the
+market, Reading becomes scarcer still,
+and traders, being now long, become
+more bullish. They begin to “mark up
+prices.” This is not difficult, since they
+are, for the time being, practically unanimous
+in a desire for higher prices. Suppose
+the market is 161⅛ bid, offered at
+161¼. They find that only 100 shares
+are for sale at ¼, and 200 are offered
+at ⅜. As to how much stock may be
+awaiting bids at ½ or higher, they cannot
+be sure, but can generally make a
+shrewd guess. One or more traders take
+these offerings, of perhaps 500 shares,
+and make the market ½ bid. The other
+floor traders are not willing to sell at
+this trifling profit, and a wait ensues to
+see whether any outside orders are attracted<span class="pagenum" id="Page_45">[Pg 45]</span>
+by the movement of the price,
+and if so, whether they are buying or
+selling orders. If a few buying orders
+come in, they are filled, perhaps at ⅝
+and ¾. If selling appears, the floor
+traders retire in good order, take the
+offerings at lower prices, and try it again
+the next day or perhaps the next hour.
+Eventually, by seizing every favorable
+opportunity, they engineer an upward
+move of perhaps two or three points
+without taking any more stock than they
+want.</p>
+
+<p>If such a movement attracts a following,
+it may easily run ten points without
+any real change in the prospects of the
+Reading road—though the prospects of
+the road may have had something to do
+with making the stock scarce before the
+movement started. On the other hand,
+if large offerings of stock are encountered
+at the advance, the boomlet is
+ignominiously squelched and the floor
+traders make trifling profits or losses.</p>
+
+<p>Pools are not so common as most outsiders
+believe. There are many difficulties<span class="pagenum" id="Page_46">[Pg 46]</span>
+and complications to be overcome before
+a pool can be formed, held together,
+and operated successfully, as we had ample
+opportunity to observe not long ago
+in the case of Hocking Coal &amp; Iron.
+But if a definite pool exists in any stock,
+its operations are practically a reproduction,
+on a larger scale and under a binding
+agreement, of the methods employed
+by floor traders over a smaller range and
+in a mere loose and voluntary association
+resulting from their common interests.
+And the individual manipulator is
+only a pool consisting of one person.</p>
+
+<p>Second, many conceive “Them” as an association
+of powerful capitalists who are
+running a campaign in all the important
+speculative stocks simultaneously. It is
+safe to say that no such permanent and
+united association exists, though it would
+be hard to prove such a statement. But
+there have been many times when a single
+great interest was practically in control
+of the market for a time, other interests
+being content to look on, or to<span class="pagenum" id="Page_47">[Pg 47]</span>
+participate in a small way, or to await a
+favorable chance to take the other side.</p>
+
+<p>The “Standard Oil crowd,” the “Gates
+crowd,” the “Morgan interests,” and
+Harriman and his associates, will at
+once occur to the reader as having been,
+at various times in the past, in sole control
+of an important general campaign.
+At present the great interests are generally
+classified into three divisions—Morgan,
+Standard Oil, and Kuhn-Loeb.</p>
+
+<p>A definite agreement among such interests
+as these would be impossible, except
+for limited and temporary purposes.
+This is perhaps not so much because
+these high financiers couldn’t trust each
+other, as it is because each so-called interest
+consists of a loosely bound aggregation
+of followers of all sorts and varieties,
+having only one thing in common—control
+of capital. Such an “interest”
+is not an army, where the traitor
+can be court-martialed and shot; it is
+a mob, and has to be led, not driven.
+True, the known traitor might be put to
+death, financially speaking, but in stock<span class="pagenum" id="Page_48">[Pg 48]</span>
+market operations the traitor cannot, as
+a rule, be known. Unless his operations
+are of unusual size, he can successfully
+cover his tracks.</p>
+
+<p>From this second point of view,
+“They” are not always active in the market.
+Great campaigns can only be undertaken
+with safety in periods when the
+future is to a certain extent assured. When
+the future is in doubt, when various
+confusing elements enter into the financial
+and political situation, leading financiers
+may be quite content to confine
+their stock market operations to individual
+deals, and to postpone the inauguration
+of a broad campaign until a more
+solid foundation exists for it.</p>
+
+<p>Third, “They” may be conceived simply
+as speculators and investors in
+general—all that miscellaneous and
+heterogeneous troop of persons, scattered
+over the whole world, each of
+whom contributes his mite to the fluctuations
+of prices on the Stock Exchange.
+In this sense there is no doubt about the
+existence of Them, and They are the<span class="pagenum" id="Page_49">[Pg 49]</span>
+court of last resort in the establishment
+of prices. To put it another way, these
+are the “They” who are the ultimate consumers
+of securities. It is to Them that
+everybody else is planning, sooner or
+later, directly or indirectly, to sell his
+stocks.</p>
+
+<p>You can lead the horse to water, but
+you can’t make him drink. You or I or
+any other great millionaire can put up
+prices, but you can’t make Them buy the
+stocks from you, unless They have the
+purchasing power and the purchasing
+disposition. So there is no doubt that
+here, at any rate, we have a conception
+of Them which will stand analysis without
+exploding.</p>
+
+<p>In cases where a general campaign is
+being conducted, the “They” theory of
+values is of considerable help in the accumulation
+or distribution of stocks. In
+fact, in the late stages of a bull campaign
+the argument most frequently heard is
+likely to be something as follows: “Yes,
+prices are high and I can’t see that future
+prospects are especially bullish—but<span class="pagenum" id="Page_50">[Pg 50]</span>
+stocks are in strong hands and They
+will have to put them higher to make
+a market to sell on.” Some investors
+make a point of dumping over all their
+stocks as soon as this veteran war-horse
+of the news brigade is groomed and trotted
+out. Likewise, after a prolonged
+bear campaign, we hear that somebody
+is “in trouble” and that They are going
+to break the market until certain concentrated
+holdings are brought out.</p>
+
+<p>All this is very likely to be nothing
+but dust thrown in the eyes of that most
+gullible of all created beings—the haphazard
+speculator. When prices are so
+high in comparison with conditions that
+no sound reason can be advanced why
+they should go higher, a certain number
+of people are still induced to buy because
+of what They are going to do. Or,
+at least, if the public can no longer be
+induced to buy in any large volume, it is
+prevented from selling short for fear of
+what They may do.</p>
+
+<p>The close student of the technical condition
+of the market—by which is meant<span class="pagenum" id="Page_51">[Pg 51]</span>
+the character of the long and short interests
+from day to day—is pretty sure to
+base his operations to a considerable extent
+on what he thinks They will do
+next. He has in mind Them as described
+in the first classification above—floor
+traders, pools and manipulators.
+He gets a good deal of help from this
+conception, crude as it may appear to
+be—largely, no doubt, because it serves
+to distract his mind from current news
+and gossip, and to prevent him from
+being too greatly influenced by the momentary
+appearance of the market.</p>
+
+<p>When the market looks weakest, when
+the news is at the worst, when bearish
+prognostications are most general, is the
+time to buy, as every schoolboy knows;
+but if a man has in mind a picture of a
+flood of stocks pouring out from the four
+quarters of the globe, with no buyers,
+because of some desperately bad news
+which is just coming over the ticker, it
+is almost a mental impossibility for him
+to get up the courage to plunge in and
+buy. If, on the other hand, he conceives<span class="pagenum" id="Page_52">[Pg 52]</span>
+that They are just giving the market a
+final smash to facilitate covering a gigantic
+line of short stocks, he has courage
+to buy. His view may be right or
+wrong, but at least he avoids buying at
+the top and selling at the bottom, and he
+has nerve to buy a weak market and sell
+a strong one.</p>
+
+<p>The reason for the haziness of the
+“They” conception in the average trader’s
+mind is that he is only concerned
+with Them as They manifest Themselves
+through the stock market. As to who
+They are he feels a mild and detached
+curiosity; but as to Their manifestations
+in the market he is vitally and financially
+interested. It is on the latter point,
+therefore, that he concentrates his
+thoughts.</p>
+
+<p>But inasmuch as definite, painstaking
+analysis of a situation is always better
+than a hazy general notion of it, the
+trader or investor would do much better
+to rid his mind of Them. The word
+“They” means nothing until it has an
+antecedent; and to use it continually<span class="pagenum" id="Page_53">[Pg 53]</span>
+without having any antecedent in mind
+is slipshod language, which stands for
+slipshod thinking. They, in the sense
+of the big banking interests, may be
+working directly against Them in the
+sense of individual manipulators; the
+manipulator, again, may be trying to trap
+Them in the sense of floor traders.</p>
+
+<p>A genuine knowledge of the technical
+condition of the market cannot be
+summed up in any offhand declaration
+about what They are going to do. You
+cannot determine the attitude toward the
+market of every individual who is interested
+in it, but you can roughly classify
+the sources from which buying and selling
+are likely to come, the motives which
+are likely to actuate the various classes,
+and the character of the long interest and
+short interest. In brief, after enough
+study and observation, you can always
+have in mind some kind of an antecedent
+for Them, and must have it, if you base
+your operations on technical conditions.</p>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter">
+<p><span class="pagenum" id="Page_55">[Pg 55]</span></p>
+
+<h2 class="nobreak" id="IVConfusing_the_Present_with">IV—Confusing the Present with
+the Future—Discounting</h2>
+</div>
+
+<p class="drop-cap"><span class="upper-case">It</span> is axiomatic that inexperienced
+traders and investors, and indeed a
+majority of the more experienced as
+well, are continually trying to speculate
+on past events. Suppose, for example,
+railroad earnings as published are showing
+constant large increases in net. The
+novice reasons, “Increased earnings mean
+increased amounts applicable to the payment
+of dividends. Prices should rise.
+I will buy.”</p>
+
+<p>Not at all. He should say, “Prices
+<em>have risen</em> to the extent represented by
+these increased earnings, unless this effect
+has been counterbalanced by other
+considerations. Now what next?”</p>
+
+<p>It is a sort of automatic assumption of
+the human mind that present conditions
+will continue, and our whole scheme of
+life is necessarily based to a great degree<span class="pagenum" id="Page_56">[Pg 56]</span>
+on this assumption. When the price of
+wheat is high farmers increase their
+acreage because wheat-growing pays
+better; when it is low they plant less.
+I remember talking with a potato-raiser
+who claimed that he had made a good
+deal of money by simply reversing the
+above custom. When potatoes were low
+he had planted liberally; when high he
+had cut down his acreage—because he
+reasoned that other farmers would do
+just the opposite.</p>
+
+<p>The average man is not blessed—or
+cursed, however you may look at it—with
+an analytical mind. We see “as
+through a glass darkly.” Our ideas are
+always enveloped in a haze and our
+reasoning powers work in a rut from
+which we find it painful if not impossible
+to escape. Many of our emotions and
+some of our acts are merely automatic
+responses to external stimuli. Wonderful
+as is the development of the human
+brain, it originated as an enlarged ganglion,
+and its first response is still practically
+that of the ganglion.</p>
+
+<p><span class="pagenum" id="Page_57">[Pg 57]</span></p>
+
+<p>A simple illustration of this is found
+in the enmity we all feel toward the alarm
+clock which arouses us in the morning.
+We have carefully set and wound that
+alarm and if it failed to go off it would
+perhaps put us to serious inconvenience;
+yet we reward the faithful clock with
+anathemas.</p>
+
+<p>When a subway train is delayed nine-tenths
+of the people waiting on the platforms
+are anxiously craning their necks
+to see if it is coming, while many persons
+on it who are in danger of missing an
+engagement are holding themselves tense,
+apparently in the effort to help the train
+along. As a rule we apply more well-meant,
+but to a great extent ineffective,
+energy, physical or nervous, to the accomplishment
+of an object, than analysis
+or calculation.</p>
+
+<p>When it comes to so complicated a
+matter as the price of stocks, our haziness
+increases in proportion to the difficulty
+of the subject and our ignorance
+of it. From reading, observation and
+conversation we imbibe a miscellaneous<span class="pagenum" id="Page_58">[Pg 58]</span>
+assortment of ideas from which we conclude
+that the situation is bullish or
+bearish. The very form of the expression
+“the situation is bullish”—not “the
+situation will soon become bullish”—shows
+the extent to which we allow the
+present to obscure the future in the
+formation of our judgment.</p>
+
+<p>Catch any trader and pin him down to
+it and he will readily admit that the
+logical moment for the highest prices is
+when the news is most bullish; yet you
+will find him buying stocks on this news
+after it comes out—if not at the moment,
+at any rate “on a reaction.”</p>
+
+<p>Most coming events cast their shadows
+before, and it is on this that intelligent
+speculation must be based. The movement
+of prices in anticipation of such
+an event is called “discounting,” and this
+process of discounting is worthy a little
+careful examination.</p>
+
+<p>The first point to be borne in mind is
+that some events cannot be discounted,
+even by the supposed omniscience of the
+great banking interests—which is in<span class="pagenum" id="Page_59">[Pg 59]</span>
+point of fact, more than half imaginary.
+The San Francisco earthquake is the
+standard example of an event which
+could not be foreseen and therefore
+could not be discounted; but an event
+does not have to be purely an “act of
+God” to be undiscountable. There can
+be no question that our great bankers
+have been as much in the dark in regard
+to some recent Supreme Court decisions
+as the smallest “piker” in the customers’
+room of an odd-lot brokerage house.</p>
+
+<p>If the effect of an event does not make
+itself felt before the event takes place, it
+must come after. In all discussion of
+discounting we must bear this fact in
+mind in order that our subject may not
+run away with us.</p>
+
+<p>On the other hand an event may sometimes
+be overdiscounted. If the dividend
+rate on a stock is to be raised from
+four to five per cent., earnest bulls, with
+an eye to their own commitments, may
+spread rumors of six or seven per cent.,
+so that the actual declaration of five per<span class="pagenum" id="Page_60">[Pg 60]</span>
+cent. may be received as disappointing
+and cause a decline.</p>
+
+<p>Generally speaking, every event which
+is under the control of capitalists associated
+with the property, or any financial
+condition which is subject to the
+management of combined banking interests,
+is likely to be pretty thoroughly
+discounted before it occurs. There is
+never any lack of capital to take advantage
+of a sure thing, even though it
+may be known in advance to only a few
+persons.</p>
+
+<p>The extent to which future business
+conditions are known to “insiders” is,
+however, usually overestimated. So
+much depends, especially in America,
+upon the size of the crops, the temper of
+the people, and the policies adopted by
+leading politicians, that the future of
+business becomes a very complicated
+problem. No power can drive the American
+people. Any control over their action
+has to be exercised by cajolery or
+by devious and circuitous methods.</p>
+
+<p>Moreover, public opinion is becoming<span class="pagenum" id="Page_61">[Pg 61]</span>
+more volatile and changeable year by
+year, owing to the quicker spread of information
+and the rapid multiplication of
+the reading public. One can easily
+imagine that some of our older financiers
+must be saying to themselves, “If I had
+only had my present capital in 1870, or
+else had the conditions of 1870 to work
+on today!”</p>
+
+<p>A fair idea of when the discounting
+process will be completed may usually be
+formed by studying conditions from
+every angle. The great question is,
+when will the buying or selling become
+most general and urgent? In 1907, for
+example, the safest and best time to buy
+the sound dividend-paying stocks was
+on the Monday following the bank statement
+which showed the greatest decrease
+in reserves. The markets opened down
+several points under pressure of liquidation,
+and standard issues never sold so
+low afterward. The simple explanation
+was that conditions had become so bad
+that they could not get any worse without<span class="pagenum" id="Page_62">[Pg 62]</span>
+utter ruin, which all parties must and
+did unite to prevent.</p>
+
+<p>Likewise in the Presidential campaign
+of 1900, the lowest prices were made on
+Bryan’s nomination. Everyone said at
+once, “He can’t be elected.” Therefore
+his nomination was the worst that could
+happen—the point of time where the
+political news became most intensely
+bearish. As the campaign developed his
+defeat became more and more certain,
+and prices continued to rise in accordance
+with the general economic and financial
+conditions of the period.</p>
+
+<p>It is not the discounting of an event
+thus known in advance to capitalists, that
+presents the greatest difficulties, but
+cases where considerable uncertainty
+exists, so that even the clearest mind and
+the most accurate information can result
+only in a balancing of probabilities, with
+the scale perhaps inclined to a greater or
+less degree in one direction or the other.</p>
+
+<p>In some cases the uncertainty which
+precedes such an event is more depressing
+than the worst that can happen<span class="pagenum" id="Page_63">[Pg 63]</span>
+afterward. An example is a Supreme
+Court decision upon a previously undetermined
+public policy which has kept
+business men so much in the dark that
+they feared to go ahead with any important
+plans. This was the case at the
+time of the Northern Securities decision
+in 1904. “Big business” could easily
+enough adjust itself to either result. It
+was the uncertainty that was bearish.
+Hence the decision was practically discounted
+in advance, no matter what it
+might prove to be.</p>
+
+<p>This was not true to the same extent
+of the Standard Oil and American Tobacco
+decisions of 1911, because those
+decisions were an earnest of more
+trouble to come. The decisions were
+greeted by a temporary spurt of activity,
+based on the theory that the removal of
+uncertainty was the important thing; but
+a sensational decline started soon after
+and was not checked until the announcement
+that the Government would prosecute
+the United States Steel Corporation.
+This was deemed the worst that<span class="pagenum" id="Page_64">[Pg 64]</span>
+could happen for some time to come, and
+was followed by a considerable advance.</p>
+
+<p>More commonly, when an event is uncertain
+the market estimates the chances
+with considerable nicety. Each trader
+backs his own opinion, strongly if he
+feels confident, moderately if he still has
+a few doubts which he cannot down.
+The result of these opposing views may
+be stationary prices, or a market fluctuating
+nervously within a narrow range, or
+a movement in either direction, greater
+or smaller in proportion to the more or
+less emphatic preponderance of the buying
+or selling.</p>
+
+<p>Of course it must always be remembered
+that it is the dollars that count,
+not the number of buyers or sellers. A
+few great capitalists having advance information
+which they regard as accurate,
+may more than counterbalance thousands
+of small traders who hold an opposite
+opinion. In fact, this is a condition very
+frequently seen, as explained in a previous
+chapter.</p>
+
+<p>Even the operations of an individual<span class="pagenum" id="Page_65">[Pg 65]</span>
+investor usually have an effect on prices
+pretty accurately adjusted to his opinions.
+When he believes prices are low
+and everything favors an upward movement,
+he will strain his resources in
+order to accumulate as heavy a load of
+securities as he can carry. After a fair
+advance, if he sees the development of
+some factor which <em>might</em> cause a decline—though
+he doesn’t really believe it will—he
+thinks it wise to lighten his load
+somewhat and make sure of some of his
+accumulated profits. Later when he
+feels that prices are “high enough,” he
+is a liberal seller; and if some danger
+appears while the level of quoted values
+continues high, he “cleans house,” to be
+ready for whatever may come. Then if
+what he considers an unwarranted speculation
+carries prices still higher, he is
+very likely to sell a few hundred shares
+short by way of occupying his capital
+and his mind.</p>
+
+<p>It is, however, the variation of opinion
+among different men that has the largest
+influence in making the market responsive<span class="pagenum" id="Page_66">[Pg 66]</span>
+to changing conditions. A development
+which causes one trader to lighten his
+line of stocks may be regarded as harmless
+or even beneficial by another, so that
+he maintains his position or perhaps buys
+more. Out of a world-wide mixture of
+varying ideas, personalities and information
+emerges the average level of
+prices—the true index number of investment
+conditions.</p>
+
+<p>The necessary result of the above line
+of reasoning is that not only probabilities
+but even rather remote possibilities
+are reflected in the market. Hardly any
+event can happen of sufficient importance
+to attract general attention which some
+process of reasoning cannot construe as
+bullish and some other process interpret
+as bearish. Doubtless even our old friend
+of the news columns to the effect that
+“the necessary activities of a nation of
+ninety million souls create and maintain
+a large volume of business,” may influence
+some red-blooded optimist to buy
+100 Union; but the grouchy pessimist who
+has eaten too many doughnuts for breakfast<span class="pagenum" id="Page_67">[Pg 67]</span>
+will accept the statement as an evidence
+of the scarcity of real bull news
+and will likely enough sell 100 Union
+short on the strength of it.</p>
+
+<p>It is the overextended speculator who
+causes most of the fluctuations that look
+absurd to the sober observer. It does not
+take much to make a man buy when he
+is short of stocks “up to his neck.” A
+bit of news which he would regard as insignificant
+at any other time will then
+assume an exaggerated importance in his
+eyes. His fears increase in geometrical
+proportion to the size of his line of
+stocks. Likewise the overloaded bull
+may begin to “throw his stocks” on some
+absurd story of a war between Honduras
+and Roumania, without even stopping to
+look up the geographical location of the
+countries involved.</p>
+
+<p>Fluctuations based on absurdities are
+always relatively small. They are due
+to an exaggerated fear of what “the
+other fellow” may do. Personally, you
+do not fear a war between Honduras and
+Roumania; but may not the rumor be<span class="pagenum" id="Page_68">[Pg 68]</span>
+seized upon by the bears as an excuse
+for a raid? And you have too many
+stocks to be comfortable if such a break
+should occur. Moreover, even if the
+bears do not raid the market, will there
+not be a considerable number of persons
+who, like yourself, will fear such a raid,
+and will therefore lighten their load of
+stocks, thus causing some decline?</p>
+
+<p>The professional trader, following this
+line of reasoning to the limit, eventually
+comes to base all his operations for short
+turns in the market not on the facts but
+on what he believes the facts will cause
+others to do—or more accurately, perhaps,
+on what he <em>sees</em> that the news <em>is</em>
+causing others to do; for such a trader
+is likely to keep his finger constantly on
+the pulse of buying and selling as it
+throbs on the floor of the Exchange or
+as recorded on the tape.</p>
+
+<p>The non-professional, however, will
+do well not to let his mind stray too far
+into the unknown territory of what others
+may do. Like the “They” theory of
+values, it is dangerous ground in that it<span class="pagenum" id="Page_69">[Pg 69]</span>
+leads toward the abdication of common
+sense; and after all, others may not prove
+to be such fools as we think they are.
+While the market is likely to discount
+even a possibility, the chances are very
+much against <em>our</em> being able to discount
+the possibility profitably.</p>
+
+<p>In this matter of discounting, as in
+connection with most other stock market
+phenomena, the most useful hint that can
+be given is to avoid all efforts to reduce
+the movement of prices to rules, measures,
+or similarities and to analyze each case
+by itself. Historical parallels are likely
+to be misleading. Every situation is new,
+though usually composed of familiar
+elements. Each element must be weighed
+by itself and the probable result of the
+combination estimated. In most cases
+the problem is by no means impossible,
+but the student must learn to look into
+the future and to consider the present
+only as a guide to the future. Extreme
+prices will come at the time when the
+news is most emphatic and most widely
+disseminated. When that point is passed<span class="pagenum" id="Page_70">[Pg 70]</span>
+the question must always be, “What
+next?”</p>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter">
+<p><span class="pagenum" id="Page_71">[Pg 71]</span></p>
+
+<h2 class="nobreak" id="VConfusing_the_Personal_with">V—Confusing the Personal with
+the General</h2>
+</div>
+
+<p class="drop-cap"><span class="upper-case">In</span> a previous chapter the fact has
+been mentioned that one of the
+greatest difficulties encountered by
+the active trader is that of keeping his
+mind in a balanced and unprejudiced
+condition when he is heavily committed
+to either the long or short side
+of the market. Unconsciously to himself,
+he permits his judgment to be
+swayed by his hopes.</p>
+
+<p>A former large speculator on the
+Chicago Board of Trade, after being
+short of the market and very bearish
+on wheat for a long time, one day surprised
+all his friends by covering
+everything, going long a moderate
+amount, and arguing violently on the
+bull side. For two days he maintained
+this position, but the market failed to
+go up. He then turned back to the
+short side, and had even more bear<span class="pagenum" id="Page_72">[Pg 72]</span>
+arguments at his tongue’s end than before.</p>
+
+<p>To a certain extent he did this to
+test the market, but still more to test
+himself—to see whether, by changing
+front and taking the other side, he
+could persuade himself out of his bearish
+opinions. When even this failed
+to make any real change in his views,
+he was reassured and was ready for
+a new and more aggressive campaign
+on the short side.</p>
+
+<p>There is nothing peculiar about this
+condition. While it is especially difficult
+to maintain a balanced mind in
+regard to commitments in the markets,
+it is not easy to do so about anything
+that closely touches our personal interests.
+As a rule we can find plenty
+of reasons for doing what we very
+much want to do, and we are still more
+prolific with excuses for not doing
+what we don’t want to do. Most of
+us change the old sophism “Whatever
+is, is right” to the more directly useful
+form “Whatever I want is right.”
+To many readers will occur at once the<span class="pagenum" id="Page_73">[Pg 73]</span>
+name of a man prominent in public
+life who seems very frequently to act
+on this motto.</p>
+
+<p>If Smith and Jones have a verbal
+agreement, which afterwards turns out
+to be greatly to Jones’ advantage,
+Smith’s recollection is that it was
+merely a loose understanding which
+could be cancelled at any time, while
+Jones remembers it to have been a
+definite legal contract, perfectly enforceable
+if it had only been written.
+Talleyrand said that language was
+given us for the purpose of concealing
+thought. Likewise many seem to
+think that logic was given us for the
+purpose of backing up our desires.</p>
+
+<p>Few persons are so introspective as
+to be able to tell where this bias in
+favor of their own interests begins and
+where it leaves off. Still fewer bother
+to make the effort to tell. To a great
+extent we train our judgment to lend
+itself to our selfish interests. The
+question with us is not so much
+whether we have the facts of a situation<span class="pagenum" id="Page_74">[Pg 74]</span>
+correctly in mind, as whether we
+can “put it over.”</p>
+
+<p>When it comes to buying and selling
+stocks, there is no such thing as
+“putting it over.” The market is relentless.
+It cannot be budged by our
+sophistries. It will respond exactly to
+the forces and personalities which are
+working upon it, with no more regard
+for our opinions than if we couldn’t
+vote. We cannot work for our own
+interests as in other lines of business—we
+can only fit our interests to the
+facts.</p>
+
+<p>To make the greatest success it is
+necessary for the trader to forget entirely
+his own position <em>in</em> the market,
+his profits or losses, the relation of
+present prices to the point where he
+bought or sold, and to fix his thoughts
+upon the position <em>of</em> the market. If
+the market is going down the trader
+must sell, no matter whether he has a
+profit or a loss, whether he bought a
+year ago or two minutes ago.</p>
+
+<p>How far the average trader is from
+attaining this point of view is quickly<span class="pagenum" id="Page_75">[Pg 75]</span>
+seen from his conversation, and it is
+also true that a great deal of the literature
+of speculation absolutely fails to
+reach this conception.</p>
+
+<p>“You have five points profit—you
+had better take it,” advises the broker.
+Perhaps so, if you know nothing about
+the market; but if you understand the
+market the time to take your profit is
+when the upward movement shows
+signs of culminating, regardless of
+your own deal.</p>
+
+<p>“Stop your losses; let your profits
+run” is a saying which appeals to the
+novice as the essence of wisdom. But
+the whole question is <em>where</em> to stop the
+losses and <em>how far</em> to let the profits
+run. In other words, what is the <em>market</em>
+going to do? If you can tell this
+your personal losses and profits will
+take care of themselves.</p>
+
+<p>Here is a man who has done a great
+deal of figuring and has proved to his
+own satisfaction that seven points is
+the correct profit to take in Union
+Pacific, while losses should be limited
+to two and one-half points. Nothing<span class="pagenum" id="Page_76">[Pg 76]</span>
+could be more foolish than these arbitrary
+figures. He is trying to make
+the market fit itself around his own
+trades, instead of adapting his trades
+to the market.</p>
+
+<p>In any broker’s office you will notice
+that a large part of the talk concerns
+the profits and losses of the traders.
+Brown had a profit of ten points and
+then let it get away from him. “Great
+Scott!” says his wise friend. “What
+do you want? Aren’t you satisfied with
+ten points profit?” The reply should
+be, though it rarely is, “Certainly not,
+if I think the market is going higher.”</p>
+
+<p>“Get them out with a small profit,”
+I once heard one broker say to another.
+“If you don’t they will hang
+on and take a loss. They never get
+profit enough to satisfy them.” A
+good policy, probably, if neither the
+broker nor his customer had any real
+knowledge of the market; but mere
+nonsense for the trader who aims to
+be in the slightest degree scientific.</p>
+
+<p>The fact is that the more a trader
+allows his mind to dwell upon his own<span class="pagenum" id="Page_77">[Pg 77]</span>
+position in the market the more likely
+it is that his judgment will become
+warped so that his mind is blind to
+those considerations which do not fall
+in with his preconceived opinion.</p>
+
+<p>Until you try it, you have almost no
+idea of the extent to which you may
+be rendered unreasonable by the mere
+fact that you are committed to one
+side of the market. “In the market,
+to be consistent is to be stubborn,”
+some one has said; and it is true that
+the man of strong will and logical intellect
+is often less successful than the
+more shallow and volatile observer,
+who is ready to whiffle about like the
+weathercock at any suspicion of a
+change in the wind. This is because
+the strong man has in this instance
+embarked upon an enterprise where
+he cannot use his natural force and determination—he
+can employ only his
+faculties of observation and interpretation.
+Yet in the end the man of character
+will be the more permanently
+successful, because he will eventually<span class="pagenum" id="Page_78">[Pg 78]</span>
+master his subject more thoroughly
+and attain a more judicial attitude.</p>
+
+<p>The more simple-minded, after once
+committing themselves to a position,
+are thereafter chiefly influenced and
+supported by the illusions of hope.
+They bought, probably, as a result of
+some bullish development. If prices
+have advanced, they find that the market
+“looks strong,” a good deal of encouraging
+news comes out on the
+tickers, and they hope for large profits.
+After five points in their favor, they
+hope for ten, and after ten they look
+for fifteen or twenty.</p>
+
+<p>On the other hand, if prices decline
+they charge it to “manipulation,” “bear
+raids,” etc., and expect an early recovery.
+Much of the bear news appears
+to them to be put out maliciously,
+in order to cause prices to decline
+further. It is not until the decline
+begins to cause a painful encroachment
+upon their capital that they
+reach the point of saying, “If
+‘they’ can depress prices like this
+in the face of a bullish situation,<span class="pagenum" id="Page_79">[Pg 79]</span>
+what is the use of fighting them? By
+a flood of short sales, they can put
+prices down as much as they like”—or
+something of the sort.</p>
+
+<p>Such traders are suffering merely
+from youth, or lack of sound business
+sense, or both. They have a considerable
+period of study before them, if
+they persist until they get permanently
+profitable results. Most of them, of
+course, do not persist.</p>
+
+<p>A much more intelligent class, many
+of whom are properly to be considered
+as investors, do not allow their position
+in the market to blind them so far
+as current news or statistical developments
+are concerned, but do permit
+themselves to become biased in regard
+to the most important factor of all—the
+effect of a change in the price level.</p>
+
+<p>They bought stocks in the expectation
+of an improved situation. The
+improved situation comes and prices
+rise. Nothing serious in the way of
+bear news appears. On the contrary,
+bull news continues plentiful.<span class="pagenum" id="Page_80">[Pg 80]</span>
+Under these conditions they see no
+reason for selling.</p>
+
+<p>Yet there may be a most important
+reason for selling—namely, that prices
+have risen sufficiently to counterbalance
+the improved situation—and they
+would see and appreciate this fact if
+they were in the position of an uninterested
+observer.</p>
+
+<p>One of the principal reasons why investors
+of this class allow themselves
+to become confused as to the influence
+of the price level is because a bull
+market nearly always goes unreasonably
+high before it culminates. The
+investor has perhaps, in several previous
+instances, sold out at what he
+thought was a fair price level, only to
+see the public run away with the market
+to a point where his profits would
+have been doubled if he had held on.</p>
+
+<p>It is in such cases that an expert
+knowledge of speculation is essential.
+If the investor has not this knowledge,
+and cannot obtain the dependable advice
+of one who has it, then he must
+content himself with more moderate<span class="pagenum" id="Page_81">[Pg 81]</span>
+profits and forego the expectation of
+getting the full benefit of the advance.
+But with a fair knowledge of speculative
+influences, he can fix his mind on
+the development of the campaign, regardless
+of his own holdings, and can
+usually secure a larger profit than if
+he depended merely upon ordinary
+business “common sense.”</p>
+
+<p>The mistake is made when, without
+any expert knowledge of speculation,
+he permits himself to hold on in
+the hope of higher prices after a level
+has been reached which has fairly discounted
+improved business conditions.</p>
+
+<p>Not one trader in a thousand ever
+becomes so expert or so seasoned as
+to entirely overcome the influence his
+position in the market exerts upon his
+judgment. That influence appears in
+the most insidious and elusive ways.
+One of the principal difficulties of the
+expert is in preventing his active imagination
+from causing him to see
+what he is looking for just because he
+is looking for it.</p>
+
+<p>An example will make this clear.<span class="pagenum" id="Page_82">[Pg 82]</span>
+The expert has learned from experience,
+let us say, that the appearance
+of “holes” in the market is a sign of
+weakness. By a “hole” is meant a
+condition of the market where it suddenly
+and unaccountably refuses to
+take stock. A few hundred shares of
+an active stock are offered for sale.
+Sentiment is generally bullish, but
+there is no buyer for that stock. Prices
+slip quickly down half a point or a
+point before buyers are found. This,
+in an active stock, is unusual; and although
+the price may recover, the professional
+does not forget this treacherous
+failure of the market to accept
+moderate offerings. He considers it a
+sign of an “over-bought” market.</p>
+
+<p>Now suppose the trader has calculated
+that an advance is about to culminate
+and has taken the short side
+in anticipation of that event. He suspects
+that the market is over-bought,
+but is not yet sure of it. Under these
+circumstances any little dip in the
+price will perhaps look to him like a
+“hole,” even though under other conditions<span class="pagenum" id="Page_83">[Pg 83]</span>
+he would not notice it or would
+think nothing about it. He is looking
+for the development of weakness and
+there is danger that his imagination may
+show him what he is looking for even
+though it isn’t there!</p>
+
+<p>The same remarks would apply to
+the detection of accumulation or distribution.
+If you want to see distribution
+after a sharp advance, you are
+very likely to see it. If you have sold
+out and want to get a reaction on which
+to repurchase, you will see plenty of
+indications of a reaction. Indeed, it
+is a sort of proverb in Wall Street that
+there is no bear so bearish as a sold out
+bull who wants a chance to repurchase.</p>
+
+<p>In the study of so-called “technical”
+conditions of the market, a situation
+often appears which permits a double
+construction. Indications of various
+kinds are almost evenly balanced; some
+things might be interpreted in two different
+ways; and a trader not already
+interested in the market would be likely<span class="pagenum" id="Page_84">[Pg 84]</span>
+to think it wise to stay out until
+he could see his way more clearly.</p>
+
+<p>Under such circumstances you will
+find it an almost invariable rule that
+the man who was long before this condition
+arose will interpret technical
+conditions as bullish, while the man
+who was and remains short, sees plain
+indications of technical weakness.
+Somewhat amusing, but true.</p>
+
+<p>In this matter of allowing the judgment
+to be influenced by personal commitments,
+very little of a constructive
+or practically helpful nature can be
+written, except the one word “Don’t.”
+Yet when the investor or trader has
+come to realize that he is a prejudiced
+observer, he has made progress; for
+this knowledge keeps him from trusting
+too blindly to something which, at
+the moment, he calls judgment, but
+which may turn out to be simply an
+unusually strong impulse of greed.</p>
+
+<p>It has often been noted by stock market
+writers that since the great public
+is bearish at the bottom and bullish at
+the top, it could make its fortune and<span class="pagenum" id="Page_85">[Pg 85]</span>
+beat the multi-millionaires at their own
+game by simply reversing itself—buying
+when it feels like selling and selling
+when it feels like buying. Tom Lawson,
+in the heyday of his publicity,
+seems to have had some sort of dream
+of the public selling back to Standard
+Oil capitalists the stocks which it had
+bought from them and thus bringing
+everything to smash in a heap—the
+philanthropic Thomas, doubtless, being
+first properly short of the market.</p>
+
+<p>This wrongheadedness of the public
+no longer exists to the same extent as
+formerly. A great number of small investors
+buy and sell intelligently and
+there has been a most noticeable falling
+off in the gambling class of trade—much
+to the satisfaction of everyone,
+except, perhaps, the brokers who formerly
+handled such business.</p>
+
+<p>It remains true, nevertheless, that
+the very moment when the market
+looks strongest, is likely to be near the
+top, and just when prices appear to
+have started on a straight drop to the
+zero point is usually near the bottom.<span class="pagenum" id="Page_86">[Pg 86]</span>
+The practical way for the investor to
+use this principle is to be ready to
+sell at the moment when bull sentiment
+seems to be most widely distributed,
+and to buy when the public in general
+seem most discouraged. It is especially
+important for him to bear this principle
+in mind in taking profits on previous
+commitments, as his own interests are
+then identified with the current trend
+of prices.</p>
+
+<p>In a word, the trader or investor who
+has studied the subject enough to be
+reading this book, probably could
+not make profits by reversing himself,
+even if such a thing were
+possible; but he can endeavor to hold
+himself in a detached, unprejudiced
+frame of mind, and to study the psychology
+of the crowd, especially as it
+manifests itself in the movement of
+prices.</p>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter">
+<p><span class="pagenum" id="Page_87">[Pg 87]</span></p>
+
+<h2 class="nobreak" id="VIThe_Panic_and_the_Boom">VI—The Panic and the Boom</h2>
+</div>
+
+<p class="drop-cap"><span class="upper-case">Both</span> the panic and the boom are
+eminently psychological phenomena.
+This is not saying
+that fundamental conditions do not at
+times warrant sharp declines in prices
+and at other times equally sharp advances.
+But the panic, properly so-called,
+represents a decline greater
+than is warranted by conditions, usually
+because of an excited state of the
+public mind, accompanied by exhaustion
+of resources; while the term
+“boom” is used to mean an excessive
+and largely speculative advance.</p>
+
+<p>There are some special features connected
+with the panic and the boom
+which are worthy of separate consideration.</p>
+
+<p>It is really astonishing what a hold
+the fear of a possible panic has upon
+the minds of many investors. The<span class="pagenum" id="Page_88">[Pg 88]</span>
+memory of the events of 1907 has undoubtedly
+operated greatly to lessen
+the volume of speculative trade from
+that time to the present (April, 1912).
+Panics of equal severity have occurred
+only a few times in the entire history
+of the country, and the possibility of
+such an outbreak in any one month is
+smaller than the chance of loss on the
+average investment through the failure
+of the company. Yet the specter of
+such a panic rises in the minds of the
+inexperienced whenever they think of
+buying stocks.</p>
+
+<p>“Yes,” the investor may say, “Reading
+seems to be in a very strong position,
+but look where it sold in 1907—at
+$70 a share!”</p>
+
+<p>It is sometimes assumed that the
+low prices in a panic are due to a sudden
+spasm of fear, which comes quickly
+and passes away quickly. This is not
+the case. In a way, the operation of
+the element of fear begins when prices
+are near the top. Some cautious investors
+begin to fear that the boom is<span class="pagenum" id="Page_89">[Pg 89]</span>
+being overdone and that a disastrous
+decline must follow the excessive speculation
+for the rise. They sell under
+the influence of this feeling.</p>
+
+<p>During the ensuing decline, which
+may run for years, more and more
+people begin to feel uneasy over business
+or financial conditions, and they
+liquidate their holdings. This caution
+or fearfulness gradually spreads, increasing
+and decreasing in waves, but
+growing a little greater at each successive
+swell. The panic is not a sudden
+development, but is the result of causes
+long accumulated.</p>
+
+<p>The actual bottom prices of the panic
+are more likely to result from necessity
+than from fear. Those investors who
+could be frightened out of their holdings
+are likely to give up before the
+bottom is reached. The lowest prices
+are usually made by sales for those
+whose immediate resources are exhausted.
+Most of them are taken by
+surprise and could raise the money necessary
+to carry their stocks if they had<span class="pagenum" id="Page_90">[Pg 90]</span>
+a little time; but in the stock market,
+“time is the essence of the contract,”
+and is the very thing that they cannot
+have.</p>
+
+<p>The great cause of loss in times of
+panic is the failure of the investor to
+keep enough of his capital in liquid
+form. He becomes “tied up” in various
+undertakings so that he cannot realize
+quickly. He may have abundant property,
+but no ready money. This condition,
+in turn, results from trying to do
+too much—greed, haste, excessive ambition,
+an oversupply of easy confidence
+as to the future.</p>
+
+<p>It is noticeable in panic times that
+a period arrives when nearly every one
+thinks that stocks are low enough, yet
+prices continue downward to a still
+lower level. The result is that many
+investors, after thinking that they have
+“loaded up” near the bottom, find that
+it was a false bottom, and are finally
+forced to throw over their holdings on
+a further decline.</p>
+
+<p>This is due to the fact mentioned<span class="pagenum" id="Page_91">[Pg 91]</span>
+above, that final low prices are the result
+of necessities, not of opinions. In
+1907, for example, every one of good
+sense knew perfectly well that stocks
+were selling below their value—the
+trouble was that investors could not
+get hold of the money with which to
+buy.</p>
+
+<p>The moral is that low prices, after
+a prolonged bear period, are not in
+themselves a sufficient reason for buying
+stocks. The key to the situation
+lies in the <em>accumulation of liquid capital</em>,
+which is most quickly evidenced by a
+rapid recovery of the excess of deposits
+over loans in the New York clearing
+house banks (excluding the trust companies,
+in which loans are more varied).
+This subject, however, takes us outside
+our present field.</p>
+
+<p>It is to a great extent because the
+last part of the decline in a panic has
+been caused not by public opinion, or
+even by public fear, but by necessity,
+arising from absolute exhaustion of
+available funds, that the first part of<span class="pagenum" id="Page_92">[Pg 92]</span>
+the ensuing recovery takes place without
+any apparent reason.</p>
+
+<p>Traders say, “The panic is over, but
+stocks cannot go up much under such
+bearish conditions as now exist.” Yet
+stocks can and do go up, because they
+are merely regaining the natural level
+from which they were depressed by
+“bankrupt sales,” as we would say in
+discussing dry goods.</p>
+
+<p>Perhaps the word “fear” has been
+overworked in the discussion of stock
+market psychology. It is only the very
+few who actually sell their stocks under
+the direct influence of the emotion
+of fear. But a feeling of caution strong
+enough to induce sales, or even a fixed
+belief that prices must decline, constitutes
+in itself a sort of modification
+of fear, and has the same result so far
+as prices are concerned.</p>
+
+<p>The effect of this fear or caution in a
+panic is not limited to the selling of
+stocks, but is even more important in
+preventing purchases. It takes far less
+uneasiness to cause the intending investor<span class="pagenum" id="Page_93">[Pg 93]</span>
+to delay purchases than to precipitate
+actual sales by holders. For
+this reason, a small quantity of stock
+pressed for sale in a panicky market
+may cause a decline out of all proportion
+to its importance. The offerings
+may be small, but nobody wants them.</p>
+
+<p>It is this factor which accounts for
+the rapid recoveries which frequently
+follow panics. Waiting investors are
+afraid to step in front of a demoralized
+market, but once the turn appears, they
+fall over each other to buy.</p>
+
+<p>The boom is in many ways the reverse
+of the panic. Just as fear keeps
+growing and spreading until the final
+crash, so confidence and enthusiasm
+keep reproducing each other on a wider
+and wider scale until the result is a
+sort of hilarity on the part of thousands
+of men, many of them comparatively
+young and inexperienced, who have
+“made big money” during the long advance
+in prices.</p>
+
+<p>These imaginary millionaires appear
+in a small swarm during every prolonged<span class="pagenum" id="Page_94">[Pg 94]</span>
+bull market, only to fall with
+their wings singed as soon as prices
+decline. Such speculators are, to all
+practical intents and purposes, irresponsible.
+It is their very irresponsibility
+which has enabled them to make money
+so rapidly on advancing prices. The
+prudent man gets only moderate profits
+in a bull market—it is the man who
+trades on “shoe-string margins” who
+gets the biggest benefit out of the rise.</p>
+
+<p>When such mushroom fortunes have
+accumulated, the market may fall temporarily
+into the hands of these daredevil
+spirits, so that almost any recklessness
+is possible for the time. It is
+this kind of buying which causes prices
+to go higher after they are already high
+enough—just as they go lower in a
+panic after they are plainly seen to be
+low enough.</p>
+
+<p>When prices get above the natural
+level, a well-judged short interest begins
+to appear. These shorts are right,
+but right too soon. In a genuine bull
+market they are nearly always driven<span class="pagenum" id="Page_95">[Pg 95]</span>
+to cover by a further rise, which is,
+from any common sense standpoint, unreasonable.
+A riot of pyramided margins
+drives the sane and calculating
+short seller temporarily to shelter.</p>
+
+<p>A psychological influence of a much
+wider scope also operates to help a bull
+market along to unreasonable heights.
+Such a market is usually accompanied
+by rising prices in all lines of business
+and these rising prices always create,
+in the minds of business men, the impression
+that their various enterprises
+are more profitable than is really the
+case.</p>
+
+<p>One reason for this false impression
+is found in stocks of goods on hand.
+Take the wholesale grocer, for example,
+carrying a stock of goods which
+inventories $10,000 in January, 1909.
+On that date Bradstreet’s index of commodity
+prices stood at 8.26. In January,
+1910, Bradstreet’s index was 9.23.
+If the prices of the various articles included
+in this stock of groceries increased
+in the same ratio as Bradstreet’s<span class="pagenum" id="Page_96">[Pg 96]</span>
+list, and if the grocer had on
+hand exactly the same things, he would
+inventory them at about $11,168 in
+January, 1910.</p>
+
+<p>He made an additional profit of
+$1,168 during the year without any effort,
+and probably without any calculation,
+on his part. But this profit was
+only apparent, not real; for he could
+not buy any more with the $11,168 in
+January, 1910, than he could have
+bought with the $10,000 in January,
+1909. He is deceived into supposing
+himself richer than he really is, and
+this false idea leads to a gradual
+growth of extravagance and speculation
+in every line of business and every
+walk of life.</p>
+
+<p>The secondary results of this delusion
+of increased wealth because of rising
+prices, are even more important
+than the primary results. Our grocer,
+for example, decides to spend this
+$1,168 for an automobile. This helps
+the automobile business. Hundreds of
+similar orders induce the automobile<span class="pagenum" id="Page_97">[Pg 97]</span>
+company to enlarge its plant. This
+means extensive purchases of material
+and employment of labor. The increased
+demand resulting from a similar
+condition of things in all departments
+of industry produces, if other
+conditions are favorable, a still further
+rise in prices; hence at the end of another
+year the grocer perhaps has another
+imaginary profit, which he
+spends in enlarging his residence or
+buying new furniture, etc.</p>
+
+<p>The stock market feels the reflection
+of all this increased business and
+higher prices. Yet the whole thing is
+psychological, and sooner or later our
+grocer must earn and save, by hard
+work, economical living and shrewd
+calculation, the amount he has paid for
+his automobile or furniture.</p>
+
+<p>Again, rising stock prices and rising
+commodity prices react on each other.
+If the grocer, in addition to his imaginary
+profit of $1,168 sees a ten per
+cent. advance in the prices of various
+securities which he holds for investment,<span class="pagenum" id="Page_98">[Pg 98]</span>
+he is encouraged to still larger
+expenditures; and likewise if the capitalist
+notes a ten per cent. advance in
+the stock market, he perhaps employs
+additional servants and enlarges his
+household expenditures so that he buys
+more groceries. Thus the feeling of
+confidence and enthusiasm spreads
+wider and wider like ripples from a
+stone dropped into a pond. And all of
+these developments are faithfully reflected
+by the stock market barometer.</p>
+
+<p>The result is that, in a year like 1902
+or 1906, the high prices for stocks and
+the feverish activity of general trade
+are based, to an entirely unsuspected
+extent, on a sort of pyramid of mistaken
+impressions, most of which may
+be traced, directly or indirectly, to the
+fact that we measure everything in
+money and always think of this money-measure
+as fixed and unchangeable,
+while in reality our money fluctuates
+in value just like iron, potatoes, or
+“Fruit of the Loom.” We are accustomed
+to figuring the money-value of<span class="pagenum" id="Page_99">[Pg 99]</span>
+wheat, but we get a headache when we
+try to reckon the wheat-value of
+money.</p>
+
+<p>When a fictitious situation like this
+begins to go to pieces, the stock market,
+fulfilling its function of barometer,
+declines first, while general business
+continues active. Then the “money
+sharks of Wall Street” get themselves
+roundly cursed by the public and there
+is a widespread desire to wipe them off
+the earth in summary fashion. The
+stock market never finds itself popular
+unless it is going up; yet its going
+down undoubtedly does far more to
+promote the country’s welfare in the
+long run, for it serves to temper the
+crash which must eventually come in
+general business circles and to forewarn
+us of trouble ahead so that we
+may prepare for it.</p>
+
+<p>It is generally more difficult to distinguish
+the end of a stock market
+boom than to decide when a panic is
+definitely over. The principle of the
+thing is simple enough, however. It<span class="pagenum" id="Page_100">[Pg 100]</span>
+was an oversupply of liquid capital that
+started the market upward after the
+panic was over. Similarly it is exhaustion
+of liquid capital which brings the
+bull movement to an end. This exhaustion
+is shown by higher call money
+rates, loss of the excess of deposits over
+loans in New York clearinghouse
+banks, a steady rise in commercial paper
+rates, and a sagging market for
+high-grade bonds.</p>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter">
+<p><span class="pagenum" id="Page_101">[Pg 101]</span></p>
+
+<h2 class="nobreak" id="VIIThe_Psychology_of_Scale">VII—The Psychology of Scale
+Orders</h2>
+</div>
+
+<p class="drop-cap"><span class="upper-case">The</span> observer of market conditions
+soon comes to know that there
+are two general classes of minds
+whose operations are reflected in
+prices. These classes might be named
+the “impulsive” and the “phlegmatic.”</p>
+
+<p>The “impulsive” operator says, for
+example, “Conditions, both fundamental
+and technical, warrant higher
+prices. Stocks are a purchase.” Having
+formed this conclusion, he proceeds
+to buy. He does not try or expect to
+buy at the bottom. On the contrary
+he is perfectly willing to buy at the top
+so far, provided he sees prospects of a
+further advance. When he concludes
+that conditions have turned bearish, or
+that the advance in prices has overdiscounted
+previous conditions, he sells out.</p>
+
+<p>The “phlegmatic” type of investor,<span class="pagenum" id="Page_102">[Pg 102]</span>
+on the other hand, can hardly ever be
+persuaded to buy on an advance. He
+reasons, “Prices frequently move several
+points against conditions, or at
+least against what the conditions seem
+to me to be. The sensible thing for me
+to do is to take advantage of these contrary
+movements.”</p>
+
+<p>Hence when he believes stocks
+should be bought he places an order
+to buy on a scale. His thought is:</p>
+
+<p>“It seems to me stocks should advance
+from these prices, but I am not
+a soothsayer, and prices have often
+declined three points when I felt just
+as bullish as I do now. So I will place
+orders to buy every half point down
+for three points. These speculators
+are a crazy lot and there is no knowing
+what passing breeze might strike
+them that would cause a temporary decline
+of a few points.”</p>
+
+<p>Among large capitalists, and especially
+in the banking community, the
+“phlegmatic” type naturally predominates.
+Such men have neither the<span class="pagenum" id="Page_103">[Pg 103]</span>
+time nor the disposition to watch the
+ticker closely and they nearly always
+disclaim any ability to predict the
+smaller movements of prices. They
+are entirely ready, nevertheless, to take
+advantage of these small fluctuations
+when they occur, and having plenty of
+capital, they can easily accomplish this
+by buying or selling on a scale.</p>
+
+<p>As a matter of fact, the market is
+usually full of scale orders, and the
+knowledge of this and of the way in
+which such orders are handled is decidedly
+helpful in judging the tone and
+technical position of the market from
+day to day.</p>
+
+<p>The two types of operators above
+described are always working against
+each other. The buying or selling of
+the “impulsive” trader tends to force
+prices up or down, while the scale orders
+of the “phlegmatic” class tend to
+oppose any movement.</p>
+
+<p>For example, let us suppose that
+banking interests believe conditions to
+be fundamentally sound and that the<span class="pagenum" id="Page_104">[Pg 104]</span>
+general trend of the market will be upward
+for some time to come. Orders
+are therefore placed by various persons
+to buy stocks every point down,
+or every half, quarter, or even eighth
+point down.</p>
+
+<p>On the other hand, the active floor
+traders find that, owing to some temporary
+unfavorable development, a following
+can be obtained on the bear
+side. They perceive the presence of
+scale orders, but they think stocks enough
+will come out on the decline to fill the
+scale orders and leave a balance over.</p>
+
+<p>To put it another way, the floating
+supply of stocks has become, at the
+moment, larger than can comfortably
+be tossed about from hand to hand by
+the in-and-out class of traders. The
+market must decline until a part of this
+floating supply is absorbed by the scale
+orders which underlie current prices.</p>
+
+<p>These conditions produce what is
+commonly called a “reaction.” Once
+this surplus floating supply of stocks
+is absorbed by standing orders, the<span class="pagenum" id="Page_105">[Pg 105]</span>
+market is ready to start upward again.
+If the general trend is upward, far less
+resistance will be encountered on the
+advance than was met on the reaction;
+hence prices rise to a new high level.
+Then profit-taking sales will be met,
+on limited or scale orders at various
+prices, and as the market advances the
+floating supply will gradually increase
+until it again becomes unwieldy and
+another reaction is necessary.</p>
+
+<p>Eventually a level is reached, or
+some change in conditions appears,
+which causes these scale buying orders
+to be partially or entirely withdrawn,
+and selling orders to be substituted on
+a scale up. The bull market will not
+go much further after this change
+takes place. It has now become easier
+to produce declines than advances.
+The situation is the reverse of that described
+above, and a bear market follows.</p>
+
+<p>Commonly there is a considerable
+period around top prices when scale
+buying orders are still found on declines,
+but profit-taking sales are also<span class="pagenum" id="Page_106">[Pg 106]</span>
+met on advances, so that the market is
+kept fluctuating within comparatively
+narrow limits for a month or more. In
+fact, it is likely to be kept on this level
+so long as public buying continues
+greater than public selling. This is
+sometimes called “distribution.” A
+similar period of “accumulation” often
+occurs after a bear market has run its
+course, and before any important advance
+appears.</p>
+
+<p>A close watch of transactions, or a
+study of continuous quotations as published
+in certain newspapers, often enables
+the experienced trader to discover
+when the most important of these scale
+orders are withdrawn or reversed.</p>
+
+<p>A bull market which is full of scale
+buying orders encounters “support,”
+so-called, on declines. Bears are timid
+about driving down prices, because
+they are continually “losing their
+stocks.” They say that “very little
+stock comes out on declines”; hence
+there is a certain appearance of caution
+in the way the market goes down, and<span class="pagenum" id="Page_107">[Pg 107]</span>
+the activity of trade shows, in a broad
+way, a falling off at lower prices. On
+the advances, however, a following is
+obtained and activity increases.</p>
+
+<p>Toward the end of the bull market
+a change is noticeable. Prices go
+down easily and on larger transactions,
+while advances are sluggish and opposition
+is met at higher levels where
+profit-taking orders have been placed.
+The very day when scale buying orders
+in a stock are withdrawn can
+oftentimes be distinguished.</p>
+
+<p>In a bear market, “pressure” appears
+in place of “support.” The scale orders
+are mostly to sell as the market
+rises. Only a small following of purchasers
+is obtainable on advances,
+hence the activity of business, in a general
+way, falls off as prices go up.
+The end of the bear market is marked
+by the reappearance of “support” and
+the removal of “pressure,” so that
+prices rebound quickly and sharply
+from declines.</p>
+
+<p>The common assumption is that this<span class="pagenum" id="Page_108">[Pg 108]</span>
+“support” or “pressure” is supplied by
+“manipulators.” But it is quite as
+likely to result from the scale operations
+of hundreds of different persons,
+whose mental make-up prevents them
+from buying or selling in the “impulsive”
+way.</p>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter">
+<p><span class="pagenum" id="Page_109">[Pg 109]</span></p>
+
+<h2 class="nobreak" id="VIIIThe_Mental_Attitude_of_the">VIII—The Mental Attitude of the
+Individual</h2>
+</div>
+
+<p class="drop-cap"><span class="upper-case">In</span> previous chapters we have seen
+that many, if not most, of the eccentricities
+of speculative markets,
+commonly charged to manipulation,
+are in fact due to the peculiar psychological
+conditions which surround such
+markets. Especially, and more than all
+else together, these erratic fluctuations
+are the result of the efforts of traders
+to operate, not on the basis of facts,
+nor on their own judgment as to the
+effect of facts on prices, but on what
+they believe will be the probable effect
+of facts or rumors on the minds of
+other traders. This mental attitude
+opens up a broad field of conjecture,
+which is not limited by any definite
+boundaries of fact or common sense.</p>
+
+<p>Yet it would be foolish to assert that
+assuming a position in the market
+based on what others will do is a wrong<span class="pagenum" id="Page_110">[Pg 110]</span>
+attitude. It is confusing to the uninitiated,
+and first efforts to work on such
+a plan are almost certain to be disastrous;
+but for the experienced it becomes
+a successful, though of course
+never a certain, method. A child’s first
+efforts to use a sharp tool are likely to
+result in bloodshed, but the same tool
+may trace an exquisite carving in the
+hands of an expert.</p>
+
+<p>What, then, should be the mental attitude
+of the intelligent buyer and
+seller of securities?</p>
+
+<p>The “long pull” investor, buying outright
+for cash and holding for a liberal
+profit, need only consider this matter
+enough to guard against becoming confused
+by the vagaries of public sentiment
+or by his own inverted reasoning
+processes. He will get the best results
+by keeping his eye single to two things:
+Facts and Prices. The current rate of
+interest, the earning power of the corporations
+whose stocks he buys, the
+development of political conditions as
+affecting invested capital, and the relation<span class="pagenum" id="Page_111">[Pg 111]</span>
+of current prices to the situation
+as shown by these three factors—these
+constitute the most important food for
+his mind to work upon.</p>
+
+<p>When he finds himself wandering off
+into a consideration of what “They”
+will do next, or what effect such and
+such events may have on the sentiment
+of speculators, he cannot do better
+than to bring himself up with a short
+turn and sternly bid himself “Back to
+common sense.”</p>
+
+<p>For the more active trader the situation
+is different. He need not be entirely
+unregardful of values or fundamental
+conditions, but his prime object
+is to “go with the tide.” That means
+basing his operations to a great extent
+on what others will think and do. His
+own mental attitude, then, is a most important
+part of his equipment for
+success.</p>
+
+<p>First, the trader must be a <em>reasoning
+optimist</em>. A more horrible fate can
+scarcely be imagined than the shallow
+pessimism of many market habitués,
+whose minds, incapable of grasping the<span class="pagenum" id="Page_112">[Pg 112]</span>
+larger forces beneath the movements
+of prices, take refuge in a cynical disbelief
+in pretty much everything that
+makes life worth living.</p>
+
+<p>Owing to the nature of the business,
+however, this optimism must be of a
+somewhat different character from that
+which brings success in other lines. As
+a general thing optimism includes the
+persistent nourishing of hope, an aggressive
+confidence, the certainty that
+you are right, a firm determination to
+accomplish your end. But you cannot
+make the stock market move your way
+by believing that it will do so. Here
+is one case, at any rate, where New
+Thought methods cannot be directly
+applied.</p>
+
+<p>In the market you are nothing but
+a chip on the tide of events. Optimism,
+then, must consist in believing, not
+that the tide will continually flow your
+way, but that you will succeed in floating
+with the tide. Your optimism must
+be, in a sense, of the intellect, not of
+the will. An optimism based on determination<span class="pagenum" id="Page_113">[Pg 113]</span>
+would, in this case, amount
+to stubbornness.</p>
+
+<p>Another quality that makes for success
+in nearly every line of business is
+enthusiasm. For this you have absolutely
+no use in the stock market. The
+moment you permit yourself to become
+enthusiastic, you are subordinating
+your reasoning powers to your beliefs
+or desires.</p>
+
+<p>Enthusiasm helps you influence other
+men’s minds, but in the market you do
+not desire to do this (unless you happen
+to be a big bull leader). You wish
+to keep your mind as clear, cool and
+unruffled as the surface of a mountain
+lake on a calm day. Any emotion—enthusiasm,
+fear, anger, depression—will
+only cloud the intellect.</p>
+
+<p>Doubtless it would be axiomatic to
+warn the trader against stubbornness.
+It cannot be assumed that any operator
+would consciously permit himself to
+become stubborn. The trouble arises
+in drawing the line between, on the
+one hand, persistence, consistence, pursuit<span class="pagenum" id="Page_114">[Pg 114]</span>
+of a definite plan until conditions
+change; and, on the other, stubborn adherence
+to a course of action which
+subsequent events have proved to be
+erroneous.</p>
+
+<p>A day in the country, with the market
+forgotten, or if necessary forcibly
+ejected from the thoughts, will often
+enable the trader to return with a clarified
+mind, so that he can then intelligently
+convict or acquit himself of the vice of
+stubbornness. Sometimes it may become
+necessary to close all commitments
+and remain out of the market
+for a few days.</p>
+
+<p>One of the most common errors
+might be described as “getting a notion.”
+This is due to the failure or inability
+of the trader to take a broad
+view of the entire situation. Some
+particular point in the complex conditions
+which usually control prices, appeals
+to him strongly and impresses
+him as certain to have its effect on the
+market. He acts on this single idea.
+The idea may be all right, but other<span class="pagenum" id="Page_115">[Pg 115]</span>
+counterbalancing factors may prevent
+it from having its natural effect.</p>
+
+<p>You encounter these “notions” every
+day in the Street. You meet a highly
+conservative individual and ask him
+what he thinks of the situation. “I am
+alarmed at the rapid spread of radical
+sentiment,” he replies. “How can we
+expect capital to branch out into new
+enterprises when the profits may be
+swept away at any moment by socialistic
+legislation?”</p>
+
+<p>You say mildly that the crops are
+good, the banking situation sound, business
+active, etc. But all this produces
+no impression upon him. He has sold
+all his stocks and has his money in the
+banks. (He is also short a considerable
+line, but he doesn’t tell you this).
+He will not buy again until the public
+becomes “sane.”</p>
+
+<p>The next man you talk with says:
+“We cannot have much decline with
+the present good crop prospect. Crops
+lie at the basis of everything. With
+nine billions of new wealth coming out<span class="pagenum" id="Page_116">[Pg 116]</span>
+of the ground and flowing into the
+channels of trade, we are bound to
+have prosperous conditions for some
+time to come.”</p>
+
+<p>You speak of radicalism, adverse legislation,
+high cost of living, etc.; but
+he thinks these are relatively unimportant
+compared with that $9,000,000,000
+of new wealth. Of course, he
+is long of stocks.</p>
+
+<p>“To make the worse appear the better
+reason,” said Mr. Socrates, some
+little time ago. It is too bad we can’t
+have Socrates’ comments on Wall
+Street. The Socratic method applied
+to the average speculator would produce
+amusing results.</p>
+
+<p>Beware of saying, “This is the most
+important factor in the situation,” unless
+the action of the market shows
+that others agree with you. Every
+human mind has its own peculiarities,
+so presumably yours has, though you
+can’t see them plainly; but the stock
+market is the meeting of many minds,
+having every imaginable peculiarity.<span class="pagenum" id="Page_117">[Pg 117]</span>
+However important some single factor
+in the situation may appear to you, it
+is not going to control the movement
+of prices regardless of everything else.</p>
+
+<p>An exaggerated example of “getting
+a notion” is seen in the so-called
+“hunch.” This term appears to mean,
+when it means anything, a sort of sudden
+welling up of instinct so strong as
+to induce the trader to follow it regardless
+of reason. In many cases, the
+“hunch” is nothing more than a strong
+impulse.</p>
+
+<p>Almost any business man will say
+at times, “I have a feeling that we
+ought not to do this,” or “Somehow I
+don’t like that proposition,” without
+being able to explain clearly the
+grounds for his opposition. Likewise the
+“hunch” of a man who has watched
+the stock market for half a lifetime
+may not be without value. In such a
+case it doubtless represents an accumulation
+of small indications, each so
+trifling or so evasive that the trader<span class="pagenum" id="Page_118">[Pg 118]</span>
+cannot clearly marshal and review
+them even in his own mind.</p>
+
+<p>Only the experienced trader is entitled
+to a “hunch.” The novice, or the
+man who is not closely in touch with
+technical conditions, is merely making
+an unusual ass of himself when he
+talks about a “hunch.”</p>
+
+<p>The successful trader gradually
+learns to study his own psychological
+characteristics and allow to some extent
+for his customary errors of judgment.
+If he finds that he is generally
+too hasty in reaching a conclusion, he
+learns to wait and reflect further.
+After making his decision, he withdraws
+it and lays it up on a shelf to
+ripen. He makes only a part of his full
+commitment at the moment when he
+feels most confident, holding the remainder
+in reserve.</p>
+
+<p>If he finds that he is usually overcautious,
+he eventually learns to be a
+little more daring, to buy a part of his
+line while his mind is still partially enveloped
+in the mists of doubt.</p>
+
+<p><span class="pagenum" id="Page_119">[Pg 119]</span></p>
+
+<p>Most of the practical suggestions
+which can be offered are necessarily of
+a somewhat negative character. We
+can point out the errors to be avoided
+much more successfully than we can
+lay out a course of positive action. But
+the following summary may be useful
+to the active trader:</p>
+
+<p>(1) Your main purpose must be to
+keep the mind clear and well balanced.
+Hence, do not act hastily on apparently
+sensational information; do not trade
+so heavily as to become anxious; and
+do not permit yourself to be influenced
+by your position in the market.</p>
+
+<p>(2) Act on your own judgment, or
+else act absolutely and entirely on the
+judgment of another, regardless of
+your own opinion. “Too many cooks
+spoil the broth.”</p>
+
+<p>(3) When in doubt, keep out of the
+market. Delays cost less than losses.</p>
+
+<p>(4) Endeavor to catch the trend of
+sentiment. Even if this should be temporarily
+against fundamental conditions,<span class="pagenum" id="Page_120">[Pg 120]</span>
+it is nevertheless unprofitable to
+oppose it.</p>
+
+<p>(5) The greatest fault of ninety-nine
+out of one hundred active traders is
+being bullish at high prices and bearish
+at low prices. Therefore, refuse to
+follow the market beyond what you
+consider a reasonable climax, no matter
+how large the possible profits that
+you may appear to be losing by inaction.</p>
+
+<p>The field covered by these chapters
+is to a great extent new. As it becomes
+more thoroughly cultivated, it
+may be possible to speak with more
+scientific definiteness. In the meantime,
+the author hopes that his comments
+and suggestions may be of some
+service in helping readers to avoid unwise
+risks and to apply sound principles
+of analysis to the investment or
+speculative situation.</p>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter pageborder">
+<p class="center no-indent fs150 wsp bold"><em>THE MAGAZINE<br>
+OF<br>
+WALL STREET</em></p>
+
+<p class="center no-indent wsp"><em>Articles by practical, authoritative writers
+discuss each month</em>:</p>
+
+
+<div class="blockquot">
+
+<p style="margin-left: 2em; text-indent: -2em;"><b>Business and Investment Conditions</b>—the
+future, not the past.</p>
+
+<p style="margin-left: 2em; text-indent: -2em;"><b>Fundamental Statistics</b>—as they bear upon
+financial conditions.</p>
+
+<p style="margin-left: 2em; text-indent: -2em;"><b>Special Opportunities in Bonds</b>—pointed out
+by a well-known expert.</p>
+
+<p style="margin-left: 2em; text-indent: -2em;"><b>Bargains in Stocks</b>—as indicated by earning
+power.</p>
+
+<p style="margin-left: 2em; text-indent: -2em;"><b>Railroad and Industrial Reports</b>—analyzed
+and interpreted.</p>
+
+<p style="margin-left: 2em; text-indent: -2em;"><b>Digest of Investment News</b>—condensed
+from all authentic sources.</p>
+
+<p style="margin-left: 2em; text-indent: -2em;"><b>The Market Outlook</b>—factors beneath the
+surface of current events.</p>
+
+<p style="margin-left: 2em; text-indent: -2em;"><b>Cotton and Grain</b>—articles by practical
+students of the situation.</p>
+
+<p style="margin-left: 2em; text-indent: -2em;"><b>Inquiries</b>—a suggestive department of answers
+by conservative authorities.</p>
+
+<p style="margin-left: 2em; text-indent: -2em;"><b>Dividend Calendar</b>—showing in advance
+when books close.</p>
+
+<p style="margin-left: 2em; text-indent: -2em;"><b>Scientific Methods of Investment</b>—explained
+in special articles.</p>
+
+<p style="margin-left: 2em; text-indent: -2em;"><b>Analyses of Trader’s Accounts, etc.</b>—showing
+right and wrong methods.</p>
+</div>
+
+
+<p class="center no-indent wsp">
+25c. a Copy—$3.00 a Year<br>
+TICKER PUBLISHING COMPANY<br>
+2 Rector St., New York<br>
+</p>
+</div>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter pageborder">
+<p class="center no-indent fs150 wsp bold">14 METHODS OF OPERATING<br>
+IN THE STOCK MARKET</p>
+
+<p class="center no-indent wsp bold"><em>Contains Some of the Best Ideas Printed<br>
+in The Magazine of Wall Street</em></p>
+
+<p class="center no-indent wsp bold">Bound in Leather, $1.00 Postpaid</p>
+
+
+<p>The tried and tested methods of market experts
+are here collected for the first time.</p>
+
+<p>CONTENTS:—PRINCIPLES OF PRICE
+MOVEMENTS; the fundamental basis of
+market changes, by Thos. F. Woodlock,
+Member N. Y. Stock Exchange—A SCALE
+PLAN; recommended by Chas. H. Dow, formerly
+of Dow, Jones &amp; Co.—METHODS OF
+FORECASTING THE MARKET; by Roger W.
+Babson, the eminent statistician—TAKING
+AN INVESTMENT POSITION; by Henry
+Hall, the prominent financial writer—THE
+STUDY OF VOLUMES; practical methods of
+applying recognized stock market principles—A
+SIGN OF BULL MOVES; a principle
+which shows when stocks are scarce—A STOP
+ORDER METHOD; successfully used by an experienced
+trader—HOW TO JUDGE THE
+MARKET FROM THE TAPE; by “Rollo
+Tape”—A SUCCESSFUL ACCOUNT; from
+small capital and sound methods—METHOD
+OF FORECASTING A GREAT RISE—HOW
+A SMALL TRADER BUILT UP A FORTUNE—WHEN
+TO BUY BANKRUPT STOCKS.</p>
+
+<p>Illustrated with charts and diagrams.
+Pocket size.</p>
+
+
+<p class="center no-indent wsp fs150 bold">
+The Magazine of Wall Street</p>
+
+<p class="center no-indent wsp bold">(formerly The Ticker and Investment Digest)</p>
+
+<div>
+ <p style="float: left;">2 Rector St.</p>
+ <p style="float: right;">New York</p>
+</div>
+<div style="clear:both;"></div>
+</div>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter pageborder">
+<p class="center no-indent wsp fs120">The Most Important Factor in<br>
+Trading or Investing is a<br>
+Knowledge of</p>
+
+<p class="center no-indent fs350 bold">The Trend</p>
+
+<p>It is better to know which way
+the general market is likely to
+swing than to know earnings, dividends
+or fundamentals.</p>
+
+<p>The tape gives very definite indications
+as to the immediate future.</p>
+
+<p>Our Trend Letter, written from
+the tape, contains this information.</p>
+
+<p class="center no-indent bold wsp fs90">Issued every Thursday with additional special letters<br>
+whenever a change occurs. Condensed “collect”<br>
+night letter given by wire to distant subscribers<br>
+without additional charge.</p>
+
+<p class="center no-indent bold wsp fs90">Write TODAY for samples, terms and record of results</p>
+
+
+<p class="center no-indent bold wsp">
+<span class="fs150">Ticker Publishing Company</span><br>
+2 Rector Street, New York<br>
+</p>
+</div>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter pageborder">
+<p class="center no-indent fs350 wsp bold">A NEW ERIE</p>
+
+<p class="center no-indent wsp fs120 bold"><em>Read the history of this<br>
+great railroad</em></p>
+
+<p class="center no-indent wsp fs150 bold">“The Story of Erie”</p>
+
+<p class="center no-indent wsp">By EDWARD HAROLD MOTT.</p>
+
+
+<p>Jay Gould’s manipulations—his amazing genius
+and audacity—Commodore Vanderbilt’s attempt
+to control Erie; Daniel Drew and his printing
+press; the inside stories of Manipulation; the
+conspiracies and corners in Erie; the story of
+Jim Fisk; the Wall Street bouts of Drew and
+Vanderbilt; the Black Friday panic—all are
+faithfully depicted here in the most absorbing
+style. No one with a dollar’s interest in Wall
+Street can afford to miss this opportunity to
+secure one of these books. Size, 10 × 12; 524
+pp.; nearly 2 inches thick. Cost to mail, 45
+cents. Bound in extra cloth.</p>
+<br>
+
+<p class="center no-indent wsp">Price, $1.00 net; $1.45 postpaid</p>
+
+<p class="center no-indent wsp fs150 bold">THE TICKER PUBLISHING CO.</p>
+
+<p class="center no-indent wsp">2 Rector Street, New York</p>
+</div>
+
+
+<hr class="chap x-ebookmaker-drop">
+
+<div class="chapter transnote">
+<h2>
+Transcriber’s Notes</h2>
+
+<table class="autotable lh">
+<tr>
+<td class="tdr">pg 17 Changed:</td>
+<td class="tdl">to fight the advance by by selling short</td>
+</tr>
+<tr>
+<td class="tdr">to:</td>
+<td class="tdl">to fight the advance by selling short</td>
+</tr>
+<tr>
+<td class="tdr">pg 111 Changed:</td>
+<td class="tdl">His own mental attitute, then, is a most important</td>
+</tr>
+<tr>
+<td class="tdr">to:</td>
+<td class="tdl">His own mental attitude, then, is a most important</td>
+</tr>
+<tr>
+<td class="tdl" colspan="2">New original cover art included with this eBook is granted to the public domain.</td>
+</tr>
+</table>
+</div>
+
+
+<div style='text-align:center'>*** END OF THE PROJECT GUTENBERG EBOOK 75570 ***</div>
+</body>
+</html>
+
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+This eBook, including all associated images, markup, improvements,
+metadata, and any other content or labor, has been confirmed to be
+in the PUBLIC DOMAIN IN THE UNITED STATES.
+
+Procedures for determining public domain status are described in
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+
+No investigation has been made concerning possible copyrights in
+jurisdictions other than the United States. Anyone seeking to utilize
+this eBook outside of the United States should confirm copyright
+status under the laws that apply to them.
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+Project Gutenberg (https://www.gutenberg.org) public repository for
+eBook #75570 (https://www.gutenberg.org/ebooks/75570)