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diff --git a/.gitattributes b/.gitattributes new file mode 100644 index 0000000..d7b82bc --- /dev/null +++ b/.gitattributes @@ -0,0 +1,4 @@ +*.txt text eol=lf +*.htm text eol=lf +*.html text eol=lf +*.md text eol=lf diff --git a/75570-0.txt b/75570-0.txt new file mode 100644 index 0000000..0d94c85 --- /dev/null +++ b/75570-0.txt @@ -0,0 +1,2068 @@ + +*** 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. + + =Fundamental Statistics=—as they bear upon financial conditions. + + =Special Opportunities in Bonds=—pointed out by a well-known expert. + + =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 + + + + +14 METHODS OF OPERATING IN THE STOCK MARKET + +_Contains Some of the Best Ideas Printed in The Magazine of Wall Street_ + +Bound in Leather, $1.00 Postpaid + + +The tried and tested methods of market experts are here collected for +the first time. + +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 +& 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. + +Illustrated with charts and diagrams. Pocket size. + + + The Magazine of Wall Street + (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 + distant subscribers without additional charge. + + Write TODAY for samples, terms and record of results + + + Ticker Publishing Company + 2 Rector Street, New York + + + + +A NEW ERIE + +_Read the history of this great railroad_ + +“The Story of Erie” + +By EDWARD HAROLD MOTT. + + +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. + + +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 *** diff --git a/75570-h/75570-h.htm b/75570-h/75570-h.htm new file mode 100644 index 0000000..260b7b3 --- /dev/null +++ b/75570-h/75570-h.htm @@ -0,0 +1,3571 @@ +<!DOCTYPE html> +<html lang="en"> +<head> + <meta charset="UTF-8"> + <title> + Psychology of the Stock Market | Project Gutenberg + </title> + <link rel="icon" href="images/cover.jpg" type="image/x-cover"> + <style> + +body { + margin-left: 10%; + margin-right: 10%; +} + + h1,h2,h3 { + text-align: center; /* all headings centered */ + clear: both; +} + +p { + margin-top: .51em; + text-align: justify; + margin-bottom: .49em; + text-indent: 1em; +} + +hr { + width: 33%; + margin-top: 2em; + margin-bottom: 2em; + margin-left: 33.5%; + margin-right: 33.5%; + clear: both; +} + +hr.chap {width: 65%; margin-left: 17.5%; margin-right: 17.5%;} + +div.chapter {page-break-before: always;} +h2.nobreak {page-break-before: avoid;} + +table { + margin-left: auto; + margin-right: auto; +} +table.autotable { border-collapse: collapse; } + +.tdl {text-align: left; padding-left: .5em;} +.tdr {text-align: right;} + +.pagenum { /* uncomment the next line for invisible page numbers */ + /* visibility: hidden; */ + position: absolute; + left: 92%; + font-size: small; + text-align: right; + font-style: normal; + font-weight: normal; + font-variant: normal; + text-indent: 0; + color: #A9A9A9; +} /* page numbers */ + +.blockquot { + margin-left: 5%; + margin-right: 10%; +} + +.center {text-align: center;} + +.right {text-align: right;} + +.smcap {font-variant: small-caps;} + +/* Images */ + +img { + max-width: 100%; + height: auto; +} + + +.figcenter { + margin: auto; + text-align: center; + page-break-inside: avoid; + max-width: 100%; +} + +/* Footnotes */ +.footnotes {border: 1px dashed;} + +.footnote {margin-left: 10%; margin-right: 10%; font-size: 0.9em;} + +.footnote .label {position: absolute; right: 84%; text-align: right;} + +.fnanchor { + vertical-align: super; + font-size: .8em; + text-decoration: + none; +} + +/* Transcriber's notes */ +.transnote {background-color: #E6E6FA; + color: black; + font-size:small; + padding:0.5em; + margin-bottom:5em; + font-family:sans-serif, serif; +} + +.fs70 {font-size: 70%} +.fs80 {font-size: 80%} +.fs90 {font-size: 90%} +.fs120 {font-size: 120%} +.fs150 {font-size: 150%} +.fs350 {font-size: 350%} + +.no-indent {text-indent: 0em;} +.bold {font-weight: bold;} +.wsp {word-spacing: 0.3em;} +.lh {line-height: 1.5em;} + +p.drop-cap { + text-indent: 0em; +} +p.drop-cap:first-letter +{ + float: left; + margin: 0em 0.1em 0em 0em; + font-size: 250%; + line-height:0.85em; +} + +.upper-case +{ + text-transform: uppercase; +} + +.pageborder {width: 400px; border: 2px solid; padding: 10px; margin: auto;} + + </style> +</head> +<body> +<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 & 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 & 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> + diff --git a/75570-h/images/cover.jpg b/75570-h/images/cover.jpg Binary files differnew file mode 100644 index 0000000..2b436f8 --- /dev/null +++ b/75570-h/images/cover.jpg diff --git a/LICENSE.txt b/LICENSE.txt new file mode 100644 index 0000000..6312041 --- /dev/null +++ b/LICENSE.txt @@ -0,0 +1,11 @@ +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 +the "Copyright How-To" at https://www.gutenberg.org. + +No investigation has been made concerning possible copyrights in +jurisdictions other than the United States. 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