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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 *** |