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Title: Psychology of the stock market

Author: George Charles Selden

Release date: March 9, 2025 [eBook #75570]

Language: English

Original publication: United States: Ticker Publishing Company, 1912

Credits: Bob Taylor, Tim Lindell and the Online Distributed Proofreading Team at https://www.pgdp.net (This file was produced from images generously made available by The Internet Archive/American Libraries.)


*** START OF THE PROJECT GUTENBERG EBOOK PSYCHOLOGY OF THE STOCK MARKET ***





  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
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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
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  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





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