Stock market speculation

“ What are the further obvious deductions from the large increase of speculation in public securities thus suggested, to confine ourselves to one kind of market? If the business of the Stock markets were reduced within safe and legitimate limits, that is, was confined to operations of a bona fide investment nature, it is certain that no more than one-tenth, it might be one-twentieth, of the brokers would be required to execute properly all the orders that come into the markets. ”

“ Many indeed without knowing anything about Wall Street speculation, and who have never speculated anywhere, blame speculation for a host of evils that are in no way due to it. Some of them would even close the Stock Exchange to stop speculation there, forgetting apparently that this would deprive investors and banking institutions as well as speculators of a market for securities, and make all the stocks and 963bonds now listed and dealt in there practically unmarketable. ”

“ To speculate is to theorize about something that is uncertain. We can speculate about anything that is uncertain, but we use the word "speculation" in this book with particular reference to the buying and selling of stocks and bonds for the purpose of making a profit. When people buy stocks and bonds for the income they get from them and the amount of that income is fixed, they are said to invest and not to speculate. In nearly all investments there is also an element of speculation, because the market price of investments is subject to change. ”

“ The illegitimate speculator is the one who starts with a small capital and with some method, with the idea of increasing it upon a system of incurring risks which, in the ordinary course of the market he may operate in, will enable him in case he has wrongly calculated the course of prices, to pay his losses and go on again. ”

“ The chances in buying manipulated stocks are invariably against the outsider.
There always is so much publicity about these very active speculative stocks that the public is attracted towards them. Newspapers and brokers' market letters give altogether too much space to them. Such stocks sell far too high, and when the break comes, it brings ruinous losses to many people.
On the other hand, by following a conservative course, you really have a chance to make large profits with a minimum risk. ”

“ THE RIGHT TEMPERAMENT FOR A PROFESSIONAL SPECULATOR.
A man who wins by haphazard speculation, who chances to operate successfully until he has filled his pockets, and retires with his gains from so fascinating an arena, is one in a hundred. Any one who knows anything of Stock Exchange speculation will confirm the statement that, to the ordinary run of men, the game is not worth the candle. There are, however, conditions under which speculation, in a market where ten or fifty thousand pounds can be lost in half-an-hour, may, under given conditions, be systematically practised profitably. ”

“ The market tipsters, the financial editors of newspapers, the brokers’ letters and all stock market literature, with but few exceptions, were crowing loud and boastfully for still higher prices, and after the whole group of stocks had risen in unison for a time, some individual stock was singled out every day or so, pushed into the forefront and skyrocketed to dizzying heights. The brokers and all the customers were delirious with joy and excitement. ”

“ Nothing could be farther from the truth; nothing could disclose a more profound ignorance of existent facts than for one to adhere to any or all of these fallacious beliefs. The stock exchange itself has no more control over the price of securities than it has over the ocean tides. It is merely an auction room where anyone may send in orders to sell stocks and bonds, either at a certain asking price, or “at market” to the highest bidder. On the other hand anyone may put in either a limited or “at market” bid for whatever securities he wants, provided they are on the list admitted for trading ”

“ On the contrary, the speculative element represents for the most part men of uncommon shrewdness and foresight; men of studious and analytical minds; men who are, or have been, masters of every situation in their own professions or commercial vocations, even though most of them act like children when they get tangled up in the meshes of stock speculation.
Nor should it be imagined that the stock market is primarily a guessing game, or a game of chance ”

“ The nation had indeed gone prosperity mad, while the rest of the world was going to destruction—certainly an irregular and puzzling phenomenon. Occasionally when some veteran writer piped a note of warning to stock speculators, it was met with a new outburst of bullish demonstration, and the market swept on like a conflagration in a city built of tinderwood. Stocks that had lain dormant for months suddenly came to life and became the favorites of powerful cliques ”

“ Today, after fifteen months of national sunshine and cloudless skies in all directions, we believe it behooves a man of affairs to take counsel with himself relative to his investment and speculative position. Many business men who should have learned better by past experience, still take the business situation as a guide to their stock market [78] operations in spite of the fact that all stock exchange history shows that the market turns up long before a period of business depression has run its course and likewise turns down six months or more before prosperity comes to a pause. ”

“ If the critics are correct in their contention that pressure of easy money in the New York market holds out inducements for foolhardy speculation on the Stock Exchange, the year 1909, just cited, should have witnessed a great boom in securities. If speculators could borrow at 11⁄2 per cent. on securities that netted 5 and 6 per cent., the theory117 of our adversaries is that this disproportion entices a large number of people into such speculative ventures that inflation takes place, followed by collapse. ”

“ Their buoyant spirits increase with every [45] new success, until at length they throw discretion to the winds, extend their risks far beyond the margin of safety, and at the infallible turn of the market they find themselves in difficulty, like foolish fishes that get stranded on the beach at high tide. It is a fact, as inexplicable as it is true, that men with a fair amount of gray matter in their heads, who would flout the idea of paying $50 a share for a particular stock, will later borrow money from a broker at from six to eight per cent. ”

“ Speculation in stocks, as conducted through Stock Exchange brokers, is no more gambling than speculation in real estate or ordinary merchandise. All trade is more or less speculative because it involves risks. If it did not involve risk there would not be so many mercantile failures as there are every year, yet no one calls trade gambling. Every time a merchant buys a line of goods, he makes a venture, not knowing whether they will rise or depreciate in market value on his hands. He buys also on credit, just as he gives credit to his customers ”

“ Of course, we do not claim that by following the conservative course we advise, you always will make such large profits, although you might do just as well as that if you took advantage of some of the opportunities so frequently to be found in the market; but keen discrimination in what you buy always is necessary. However, let us suppose you made annual profits of one-fifth the above amount, or 50%, which is easily possible without taking the risks that are usually taken in stock speculating. ”

“ The long upward trend of fundamental progress, however, gave rise to over-optimism as to profits, which translated itself into a wave of uncontrolled speculation in securities, resulting in the diversion of capital from business to the stock market and the inevitable crash. ”

“ They make fifty thousand dollars legitimately, and then the insane desire seizes them to double this amount in a day. Nine lose every thing where one makes his fortune.
The reason is plain. The speculation in stocks is controlled by men without principle, whose only object is to enrich themselves at the expense of their victims. The Herald recently presented the following picture of the transactions in the stock market:
Within the past few days we have seen the most gigantic swindling operations carried on in Wall street that have as yet disgraced our financial centre. ”

“ When the whole country becomes pervaded with an epidemic of bullishness the action of speculators is always directed by sentiment rather than judgment; and a market that is swept along by excited emotions [83] is always dangerous,—dangerous to go short of and dangerous to be long of. Hysterical “bulls” care nothing whatever about the earnings or dividend returns on a stock; the only note to which they attune their actions is the optimistic slogan, “It’s going up!” and the higher it goes the more they buy, and the more their ranks are swelled by new recruits. ”

“ The prices of stocks are periodically rising and falling, and one might as well undertake to fight the ocean tide as to contest the course of the stock market when once in full swing in either direction; for the market, unlike the tide, has no prescribed boundaries. There are times—indeed most of the time—when it is much wiser to sit by in the capacity of an interested observer, than to plunge in and become a struggling participant, with the chance of being carried out beyond one’s depth. ”

“ In his exhaustive study of stock market psychology he had learned that while it is the practice of inexperienced traders to take small profits on stocks in a rising market, it is also their custom to buy the stocks back again at much higher figures, instead of waiting for prices to decline. ”

“ Speculators may be divided into three classes which about embraces all the phases of speculation. First, we have the legitimate speculator who spends all or some of his surplus capital in taking off the market what he [133] believes will give him a gain by holding it for some time. That is the legitimate speculator who is a benefit to the community as a leveller up of prices. ”

“ Moreover, if at any time a purchaser becomes dissatisfied with his investment and wishes to get his money back or change into something else, there is always a ready market for the stock. It may be more, or it may be less, than he paid for it, but in either case it can be quickly converted into cash. ”

“ As a method of operating in the stock market, we do not recommend the buying of puts and calls. Professional speculators may be able to use them to advantage sometimes, but for the outsider, who is not in close touch with the market, there is nothing about them to recommend.
Here is one point: the people who sell puts and calls fix the terms. If the market is irregular, they will set the point of buying or selling far away from the market price. These people are shrewd traders and they make the terms in their own favor. ”

“ Nor is it ever unsafe to buy good stocks at figures away below their intrinsic worth. The element of gambling does not enter the undertaking until the market price has risen above the investment value; then if the owner refuses to sell, or buys more (as the speculator usually does) he is gambling on the uncertain event that some individual or clique is going to pay him more than the stock is worth. ”

“ The market does not collapse like a ten-story card house; it generally goes down gradually for a while, one or two flights at a time, and finds steadying props every now and then which sustain it for brief periods. For instance, a certain stock paying $5 a share annually has been hoisted by degrees from $75 up to $150 a share. When it descends to $140 a few wise traders who have been impatiently waiting for a reaction will buy it because it looks cheap at $140 after having sold at $150 ”

“ Also there are many who after selling their stocks at a handsome profit will buy them back at twenty, fifty, eighty, or a hundred points higher, and with much less timidity than they felt when they first bought them at low figures. Prosperity in the stock market seems to encourage optimism, rashness and impatience in about the same degree that adversity discourages enterprise and aspiration. ”

“ Once the market reacted and five hundred shares of his stock were sold on “stop,” after which the price quickly recovered, and being assured that the stock had been hammered down for the sole purpose of “shaking him out,” he bought back the five hundred shares at five points higher than he had sold it. To prevent another similar coup he cancelled all stop loss orders and [49] took his chances in the open market, confident that he could not be beaten as long as he was trading on “velvet” with an original investment risk of only $2500. ”

“ If he wins, instead of withdrawing the original capital, with perhaps a little more, he usually stakes the whole amount on every venture until it is lost.
Viewing the stock market calmly in the perspective, it is not a question whether stocks will rise or fall ”

“ While there is much of what may be deemed pure speculation (some of it reckless and unprincipled enough) carried on through the medium of the Stock Exchange, it should be remembered that there is no business, however legitimate or conservative in its character or pretensions, that has not its speculative side, and does not present ample opportunities for reckless or inexperienced men to ruin themselves if they choose. ”

“ As a consequence, when interest rates go up, bond prices go down. During this period, speculative stocks are selling at their highest prices; and under the influence of this movement, many stocks that have no actual value sell up at high prices. ”