The psychology of speculation

It may be set down as an axiomatic truth that no one can learn the art of making money in the stock market by reading statistics, charts, precedents, theoretical disquisitions and instructions. Of course it is not needful, nor would it be any more practicable than it is necessary, to set forth any fixed rules or maxims governing one’s procedure in any other line of business or any other profession, since no one could use them advantageously without the requisite qualifications, such as adaptability, shrewdness and practice. Hundreds of different combinations of cards are laid out in books of instructions on auction bridge, with explicit directions as to how to bid and play the hands, yet nobody ever heard of a good bridge player being made solely from book instruction. One reason is that there are actually millions of combinations of cards. Also in stock trading there is an indefinite number of needful “don’ts” which the most resourceful person can neither contemplate nor anticipate. Every stock market cycle shatters some precedent; every era produces new phenomena. Everyone who has ever studied a book of instructions on how to play golf knows how impossible it is to take up any golf club and make it perform according to schedule. A firm stance, feet well apart, body under full control, the right knee stiff, the left arm almost rigid as it follows the right in a low backward swing; and most important of all, the eye firmly fixed on the ball, while the club whips through the air, and after lifting the ball, follows on through, carrying both arms forward to their full length, and many other things which I never could do, and cannot now recall; all these directions the would-be player will learn as he knows his A, B, C’s; but in his intense eagerness to swat the ball he disregards most, or all, of the stated essentials, and at the moment of impact, while his club is ploughing up the sod two or three inches behind the ball, his eyes are cast heavenward in fervent anticipation of watching its flight. Likewise the speculator figures his profits long before they materialize. The most important thing in golf, and the hardest thing to learn, is to keep the eye on the ball while in the act of hitting it; and the hardest thing to learn in stock trading is to keep the eye off the market, hold firmly and patiently to good resolutions, and not try to get rich too quickly. Both look to be easy, but—

Reducing the whole problem to its simplest form, the stock exchange is a well-organized and honestly conducted market-place where anyone may sell or buy investment or speculative securities, at whatever price anybody else is willing to pay or accept for them. There is no more mysticism about the exchange itself than there is about a book auction room, or any other auction room where articles of merchandise are offered at an upset price, or auctioned off to the highest bidder. A man who buys stocks or bonds for investment is not gambling with anybody that they will go up or down; he buys them because he wants to invest his money and get interest or dividends on it. If a stock bought at $100 a share, paying seven per cent. annually in dividends, should increase in market value to $150 it is obvious that the rate of interest on the total capital is correspondingly reduced, and that whereas his original $10,000 brought a return of seven per cent., the capital of $15,000 is earning a net return of only four and six tenths per cent. Under such conditions it is oftentimes wise to sell out and reinvest the money in other securities which bring a larger net return; or if stocks in general are too high, put the money in the bank and wait for lower prices. The $5000 gain in capital will surely more than cover interest on the original $10,000 investment during the time one has to wait for good buying opportunities.

This reminds me that some years ago, when Calumet & Hecla Mining stock was selling at $850 a share, on which amount it netted only a small dividend return, I asked a friend (who owned a large amount of the stock) why he didn’t sell it and reinvest in other securities. My argument was that the stock having already declined from $1000 a share, would probably go much lower, considering that the earning capacity of the mine was in all probability as great as it ever would be; therefore the chances were more in favor of a decrease than an increase in earnings and dividends. To all of which he readily assented, but in view of the fact that he had bought the stock at $50 a share it was paying a very high rate of interest on his original investment; and for sentimental reasons he preferred to keep it,—which he did. Such instances are not at all uncommon; nor is it uncommon to hear intelligent business men remark that they know they ought to sell certain investment securities, because the market price has risen out of all proportion to the income yield, but other good securities are all so high that they really don’t know what to put their money in. The chances are probably a hundred to one that if the money were put in the bank and allowed to rest a while at three per cent. interest, it could within a few months be reinvested in the same securities, or other equally good ones, at a net gain of three to five years’ interest, or even more. This is not stock gambling; it is merely business prudence.