The psychology of speculation

An enormous percentage of stock market speculators become victims of over-confidence after a series of successful trades. Their buoyant spirits increase with every 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. to buy the same stock all the way up from $100 to $150 a share on the slenderest permissible margin; and, instead of proportioning the margin of safety to the increased carrying risk they narrow it by continuing to buy as the prices advance. 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. But there is far greater danger in excessive optimism than in excessive pessimism, for the reason that optimists are inclined to back their hopeful views by indiscriminate purchases of stocks at high prices, while pessimists are seldom disposed to back their views at all. The risks incurred in buying stocks on a “thin” margin are so manifest that it seems almost as platitudinous to mention them as it would be to remark that children endanger their lives when they congregate on thin ice.