The psychology of speculation

Of course the speculator who buys stock in a new copper mine is simply taking a gambler’s chance that ore will be found in paying quantities. Most of those who have submitted to this enticement in the past thirty years do not need to be reminded of the hazards attending such risks. I recall that about twenty-five years ago, when the “copper fever” was raging throughout the country—and in Boston especially it was highly infectious—a half-page advertisement appeared in one of the leading Boston newspapers, relating in graphic terms the discovery of the most remarkable copper mining prospect that had ever come to light. The chief mining engineer of one of the largest and best known copper mines in the United States—a man of wide experience and vast knowledge in the mining business—while prospecting somewhere in the West came upon what seemed to him the richest deposits of copper ore he had ever seen. These ore bodies were said to be located in a large mountain, conveniently near a railroad, and by tunneling into the side of the mountain the ore could be trammed out, dumped onto the cars and hauled to a smelter a few miles away. The mining engineer (whose full name was given) had immediately resigned his position, organized a stock company, known as the Occidental Copper Mining Company—into which he admitted a number of personal friends—bought the property, and began tunneling operations on his own capital and what he had raised among his friends through the sale of stock in the new corporation. Having exhausted their funds and desiring to continue exploration work—which became more and more promising—the directors had sold a block of treasury stock, the par value of which was one dollar a share. The latest reports showed that the work was progressing satisfactorily under the personal direction of the engineer who had discovered the mine, and that stockholders might expect dividend returns inside of a year or so. The advertisement was inserted, not by a stock-jobbing firm or underwriting syndicate, but by a well known wholesale and retail grocery and provision company, who claimed that after fully investigating matters they had bought a large block of the stock, twenty thousand shares of which they would distribute among their customers at the par value of one dollar per share. I called on the president of the grocery company, who said his firm thought so well of the prospect that they had bought twenty thousand shares as a speculative investment, and a like amount to distribute among their customers. He represented that although the shares were easily worth $5 each he considered it good advertising for his company to sell them at par, $1; and with a view to extending the benefits as widely as possible he preferred to dispose of the stock in small lots. He cheerfully gave me the names and addresses of the directors of the new mining company and suggested that, if interested, I might write to them. One was a physician of good repute, another was general auditor of the Chicago, Milwaukee & St. Paul Railway Co., another was a western lawyer of prominence, and so on. I wrote to each of these three, telling them of my interest in the matter, also asking for a candid expression of their opinions about the property. Each of them sent me a personally written reply, substantially corroborating what information I already had, and saying that they had given their names and their financial support to the company solely upon the recommendation of the mining engineer, whom they knew personally and trusted implicitly. Further than that they knew nothing, but were willing to take a gamble on his judgment. After receiving the second of these three letters I hurried to the office of the grocery and provision company, and to my great disappointment, found that they had only a few hundred shares left. When I told the president that I would take the entire lot at his price, one dollar per share, he shook his head. He said the stock was going rapidly in five, ten, and twenty share lots, and that in justice to their other customers and friends he did not think it fair to let me have more than one hundred shares at most. But finally he yielded to my persuasive argument, that inasmuch as he had only a few hundred shares left he might as well let me have them all and thus finish the whole transaction at once, saving himself the bother of peddling them out piecemeal.

Nothing further transpired until, some months later, I received a circular from the mining company reporting good progress with development work; also stating that owing to further need of funds to continue this work the directors had concluded to make another offering of treasury stock at the same reduced price at which they had sold the previous block, namely, at five cents a share! In the aggregate the advertising feature was probably more advantageous to the customers than it was to the grocery company (which soon afterwards went bankrupt); for although the purchasers, including myself, lost every dollar of their investment, it doubtless served as a warning (which in my case it certainly did) that prevented much greater losses in other swindling schemes.

The task of preparing the prospectuses of the thousands of fake copper mining propositions and oil schemes that have been foisted on the public in the past twenty-five years, and made to appear especially attractive by a price of from five cents to one dollar a share, has developed some of the most remarkable inventive geniuses of modern times. Their advertisements and arguments have been so convincing that the contrary persuasions of bankers and brokers have been absolutely unavailing with friends and customers who have given orders to buy the stocks; and against their enticements there is positively no remedy short of experience. The tempting baits of every imaginable variety offered by the promoters and dispensers of these bogus stocks have been the means of filching hundreds of millions of hard-earned money from credulous people, who are misled to suppose they are getting in on the “ground floor” of a modern Aladdin’s Cave before it is opened to the public. But it always has been so, and probably it always will be. It would be as useless to warn the general public, or even particular individuals, against these alluring ground-floor propositions as it would be to warn a flock of goslins to keep out of a mud puddle. It’s like admonishing a boy against a hundred kinds of mischief; he will surely find some act of deviltry not included in the list, and his defence will be that you didn’t tell him not to do that. And this argument is the more unanswerable because you well remember having used the same stratagem yourself.