Study Of The Stock Market
( Originally Published Early 1900's )
The power of speculative fascination over a large number of people. Bad results of adopting second-hand opinions. The laws of speculation and investment must be studied profoundly. Fact and rumor should be carefully distinguished. Hard study of facts and realities generally leads to sound and accurate conclusions. It is also necessary to study the circumstances and events which cause real values to fluctuate. How natural laws eventually regulate values and reduce inflated ones to their true basis. ANYTHING that is worth doing is worth doing well. In order to do anything well, one must study the subject thoroughly, not necessarily in books, because books are, except as to the laying down of principles, rather unsatisfactory teachers. The stock market is a most fruitful and fascinating field of study. It attracts more influential and well-to-do men than any other arena of activity in American life, and of course a great deal of study is bestowed upon it. The reasons why the results of so much study are not always commensurate with the labor and time employed are numerous. Some of them are substantially as follows - People have preconceived notions. They are not willing to clear their minds of existing theories and bring themselves down to close dealing with facts. They are apt to base their conclusions on the opinions of others. Now, opinions as to the value of anything are sure to differ, and opinions as to future values differ still more widely, just as the spokes of a wheel are wider apart as you travel away from the hub. When you reach out into the future, you are getting away from the hub of the present. People are usually unwilling to act on conclusions that conflict with their desires, and that involve the acceptance of immediate losses. They resemble the wounded man who’s refuses to let the surgeon cut off his leg when he is told that amputation will probably save his life. They are apt to study in a superficial manner, without thoroughness, using scraps and smatterings of knowledge when even the most exact information is hardly sufficient. Other reasons could be adduced, but they might be needless. A certain king excused the municipality of a town that neglected to fire a salute in his honor on their giving him the first one of fifty good reasons, that they had no powder. The other forty-nine were suffered to remain undivulged. Enough reasons have been given here to explain why so many people fail to study the stock market successfully. But while it is very easy to pick to pieces the various systems that are sure to win on the stock exchange, and to criticize the methods of study of the prejudiced, it is most difficult to lay down absolute rules for the successful study of the share market. One invariable rule there is, but it requires large capital and patience to practice it. It is this: Buy only what you can pay for; buy when cheap and sell when dear. The veriest financial infants can see the force of this. Yet even this precept has its weak points. For instance, how is a person to be absolutely certain that a given stock is cheap or dear at a given time? You say, by comparison? But if he compares the price with what it was at any past period, he must also be able to state all the facts that existed at that period having any bearing on this stock, and since these facts may run into the thousands as to number, and into all parts of the country as to place, our learner has a heavy contract on hand. Then, too, he must bring to bear a clear judgment, and a resolution such as soldiers exercise when they charge batteries, and he must be prepared next day to find out that he was wrong. After a careful and exhaustive search into all the materials at hand, he buys shares at, say, 60 per cent. of par, as being cheap at the price, and really worth more money, and next day they may be offered at 50. He then has really lost $10 on each share; but if he holds the purchase, and it ultimately advances to par, he has gained $40 per share. And suppose he sells on any given day at par, and a week after that the shares sell at 110, he then loses $10 per share. So that this "safe" road to success has its stumbling blocks as well as others, although they are not so dangerous. In such a road there are no deadly pitfalls. The men who travel it are not tempted to defalcations and suicides. Horace Greeley once said that the way to resume specie payments was to resume; and it might also be said that the way to study the stock market is to study it. One distinguished and generally successful stock operator of the period is credited with being in daily receipt of numerous pieces of information from various parts of the country as to the condition of crops, weather, freights, passenger traffic, in short, all facts that go to make up the status of railroad enterprises. These private bits of information are not open to the general public- they cost too much, and call for too much machinery; but the bureaus of public information are continually sending out intelligence, and it is mostly trustworthy. This class of facts must be distinguished from mere rumors. Rumor is, as a rule, uncertain and untrustworthy. It has been compared to an animated thing that begins its career by being small and compact, but as it stalks along it becomes larger and less definite as to form, until at last it is like a monstrous cloud that has neither shape nor consistency, and finally disappears, no one knows how or where. But to study facts leads to generally accurate conclusions; and accurate conclusions are apt to lead to wise transactions. Thus, the fact of large harvests in the year 1891 in the United States, coupled with the fact of poor harvests in Europe in the same year, led to the conclusion that our grain would be in demand for foreign shipment, and that the earnings of our railroads would be increased. The conclusions were sound and the earnings were increased, and judicious students of the market bought stocks for a rise. Then the fact that stocks rose and kept on rising, coupled with the fact that the general public were buyers, and with the additional fact that the public prefer to be buyers and to buy at high prices, and not to buy at all unless prices are high, led these same judicious students to sell the same stocks during the prevalence of high prices, both the stocks which they owned and large amounts which they did not own. Again, the study of facts led to wise conclusions, and these ended in successful results. Both as bulls and as bears the wise students have fared well. The careless and superficial public, coming in too late as bulls, found themselves at last compelled to become unwilling sellers at greater or less losses, in some cases so severe as to shatter households and drive citizens to ruin. Thus the person who studies real values must not be content with that alone. He must also study the facts that in times of stress and storm make real values fluctuate as wildly in manner, if not in amount, as those of the most fanciful securities, and he must learn that no operation on margin is really safe unless the margin is large beyond the ordinary run, and is backed by equally large reserves. Some financial teachers lay it down that your risks should not exceed 25 per cent. of your capital. This is excessive prudence; but the man who keeps half a mile away from the edge of a cliff will never fall from it. One who has studied the share market carefully has eventually found that if he is able to pay one half the market price of his holdings, he need have little fear as to the other half; that is, on judicious selections of properties. No mention is made here of shares that sell in December at 72 and in March at 30. Whoever buys such goods should pay for them and put them away, and let them incubate with such patience as is attributed to the hopeful setting hen. The student of the stock market has at certain periods no easy task before him. Imports are sometimes large, and exports small. We sell to foreigners a million per week of cotton, and buy from them two millions per week of coffee, the cotton yielding us a small profit, the coffee yielding foreigners an immense profit. Other nations at times do not seem to prefer our grains to those of Russia and the East, despite those foreign markets of bewildering extent and good prices which exist, I fear, only in the imagination of free-traders. Then, too, the indebtedness of corporations and individuals acts as a constant menace to the natural tendency of loose capital to be lent out to useful enterprises. Yet, at the bottom of all this turbulent mass of facts there are natural laws at work which, if we study them in relation to the objects which they control, will be found to be as sure in their operation as sunrise. The collapse of the iniquitous coal combination, as cruel as one to raise the price of water or air, was the result of natural law, and the same laws are busy today, and the facts are always with us. It is the business of the diligent to find them and to profit thereby. Next to the unwisdom of selecting and following bad or incompetent advisers in matters of speculation and investment, there are also certain persons whom, if you wish to do well and make a fortune honestly, you should be careful to avoid. You will not always know them by their appearance; in fact, that is often the worst rule to go by, for they are generally well disguised. It is in their walk, talk, and conversation that you will find them out, and, that this be the easier, I have made a collection of their characteristics, as follows: — Avoid a man Who vilifies his benefactor; Who unjustly accuses others of bad deeds; Who never has a good word for anybody; Who is always prating about his own virtues; Who, when he drinks, habitually drinks alone; Who boasts of the superiority of his family; Who talks religion down-town in connection with his daily business affairs; Who talks recklessly against the virtue of respectable women; Who runs in debt with no apparent intention of paying; Who borrows small sums on his note or [heck dated ahead; Who won't work for an honest living; Who looks down upon those who do; Who imputes bad motives to those trying to do good; Who betrays confidence; who lies; Who is honest only for policy's sake; Who deceives his wife and boasts of it to others; Who chews tobacco in a public conveyance; Who gets intoxicated in public places; Who partakes of hospitality and talks behind his entertainer's back; Who borrows money from a friend and then blackguards the lender. With a population of 80,000,000 people, which this country now has, it is easy to find associates in life without selecting men possessed of any of these characteristics, and life is the better worth living without them. You will both save and make money by strict observance of this short catalogue of avoidances. You are not called upon to do anything or to risk any money in the exercise of this discretion. It simply consists in letting such people severely alone, and if you have been in the habit of being imposed upon by such characters, you will find your happiness as well as your treasury greatly increased by prudently avoiding them.