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Wall Street - False Men And Methods

( Originally Published Early 1900's )

ONE of the popular subjects of the day is the theory of degeneration, which has been imbued with new life by that voluminous and somewhat eccentric author, Max Nordau. In all that has been lately written, very little has appeared to modify the earliest opinions on this question. The Creator Himself made the discovery of human degeneration at an early period, according to the record of Moses, who told the matter candidly in the following terms: "And God saw that the wickedness of man was great in the earth, and that every imagination of the thoughts of his heart was only evil continually. And it repented the Lord that he made man on the earth, and it grieved him at his heart." Surely there can be no stronger testimony to man's degeneracy than this. It has been with a deep sense of my own incapacity to cope with the mysteries of this question that I have made several references to it for some years past at the request of certain journalists and newspaper proprietors; but any opinion, no matter whence it emanates, provided the source is only human, must be of a speculative character. In Wall Street affairs we have many examples of the degenerates; but they do not belong to the ranks of the genuine business men, and, such as they are, they seem to be now in a fair way of being expelled from what is known as the Wall Street district. They are, for the most part, simply confidence men who have not had any Wall Street training or experience, and do not require it, since their game for making money is entirely outside of, and antagonistic to, genuine Wall Street methods. Their system is one of misrepresentation and deliberate lying. They personate Wall Street methods to outsiders, and by this means get people in various parts of the country to send them money for the ostensible purpose of speculating and investing in stocks, but the alleged purpose is never put into operation. The money is pocketed by the confidence operators, but no stocks are bought in good faith, and fresh victims are sought through similar false pretenses by advertising in the Sunday newspapers and by sending circulars offering large monthly dividends and professing to have a "system " of speculation that cannot fail. Then there is another class of more clever swindlers who occasionally give the victim some chance, with the ultimate design of leading him further on and bleeding him more copiously. These are the financial degenerates of our day, often found in the midst of our honest business life and operations, of whom we must beware, and concerning whom we wish to warn people who are ignorant of their deceptive and insinuating methods. A feeling of regret cannot always be repressed at the view of the broken-down merchant, and small, timid, impecunious speculators who frequent the bucket shops, so called, in hope of gain. The proprietor's game is, on the face, fair enough; but the customer is so intent on digging his own pit that he fails to calculate the chief factor involved. The margin required is 1 per cent., and you pay one eighth commission to come in and one eighth to go out. Therefore, when you lose a dollar you lose a whole dollar; when you win a dollar you collect 75 cents. The odds of 100 to 75 are thus continuously against you. Again, the customer goes wholly on guess work. If he were to toss a copper as to whether to buy or sell, he might be right something like half the time, but if the odds are I to 2 that a stock will move in a given direction and also 1 to 2 that a guesser will guess right, the guesser starts in with actual odds 61 of 4 to 1 against him. The bucket-shop customer may not be familiar with this element of probabilities, but the mathematical professors lay it down, and Mr. Proctor mentions it in his treatise on gambling, and the prosperity of the bucket shops seems to bear it out as a truth. In some of these byways of finance you can buy one share. In others, where five shares are the smallest gamble, two, three, sometimes five small speculators will share in a five-share lot. These facts are not stated as evidences of depravity nor as the basis for sneers at honest and laborious poverty; they only tend to show that where people are unable to dig large holes to bury themselves in they will dig small ones. A pitfall in the regular stock market is the small margin system. There are indeed advocates of this system, on the ground that where the market goes against you it is better to lose 1 or 2 per cent. than 5 or 10. And where a speculator is in close touch with the exchange this may answer. On the exhaustion of his margin he may re-margin, or may let the stock alone until a proper time comes to buy in again. But if the speculator has other affairs, this system is eminently a pitfall. Let him buy into a stock at 75 at 5 per cent. margin, which is the smallest that any reputable broker will accept, even on stop order. It is quite upon the cards that the said stock will drop to 72, or 71, or 70, within a few hours, or even half hours, and then rally again to cost price or above. In such a case, with a proper margin he would not be injured; but with a slim margin he has lost his total investment. As a matter of fact, men who speculate on small margins, 2 and 3 per cent., acquire reckless and unreasonable habits of dealing, and degenerate into actual gamblers. They are almost certain to be losers also, because the same odds operate against them that we have seen operating against the bucket-shop players. Brokers' commissions, one eighth each way, must be paid. On 1 per cent. margins the odds are 100 to 75; on 2 per cent., 100 to 87k; on 3 per cent., 100 to 92; whereas the operator who puts up 10 per cent. margin has only odds of 24 per cent. against him, with a fair prospect in any ordinary condition of the market of not being sold out for want of margin. The man who puts up 16 per cent. usually has another Io per cent. in reserve, which is almost sure to carry him out in the end to a profit. One of the deepest, most precipitous pitfalls is dug for the unwary by the professional point-giver. King Solomon is reputed as saying in the Book of Proverbs, "Surely in vain is the net spread in the sight of any bird," but the people who slide numerously and with alacrity into the holes dug for them by the givers of points seem to gainsay the wisdom of Solomon. The point-giver is of Protean build. Sometimes he makes your acquaintance accidentally, as it were. Sometimes he brings a letter of introduction from some person who does not thoroughly know him. Then, again, he advertises. When he advertises it is done in something like the form of one of these announcements, which can be cut by the dozen out of many Sunday newspapers: CONFIDENTIAL CLERK to prominent operator knows of good dividend paying stock that will yield good profits. Address Profits, 185, - office. A Great Opportunity for making money in stocks. For particulars address Active, box 202, - office. A. - WANTED - Party with capital to take advantage of my reliable information on stock market. Address Success, box 24, -office. If you address either of these ingenious gentlemen, he will call upon you if he thinks you are worth calling upon, and after some conversation touching the necessity of caution and confidence on both sides, and the superior sources of information enjoyed upon his side, he will tell you to go at once to your broker and buy X, Y, Z shares. That is, unless he has just advised some other person to buy X, Y, Z; in which case he will earnestly urge you to hasten, without loss of time, to sell X, Y, Z. As for the profits, in all cases he is to have half the net gain, and he leaves it to your honor to let him know what the amount of the gain is. If ten persons act upon his advice, five will gain and five will lose. The losers he has nothing to do with, he would prefer not to see them; but he has the names of the winners in his memorandum book, and he rarely fails to collect from them. This pitfall looks like a shallow artifice, and it is; but a great many people slide down its sides in the course of any given year. Else how should the professional point-giver flourish as he does, and have so much cash wherewith to advertise in the Sunday newspapers? Among the degenerates that infest Wall Street, that class which has been running at intervals which are known as " discretionary pools " is one of the most atrocious. Their depredations, it would seem, have been most conspicuous among savings banks depositors, to whom they make special appeals in their circulars, showing the profits derivable from their guaranteed two per cent. a month, compared with the small interest paid by the savings banks. These land sharks were making very bold and profitable invasions on the deposits of many savings banks throughout the country when the police raids some time ago put a partial stop to their fraudulent operations; but they are not all dead, and new adventurers of a similar character are springing up every day in all parts of the country. One of the worst, deepest, most dangerous, and most frequently tumbled into of all pitfalls of Wall Street is dug by operators themselves, and seems to be the result of a weakness of the human mind, which leads it into the practice of taking small profits and large losses. A speculator puts up 10 per cent. margin and buys X, Y, Z at 75. The shares fall to 74, 73, 72, and so on. Now, if he knows the property to be sound and really valuable, there is no reason why he should relinquish it merely because the market price is lower than it was. On the contrary, if he can afford the cost, it may be policy for him to buy another lot at 70, and even another lot at 65, besides protecting his first purchase. But suppose he is merely the kind of speculator whose gains proceed from turning a small capital frequently, is it not his most obviously plain course of action to drop his purchase at 73 and take chances of buying in again? Most of us would say, " Yes, by all means." But as a matter of fact he will not drop out until the Io per cent. margin is exhausted. On the other hand, if X, Y, Z had gone up to 77 or 78 and then shown a tendency to sag off, this same operator would at once have closed the transaction, thus showing a willingness to gain by twos and threes and lose by tens. An English novelist once wrote: "There are at this moment 10,000 Englishmen wandering homeless and penniless over the continent of Europe because they would not lead trumps at the proper time!" So any well-informed broker can say of his own personal knowledge and experience, "There are thousands of American citizens who are today poor because they would not cut short their losses and let their profits run on." There is also another dangerous pitfall which men dig for themselves; namely, the belief that because a certain description of shares mounts and soars above previous calculations of the general market, therefore it is desirable to buy into it after it has mounted during a long period of days. This belief is almost universal, and yet it directly contradicts our experience and the laws of nature. We know that the higher the wave gets, the weaker it is at the top, while its base is always strong; and we also know that whatever goes up has a tendency to descend again, and that the time always comes when the holders of any commercial property, no matter how desirable, prefer money to property. Still, the majority of outside operators regard the market as strongest when prices are up and weakest when prices are down, and act accordingly; whereas those who know, base their actions on the firm truth that the market is never so weak as when it is high, and never so strong as when it is low; being, in fact, like that ancient wrestler who, whenever forced down by his antagonist so that his body touched the ground, immediately received from Mother Earth a redoubled allowance of strength. Some men are born degenerate, some achieve degeneracy, and some have degeneracy thrust upon them; and one is likely to meet these three kinds of degeneracy in Wall Street. I think, however, that of all the class, those who achieve degeneracy are in the majority, since " evil communications corrupt good manners." Most men are born with a capacity for doing good, and they are capable of acting an honest, straightforward part in business, if they will only exercise that faculty. Money gained by crooked business methods does not make its possessors prosperous for many generations, seldom even for one; and I believe, if the statistics on the subject could be fully ascertained, it would be seen that the number who adopt surreptitious means, no matter how well concealed, to succeed in life would show far more failures in their ranks, perhaps ten times more, than those who fail while seeking fortune by honest methods. The fortunes made by degenerates are usually built upon sandy and shifty foundations, while those that are amassed by their opposites, the regenerates, the good, and the true among mankind, are founded upon rock of the most adamantine quality.

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