The Psychology of Speculation

Part 1

Transcriber’s Notes:

Text enclosed by underscores is in italics (italics).

Additional Transcriber’s Notes are at the end.

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THE PSYCHOLOGY OF SPECULATION

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THE PSYCHOLOGY OF SPECULATION

THE HUMAN ELEMENT IN STOCK MARKET TRANSACTIONS

BY HENRY HOWARD HARPER

WITH ILLUSTRATIONS BY HAYDON JONES

PRIVATELY PRINTED

BOSTON--MDCDXXVI

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COPYRIGHT 1926 BY HENRY HOWARD HARPER All rights reserved

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BOOKS BY THE SAME AUTHOR

Booklovers, Bibliomaniacs and Book Clubs Bob Hardwick A Journey in South-eastern Mexico The Stumbling Block Random Verses The Codicil The Unexpected Hodgkins The Story of a Manuscript Byron’s Malach Hamoves The Tides of Fate The Devils’ Nest Library Essays Highlights of Foreign Travel

(All of the above are out of print)

The Torch Press CEDAR RAPIDS, IOWA

THE PURPOSE OF THIS BOOK

There are many persons who, although knowing a great deal about the stock market, do not realize that the reason why they cannot “beat” it, is that they know too little about themselves. There are others who know their limitations well enough to let this monster problem alone. As it is important that one should learn to swim before plunging into deep water, so it is well to know some of the dangers of the stock market before delving into it.

It is not the purpose of this book to dissuade anyone from buying and selling securities, but merely to point out some of the stumbling blocks and handicapping influences that speculators, and even investors, are sure to encounter.

H. H. H.

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THE PSYCHOLOGY OF SPECULATION

THE HUMAN ELEMENT IN STOCK MARKET TRANSACTIONS

The stock market literature of the past thirty years would make a vast library in itself--one that would provide reading for a lifetime. Perhaps there is no other subject, apart from the eternal topic of love, in which more people are vitally concerned, either directly or indirectly. Since most of the country’s wealth and commerce is controlled by corporations whose securities are listed on the various stock exchanges, the price fluctuations, which often reach the daily aggregate of hundreds of millions of dollars, either in loss or enhancement of value, are necessarily a matter of general concern. In 1925 the stock transactions on the New York Stock Exchange alone amounted to the stupendous and unprecedented total of well over 452,000,000 shares, while the sales of listed bonds totaled more than $3,398,000,000. These figures, of course, do not include the unknown billions of dollars worth of securities bought and sold on a dozen or more other exchanges and through private channels.

In addition to the large daily grist of “Market Opinions,” many books and pamphlets are written which purport to be “Guides to Traders,” or up-to-date recipes for “Beating Wall Street.” They set forth an exhaustive array of statistics, instructions and warnings; they furnish elaborately charted plans indicating many of the pitfalls of speculation; they tell how to avoid these, how to buy, what to buy, when to buy and how to make money; but while the theories advanced are oftentimes sound and easily comprehended, very few people profit by them, because when once caught in the maelstrom of stock speculation the average man becomes more or less mesmerized, and at critical moments his conservatism, his resolutions and his theories all take flight. Under the discomposing influence of a rapid succession of changing values and alternating impulses he loses his perspective, is incapable of calm reasoning, and is likely to do precisely the opposite of what he had intended doing. Like a piece of driftwood in a swirling stream, his actions are controlled less by personal instigation than by the currents about him. Therefore to write, however intelligently, or to read, however studiously, about how to make money in the stock market is largely wasted effort in imparting, also in acquiring, information that does not adequately inform. Not that the instructor’s premises are faulty, or that the reader is deficient in understanding; but that the difficulties which necessarily attend the application of the scheme of operations subsisting in the mind of the author are so perplexing and disconcerting that the disciple becomes incapable of adhering to sound basic principles. And it must be perfectly obvious to anyone that even the teacher himself is not a master, but merely an expounder, of his own principles; for otherwise he would be a capitalist instead of a professional scribbler. Notwithstanding the many excellent books which have been written on the subject, the real secret of stock market success still remains (and probably always will remain) locked up in the bosoms of a few who are too busy to write, and too rich to feel the need of writing.

Part 2

THE PERNICIOUS INFLUENCE OF THE STOCK TICKER

The individual who trades or invests in stocks will do well to keep away from the stock ticker; for the victim of “tickeritis” is no more capable of reasonable and self-composed action than one who is in the delirium of typhoid fever. The gyroscopic action of the prices recorded on the ticker-tape produces a sort of mental intoxication, which foreshortens the vision by involuntary submissiveness to momentary influences. It also produces on some minds an effect somewhat similar to that which one feels after standing for a considerable time intently watching the water as it flows over Niagara Falls. Dozens of people, without any suicidal intentions, have been drawn into this current and dashed on the rocks below. And thousands daily are influenced by the stock ticker to commit the most fatuous blunders.

As a camera fails to record a true picture if placed in too close juxtaposition to the object, so in studying the ticker-tape one is restricted to a close-up view of conditions, resulting in a distorted gauge of values; for the figures recorded often mislead and confuse the attentive observer; in fact it frequently happens that the price fluctuations result from a wave of hysteria among a coterie of traders, and bear but little analogy to the true value of the stocks. To illustrate this point more explicitly, the stock of almost any conservatively capitalized and well managed concern paying six dollars annually in dividends has an investment value of from $85 to $100 a share; but in the ups and downs of the market the stock gets buffeted about on the exchange in obedience to the varying sentiments of traders, sometimes selling as low as $50, and at other times as high as $150, without any change whatever in the company’s earnings, its prospects, or its management. (These matters will be dealt with a little farther on, and exemplified by showing their effects upon the mentalities of various types of speculators.) It does not follow that one who keeps in touch with the stock market by telephone, or through the daily papers, will find his path free from thorns and snares; but he will at least have a more open perspective than one who submits to the influence of the ticker.

Any intelligent trader may reason out exactly what he ought to do under certain specific conditions; but in the quickly shifting and uncertain process of determining values he loses his mental poise; and experience proves that anyone whose reasoning faculties become confounded is apt to be affected by some form of hysteria, and will frequently do the opposite of what he would do under normal conditions.

The most copious and the most unreliable financial writers are the market “tipsters” who write daily letters of advice to an army of subscribers, and claim to have more or less positive knowledge of what certain stocks or groups of stocks are going to do marketwise. They often profess to have definite “inside information,” which any subscriber may receive at a stated price, ranging anywhere from $10 a month upward. These false financial prophets, who lead a horde of blind followers, should not be confused with reputable bureaus and statistical experts who base their opinions and their advice to clients upon a logical analysis of general conditions.

Henry Fielding wrote a whole essay to prove that a man can write more informingly on topics of which he has some knowledge than on matters that he knows nothing about. He believed also that mankind is more agreeably entertained by example than by precept; therefore it is not the purpose of this discourse to teach anybody anything, unless perchance something may be gained by example or suggestion. There are four subjects on which advice, however good, is generally wasted,--politics, stock speculation, religion, and love; for in these matters grown-ups rarely follow the advice of others, and when they do, if they profit by it they take all the credit to themselves, whereas if they lose they always blame the adviser. Such are the inexorable and universal laws of human nature.

Anyone may relate his own stock market experiences, or those of others--perhaps to the surprise or enlightenment of his audience. He may even venture his opinions on the subject; but for anybody to assume that he can continuously operate an unfailing system of making money on stock or grain exchanges would be equivalent to asserting that he could invert the fundamental laws of psychology, or that he could beat the game at Monte Carlo by scientific methods. Many have tried both, to their sorrow.

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