The Theory of Stock Exchange Speculation

by Arthur Crump

The Misfortune of early gains.

The greatest misfortune that can happen to the haphazard speculator is for him to make money the first two or three “accounts.” He will, in such a case, in the first place believe himself to possess some uncommon luck, or a shrewdness for selecting a security that was about to move in the direction he had reckoned upon. The operations of the most stupid speculator are frequently attended with such results, just as they might also be on his first essay at pitch-and-toss. Such incipient luck, by drawing forth the commendations of others, especially of the brokers—who do not generally err on the side of warning the individual against the dangers which beset such a path—builds up in him a false estimate of his powers. Early success associates his mind with the gains and not with the losses, and the latter are incurred subsequently with a light heart, as a sort of accident that will be sponged out by the results of the next throw.

A case came under our notice of the extreme danger of good luck attending a first operation, but it was in another market. A Spaniard had settled in London with his wife and family, and had entered into partnership with another gentleman. Much money had been made in iron, and prices had attained to an unprecedented figure (it was in 1872). He bought on pure speculation 30,000 tons, and cleared £6,000 profit. Elated with such success, his next operation was a purchase of 40,000 tons. The price fell £1 a ton. He lost all his own and his partner’s money, and fled from the country leaving his family destitute.

But when two or three losses have been incurred the confidence becomes somewhat shaken, especially after a large operation has been attempted, so as to recover the losses on several smaller ones at one coup, and has failed. Then some sort of a system will be tried, but the bad judgment which has landed the haphazard speculator so far without his having perceived the necessity of machinery and a system, will prevent his adhering to any set purpose. Such a man acts on this information and on that, led away by the plausibility of a wiser head possessed by a person who goes about like a big fish in the deep waters, disposing of the smaller fry for his own purposes.

Very Few Failures made public.

To dig to the bottom of the question without attempting further to widen it, what are the chances against the haphazard speculator? If we ask ourselves whether we have known personally any individuals who have succeeded as haphazard speculators, we must reply emphatically in the negative. It occurs to us on making this observation that we have heard of one individual, who may be described as a haphazard speculator who did get clear off with £100,000, and we believe it to be correct. Everything he touched chanced to go the right way until one morning he raised his hat to his friends and the members who were in the markets at the time, and bid them farewell. He was a solitary instance of a man with sufficient strength of character to say to himself, “Thus far shalt thou go and no farther,” and he adhered to it. Many had made as much before, but they could never stop until it was all lost again. How is it so little is heard of those who venture and fail, for the practice would be greatly discouraged if the failures always came to light. All concerned are interested in keeping such matters quiet for obvious reasons. The broker who does the business for the speculator can measure his means pretty well at the outset, and takes care to keep his client informed so that he may persuade him to diminish his commitments if the times are not promising. The business is remunerative enough to make it worth while to run some risk, and as the client will have always something, at least, to meet his losses with, the broker is generally prepared for accidents. The speculator will, for his own sake, keep his misfortunes to himself, and so the new men come on, never knowing how many have gone irretrievably into the gulf before them until they have passed the fatal barrier of actual experience from which, in all but a very few cases, there are vestigia nulla retrorsum.

The chances are overwhelmingly against the class of speculator with whom we are now dealing, for the following reasons: He has no money, as a rule, worthy of the name of capital, and consequently if he is caught deep in by any of the thousand and one accidents that may burst like a thunder-clap on the top of the markets any hour of any day in the week, he is unable to “see it out,” as the saying goes. Not being able to take his stock off the market, the settling day occurs before a sufficient recovery takes place, and he is done for. Where there is an exposure to such a catastrophe, that may happen at any moment and sweep away the entire fund, it is obvious that the game is not worth the shadow of a candle-end, to say nothing of the substance. Yet this is the common condition of the haphazard speculator. He stands at the edge of a precipice knowing that a puff of wind will blow him over, and that it may come at any moment.

Supposing, for the sake of argument, we put such a possibility of accident out of the question, and imagine the haphazard speculator not to be exposed to the contingency of such a collapse, what do we find in the second rank of chances against him? In the first place his attention, as a rule, will be drawn to a stock by, we will say, its upward movement. He thinks to himself, “That stock has been getting up, why shouldn’t I have some of it?” and he buys, allured as are many others who wait to buy of those who have rigged the market up to a certain price, and then send the tip round to buy. The haphazard man thus assists probably the professional and systematic speculator to unload. He has got in at the top, and only sees his mistake by getting out at the bottom. Secondly, he very seldom pauses after having taken the decision to operate, owing to some special circumstance, to reflect upon the minor surroundings which are very necessary to keep in view. What are these? To buy on the eve of a settlement is a mistake, as a rule. In Stock Exchange speculation the exceptions are of the utmost importance, as for instance—When there has been a very sharp fall in the middle of an account, and it is known that the depression has been due to any considerable extent to bear operations, there will nearly always be a recovery on the eve of the account, caused by the bears taking their profits. The converse will also necessitate an operation of an exceptional nature, as when values have been driven up to a high point in an account by the bulls, to sell would be the line to take as the account approached, because the bulls might be reckoned on to take their profits in the same way. As a rule, however, prices tend to droop as the settlement approaches, owing to sales. The haphazard speculator is always very much discouraged when he has to pull up a loss, he should consequently avoid as much as possible incurring it. If he does not keep these important influences in mind, he will assuredly have to pay for the negligence.

Greediness Involves Loss.