Speculation for the Fall, which is both Legitimate and of Benefit to the Community.
A Reasonable Relative Value for all Commodities.
The remarks upon speculation in the foregoing chapters may, perhaps, lead the reader to infer that our object has been to enter upon a crusade against all speculators, guerre à mort. Such an impression would not be a correct one, and this chapter is intended, just in conclusion, to show why. Speculation in the sense of buying for cash or on ordinary credit what the purchaser has very good reason for knowing is uncommonly cheap, and what he believes will, ere long, improve in price, does not come under the category of speculation such as that to which the foregoing remarks refer. There is hardly an individual who buys anything who is not at times more or less of a speculator, and he has a perfect right so to be under given conditions, and his being so under such conditions is a direct benefit also to the community. For instance, take a very homely article which will serve for an illustration, bacon. Supposing bacon, through some passing influence, were to fall considerably in price, very large purchases would at once be made on speculation, because it is an article almost certain to be directly consumed in a proportion greater than the production could be increased. Large quantities would be taken off the market by both retail and wholesale dealers, who would store it in anticipation of a recovery in value. They probably would not want it for immediate use, and would be induced to run the risk of the operation turning out profitable by reason of its being suddenly so much cheaper than they had been accustomed to buy it. They would, in one word, speculate in bacon, just as some people speculate in stocks after a heavy fall. Unless something had happened to permanently depreciate the value of bacon this rush of buyers, the great majority of whom would soon settle their operations by cash payments, would speedily cause at least a partial recovery in value, which might be followed by a further rise or relapse according to circumstances. Whether anything serious had been at work to depreciate value or not, the innumerable interests that would have suffered by the decline in value would thus be protected at least for a time by the speculative operations referred to. The price would be kept up above what it would have been in the absence of such speculative operations, while either the real or fictitious agency at work in causing a fall were discovered and analysed. So in a converse sense, if for some reason or other the price of corn were driven up very rapidly several shillings per quarter above the value ruling at a particular period, without holders of large stocks being able to discover sufficient cause, many of them would hurry to market and sell what was still even unthrashed. They would be so tempted by the very high price that they would speculate upon such a high quotation being followed by a low one, and they would sell all they could manage to deliver in a given time. The speculator in the bacon would be playing in a legitimate sense the part of the bull, and the speculator in corn that of the bear. It will be admitted that there is what we know as a reasonable price for all things, and that it is better for all concerned that a reasonable relative value is maintained for all articles than that anything becomes either extravagantly dear or so cheap that it is worth no one’s while to produce it. Every article of those consumed by mankind in their several stations has its fitting place either as a necessity or as a luxury. A necessity for some reason may in course of time become a luxury, while, what is much oftener the case, luxuries may by degrees come under the category of necessities. The value of the one or the other may in relation to other necessities or luxuries change, but it will probably change only gradually, and during the process of change there will be a reasonable relative value for such articles. It is important then in order to satisfy the rational desires of all members of the community that the reasonable relative values of all commodities should, if disturbed by any cause, remain so as short a time as possible. The undue inflation or depression of prices will be counteracted by speculative operations such as we have referred to, and in that sense, speculation is directly of immense benefit, as it is one limb of a body of law which administers justice silently but surely to any one who has left one weak point in his armour when attempting by violent or fraudulent means to snatch a profit by unjustifiably raising or depressing prices. The one condition, however, of such speculation being of direct benefit in keeping prices at a level which is in accord with the existing state of supply in relation to the demand at any period is, that the speculative operations shall partake as nearly as possible of the nature of bona fide operations. The great benefit which is caused by the one kind of speculation is the antithesis of the evil which results from the system of “time-bargain” speculation as practised in all markets. The one kind of speculation is the legitimate advantage taken of being able to buy any article cheap, or to sell any commodity that is dear, whereas the other is nothing better than pitch and toss in disguise.
The kind of speculation which is of benefit to the community may be termed corrective speculation, as implying a restoration of prices, through its agency, to a reasonable relative level. Such speculation would come from buyers who had good reason to know that what they bought they would be able again to sell, and that its purchase speculatively was simply the supply of their ordinary requirements in anticipation, owing to a favourable opportunity having presented itself. In proportion as speculation proceeds from simply time-bargain operators will the price be driven up or down, according to circumstances to an injurious degree, as compared with a corrective degree, the influence of the one set of speculators doing good and that of the other set harm.
The Three Classes into which Speculators may be Divided.
Speculators may be divided into three classes which about embraces all the phases of speculation. First, we have the legitimate speculator who spends all or some of his surplus capital in taking off the market what he believes will give him a gain by holding it for some time. That is the legitimate speculator who is a benefit to the community as a leveller up of prices. Then we have the legitimate speculator of the same stamp, with a difference that he is a leveller down of prices, and is equally of service to society by immediately throwing on the market all the stock of a certain article he may hold of be able to get for the purpose, when it rises to a price above what he calculated on being able to obtain, and which his experience told him was an unusually high figure. Such speculators as these not only do not hurt themselves, but directly benefit themselves by speculating, and in so doing protect the interests of their neighbours and the community at large. Such as these this book is not written for. We are concerned with those who, classified as illegitimate speculators, and reckless speculators, which, second term may have to be moved a point or two according to circumstances, are over the border-line, whose dictum is “Heads I win, tails you lose.” The illegitimate speculator is the one who starts with a small capital and with some method, with the idea of increasing it upon a system of incurring risks which, in the ordinary course of the market he may operate in, will enable him in case he has wrongly calculated the course of prices, to pay his losses and go on again. His intention is never bona fide sale or bona fide purchase. The reckless speculator is the man who with little more than he stands up in makes a great pretence, imposes upon the weak and credulous, enters the Stock markets and operates to right and left up to the hilt so far as he may be trusted. So long as he may enjoy a run of luck he rakes in the coin; when it turns he leaves his dupes to pay and goes up the country, as they say of the native Indian merchants when the telegraph announces to them that the goods shipped to Europe for which they have drawn, will leave a loss.
We have then one class of speculators which is of direct use and value in all markets, while the other two, the nature of whose operations we have endeavoured to lay bare, cause an infinite deal of mischief, and get in ninety-nine cases out of a hundred no good for themselves in the long run, whether their transactions are entered upon carelessly, and are allowed simply to take their chance, or an attempt be made to achieve success by some exercise or skill.
FOOTNOTES
[1] In speaking of taking profits, the question arises, what is a profit? Some people might say a profit is ½ per cent., and others 10 per cent. Now, of course, it is impossible to give an exact answer to this question. As a general rule, a transaction should not be made unless the chances of a gain are greater than the chances of a loss, but there may occasions occur when it would be advisable to take a small profit. All depends on the condition and temper of the market; but one rule I found to work well, and would recommend to every speculator, namely, that at the moment when a doubt arises in your mind, and you begin to ask yourself whether you ought to take your profit or not, then do not lose one moment’s time, but take your profit, because you can never make a very serious mistake by doing so, while you might possibly make a very serious one by refusing it.