It was a wise custom of the ancients to build their pyramids with the big end on the ground; but modern builders of pyramids in the stock market have reversed this time-honored practice, and most of them build their stock pyramids with the heavy end up; therefore they invariably topple over after reaching a certain height. For example, when a certain stock known as Lake Copper was selling at $5 a share a trader bought five hundred shares, expecting to double his money on it, as the stock was “tipped” to go up to $10. When it reached that figure, instead of selling he bought another hundred, and put in an order to sell the whole lot at $15 a share. Before it reached his selling price he cancelled the order and raised it to $25; again cancelling it and buying another hundred at $25. By this time he was convinced that it would go to $50. He bought five hundred more at $40, then the stock dropped back, and fearing he might lose all his gains he sold a thousand shares at $30. Although he had lost $5000 on the last five hundred shares he still had a profit of $4500, less commission, after deducting the full cost of the two hundred shares still remaining. The stock recovered to $50, and encouraged by the “street” gossip about rich ore bodies being uncovered, with accompanying reports that the stock would be cheap at $75, he bought back at $50 the thousand shares he had sold at $30. At $60 he sold five hundred shares, which he afterwards repurchased, with five hundred more, at $75. By this time the speculators had discovered that the mine was one of the richest prospects in the Lake region; it was rumored that the company’s stock was being bought for control by a large mining company whose property it joined, and the stock was “tipped” for $150. Many surmised it to be another Calumet & Hecla, which had sold at $12 a share, and afterwards at $1000. From here on up he “pyramided,” buying a hundred shares at every point advance, and wisely protecting his profits with “stop loss” orders a few points under the market price. Once the market reacted and five hundred shares of his stock were sold on “stop,” after which the price quickly recovered, and being assured that the stock had been hammered down for the sole purpose of “shaking him out,” he bought back the five hundred shares at five points higher than he had sold it. To prevent another similar coup he cancelled all stop loss orders and took his chances in the open market, confident that he could not be beaten as long as he was trading on “velvet” with an original investment risk of only $2500. When the stock reached $85 someone half convinced him that it was time to cash in his profits, and he put in an order to sell the whole lot at $90, including the additional shares he should buy on the scale order up to that point. When the price approached $90 he cancelled the selling order and put it in at $100. Later the price reached $94.50, and he had thirty-two hundred shares, on which he could have cashed in a fortune. But what was the use cashing in then, when he was in a fair way to making half a million, or even more? After reaching $94.50 the stock began to decline, and here the top-heaviness of the pyramid commenced to manifest itself, for with every downward point he was losing $3200. When the price got down to $75 his broker demanded that he either put up more margin or lighten his load by selling a thousand shares or so. The stock continued to go down, and again the broker called on him for more margin. Soon after putting up all the money he had, and all he could borrow, the broker was obliged to close out the account to protect himself. The stock afterwards went down to ninety cents a share.

THE LURE OF THE COPPER BOOM—AND
BOGUS SECURITIES

Of course the speculator who buys stock in a new copper mine is simply taking a gambler’s chance that ore will be found in paying quantities. Most of those who have submitted to this enticement in the past thirty years do not need to be reminded of the hazards attending such risks. I recall that about twenty-five years ago, when the “copper fever” was raging throughout the country—and in Boston especially it was highly infectious—a half-page advertisement appeared in one of the leading Boston newspapers, relating in graphic terms the discovery of the most remarkable copper mining prospect that had ever come to light. The chief mining engineer of one of the largest and best known copper mines in the United States—a man of wide experience and vast knowledge in the mining business—while prospecting somewhere in the West came upon what seemed to him the richest deposits of copper ore he had ever seen. These ore bodies were said to be located in a large mountain, conveniently near a railroad, and by tunneling into the side of the mountain the ore could be trammed out, dumped onto the cars and hauled to a smelter a few miles away. The mining engineer (whose full name was given) had immediately resigned his position, organized a stock company, known as the Occidental Copper Mining Company—into which he admitted a number of personal friends—bought the property, and began tunneling operations on his own capital and what he had raised among his friends through the sale of stock in the new corporation. Having exhausted their funds and desiring to continue exploration work—which became more and more promising—the directors had sold a block of treasury stock, the par value of which was one dollar a share. The latest reports showed that the work was progressing satisfactorily under the personal direction of the engineer who had discovered the mine, and that stockholders might expect dividend returns inside of a year or so. The advertisement was inserted, not by a stock-jobbing firm or underwriting syndicate, but by a well known wholesale and retail grocery and provision company, who claimed that after fully investigating matters they had bought a large block of the stock, twenty thousand shares of which they would distribute among their customers at the par value of one dollar per share. I called on the president of the grocery company, who said his firm thought so well of the prospect that they had bought twenty thousand shares as a speculative investment, and a like amount to distribute among their customers. He represented that although the shares were easily worth $5 each he considered it good advertising for his company to sell them at par, $1; and with a view to extending the benefits as widely as possible he preferred to dispose of the stock in small lots. He cheerfully gave me the names and addresses of the directors of the new mining company and suggested that, if interested, I might write to them. One was a physician of good repute, another was general auditor of the Chicago, Milwaukee & St. Paul Railway Co., another was a western lawyer of prominence, and so on. I wrote to each of these three, telling them of my interest in the matter, also asking for a candid expression of their opinions about the property. Each of them sent me a personally written reply, substantially corroborating what information I already had, and saying that they had given their names and their financial support to the company solely upon the recommendation of the mining engineer, whom they knew personally and trusted implicitly. Further than that they knew nothing, but were willing to take a gamble on his judgment. After receiving the second of these three letters I hurried to the office of the grocery and provision company, and to my great disappointment, found that they had only a few hundred shares left. When I told the president that I would take the entire lot at his price, one dollar per share, he shook his head. He said the stock was going rapidly in five, ten, and twenty share lots, and that in justice to their other customers and friends he did not think it fair to let me have more than one hundred shares at most. But finally he yielded to my persuasive argument, that inasmuch as he had only a few hundred shares left he might as well let me have them all and thus finish the whole transaction at once, saving himself the bother of peddling them out piecemeal.

Nothing further transpired until, some months later, I received a circular from the mining company reporting good progress with development work; also stating that owing to further need of funds to continue this work the directors had concluded to make another offering of treasury stock at the same reduced price at which they had sold the previous block, namely, at five cents a share! In the aggregate the advertising feature was probably more advantageous to the customers than it was to the grocery company (which soon afterwards went bankrupt); for although the purchasers, including myself, lost every dollar of their investment, it doubtless served as a warning (which in my case it certainly did) that prevented much greater losses in other swindling schemes.

The task of preparing the prospectuses of the thousands of fake copper mining propositions and oil schemes that have been foisted on the public in the past twenty-five years, and made to appear especially attractive by a price of from five cents to one dollar a share, has developed some of the most remarkable inventive geniuses of modern times. Their advertisements and arguments have been so convincing that the contrary persuasions of bankers and brokers have been absolutely unavailing with friends and customers who have given orders to buy the stocks; and against their enticements there is positively no remedy short of experience. The tempting baits of every imaginable variety offered by the promoters and dispensers of these bogus stocks have been the means of filching hundreds of millions of hard-earned money from credulous people, who are misled to suppose they are getting in on the “ground floor” of a modern Aladdin’s Cave before it is opened to the public. But it always has been so, and probably it always will be. It would be as useless to warn the general public, or even particular individuals, against these alluring ground-floor propositions as it would be to warn a flock of goslins to keep out of a mud puddle. It’s like admonishing a boy against a hundred kinds of mischief; he will surely find some act of deviltry not included in the list, and his defence will be that you didn’t tell him not to do that. And this argument is the more unanswerable because you well remember having used the same stratagem yourself.

THE PERILS OF OVER-ACQUISITIVENESS—THE
HUMAN ELEMENT IN SPECULATION

Reverting again to the characteristic bent of speculators who trade on the constructive side of the market, some years ago a man of my acquaintance bought a hundred shares of Union Pacific at $120 a share, just for “a turn of a few points,” as he expressed it. Within a few days he sold it at $125, making a net gain of $500, less commission,—equal to more than five years’ interest at six per cent. on the $1500 he put up as margin. Someone afterwards convinced him that he was silly to have sold out at $125, because the stock was sure to go to $150; therefore he bought it back at $130, and at $135 he took on another hundred. The stock dropped back to $125, and on hearing from someone else that it was likely to go down to par he sold the two hundred shares at a net loss of $1500 and commissions. About that time somebody discovered that the Company was likely to distribute its large surplus, consisting of Baltimore & Ohio stock and other securities, and the stock rebounded to $135, at which figure my friend repurchased the two hundred shares he had sold at $125. At $139 he bought two hundred more, which, in a spasm of fright, he sold when the price suddenly dipped down to $133. Later, at $140, he recovered his nerve, also the last two hundred shares he had sold at a loss. At $160 the stock looked cheaper than it had at $120, and having a safe margin of profit to trade on he bought five hundred more. At $170 it was reported that Harriman (who controlled the road) was buying the stock, and encouraged by the entry of such distinguished company my friend plunged in and bought a thousand shares more. When the stock got to about $190 it was noised about that the great railroad magnate had completed his purchases, so the price went down a few points, again frightening our trader into taking a loss on three hundred shares he had bought at $189. But concurrently some wise tipster had discovered that the price had been depressed purposely, to enable other “inside interests” to accumulate a large line, and in a short time the price climbed to $200. By this time my affluent friend was becoming somewhat disturbed and confused, but lured by the prospect of greater gains he managed to regain his composure, and bought five hundred shares more; figuring that as long as he was trading on profits he had everything to gain, and nothing to lose. From here on the stock maintained a fairly steady upward course, and not to be outdone by the greedy “insiders” he bought three hundred shares at every point advance until the price reached $212, when he had accumulated fifty-one hundred shares. The net paper profit of well over $100,000 looked exceedingly tempting, and acting upon his own judgment, seconded by the good advice of his broker, he wisely closed out the entire lot, invested the net proceeds in government bonds, bade good-bye to the market, and planned a three months’ excursion to Europe. So far, so good; but—

“U. P.” (along with other stocks) continued its upward course, accompanied by much excitement and jubilation among the “longs” with an equal measure of apprehension and despondency among the hard-squeezed “shorts.” When our trader was preparing for his departure he happened to read a review by some stock market wizard who reported that according to “late inside information” a dividend of $100 a share in securities would be declared on Union Pacific, and that the stock would pay $10 a share in annual dividends; consequently at $250 a share it would be cheap. Whereupon my friend, who occupied the uncomfortable position of a “sold out bull,” became wretchedly aware that he had dropped out of the race long before the course was completed, and by doing so he had thrown away a grand opportunity of making nearly $200,000 more.

It may here be explained that the mental attitude of a “sold out bull” toward a rising market is much the same as that of a bulldog chained in his kennel while a dog fight is going on outside. A speculator may stand by and view with unruffled complacency the most enormous profits of others in securities that he never owned, but if one of his own pet stocks continues to advance after he has sold out, it not only reflects the error of his judgment, but the remorse he suffers in contemplating the additional sum he might have made dampens all the pleasure of reflecting upon the profit he actually did make.