The psychology of speculation

by Henry Howard Harper

H. H. H.

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.

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.