The thought of becoming a stock “gambler” was farthest from this man’s mind; for gambling in any form was contrary to his code of ethics. But buying and selling legitimate commodities could not be construed as gambling; therefore stocks and bonds, being legitimate commodities, could be bought and sold without doing violence to the most sensitive conscience. In order to gamble, one must “risk or stake something on an uncertain event;” which is popularly regarded as a vice, and is made legally wrong because it is said to be injurious to the public morals. It also is morally wrong to gamble, because if you win you deprive your fellow-being of something without giving any adequate return. Our friend contended that stocks bought at figures below their intrinsic value are so sure to advance, that the transaction does not come within the given definition of the word gamble; also that the same rule applies to stocks sold at prices far above their worth, no matter whether for long or short account. He reasoned that if he gained by selling a stock short, although someone was apt to be the loser, he had no means of knowing who that someone was, therefore he assumed no moral responsibility in prudently acquiring money in a businesslike way, even at the expense of some indefinite person who had been foolish enough to risk it. If the act of selling stocks which one does not own is regarded by some as being unethical in the strictest sense, it is at least sanctioned by general custom. All sorts of goods are sold for future delivery, even before they are manufactured; and our erstwhile merchant had often sold leather for forward delivery, while it was still in process of tanning; hence he had no scruples against selling stocks in anticipation of being able to buy and deliver them later.
It is generally conceded that the public is always arrayed on the “long” side (that is, the buying side) of the market; it is also universally admitted, at least by those who know, that the so-called “public” always bears the brunt of stock market losses; therefore our friend decided that he would act the part of wisdom and go “short” of the same number of shares that he had previously bought and sold,—the idea being that before selling his long stock he convinced himself that approximately the top prices had been reached, in which case the market would naturally react. But for some inexplicable reason it failed to run true to his expectations; that is, the probable course deducible from charts and precedents. Per contra, the prices continued stubbornly to rise. When he had lost all his profits he backed his judgment by his actions, and doubled his short sales; and at five points higher he doubled again, for a break was long overdue. Being short upwards of three thousand shares in a rapidly rising market is a tremendous mental strain, even for a seasoned trader; and naturally our novice became somewhat nervous. Some stock market wiseacre—one or more of which class are usually to be found lounging about every brokerage office—consolingly remarked that while stocks have a certain fixed bottom, they have no top; which increased his anxiety.
After studying charts and various compilations of figures and facts about earnings and past market performances, he concluded that Bethlehem Steel, selling at $45 a share, was not worth half that price; also that Studebaker at $35 was much too high. After an extended inquiry into the past and prospective earnings of these two companies he sold short a thousand shares of each; but instead of reacting they steadily maintained their upward course with the rest of the list. His broker called for more margin, and he put up another hundred thousand in bonds. He was advised to “cover” and go “long,” but he stood firmly by his convictions—and the charts.
“That’s why the public all lose,” he declared; “they get ‘cold feet’ and shift positions at the wrong time.” From a personal friend who was a director of the new General Motors Corporation he got an “inside tip” that that stock, selling at $82, was too high, so he added a few hundred shares of it to his short account. Meantime the country’s commerce and the entire group of stocks, moved forward with the steady even tread of an army on parade.
THE STOCK MARKET PRODUCES A NEW PHENOMENON—TURNS
WORLD-WIDE DISASTER
INTO LOCAL PROSPERITY
At this time (1915) the major portion of the civilized world was embroiled in a mad turmoil, employing every known device and resource in destroying human life and every form of physical property. With the very foundations of civilization thus disrupted, and our own country on the verge of being drawn into a deadly combat in which the most humane and enlightened nations of the earth were reverting to the practices of ancient barbarism, it is not strange that our merchant friend should have argued that it was a most unpromising situation upon which to construct investment values and business prosperity. It was inconsistent, inconceivable and seemingly impossible that stocks, even good stocks, could continue to advance in the face of such demoralizing conditions. When war was first declared, even before England became involved, the stock market was thrown into such a violent state of panic that it became necessary to close the stock exchange for several months; yet now when the clouds of disaster were at their darkest and hung menacingly over the whole of civilization this country alone was indulging in a riotous exhibition of prosperity such as had never been dreamed of. The market tipsters, the financial editors of newspapers, the brokers’ letters and all stock market literature, with but few exceptions, were crowing loud and boastfully for still higher prices, and after the whole group of stocks had risen in unison for a time, some individual stock was singled out every day or so, pushed into the forefront and skyrocketed to dizzying heights. The brokers and all the customers were delirious with joy and excitement. The stock brokers were all bulls, the traders were bulls, the tipsters and rumor-mongers were bulls—even the office boys who called the quotations from the tickers were bulls, and shouted vociferously when some special stock jumped a point or more from the previous quotation; and it seemed to our trader that in calling out the advancing prices special emphasis was always given to the particular stocks he was short of. He was literally beset with bullish exultation and bullish news from everywhere. The noisy enthusiasm in the board-room rankled in his ears and rasped on his over-wrought nerves. He felt as one could imagine a tiny lone bear would feel in the center of a great arena, surrounded by a cordon of cavorting bulls. To him it seemed that he was the only bear on earth. There might be others, but they were too cleverly sequestered to admit of sharing his misery with them.
NOBODY LOVES A BEAR
In a bear market a discouraged bull is at least not despised; he may find a sympathetic sufferer; but in a bull market no one ever wastes any compassion on a bear, or admits sympathetic kinship with him. He is popularly regarded as a pessimist, a destroyer of values, a discordant note, an uninvited guest at a banquet. If it be a true saying that “misery loves company,” it must follow that wretchedness is accentuated by noncommunion with fellow-sufferers; in which case it may be said that the situation of a bear in a rousing bull market represents the ne plus ultra of hopeless desolation.
At length it became a mooted question whether to “sit tight” and wait for the boisterous storm to blow over, or cover his shorts, buy more stocks and go with the tide. Heretofore he had maintained a stolid attitude, born of self-confidence, inspired by a triumphant business career, and supported by precedent and every reasonable prophecy. The traders had simply gone mad and were rushing headlong to their ruin, as they had often done before. History was merely repeating itself. It was a time for sound cool-headed judgment, and he stood firm in the determination not to lose his head and join in any such reckless carousal. But the more he reasoned and studied the charts, the more unprecedented and obstinate the market became. One thing he failed to consider was, that the favorite caprice of the stock market is to violate precedent, and to do the thing least to be expected of it. The newspapers gave front page double-column headings to business improvement and stock market news—the enormous demand for textiles, increased prices for all commodities, easy money conditions, all labor disputes amicably adjusted, and the stage all set for the greatest era of prosperity the world had ever known. The financial columns of the newspapers literally teemed with bullish interviews with financiers and bullish reports in all lines of trade and finance. There was scarcely a discordant note in the rush and rhythm of progress; and when one was faintly sounded the general din instantly smothered it. Even the great cataclysm in Europe was now construed as an additional bull point, because our factories were all running night and day to supply the armies with equipment and provisions. It was argued that the more they fought the more supplies they would need, and the more money we would make in furnishing them; also that the more ships the Germans torpedoed the greater demand there would be upon our shipyards to replace them. The nation had indeed gone prosperity mad, while the rest of the world was going to destruction—certainly an irregular and puzzling phenomenon. Occasionally when some veteran writer piped a note of warning to stock speculators, it was met with a new outburst of bullish demonstration, and the market swept on like a conflagration in a city built of tinderwood. Stocks that had lain dormant for months suddenly came to life and became the favorites of powerful cliques; corporations that had never earned their fixed charges were said to be piling up enormous surpluses, the railroads and steamship lines were glutted with traffic, the factories, steel foundries and ammunition plants were running night shifts, banks and millionaires were said to be buying everything for control, whole fleets of grain-laden ships were going abroad and the farmers were simply wallowing in wealth; the retail stores were jammed with eager customers, labor was all employed at high wages, and Big Business was rushing with all the force of an avalanche along Prosperity Highway, without a danger signal in sight.