Gradually, though manifestly, it became evident that to resist such a tremendous momentum was as expensive as it was exasperating; and his hitherto fond illusions of greater wealth were dispelled by a terrifying reality. But a man who has been right all his life is not easily convinced that he is wrong in a market position that seems justified by common sense and fundamental conditions. And yet, however steadfast human resolution may be, it is wellnigh impossible to maintain a fixed attitude in opposition to such a cumulative and overwhelming force. The sensation of being short in a rampant bull market has been pictured as similar to that of being chained by the heels to a rising balloon, without any idea of the height to which the gas will carry it—not a cheery picture for the contemplation of one who is bearishly disposed. It is therefore easy to understand how likely one is under these “third degree” operations to lose his mental bearings, his nerve—and his money. A trader who is long of stocks knows to a certainty how much he can lose on any given number of shares; but on the short side there is no limit to what one may lose, even on a few hundred shares. The loss of a definite sum, whatever the amount may be, can be borne with equanimity by a man of nerve; but to maintain a short position in a bull market gives one about as uneasy a feeling as it would to have a number of outstanding promissory notes with the amounts left blank for some unknown person to fill in. It keeps one in a constant state of fear, and fear knows no limitations; it contemplates and magnifies every baneful possibility.
However, this man of iron nerve, this erstwhile dominant figure in the leather trade who had ridden for a quarter of a century with his feet firmly in the stirrups, was not to be easily unhorsed. At the close of a turbulent day he took account of stock and decided to “cover” (buy in) all the dividend paying stocks he was short of, and to sell an equal number of additional shares in the non-dividend paying issues, such as Bethlehem Steel, General Motors and Studebaker. The reckoning showed a paper loss of a quarter of his million dollar capital, but he bore it courageously, determined to recover it by adopting the safer course of “shorting” only such stocks as had never paid dividends, and perhaps never would. Therefore he sold more Bethlehem Steel, at $80, $90, $100, $150 and $200 a share. He sold Studebaker again at $75, $100 and $150, and more General Motors at $100, $150, $200; and a hundred shares at every fifty points advance until it reached $500. Those who knew him in the board room said that throughout this ordeal he maintained the most inflexible nerve they had ever known; but at the close of the market on that memorable day in 1915 when Bethlehem Steel touched $600 a share he collapsed in a state of nervous prostration and was taken home in an ambulance. He did not live to see General Motors sell at $850 a share (on October 25, 1916) and Bethlehem Steel at $700 a share (on November 18, 1916). Long before these figures were reached his million dollar capital had vanished and he had crossed the bar into the Great Beyond. His widow was left almost penniless and he was buried at the expense of his Lodge. Shortly before passing away he remarked sorrowfully to a friend at the bedside,—“In the past year I’ve suffered every torment known to the demons of hell. My only grain of comfort is that it’s all over now and I have nothing more to lose.”
From this tragic experience it is obvious that there is but little comfort or profit to be gained on the short side of a protracted bull market; and the natural inference must be that the “long” side of such a market is as felicitous and profitable for bulls as the short side is discomforting and unprofitable for bears. In theory it is, but in practice there are comparatively few who make large gains, and fewer still who “get away” with them. It has been authoritatively stated by the head of the world’s largest gambling emporium that it is impossible for any human being to beat the roulette wheel for any considerable length of time; and that human nature is so constituted that nearly all of those who make large winnings continue to play until they have lost all their gains, and perhaps more. In the first place, there are thirty-six numbers, with a single and double zero,[1] on the wheel; if a player places a dollar on each of these he stakes $38. He must inevitably win on some one of the numbers or one of the zeros, whereupon he collects $35, together with the dollar risked on the successful number, making a sure loss of two dollars, which is the house’s fixed percentage. If a player wagers a dollar on one number, with an even break of luck he is due to win $35 (and also to get his dollar back) once in thirty-eight plays. At this rate, for every $3800 risked he is due to lose $200. Players often stake as high as two to three thousand dollars, or even more, on every spin of the wheel; from which it will be seen that with average luck, at this rate of play one will lose more than a thousand dollars an hour. It is said to be a proven fact that the chances are so much against the player, that a roulette wheel can be run at a profit, even if the percentage in favor of the house is entirely eliminated. This is due to the fact that the excitement of play causes a certain confusion of mind, and players are prone to do the wrong thing; for instance, double their bets when in an adverse run of luck and “pinch” them when luck is running favorably. Or, on the other hand, players who have pressed their advantage and doubled in a run of favorable luck will continue stubbornly to plunge long after their luck has changed. Precisely the same psychology applies to trading in stocks.
FOOTNOTE:
[1] At Monte Carlo the roulette wheels have only one cipher, but at the end of each turn of the wheel the person (or persons) playing on the winning number usually contributes a disk (or one thirty-fifth of the amount won) to the croupier’s “box,” which amounts to about the same thing as having two ciphers, without this customary gratuity. It is said that one-half of the amount of these voluntary contributions goes to the corporation, and the other half pays for the entire upkeep of the establishment, including the salaries of the croupiers and other attaches. The same disks are used by all players, and a winner who persistently ignores the “box” is not apt to be favored by the croupier when another player claims his winning bet, as often happens.
FRENZIED SPECULATION IS THE RANKEST
FORM OF GAMBLING; IT IS A PERILOUS
INDULGENCE
An enormous percentage of stock market speculators become victims of over-confidence after a series of successful trades. Their buoyant spirits increase with every new success, until at length they throw discretion to the winds, extend their risks far beyond the margin of safety, and at the infallible turn of the market they find themselves in difficulty, like foolish fishes that get stranded on the beach at high tide. It is a fact, as inexplicable as it is true, that men with a fair amount of gray matter in their heads, who would flout the idea of paying $50 a share for a particular stock, will later borrow money from a broker at from six to eight per cent. to buy the same stock all the way up from $100 to $150 a share on the slenderest permissible margin; and, instead of proportioning the margin of safety to the increased carrying risk they narrow it by continuing to buy as the prices advance. Also there are many who after selling their stocks at a handsome profit will buy them back at twenty, fifty, eighty, or a hundred points higher, and with much less timidity than they felt when they first bought them at low figures. Prosperity in the stock market seems to encourage optimism, rashness and impatience in about the same degree that adversity discourages enterprise and aspiration. But there is far greater danger in excessive optimism than in excessive pessimism, for the reason that optimists are inclined to back their hopeful views by indiscriminate purchases of stocks at high prices, while pessimists are seldom disposed to back their views at all. The risks incurred in buying stocks on a “thin” margin are so manifest that it seems almost as platitudinous to mention them as it would be to remark that children endanger their lives when they congregate on thin ice.
THE DANGERS OF INVERTED PYRAMIDS
