With these opinions before them, so long as the governors of the Stock Exchange continue their policy of a wise and dignified administration in the interest of the public they serve, there is nothing to fear. Corrections, remedies, improvements, and reforms will be found to be necessary from time to time—some of them are necessary at this moment, and the governors are hard at work on the task. To accuse them of indifference or neglect of duty is to deny them that form of intelligence which enables a man to protect his property. Their splendid institution has grown to its present importance and power through economic development that could not have been foreseen nor prevented. Speculation on a large scale has accompanied its growth, and contributed to it; and speculation, as we have seen, is a highly desirable and useful part of all business. This speculation numbers among its adherents people in all parts of the world who have a perfect right to speculate, and who do vastly more good than harm in their operations.
It has also attracted a great many people who have no business to speculate, and who would be prevented from doing so if it were possible. The ignorance and cupidity of these people is so great, and the pitfalls provided them by unscrupulous, methods outside the Exchange are so many and various that something has to be done to protect them. The Stock Exchange does not encourage them, but it recognizes that they have legal if not moral rights, and it stands ready to help them. It gives to such people the same information that it gives to the richest investor in the land. The securities in which it deals are known to be free from taint; all forms of crookedness are prohibited; every transaction within its walls is made openly, as a result of free competitive bidding, and published broadcast to the world. What more, and what less, can be done? Has there ever been a time in the world’s history when property and trade were so secure, and when speculation, which makes property and trade, was so jealously safeguarded?[30]
CHAPTER III
THE BEAR AND SHORT SELLING
The operations of “bears” in the great speculative markets and the practice of “short selling” are riddles which the layman but dimly comprehends. Buying in the hope of selling at a profit, and if need be, “holding the baby” for a long time and “nursing” it until the profit appears, is simple enough; but an Oedipus is required to solve the enigma of selling what one does not possess, and of buying it at a profit after the price has cheapened. It is the most complicated of all ordinary commercial transactions. How the thing can be done at all is a mystery; how such a man can serve a really useful economic purpose by this process is unfathomable. The layman who tries to figure it out thinks there is an Ethiopian somewhere in the wood-pile; the thing is unreal and fictitious. The only way he can understand it is to turn bear himself and learn by experience.
Why there should be so many bulls and so few bears can only be explained on the ground that optimism is the basis of speculation, and hope the essence of it. Yet the market can only go two ways: it is quite as likely to go down as up. Since sentiment should have no place in speculation one would think there should be as many bears as bulls, more of them, in fact, because the market almost always goes down faster than it goes up, and because nine out of ten of the unforeseen things that occur result in lower prices.
Accidents like diplomatic entanglements, rumors of war, earthquakes, and drought are constantly occurring to upset the plans of bulls and bring fat profits to bears in a hurry, while matters that bring about higher markets are generally things long anticipated, in which the profits that accrue to the bulls come about slowly and laboriously, and always with the attendant risk that a disturbance in any corner of the globe may bring on a sudden smash that will undo the upbuilding of months. In theory, therefore, there should be at least as many bears as bulls in all active markets, but in practice the large majority are always bulls, to whose sanguine and credulous natures the bear is a thing apart—a gloomy and misanthropic person hovering about like a vulture awaiting the carrion of a misfortune in the hope of a profit. Naturally the layman cannot understand him, and would like to suppress him.
Despite the fact that the odds seem to favor the bears, there is an old and true saying that no Ursa Major ever retired with a fortune. Wall Street has seen many of them, and with perhaps one exception the records agree that the chronic pessimists have not succeeded. Fortune seems to have smiled on them at intervals; in the country’s early days of construction and development mistakes were made that brought about disaster, but in the long run such tremendous progress has resulted in America as to defeat the aspirations of any man or group of men who stood in its way. The big bears, as a rule, have “over-stayed the market.” Imbued with the hope that worse things were in store, they have been swept away by the forces they sought to oppose. One of them, a power in his day, was so obsessed with the notion that all prices were inflated, that he has been known to sell stocks short “for investment.” One night when a lady at his side remarked on the beauty of the moon, he is said to have replied with that absent-minded mechanical skepticim inherent in the bear, “yes, but it’s too high; it must come down.”
One would think the ideal temperament for a speculator would be absolute impartiality, with an open mind uninfluenced by sentiment, ever ready to take advantage of all fluctuations as they occur. The ups and downs of a stock market always show, on average long periods, a practically equivalent swing each way, so it would seem that the speculator most likely to profit by these fluctuations would be one without preconceived prejudices, ready at all times to turn bull or bear as the occasion required. As a matter of fact, this type is the rarest of all, being confined, generally speaking, to the professional “traders” on the large exchanges, necessarily a very small minority of the speculative group, yet withal perhaps the most uniformly successful. These men, it must be understood, are not speculators, but traders, a nice distinction involving “catching a turn,” as opposed to the speculative habit of “taking a position.”
In active times I have known one of them to operate simultaneously in the New York Stock market, in the cotton market, and in the wheat market, trading at the same time in London and Paris, “shifting his position,” or “switching” from the bull to the bear side twice in a single day, and closing all his trades at three o’clock with a total net profit of less than a thousand dollars on a turnover of 30,000 shares, to say nothing of the transactions in cotton and grain. It goes without saying that to do all these things in one day requires a curiously mercurial temperament, and calls for nerve and celerity altogether foreign to the average speculator. Such a man, moreover, contributes but little to the making of prices and values, which is the function of large markets; his chief economic usefulness lies rather in the enormous revenues he pays to the State. The man whose operations I have just described contributed in a single year $75,000 to the State Government in stock-transfer taxes.