In previous chapters we have seen that many, if not most, of the eccentricities of speculative markets, commonly charged to manipulation, are in fact due to the peculiar psychological conditions which surround such markets. Especially, and more than all else together, these erratic fluctuations are the result of the efforts of traders to operate, not on the basis of facts, nor on their own judgment as to the effect of facts on prices, but on what they believe will be the probable effect of facts or rumors on the minds of other traders. This mental attitude opens up a broad field of conjecture, which is not limited by any definite boundaries of fact or common sense.
Yet it would be foolish to assert that assuming a position in the market based on what others will do is a wrong attitude. It is confusing to the uninitiated, and first efforts to work on such a plan are almost certain to be disastrous; but for the experienced it becomes a successful, though of course never a certain, method. A child’s first efforts to use a sharp tool are likely to result in bloodshed, but the same tool may trace an exquisite carving in the hands of an expert.
What, then, should be the mental attitude of the intelligent buyer and seller of securities?
The “long pull” investor, buying outright for cash and holding for a liberal profit, need only consider this matter enough to guard against becoming confused by the vagaries of public sentiment or by his own inverted reasoning processes. He will get the best results by keeping his eye single to two things: Facts and Prices. The current rate of interest, the earning power of the corporations whose stocks he buys, the development of political conditions as affecting invested capital, and the relation of current prices to the situation as shown by these three factors—these constitute the most important food for his mind to work upon.
When he finds himself wandering off into a consideration of what “They” will do next, or what effect such and such events may have on the sentiment of speculators, he cannot do better than to bring himself up with a short turn and sternly bid himself “Back to common sense.”
For the more active trader the situation is different. He need not be entirely unregardful of values or fundamental conditions, but his prime object is to “go with the tide.” That means basing his operations to a great extent on what others will think and do. His own mental attitude, then, is a most important part of his equipment for success.
First, the trader must be a _reasoning optimist_. A more horrible fate can scarcely be imagined than the shallow pessimism of many market habitués, whose minds, incapable of grasping the larger forces beneath the movements of prices, take refuge in a cynical disbelief in pretty much everything that makes life worth living.
Owing to the nature of the business, however, this optimism must be of a somewhat different character from that which brings success in other lines. As a general thing optimism includes the persistent nourishing of hope, an aggressive confidence, the certainty that you are right, a firm determination to accomplish your end. But you cannot make the stock market move your way by believing that it will do so. Here is one case, at any rate, where New Thought methods cannot be directly applied.
In the market you are nothing but a chip on the tide of events. Optimism, then, must consist in believing, not that the tide will continually flow your way, but that you will succeed in floating with the tide. Your optimism must be, in a sense, of the intellect, not of the will. An optimism based on determination would, in this case, amount to stubbornness.
Another quality that makes for success in nearly every line of business is enthusiasm. For this you have absolutely no use in the stock market. The moment you permit yourself to become enthusiastic, you are subordinating your reasoning powers to your beliefs or desires.
Enthusiasm helps you influence other men’s minds, but in the market you do not desire to do this (unless you happen to be a big bull leader). You wish to keep your mind as clear, cool and unruffled as the surface of a mountain lake on a calm day. Any emotion—enthusiasm, fear, anger, depression—will only cloud the intellect.
Doubtless it would be axiomatic to warn the trader against stubbornness. It cannot be assumed that any operator would consciously permit himself to become stubborn. The trouble arises in drawing the line between, on the one hand, persistence, consistence, pursuit of a definite plan until conditions change; and, on the other, stubborn adherence to a course of action which subsequent events have proved to be erroneous.
A day in the country, with the market forgotten, or if necessary forcibly ejected from the thoughts, will often enable the trader to return with a clarified mind, so that he can then intelligently convict or acquit himself of the vice of stubbornness. Sometimes it may become necessary to close all commitments and remain out of the market for a few days.
One of the most common errors might be described as “getting a notion.” This is due to the failure or inability of the trader to take a broad view of the entire situation. Some particular point in the complex conditions which usually control prices, appeals to him strongly and impresses him as certain to have its effect on the market. He acts on this single idea. The idea may be all right, but other counterbalancing factors may prevent it from having its natural effect.
You encounter these “notions” every day in the Street. You meet a highly conservative individual and ask him what he thinks of the situation. “I am alarmed at the rapid spread of radical sentiment,” he replies. “How can we expect capital to branch out into new enterprises when the profits may be swept away at any moment by socialistic legislation?”
You say mildly that the crops are good, the banking situation sound, business active, etc. But all this produces no impression upon him. He has sold all his stocks and has his money in the banks. (He is also short a considerable line, but he doesn’t tell you this). He will not buy again until the public becomes “sane.”
The next man you talk with says: “We cannot have much decline with the present good crop prospect. Crops lie at the basis of everything. With nine billions of new wealth coming out of the ground and flowing into the channels of trade, we are bound to have prosperous conditions for some time to come.”
You speak of radicalism, adverse legislation, high cost of living, etc.; but he thinks these are relatively unimportant compared with that $9,000,000,000 of new wealth. Of course, he is long of stocks.
“To make the worse appear the better reason,” said Mr. Socrates, some little time ago. It is too bad we can’t have Socrates’ comments on Wall Street. The Socratic method applied to the average speculator would produce amusing results.
Beware of saying, “This is the most important factor in the situation,” unless the action of the market shows that others agree with you. Every human mind has its own peculiarities, so presumably yours has, though you can’t see them plainly; but the stock market is the meeting of many minds, having every imaginable peculiarity. However important some single factor in the situation may appear to you, it is not going to control the movement of prices regardless of everything else.
An exaggerated example of “getting a notion” is seen in the so-called “hunch.” This term appears to mean, when it means anything, a sort of sudden welling up of instinct so strong as to induce the trader to follow it regardless of reason. In many cases, the “hunch” is nothing more than a strong impulse.
Almost any business man will say at times, “I have a feeling that we ought not to do this,” or “Somehow I don’t like that proposition,” without being able to explain clearly the grounds for his opposition. Likewise the “hunch” of a man who has watched the stock market for half a lifetime may not be without value. In such a case it doubtless represents an accumulation of small indications, each so trifling or so evasive that the trader cannot clearly marshal and review them even in his own mind.
Only the experienced trader is entitled to a “hunch.” The novice, or the man who is not closely in touch with technical conditions, is merely making an unusual ass of himself when he talks about a “hunch.”
The successful trader gradually learns to study his own psychological characteristics and allow to some extent for his customary errors of judgment. If he finds that he is generally too hasty in reaching a conclusion, he learns to wait and reflect further. After making his decision, he withdraws it and lays it up on a shelf to ripen. He makes only a part of his full commitment at the moment when he feels most confident, holding the remainder in reserve.
If he finds that he is usually overcautious, he eventually learns to be a little more daring, to buy a part of his line while his mind is still partially enveloped in the mists of doubt.
Most of the practical suggestions which can be offered are necessarily of a somewhat negative character. We can point out the errors to be avoided much more successfully than we can lay out a course of positive action. But the following summary may be useful to the active trader:
(1) Your main purpose must be to keep the mind clear and well balanced. Hence, do not act hastily on apparently sensational information; do not trade so heavily as to become anxious; and do not permit yourself to be influenced by your position in the market.
(2) Act on your own judgment, or else act absolutely and entirely on the judgment of another, regardless of your own opinion. “Too many cooks spoil the broth.”
(3) When in doubt, keep out of the market. Delays cost less than losses.
(4) Endeavor to catch the trend of sentiment. Even if this should be temporarily against fundamental conditions, it is nevertheless unprofitable to oppose it.
(5) The greatest fault of ninety-nine out of one hundred active traders is being bullish at high prices and bearish at low prices. Therefore, refuse to follow the market beyond what you consider a reasonable climax, no matter how large the possible profits that you may appear to be losing by inaction.
The field covered by these chapters is to a great extent new. As it becomes more thoroughly cultivated, it may be possible to speak with more scientific definiteness. In the meantime, the author hopes that his comments and suggestions may be of some service in helping readers to avoid unwise risks and to apply sound principles of analysis to the investment or speculative situation.