Retired business men suffering from _ennui_, have often had recourse to the stock market as a means of stimulating their emotions and expanding their fortunes; with the result, in the first of these purposes they have usually succeeded beyond their expectations, while in the second they have met with uncharted obstacles. Some years ago when many of the great trusts were in process of formation a well known Pittsburgh magnate sold out his business to the United States Steel Corporation and later bought a home in New York and turned his attention to stock speculation. After plunging into a boiling market and buying thousands of shares at top prices, the trend eventually changed and he found himself on the crest of a tobogganing market with more than a hundred thousand shares of speculative stocks. At length when the pace threatened both his fortune and his peace of mind, in a fit of disgust he dumped his holdings overboard and proceeded to damn the market, the broker and everything else, including himself for being such an unlucky simpleton.
“My dear Mr. Blank,” said his broker, “you are possibly quite justified in all your abuse, except that of yourself, to whom you really should apologize, since you do yourself a great injustice. You have had six months’ experience in this game at an expense of a little less than two millions of dollars, whereas at the pace you began you were due to lose at least five times that amount but for your rare judgment and cool-headedness.”
“But why in hell didn’t you tell me all this before?” inquired the irate customer. To which the broker calmly replied, “It’s my business to _take_ orders; not to give directions to a man of your understanding.”
When the American Hide and Leather Company was formed a number of years ago, a prominent Boston leather merchant of my acquaintance, sold his business to the new organization for a round million dollars in preferred stock and bonds, and in the course of the next few years of more or less restless inoccupation he devoted himself to a systematic study of investment securities and general stock market conditions. The panic of 1907, when values were almost entirely lost sight of in the mad scramble to liquidate stocks, afforded a rare opportunity to view the follies of reckless speculation, and our astute leather merchant was quick to observe the importance of this salutary lesson. The recovery that followed was almost magical, and many who bought stocks at the low prices doubled their money in a few months. Then following this sharp recovery there was the natural setback when speculators undertook to convert their new wealth into cash. And this too proved a wholesome lesson to our new apprentice in the game of high finance. For some years he had held to the conservative practice of investing only in non-speculative bonds, but this proved to be a slow and monotonous process of enlarging his fortune; furthermore it was devoid of the exciting thrills experienced by those who make fortunes overnight. He thought the funds of widows and orphans ought properly to be invested in gilt edge bonds and mortgages, but for a man of his business sagacity, in the prime of life, to content himself with merely cashing his coupons every six months was to decline into a state of innocuous desuetude--a condition into which he was determined not to retrograde. To launch one’s bark into the rapidly shifting currents of fortune in the stock market and attempt to steer an even course is one of the surest preventives of _ennui_, and after deliberately weighing and analysing conditions from every conceivable angle our erstwhile leather merchant concluded that cutting a few coupons now and then was too tame an occupation for a man of his acumen and ambition. He informed his friends that after years of careful study of the “game,” he was convinced that the reason why people lost, was that while in theory they all had the right ideas, they all used wrong formulas in practice. He declared that the “public,” so-called, always “bought at the top and sold at the bottom”--a commonplace in stock market parlance, though not necessarily true. Also that the inclination of all speculators is to venture out beyond their depth, i. e., to buy more stocks than they can pay for, or protect by ample margin. This indiscretion he thought to be especially characteristic of those with but small capital, whose eagerness for large gains outstripped their conservatism and exposed them to the perils of abrupt and unexpected reactions and panics. He had never bought more hides and leather than he could pay for, either with his own funds or with money easily borrowed from banks; he would never buy more stocks or bonds than he could pay for, or protect with sufficient margin to carry them through the severest depression.
He was a self-made man; he had entered his firm as errand boy, and by sheer force of perseverance, ambition and intellect he rose steadily in usefulness and power until he became sole proprietor of the whole establishment. His prestige and the bulk of his fortune had been made in buying and storing goods when the markets were glutted and prices were low, and holding them till the markets were bare and prices were high. After accumulating large stores it sometimes required a year or more of patient waiting for the readjustment of trade conditions; but never had there been a time when during a given cycle, prices had not been abnormally low and also abnormally high. He reckoned his twenty-five years of this sort of training as a singularly qualifying element of success in buying and selling stocks. This undertaking, like dealing in hides and leather, required forethought, discretion, patience and courage. There was scarcely a two-year period in any decade wherein stocks in general could not be bought reasonably cheap; nor was there a similar period when at some time during the twenty-four months they could not be sold at fairly high prices. Statistics proved this to be almost infallibly true; statistics likewise proved that the preponderance of failures in his own line of business could be traced to injudicious purchases of large stores of merchandise at high prices, with resultant inventory losses. As a merchant he had learned that buying and selling leather and hides at a profit was a matter of forecasting future conditions in the light of past events; and as a student of stock market conditions he learned that a recovery of values _always_ follows a prolonged slump in the price of stocks, and that sure success awaits those who pick the right psychological moments to buy and sell.
In due time this retired merchant secured a desk in a brokerage office and undertook to study the stock market systematically at close range, and to reduce some of his theories to actual practice. He did not launch into this new venture as one would plunge into a cold bath; he patiently watched the action of the market from day to day, until stocks declined to a point where it seemed safe to begin buying on a scale down. Meanwhile he continued to study stock market charts and conditions--charts with double bottoms, double tops, pyramids and all such enlightening information--about past performances. At length he bought a few hundred shares of selected stocks, depositing bonds as margin--ample margin of fifty points or more. Prices reacted a little further, and in keeping with his motto, which was--“Buy on the decline, when the public is getting out, and sell on the rise when the public is getting in,” he increased his holdings at every two or three points decline. In the course of time the market faced about, stocks began to recover, and in a few weeks he had the satisfaction of seeing his plans work out successfully in experiment, with a net gain of enough to cover interest on his investment for more than four years. According to precedent a temporary reaction was due; therefore, like most wary beginners, he sold out and cashed in his profits. In his exhaustive study of stock market psychology he had learned that while it is the practice of inexperienced traders to take small profits on stocks in a rising market, it is also their custom to buy the stocks back again at much higher figures, instead of waiting for prices to decline. This was one of the danger pits charted on his course of action; one of the many against which he had built up mental fortifications, strong enough in seasons of peace and calm, but in most people easily destructible by the baffling influences of stock market speculation.
Although a beginner in practice, he was a veteran in theory, for prior to entering the financial arena he had made hundreds of imaginary purchases and sales, nearly always at a profit. Moreover he had discovered that one may play both sides of the market, apparently with equal safety, and that the biggest “killings” are said to be made on the “short” side. By selling “short” on bulges and “covering” (i. e., buying the stock in to cover the sale) on reactions, it was possible not only to make money both ways, but also to avoid the tedium of waiting inertly for opportune occasions to buy at bargain-prices. From the experience of others he derived a valuable lesson, namely, that investors and traders are always too eager to keep their capital constantly employed; that they are prone to hold stubbornly to one position, either long or short; and that the wellnigh irresistible impulse to get back into the market after selling out, whether at a profit or a loss, has probably been the ruination of more speculators than any other one cause. Playing the market both ways seemed a sure means of forestalling this error.