Short Periods in and Long ones out.
There is scarcely a more important point to which to draw attention, than that of being contented to watch for an opportunity. It is fatal to the success of a speculator to be always with stock open in the markets. The casual observer must be well aware[36]that now and again a small panic occurs, and the general level of values is knocked down perhaps two, three, oron serious occasions as much as four per cent., according to the inflated state of particular stocks at the time. A speculator who has twenty or thirty thousand pounds nominal of stock open at such a time, stands in a moment to lose eight or twelve hundred pounds at a blow. With such a contingency always hanging over him, it must be evident to the prudent man that in order not to expose himself more than he can possibly help to such a catastrophe, which may happen at any moment, he should operate, be contented with a moderate profit, and close.[37]The obvious advantage of looking on for comparatively long periods, and having commitments for short periods is, that the chances will be much more in favour of the speculator when a panic causes a heavy fall. He is then free to buy at prices which are sure to be unduly depressed, and instead of the dreary waiting to recover from losses incurred, he makes in a very short time probably a handsome profit, again retiring to avoid the reaction that follows a sharp recovery, to await a similar favourable opportunity. To be overtaken, with large amounts of stock open for the rise, by a panic which engulphs a speculator’s money and upsets his judgment at the same time, is among the least excusable faults when committed by the man who starts upon any system. The haphazard speculator is almost sure to have accounts open when a panic takes place, because he is, as a rule, in a fever lest he shall miss a rise, and is, therefore, never contented unless he is “in the swim,” and hence the severe handling he gets by never seeing the cataract until he is half way to the bottom.
Restoring the Balance Of Advantages.
It is in the nature of free trade, that whatever mathematical advantage is to be obtained at all is more accessible to the rich speculator than to the poor one. The rich player consequently can make himself the stronger one, and the operator with capital has advantage over the operator without.[38]So far, however, as it is worth while to exercise at all the natural skill in Stock Exchange speculation, which one individual may possess beyond another, there can be no doubt that a less rich, but very skilful operator, would very materially, if not quite, in the long run, restore the balance of advantages which was against him at the start. As the haphazard speculator always must enter the lists at a disadvantage or on unequal terms, it follows that the exercise of any amount of skill will only bring him somewhat nearer to, or at best slightly beyond, holding his own; and in that he would fail in the long run. If he lay down all the machinery necessary to success in ordinary business, he virtually passes the limit which definespure speculation by reducing the risks to such a minimum that they are no more than the percentage which is an inevitable element in all mercantile transactions.
The Necessity of Some Capital.
That it is absolutely necessary that a speculator should possess capital may be illustrated from several points of view, and although we may become, perhaps, tedious by repetition, as in Chapter III., for instance, when speaking of the temperament of a speculator, the time spent in double reflections by the uninitiated may prevent shipwreck, at least in the first stages. A man who is going to operate on a large scale will be equally dishonest if he have not a large capital, as a small speculator who has no more than his £300 a year out of which to save up if he loses more than he can pay. It seems hardly necessary to state that a speculator who operates in the Stock markets and loses without having anything of his own wherewith to pay, inflicts just the same loss upon the broker who does the business for him, as he would upon a butcher of whom he purchased a leg of mutton, consumed it, and then declared he had no money. It is really, however, necessary to make this statement, clear as is the truth of it, because speculators, as a rule, do not realize the liability in the same way. There are differences in degrees of tangibility in these matters, no doubt, and hence the morally injurious effects of speculation and all kinds of gambling. A leg of mutton is a solid substance, and the fact of consuming it not only impresses the circumstance upon the mind, but upon the body too, in the shape of the recollection that the body benefited by the food. By the aid of the remembrance of the benefitsthat grow out of the consumption of the leg of mutton, the liability to pay for it becomes realizeable in a high degree, and no man allows himself to dream of escaping from it. It is not so in the same degree with a liability incurred by “time bargain” speculation, because what represents exactly the same tangible substance, was never fully, or even partially, realized as such.
Capital to Expend in Feints.
La Haute Finance.
All large speculators are well known. If they try to operate through other persons in order to deceive, the truth leaks out some time or other. Large orders are very difficult of execution, unless the broker is either of very good standing himself, or hints at the source from which he receives his instructions. Unless, therefore, it can be shown that the real operator has a very broad pecuniary back, an attempt to buy or sell large amounts of stock through brokers is difficult. It is sometimes necessary to have capital to throw away in feints, before the speculator commences his operations, just as a general may find it expedient to throw away a quantity of ammunition, and even the lives of some of his soldiers, to draw off attention from the real attack. A speculator who contracts to bring out a new loan, unless the security he has to offer is of the highest class, runs considerable risk of losing his money, as he has, as a rule, to pay something down to the borrower as a guarantee of good faith, and to allow him also to taste the ready cash, as some immediate consideration for entering upon business, which, if successful, is of all business the most remunerative. This kind of speculation belongs tola haute finance.
A supply of ready money is essential to the speculatorin all markets, and it is marvelous that there can be so many persons who have to grope their way by the aid of bitter experience through the thick darkness of their ignorance to such a shining light of truth as this. And the full realization of this truth is, in most cases, only obtained at an expense which renders it impossible to repeat the experiment.
The Best of all Chances for Speculator with Capital.
The most Legitimate Form of Speculation, Pawning the Stock.
After a severe commercial collapse, like that of 1866 for instance, all securities are low in price, holders of them have been compelled to realize through thedebaclewhich has for the time destroyed credit, turned profits into losses, and frightened everybody into hoarding the precious metals. When things are beginning to mend, and a resurrection of industries takes place, the tide of the national profits begins to turn, and, rippling back into innumerable channels where securities of all sorts have laid high and dry and neglected, again floats them into notice. Just as when there is no use for the plough the oxen are idle, so when the great industries of a nation are stagnant, floating capital lies idle, and is cheap. In such times the speculator of good judgment, with ten or twenty thousand pounds can make money without much risk if he is satisfied to watch the general recovery of prices up to a certain level, and then realize. We will suppose money at 3 per cent., and the best English railway stocks some thirty per cent. below the value they will reach when the country is in the full tide of prosperity. He selects one hundred thousand pounds worth of the leading stocks, yielding at the price at which he purchased them, 6 per cent. At different banks where he keeps accounts for the purpose, he pawns the stock, and gets loans within 10 per cent.of the market value, which amount to eighty thousand pounds. The ten thousand pounds he has himself, which enables him to take the stock off the market. In this way he is virtually the possessor for the time of this amount of stock, and he profits by the rise in value at the rate of one thousand pounds for every one per cent. Apart from this advantage he benefits to the extent of the difference between the yield on the money value of the stocks, and the interest with which the bankers debit him on the eighty thousand pounds; and so long as circumstances are favourable and the value of money does not rise and remain above the rate which the stocks yield, he enjoys an income from that source with a fair prospect in a year or so of doubling his ten thousand pounds.
Very large amounts of money are known to have been made in 1870, 1871, and 1872, in English railway, and also in various other stocks, in this way in the London market, when money was poured in from France and the Continent generally on the outbreak of the Franco-German war. Bankers, moreover, were aware that the large amounts placed with them for safe keeping might be called for at any time, and sound Stock Exchange securities, upon which loans could be made from fortnight to fortnight, were very much in favour. In consequence of such operations as that referred to, prices were found upon several occasions to be very much inflated, resulting in some mischief and not a few failures.
When to Begin and when to Leave off.
In speculation of this nature, there is a time to begin and a time to leave off. When stocks have attained a reasonably high level of value as a result of the recoveryof a country’s industry, the chances for the speculator to profit by a continuous rise are of course gone, and he seeks in other directions to turn his capital to account; but the example we have given illustrates perhaps the most legitimate of all forms of speculation in Stocks, provided always the operator knows his business, and allows a sufficient margin for contingencies.
Test of a Speculator’s Pecuniary Position.
The marked difference between Stock Exchange business and other kinds is, that it is the custom to pay cash for all bargains when the settlement takes place. Special delays may be agreed to between persons who know each other well, but it is quite the exception, and certainly should remain so, for credit is already quite sufficiently extended throughout all branches of trade and commercial affairs. The one thing that keeps a tight rein on Stock Exchange operators is the test of their position which lies in fortnightly cash settlements.[39]The very nature of the business affords such facilities for incurring very large liabilities by extensive operations in various securities, that if settlements by bill accommodation were permitted, extending over two or three months as in trade, hopeless confusion would soon be the result, apart from the temptation which an insolvent broker or jobber would lie under further to involve himself so long as he could get the credit. The remarkably few failures that take place among stock-jobbers and brokers, when it is considered how much risk they run, and to what a limited extent they can make themselves aware, in time to avoid complications, oftheir clients’ actual means, reflects much credit upon them as a class. At the same time it must be admitted that the custom of frequent cash settlements, by testing the actual position of all concerned, is the best possible safe-guard against operators getting out of their depth; and although business generally would be very seriously curtailed if the custom prevailed in all branches of commerce when distance did not make it impossible, there can be no doubt that a vast deal of mischief and dishonesty would be nipped in the bud.
A Familiar Case.
Bitter Experience.
The Question of Seeing it out.
We will now suppose a familiar case of a speculator following in the path of so many wise persons who have gone before to their ruin in the process of applying some nostrum, which was to make their fortune in a week. The fortnightly settlements on the Stock Exchange take place about the middle and end of each month. We will suppose a young speculator, full of ideas upon such subjects, and having just sufficient knowledge of the different stocks to make believe that he knows a great deal, gets introduced to a broker, who on ascertaining that he has two or three hundred pounds available, intimates his willingness to execute his orders. The speculator buys £5,000 Turkish 5 per cents of 1865, £5,000 Spanish 3 per cents and £5,000 Egyptian 7 per cents of 1868, being told that these are easy markets to deal in. We will assume these bargains are done in the middle of an account. On the day of the purchases the several stocks rise ¼ to ½ per cent., and he goes home a happy man with his contracts in his pocket, reckoning the gain he has already made, and sleeps like a top. He rises with a light heart next morningto devour his money article and breakfast simultaneously, eagerly searching in the list for his friends the Turkish, Spanish and Egyptian Stocks. The rise reported to him by his broker the evening before is confirmed in his newspaper, and he is in the act of laying it down when his eye catches a telegram, headed “Defeat and resignation of the French Government.” His little experience has already taught him that the leading foreign stocks are largely dealt in on the Continent, and here comes a sinking of the heart number one. The breakfast is left unfinished, and he hurries to the city to find the Stock Markets open very flat all around on selling orders from Paris. The ¼ to ½ per cent. profit had disappeared, and an additional 1 per cent. into the bargain; so that instead of standing to gain £30 or £40, he stands to lose £150. A conference with the broker is somewhat encouraging, as he laughs over the matter, and assures his client that “they are bound to rally.” Another day passes and there is no rally. Several days go by, and disorders in the streets are reported from Paris, causing further sales in the London market, and our friend sees a loss of £300 on his three purchases.[40]The “carrying over” day arrives without any recovery having taken place, but the broker is still cheerful, being himself a man of some means, although suffering from the prevalent disease of a great weakness for commissions, which has often caused him heavy losses through negligence in ascertaining the means of his clients. “It is only a question of seeing it out, sir,” he says,an observation which disperses with a lightning flash the ignorance under which our friend had hitherto labored with regard to the necessity of available capital, or in still plainer terms, ready cash. He goes away to turn this awkward dilemma in which he finds himself, over in his mind. Seeing it out, is, of course, waiting for a recovery. In the meantime he must pay his differences, which amount to £50 more than he possesses.
This one case in point tells the whole tale, and it is therefore superfluous to take up time and space with other instances. If legitimate trading business, in which the risk of loss is so reduced as to enable a man to earn a living at it, cannot be carried on without adequate capital, how is it possible that pure speculation can be successfully practised in which the conditions are reversed, and at which experience shows that no one can succeed except the professional expert, and only then in some cases under circumstances to which we have before referred?
A Friendly “Tip.”
Unloading at Other People’s Expense.
A fool and his money are soon parted, is an old saw, and it is in a high degree applicable to the inexperienced speculator who operates in the markets on a friendly “tip.”[41]It is marvellous to think how many persons daily and hourly are misled by the same snare and delusion. If a man, who starts off in an excited state to instruct his broker in consequence of having received the “tip” to buy a certain stock, pauses for one moment to reflect, he can hardly fail to doubt the disinterestedness of the communication. Take an example:—In the first place a man who gives a “tip” to another to buy some of a certain stock, must have some motive for so doing. No human being wanders about with, what he makes out to be, valuable information to distribute gratis among his friends. One might as well expect the girls who sell oranges, combs, umbrella-rings, and collar-studs, in Lombard Street, to give them away for nothing, as expect to obtain disinterested and genuine “tips” from some wandering philanthropist. Such a person was never heard of, and never will be. If a man gives the “tip” tobuy a certain stock it is because he wants to “unload” at other people’s expense,[42]and that is not what is generally understood by philanthropy. The system of sending round the “tip” to buy or sell, has become very general in all markets, and it is certain that a vast deal of mischief is done by it. The common practice is for a number of persons to band together, and put the price of a certain article or stock up by buying a large quantity and making it scarce. When the higher price has been maintained for some little time, so that it meets the public eye in price currents, the process of putting the public in is commenced. When this benevolent operation has been sufficiently worked, and the “tip” has been administered to a number of poor dupes, the price is let down. Those who have advised their friend to buy, begin to sell and deliberately rob them, in return for the misplaced confidence.
The Qualified “Tip.”
There is a distinction between the qualified and the unqualified “tip.” One man is a shade more honest than another, and does not exactly wish to charge his conscience with having deceived a friend with regard to a certain event. He merely suggests on general grounds that such a stock is going up. If he can get the person to whom the suggestion is made to act on such general advice, he achieves his purpose without exposing himself to be saddled with direct responsibility in case the result should be unfavourable. There are numbers of such persons who daily administer “tips,” not only to their friends, but to strangers who will not trouble themselves to go farther to obtain any confirmation. Suchan important communication coming from credited quarters, is of course looked upon as a valuable secret to be acted on silently and immediately.
The Unqualified “Tip.”
The unqualified “tip” comes from the individual who intends from the first to drive his horse full of armed men into the town,vi et armis, without too much parleying at the gates. He assumes an optimism of manner, and displays such a degree of confidence as shall override any rising objection, gets a promise to act on his advice, and passes on before the person to be made a tool of has time, or can summon courage, absolutely to refuse.
“Tips” Worked by Syndicates.
Then there are “tips,” worked by syndicates, which is a more elaborate affair. The extent of the increased area over which it is intended to operate depends upon the magnitude of the amount to be unloaded, the quality of the security, and the necessity for reaching a certain class of individuals. A vast deal of the rubbish that is shot away from the great financing centres is carefully and eagerly laid hold off by clergymen, and teachers male and female. As a rule, these good people seldom pause to reflect that what is so studiously brought under their notice in their rural retreats, is almost sure to lack a market anywhere else. Is it at all likely that so much trouble would be taken to recommend investments to people, by means of prospectuses delivered by the postman, if the statements contained in such prospectuses were really as true as they profess to be? In large cities there are innumerable agents for all country districts always on the look out for sound remunerative investments, and there is no need to recommend them to people’s attention by thrusting them upon them at their own houses. Such a processof advertising is obviously to net the unwary, who are ignorant of what constitutes good security. The “tip” of a syndicate is passed on, so to speak, for a consideration, in proportion to the amount bought by the clients of the persons employed.
This branch of the subject can be almost indefinitely elaborated, but it may be concluded by one remark, which contains the pith of the whole thing, as applicable to speculation. Speculation as practised by the multitude is no better, in any market, than pitch and toss, and it is only by the aid of experience and more native skill, that some in the long run will lose less than others. One golden rule with reference to “tips,” no matter from whom they proceed, or by what alleged incontrovertible facts they are supported, is this: when you are told to buy go and sell.
Machinery in Existence for Directing Human Volition.
The Patrician Investor.
Everything, in these times, is done by machinery, and there is consequently no need for astonishment at finding that machinery is in existence for directing human volition. Such mechanism has for a long time been in working order, although it is scarcely realized by the community as a body. The most accomplished professional speculators make it their business to study the peculiar tendencies of people who have any money over and above what they immediately require for necessities. Firms, with numbers of clerks, exist in our day, who have forty, fifty, and as many sixty thousand names of people duly registered in their books, with their place of abode, duration of residences, means, style of living, trade, or profession, and other particulars, enabling a judgment to be formed of the kind of investment which is likely to suit them. These names are all duly marshalled under different heads, and when a certain kind of undertaking is to be brought before the notice of the public, in the form of a prospectus, that class of people for whom it is thought a suitable investment, have one sent to them by post. Experience has shown that it is unwise to scatter prospectusesbroadcast over the country, trusting to some portion of them bringing applications. A wholesale scattering of prospectuses among a class of people who are not at all likely to read them even, will injure the credit of the scheme for which it is desired to raise the capital in proportion to the number of prospectuses that are thus wasted. As in everything else, in business great care must be taken to offer the right sort of investment to the persons addressed. A man, for instance who lives in a fine house in a country parish, owns land, and moves among the patricians of the district, would not think of looking at a new undertaking, if he knew a prospectus had come by the same post to a man who touches his hat to him, and lives in a small way outside the gates of the great man’s estate. A man who is higher up in life than his neighbour’s endeavours, as a rule, to mark the distinction by having everything that belongs to him of a superior type. The man of high degree would consider himself insulted if he were classed indiscriminately with the man of low degree, in sending out twenty thousand prospectuses of a new mine. People are very touchy in such matters, and therefore, in catering for the public, as regards investments, great discrimination is necessary. The different classes of investors must be passed through the speculator’s machine like the threshed corn, and when the husks and dust have been winnowed from the solid grain, he proceeds to classify them, and, as far as possible, learn their taste in the matter of investments.
Administering Shares to the Public.
When joint-stock banking came into vogue, promoters of the new undertakings that were destined gradually to supersede private banks, and have supersededall but those that have exceptionally deep roots, and partners left who are very tenacious of ancient customs, were very tentative in their mode of proceeding. As with all new things for which the public require to be educated, companies established on the share system had in the beginning to be brought forward gently and quietly, so as not to startle people. Persons are easily scared when asked to become partners in a bank, in the sense of taking much responsibility and sharing but to a small extent in what are understood to be the honors of such a position. The finessing which was at first necessary to accustom the public to joint-stock undertakings was gradually followed by a thirst for shares, because all such concerns for a considerable time were associated with a premium. Individual promoters worked at the business of building up joint-stock schemes, then it grew to syndicates, and now we have wealthy firms, with large machinery, whose whole time and staff are devoted to hunting about the world for powers to bring out foreign loans, for concessions for making railways, docks, harbours, gasworks, and the like. When they have procured one or the other, they fix the amount of capital, cut it up into shares, and administer them to the public, by much the same process as the Strasburgers enlarge the livers of their geese. Instead of people being asked politely by an advertisement to become shareholders in a new concern, the axiom of the supply creating a demand is acted upon in these times, and a man finds in his letter-box an investment especially suited to his taste and means, at the precise moment when his half-yearly dividends arefalling due. The economy of capital is thus being pushed to its extremest limits, through the development of a system by which one man makes it his anxious business to see that his neighbour’s interest on his capital shall scarcely have been passed to his credit at the bank before it is snatched away to fructify in some scheme for benefiting mankind in one or other of the four quarters of the globe.
Investments provided by machinery can be done on a very large scale, and when successful are as a consequence very profitable. But unfortunately it is a kind of avocation that is pretty nearly sure to be followed by many unscrupulous persons, who will resort to all kinds of deceit and trickery, in giving a false and dazzling hue to projects that should never have seen the light. Moreover, the great difficulty that individuals find in ascertaining the truth of statements, and the authenticity of facts, causes them too frequently to take for granted what should be always viewed with more or less suspicion, unless the people who vouch for such facts are of the most undoubted standing and respectability; and, as we have remarked, it is seldom that such persons will lend their names to anything of the kind. During a season of great prosperity the promotion of new companies is sure to be largely overdone, and great will be the losses suffered; but there is sure to be more good done in the world by the dissemination of capital in new parts of the earth that would otherwise lie for the most part unproductive, than there is harm done through the misapplication or loss of a part of it. Many people bewail and lament over the failure of a bank, a discount house, or joint-stock concern now and again, and when a commercial crisistakes place one would think the world was coming to an end, as indeed the Viennese thought when they had a sharp lesson for their money-greed, early in 1873; but a little sensible reflection will show that calms and storms alternate in every variety of form on the earth, and are not confined to seas whose strands occasionally strewed with the produce of a foreign clime is only an indication of the miscarriage of a minute portion of the benefits which, in fair weather, are conveyed by the inhabitants of one land to those of another.
The fact remains, however, that speculation by machinery, or in other words, the modern system of cramming the public with securities wholesale, may be attended with a good deal of mischief, and although it is too much to say that people who launch new undertakings upon such a system are necessarily unscrupulous, there are strong reasons for looking very closely at securities known to proceed from the offices of firms whose business it professedly is to make money by manufacturing stocks and shares wholesale, and forcing them upon the public. In the first place, such a business requires a great deal of money to carry it on, and a good deal of risk must be run, and money paid out of pocket, before there is a chance of seeing anything back again. Under such circumstances private enterprises are sought to be purchased at a small price, and sold to the public at a very large one, so as to secure a considerable margin, the only object of the speculators by machinery being to fill their own pockets.
It is astonishing what faith people put in printed certificates, got up in a style which resembles documents of real value. A sheet of thin paper resemblingthat of a bank note, with a large impressed stamp of a corporation upon it, and filled in with the magic word sterling, is, as a rule, sufficient dust thrown in the eyes of the general public to send them home satisfied to make no further inquiries until collapse reveals the sham that has been prepared for them. Ordinary people go to market and make an elaborate fuss over a joint of meat before paying their money, seeing that it is to a Shylockian nicety of weight, but when they invest a hundred pounds in a mine, there have been cases in which they hardly knew where the property was,—or even if it existed at all. It is very wonderful that such an incomprehensible degree of confidence is placed in concoctors of companies, and it is the knowledge that the general public is so ludicrously gullible that encourages the formation of joint-stock concerns upon often the most flimsy bases.
Speculation in Consols as a Hedge.
Compared with what there used to be in bygone years there is now next to no speculation in Consols at all. Merchants and bankers once upon a time used to speculate in the Funds[43]as a hedge. But things have changed, and such a method of providing against a mercantile loss, which might be brought about by the same cause that would depress Consols, has gone out of fashion, doubtless owing in some degree to there being other modes of protecting themselves against risks which both merchants and bankers must for all time incur.
The maxim which is adopted by all prudent speculators in the markets, by which we mean the dealers in the Stock Exchange, who in the nature of their business must to some extent speculate, or they would lose business, is to sell when things are dear, and buy when they are cheap, and pay no attention at all to reports. Men who have had years of experience, know how to estimate at their just value theon ditsthat are for ever floating about their ears.Right or wrong, there is no money in them in the long run, and it is with the long run that operators should have to do.
Speculation has Changed its Venue.
Increase of the Indebtedness of the States of the World.
The Fluctuations in the Price of Government Stocks.
One reason why speculation in Consols has been reduced to a minimum is, that speculation has of late years changed its venue. The stock markets now are the field of operations for dealers in the stocks of all nations and all climes. There are a few countries whose names are still withheld from Wetenhall’s list, among which China may be mentioned, but they are few. The extent to which the world has been borrowing within the last quarter of a century may be judged of from the fact that the indebtedness of the States of the world has increased from 1851 to 1873 by £2,218,000,000, the proportion of which belonging to Europe is £1,500,000,000. People have become used to making larger profits, by which we mean that all the world lives better and makes larger incomes than they used to. Consequently they do not care to speculate in stocks unless the fluctuations are somewhat considerable and frequent. The quieter attitude of England towards foreign states for many years past, and the absence of any internal disturbances worth mentioning, has produced much more steadiness in Government securities than was the case earlier in the century. There is not much exaggeration in the remark that a fluctuation of two per cent. in a day in Consols is now witnessed once in a life-time. The process of getting in and getting out of a stock, as a speculation, cannot be profitable when the fluctuations are so small and infrequent. Speculation consequently hasshifted from the Consol market, and from the market where the highest class of securities is dealt in, to departments of the Stock Exchange where a bull or a bear stands to make something in a reasonable period, if he chance to be operating the right way. It may be supposed that speculation for this reason has decreased in extent. The contrary is the fact, speculators having simply taken up new ground, as they found it useless for any purpose to speculate in stocks in which the fluctuations were so small.
High Class Stocks more Firmly held than Formerly.
One of the reasons why speculation in high-class securities has more or less ceased is obviously because Consols and such like stocks are more firmly held than they used to be when the country was oftener engaged in wars, or disturbed by semi-revolutionary agitations. Then again, the very fact of high-class stocks remaining at a uniformly high level of price, causes a certain class of investors to buy them for simply absolute security’s sake. There are numbers of people who hold Consols because they are perfectly certain their £3 odd per cent. per annum will always be paid. They never trouble themselves about the price of the stock, and continue entirely apathetic whether the price rises to 120 or falls to 50. It stands to reason that, as the country grows in wealth, so do the holders of these high-class stocks increase in number, and as such securities are purchased largely for permanent holding, and purely as a means of providing income, so is steadiness imparted to the price, which tends consequently to be less and less disturbed in the absence of exceptionally adverse influences. There are always large numbers of persons in a country like England who are retiringfrom active life to live on an income, derived through the medium of public securities of one form or another, which is hereafter to be a purchasing power dependent upon the labour of others. One man does his share of work in the world, and in the process he provides for his future wants through the medium of saved capital. There can be no doubt that if the English national debt were to be paid off there would be a considerable commotion among those holders of Consols who would be satisfied with nothing else half as well. While the times in which we live therefore, continue quiet, the credit of the Government is firmly maintained, and the savings of the people are large, there will be always more buyers than sellers of high-class securities while the return for the money is not less than about 3 per cent. Buyers would in most cases probably prefer to look in other directions than pay anything over par for Consols. The fluctuations under such circumstances are consequently very small, and there is nothing literally but a bare bone for a speculator to pick, which is not worth the commission, and he migrates into other markets.
The “Turn” a known Quantity always against the Speculator.
Although we have already alluded to this question of “turns,” in referring to the forces, so to speak, in the markets which are arrayed against the speculator, we have thought it advisable, subsequently, to give it a separate chapter. The “turn” is a known quantity about which there is no doubt, and in which there is no element of chance to be reckoned upon according to any doctrine of probabilities, as sometimes favouring one side, and sometimes the other. The “turn” may be described in brief as the income of the jobber, or in other words that fractional part of the whole sum which, if a buyer of some stock, he gets by its sale in excess of what he pays—and if he be on the other hand, a seller, the “turn” is that proportional part of the whole sum which he gets in excess on buying back the stock, in order to square his book. Supposing the two operations of a purchase and a sale proceed first from a bull speculator, and secondly from a bear; the jobber in the one case covers himself as soon as he can by a purchase of the stock sold by the first operation, and by the sale of an amount equal to that bought by the second operation.
The “Turn” a Loss on Going Into and also in Coming Out of the Market.
The “turn” comes in the second rank of obstacles which stand between the speculator and the goal, or profit, which it is his aim to reach, and is the most formidable of the fixed and, it may be said, inevitable, elements arrayed against him at the start. When a speculator enters the markets, therefore, he has to do his share of keeping both the broker and the jobber, and that not only when he commences his operations, but also when he finishes. There is the “turn” to be paid on going in, and also on coming out. The same may be said of the broker, only under certain circumstances. It is customary for a broker to charge no second commission on closing an operation, if it be done in the same account as that in which the operation was commenced. As speculators, however, especially the haphazard kind, are never contented to take small profits, and get out of the markets, they almost invariably pay a second commission. Thus there may be said to be two double fixed quantities, which are piled up against a speculator at the start.[44]
The Difference in the Character of the “Turn” as compared with Former Times.
Special Danger of Speculating in a Stock that is quoted very wide.
If there be any difference in the character of the “turn” as compared with former times, it must be allowed that there is a point in favour of the speculator: whether it be more apparent than real, owing to the growth of other adverse influences is another matter. But it is certain that the “turn” is not so great in these times as it used to be, and it comes from the increase of competition by the larger number of jobbers in the markets, just as commissions in allbusinesses have dwindled down from two and three per cent., and in some cases much more, to ¼ and ½, and in the Stock markets to ⅟₁₆ and even a ⅟₃₂. It should, however, be remarked that, owing to the great increase in the number of transactions, the jobber makes more in these times by the smaller “turns” than he did formerly out of the large ones, the increase being in a greater ratio than the diminution in the amount of the single “turn.” Moreover the public, as it is to be hoped should be the case with the growth of intelligence and the spread of education and wealth, decline to buy stocks when very wide prices are quoted to them from the jobbers. It stands to reason that the jobbers rather enjoy dealing in stocks where there is a good deal of cover for them to play with their prey. A difference of two or three per cent. between the buying and selling price affords the jobber much more scope in fixing the “turn” he is to get out of a transaction. The wide quotations between a buying and selling price are no doubt to some extent a legitimately justifiable defence against the sudden and perhaps violent fluctuations to which an indifferent security is exposed, and it is on this account the price is made wide. As the public, however, get to know and understand that a stock which is quoted say 35 to 38, as compared with one that is quoted 85 ⁵⁄₁₆ to ⁷⁄₁₆ is in proportion to the difference between the extremes of the two figures, a worse security, so they instinctively avoid any operations at all where there is no knowing from one moment to the other whether their property is worth one per cent. more or less. In fact many young operators have been electrified to find that, having purchased on speculationsome stock of the character of that quoted above at 35 to 38, and wishing to get out of the bargain, for some reason or other, there was a difference between the buying and the selling price of actually as much as that indicated, viz.: 3 per cent. Ruinous mistakes by the unwary are thus made. They fancy very naturally that a stock which is subject to violent fluctuations, and which is seen to fall and rise two or three per cent. in a day, is a fine field to operate in; but the compensation which is in all things, soon reveals itself here in the manner described, so that the speculator stands perhaps even less chance of making a profit off a widely fluctuating security than he would by one that moved to a smaller extent over or under a central point of value from which there was not so much movement.
Then again, a jobber is willing to take a much smaller “turn” on a transaction which he can depend upon closing in his own book at any moment, at probably only a fractional difference in price from that at which he opened it. A speculator wishes, for instance, to buy £10,000 Consols for the rise at 92½. At the time the transaction is done the jobber knows he can any moment square his book as far as that operation is concerned, within a trifle of the same figure, and he is accordingly satisfied with a small “turn.”
On the other hand, a stock that fluctuates violently may leave a buyer of it a loss of one or two per cent. before he has entered the operation in his book. The consequence is that a speculator proposing to buy for the rise £2,000 of a stock which is quoted in the markets at 35 to 38, will have probablyto pay 38 or near about that for it, for the simple reason that the jobber who sells knows that a widely-quoted stock is liable to unusual movements in both directions, and he protects himself accordingly, by declining to sell except at the higher figure, or to buy except at or below the lowest. The difference may even be wider than in this hypothetical case. The stock may recently have become very much depreciated in value, which carries with it the obvious suggestion that it may fall still further indefinitely, short of the bottom, for reasons which have so far contributed to depress it. Under such circumstances, unless the jobbers in the markets have limits at which to buy such a security, they probably will refuse to purchase from an outside seller, or from anybody, at any price, unless it come within the range of a fancy figure. With stocks, therefore, that are liable to sudden and considerable changes in value, the “turn” assumes dimensions in proportion, and speculation in such securities is correspondingly dangerous.