STOCK MARKET TRANSACTIONS APARTFROM GAMBLING
The thought of becoming a stock “gambler” was farthest from this man’s mind; for gambling in any form was contrary to his code of ethics. But buying and selling legitimate commodities could not be construed as gambling; therefore stocks and bonds, being legitimate commodities, could be bought and sold without doing violence to the most sensitive conscience. In order to gamble, one must “risk or stake something on an uncertain event;” which is popularly regarded as a vice, and is made legally wrong because it is said to be injurious to the public morals. It also is morally wrong to gamble, because if you win you deprive your fellow-being of something without giving any adequate return. Our friend contended that stocks bought at figures below their intrinsic valueare so sure to advance, that the transaction does not come within the given definition of the wordgamble; also that the same rule applies to stocks sold at prices far above their worth, no matter whether for long or short account. He reasoned that if he gained by selling a stock short, although someone was apt to be the loser, he had no means of knowing who that someone was, therefore he assumed no moral responsibility in prudently acquiring money in a businesslike way, even at the expense of some indefinite person who had been foolish enough to risk it. If the act of selling stocks which one does not own is regarded by some as being unethical in the strictest sense, it is at least sanctioned by general custom. All sorts of goods are sold for future delivery, even before they are manufactured; and our erstwhile merchant had often sold leather for forward delivery, while it was still in process of tanning; hence he had no scruples against selling stocks in anticipation of being able to buy and deliver them later.
It is generally conceded that the public is always arrayed on the “long” side (that is,the buying side) of the market; it is also universally admitted, at least by those who know, that the so-called “public” always bears the brunt of stock market losses; therefore our friend decided that he would act the part of wisdom and go “short” of the same number of shares that he had previously bought and sold,—the idea being that before selling his long stock he convinced himself that approximately the top prices had been reached, in which case the market would naturally react. But for some inexplicable reason it failed to run true to his expectations; that is, the probable course deducible from charts and precedents. Per contra, the prices continued stubbornly to rise. When he had lost all his profits he backed his judgment by his actions, and doubled his short sales; and at five points higher he doubled again, for a break was long overdue. Being short upwards of three thousand shares in a rapidly rising market is a tremendous mental strain, even for a seasoned trader; and naturally our novice became somewhat nervous. Some stock market wiseacre—one or more of which class are usually to be found loungingabout every brokerage office—consolingly remarked that while stocks have a certain fixed bottom, they have no top; which increased his anxiety.
After studying charts and various compilations of figures and facts about earnings and past market performances, he concluded that Bethlehem Steel, selling at $45 a share, was not worth half that price; also that Studebaker at $35 was much too high. After an extended inquiry into the past and prospective earnings of these two companies he sold short a thousand shares of each; but instead of reacting they steadily maintained their upward course with the rest of the list. His broker called for more margin, and he put up another hundred thousand in bonds. He was advised to “cover” and go “long,” but he stood firmly by his convictions—and the charts.
“That’s why the public all lose,” he declared; “they get ‘cold feet’ and shift positions at the wrong time.” From a personal friend who was a director of the new General Motors Corporation he got an “inside tip” that that stock, selling at $82, was too high,so he added a few hundred shares of it to his short account. Meantime the country’s commerce and the entire group of stocks, moved forward with the steady even tread of an army on parade.