WHIMS AND FALLACIES IN SPECULATION
Traders and investors too often become stubbornly insistent on recouping their stock market losses in the same identical securities in which they lost their money. After having lost a large sum of money there is undoubtedlya special gratification in seeing it return by the same channel through which it escaped, but the enjoyment of this peculiar satisfaction is hardly commensurate with the risk that many people run in attaining it. In discussing this point some years ago with a friend who owned a thousand shares of stock in a bankrupt railway company which had cost him $50 a share, and was then selling at $15 a share, with a fifty to one chance that the road would go into receivership, I argued that while the loss of $35,000 was a large and bitter pill to swallow, the chances were that it would not be made smaller or more palatable by the inevitable receivership, and that he might as well salvage what he could from the wreckage of his investment. After all, there were dozens of reallygoodstocks that had declined more than $35 a share; stocks that would eventually “come back” when the market turned about; whereas with his stock there was a probable assessment of $10 to $15 a share staring him in the face, and after paying that, the stock was likely to sell at a figure less than the assessment to be paid, judging by past performance of the stocks ofother companies in receivership. The road was tremendously over-bonded, over-capitalized, encumbered with every conceivable sort of debt, and not earning its fixed charges. He vehemently declared,—“No, I’ll be damned if I’ll allow those thieves to do me out of that money; they shall pay it all back, and more with it!” He held tenaciously to his resolution, the road fell into receivership, and a few months later he could have bought the stock in the open market at two dollars a share less than he had paid in on the assessment.
A favorite and amusing pastime with a multitude of traders is to cajole themselves into believing that when some stock they own becomes increasingly active after a considerable advance, the renewed activity is a sure indication that “bankers and insiders” are accumulating it for a still further advance. It is well to remember, however, that bankers and insiders do most of their accumulating before the rise begins, and while the outside public is doing its accumulating the bankers and insiders are quietly supplying the stocks. It is quite clear that if the insiders pursued the same tactics as the public they would soonbe relegated to the ranks of the outsiders.
It is a common saying, even among veteran traders, that such and such a stock “is a good buy, but you must watch it closely.” Towatcha stock after buying it is about the most foolish thing one can do. To watch it go down is certainly no pleasure, and if it goes up it doesn’t need watching. The time to watch it is before buying. In order to limit one’s loss on a purchase it is a simple matter to put in an “open stop loss” order somewhere under the cost price; and no amount of diligent “watching” will prevent it from going down. On the other hand, to insure one’s profit, if the price goes up, nothing more is required than to put in a “G. T. C.” (good till cancelled), selling order at whatever figure above the cost price the purchaser is willing to accept as his profit.
There is probably no more popular fallacy among traders than the one which presupposes that great “pools” and combinations formed to manipulate certain stocks are either made up of officers and directors of the corporations concerned, or else that such pools base their operations upon valuable insideinformation from some head official. This may be true in rare instances; but generally speaking the directors and officers of the companies know nothing whatever of the pool operations in their stocks, and when they do know they usually frown on such schemes. Anyone who stops to consider knows that the market prices of the company’s securities are of far less concern to the officials than the matter of conducting their business operations at a profit. If the company’s earnings are good, it is clear that this fact will soon enough manifest itself in the demand for the securities, without any abortive or clandestine efforts; and if the earnings are poor, it would obviously be beneath the dignity of the officials to deceive the public through pool operations or pool affiliations. A more simple plan would be to utilize their “inside information” by quietly selling the stock.
I recall a particular instance, a few years ago, when there were some tremendous pool operations in the common stock of one of America’s largest industrial corporations, and after the stock had been bid up ten or adozen points it was reported that a “managing director” of the company had assured one of the pool members that it had been tacitly agreed among the directors to declare a fifty per cent. stock dividend at the next board meeting. The public instantly took the bit in its teeth, and inside of a week the stock advanced fifteen points more, which doubtless afforded the clique an auspicious occasion for unloading its holdings, bought at much lower figures. About that time I happened to be in New York, and while lunching one day with the chairman of the board of directors at his club he told me that the matter of a stock dividend had not even been discussed among the directors, and that in his opinion there was no likelihood of any change in the dividend policy for at least a year,—which proved to be true.