PSYCHOLOGY 
 
 OF THE 
 
 STOCK MARKET 
 
 By G. C. Selden 
 
 Author of " Trade Cycles," " What Makes the Market ? ' 
 Etc 
 
 TICKER PUBLISHING COMPANY 
 
 2 RECTOR STREET 
 NEW YORK 
 
PREFACE 
 
 THIS book is based upon the belief that the 
 movements of prices on the exchanges 
 are dependent to a very large degree on the 
 mental attitude of the investing and trading 
 public. It is the result of years of study and 
 experience as fellow at Columbia University, 
 news writer, statistician, on the editorial staff 
 of THE MAGAZINE OF WALL STREET, etc. 
 
 The book is intended chiefly as a practical 
 help to that considerable part of the com- 
 munity which is interested, directly or in- 
 directly, in the markets ; but it is hoped that it 
 may also have some scientific value as a pre- 
 liminary discussion in a new field, where op- 
 portunities for further research seem almost 
 unlimited. G. C. SELDEN. 
 
 New York, May 28, 1912. 
 
 ^59783 
 
Copyright 1912 
 Ticker Publishing Company 
 
CONTENTS. 
 
 I. The Speculative Cycle .......... 9 
 
 II. Inverted Reasoning and Its Con- 
 
 sequences ................. 27 
 
 III. "They" ....................... 39 
 
 IV. Confusing the Present with the 
 
 Future Discounting ........ 55 
 
 fS 
 
 V. Confusing the Personal with the 
 
 General .................... 71 
 
 VI. The Panic and the Boom ...... 87 
 
 VII. The Psychology of Scale Orders 101 
 
 VIII. The Mental Attitude of the 
 
 Individual . . 109 ^ 
 
I The Speculative Cycle 
 
 MOST experienced professional 
 traders in the stock market will 
 readily admit that the minor 
 fluctuations, amounting to perhaps five 
 or ten dollars a share in the active 
 speculative issues, are chiefly psycho- 
 logical. They result from varying atti- 
 tudes of the public mind, or, more 
 strictly, from the mental attitudes of 
 those persons who are interested in the 
 market at the time. 
 
 Such flucluations may be, and often 
 are, based on "fundamental" condi- 
 tions that is, on real changes in the 
 dividend prospects of the stocks af- 
 fected or on variations in the earning 
 power of the corporations represented 
 and again they may not. The broad 
 movements of the market, covering 
 periods of months or even years, are 
 always the result of general financial 
 
10 THE PSYCHOLOGY OF 
 
 conditions; but the smaller intermedi- 
 ate fluctuations represent changes in 
 the state of the public mind, which 
 may or may not coincide with altera- 
 tions in basic factors. 
 
 To bring out clearly the degree to 
 which psychology enters into the stock 
 market problem from day to day, it is 
 only necessary to reproduce a conver- 
 sation between professional traders 
 such as may be heard almost any day 
 in New street or in the neighboring 
 cafes. 
 
 "Well, what do you know?" says one 
 trader to the other. 
 
 "Just covered my Steel," is the reply. 
 "Too much company. Everybody 
 seems to be short." 
 
 "Everybody I've seen thinks just as 
 you do. Each one has covered be- 
 cause he thinks everybody else is short 
 still the market doesn't rally much. 
 I don't believe there's much short in- 
 terest left, and if that's the case we 
 shall get another break." 
 
 "Yes, that's what they all say and 
 
THE STOCK MARKET. 11 
 
 they've all sold short again because 
 they think everybody else has covered. 
 I believe there's just as much short 
 interest now as there was before." 
 
 It is evident that this series of inver- 
 sions might be continued indefinitely. 
 These alert mental acrobats are doing 
 a succession of flip-flops, each one of 
 which leads up logically to the next, 
 without ever arriving at a final stop- 
 ping-place. 
 
 The main point of their argument is 
 that the state of mind of a man short 
 of the market is radically different from 
 the state of mind of one who is long. 
 Their whole study, in such a conversa- 
 tion, is the mental attitude of those in- 
 terested in the market. If a majority 
 of the volatile class of in-and-out trad- 
 ers are long, many of them will hasten 
 to sell on any sign of weakness and 
 a decline will result. If the majority 
 are short, they will buy on any develop- 
 ment of strength and an advance may 
 be expected. 
 
 The psychological aspects of specula- 
 
12 THE PSYCHOLOGY OF 
 
 tion may be considered from two points 
 of view, equally important. One ques- 
 tion is, What effect do varying mental 
 attitudes of the public have upon the 
 course of prices? How is the character 
 of the market influenced by psycholog- 
 ical conditions? 
 
 A second consideration is, How does 
 the mental attitude of the individual 
 trader affect his chances of success? 
 To what extent, and how, can he over- 
 come the obstacles placed in his path- 
 way by his own hopes and fears, his 
 timidities and his obstinacies? 
 
 These two points of view are so 
 closely involved and intermingled that 
 it is almost impossible to consider 
 cither one alone. It will be necessary 
 to take up first the subject of specu- 
 lative psychology as a whole, and later 
 to attempt to draw conclusions both 
 as to its effects upon the market and 
 its influence upon the fortunes of the 
 individual trader. 
 
 As a convenient starting point it may 
 be well to trace briefly the history of 
 
THE STOCK MARKET. 13 
 
 the typical speculative cycle, which 
 runs its course over and over, year after 
 year, with infinite slight variations but 
 with substantial similarity, on every 
 stock exchange and in every specula- 
 tive market of the world and presum- 
 ably will continue to do so as long as 
 prices are fixed by the competition of 
 buyers and sellers, and as long as hu- 
 man beings seek a profit and fear a loss.* 
 Beginning with a condition of dull- 
 ness and inactivity, with small fluctu- 
 ations and very slight public interest, 
 prices begin to rise, at first almost im- 
 perceptibly. No special reason appears 
 for the advance, and it is generally 
 thought to be merely temporary, due to 
 small professional operations. There 
 is, of course, some short interest in "the 
 market, mostly, at this time, of the 
 character sometimes called a "sleeping" 
 
 *The writer discussed this subject rather fully in 
 the Quarterly Journal of Economics, Vol. XVI, No. 2. 
 The article will also be found extensively summarized 
 and quoted in Vol. VII of "Modern Business," edited 
 by Joseph French Johnson, Dean of New York Uni- 
 versity School of Commerce. 
 
14 THE PSYCHOLOGY OF 
 
 short interest. An active speculative 
 stock is never entirely free from shorts. 
 
 As there is so little public specula- 
 tion at this period in the cycle, there 
 are but few who are willing to sell out 
 on so small an advance, hence prices 
 are not met by any large volume of 
 profit-taking. The smaller profes- 
 sionals take the short side for a turn, 
 with the idea that trifling fluctuations 
 are the best that can be hoped for at 
 the moment and must be taken advan- 
 tage of if any profits are to be secured. 
 This class of selling brings prices back 
 almost to their former dead level. 
 
 Soon another unostentatious upward 
 movement begins, carrying prices a 
 trifle higher than the first. A few 
 shrewd traders take the long side, but 
 the public is still unmoved and the 
 sleeping short interest most of it orig- 
 inally put out at much higher figures 
 still refuses to waken. 
 
 Gradually prices harden further and 
 finally advance somewhat sharply. A 
 few of the more timid shorts cover, per- 
 
THE STOCK MARKET. 15 
 
 haps to save a part of their profits or 
 to prevent their trades from running 
 into a loss. The fact that a bull turn 
 is coming now penetrates through an- 
 other layer of intellectual density and 
 another wave of traders take the long 
 side. The public notes the advance and 
 begins to think some further upturn 
 is possible, but that there will be plenty 
 of opportunities to buy on substantial 
 reactions. 
 
 Strangely enough, these reactions, ex- 
 cept of the most trifling character, do 
 not appear. Waiting buyers do not get 
 a satisfactory chance to take hold. 
 Prices begin to move up faster. There 
 is a halt from time to time, but when 
 a real reaction finally comes the market 
 looks "too weak to buy," and when it 
 starts up again it often does so with a 
 sudden leap that leaves would-be pur- 
 chasers far in the rear. 
 
 At length the more stubborn bears 
 become alarmed and begin to cover in 
 large volume. The market "boils," and 
 to the short who is watching the tape, 
 
16 THE PSYCHOLOGY OF 
 
 seems likely to shoot through the ceil- 
 ing at almost any moment. However 
 firm may be his bearish convictions, his 
 nervous system eventually gives out un- 
 der this continual pounding, and he 
 covers everything "at the market" with 
 a sigh of relief that his losses are no 
 greater. 
 
 About this time the outside public 
 begins to reach the conclusion that the 
 market is "too strong to react much," 
 and that the only thing to do is to "buy 
 'em anywhere." From this source 
 comes another wave of buying, which 
 soon carries prices to new high levels, 
 and purchasers congratulate themselves 
 on their quick and easy profits. 
 
 For every buyer there must be a 
 seller or, more accurately, for every 
 one hundred shares bought one hundred 
 shares must be sold, as the actual num- 
 ber of persons buying at this stage is 
 likely to be much greater than the num- 
 ber of persons selling. Early in the 
 advance the supply of stocks is small 
 and comes from scattered sources, but 
 
THE STOCK MARKET. 17 
 
 as prices rise, more and more holders 
 become satisfied with their profits and 
 willing to sell. The bears, also, begin 
 to fight the advance by by selling short 
 on every quick rise. A stubborn pro- 
 fessional bear will often be forced to 
 cover again and again, with a small 
 loss each time, before he finally locates 
 the top and secures a liberal profit on 
 the ensuing decline. 
 
 Those selling at this stage are not, 
 as a rule, the largest holders. The larg- 
 est holders are usually those whose 
 judgment is sound enough, or whose 
 connections are good enough, so that 
 they have made a good deal of money; 
 and neither a sound judgment nor the 
 best advisers are likely to favor selling 
 so early in the advance, when much 
 larger profits can be secured by simply 
 holding on. 
 
 The height to which prices can now 
 be carried depends on the underlying 
 conditions. If money is easy and gen- 
 eral business prosperous a prolonged 
 bull movement may result, while 
 
18 THE PSYCHOLOGY OF 
 
 strained banking resources or depressed 
 trade will set a definite limit to the 
 possible advance. If conditions are 
 bearish, the driving of the biggest 
 shorts to cover will practically end the 
 rise; but in a genuine bull market the 
 advance will continue until checked by 
 sales of stocks held for investment, 
 which come upon the market only 
 when prices are believed to be unduly 
 high. 
 
 In a sense, the market is always a 
 contest between investors and specula- 
 tors. The real investor, looking chiefly 
 to interest return, but by no means un- 
 willing to make a profit by buying low 
 and selling high, is ready, perhaps, to 
 buy his favorite stock at a price which 
 will yield him six per cent, on his in- 
 vestment, or to sell at a price yielding 
 only four per cent. The speculator 
 cares nothing about interest return. 
 He wants to buy before prices go up 
 and to sell short before they go down. 
 He would as soon buy at the top of a 
 
THE STOCK MARKET. 19 
 
 big rise at any other time, provided prices 
 are going still higher. 
 
 As the market advances, therefore, 
 one investor after another sees his limit 
 reached and his stock sold. Thus the 
 volume of stocks to be carried or tossed 
 from hand to hand by bullish specula- 
 tors is constantly rolling up like a 
 snowball. On the ordinary intermedi- 
 ate fluctuations, covering five to 
 twenty dollars a share, these sales by 
 investors are small compared with the 
 speculative business. In one hundred 
 shares of a stock selling at 150, the 
 investor has $15,000; but with this sum 
 the speculator can easily carry ten 
 times that number of shares. 
 
 The reason why sales by investors^ 
 are so effective is not because of the 
 actual amount of stock thrown on the 
 market, but because this stock is a per- 
 manent load, which will not be got 
 rid of again until prices have suffered 
 a severe decline. What the speculator 
 sells he or some other trader may buy 
 back tomorrow. 
 
20 THE PSYCHOLOGY "OF 
 
 The time comes when everybody 
 seems to be buying. Prices become 
 confused. One stock leaps upward in 
 a way to strike terror to the heart of 
 the last surviving short. Another ap- 
 pears almost equally strong, but slips 
 back unobtrusively when nobody is 
 looking, like the frog jumping out of 
 the well in the arithmetic of our boy- 
 hood. Still another churns violently in 
 one place, like a side-wheeler stuck on 
 a sand-bar. 
 
 Then the market gives a sudden 
 lurch downward, as though in danger 
 of spilling out its unwieldy contents. 
 This is hailed as a "healthy reaction," 
 though it is a mystery whom it can be 
 healthy for, unless it is the shorts. 
 Prices recover again, with everybody 
 happy except a few disgruntled bears, 
 who are rightly regarded with con- 
 temptuous amusement. 
 
 Curiously, however, there seems to 
 be stock enough for all comers, and 
 the few cranks who have time to 
 bother with such things notice that 
 
THE STOCK MARKET. 21 
 
 the general average of prices is now 
 rising very slowly, if at all. The larg- 
 est speculative holders of stocks, find- 
 ing a market big enough to absorb 
 their sales,, are letting go. And there 
 are always stocks enough to go around. 
 Our big capitalists are seldom entirely 
 out of stocks. They merely have more 
 stocks when prices are low and fewer 
 when prices are high. Moreover, long 
 before there is any danger of the sup- 
 ply running out, plenty of new issues 
 are created. 
 
 When there is a general public inter- 
 est in the stock market, an immense 
 amount of realizing will often be ab- 
 sorbed within three or four days or a 
 week, after which the deluge; but if 
 speculation is narrow, prices may re- 
 main around top figures for weeks or 
 months, while big holdings are fed out, 
 a few hundred shares here and a few 
 hundred there, and even then a bal- 
 ance may be left to be thrown over on 
 the ensuing decline at whatever prices 
 can be obtained. Great speculative 
 
22 THE PSYCHOLOGY OF 
 
 leaders are far from infallible. They 
 have often sold out too soon and later 
 have seen the market run away to un- 
 expected heights, or have held on too 
 long and have suffered severe losses 
 before they could get out. 
 
 In this selling the bull leaders get a 
 good deal of undesired help from the 
 bears. However wary the bulls may 
 be in concealing their sales, their machi- 
 nations will be discovered by watch- 
 ful professionals and shrewd chart stu- 
 dents, and a considerable sprinkling of 
 short sales will be put out within a 
 few points of the top. This is one of 
 > the reasons why the long swings in 
 active speculative stocks are smaller 
 in proportion to price than in inactive 
 specialties of a similar character 
 contrary to the generally received im- 
 pression. It is rare that any consider- 
 able short interest exists in the inactive 
 stocks. 
 
 Once the top-heavy load is over- 
 turned, the decline is usually more 
 rapid than the previous advance. The 
 
THE STOCK MARKET. 23 
 
 floating supply, now greatly increased, 
 is tossed about from one speculator to 
 another at lower and lower prices. 
 From time to time stocks become tem- 
 porarily lodged in stubborn hands, so 
 that part of the shorts take fright and 
 cover, causing a sharp upturn; but so 
 long as the load of stocks is still on 
 the market the general course of prices 
 must be downward. 
 
 Until investors or big speculative 
 capitalists again come into the market^ 
 the load of stocks to be carried by or- 
 dinary speculative bulls increases al- 
 most continually. There is no lessen- 
 ing of the floating supply of stock cer- 
 tificates in the Street, and there is a 
 gradual increase in the short interest; 
 and of course the bulls have to carry 
 these short sales as well as the actual 
 certificates, since for every seller there 
 must be a buyer, whether the sale be 
 made by a short or a long. Shorts 
 cover again and again on the sharp 
 breaks, but in most cases they put out 
 their lines again, either higher or lower, 
 
24 THE PSYCHOLOGY OF 
 
 as opportunity offers. On the average, 
 the short interest is largest at low 
 prices, though there are likely to be 
 periods during the decline when it will 
 be larger than at the final bottom, 
 where buying by shorts often helps to 
 avert panicky conditions. 
 
 The length of this decline, like the 
 extent of the preceding advance, de- 
 pends on fundamental conditions; for 
 both investors and speculative capital- 
 ists will come into the market sooner 
 if all conditions are favorable than they 
 will in a stringent money market or 
 w r hen the future prospects of business 
 are unsatisfactory. As a rule, buyers 
 do not appear in force until a "bargain 
 day" appears. This is when, in its 
 downward course, the heavy load of 
 stocks strikes an area honeycombed 
 with stop loss orders. Floor traders 
 seize the opportunity to put out short 
 lines and a general collapse results. 
 
 Here are plenty of stocks to be had 
 cheap, and shrewd operators large 
 and small, but mostly large or on the 
 
THE STOCK MARKET. 25 
 
 way to become so are busy picking 
 them up. The fixed limits of many in- 
 vestors are also reached by the sharp 
 break, and their purchases disappear, 
 to be seen in the Street no more until 
 the next bull turn. 
 
 Many shorts cover on such a break, 
 but not all. The sequel to the "bar- 
 gain day" is a big short interest which 
 has overstayed its market, and a quick 
 rally follows ; but when the more 
 urgent shorts get relief, prices sag 
 again and fall into that condition of 
 lethargy from which this consideration 
 of the speculative cycle started. 
 
 The movements described are sub- 
 stantially uniform, whether the cycle 
 be one covering a week, a month, or a 
 year. The big cycle includes many 
 intermediate movements, and these 
 movements in turn contain smaller 
 swings. Investors do not participate to 
 any extent in the small swings, but other- 
 wise the forces involved in a three-point 
 turn up and down are substantially the 
 same as those which appear in a thirty- 
 
26 PSYCHOLOGY OF STOCKS. 
 
 point cycle, though not so easy to iden- 
 tify. 
 
 The fact will at once be recognized 
 that the above description is, in es- 
 sence, a story of human hopes and 
 fears ; of a mental attitude, on the part 
 of those interested, resulting from their 
 own position in the market, rather than 
 from any deliberate judgment of con- 
 ditions ; of an unwarranted projection 
 by the public imagination of a perceived 
 present into an unknown though not 
 wholly unknowable future. 
 
 Laying aside for the present the in- 
 fluence of fundamental conditions on 
 prices, it is our task to trace out both 
 the causes and the effects of these 
 psychological elements in speculation. 
 
II Inverted Reasoning and its 
 Consequences 
 
 IT is hard for the average man to op- 
 pose what appears to be the gen- 
 eral drift of public opinion. In the 
 stock market this is perhaps harder 
 than elsewhere ; for we all realize that 
 the prices of stocks must, in the long 
 run, be controlled by public opinion. 
 The point we fail to remember is that 
 public opinion in a speculative market 
 is measured in dollars, not in popula- 
 tion. One man controlling one million 
 dollars has double the weight of five 
 hundred men with one thousand dol- 
 lars each. Dollars are the horse-power 
 of the markets the mere number of 
 men does not signify. 
 
 This is why the great body of opinion 
 appears to be bullish at the top and 
 bearish at the bottom. The multitude 
 of small traders must be, as a plain 
 
28 THE PSYCHOLOGY OF 
 
 necessity, long when prices are at the 
 top, and short or out of the market at 
 the bottom. The very fact that they 
 are long at the top shows that they 
 have been supplied with stocks from 
 some source. 
 
 Again, the man with one million dol- 
 lars is a silent individual. The time 
 when it was necessary for him to talk 
 is past his money now does the talk- 
 ing. But the one thousand men who 
 have one thousand dollars each are 
 conversational, fluent, verbose to the 
 last degree; and among these smaller 
 traders are the writers the newspaper 
 and news bureau men, and the manu- 
 facturers of gossip for brokerage 
 houses. 
 
 It will be observed that the above 
 course of reasoning leads us to the con- 
 clusion that most of those who write 
 and talk about the market are more 
 likely to be wrong than right, at least 
 so far as speculative fluctuations are 
 concerned. This is not complimentary 
 to the "moulders of public opinion/' 
 
THE STOCK MARKET. 29 
 
 but most seasoned newspaper readers 
 will agree that it is true. The press 
 reflects, in a general way, the thoughts 
 of the multitude, and in the stock mar- 
 ket the multitude is necessarily, as a 
 logical deduction from the facts of the 
 case, likely to be bullish at high prices 
 and bearish at low. 
 
 It has often been remarked that the 
 average man is an optimist regarding 
 his own enterprises and a pessimist re- 
 garding those of others. Certainly this 
 is true of the professional trader in 
 stocks. As a result of the reasoning 
 outlined above, he comes habitually to 
 expect that nearly every one else will 
 be wrong, but is, as a rule, confident 
 that his own analysis of the situation 
 will prove correct. He values the opin- 
 ions of a few persons whom he be- 
 lieves to be generally successful ; but 
 aside from these few, the greater the 
 number of the bullish opinions he 
 hears, the more doubtful he becomes 
 about the wisdom of following the bull 
 side. 
 
30 THE PSYCHOLOGY OF 
 
 This apparent contrariness of the 
 market, although easily understood 
 when its causes are analyzed, breeds 
 in professional traders a peculiar sort 
 of skepticism leads them always to 
 distrust the obvious and to apply a 
 kind of inverted reasoning to almost 
 all stock market problems. Often, in 
 the minds of traders who are not natu- 
 rally logical, this inverted reasoning 
 assumes the most erratic and gro- 
 tesque forms, and it accounts for many 
 apparently absurd fluctuations in prices 
 which are commonly charged to ma- 
 nipulation. 
 
 For example, a trader starts with 
 this assumption : The market has had 
 a good advance ; all the small traders 
 are bullish; somebody must have sold 
 them the stock which they are carry- 
 ing; hence the big capitalists are prob- 
 ably sold out or short and ready for a 
 reaction or perhaps for a bear market. 
 Then if a strong item of bullish news 
 comes out one, let us say, that really 
 makes an important change in the 
 
THE STOCK MARKET. 31 
 
 situation he says, "Ah, so this is what 
 they have been bulling the market on ! 
 It has been discounted by the previous 
 rise." Or he may say, "They are put- 
 ting out this bull news to sell stocks 
 on." He proceeds to sell out any long 
 stocks he may have or perhaps to sell 
 short. 
 
 His reasoning may be correct or it 
 may not; but at any rate his selling 
 and that of others who reason in a 
 similar way, is likely to produce at 
 least a temporary decline on the an- 
 nouncement of the good news. This 
 decline looks absurd to the outsider 
 and he falls back on the old explana- 
 tion, "All manipulation." 
 
 The same principle is often carried 
 further. You will find professional 
 traders reasoning that favorable fig- 
 ures on the steel industry, for example, 
 have been concocted to enable insiders 
 to sell their Steel ; or that gloomy re- 
 ports are put in circulation to facilitate 
 accumulation. Hence they may act in 
 direct opposition to the news and carry 
 
32 THE PSYCHOLOGY OF 
 
 the market with them, for the time at 
 least. 
 
 The less the trader knows about the 
 fundamentals. of the financial situation 
 the more likely he is to be led astray 
 in conclusions of this character. If he 
 has confidence in the general strength 
 of conditions he may be ready to ac- 
 cept as genuine and natural, a piece of 
 news which he would otherwise receive 
 with cynical skepticism and use as a 
 basis for short sales. If he knows that 
 fundamental conditions are unsound, 
 he will not be so 'likely to interpret bad 
 news as issued to assist in accumula- 
 tion of stocks. 
 
 The same reasoning is applied to 
 large purchases through brokers kno,wn 
 to be associated with capitalists. In fact, 
 in this case we often hear a double in- 
 version, as it were. Such buying may 
 impress the observer in three ways : 
 
 1. The "rank outsider" takes it at 
 face value, as bullish. 
 
 2. A more experienced trader may 
 say, "If they really wished to get the 
 
THE STOCK MARKET. 33 
 
 stocks they would not buy through 
 their own brokers, but would endeavor 
 to conceal their buying by scattering 
 it among other houses." 
 
 3. A still more suspicious profes- 
 sional may turn another mental somer- 
 sault and say, 'They are buying 
 through their own brokers so as to 
 throw us off the scent and make us 
 think someone else is using their bro- 
 kers as a blind." By this double somer- 
 sault such a trader arrives at the same 
 conclusion as the outsider. 
 
 The reasoning of traders becomes 
 even more complicated when large 
 buying or selling is done openly by a 
 big professional who is known to trade 
 in and out for small profits. If he buys 
 50,000 shares, other traders are quite 
 willing to sell to him and their opinion 
 of the market is little influenced, 
 simply because they know he may sell 
 50,000 the next day or even the next 
 hour. For this reason great capitalists 
 sometimes buy or sell through such big 
 professional traders in order to execute 
 
34 THE PSYCHOLOGY OF 
 
 their orders easily and without arous- 
 ing suspicion. Hence the play of subtle 
 intellects around big trading of this 
 kind often becomes very elaborate. 
 
 It is to be noticed that this inverted 
 reasoning is useful chiefly at the top 
 or bottom of a movement, when dis- 
 tribution or accumulation is taking 
 place on a large scale. A market which 
 repeatedly refuses to respond to good 
 news after a considerable advance is 
 likely to be "full of stocks." Likewise 
 a market which will not go down on 
 bad news is usually "bare of stocks." 
 
 Between the extremes will be found 
 long stretches in which capitalists have 
 very little cause to conceal their posi- 
 tion. Having accumulated their lines 
 as low as possible, they are then willing 
 to be known as the leaders of the up- 
 ward movement and have every reason 
 to be perfectly open in their buying. 
 This condition continues until they are 
 ready to sell. Likewise, having sold as 
 much as they desire, they have no 
 reason to conceal their position further. 
 
-THE STOCK MARKET. 35 
 
 even though a subsequent decline may 
 run for months or a year. 
 
 It is during a long upward move- 
 ment that the "lamb" makes money, 
 because he accepts facts as facts, while / 
 the professional trader is often found 
 fighting the advance and losing heavily 
 because of his over-development of 
 cynicism and suspicion. 
 
 The successful trader eventually 
 learns when to invert his natural men- 
 tal processes and when to leave them 
 in their usual position. Often he 
 develops a sort of instinct which could 
 scarcely be reduced to cold print. But 
 in the hands of the tyro this form of 
 reasoning is exceedingly dangerous, be- 
 cause it permits of putting an alternate 
 construction on any event. Bull news 
 either (1) is significant of a rising 
 trend of prices, or (2) indicates that 
 "they" are trying to make a market 
 to sell on. Bad news may indicate 
 either a genuinely bearish situation or 
 a desire to accumulate stocks at low 
 prices. 
 
36 THE PSYCHOLOGY OF 
 
 The inexperienced operator is there- 
 fore left very much at sea. He is play- 
 ing with the professional's edged tools 
 and is likely to cut himself. Of what 
 use is it for him to try to apply his 
 reason to stock market conditions when 
 every event may be doubly interpreted? 
 
 Indeed, it is doubtful if the profes- 
 sional's distrust of the obvious is of 
 much benefit to him in the long run. 
 Most of us have met those deplorable 
 mental wrecks, often found among the 
 "chairwarmers" in brokers' offices, 
 whose thinking machinery seems to 
 have become permanently demoralized 
 as a result of continued acrobatics. 
 They are always seeking an "ulterior 
 motive" in everything. They credit 
 or debit Morgan and Rockefeller with 
 the smallest and meanest trickery and 
 ascribe to them the most artful duplici- 
 ty in matters which those "high finan- 
 ciers" wouldn't stoop to notice. The 
 continual reversal of the mental engine 
 sometimes deranges its mechanism. 
 
 Probably no better general rule can 
 
THE STOCK MARKET. 37 
 
 be laid down than the brief one, "Stick 
 to common sense/' Maintain a bal- 
 anced, receptive mind and avoid ab- 
 struse deductions. A few further sug- 
 gestions may, however, be offered : 
 
 If you already have a position, in 
 the market, do not attempt to bolster 
 up your failing faith by resorting to 
 intellectual subtleties in the interpre- 
 tation of obvious facts. If you are 
 long or short of the market, you are 
 not an unprejudiced judge, and you will 
 be greatly tempted to put such an in- 
 terpretation upon current events as will 
 coincide with your preconceived opin- 
 ion. It is hardly too much to say that 
 this is the greatest obstacle to success. 
 The least you can do is to avoid in- 
 verted reasoning in support of your 
 own position. 
 
 After a prolonged advance, do not 
 call inverted reasoning to your aid in 
 order to prove that prices are going 
 still higher; likewise after a big break 
 do not let your bearish deductions be- 
 come too complicated. Be suspicious 
 
38 PSYCHOLOGY OF STOCKS. 
 
 of bull news at high prices, and of bear 
 news at low prices. 
 
 Bear in mind that an item of news 
 usually causes but one considerable 
 movement of prices. If the movement 
 takes place before the news comes out, 
 as a result of rumors and expectations, 
 then it is not likely to be repeated after 
 the announcement is made; but if the 
 movement of prices has not preceded, 
 then the news contributes to the gen- 
 eral strength or weakness of the situ- 
 ation and a movement of prices may 
 follow. 
 
Ill "They " 
 
 IF a man entirely unfamiliar with the 
 stock market should spend several 
 days around the Exchange listen- 
 ing to the conversation of all sorts of 
 traders and investors, in order to pick 
 up information about the causes of price 
 movements, the probability is that the 
 most pressing question in his mind at the 
 end of that time would be "Who are 
 They?'" 
 
 Everywhere he went he would 
 hear about Them. In the customers' 
 rooms of the fractional lot houses 
 he would find young men trading in 
 ten shares and arguing learnedly as 
 to what They were to do next. Tape 
 readers experts and tyros alike 
 would tell him that They were accumu- 
 lating Steel, or distributing Reading. 
 Floor traders and members of the Ex- 
 change would whisper that they were 
 
40 THE PSYCHOLOGY OF 
 
 told They were going to put the market 
 up, or down, as the case might be. Even 
 sedate investors might inform him that, 
 although the situation was bearish, un- 
 doubtedly They would have to put the 
 market temporarily higher in order to 
 unload Their stocks. 
 
 This "They" theory of the market is 
 quite as prevalent among successful 
 traders as among beginners probably 
 more so. There may be room for argu- 
 ment as to why this is so, but as to the 
 fact itself there is no doubt. Whether 
 They are a myth or a definite reality, 
 many persons are making money by 
 studying the market from this point of 
 view. 
 
 If you were to go around Wall street 
 and ask various classes of traders who 
 They are, you would get nearly as many 
 different answers as the number of peo- 
 ple interviewed. One would say, "The 
 house of Morgan"; another, "Standard 
 Oil and associated interests" which is 
 pretty broad, when you stop to think of 
 it ; another, "The big banking interests" ; 
 
THE STOCK MARKET. 41 
 
 still another, "Professional traders on the 
 floor"; a fifth, "Pools in the various fa- 
 vorite stocks, which act more or less in 
 concert" ; a sixth might say, "Shrewd and 
 successful speculators, whoever and 
 wherever they are" ; while to the seventh, 
 They may typify merely active traders 
 as a whole, whom he conceives to make 
 prices by falling over each other to buy 
 or to sell. 
 
 Indeed, one writer of no small attain- 
 ments as a student of market conditions 
 believes that the entire phenomena of the 
 New York stock market are under the 
 control of some one individual, who is 
 presumably, in some way or other, the 
 representative of great associated inter- 
 ests. 
 
 It seems obviously impossible to trace 
 to its source, tag and identify any sort 
 of permanent controlling power. The 
 stock markets of the world move pretty 
 much together in the broad cyclical 
 swings, so that such a power would have 
 to consist of a world-wide association of 
 great financial interests, controlling all of 
 
42 THE PSYCHOLOGY OF 
 
 the principal security markets. The av- 
 erage observer will find it difficult to 
 masticate and swallow this proposition. 
 
 The effort to reduce the science of 
 speculation and investment to an impos- 
 sible definiteness or an ideal simplicity 
 is, I believe, responsible for many fail- 
 ures. A. S. Hardy, the diplomat, who was 
 formerly a professor of mathematics and 
 wrote books on quaternions, differential 
 calculus, etc., once remarked that the 
 study of mathematics is very poor mental 
 discipline, because it does not cultivate 
 the judgment. Given fixed and certain 
 premises, your mathematician will follow 
 them out to a correct conclusion; but in 
 practical affairs the whole difficulty lies 
 in selecting your premises. 
 
 So the market student of a mathemat- 
 ical turn of mind is always seeking a 
 rule or a set of rules a "sure thing" as 
 traders put it. He would not seek such 
 rules for succeeding in the grocery busi- 
 ness or the lumber business; he would, 
 on the contrary, analyze each situation as 
 it arose and act accordingly. The stock 
 
THE STOCK MARKET. 43 
 
 market presents itself to my mind as a 
 purely practical proposition. Scientific 
 methods may be applied to any line of 
 business, from stocks to chickens, but 
 this is a very different thing from trying 
 to reduce the fluctuations of the stock 
 market to a basis of mathematical cer- 
 tainty. 
 
 In discussing the identity of Them, 
 therefore, we must be content to take 
 obvious facts as we find them without 
 attempting to spin fine theories. 
 
 There are three senses in which this 
 idea of 'Them" has some foundation in 
 fact. First, "They" may be and often 
 are roughly conceived of as the floor 
 traders on the Stock Exchange who are 
 directly concerned in making quotations, 
 pools formed to control certain stocks, or 
 individual manipulators. 
 
 Floor traders exercise an important in- 
 fluence on the immediate movement of 
 prices. Suppose, for example, they ob- 
 serve that offerings of Reading are very 
 light. Declines do not induce liquidation 
 and only small offerings of stock are met 
 
44 THE PSYCHOLOGY OF 
 
 on advances. They begin to feel that, in 
 the absence of unexpected cataclysms, 
 Reading will not decline much. The nat- 
 ural thing for them to do is to begin buy- 
 ing Reading on all soft spots. Whenever 
 a few hundred shares are offered at a 
 bargain, floor traders snap up the stock. 
 As a result of this "bailing out" of the 
 market, Reading becomes scarcer still, 
 and traders, being now long, become 
 more bullish. They begin to "mark up 
 prices." This is not difficult, since they 
 are, for the time being, practically unani- 
 mous in a desire for higher prices. Sup- 
 pose the market is 161 J^j bid, offered at 
 161%. They find that only 100 shares 
 are for sale at J4, and 200 are offered 
 at 3/g. As to how much stock may be 
 awaiting bids at yZ or higher, they can- 
 not be sure, but can generally make a 
 shrewd guess. One or more traders take 
 these offerings, of perhaps 500 shares, 
 and make the market 3/2 bid. The other 
 floor traders are not willing to sell at 
 this trifling profit, and a wait ensues to 
 see whether any outside orders are at- 
 
THE STOCK-MARKET. 45 
 
 traded by the movement of the price, 
 and if so, whether they are buying or 
 selling orders. If a few buying orders 
 come in, they are rilled, perhaps at ^ 
 and 24- If selling appears, the floor 
 traders retire in good order, take the 
 offerings at lower prices, and try it again 
 the next day or perhaps the next hour. 
 Eventually, by seizing every favorable 
 opportunity, they engineer an upward 
 move of perhaps two or three points 
 without taking any more stock than they 
 want. 
 
 If such a movement attracts a follow- 
 ing, it may easily run ten points without 
 any real change in the prospects of the 
 Reading road though the prospects of 
 the road may have had something to do 
 with making the stock scarce before the 
 movement started. On the other hand, 
 if large offerings of stock are en- 
 countered at the advance, the boomlet is 
 ignominiously squelched and the floor 
 traders make trifling profits or losses. 
 
 Pools are not so common as most out- 
 siders believe. There are many difficul- 
 
46 THE PSYCHOLOGY OF 
 
 ties and complications to be overcome be- 
 fore a pool can be formed, held together, 
 and operated successfully, as we had am- 
 ple opportunity to observe not long ago 
 in the case of Hocking Coal & Iron. 
 But if a definite pool exists in any stock, 
 its operations are practically a reproduc- 
 tion, on a larger scale and under a bind- 
 ing agreement, of the methods employed 
 by floor traders over a smaller range and 
 in a mere loose and voluntary associa- 
 tion resulting from their common inter- 
 ests. And the individual manipulator is 
 only a pool consisting of one person. 
 
 Second, many conceive "Them" as an as- 
 sociation of powerful capitalists who are 
 running a campaign in all the important 
 speculative stocks simultaneously. It is 
 safe to say that no such permanent and 
 united association exists, though it would 
 be hard to prove such a statement. But 
 there have been many times when a sin- 
 gle great interest was practically in con- 
 trol of the market for a time, other in- 
 terests being content to look on, or to 
 
THE STOCK MARKET. 47 
 
 participate in a small way, or to await a 
 favorable chance to take the other side. 
 
 The "Standard Oil crowd," the "Gates 
 crowd/' the "Morgan interests/' and 
 Harriman and his associates, will at 
 once occur to the reader as having been, 
 at various times in the past, in sole con- 
 trol of an important general campaign. 
 At present the great interests are gen- 
 erally classified into three divisions 
 Morgan, Standard Oil, and Kuhn-Loeb. 
 
 A definite agreement among such in- 
 terests as these would be impossible, ex- 
 cept for limited and temporary purposes. 
 This is perhaps not so much because 
 these high financiers couldn't trust each 
 other, as it is because each so-called in- 
 terest consists of a loosely bound aggre- 
 gation of followers of all sorts and va- 
 rieties, having only one thing in com- 
 mon control of capital. Such an "in- 
 terest" is not an army, where the traitor 
 can be court-martialed and shot; it is 
 a mob, and has to be led, not driven. 
 True, the known traitor might be put to 
 death, financially speaking, but in stock 
 
48 THE PSYCHOLOGY OF 
 
 market operations the traitor cannot, as 
 a rule, be known. Unless his operations 
 are of unusual size, he can successfully 
 cover his tracks. 
 
 From this second point of view, 
 "They" are not always active in the mar- 
 ket. Great campaigns can only be un- 
 dertaken with safety in periods when the 
 future is to a certain extent assured. When 
 the future is in doubt, when various 
 confusing elements enter into the finan- 
 cial and political situation, leading finan- 
 ciers may be quite content to confine 
 their stock market operations to indi- 
 vidual deals, and to postpone the inaugu- 
 ration of a broad campaign until a more 
 solid foundation exists for it. 
 
 Third, "They" may be conceived sim- 
 ply as speculators and investors in 
 general all that miscellaneous and 
 heterogeneous troop of persons, scat- 
 tered over the whole world, each of 
 whom contributes his mite to the fluctua- 
 tions of prices on the Stock Exchange. 
 In this sense there is no doubt about the 
 existence of Them, and They are the 
 
THE STOCK MARKET. 49 
 
 court of last resort in the establishment 
 of prices. To put it another way, these 
 are the "They" who are the ultimate con- 
 sumers of securities. It is to Them that 
 everybody else is planning, sooner or 
 later, directly or indirectly, to sell his 
 stocks. 
 
 You can lead the horse to water, but 
 you can't make him drink. You or I or 
 any other great millionaire can put up 
 prices, but you can't make Them buy the 
 stocks from you, unless They have the 
 purchasing power and the purchasing 
 disposition. So there is no doubt that 
 here, at any rate, we have a conception 
 of Them which will stand analysis with- 
 out exploding. 
 
 In cases where a general campaign is 
 being conducted, the "They" theory of 
 values is of considerable help in the ac- 
 cumulation or distribution of stocks. In 
 fact, in the late stages of a bull campaign 
 the argument most frequently heard is 
 likely to be something as follows: "Yes, 
 prices are high and I can't see that fu- 
 ture prospects are especially bullish 
 
50 THE PSYCHOLOGY OF 
 
 but stocks are in strong hands and They 
 will have to put them higher to make 
 a market to sell on." Some investors 
 - make a point of dumping over all their 
 stocks as soon as this veteran war-horse 
 of the news brigade is groomed and trot- 
 ted out. Likewise, after a prolonged 
 bear campaign, we hear that somebody 
 is "in trouble" and that They are going 
 to break the market until certain con- 
 centrated holdings are brought out. 
 
 All this is very likely to be nothing 
 but dust thrown in the eyes of that most 
 gullible of all created beings the hap- 
 hazard speculator. When prices are so 
 high in comparison with conditions that 
 no sound reason can be advanced why 
 they should go higher, a certain number 
 of people are still induced to buy be- 
 cause of what They are going to do. Or, 
 at least, if the public can no longer be 
 induced to buy in any large volume, it is 
 prevented from selling short for fear of 
 what They may do. 
 
 The close student of the technical con- 
 dition of the market by which is meant 
 
THE STOCK MARKET. 51 
 
 the character of the long and short inter- 
 ests from day to day is pretty sure to 
 base his operations to a considerable ex- 
 tent on what he thinks They will do 
 next. He has in mind Them as de- 
 scribed in the first classification above 
 floor traders, pools and manipulators. 
 He gets a good deal of help from this 
 conception, crude as it may appear to 
 be largely, no doubt, because it serves 
 to distract his mind from current news 
 and gossip, and to prevent him from 
 being too greatly influenced by the mo- 
 mentary appearance of the market. 
 
 When the market looks weakest, when 
 the news is at the worst, when bearish 
 prognostications are most general, is the 
 time to buy, as every schoolboy knows; 
 but if a man has in mind a picture of a 
 flood of stocks pouring out from the four 
 quarters of the globe, with no buyers, 
 because of some desperately bad news 
 which is just coming over the ticker, it 
 is almost a mental impossibility for him 
 to get up the courage to plunge in and 
 buy. If, on the other hand, he conceives 
 
52 THE PSYCHOLOGY OF 
 
 that They are just giving the market a 
 final smash to facilitate covering a gi- 
 gantic line of short stocks, he has cour- 
 age to buy. His view may be right or 
 wrong, but at least he avoids buying at 
 the top and selling at the bottom, and he 
 has nerve to buy a weak market and sell 
 a strong one. 
 
 The reason for the haziness of the 
 "They" conception in the average trad- 
 er's mind is that he is only concerned 
 with Them as They manifest Themselves 
 through the stock market. As to who 
 They are he feels a mild and detached 
 curiosity ; but as to Their manifestations 
 in the market he is vitally and financially 
 interested. It is on the latter point, 
 therefore, that he concentrates his 
 thoughts. 
 
 But inasmuch as definite, painstaking 
 analysis of a situation is always better 
 than a hazy general notion of it, the 
 trader or investor would do much better 
 to rid his mind of Them. The word 
 "They" means nothing until it has an 
 antecedent; and to use it continually 
 
THE STOCK MARKET. 53 
 
 without having any antecedent in mind 
 is slipshod language, which stands for 
 slipshod thinking. They, in the sense 
 of the big banking interests, may be 
 working directly against Them in the 
 sense of individual manipulators; the 
 manipulator, again, may be trying to trap 
 Them in the sense of floor traders. 
 
 A genuine knowledge of the technical 
 condition of the market cannot be 
 summed up in any offhand declaration 
 about what They are going to do. You 
 cannot determine the attitude toward the 
 market of every individual who is inter- 
 ested in it, but you can roughly classify 
 the sources from which buying and sell- 
 ing are likely to come, the motives which 
 are likely to actuate the various classes, 
 and the character of the long interest and 
 short interest. In brief, after enough 
 study and observation, you can always 
 have in mind some kind of an antecedent 
 for Them, and must have it, if you base 
 your operations on technical conditions 
 
IV Confusing the Present with 
 the Future Discounting 
 
 IT is axiomatic that inexperienced 
 traders and investors, and indeed a 
 majority of the more experienced as 
 well, are continually trying to speculate 
 on past events. Suppose, for example, 
 railroad earnings as published are show- 
 ing constant large increases in net. The 
 novice reasons, "Increased earnings mean 
 increased amounts applicable to the pay- 
 ment of dividends. Prices should rise. 
 I will buy." 
 
 Not at all. He should say, "Prices 
 have risen to the extent represented by 
 these increased earnings, unless this ef- 
 fect has been counterbalanced by other 
 considerations. Now what next?" 
 
 It is a sort of automatic assumption of 
 the human mind that present conditions 
 will continue, and our whole scheme of 
 life is necessarily based to a great degree 
 
56 THE PSYCHOLOGY OF 
 
 on this assumption. When the price of 
 wheat is high farmers increase their 
 acreage because wheat-growing pays 
 better; when it is low they plant less. 
 I remember talking with a potato-raiser 
 who claimed that he had made a good 
 deal of money by simply reversing the 
 above custom. When potatoes were low 
 he had planted liberally; when high he 
 had cut down his acreage because he 
 reasoned that other farmers would do 
 just the opposite. 
 
 The average man is not blessed or 
 cursed, however you may look at it 
 with an analytical mind. We see "as 
 through a glass darkly." Our ideas are 
 always enveloped in a haze and our 
 reasoning powers work in a rut from 
 which we find it painful if not impossible 
 to escape. Many of our emotions and 
 some of our acts are merely automatic 
 responses to external stimuli. Wonder- 
 ful as is the development of the human 
 brain, it originated as an enlarged gan- 
 glion, and its first response is still prac- 
 tically that of the ganglion. 
 
THE STOCK MARKET. 57 
 
 A simple illustration of this is found 
 in the enmity we all feel toward the alarm 
 clock which arouses us in the morning. 
 We have carefully set and wound that 
 alarm and if it failed to go off it would 
 perhaps put us to serious inconvenience ; 
 yet we reward the faithful clock with 
 anathemas. 
 
 When a subway train is delayed nine- 
 tenths of the people waiting on the plat- 
 forms are anxiously craning their necks 
 to see if it is coming, while many persons 
 on it who are in danger of missing an 
 engagement are holding themselves tense, 
 apparently in the effort to help the train 
 along. As a rule we apply more well- 
 meant, but to a great extent ineffective, 
 energy, physical or nervous, to the ac- 
 complishment of an object, than analysis 
 or calculation. 
 
 When it comes to so complicated a 
 matter as the price of stocks, our hazi- 
 ness increases in proportion to the dif- 
 ficulty of the subject and our ignorance 
 of it. From reading, observation and 
 conversation we imbibe a miscellaneous 
 
58 THE PSYCHOLOGY OF 
 
 assortment of ideas from which we con- 
 clude that the situation is bullish or 
 bearish. The very form of the expres- 
 sion "the situation is bullish" not "the 
 situation will soon become bullish" 
 shows the extent to which we allow the 
 present to obscure the future in the 
 formation of our judgment. 
 
 Catch any trader and pin him down to 
 it and he will readily admit that the 
 logical moment for the highest prices is 
 when the news is most bullish; yet you 
 will find him buying stocks on this news 
 after it comes out if not at the moment, 
 at any rate "on a reaction." 
 
 Most coming events cast their shadows 
 before, and it is on this that intelligent 
 speculation must be based. The move- 
 ment of prices in anticipation of such 
 an event is called "discounting," and this 
 process of discounting is worthy a little 
 careful examination. 
 
 The first point to be borne in mind is 
 that some events cannot be discounted, 
 even by the supposed omniscience of the 
 great banking interests which is in 
 
THE STOCK MARKET. 59 
 
 point of fact, more than half imaginary. 
 The San Francisco earthquake is the 
 standard example of an event which 
 could not be foreseen and therefore 
 could not be discounted; but an event 
 does not have to be purely an "act of 
 God" to be undiscountable. There can 
 be no question that our great bankers 
 have been as much in the dark in regard 
 to some recent Supreme Court decisions 
 as the smallest "piker" in the customers' 
 room of an odd-lot brokerage house. 
 
 If the effect of an event does not make 
 itself felt before the event takes place, it 
 must come after. In all discussion of 
 discounting we must bear this fact in 
 mind in order that our subject may not 
 run away with us. 
 
 On the other hand an event may some- 
 times be overdiscounted. If the div- 
 idend rate on a stock is to be raised from 
 four to five per cent., earnest bulls, with 
 an eye to their own commitments, may 
 spread rumors of six or seven per cent., 
 so that the actual declaration of five per 
 
60 THE PSYCHOLOGY OF 
 
 cent, may be received as disappointing 
 and cause a decline. 
 
 Generally speaking, every event which 
 is under the control of capitalists as- 
 sociated with the property, or any fi- 
 nancial condition which is subject to the 
 management of combined banking in- 
 terests, is likely to be pretty thoroughly 
 discounted before it occurs. There is 
 never any lack of capital to take ad- 
 vantage of a sure thing, even though it 
 may be known in advance to only a few 
 persons. 
 
 The extent to which future business 
 conditions are known to "insiders" is, 
 however, usually overestimated. So 
 much depends, especially in America, 
 upon the size of the crops, the temper of 
 the people, and the policies adopted by 
 leading politicians, that the future of 
 business becomes a very complicated 
 problem. No power can drive the Ameri- 
 can people. Any control over their ac- 
 tion has to be exercised by cajolery or 
 by devious and circuitous methods. 
 
 Moreover, public opinion is becoming 
 
THE STOCK MARKET. 61 
 
 more volatile and changeable year by 
 year, owing to the quicker spread of in- 
 formation and the rapid multiplication of 
 the reading public. One can easily 
 imagine that some of our older financiers 
 must be saying to themselves, "If I had 
 only had my present capital in 1870, or 
 else had the conditions of 1870 to work 
 on today!" 
 
 A fair idea of when the discounting 
 process will be completed may usually be 
 formed by studying conditions from 
 every angle. The great question is, 
 when will the buying or selling become 
 most general and urgent? In 1907, for 
 example, the safest and best time to buy 
 the sound dividend-paying stocks was 
 on the Monday following the bank state- 
 ment which showed the greatest decrease 
 in reserves. The markets opened down 
 several points under pressure of liquida- 
 tion, and standard issues never sold so 
 low afterward. The simple explanation 
 was that conditions had become so bad 
 that they could not get any worse with- 
 
62 THE PSYCHOLOGY OF 
 
 out utter ruin, which all parties must and 
 did unite to prevent. 
 
 Likewise in the Presidential campaign 
 of 1900, the lowest prices were made on 
 Bryan's nomination. Everyone said at 
 once, "He can't be elected." Therefore 
 his nomination was the worst that could 
 happen the point of time where the 
 political news became most intensely 
 bearish. As the campaign developed his 
 defeat became more and more certain, 
 and prices continued to rise in accordance 
 with the general economic and financial 
 conditions of the period. 
 
 It is not the discounting of an event 
 thus known in advance to capitalists, that 
 presents the greatest difficulties, but 
 cases where considerable uncertainty 
 exists, so that even the clearest mind and 
 the most accurate information can result 
 only in a balancing of probabilities, with 
 the scale perhaps inclined to a greater or 
 less degree in one direction or the other. 
 
 In some cases the uncertainty which 
 precedes such an event is more depress- 
 ing than the worst that can happen 
 
THE STOCK MARKET. 63 
 
 afterward. An example is a Supreme 
 Court decision upon a previously un- 
 determined public policy which has kept 
 business men so much in the dark that 
 they feared to go ahead with any im- 
 portant plans. This was the case at the 
 time of the Northern Securities decision 
 in 1904. "Big business" could easily 
 enough adjust itself to either result. It 
 was the uncertainty that was bearish. 
 Hence the decision was practically dis- 
 counted in advance, no matter what it 
 might prove to be. 
 
 This was not true to the same extent 
 of the Standard Oil and American To- 
 bacco decisions of 1911, because those 
 decisions were an earnest of more 
 trouble to come. The decisions were 
 greeted by a temporary spurt of activity, 
 based on the theory that the removal of 
 uncertainty was the important thing ; but 
 a sensational decline started soon after 
 and was not checked until the announce- 
 ment that the Government would pros- 
 ecute the United States Steel Corpora- 
 tion. This was deemed the worst that 
 
64 THE PSYCHOLOGY OF 
 
 could happen for some time to come, and 
 was followed by a considerable advance. 
 
 More commonly, when an event is un- 
 certain the market estimates the chances 
 with considerable nicety. Each trader 
 backs his own opinion, strongly if he 
 feels confident, moderately if he still has 
 a few doubts which he cannot down. 
 The result of these opposing views may 
 be stationary prices, or a market fluctuat- 
 ing nervously within a narrow range, or 
 a movement in either direction, greater 
 or smaller in proportion to the more or 
 less emphatic preponderance of the buy- 
 ing or selling. 
 
 Of course it must always be remem- 
 bered that it is the dollars that count, 
 not the number of buyers or sellers. A 
 few great capitalists having advance in- 
 formation which they regard as accurate, 
 may more than counterbalance thousands 
 of small traders who hold an opposite 
 opinion. In fact, this is a condition very 
 frequently seen, as explained in a pre- 
 vious chapter. 
 
 Even the operations of an individual 
 
THE STOCK MARKET. 65 
 
 investor usually have an effect on prices 
 pretty accurately adjusted to his opin- 
 ions. When he believes prices are low 
 and everything favors an upward move- 
 ment, he will strain his resources in 
 order to accumulate as heavy a load of 
 securities as he can carry. After a fair 
 advance, if he sees the development of 
 some factor which might cause a decline 
 though he doesn't really believe it will 
 he thinks it wise to lighten his load 
 somewhat and make sure of some of his 
 accumulated profits. Later when he 
 feels that prices are "high enough," he 
 is a liberal seller; and if some danger 
 appears while the level of quoted values 
 continues high, he "cleans house/' to be 
 ready for whatever may come. Then if 
 what he considers an unwarranted specu- 
 lation carries prices still higher, he is 
 very likely to sell a few hundred shares 
 short by way of occupying his capital 
 and his mind. 
 
 It is, however, the variation of opinion 
 among different men that has the largest 
 influence in making the market responsive 
 
66 THE PSYCHOLOGY OF 
 
 to changing conditions. A development 
 which causes one trader to lighten his 
 line of stocks may be regarded as harm- 
 less or even beneficial by another, so that 
 he maintains his position or perhaps buys 
 more. Out of a world-wide mixture of 
 varying ideas, personalities and informa- 
 tion emerges the average level of 
 prices the true index number of in- 
 vestment conditions. 
 
 The necessary result of the above line 
 of reasoning is that not only probabili- 
 ties but even rather remote possibilities 
 are reflected in the market. Hardly any 
 event can happen of sufficient importance 
 to attract general attention which some 
 process of reasoning cannot construe as 
 bullish and some other process interpret 
 as bearish. Doubtless even our old friend 
 of the news columns to the effect that 
 "the necessary activities of a nation of 
 ninety million souls create and maintain 
 a large volume of business/' may in- 
 fluence some red-blooded optimist to buy 
 100 Union ; but the grouchy pessimist who 
 has eaten too many doughnuts for break- 
 
THE STOCK MARKET. 67 
 
 fast will accept the statement as an evi- 
 dence of the scarcity of real bull news 
 and will likely enough sell 100 Union 
 short on the strength of it. 
 
 It is the overextended speculator who 
 causes most of the fluctuations that look 
 absurd to the sober observer. It does not 
 take much to make a man buy when he 
 is short of stocks "up to his neck." A 
 bit of news which he would regard as in- 
 significant at any other time will then 
 assume an exaggerated importance in his 
 eyes. His fears increase in geometrical 
 proportion to the size of his line of 
 stocks. Likewise the overloaded bull 
 may begin to "throw his stocks" on some 
 absurd story of a war between Honduras 
 and Roumania, without even stopping to 
 look up the geographical location of the 
 countries involved. 
 
 Fluctuations based on absurdities are 
 always relatively small. They are due 
 to an exaggerated fear of what "the 
 other fellow" may do. Personally, you 
 do not fear a war between Honduras and 
 Ron mania ; but may not the rumor be 
 
68 THE PSYCHOLOGY OF 
 
 seized upon by the bears as an excuse 
 for a raid? And you have too many 
 stocks to be comfortable if such a break 
 should occur. Moreover, even if the 
 bears do not raid the market, will there 
 not be a considerable number of persons 
 who, like yourself, will fear such a raid, 
 and will therefore lighten their load of 
 stocks, thus causing some decline? 
 
 The professional trader, following this 
 line of reasoning to the limit, eventually 
 comes to base all his operations for short 
 turns in the market not on the facts but 
 on what he believes the facts will cause 
 others to do or more accurately, per- 
 haps, on what he sees that the news is 
 causing others to do; for such a trader 
 is likely to keep his finger constantly on 
 the pulse of buying and selling as it 
 throbs on the floor of the Exchange or 
 as recorded on the tape. 
 
 The non-professional, however, will 
 do well not to let his mind stray too far 
 into the unknown territory of what others 
 may do. Like the "They" theory of 
 values, it is dangerous ground in that it 
 
THE STOCK MARKET. 69 
 
 leads toward the abdication of common 
 sense ; and after all, others may not prove 
 to be such fools as we think they are. 
 While the market is likely to discount 
 even a possibility, the chances are very 
 much against our being able to discount 
 the possibility profitably. 
 
 In this matter of discounting, as in 
 connection with most other stock market 
 phenomena, the most useful hint that can 
 be given is to avoid all efforts to reduce 
 the movement of prices to rules, measures, 
 or similarities and to analyze each case 
 by itself. Historical parallels are likely 
 to be misleading. Every situation is new, 
 though usually composed of familiar 
 elements. Each element must be weighed 
 by itself and the probable result of the 
 combination estimated. In most cases 
 the problem is by no means impossible, 
 but the student must learn to look into 
 the future and to consider the present 
 only as a guide to the future. Extreme 
 prices will come at the time when the 
 news is most emphatic and most widely 
 disseminated. When that point is passed 
 
70 PSYCHOLOGY OF STOCKS. 
 
 the question must always be, "What 
 next?" 
 
V Confusing the Personal with 
 the General 
 
 IN a previous chapter the fact has 
 been mentioned that one of the 
 greatest difficulties encountered by 
 the active trader is that of keeping his 
 mind in a balanced and unprejudiced 
 condition when he is heavily com- 
 mitted to either the long or short side 
 of the market. Unconsciously to him- 
 self, he permits his judgment to be 
 swayed by his hopes. 
 
 A former large speculator on the 
 Chicago Board of Trade, after being 
 short of the market and very bearish 
 on wheat for a long time, one day sur- 
 prised all his friends by covering 
 everything, going long a moderate 
 amount, and arguing violently on the 
 bull side. For two days he maintained 
 this position, but the market failed to 
 go up. He then turned back to the 
 short side, and had even more bear 
 
72 THE PSYCHOLOGY OF 
 
 arguments at his tongue's end than be- 
 fore. 
 
 To a certain extent he did this to 
 test the market, but still more to test 
 himself to see whether, by changing 
 front and taking the other side, he 
 could persuade himself out of his bear- 
 ish opinions. When even this failed 
 to make any real change in his views, 
 he was reassured and was ready for 
 a new and more aggressive campaign 
 on the short side. 
 
 There is nothing peculiar about this 
 condition. While it is especially dim- 
 cult to maintain a balanced mind in 
 regard to commitments in the markets, 
 it is not easy to do so about anything 
 that closely touches our personal in- 
 terests. As a rule we can find plenty 
 of reasons for doing what we very 
 much want to do, and we are still more 
 prolific with excuses for not doing 
 what we don't want to do. Most of 
 us change the old sophism "Whatever 
 is, is right" to the more directly use- 
 ful form "Whatever I want is right." 
 To many readers will occur at once the 
 
THE STOCK MARKET. 73 
 
 name of a man prominent in public 
 life who seems very frequently to act 
 on this motto. 
 
 If Smith and Jones have a verbal 
 agreement, which afterwards turns out 
 to be greatly to Jones' advantage, 
 Smith's recollection is that it was 
 merely a loose understanding which 
 could be cancelled at any time, while 
 Jones remembers it to have been a 
 definite legal contract, perfectly en- 
 forceable if it had only been written. 
 Talleyrand said that language was 
 given us for the purpose of concealing 
 thought. Likewise many seem to 
 think that logic was given us for the 
 purpose of backing up our desires. 
 
 Few persons are so introspective as 
 to be able to tell where this bias in 
 favor of their own interests begins and 
 where it leaves off. Still fewer bother 
 to make the effort to tell. To a great 
 extent we train our judgment to lend 
 itself to our selfish interests. The 
 question with us is not so much 
 whether we have the facts of a situa- 
 
74 THE PSYCHOLOGY OF 
 
 tion correctly in mind, as whether we 
 can "put it over." 
 
 When it comes to buying and selling 
 stocks, there is no such thing as 
 "putting it over." The market is re- 
 lentless. It cannot be budged by our 
 sophistries. It will respond exactly to 
 the forces and personalities which are 
 working upon it, with no more regard 
 for our opinions than if we couldn't 
 vote. We cannot work for our own 
 interests as in other lines of business 
 we can only fit our interests to the 
 facts. 
 
 To make the greatest success it is 
 necessary for the trader to forget en- 
 tirely his own position in the market, 
 his profits or losses, the relation of 
 present prices to the point where he 
 bought or sold, and to fix his thoughts 
 upon the position of the market. If 
 the market is going down the trader 
 must sell, no matter whether he has a 
 profit or a loss, whether he bought a 
 year ago or two minutes ago. 
 
 How far the average trader is from 
 attaining this point of view is quickly 
 
THE STOCK MARKET. 75 
 
 seen from his conversation, and it is 
 also true that a great deal of the litera- 
 ture of speculation absolutely fails to 
 reach this conception. 
 
 "You have five points profit you 
 had better take it," advises the broker. 
 Perhaps so, if you know nothing about 
 the market ; but if you understand the 
 market the time to take your profit is 
 when the upward movement shows 
 signs of culminating, regardless of 
 your own deal. 
 
 "Stop your losses ; let your profits 
 run" is a saying which appeals to the 
 novice as the essence of wisdom. But 
 the whole question is where to stop the 
 losses and how far to let the profits 
 run. In other words, what is the mar- 
 ket going to do? If you can tell this 
 your personal losses and profits will 
 take care of themselves^, 
 
 Here is a man who has done a great 
 deal of figuring and has proved to his 
 own satisfaction that seven points is 
 the correct profit to take in Union 
 Pacific, while losses should be limited 
 to two and one-half points. Nothing 
 
76 THE PSYCHOLOGY OF 
 
 could be more foolish than these ar- 
 bitrary figures. He is trying to make 
 the market fit itself around his own 
 trades, instead of adapting his trades 
 to the market. 
 
 In any broker's office you will notice 
 that a large part of the talk concerns 
 the profits and losses of the traders. 
 Brown had a profit of ten points and 
 then let it get away from him. "Great 
 Scott!" says his wise friend. "What 
 do you want? Aren't you satisfied with 
 ten points profit?" The reply should 
 be, though it rarely is, "Certainly not, 
 if I think the market is going higher." 
 
 "Get them out with a small profit," 
 I once heard one broker say to an- 
 other. "If you don't they will hang 
 on and take a loss. They never get 
 profit enough to satisfy them." A 
 good policy, probably, if neither the 
 broker nor his customer had any real 
 knowledge of the market; but mere 
 nonsense for the trader who aims to 
 be in the slightest degree scientific. 
 
 The fact 'is that the more a trader 
 allows his mind to dwell upon his own 
 
THE STOCK MARKET. 77 
 
 position in the market the more likely 
 it is that his judgment will become 
 warped so that his mind is blind to 
 those considerations which do not fall 
 in with his preconceived opinion. 
 
 Until you try it, you have almost no 
 idea of the extent to which you may 
 be rendered unreasonable by the mere 
 fact that you are committed to one 
 side of the market. "In the market, 
 to be consistent is to be stubborn/' 
 some one has said; and it is true that 
 the man of strong will and logical in- 
 tellect is often less successful than the 
 more shallow and volatile observer, 
 who is ready to whiffle about like the 
 weathercock at any suspicion of a 
 change in the wind. This is because 
 the strong man has in this instance 
 embarked upon an enterprise where 
 he cannot use his natural force and de- 
 termination he can employ only his 
 faculties of observation and interpreta- 
 tion. Yet in the end the man of char- 
 acter will be the more permanently 
 successful, because he will eventually 
 
78 THE PSYCHOLOGY OF 
 
 master his subject more thoroughly 
 and attain a more judicial attitude. 
 
 The more simple-minded, after once 
 committing themselves to a position, 
 are thereafter chiefly influenced and 
 supported by the illusions of hope. 
 They bought, probably, as a result of 
 some bullish development. If prices 
 have advanced, they find that the mar- 
 ket "looks strong," a good deal of en- 
 couraging news comes out on the 
 tickers, and they hope for large profits. 
 After five points in their favor, they 
 hope for ten, and after ten they look 
 for fifteen or twenty. 
 
 On the other hand, if prices decline 
 they charge it to "manipulation," "bear 
 raids," etc., and expect an early re- 
 covery. Much of the bear news ap- 
 pears to them to be put out malicious- 
 ly, in order to cause prices to decline 
 further. It is not until the decline 
 begins to cause a painful encroach- 
 ment upon their capital that they 
 reach the point of saying, "If 
 'they' can depress prices like this 
 in the face of a bullish situation, 
 
THE STOCK MARKET. 79 
 
 what is the use of fighting them? By 
 a flood of short sales, they can put 
 prices down as much as they like" 
 or something of the sort. 
 
 Such traders are suffering merely 
 from youth, or lack of sound business 
 sense, or both. They have a consider- 
 able period of study before them, if 
 they persist until they get permanently 
 profitable results. Most of them, of 
 course, do not persist. 
 
 A much more intelligent class, many 
 of whom are properly to be considered 
 as investors, do not allow their posi- 
 tion in the market to blind them so far 
 as current news or statistical develop- 
 ments are concerned, but do permit 
 themselves to become biased in regard 
 to the most important factor of all 
 the effect of a change in the price level. 
 
 They bought stocks in the expecta- 
 tion of an improved situation. The 
 improved situation comes and prices 
 rise. Nothing serious in the way of 
 bear news appears. On the con- 
 trary, bull news continues plentiful. 
 
80 THE PSYCHOLOGY OF 
 
 Under these conditions they see no 
 reason for selling. 
 
 Yet there may be a most important 
 reason for selling namely, that prices 
 have risen sufficiently to counterbal- 
 ance the improved situation and they 
 would see and appreciate this fact if 
 they were in the position of an unin- 
 terested observer. 
 
 One of the principal reasons why in- 
 vestors of this class allow themselves 
 to become confused as to the influence 
 of the price level is because a bull 
 market nearly always goes unreason- 
 ably high before it culminates. The 
 investor has perhaps, in several previ- 
 ous instances, sold out at what he 
 thought was a fair price level, only to 
 see the public run away with the mar- 
 ket to a point where his profits would 
 have been doubled if he had held on. 
 
 It is in such cases that an expert 
 knowledge of speculation is essential. 
 If the investor has not this knowledge, 
 and cannot obtain the dependable ad- 
 vice of one who has it, then he must 
 content himself with more moderate 
 
THE STOCK MARKET. 81 
 
 profits and' forego the expectation of 
 getting the full benefit of the advance. 
 But with a fair knowledge of specula- 
 tive influences, he can fix his mind on 
 the development of the campaign, re- 
 gardless of his own holdings, and can 
 usually secure a larger profit than if 
 he depended merely upon ordinary 
 business "common sense." 
 
 The mistake is made when, with- 
 out any expert knowledge of specula- 
 tion, he permits himself to hold on in 
 the hope of higher prices after a level 
 has been reached which has fairly dis- 
 counted improved business conditions. 
 
 Not one trader in a thousand ever 
 becomes so expert or so seasoned as 
 to entirely overcome the influence his 
 position in the market exerts upon his 
 judgment. That influence appears in 
 the most insidious and elusive ways. 
 One of the principal difficulties of the 
 expert is in preventing his active im- 
 agination from causing him to see 
 what he is looking for just because he 
 is looking for it. 
 
 An example will make this clear. 
 
82 THE PSYCHOLOGY OF 
 
 The expert has learned from experi- 
 ence, let us say, that the appearance 
 of "holes" in the market is a sign of 
 weakness. By a "hole" is meant a 
 condition of the market where it sud- 
 denly and unaccountably refuses to 
 take stock. A few hundred shares of 
 an active stock are offered for sale. 
 Sentiment is generally bullish, but 
 there is no buyer for that stock. Prices 
 slip quickly down half a point or a 
 point before buyers are found. This, 
 in an active stock, is unusual; and al- 
 though the price may recover, the pro- 
 fessional does not forget this treacher- 
 ous failure of the market to accept 
 moderate offerings. He considers it a 
 sign of an "over-bought" market. 
 
 Now suppose the trader has calcu- 
 lated that an advance is about to cul- 
 minate and has taken the short side 
 in anticipation of that event. He sus- 
 pects that the market is over-bought, 
 but is not yet sure of it. Under these 
 circumstances any little dip in the 
 price will perhaps look to him like a 
 "hole," even though under other con- 
 
THE STOCK MARKET. 83 
 
 ditions he would not notice it or would 
 think nothing about it. He is looking 
 for the development of weakness and 
 there is danger that his imagination may 
 show him what he is looking for even 
 though it isn't there ! 
 
 The same remarks would apply to 
 the detection of accumulation or dis- 
 tribution. If you want to see distribu- 
 tion after a sharp advance, you are 
 very likely to see it. If you have sold 
 out and want to get a reaction on which 
 to repurchase, you will see plenty of 
 indications of a reaction. Indeed, it 
 is a sort of proverb in Wall Street that 
 there is no bear so bearish as a sold- 
 out bull who wants a chance to re- 
 purchase. 
 
 In the study of so-called "technical" 
 conditions of the market, a situation 
 often appears which permits a double 
 construction. Indications of various 
 kinds are almost evenly balanced ; some 
 things might be interpreted in two dif- 
 ferent ways; and a trader not already 
 interested in the market would be likely 
 
84 THE PSYCHOLOGY OF 
 
 to think it wise to stay out until 
 he eould see his way more clearly. 
 
 Under such circumstances you will 
 find it an almost invariable rule that 
 the- man who was long before this con- 
 dition arose will interpret technical 
 conditions as bullish, while the man 
 who was and remains short, sees plain 
 indications of technical weakness. 
 Somewhat amusing, but true. 
 
 In this matter of allowing the judg- 
 ment to be influenced by personal com- 
 mitments, very little of a constructive 
 or practically helpful nature can be 
 written, except the one word "Don't." 
 Yet when the investor or trader has 
 come to realize that he is a prejudiced 
 observer, he has made progress ; for 
 this knowledge keeps him from trust- 
 ing too blindly to something which, at 
 the moment, he calls' judgment, but 
 which may turn out to be simply an 
 unusually strong impulse of greed. 
 
 It has often been noted by stock mar- 
 ket writers that since the great public 
 is bearish at the bottom and bullish at 
 the top, it could make its fortune and 
 
THE STOCK MARKET. 85 
 
 beat the multi-millionaires at their own 
 game by simply reversing itself buy- 
 ing when it feels like selling and selling 
 when it feels like buying. Tom Law- 
 son, in the heyday of his publicity, 
 seems to have had some sort of dream 
 of the public selling back to Standard 
 Oil capitalists the stocks which it had 
 bought from them and thus bringing 
 everything to smash in a heap the 
 philanthropic Thomas, doubtless, being 
 first properly short of the market. 
 
 This wrongheadedness of the public 
 no longer exists to the same extent as 
 formerly. A great number of small in- 
 vestors buy and sell intelligently and 
 there has been a most noticeable falling 
 off in the gambling class of trade 
 much to the satisfaction of everyone, 
 except, perhaps, the brokers who form- 
 erly handled such business. 
 
 It remains true, nevertheless, that 
 the very moment when the market 
 looks strongest, is likely to be near the 
 top, and just when prices appear to 
 have started on a straight drop to the 
 zero point is usually near the bottom 
 
86 PSYCHOLOGY OF STOCKS. 
 
 The practical way for the investor to 
 use this principle is to be ready to 
 sell at the moment when bull sentiment 
 seems to be most widely distributed, 
 and to buy when the public in general 
 seem most discouraged. It is especially 
 important for him to bear this principle 
 in mind in taking profits on previous 
 commitments, as his own interests are 
 then identified with the current trend 
 of prices. 
 
 In a word, the trader or investor who 
 has studied the subject enough to be 
 reading this book, probably could 
 not make profits by reversing him- 
 self, even if such a thing were 
 possible; but he can endeavor to hold 
 himself in a detached, unprejudiced 
 frame of mind, and to study the psy- 
 chology of the crowd, especially as it 
 manifests itself in the movement of 
 prices. 
 
VI The Panic and the Boom 
 
 BOTH the panic and the boom are 
 eminently psychological phe- 
 nomena. This is not saying 
 that fundamental conditions do not at 
 times warrant sharp declines in prices 
 and at other times equally sharp ad- 
 vances. But the panic, properly so- 
 called, represents a decline greater 
 than is warranted by conditions, usu- 
 ally because .of an excited state of the 
 public mind, accompanied by exhaus- 
 tion of resources; while the term 
 "boom" is used to mean an excessive 
 and largely speculative advance. 
 
 There are some special features con- 
 nected with the panic and the boom 
 which are worthy of separate consider- 
 ation. 
 
 It is really astonishing what a hold 
 the fear of a possible panic has upon 
 the minds of many investors. The 
 
88 THE PSYCHOLOGY OF 
 
 memory of the events of 1907 has un- 
 doubtedly operated greatly to lessen 
 the volume of speculative trade from 
 that time to the present (April, 1912). 
 Panics of equal severity have occurred 
 only a few times in the entire history 
 of the country, and the possibility of 
 such an outbreak in any one month is 
 smaller than the chance of loss on the 
 average investment through the failure 
 of the company. Yet the specter of 
 such a panic rises in the minds of the 
 inexperienced whenever they think of 
 buying stocks. 
 
 "Yes," the investor may say, "Read- 
 ing seems to be in a very strong posi- 
 tion, but look where it sold in 1907 
 at $70 a share !" 
 
 It is sometimes assumed that the 
 low prices in a panic are due to a sud- 
 den spasm of fear, which comes quickly 
 and passes away quickly. This is not 
 the case. In a way, the operation of 
 the element of fear begins when prices 
 are near the top. Some cautious in- 
 vestors begin to fear that the boom is 
 
THE STOCK MARKET. 89 
 
 being overdone and that a disastrous 
 decline must follow the excessive spec- 
 ulation for the rise. They sell under 
 the influence of this feeling. 
 
 During the ensuing decline, which 
 may run for years, more and more 
 people begin to feel uneasy over busi- 
 ness or financial conditions, and they 
 liquidate their holdings. This caution 
 or fearfulness gradually spreads, in- 
 creasing and decreasing in waves, but 
 growing a little greater at each succes- 
 sive swell. The panic is not a sudden 
 development, but is the result of causes 
 long accumulated. 
 
 The actual bottom prices of the panic 
 are more likely to result from necessity 
 than from fear. Those investors who 
 could be frightened out of their hold- 
 ings are likely to give up before the 
 bottom is reached. The lowest prices 
 are usually made by sales for those 
 whose immediate resources are ex- 
 hausted. Most of them are taken by 
 surprise and could raise the money nec- 
 essary to carry their stocks if they had 
 
90 THE PSYCHOLOGY OF 
 
 a little time; but in the stock market, 
 "time is the essence of the contract," 
 and is the very thing that they cannot 
 have. 
 
 The great cause of loss in times of 
 panic is the failure of the investor to 
 keep enough of his capital in liquid 
 form. He becomes "tied up" in various 
 undertakings so that he cannot realize 
 quickly. He may have abundant prop- 
 erty, but no ready money. This condi- 
 tion, in turn, results from trying to do 
 too much greed, haste, excessive am- 
 bition, an oversupply of easy confidence 
 as to the future. 
 
 It is noticeable in panic times that 
 a period arrives when nearly every one 
 thinks that stocks are low enough, yet 
 prices continue downward to a still 
 lower level. The result is that many 
 investors, after thinking that they have 
 "loaded up" near the bottom, find that 
 it was a false bottom, and are finally 
 forced to throw over their holdings on 
 a further decline. 
 
 This is due to the fact mentioned 
 
THE STOCK MARKET. 91 
 
 above, that final low prices are the re- 
 sult of necessities, not of opinions. In 
 1907, for example, every one of good 
 sense knew perfectly well that stocks 
 were selling below their value the 
 trouble was that investors could not 
 get hold of the money with which to 
 buy. 
 
 The moral is that low prices, after 
 a prolonged bear period, are not in 
 themselves a sufficient reason for buy- 
 ing stocks. The key to the situation 
 lies in the accumulation of liquid capital, 
 which is most quickly evidenced by a 
 rapid recovery of the excess of deposits 
 over loans in the New York clearing 
 house banks (excluding the trust com- 
 panies, in which loans are more varied). 
 This subject, however, takes us outside 
 our present field. 
 
 It is to a great extent because the 
 last part of the decline in a panic has 
 been caused not by public opinion, or 
 even by public fear, but by necessity, 
 arising from absolute exhaustion of 
 available funds, that the first part of 
 
92 THE PSYCHOLOGY OF 
 
 the ensuing recovery takes place with- 
 out any apparent reason. 
 
 Traders say, "The panic is over, but 
 stocks cannot go up much under such 
 bearish conditions as now exist." Yet 
 stocks can and do go up, because they 
 are merely regaining the natural level 
 from which they were depressed by 
 "bankrupt sales," as we would say in 
 discussing dry goods. 
 
 Perhaps the word "fear" has been 
 overworked in the discussion of stock 
 market psychology. It is only the very 
 few who actually sell their stocks un- 
 der the direct influence of the emotion 
 of fear. But a feeling of caution strong 
 enough to induce sales, or even a fixed 
 belief that prices must decline, con- 
 stitutes in itself a sort of modification 
 of fear, and has the same result so far 
 as prices are concerned. 
 
 The effect of this fear or caution in a 
 panic is not limited to the selling of 
 stocks, but is even more important in 
 preventing purchases. It takes far less 
 uneasiness to cause the intending in- 
 
THE STOCK MARKET. 93 
 
 vestor to delay purchases than to pre- 
 cipitate actual sales by holders. For 
 this reason, a small quantity of stock 
 pressed for sale in a panicky market 
 may cause a decline out of all propor- 
 tion to its importance. The offerings 
 may be small, but nobody wants them. 
 
 It is this factor which accounts for 
 the rapid recoveries which frequently 
 follow panics. Waiting investors are 
 afraid to step in front of a demoralized 
 market, but once the turn appears, they 
 fall over each other to buy. 
 
 The boom is in many ways the re- 
 verse of the panic. Just as fear keeps 
 growing and spreading until the final 
 crash, so confidence and enthusiasm 
 keep reproducing each other on a wider 
 and wider scale until the result is a 
 sort of hilarity on the part of thousands 
 of men, many of them comparatively 
 young and inexperienced, who have 
 "made big money" during the long ad- 
 vance in prices. 
 
 These imaginary millionaires appear 
 in a small swarm during every pro- 
 
94 THE PSYCHOLOGY OF 
 
 longed bull market, only to fall with 
 their wings singed as soon as prices 
 decline. Such speculators are, to all 
 practical intents and purposes, irrespon- 
 sible. It is their very irresponsibility 
 which has enabled them to make money 
 so rapidly on advancing prices. The 
 prudent man gets only moderate profits 
 in a bull market it is the man who 
 trades on "shoe-string margins" who 
 gets the biggest benefit out of the rise. 
 k When such, mushroom fortunes have 
 accumulated,, the market may fall tem- 
 porarily into the hands of these dare- 
 devil spirits, so that almost any reck- 
 lessness is possible for the time. It is 
 this kind of buying which causes prices 
 to go higher after they are already high 
 enough just as they go lower in a 
 panic after they are plainly seen to be 
 low enough. 
 
 When prices get above the natural 
 level, a well-judged short interest be- 
 gins to appear. These shorts are right, 
 but right too soon. In a genuine bull 
 market they are nearly always driven 
 
THE STOCK MARKET. 95 
 
 to cover by a further rise, which is, 
 from any common sense standpoint, un- 
 reasonable. A riot of pyramided mar- 
 gins drives the sane and calculating 
 short seller temporarily to shelter. 
 
 A psychological influence of a much 
 wider scope also operates to help a bull 
 market along to unreasonable heights. 
 Such a market is usually accompanied 
 by rising prices in all lines of business 
 and these rising prices always create, 
 in the minds of business men, the im- 
 pression that their various enterprises 
 are more profitable than is really the 
 case. 
 
 One reason for this false impression 
 is found in stocks of goods on hand. 
 Take the wholesale grocer, for ex- 
 ample, carrying a stock of goods which 
 inventories $10,000 in January, 1909. 
 On that date Bradstreet's index of com- 
 modity prices stood at 8.26. In Jan- 
 uary, 1910, Bradstreet's index was 9.23. 
 If the prices of the various articles in- 
 cluded in this stock of groceries in- 
 creased in the same ratio as Brad- 
 
96 THE PSYCHOLOGY OF 
 
 street's list, and if the grocer had on 
 hand exactly the same things, he would 
 inventory them at about $11,168 in 
 January, 1910. 
 
 He made an additional profit of 
 $1,168 during the year without any ef- 
 fort, and probably without any calcu- 
 lation, on his part. But this profit was 
 only apparent, not real; for he could 
 not buy any more with the $11,168 in 
 January, 1910, than he could have 
 bought with the $10,000 in January, 
 1909. He is deceived into supposing 
 himself richer than he really is, and 
 this false idea leads to a gradual 
 growth of extravagance and specula- 
 tion in every line of business and every 
 walk of life. 
 
 The secondary results of this delu- 
 sion of increased wealth because of ris- 
 ing prices, are even more important 
 than the primary results. Our grocer, 
 for example, decides to spend this 
 $1,168 for an automobile. This helps 
 the automobile business. Hundreds of 
 similar orders induce the automobile 
 
THE STOCK MARKET. 97 
 
 company to enlarge its plant. This 
 means extensive purchases of material 
 and employment of labor. The in- 
 creased demand resulting from a sim- 
 ilar condition of things in all depart- 
 ments of industry produces, if other 
 conditions are favorable, a still further 
 rise in prices; hence at the end of an- 
 other year the grocer perhaps has an- 
 other imaginary profit, which he 
 spends in enlarging his residence or 
 buying new furniture, etc. 
 
 The stock market feels the reflection 
 of all this increased business and 
 higher prices. Yet the whole thing is 
 psychological, and sooner or later our 
 grocer must earn and save, by hard 
 work, economical living and shrewd 
 calculation, the amount he has paid for 
 his automobile or furniture. 
 
 Again, rising stock prices and rising 
 commodity prices react on each other. 
 If the grocer, in addition to his im- 
 aginary profit of $1,168 sees a ten per 
 cent, advance in the prices of various 
 securities which he holds for invest- 
 
98 THE PSYCHOLOGY OF 
 
 ment, he is encouraged to still larger 
 expenditures; and likewise if the capi- 
 talist notes a ten per cent, advance in 
 the stock market, he perhaps employs 
 additional servants and enlarges his 
 household expenditures so that he buys 
 more groceries. Thus the feeling of 
 confidence and enthusiasm spreads 
 wider and wider like ripples from a 
 stone dropped into a pond. And all of 
 these developments are faithfully re- 
 flected by the stock market barometer. 
 The result is that, in a year like 1902 
 or 1906, the high prices for stocks and 
 the feverish activity of general trade 
 are based, to an entirely unsuspected 
 extent, on a sort of pyramid of mis- 
 taken impressions, most of which may 
 be traced, directly or indirectly, to the 
 fact that we measure everything in 
 money and always think of this money- 
 measure as fixed and unchangeable, 
 while in reality our money fluctuates 
 in value just like iron, potatoes, or 
 "Fruit of the Loom." We are accus- 
 tomed to figuring the money-value of 
 
THE STOCK MARKET. 99 
 
 wheat, but we get a headache when we 
 try to reckon the wheat-value of 
 money. 
 
 When a fictitious situation like this 
 begins to go to pieces, the stock mar- 
 ket, fulfilling its function of barometer, 
 declines first, while general business 
 continues active. Then the "money 
 sharks of Wall Street" get themselves 
 roundly cursed by the public and there 
 is a widespread desire to wipe them off 
 the earth in summary fashion. The 
 stock market never finds itself popular 
 unless it is going up; yet its going 
 down undoubtedly does far more to 
 promote the country's welfare in the 
 long run, for it serves to temper the 
 crash which must eventually come in 
 general business circles and to fore- 
 warn us of trouble ahead so that we 
 may prepare for it. 
 
 It is generally more difficult to dis- 
 tinguish the end of a stock market 
 boom than to decide when a panic is 
 definitely over. The principle of tfie 
 thing is simple enough, however. It 
 
100 PSYCHOLOGY OF STOCKS. 
 
 was an oversupply of liquid capital that 
 started the market upward after the 
 panic was over. Similarly it is exhaus- 
 tion of liquid capital which brings the 
 bull movement to an end. This ex- 
 haustion is shown by higher call money 
 rates, loss of the excess of deposits over 
 loans in New York clearinghouse 
 banks, a steady rise in commercial pa- 
 per rates, and a sagging market for 
 high-grade bonds. 
 
VII The Psychology of Scale 
 Orders 
 
 THE observer of market conditions 
 soon comes to know that there 
 are two general classes of minds 
 whose operations are reflected in 
 prices. These classes might be named 
 the "impulsive" and the "phlegmatic." 
 The "impulsive" operator says, for 
 example, "Conditions, both funda- 
 mental and technical, warrant higher 
 prices. Stocks are a purchase." Hav- 
 ing formed this conclusion, he proceeds 
 to buy. He does not try or expect to 
 buy at the bottom. On the contrary 
 he is perfectly willing to buy at the top 
 so far, provided he sees prospects of a 
 further advance. When he concludes 
 that conditions have turned bearish, or 
 that the advance in prices has overdis- 
 counted previous conditions, he sells out. 
 The "phlegmatic" type of investor, 
 
102 THE PSYCHOLOGY OF 
 
 on the other hand, can hardly ever be 
 persuaded to buy on an advance. He 
 reasons, "Prices frequently move sev- 
 eral points against conditions, or at 
 least against what the conditions seem 
 to me to be. The sensible thing for me 
 to do is to take advantage of these con- 
 trary movements." 
 
 Hence when he believes stocks 
 should be bought he places an order 
 to buy on a scale. His thought is : 
 
 "It seems to me stocks should ad- 
 vance from these prices, but I am not 
 a soothsayer, and prices have often 
 declined three points when I felt just 
 as bullish as I do now. So I will place 
 orders to buy every half point down 
 for three points. These speculators 
 are a crazy lot and there is no know- 
 ing what passing breeze might strike 
 them that would cause a temporary de- 
 cline of a few points." 
 
 Among large capitalists, and espe- 
 cially in the banking community, the 
 "phlegmatic" type naturally predom- 
 inates. Such men have neither the 
 
THE STOCK MARKET. 103 
 
 time nor the disposition to watch the 
 ticker closely and they nearly always 
 disclaim any ability to predict the 
 smaller movements of prices. They 
 are entirely ready, nevertheless, to take 
 advantage of these small fluctuations 
 when they occur, and having plenty of 
 capital, they can easily accomplish this 
 by buying or selling on a scale. 
 
 As a matter of fact, the market is 
 usually full of scale orders, and the 
 knowledge of this and of the way in 
 which such orders are handled is de- 
 cidedly helpful in judging the tone and 
 technical position of the market from 
 day to day. 
 
 The two types of operators above 
 described are always working against 
 each other. The buying or selling of 
 the "impulsive" trader tends to force 
 prices up or down, while the scale or- 
 ders of the "phlegmatic" class tend to 
 oppose any movement. 
 
 For example, let us suppose that 
 banking interests believe conditions to 
 be fundamentally sound and that the 
 
104 THE PSYCHOLOGY OF 
 
 general trend of the market will be up- 
 ward for some time to come. Orders 
 are therefore placed by various per- 
 sons to buy stocks every point down, 
 or every half, quarter, or even eighth 
 point down. 
 
 On the other hand, the active floor 
 traders find that, owing to some tem- 
 porary unfavorable development, a fol- 
 lowing can be obtained on the bear 
 side. They perceive the presence of 
 scale orders, but they think stocks enough 
 will come out on the decline to fill the 
 scale orders and leave a balance over. 
 
 To put it another way, the floating 
 supply of stocks has become, at the 
 moment, larger than can comfortably 
 be tossed about from hand to hand by 
 the in-and-out class of traders. The 
 market must decline until a part of this 
 floating supply is absorbed by the scale 
 orders which underlie current prices. 
 
 These conditions produce what is 
 commonly called a "reaction." Once 
 this surplus floating supply of stocks 
 is absorbed by standing orders, the 
 
THE STOCK MARKET. 105 
 
 market is ready to start upward again. 
 If the general trend is upward, far less 
 resistance will be encountered on the 
 advance than was met on the reaction ; 
 hence prices rise to a new high level. 
 Then profit-taking sales will be met, 
 on limited or scale orders at various 
 prices, and as the market advances the 
 floating supply will gradually increase 
 until it again becomes unwieldy and 
 another reaction is necessary. 
 
 Eventually a level is reached, or 
 some change in conditions appears, 
 which causes these scale buying orders 
 to be partially or entirely withdrawn, 
 and selling orders to be substituted on 
 a scale up. The bull market will not 
 go much further after this change 
 takes place. It has now become easier 
 to produce declines than advances. 
 The situation is the reverse of that de- 
 scribed above, and a bear market follows. 
 
 Commonly* there is a considerable 
 period around top prices when scale 
 buying orders are still found on de- 
 clines, but profit-taking sales are also 
 
106 THE PSYCHOLOGY OF 
 
 met on advances, so that the market is 
 kept fluctuating within comparatively 
 narrow limits for a month or more. In 
 fact, it is likely to be kept on this level 
 so long as public buying continues 
 greater than public selling. This is 
 sometimes called "distribution." A 
 similar period of "accumulation" often 
 occurs after a bear market has run its 
 course, and before any important ad- 
 vance appears. 
 
 A close watch of transactions, or a 
 study of continuous quotations as pub- 
 lished in certain newspapers, often en- 
 ables the experienced trader to discover 
 when the most important of these scale 
 orders are withdrawn or reversed. 
 
 A bull market which is full of scale 
 buying orders encounters "support/' 
 so-called, on declines. Bears are timid 
 about driving down prices, because 
 they are continually "losing their 
 stocks." They say that "very little 
 stock comes out on declines"; hence 
 there is a certain appearance of caution 
 in the way the market goes down, and 
 
THE STOCK MARKET. 107 
 
 the activity of trade shows, in a broad 
 way, a falling off at lower prices. On 
 the advances, however, a following is 
 obtained and activity increases. 
 
 Toward the end of the bull market 
 a change is noticeable. Prices go 
 down easily and on larger transactions, 
 while advances are sluggish and oppo- 
 sition is met at higher levels where 
 profit-taking orders have been placed. 
 The very day when scale buying or- 
 ders in a stock are withdrawn can 
 oftentimes be distinguished. 
 
 In a bear market, "pressure" appears 
 in place of "support." The scale or- 
 ders are mostly to sell as the market 
 rises. Only a small following of pur- 
 chasers is obtainable on advances, 
 hence the activity of business, in a gen- 
 eral way, falls off as prices go up. 
 The end of the bear market is marked 
 by the reappearance of "support" and 
 the removal of "pressure," so that 
 prices rebound quickly and sharply 
 from declines. 
 
 The common assumption is that this 
 
108 PSYCHOLOGY OF STOCKS. 
 
 "support" or "pressure" is supplied by 
 "manipulators." But it is quite as 
 likely to result from the scale opera- 
 tions of hundreds of different persons, 
 whose mental make-up prevents them 
 from buying or selling in the "im- 
 pulsive" way. 
 
VIII The Mental Attitude of the 
 Individual 
 
 IN previous chapters we have seen 
 that many, if not most, of the ec- 
 centricities of speculative markets, 
 commonly charged to manipulation, 
 are in fact due to the peculiar psycholog- 
 ical 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 
 
110 THE PSYCHOLOGY OF 
 
 attitude. It is confusing to the uniniti- 
 ated, and first efforts to work on such 
 a plan are almost certain to be disas- 
 trous ; but for the experienced it be- 
 comes 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 at- 
 titude of the intelligent buyer and 
 seller of securities? 
 
 The "long pull" investor, buying out- 
 right for cash and holding for a liberal 
 profit, need only consider this matter 
 enough to guard against becoming con- 
 fused by the vagaries of public senti- 
 ment 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 cor- 
 porations whose stocks he buys, the 
 development of political conditions as 
 affecting invested capital, and the re- 
 
THE STOCK MARKET. Ill 
 
 lation 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 situa- 
 tion is different. He need not be en- 
 tirely unregardful of values or funda- 
 mental 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 attitute, then, is a most im- 
 portant 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 habitues, 
 whose minds, incapable of grasping the 
 
112 THE PSYCHOLOGY OF 
 
 larger forces beneath the movements 
 of prices, take refuge in a cynical dis- 
 belief 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 ag- 
 gressive 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 float- 
 ing with the tide. Your optimism must 
 be, in a sense, of the intellect, not of 
 the will. An optimism based on deter- 
 
THE STOCK MARKET. 113 
 
 mination would, in this case, amount 
 to stubbornness. 
 
 Another quality that makes for suc- 
 cess in nearly every line of business is 
 enthusiasm. For this you have abso- 
 lutely 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 hap- 
 pen 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 en- 
 thusiasm, 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, pur- 
 
114 THE PSYCHOLOGY OF 
 
 suit of a definite plan until conditions 
 change; and, on the other, stubborn ad- 
 herence to a course of action which 
 subsequent events have proved to be 
 erroneous. 
 
 A day in the country, with the mar- 
 ket forgotten, or if necessary forcibly 
 ejected from the thoughts, will often 
 enable the trader to return with a clari- 
 fied mind, so that he can then intelligent- 
 ly convict or acquit himself of the vice of 
 stubbornness. Sometimes it may be- 
 come necessary to close all commit- 
 ments and remain out of the market 
 for a few days. 
 
 One of the most common errors 
 might be described as "getting a no- 
 tion." This is due to the failure or in- 
 ability of the trader to take a broad 
 view of the entire situation. Some 
 particular point in the complex condi- 
 tions which usually control prices, ap- 
 peals 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 
 
THE STOCK MARKET. 115 
 
 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 social- 
 istic legislation?" 
 
 You say mildly that the crops are 
 good, the banking situation sound, bus- 
 iness 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 consider- 
 able 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 
 
116 THE PSYCHOLOGY OF 
 
 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 leg- 
 islation, high cost of living, etc.; but 
 he thinks these are relatively unim- 
 portant compared with that $9,000,- 
 000,000 of new wealth. Of course, he 
 is long of stocks. 
 
 "To make the worse appear the bet- 
 ter 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 pro- 
 duce amusing results. 
 
 Beware of saying, "This is the most 
 important factor in the situation," un- 
 less 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. 
 
THE STOCK MARKET. 117 
 
 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 sud- 
 den welling up of instinct so strong as 
 to induce the trader to follow it regard- 
 less 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 accu- 
 mulation of small indications, each so 
 trifling or so evasive that the trader 
 
118 THE PSYCHOLOGY OF 
 
 cannot clearly marshal and review 
 them even in his own mind. 
 
 Only the experienced trader is en- 
 titled 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 ex- 
 tent for his customary errors of judg- 
 ment. 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 with- 
 draws 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 re- 
 mainder in reserve. 
 
 If he finds that he is usually over- 
 cautious, he eventually learns to be a 
 little more daring, to buy a part of his 
 line while his mind is still partially en- 
 veloped in the mists of doubt. 
 
THE STOCK MARKET. 119 
 
 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 tem- 
 porarily against fundamental condi- 
 
120 PSYCHOLOGY OF STOCKS. 
 
 tions, 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 bear- 
 ish at low prices. Therefore, refuse to 
 follow the market beyond what you 
 consider a reasonable climax, no mat- 
 ter how large the possible profits that 
 you may appear to be losing by inac- 
 tion. 
 
 The field covered by these chapters 
 is to a great extent new. As it be- 
 comes more thoroughly cultivated, it 
 may be possible to speak with more 
 scientific definiteness. In the mean- 
 time, the author hopes that his com- 
 ments and suggestions may be of some 
 service in helping readers to avoid un- 
 wise risks and to apply sound prin- 
 ciples of analysis to the investment or 
 speculative situation. 
 
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