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The Project Gutenberg eBook of The
psychology of speculation
This ebook is for the use of anyone anywhere in the United
States and most other parts of the world at no cost and with
almost no restrictions whatsoever. You may copy it, give it away
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eBook.

Title: The psychology of speculation

The human element in stock market transactions

Author: Henry Howard Harper

Illustrator: Haydon Jones

Release date: May 18, 2024 [eBook #73647]

Language: English

Original publication: Boston: privately printed, 1926

Credits: Tim Lindell, Craig Kirkwood, and the Online Distributed

Proofreading Team at https://www.pgdp.net (This book
was produced from images made available by the
HathiTrust Digital Library.)

*** START OF THE PROJECT GUTENBERG EBOOK THE

PSYCHOLOGY OF SPECULATION ***
 CONTENTS
The Purpose of This Book
The Human Element in Stock Market Transactions
The Pernicious Influence of the Stock Ticker
The Disconcerting Effect of Sudden Losses and
Gains
Retired Business Men in the Stock Market
Stock Market Transactions Apart from Gambling
The Stock Market Produces a New Phenomenon
—turns World-wide Disaster Into Local
Prosperity
Nobody Loves a Bear
Frenzied Speculation is the Rankest Form of
Gambling; It is a Perilous Indulgence
The Dangers of Inverted Pyramids
The Lure of the Copper Boom—and Bogus
Securities
The Perils of Over-acquisitiveness—the Human
Element in Speculation
They All Resolve, But They All Go Back
A New Knight-errant in Speculation
Some Signs are Comprehendible; Others Are
Hard to Interpret
None are so Blind As Those Who Refuse to See—
none So Foolish as Those Who Scoff at Wise
Counsel
Even the Stock Market Has Its Farcical Side
Speculators are Slaves of Sentiment
There is but One Way to Beat the Stock Market;
There are Many Ways of Being Beaten by it
The Stock Exchange is a Monument of Business
Integrity
Books Teach Wisdom, But Experience is a More
Practical Instructor
Whims and Fallacies in Speculation
Problems Defying Present Solution are Better
Deferred to the Future
THE PSYCHOLOGY OF SPECULATION
 THE
PSYCHOLOGY OF
SPECULATION

THE HUMAN ELEMENT IN STOCK MARKET

TRANSACTIONS

BY
HENRY HOWARD HARPER

WITH
ILLUSTRATIONS BY HAYDON JONES

PRIVATELY PRINTED

BOSTON—MDCDXXVI
COPYRIGHT 1926 BY
Henry Howard Harper
All rights reserved
 BOOKS BY THE SAME AUTHOR

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Clubs
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The Stumbling Block
Random Verses
The Codicil
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The Devils’ Nest
Library Essays
Highlights of Foreign Travel
(All of the above are out of print)

The Torch Press

CEDAR RAPIDS, IOWA
 THE PURPOSE OF THIS BOOK
There are many persons who, although knowing a great deal about
the stock market, do not realize that the reason why they cannot
“beat” it, is that they know too little about themselves. There are
others who know their limitations well enough to let this monster
problem alone. As it is important that one should learn to swim
before plunging into deep water, so it is well to know some of the
dangers of the stock market before delving into it.
It is not the purpose of this book to dissuade anyone from buying
and selling securities, but merely to point out some of the stumbling
blocks and handicapping influences that speculators, and even
investors, are sure to encounter.
H. H. H.
 THE
PSYCHOLOGY OF SPECULATION

THE HUMAN ELEMENT IN STOCK

MARKET
TRANSACTIONS
The stock market literature of the past thirty years would make a
vast library in itself—one that would provide reading for a lifetime.
Perhaps there is no other subject, apart from the eternal topic of
love, in which more people are vitally concerned, either directly or
indirectly. Since most of the country’s wealth and commerce is
controlled by corporations whose securities are listed on the various
stock exchanges, the price fluctuations, which often reach the daily
aggregate of hundreds of millions of dollars, either in loss or
enhancement of value, are necessarily a matter of general concern.
In 1925 the stock transactions on the New York Stock Exchange
alone amounted to the stupendous and unprecedented total of well
over 452,000,000 shares, while the sales of listed bonds totaled
more than $3,398,000,000. These figures, of course, do not include
the unknown billions of dollars worth of securities bought and sold
on a dozen or more other exchanges and through private channels.
In addition to the large daily grist of “Market Opinions,” many books
and pamphlets are written which purport to be “Guides to Traders,”
or up-to-date recipes for “Beating Wall Street.” They set forth an
exhaustive array of statistics, instructions and warnings; they furnish
elaborately charted plans indicating many of the pitfalls of
speculation; they tell how to avoid these, how to buy, what to buy,
when to buy and how to make money; but while the theories
advanced are oftentimes sound and easily comprehended, very few
people profit by them, because when once caught in the maelstrom
of stock speculation the average man becomes more or less
mesmerized, and at critical moments his conservatism, his
resolutions and his theories all take flight. Under the discomposing
influence of a rapid succession of changing values and alternating
impulses he loses his perspective, is incapable of calm reasoning,
and is likely to do precisely the opposite of what he had intended
doing. Like a piece of driftwood in a swirling stream, his actions are
controlled less by personal instigation than by the currents about
him. Therefore to write, however intelligently, or to read, however
studiously, about how to make money in the stock market is largely
wasted effort in imparting, also in acquiring, information that does
not adequately inform. Not that the instructor’s premises are faulty,
or that the reader is deficient in understanding; but that the
difficulties which necessarily attend the application of the scheme of
operations subsisting in the mind of the author are so perplexing
and disconcerting that the disciple becomes incapable of adhering to
sound basic principles. And it must be perfectly obvious to anyone
that even the teacher himself is not a master, but merely an
expounder, of his own principles; for otherwise he would be a
capitalist instead of a professional scribbler. Notwithstanding the
many excellent books which have been written on the subject, the
real secret of stock market success still remains (and probably
always will remain) locked up in the bosoms of a few who are too
busy to write, and too rich to feel the need of writing.
 THE PERNICIOUS INFLUENCE OF
THE
STOCK TICKER
The individual who trades or invests in stocks will do well to keep
away from the stock ticker; for the victim of “tickeritis” is no more
capable of reasonable and self-composed action than one who is in
the delirium of typhoid fever. The gyroscopic action of the prices
recorded on the ticker-tape produces a sort of mental intoxication,
which foreshortens the vision by involuntary submissiveness to
momentary influences. It also produces on some minds an effect
somewhat similar to that which one feels after standing for a
considerable time intently watching the water as it flows over
Niagara Falls. Dozens of people, without any suicidal intentions, have
been drawn into this current and dashed on the rocks below. And
thousands daily are influenced by the stock ticker to commit the
most fatuous blunders.
As a camera fails to record a true picture if placed in too close
juxtaposition to the object, so in studying the ticker-tape one is
restricted to a close-up view of conditions, resulting in a distorted
gauge of values; for the figures recorded often mislead and confuse
the attentive observer; in fact it frequently happens that the price
fluctuations result from a wave of hysteria among a coterie of
traders, and bear but little analogy to the true value of the stocks. To
illustrate this point more explicitly, the stock of almost any
conservatively capitalized and well managed concern paying six
dollars annually in dividends has an investment value of from $85 to
$100 a share; but in the ups and downs of the market the stock gets
buffeted about on the exchange in obedience to the varying
sentiments of traders, sometimes selling as low as $50, and at other
times as high as $150, without any change whatever in the
company’s earnings, its prospects, or its management. (These
matters will be dealt with a little farther on, and exemplified by
showing their effects upon the mentalities of various types of
speculators.) It does not follow that one who keeps in touch with the
stock market by telephone, or through the daily papers, will find his
path free from thorns and snares; but he will at least have a more
open perspective than one who submits to the influence of the
ticker.
Any intelligent trader may reason out exactly what he ought to do
under certain specific conditions; but in the quickly shifting and
uncertain process of determining values he loses his mental poise;
and experience proves that anyone whose reasoning faculties
become confounded is apt to be affected by some form of hysteria,
and will frequently do the opposite of what he would do under
normal conditions.
The most copious and the most unreliable financial writers are the
market “tipsters” who write daily letters of advice to an army of
subscribers, and claim to have more or less positive knowledge of
what certain stocks or groups of stocks are going to do marketwise.
They often profess to have definite “inside information,” which any
subscriber may receive at a stated price, ranging anywhere from $10
a month upward. These false financial prophets, who lead a horde of
blind followers, should not be confused with reputable bureaus and
statistical experts who base their opinions and their advice to clients
upon a logical analysis of general conditions.
Henry Fielding wrote a whole essay to prove that a man can write
more informingly on topics of which he has some knowledge than on
matters that he knows nothing about. He believed also that mankind
is more agreeably entertained by example than by precept; therefore
it is not the purpose of this discourse to teach anybody anything,
unless perchance something may be gained by example or
suggestion. There are four subjects on which advice, however good,
is generally wasted,—politics, stock speculation, religion, and love;
for in these matters grown-ups rarely follow the advice of others,
and when they do, if they profit by it they take all the credit to
themselves, whereas if they lose they always blame the adviser.
Such are the inexorable and universal laws of human nature.
Anyone may relate his own stock market experiences, or those of
others—perhaps to the surprise or enlightenment of his audience.
He may even venture his opinions on the subject; but for anybody to
assume that he can continuously operate an unfailing system of
making money on stock or grain exchanges would be equivalent to
asserting that he could invert the fundamental laws of psychology, or
that he could beat the game at Monte Carlo by scientific methods.
Many have tried both, to their sorrow.
And still, hundreds of thousands of people continue to play at
gambling tables, and hundreds of thousands speculate in stocks.
There are many persons who gamble moderately all their lives, just
as some drink moderately all their lives, with no resultant harm;
while with others both of these inhibited practices become fixed and
ruinous vices. Since trading in stocks has the appearance of being an
easy way of making money, it is one of the most alluring pursuits of
modern times; and from this very fact, although legalized for all, it is
susceptible of becoming one of the most dangerous habits known. It
is dangerous for the confirmed addict not only because he is apt to
lose, but for the reason that it distracts his attention from business
in daytime and frequently destroys his rest at night. But as it would
be folly to advise people not to embark in commercial pursuits
because statistics show that upwards of ninety per cent. of business
ventures result in failure, so it would be useless to caution people
not to trade in stocks because it is a hazardous undertaking in which
a peculiar sort of sagacity and self-control are the only safeguards
against certain disaster.
Most people of sturdy mentality are unwilling to admit that they
could be made easy subjects of hypnotic influences, and would scout
the idea that mere business transactions in securities could effect
any undue subversion of their equipoise. The average human mind
is, however, incapable of maintaining its equilibrium under the strain
of great excitement; and no amount of knowledge, either inherent or
acquired, no amount of experience, however dearly bought, will
enable one always to think intelligently or act wisely under highly
nerve-racking conditions. It is said that persons who become
disoriented in a forest will almost invariably go in the wrong direction
(I have done so myself on two different occasions); and that in an
effort to salvage goods from a burning house they will throw mirrors
and other fragile articles out a third-story window and carry pillows
downstairs.
 THE DISCONCERTING EFFECT OF
SUDDEN
LOSSES AND GAINS
There are but few things more unbalancing to the mind than the act
of suddenly winning or losing large sums of money. A few years ago
at Monte Carlo I was in company with a friend, a well known man of
affairs who while there played at roulette nearly every day, merely as
a pastime. He was of mature age, naturally methodical,
conservative, temperate and cool-headed. He made it an unalterable
rule to limit his losses to $200 at any one sitting, and on losing this
amount he always stopped playing. His bets were usually limited to
two dollars on the numbers, and never doubled except for one turn
of the wheel when his number won. He generally played three
numbers at a time; never more than four. For ten consecutive
sittings luck was against him and each time he had lost his stake of
$200. I saw him get up and leave the room, apparently in a state of
disgust. An hour or so later I discovered him at a roulette table in
another room stacking his chips in piles on a dozen or more
numbers. Now and again when he exceeded the limit the watchful
croupier reduced his bets and pushed a few disks back to him. In
addition to betting on the numbers he was staking a thousand franc
note on one of the three columns, another thousand on the colors,
and a like amount on the center dozen. In one run he lost seventeen
consecutive bets on red, of a thousand francs each. His eyes were
bloodshot, his fingers twitched, and plainly he was under the strain
of great agitation. He continued to play for three hours or so, when
all of a sudden he got up, stood for a moment looking dazedly
about, then left the table. He afterwards told me that he lost twenty
thousand dollars; and that he hadn’t the slightest recollection of
anything that happened during the play, nor did he realize the
amount he was betting. In this connection, it is a fact not generally
known, that many rich men sign printed cards of instructions to the
proprietor of a certain well known gambling club in the South,
directing him to stop their play and refuse them further credit
beyond a certain specified sum on any one day or evening of play,
and refusing to become responsible beyond that amount. If men
who trade in the stock market were to impose like restrictions upon
their transactions the losses would in many cases be greatly
minimized.
 RETIRED BUSINESS MEN IN THE
STOCK
MARKET
Retired business men suffering from ennui, have often had recourse
to the stock market as a means of stimulating their emotions and
expanding their fortunes; with the result, in the first of these
purposes they have usually succeeded beyond their expectations,
while in the second they have met with uncharted obstacles. Some
years ago when many of the great trusts were in process of
formation a well known Pittsburgh magnate sold out his business to
the United States Steel Corporation and later bought a home in New
York and turned his attention to stock speculation. After plunging
into a boiling market and buying thousands of shares at top prices,
the trend eventually changed and he found himself on the crest of a
tobogganing market with more than a hundred thousand shares of
speculative stocks. At length when the pace threatened both his
fortune and his peace of mind, in a fit of disgust he dumped his
holdings overboard and proceeded to damn the market, the broker
and everything else, including himself for being such an unlucky
simpleton.
“My dear Mr. Blank,” said his broker, “you are possibly quite justified
in all your abuse, except that of yourself, to whom you really should
apologize, since you do yourself a great injustice. You have had six
months’ experience in this game at an expense of a little less than
two millions of dollars, whereas at the pace you began you were due
to lose at least five times that amount but for your rare judgment
and cool-headedness.”
“But why in hell didn’t you tell me all this before?” inquired the irate
customer. To which the broker calmly replied, “It’s my business to
take orders; not to give directions to a man of your understanding.”
When the American Hide and Leather Company was formed a
number of years ago, a prominent Boston leather merchant of my
acquaintance, sold his business to the new organization for a round
million dollars in preferred stock and bonds, and in the course of the
next few years of more or less restless inoccupation he devoted
himself to a systematic study of investment securities and general
stock market conditions. The panic of 1907, when values were
almost entirely lost sight of in the mad scramble to liquidate stocks,
afforded a rare opportunity to view the follies of reckless
speculation, and our astute leather merchant was quick to observe
the importance of this salutary lesson. The recovery that followed
was almost magical, and many who bought stocks at the low prices
doubled their money in a few months. Then following this sharp
recovery there was the natural setback when speculators undertook
to convert their new wealth into cash. And this too proved a
wholesome lesson to our new apprentice in the game of high
finance. For some years he had held to the conservative practice of
investing only in non-speculative bonds, but this proved to be a slow
and monotonous process of enlarging his fortune; furthermore it was
devoid of the exciting thrills experienced by those who make
fortunes overnight. He thought the funds of widows and orphans
ought properly to be invested in gilt edge bonds and mortgages, but
for a man of his business sagacity, in the prime of life, to content
himself with merely cashing his coupons every six months was to
decline into a state of innocuous desuetude—a condition into which
he was determined not to retrograde. To launch one’s bark into the
rapidly shifting currents of fortune in the stock market and attempt
to steer an even course is one of the surest preventives of ennui,
and after deliberately weighing and analysing conditions from every
conceivable angle our erstwhile leather merchant concluded that
cutting a few coupons now and then was too tame an occupation for
a man of his acumen and ambition. He informed his friends that
after years of careful study of the “game,” he was convinced that the
reason why people lost, was that while in theory they all had the
right ideas, they all used wrong formulas in practice. He declared
that the “public,” so-called, always “bought at the top and sold at the
bottom”—a commonplace in stock market parlance, though not
necessarily true. Also that the inclination of all speculators is to
venture out beyond their depth, i. e., to buy more stocks than they
can pay for, or protect by ample margin. This indiscretion he thought
to be especially characteristic of those with but small capital, whose
eagerness for large gains outstripped their conservatism and
exposed them to the perils of abrupt and unexpected reactions and
panics. He had never bought more hides and leather than he could
pay for, either with his own funds or with money easily borrowed
from banks; he would never buy more stocks or bonds than he could
pay for, or protect with sufficient margin to carry them through the
severest depression.
He was a self-made man; he had entered his firm as errand boy, and
by sheer force of perseverance, ambition and intellect he rose
steadily in usefulness and power until he became sole proprietor of
the whole establishment. His prestige and the bulk of his fortune
had been made in buying and storing goods when the markets were
glutted and prices were low, and holding them till the markets were
bare and prices were high. After accumulating large stores it
sometimes required a year or more of patient waiting for the
readjustment of trade conditions; but never had there been a time
when during a given cycle, prices had not been abnormally low and
also abnormally high. He reckoned his twenty-five years of this sort
of training as a singularly qualifying element of success in buying
and selling stocks. This undertaking, like dealing in hides and
leather, required forethought, discretion, patience and courage.
There was scarcely a two-year period in any decade wherein stocks
in general could not be bought reasonably cheap; nor was there a
similar period when at some time during the twenty-four months
they could not be sold at fairly high prices. Statistics proved this to
be almost infallibly true; statistics likewise proved that the
preponderance of failures in his own line of business could be traced
to injudicious purchases of large stores of merchandise at high
prices, with resultant inventory losses. As a merchant he had learned
that buying and selling leather and hides at a profit was a matter of
forecasting future conditions in the light of past events; and as a
student of stock market conditions he learned that a recovery of
values always follows a prolonged slump in the price of stocks, and
that sure success awaits those who pick the right psychological
moments to buy and sell.

In due time this retired merchant secured a desk in a brokerage

office and undertook to study the stock market systematically at
close range, and to reduce some of his theories to actual practice.
He did not launch into this new venture as one would plunge into a
cold bath; he patiently watched the action of the market from day to
day, until stocks declined to a point where it seemed safe to begin
buying on a scale down. Meanwhile he continued to study stock
market charts and conditions—charts with double bottoms, double
tops, pyramids and all such enlightening information—about past
performances. At length he bought a few hundred shares of selected
stocks, depositing bonds as margin—ample margin of fifty points or
more. Prices reacted a little further, and in keeping with his motto,
which was—“Buy on the decline, when the public is getting out, and
sell on the rise when the public is getting in,” he increased his
holdings at every two or three points decline. In the course of time
the market faced about, stocks began to recover, and in a few weeks
he had the satisfaction of seeing his plans work out successfully in
experiment, with a net gain of enough to cover interest on his
investment for more than four years. According to precedent a
temporary reaction was due; therefore, like most wary beginners, he
sold out and cashed in his profits. In his exhaustive study of stock
market psychology he had learned that while it is the practice of
inexperienced traders to take small profits on stocks in a rising
market, it is also their custom to buy the stocks back again at much
higher figures, instead of waiting for prices to decline. This was one
of the danger pits charted on his course of action; one of the many
against which he had built up mental fortifications, strong enough in
seasons of peace and calm, but in most people easily destructible by
the baffling influences of stock market speculation.
Although a beginner in practice, he was a veteran in theory, for prior
to entering the financial arena he had made hundreds of imaginary
purchases and sales, nearly always at a profit. Moreover he had
discovered that one may play both sides of the market, apparently
with equal safety, and that the biggest “killings” are said to be made
on the “short” side. By selling “short” on bulges and “covering” (i. e.,
buying the stock in to cover the sale) on reactions, it was possible
not only to make money both ways, but also to avoid the tedium of
waiting inertly for opportune occasions to buy at bargain-prices.
From the experience of others he derived a valuable lesson, namely,
that investors and traders are always too eager to keep their capital
constantly employed; that they are prone to hold stubbornly to one
position, either long or short; and that the wellnigh irresistible
impulse to get back into the market after selling out, whether at a
profit or a loss, has probably been the ruination of more speculators
than any other one cause. Playing the market both ways seemed a
sure means of forestalling this error.
 STOCK MARKET TRANSACTIONS
APART
FROM GAMBLING
The thought of becoming a stock “gambler” was farthest from this
man’s mind; for gambling in any form was contrary to his code of
ethics. But buying and selling legitimate commodities could not be
construed as gambling; therefore stocks and bonds, being legitimate
commodities, could be bought and sold without doing violence to the
most sensitive conscience. In order to gamble, one must “risk or
stake something on an uncertain event;” which is popularly regarded
as a vice, and is made legally wrong because it is said to be injurious
to the public morals. It also is morally wrong to gamble, because if
you win you deprive your fellow-being of something without giving
any adequate return. Our friend contended that stocks bought at
figures below their intrinsic value are so sure to advance, that the
transaction does not come within the given definition of the word
gamble; also that the same rule applies to stocks sold at prices far
above their worth, no matter whether for long or short account. He
reasoned that if he gained by selling a stock short, although
someone was apt to be the loser, he had no means of knowing who
that someone was, therefore he assumed no moral responsibility in
prudently acquiring money in a businesslike way, even at the
expense of some indefinite person who had been foolish enough to
risk it. If the act of selling stocks which one does not own is
regarded by some as being unethical in the strictest sense, it is at
least sanctioned by general custom. All sorts of goods are sold for
future delivery, even before they are manufactured; and our
erstwhile merchant had often sold leather for forward delivery, while
it was still in process of tanning; hence he had no scruples against
selling stocks in anticipation of being able to buy and deliver them
later.