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                               THE THEORY
                                   OF
                             STOCK EXCHANGE
                              SPECULATION.

                                   BY
                              ARTHUR CRUMP.

                     With Preface and Annotations by
                            H. W. ROSENBAUM.

                                NEW YORK:
                            H. W. ROSENBAUM.
                                  1887.

                            COPYRIGHT, 1886.
                           BY H. W. ROSENBAUM.

                        JONES PRINTING CO. PRESS,
                         47 Broad St., New York.




PREFACE.


Some years ago I came across a book, called “Crump’s Theory of Stock
Speculation,” which had gone through several editions in England; and the
practical wisdom expressed therein impressed me so forcibly that ever
since then I formed the project of publishing an American edition.

The reader may be astonished that, as a broker, I desire to give such a
book a larger circulation than it possessed heretofore, as the natural
conclusion would be that it might injure my business. I feel, however,
that it is not so, and think that a broker loses nothing by doing his
duty in warning his clients against danger, and showing them the pitfalls.

I do not quite agree with the author of the book on every point,
especially when he seeks to convey the impression that it would seem
almost impossible that any profit could be derived from Stock Exchange
speculation. During my long experience I have seen many speculators
accumulate large fortunes, and I believe that when speculation is
conducted by a clear-headed man, as a matter of business and not as a
matter of amusement, it offers great chances.

Where the strength of Mr. Crump’s work lies is in his showing what
attributes of character a man must possess to be successful, and with
these attributes a man must prove successful in stock speculation as well
as in any other business. Condensed, these attributes are: first, a clear
head; second, capital; and third, patience.

I do not agree with Mr. Crump, that a speculator, to be successful,
must be a hard-hearted, selfish man. I found it different with most of
the prominent men in Wall Street. Of course, if a Gould or a Vanderbilt
buys up a whole railroad, he cannot very well take many people into
his confidence; but these men are not what is generally called
speculators—they are generals or diplomats, and they are not different in
their actions from generals in warfare or diplomats in politics.

Outside of this class, I found generally, when I asked one of the
prominent speculators for his opinion of the market, that he gave
me his true and candid opinion of the future of the market; and the
probabilities are that, if even not acting on this opinion at that very
moment, his general policy was based on such a forecast of the market’s
condition.

The strength of the successful speculator lies in his observing the
important principle set forth by Mr. Crump on page 60 of his work.
“Speculators never set sufficient value on the importance of avoiding a
loss—they think only of the profits.” As it is with our money affairs
when we say, “_Look after the pence; the pounds will take care of
themselves_,” so it is with speculation. Look after the losses; the
profits will take care of themselves. Never refuse a profit, is a golden
motto for speculators, which unhappily few of them, in their greediness,
have the courage to adopt. The observance of this rule is the main cause
of the success of the best speculators, and the non-observance is the
cause of failure of even their confidential friends.

Very few fortunes have been made in Wall Street at one stroke. Fortunes
which were made in that way were generally lost again in a very short
time. Most of the long, lasting, and solid fortunes were made by a
gradual accumulation of profits extending over a great many years. The
beginnings of these were sometimes quite small, and, as the capital
increased, larger operations were entered into.[1]

Another cause of failure is the habit of taking larger risks than the
means of speculators warrant. They naturally become nervous when they
begin to see their capital dwindle away, and then begin, what is called
in Wall Street, to “chip out.” Now this is the curse of the speculator,
not so much on account of the loss, as on account of the demoralization
it will lead him into. Of course, big losses ought to be avoided, but
at the same time well based and matured operations may sometimes be
temporarily upset by a temporary manipulation of the market, or by some
accidents which however right themselves in a few days, and cannot
seriously interrupt the natural course of the market. In such a market a
nervous speculator may “chip out” a fortune, and still be right in his
views as to general conditions.

I think it is better to make one loss of 5 per cent. or so, when you
know you are wrong, than to make three or five losses of 1 per cent.
each, when you do not know whether you are wrong or right, and in this
connection Mr. Crump has very much undervalued the importance of options.

Options, if considered in their proper light, are the most important
adjunct to speculation. They will enable the speculator to bridge over
many difficulties, and furnish capital to speculators who know how to use
them.

I do not say this simply because I am a broker in options, but because
it is my honest conviction that options are cheap at almost any price,
when a speculator has occasion to use them. If money is lost by buyers
of options, it is because many of them are bought by people who have not
sufficient reasons for doing so, and after the option has been bought,
the owner does not know what to do with it. I have, for example, known
people to be bulls on Lake Shore, and then go and spend money for a put
in Western Union. Is it any wonder that men who do business on such
principles lose money?

That many stock brokers object to options is natural. They look out for
commissions, and greatly prefer to buy and sell several times a day on
stop orders or on margins, even if customers lose money thereby, rather
than see them make money two or three times a year, through operations
extended over periods of two or three months each.

I do not mean to say that all stock brokers are of this kind, but
if speculators recall their own experience, they will undoubtedly
remember how often their broker said to them, “Cut your losses,” if the
transaction was against them, while, if the transaction showed a profit,
the advice was, “Taking profits will never make any man poorer.” All
these things make commissions for the broker, and this is the object of
his business.

Another reason for the unwillingness of some brokerage houses to
encourage speculation against options must be found in the fact that a
great many of them have not sufficiently large capital to enter upon
large transactions without any other margin than the option. Although I
acknowledge that it is hardly fair to ask a broker to do an unlimited
amount of business based on options alone, the fact, nevertheless, exists
that the strongest houses have always been glad to encourage trading
against options, and only the more insignificant houses are opposed to it.

A well planned and matured operation, looking far ahead, backed by ample
capital and patience, is the only way to make a fortune at the Stock
Exchange, and prudence demands that in case the speculator’s idea should
have been wrong, he should have a safe way for a retreat open. Options
will fulfill all these demands; and no matter how expensive, if the
speculator can afford it, it is the only way of speculating in a safe and
reasonable manner.

There are some people who are under the impression that they know
everything already, and have nothing to learn, and such may be amused,
but not benefited, by reading this book; others, however, who are
inclined to speculate (and there are and always will be many of them)
cannot fail to derive great benefit from the perusal of Mr. Crump’s
interesting work, and I hope I may put money in some people’s pockets
or save others from ruin by sending this book forth among the American
people.

                                                         H. W. ROSENBAUM.

NEW YORK, NOV., 1886.

The last chapter in Mr. Crump’s book, entitled “Outside Criticism on the
Causes of Disturbance in the Money Market,” has been omitted in this
edition, as it relates simply to questions about the policy of the Bank
of England in regard to regulating the discount rate, and a controversy
and correspondence on this point between Mr. Crump and Mr. Bonamy Price.

As this whole question is of no practical value or interest to the
American reader, I thought it expedient to omit the whole matter.

                                                                 H. W. R.




CONTENTS.


                                                                     PAGE

                                CHAPTER I.

                       _Technical Terms Explained._

     1. Jobbers and Brokers                                             19

     2. The Bull                                                        19

     3. The Bear                                                        19

     4. Contango                                                        20

     5. Backwardation                                                   24

     6. Options                                                         26

     7. The “Put and Call” Option                                       26

     8. The “Put” Option                                                26

     9. The “Call” Option                                               26

    10. The Fortnightly Settlement                                      27

    11. Speculation by Members of the House                             28

                                CHAPTER II.

       _The Importance of Special Knowledge regarding the Regularly
               Recurring Causes that influence the Markets._

     1. The Temper of the Public                                        32

     2. Meteorological Influences                                       32

     3. A Favorable Period of the Year                                  35

     4. Causes affecting the Value of English Railway Stocks            36

     5. The Course to pursue at the Turn of the Half-year               36

     6. Second Half of the Year more favorable for Bear Operations      37

     7. Activity among Buyers                                           39

     8. The Bull Speculator’s Great Chance                              39

     9. The great importance of being now and again altogether
          Clear of the Markets                                          40

    10. The Movement of Prices near the Settlements                     41

                               CHAPTER III.

          _The Right Temperament for a Professional Speculator._

     1. Cool-headedness an indispensable Condition of Success           43

     2. The Uselessness of Haphazard Speculation                        45

     3. Accurate Foresight                                              45

     4. The Cool Man, or Professional Speculator                        46

     5. Observance of the daily published Telegrams from abroad         46

     6. The Selfishness and Hard-heartedness of the Professional
          Speculator                                                    48

     7. The Non-professional or Haphazard Speculator                    50

     8. The Misfortune of Early Gains                                   55

     9. Very few Failures made Public                                   57

    10. Greediness involves Loss                                        60

    11. Keeping one’s own Counsel                                       60

                                CHAPTER IV.

            _The Increase of Speculation in Stocks and Shares._

     1. Stock Exchange Gambling increases in Europe, while Public
          Gaming-Houses are on the decline                              62

     2. Speculation an Out-growth of prosperous times                   63

     3. Commercial prosperity unhealthily fostered by Illegitimate
          Speculation                                                   64

     4. The Influence of Trade Profits upon the Stock Markets           64

     5. An increase in the amount of Trade Profits realized, causes
     an Increase in the number of Securities                            65

     6. Speculation by Established Companies                            66

     7. The Demoralization caused by Temporary Success                  66

     8. The New Era in Speculation                                      67

     9. Collapse through Over-speculation in Austria                    67

    10. Increase in the number of Members of the London Stock
     Exchange                                                           68

                                CHAPTER V.

                   _Modern Influences upon the Markets._

     1. A Fixed Line of Action                                          71

     2. Closer Uniformity of Values in all Markets through the
          Development of the Telegraph System                           72

     3. A speculator cannot hope to succeed in any degree, unless
          his arrangements are as complete as those of a man
          engaged in _bona fide_ business                               73

     4. The Diminution of Gluts in all Markets                          73

     5. Modern conditions render it more difficult than formerly
          for Small Mercantile Houses to succeed                        73

     6. Every Commercial Revulsion destroys Houses of a Speculative
          character, and throws the good business into the
          hands of the large sound Establishments                       75

     7. The Extension of Long-wire Telegraphy                           78

     8. Money Famines should henceforth be as improbable of
          occurrence as Corn Famines                                    78

     9. Advantages derived from opening up communications with
          the Corn-growing Provinces of Russia                          80

    10. The Growth of Wealthy Monetary Centres                          82

    11. Private Cipher Telegrams as exterior influences upon Prices     83

    12. The Altered Character of interior influences upon Prices        84

    13. The Creation of Securities to meet the Demand                   84

    14. Getting behind the Scenes                                       85

    15. The Difficulty of “Cutting” a Loss                              85

                                CHAPTER VI.

                           _Cacoëthes Operandi._

     1. Waiting for Extremes                                            87

     2. Reaction generally more rapid after a Sharp Rise                88

     3. What Not To Do                                                  90

     4. Special Information                                             90

     5. Much Money only obtainable as a certainty by Hard Work          90

     6. An Average Instance of Haphazard Speculation                    91

                               CHAPTER VII.

                             _The Pit-falls._

     1. Hidden Forces Opposed to the Speculator                         94

     2. The Turn                                                        95

     3. The Danger of taking Advice                                     95

     4. A Disinterested Opinion                                         96

     5. All the Eggs in One Basket                                      96

     6. Traps for the Public                                            97

     7. The Public as Speculators are Bulls by Nature                   97

     8. A Case of Roasting the Bulls                                    98

     9. A Cut off the Loaf and Pass it on                               98

    10. Short Periods in, and Long ones out                             99

                               CHAPTER VIII.

                        _Speculation With Capital._

     1. Restoring the Balance of Advantages                            100

     2. The Necessity of Some Capital                                  101

     3. Capital to expend in Feints                                    102

     4. La haute Finance                                               102

     5. The Best of all Chances for a Speculator with Capital          103

     6. The most Legitimate Form of Speculation, Pawning the Stock     104

     7. When to Begin and when to Leave Off                            105

     8. Test of a Speculator’s Pecuniary Position                      105

                                CHAPTER IX.

                      _Speculation Without Capital._

     1. A Familiar Case                                                107

     2. Bitter Experience                                              108

     3. The Question of Seeing it Out                                  108

                                CHAPTER X.

                        _The “Tip” to Buy or Sell._

     1. A Friendly “Tip”                                               110

     2. Unloading at other People’s Expense                            111

     3. The Qualified “Tip”                                            111

     4. The Unqualified “Tip”                                          112

     5. “Tips” worked by Syndicates                                    112

                                CHAPTER XI.

                        _Speculation by Machinery._

     1. Machinery in existence for directing Human Volition            114

     2. The Patrician Investor                                         115

     3. Administering Shares to the Public                             116

                               CHAPTER XII.

         _The Shifting of Speculation from the Higher to the Lower
                          Classes of Securities._

     1. Speculation in Consols as a Hedge                              120

     2. Speculation has Changed its Venue                              121

     3. Increase of the Indebtedness of the States of the World        121

     4. The Fluctuations in the Price of Government Stocks             121

     5. High Class Stocks more firmly held than formerly               122

                               CHAPTER XIII.

              _The Short “Turns,” or who makes the Profits?_

     1. The “Turn,” a known quantity always against the Speculator     124

     2. The “Turn,” a Loss in going into, and also in coming out
          of the Market                                                125

     3. The difference in the character of the “Turn,” as compared
          with former times                                            125

     4. Special Danger of Speculating in a Stock that is quoted
          very wide                                                    127

     5. The “Turn,” the Income of the Jobber                           128

                               CHAPTER XIV.

       _In what respect is Speculation useful in Markets generally?_

     1. Speculation for the Rise, which is both Legitimate and of
          Benefit to the Community                                     129

     2. Speculation for the Fall, which is both Legitimate and of
          Benefit to the Community                                     130

     3. A Reasonable Relative Value for all Commodities                131

     4. The Three Classes into which Speculators may be divided        132




INTRODUCTION.


Our object in writing this book is to endeavour to show to persons who
may contemplate trying their hand at Stock Exchange speculation, the
improbability of their hopes being realized. Much mischief and trouble
would be avoided, and a deal of money saved, if, before entering upon
such a dangerous career under the most favorable circumstances as that of
a speculator, a study were made of the difficulties such an occupation
involves, and also of the chances against the operator, considered as
one individual _versus_ the Stock markets. It is melancholy to think
of the vast sums of money that are invested in the most serious sense
of the word, annually by Stock Exchange speculators in the purchase of
a sorrowful experience. It seems to be in the nature of things, that
numbers of people must come to grief in their early struggles, through an
obstinate determination to trust complacently in their own ingenuity, in
preference to profiting by the experience of others. A mountain climber
who disclaims the aid of a guide, and is subsequently fished out of a
crevasse, can expect no other epitaph, even from his friends, than that
he has paid the deserved penalty of extreme temerity and folly. There are
probably many guides who can ensure a safe passage over most mountain
defiles, but he would be a bold man who guaranteed to pilot a young
speculator through the Stock markets, and bring him out to a certainty
with a profit.

If a speculator asks the advice of what we will term “an old hand,” and
it is in his interests to tell him what he really thinks, he will say:
“Leave it alone.”

Why so many people will never be convinced except by their own personal
experience is, that they cannot believe what others say of things that
are hidden.

“Hereof experience hath informed reason, and time hath made those things
apparent which were hidden,” says Sir W. Raleigh.

    “But apt the mind or fancy is to rove
    Uncheck’d, and of her roving is no end,
    Till warn’d, or by experience taught, she learns
    That not to know at large of things remote
    From use, obscure and subtle, but to know
    That which before us lies in daily life
    Is the prime of wisdom,”

says Milton; and

    “But if you’ll prosper, mark what I advise,
    Whom age and long experience render wise,”

says Pope.

Stock Exchange speculation is very deceitful to the eye, and also to
the ear. In some respects its associations are like those of a morass,
under whose smooth and inviting surface are hidden the remains of unwary
travellers. Those who are new to the business see only the glittering
surface, and hear only of the fortunes made by stock brokers. People
seldom tell of their losses.

Individuals who are tempted, not only by curiosity, but by a love of
excitement, and more than all in this case by the love of gain, go into
the markets and lose their money, and quit the place with much the same
feelings as the man who paid a penny to see a horse with his tail where
his head ought to be.

“If we hope for things of which we have not thoroughly considered the
value, our disappointment will be greater than our pleasure in the
fruition of them,” wrote Addison.

The most brilliant good fortune which may result from the operations of
a speculator generally fall below his anticipations, when the operations
are reduced to figures. It appears that the imagination gets, as it
were, diseased by feeding on the contemplation of very rapid gains; and
that whatever may be the reality of a hypothetical gain, the mind gets
bewildered and fails to estimate as an element of loss, the surrounding
husks in which the fruit is enclosed. One forgets that every tangible
advantage, in whatever form obtained in this life, has to be got out of a
shell. What, then, must be the speculator’s feelings when the balance is
on the wrong side of the account?

It has been suggested that the abolition of “time-bargains” would
materially, if not quite, prevent much of the mischief that results from
speculation; but it is no more possible entirely to do away with the
custom of “time-bargains” than it is to abolish credit in other kinds of
business. It may be readily conceded that a very large number of those
who are ruined or greatly injured by Stock Exchange speculation, would
never operate at all if they were called upon even to make a deposit
before the purchase was effected. But when it is considered that to
abolish “time-bargains” would be to ruin at once half the brokers in
existence, the difficulty of effecting what from one point of view would
be a most salutary change of custom, will be understood. In our day money
is so closely employed that a fortnight is not too long to get the funds
together, when, for some good reason or other, a change of investment
has been determined on. It is often that such a transfer gives rise to a
course of speculation that ends in disaster. A purchase effected for the
account[2] with the view of changing from one stock to another leaves at
the end of the fortnight, we will suppose, a handsome profit. The buyer
of the stock takes it, and postpones the intended change of investment,
thinking he shall get rich sooner by such an operation as that, than by
simply transferring his money to another security that promised a better
yield per cent. He has another try, expecting the same good fortune. In
the end he loses as usual on balance, which he would not probably have
done if he had bought and sold for money, finishing the operation on
the same day. This is what often causes loss to people who can afford
to lose, if they stop soon enough. The great mischief is done by the
facilities afforded by “time-bargains” to operators who have a little
money, just sufficient to enable them to keep afloat as speculators in
fair weather. The first serious disturbance that violently agitates
prices sweeps them away in a shoal.

The question which a sensible speculator will ask himself before he
begins to operate is, What are the risks incurred of losing his all at
one stroke? De Morgan, in his book on probabilities, says in Chapter V.,
on the risks of loss or gain, “A man should not hazard his all on any
terms; but in ventures the loss of one of which would not be felt, we
may suppose the venturer able to make a large number of the same kind;
in which case the common notions of mankind reinforced by the results of
theory, tell us that the sum risked must be only such a proportion of
the possible gain as the mathematical probability of gaining it is of
unity. For instance: suppose I am to receive a shilling if a die, yet
to be thrown, give an ace; in the long run, an ace will occur one time
out of six, or I shall lose five times for every time which I gain. I
must, therefore, make one gain compensate the outlay of six ventures, or
one-sixth of a shilling is what I may give for the prospect, one time
with another. But one-sixth is the probability of throwing the ace.
_Principle_—Multiply the sum to be gained by the fraction which expresses
the chance of gaining it, and the result is the greatest sum which
should be given for the chance.”[3] “A man should not hazard his all
on any terms.” Does a man who enters upon a career of speculation take
the trouble to consider at starting whether or not his first operation
places him in a position in which he hazards his all? There is not
probably one speculator in a hundred who ever thinks of it at all. We
will suppose a man to be worth £200 in cash as his all, applicable to the
payment; of losses. It may safely be stated that numbers of speculators
open accounts with a less sum, in fact a considerable proportion of
speculative operations are entered upon in reality without any funds
at all; misfortunes in other vocations being frequently followed by
gambling in the Stock markets. A speculator with £200 to pay losses with
is in this position if he buys, for instance, for the rise £5,000 of any
English railway stock; a fall of 5 per cent., which even in two or three
days is nothing very extraordinary, carries him £50 “under water.” What
can he reckon upon on the other side, by keeping the account open, that
is a mathematical certainty like the occurrence of an ace one time out
of six in the long run in throwing the die? If he be exposed to such a
loss at any moment as that mentioned, the risk is an absurd one to run
if there is not at least an equal chance of a similar rise, and several
times £250 in reserve. But all experienced in Stock Exchange fluctuations
know that upward movements are, as a rule, gradual, a rise of 1 per
cent. being considered as a profit which a speculator should without
hesitation take, while a fall all round in a market of two or three per
cent. in a day is of more common occurrence.[4] It may here, perhaps,
be retorted that if a fall of 5 per cent. is nothing very extraordinary
to happen in a few days, while a rise is, as a rule, gradual, why not
speculate for the fall? The answer is, that the public are very seldom
indeed bears. It goes against the grain. Speculation with the public,
as a body, is a fair weather game. When the most potent influences are
affecting the Stock markets downwards, ordinary people hold aloof. We
shall go more into detail with reference to this peculiarity farther
on. That it is so is a fact, and it is easily accounted for. When you
are dealing with a die, a hexagonal body, you know that it must fall
on one of its six sides, and that each side to a certainty will have
its turn, and therefore a mathematician is able, from there being a
limitation set to the risk incurred, to estimate to a fraction what
amount a thrower of the die can afford to venture, five times out of
six, on the chances of the ace turning up, so that in the long run he
will not lose. A game of die-throwing for money, conducted by one of two
players upon principles based upon the doctrine of probabilities, and
upon conditions to give him a certain profit, can only be continued for
a short time, as the absurdity of it becomes speedily evident to the
other player, and play ends. Those with whom outside speculators deal in
the Stock markets get all the profit also in the long run, much upon the
same system that professional bettors on horse-racing always win in the
long run by backing the field. In the die-throwing gambling there is no
mystery, at least very little for the ordinary understanding. A person
of average intelligence who is quite unable to comprehend that it is a
mathematical certainty that a die will show the ace upwards, in the long
run, one time in six, can be got by simple observations to see that in
a great number of throws the ace will have appeared about as often as
once in six throws. The fact of his losing his money through betting that
it would not be so would, in any case, bring the truth home to him. The
case, however, of speculation in the Stock markets is very different.
Although so large a proportion of speculators speedily lose their money,
a large proportion of them also, when quitting the arena through want of
capital to go on with, seem to entertain a strong conviction that money
is to be made at it. There is very frequently an impression left that if
this and that, and the other, had been done instead of what was done,
the result would have been otherwise. They regret that their purse was
not longer that they might try again, feeling sure that with such a rich
experience they would avoid the mistakes that had landed them losers. The
Stock Exchange speculator has an innumerable number of influences arrayed
against him, at least one-half of which he never sees at all until, like
the sunken snag, which sinks the steamer without any warning, one or
other of them wrecks his fortunes before he is aware of his danger.

A speculative operator has a very dangerous basis upon which to lay the
foundations of the argument by which he endeavours to justify himself,
and it is this. He says to himself: “there are only two ways for a price
to move—up and down.” At first sight the chances seem to be as much in
his favour as against, and he thinks the failure of others to make a
profit must have been the result of mistakes made by them, which he will
avoid. But does it occur to such an one that if there were any easy and
certain method of making money by speculating in stocks everybody who had
a little capital would at once commence to speculate? Speculation in the
Stock markets has almost irresistible attractions as a mere amusement,
quite apart from its being a kind of occupation which is the most
luxurious and exciting mode of making money. It must be evident therefore
from the comparatively few persons who habitually speculate, that large
numbers are simply driven away from the markets through a conviction
that such a vocation must end in disaster. The dangers of Stock Exchange
speculation are made apparent when, as a species of gambling, it is
compared with the games of chance, whose evil effects upon the community
have been at last recognised by the abolition of the tables at Hombourg,
Ems, Baden Baden, &c. The conductors of the Bank at the Palais Royal were
fully alive to the necessity of limiting the stakes, and also as regards
the number of persons with whom they would play at once. Governments
are stepping in by degrees to suppress gaming houses, and it would have
been more to the credit of Germany if the tables at the above-mentioned
places had been done away with while the effects of the golden stream
from beyond the Rhine were as yet unfelt by the comparatively poor
exchequer at Berlin. The interference of a government is shown again by
our own legislature having declared that A should not insure the life
of B, unless it can be shown that A has some pecuniary interest in B’s
continuing to live. The law, however, is for the most part evaded. Such
systems are therefore looked upon as bad; but because it is difficult
for governments to define in Stock Exchange gambling where _bona fide_
business ends and the gambling begins, the most injurious of all games of
chance is played year after year upon an increasing scale. At the first
beginning of prosperity with a comparatively poor community, gambling
springs up in these times in stocks and shares. As a result of such
operations Vienna went half mad in the first half of 1873, which was
followed shortly after by a financial crash and the suicides of certain
bankers at Posen. Older communities, which have passed through the only
crucible which in this life teaches people that if money is to be
made rapidly the process must be attended with a proportionately large
risk, are observed, as time goes on, to be less exposed to the headlong
financial panics such as that in which the speculation at Vienna lately
culminated. Commercial revulsions of one sort or another, and of greater
or less violence, will probably occur during all time at intervals,
wherever commerce is carried on, but the gradual fashioning of laws
with the view to confine the injurious effects of over-speculation and
over-trading within limited areas, as for instance the limited liability
acts, will more and more render it possible to stand between the dupe and
the financial sharper, and also to observe the gathering together for
harm of the dangerous influences, so that they may be provided against in
time, or checked at an early stage of the disease. Among the operators at
younger commercial centres there is a more feverish desire to gain, but
the efforts to satisfy it are not kept in check in the same degree as in
places where memories of disaster cluster in traditions among the people,
and inspire the growth of prudence, almost as if it were an instinct.

Farther on we shall call attention to the way in which an outside
speculator on the Stock markets is handicapped with turns, commissions,
and contangoes.[5]

Very few persons, if any, will be found to dispute the statement that
speculation on the Stock Exchange is gambling. The highest mathematical
authorities maintain that there are but two conditions under which
gambling can be prudently followed as an amusement, viz.: small stakes,
and equal play.

The ordinary gambler in the Stock market is no better off, as regards
his chance of winning, than a player against a bank, which can only make
certain of winning against all comers in the long run by the protection
of a mathematical advantage. In the case of a bank established as a
gaming-house the initial condition of existence has always been in the
long run either bankruptcy to itself, or ruin to the individual players.
As the banks have always flourished, the players, in the long run, must
always have been losers.

A gaming-bank is an institution with limited means offering to play all
who enter; or, in other words, it is limited means against unlimited
means.

The Stock Exchange occupies a parallel position to that of the bank, and
the operators[6] in the markets are protected in such a way that the
outside player at speculation must in the long run lose, or no one would
be found to take up his challenge. It must be obvious that supposing
an outside speculator had any advantage when speculation in stocks and
shares were first practised, and through such an inequality of terms he
was on the average the gainer, experience would soon show the necessity
of rectifying such a state of things, and what would be tantamount to
the mathematical advantage secured to the gaming-bank would be speedily
arrayed against him.

The number of people who play publicly at games of chance is very small
compared with the number of people who gamble in mercantile transactions.
And whereas the former are diminishing, partly from compulsion, as in
the case of Germany of late, and partly through the more enlightened
state of the human understanding as regards the immorality of this kind
of amusement, the latter appear to multiply in proportion to the general
increase of wealth, the ever enlarging fields in which public securities
are dealt in and commercial transactions are negotiated, and also in
proportion to the facilities afforded for speculation generally. The
latter part of this sentence should, however, be qualified by the remark
that the spread of wealth enables younger and less experienced persons to
engage in speculation in a larger proportion as compared with the whole
community than formerly. The difficulty of living and the ambition not
to fall below the standard maintained by the well-to-do, tempt numbers
of young men to endeavour to increase their income by speculation. And
moreover as regards Stock Exchange speculation it is unfortunately much
against the interest of the stock broker to make public the failure of
his clients, hence it is seldom that the wholesome warning of publicity
deters others from entering the arena.

Outsiders entering upon speculation with professional dealers in the
Stock markets make two mistakes on the threshold. Firstly, they commence
upon unequal terms, the effects of which adventitious favourable
influences have never more than compensated for, in the long run.
Secondly, supposing the terms were permitted to be equal, the outsiders’
stakes would be too large a proportion of their means. The losses
incurred by speculators as a body have always been upon such a scale as
to dispose of the theory advocated by some persons that the mere charges
of commission, contangoes, and the “turn” are the only obstacles to
success.

Now, if the playing of public games of hazard are on the decline from
the interference of the State on moral grounds, the question arises: are
there any considerations applying to Stock Exchange gambling, which,
as a game, raises it above other games of chance, and entitles it to
special privileges? Does the outside haphazard speculator stand a better
chance as against the Stock Exchange, than a player at _Rouge et noir_
against the bank? The answer must be No. Exactly the same considerations
apply to commercial speculations as to other games of chance in which no
absolute certainty exists. Mathematicians lay it down as a law, that if
any possible event which cannot frequently occur in a game of chance,
but which is, nevertheless, a part of the nature of the game, if a bet
or stake be made upon the recurrence of that event in a proportion to
some large gain which it is agreed that event shall secure, then prudence
demands that the game shall be often played; and if this be impossible
it shall not be played at all. Here we come to the crux of the whole
question of Stock Exchange speculation. Unless a speculator, handicapped
as we shall show he is to start with, has enough means to enable him
to hold out for the arrival of the event, the occurrence of which is
absolutely necessary to his keeping above water, he should not speculate
at all.[7]

What is the one event constituting the benefit for which the speculator
operates? it will be asked. The answer is, the greatest fluctuation in
the direction favorable to him which may be caused by any one of the many
influences that may spring into action at any time. This is part of the
mystery which allures people on. If you tell persons who are throwing a
die that the six will turn up once in six times in the long run, they can
form some estimate of their chance of winning. But until a Stock Exchange
speculator has been roughly undeceived, his understanding gets entangled
so that what he sees clearly only at first, is what is in his favour,
because his first interest is to discover that. What is against him, he
disregards until he has discovered it has undermined him, and all goes
together.

In cases where the public play against a bank, it is so managed that
the bank has a better chance than the players. It is so managed that a
considerable succession of losses can be sustained against the good luck
of any comer. One side always secures to itself the benefits of _the long
run_. The haphazard speculator stands at the same disadvantage as the
player against the bank. His position is always relatively inferior. When
the balance is nothing, as worked out by the following rule as stated by
De Morgan, then the play is equal:—“_Multiply each gain or loss by the
probability of the event on which it depends; compare the total result of
the gains with that of the losses: the balance is the average required,
and is known by the name of the mathematical expectation._”

It must stand to reason that an outside speculator plays upon unequal
terms, otherwise it could not be worth the while of the other side to
engage him. As well might we expect a man to set up a shop and sell his
goods at a loss. Then we come a step farther, and ask if it be any use
for a Stock Exchange speculator to operate if the terms be equal? If
such numbers of persons find themselves induced, by the estimate they
are enabled to form of the chances in their favor, to play on terms more
favourable to their antagonists than to themselves, their prospects
would seem to be much improved if the terms were made equal. Although
the position of the speculator be improved to the extent of the terms
being equal, it is absolutely indispensable that the operations be kept
open for a considerable time[8] in order to secure the mathematical
expectation which can have no existence except through continuity. With
the play in favour of the gambler, he stands no chance even of holding
his own, unless he makes sure of being able to continue over such a
number of trials, or during such a period of time, as will give him the
benefit of an average of the ups as well as the downs of fortune.

As at cards so at Stock Exchange speculation, there must be two kinds
of luck, ill-luck and good-luck, as the changes of fortune which are
worth while taking account of. A man speculates, gets his turn of good
luck and pockets his gain, treating the money as if it were ore from a
mine, or something added to the realized wealth of the world, a pure
plus as compared with a plus leaving a minus. For every profit made by a
speculator, and for every realized profit made by a _bona fide_ investor,
there must be a corresponding loss. The man who in his turn is a winner,
must also in his turn be a loser, and what he was plus when he won, he
must be minus when he loses.

If the manager of gaming-tables secures to himself a mathematical
advantage only sufficient to cover the expenses, he will infallibly be
ruined at last. It may be in one year or in five, or ten, but ruined he
must be. But he provides adequately against this, and in the long run
those who play with him must be ruined. So it is with Stock Exchange
speculators.

It is the character of negative events to lay less firmly hold of the
mind than positive ones. The minds of Stock Exchange speculators are
like other people’s minds. A speculator will often attribute a certain
movement in prices to an influence which happened to be exercised at a
particular moment, and he contents himself with the apparent connection
of the two, and looks no farther. On another occasion, when operating in
the same way, immediately upon the recurrence of the same influence he is
bewildered to find prices move in an opposite direction. This comes from
being satisfied with any solution which lies on the surface, and chances
to catch the eye. It used to be supposed that comets were the cause of
hot weather, and the theory was considered to be well founded, because
more comets were seen during the summer months than at other seasons of
the year. Hot and cloudless weather is most favourable for seeing comets,
but they are no more productive of hot weather than is hot weather of
them. This circumstance being fixed upon by one class of theorisers,
shows how an event which is positive lays hold of the mind of any person
who may be interested in certain effects and is in search of the causes.
It is of great importance, in endeavouring to connect certain effects
with specific causes, to mark carefully two distinct things, first,
the occurrence of an event, and, secondly, our observation of it. Many
entirely wrong deductions as to the causes of fluctuations in the value
of money, and in the prices of Stock Exchange securities, are made from
negligence in this respect.

As every rule has its exception, so in speculation are there a few
professional experts who succeed at it as a business. What is contained
in these pages is not for the expert, who is well able to take care
of himself, but for the ordinary haphazard operator. The professional
speculator, who has the right sort of head, sufficient capital, patience,
perseverance, coolness, and a business-like aptitude for laying down
the elaborate machinery that is necessary for mercantile success, may
succeed. In the following chapters it is our intention always to make
this reservation, and in speaking of the speculator, who must always
lose in the long run, we refer to the ordinary run of men, whom we will
designate as haphazard speculators.




THE THEORY OF STOCK EXCHANGE SPECULATION.




CHAPTER I.

TECHNICAL TERMS EXPLAINED.


[Sidenote: JOBBERS AND BROKERS]

The members of the Stock Exchange are of two descriptions, jobbers and
brokers. The jobber[9] deals in stocks and shares, either as a buyer or
seller, at the market prices. The broker deals with the jobber, and is
paid a commission by his principal for transacting the business between
the two.

[Sidenote: THE BULL.]

A bull is a speculator who buys for the settlement[10] with a view
of selling at some future date at a higher price, and gaining by the
difference.

[Sidenote: THE BEAR.]

A bear is a speculator who hopes to gain by the reverse operation. He
sells for the settlement, hoping to buy back at a cheaper price, and gain
by the difference.

[Sidenote: CONTANGO.]

Contango[11] means continuation charge; for instance: if a bull operator
has £2,000 Brighton railway stock open for the account, of which there
are two in a month, one in the middle and one at the end, and the
settlement which is to take place, say in the middle of the month, is
approaching without the price having advanced as much as he supposed it
would at the time when he bought, he wishes to carry over or keep the
stock open for another fortnight. For this accommodation he must pay the
jobber in the House of whom the stock has been bought, a certain rate per
cent. to allow the speculator to continue a bull of the stock, instead
of paying the money and taking it off the market. The contango rates
depend upon different circumstances. Sometimes, instead of having to pay
any contango, a bull will get something paid to him. If the stock is
very scarce, and the jobber finds it difficult to deliver to purchasers,
he will be glad to carry over a bull account for nothing, and may be he
will pay a consideration to postpone delivery for a fortnight.[12] On
the other hand, if the stock is very plentiful when the settling day
arrives, if the sellers have been numerous, and the deliveries are large,
the jobber will prefer delivering the stock to the bull speculator to
continuing it to the next account, because he wants money to pay those
who have sent their stock to market. Under these circumstances the
contango rate may be ¼ per cent. on the money price of £20,000 nominal
stock for the fortnight, or it may reach a much higher figure, even
exceeding one per cent. for the fortnight, but such a rate is seldom
charged.

The contango rates depend very much upon the state of the money market,
and hence the fluctuation in the price of public securities in sympathy
with the rise and fall in the value of money.

It has become more of a custom with bankers to lend money to the Stock
Exchange than was the case formerly; one reason being that, through the
more enlightened management of the Bank of England of late years, the
changes in the rate of discount are made more in obedience to the varying
condition of the money market as a whole, as reflected in the Bank
return, than was the case in former years, when the directors would come
down to the City some Thursday afternoon to put up their terms when there
was very little available money left upon which to obtain the increased
charge. In other words, the value of money changes more frequently
than it used to, and bankers, desiring to act at all times in view of
contingencies, find it very convenient to lend their surplus balances
for a fortnight upon easily convertible securities with a good margin.
Moreover the risks attending bills of exchange are avoided. The contango
rates at the settlement may rise suddenly through unexpected demands
upon bankers arising out of a bullion drain, and a fall in the foreign
exchanges, which compels them to refuse to continue their loans upon
stock. Such stock must then be turned out upon the market, and, if there
happen simultaneously to be more deliveries than there is stock taken off
the market, the contango rates will rule high.

It may be here observed that the contango charge is an item in the cost
of speculation which the haphazard operator seldom takes into account
at all; yet, if speculation be engaged in upon a large scale, the item
of contango charges may become a formidable one, and, when added to the
commission charged by the broker, takes so much out of the possible
advance in price which may take place in the period of, say, two
accounts, or the space of one month, that it requires no great experience
to show that the game is not worth the candle, taking one operation with
another.

Take a case in point:—A speculator buys £5,000 Turkish 5% ’65 stock at
£50, for which he engages to pay £2,500 on the settling day, which is
the last of the three account days. He pays ⅛ commission to the broker,
or £6 5_s._ When the settlement arrives, we will suppose he has been
very lucky, and has got a rise of ½ per cent. in the price, which is
a good advance for a class of stock which investors do not like, but
nevertheless is speculated in a good deal. How does the account to be
rendered to him stand, with 6 per cent. contango for carrying over the
transaction?

    DR.
                                  £  _s._ _d._
    5000 Turks. 5% at 50        2500   0   0
      Commission ⅛%                6   5   0
      Balance                     18  15   0
                             -----------------
                               2,525   0   0
                             -----------------

    CR.
                                  £  _s._ _d._
    5000 Turks. 5% at 50½       2525   0   0
                             -----------------
                               2,525   0   0
                             -----------------

The operation so far is successful, and the speculator, taking courage
from his success, awaits a further advance. He is not disappointed, we
will suppose, and the stock continues to rise, to give him the favourable
start which is so frequently the cause of his future troubles and losses.
During the next account the stock gains a further ¼ per cent., and he
credits himself mentally with an additional £12 10_s._ Here is a gain
of £37 10_s._ minus the selling commission, which is generally charged
when the stock is not bought and sold in the same account, and also minus
the contango. This second commission, which is usually charged when a
speculative account is kept open for a month, is frequently left out of
the calculation by novices. Supposing, then, towards the close of the
second account, there occurs a relapse of ⅝ per cent., making the price
really ⅜ lower, which is a very reasonable hypothesis, as stocks do not
always move in one direction,—how does the account to be rendered at the
next settlement stand? We have—

    DR.
                                  £  _s._ _d._
    5000 Turks. 5% at 50½       2525   0   0
      Int. 6% 15 days              6   4   6
      Commission                   6   5   0
                             -----------------
                               2,537   9   6
                             -----------------
     To Balance                  £12   9   6

    CR.
                                 £   _s._ _d._
      By Balance                 18   15   0
    5000 Turks. 5% at 50⅛      2506    5   0
      Balance                    12    9   6
                             -----------------
                              2,537    9   6
                             -----------------

It becomes apparent, in examining this account, the extreme danger the
speculator was in just at the period immediately preceding the relapse,
and forcibly demonstrates the importance of acting upon the soundest
of maxims in “time bargain” operations, which is, _never to refuse a
profit_. We have been supposing the speculator to have been “running
the stock,” as the saying is, for nearly a month, during which period
it had been advancing in price. At the same time he had been incurring
expense to have the chance of making a profit by such advance. After
carrying over the transaction, he had incurred the certain loss in any
case of the two commissions and the contango charge, which make together
the sum of £18 14_s._ 6_d._ It seems almost incredible that, under such
circumstances, he should still hold on when he could close with a profit
of £18 15_s._; instead of which he closes with a loss of £12 9_s._ 6_d._,
after having commenced to operate with just as reasonable a prospect of
a fall of ½ per cent., and another on the top of it of ¼. On the other
hand, everything went as well as can ever be expected on a series of
operations, and yet he finishes with a loss. The charges, to begin with,
kill the profit, to say nothing of the “turns” of the dealers, and the
risks of the fluctuations in price.

[Sidenote: BACKWARDATION.]

Backwardation[13] is the term for the charge paid by the speculator
for the fall. The word itself implies that the charge is for holding
back a transaction, as directly opposed to that for which a contango is
paid. The one is to carry forward, and the other to carry backward. A
speculator who sells for the fall, and thereby makes himself a bear, must
pay something if he wishes to keep the transaction open; just as the bull
must, unless exceptional circumstances are influencing the market. When
the settlement arrives, a bear must either deliver what he has sold, or
pay the backwardation demanded for postponing delivery; which, in other
words, is the price paid for obtaining the stock elsewhere. If the supply
of stock should chance to be large, he will find it very easy to continue
his bear account, because the stock he has sold is not wanted. Under such
circumstances, the position of the bear speculator comes to be the exact
antithesis of that in which the bull finds himself at the settlement when
the stock he has bought is scarce. In both cases the charges recede until
either the transactions are carried over “even,”[14] that is to say, for
nothing, or it may be the speculator receives a consideration. As in all
other markets, it is a question of paying or receiving, and the one or
the other depends upon the relation which the demand bears to the supply.
As we shall have occasion farther on to speak more minutely upon bear
speculations, we shall not pursue the subject at any length here; suffice
it to say that the public, as speculators, do not understand selling for
the fall. It goes against the grain. Speculating at all is associated,
in the minds of nearly all people, with fine sunshiny weather, and a
settled state of the political atmospheres of one’s own and neighbouring
states. The time to speculate for the fall is when growling despatches
are being exchanged between nations whose prosperity has reached a zenith
where nothing more is to be had, except by quarreling; when the exchanges
are adversing, and there is a drain of gold setting in and the biting
winds and sleet of chill October fill everybody with pessimist views;
when the reports of shipwrecks and hurricanes at sea fill the minds of
Oriental merchants with alarm for the safety of their galleons, and there
is an uneasy general impression creeping over the public mind that it is
perhaps prudent, under the circumstances, to hold less in securities, and
to have a larger balance at the bank. Yet, when the very air seems to
whisper coming difficulties and disturbances, and the time is ripe for
speculating for the fall, such is the weakness of the human character
that the opportunity presented is seldom discerned until the return of
sunshine, and the blowing over of the storm has shown the inutility of
being wise after the event.

[Sidenote: OPTIONS.]

[Sidenote: THE “PUT AND CALL” OPTION.]

Speculation by “options” is of all methods of speculating the most
prudent, as it is the most sensible, for all parties concerned. It
resembles in some degree the lottery-ticket mode of gambling. The
indefinite mischief that is caused by speculation which allows the
operator to incur unlimited risk on credit is prevented by the system of
options, inasmuch as a fixed payment must be made by the speculator at
the time the option account is opened. There are three kinds of options.
First, is the “put and call,”[15] which means to take or to deliver stock
at a fixed price at a future date, for which a certain sum is paid on the
day the bargain is entered into.

[Sidenote: THE “PUT” OPTION.]

The second is the “put,” which means the option of delivering a specified
amount of stock at a fixed date, the price and the day of delivery being
agreed upon at the time the money is paid.

[Sidenote: THE “CALL” OPTION.]

The third description of option is the “call,” which means an operation
exactly the opposite of the “put.” It is the option of claiming a
specified amount of stock at a future fixed date, such date, together
with the price, to be agreed upon at the time the option money is paid.
The sum of money that is paid for options fluctuates in sympathy with
the changes in the value of public securities, and also depends upon the
amount of business doing. An option may be done from day to day, or from
account to account. The option money is paid by the principal to the
broker at the time the transaction is effected. When the option expires,
the person who has paid the money declares whether he buys, sells, or
does nothing.[16]

Years of experience of this mode of speculating have only shown, as with
other kinds of speculation, that the option money once paid is hardly
ever recovered. We have taken the trouble to inquire of those who have
been for as many as thirty years in the markets, and such is their
experience.[17]

[Sidenote: THE FORTNIGHTLY SETTLEMENT.]

The Stock Exchange settling days are in the middle and at the end of each
month. Each fortnightly settlement occupies three days; the first is the
carrying over or contango day, the second is the name or ticket-day,
and the third is the day for paying the differences, or the amount of
money for stock or shares to be taken off the market. The settlement in
Consols is monthly, and near the commencement. The extent of the business
transacted in the Stock markets has been very accurately measured since
the establishment of the Clearing House. All transactions being settled
by cheques, the increase in the Clearing House totals on a Stock Exchange
settling day correctly indicates the amount of money which has passed
between buyers and sellers.[18]

[Sidenote: SPECULATION BY MEMBERS OF THE HOUSE.]

Speculation inside the Stock Exchange by members of the House does
not present many features which entitle it to comment apart from the
speculation as it is practised by the public outside. It is natural to
suppose that members of the Stock Exchange are better able to operate
in stocks and shares, with a view to profit by speculation than the
public who, as a rule, are ignorant of the art they endeavour to practise
until all they have left is some bitter experience. Those whose daily
business it is to be in the Stock markets must of course know that the
outside public are always dropping their money, and in this respect the
conviction comes nearer home to them that the play is not worth the
candle. There are speculators who are members of the Stock Exchange, but
we believe it is but a very small minority that troubles itself with
speculation as the principal means by which the profits are made. As a
rule, it may be laid down that a dealer who goes out of his market to
speculate is just as likely to lose his money as an outside haphazard
speculator. Each stock, and each description of shares, has its history,
and is influenced more or less by special causes, as well as by general
causes. Each stock, therefore, requires to be constantly watched, after
it has been studied, and its peculiar characteristics well ascertained.
When it is said that these stocks and shares are numbered not by tens,
or by hundreds, but by thousands, it is easy to understand that no one
man can master the special knowledge concerning each, which however every
jobber who understands his business should do, within the limit of those
in which he usually deals. Consequently, a jobber devotes himself to a
few descriptions which circumstances or inclination may cause him to
select. He confines himself to a particular market, where he is to be
found; and if he speculates now and then, apart from the necessities of
his business, and to satisfy a desire for a little excitement, or because
some special view of the course of events encourages him to try his luck,
it is, as a rule, in the stocks in which he is accustomed to deal.

       *       *       *       *       *

It may be of interest to some persons to contrast the terms used in
England with those employed by stock-brokers and jobbers across the
Atlantic, and we append those in use on the New York Stock Exchange, with
explanations. The inventive resource which is so characteristic of the
American, crops up in the terms used in their Stock markets, as in the
case of the “put and call” option with us, which the Yankee cannot be
satisfied with, but must invent the vulgar synonym of “straddles,” which
is certainly expressive of the pair of operations in one. The mania for
getting rich by making short cuts and royal roads engenders apparently
an impatience of terms which contain a single syllable or letter that
is unnecessary, however hallowed by time, and hence, “put and call” is
superseded by “straddles.” [19] The “put” is a contract by which, during
a fixed time, usually thirty days, a seller for a consideration agrees to
take from a buyer of a “put” a stock at a given price, generally several
per cent below the market value.

The “call” is an operation of a directly opposite nature, being a
contract by which for a consideration a seller of a “call” undertakes to
deliver to a buyer a certain stock at a given price, generally several
per cent. above the market value.

To “put up a margin” signifies to deposit with your brokers a sum of
money, as a rule 10 per cent. of the par value of a stock, as security
against failure to meet losses.

To buy “long” is the equivalent of our term “bull.”

To sell “short” is the equivalent of our term “bear.”

To “corner” a stock is to purchase all that can be obtained and make
it very scarce, and also more than can be obtained, in order to run
the price up, and “roast,” as the saying is in the London market, the
speculative sellers; but the “cornering,” as we understand the meaning
of the word, would seem to apply more to the speculative sellers who are
“roasted” than to the stock which may be selected for the operation.

“Clique,” “pool,” or “ring” are less expressive, and in consequence of
other associations, are less happy terms than our equivalent syndicate,
which in English financial circles can be mistaken for nothing else
than a combination of speculative capitalists which is formed either to
divide a loan amongst them and unload their portions upon the public as
opportunities may occur, or to “wash” a stock up and down, getting what
they can out of the unwary public during the operation. Gold “rings” on
the other side of the Atlantic, and foreign loan syndicates on this,
must by this time almost have had their day. Each new era of prosperity
requires and generally witnesses a new set of ingenious devices to throw
dust in the eyes of investors, while the new race of Autolycuses are
going through all the old tricks.

In London, settlements take place twice a month, but in Broad Street
sales are made for either cash or “regular.” In the first case purchases
have to be settled the same day before 2.15 P.M., and in the second on
the following day. Time contracts correspond to our time bargains, and
have about the same conditions attaching to them, with the exception that
the rate of interest charged, answering to our contango, is generally
6 per cent., unless otherwise stipulated, and is not influenced by a
varying standard such as our Bank rate.

The word “shrinkage” for depreciation is a neat term with which the small
catalogue may be euphoniously terminated.




CHAPTER II.

THE IMPORTANCE OF SPECIAL KNOWLEDGE REGARDING THE REGULARLY RECURRING
CAUSES THAT INFLUENCE THE MARKETS.


[Sidenote: THE TEMPER OF THE PUBLIC.]

If a speculator has not closely studied the special causes that influence
the Stock markets at regularly recurring intervals, he has not learned
the alphabet of his business. We shall endeavour to pass in review some
of these. First of all, there is the temper of the public. Many persons
have puzzled over the causes which will at one time combine to produce
activity among buyers of stocks, and at another dead stagnation; and
it is a very interesting study, albeit somewhat difficult of correct
analysis.

[Sidenote: METEOROLOGICAL INFLUENCES.]

There are periods of the year when the temper of investors tends to
sulkiness, in sympathy with a fall of the mercury. Dull and disagreeable
weather, as a rule, adversely affects the Stock markets more or less,
according to the extent of counteracting influences. If we take the
beginning of a year, in January investors will usually be found in a
conservative frame of mind, with which speculators will sympathise as
they perceive it; for it may safely be said that unless the public can
be calculated upon to follow their lead, it is useless for professional
speculators to stir up the markets. In the first month of the year
capitalists are in more or less of a stay-at-home mood; and now so
many buyers of securities live on a line of railway, they take as many
holidays as they can well find excuse for.[20]

A speculator should have a good aneroid barometer, that has a good big
indicator, hung up in his hall, and he would not be very far wrong if
he were to buy and sell according to the indications given by this
instrument that it was going to be good or bad weather. Most people are
like any one you may chance to single out of a crowd, from a physical
point of view.[21] The change from fair to foul weather will have the
same effect upon a crowd as upon that one man. Foggy, wet, and cheerless
weather sends people to their homes with a contented mind, if they feel
they can hold their own until the return of sunshine; just as a storm
causes navigators to run for a harbour, or seek the nearest shelter from
its fury. When buyers keep away from the markets, prices droop with their
own weight, and, from the mere absence of any buying at all, will often
fall as regards value, out of all proportion to the extent of the sales.
Such a period is a very good one to turn round and buy, as there is sure
to be a nearly corresponding recovery with a favourable change in the
weather.

[Sidenote: A FAVOURABLE PERIOD OF THE YEAR.]

Unless there are special causes at work, during the first month of the
year the Stock markets are usually as hard and inelastic as the frozen
earth outside. At Christmas-time people make up their accounts for the
year, and most of them, having gained less than the total pictured by
their imagination, are more or less out of humour, and disinclined to
enter upon commitments outside the limits of their business proper. At
such a period, therefore, a speculator may look for fluctuations which
as a rule will not occur. As February creeps on, if circumstances are
generally favourable for trade, so that the newspapers can dish up their
daily fare with sauces that encourage their readers to look on the future
with hopefulness, losses that are written off will begin to assume less
harrowing proportions, and the old inclination to launch out will come
to the front.[22] The professional speculative element in the community
sniffs this movement on the part of the public with the accuracy of a
pointer that has found his bird, and they commence to draw the credulous
by fictitious prices, now and then unloading to be ready when the relapse
comes, to commence anew when another favourable opportunity offers. As
the spring comes in, with its delights and young verdure, and cheering
early sun-rays, which draw the notes of the lark and the linnet, the
disposition becomes more general to disregard those strict lines of
prudence which the bleak winds of autumn and the shorter days of an aging
year, mark out so prominently for observation. At a period of the year
when spring is merging in early summer, with all its pleasant prospects
of pleasure to come, it is quite natural to suppose that a desire
should arise to make money, by which everything could be made smooth
and delightful during the most enjoyable part of the year. Then again,
as the half-year wears on, there are the dividends to look forward to,
which is always an inducement to buyers; the great cities are filling
with pleasure seekers, the import and export trade with foreign climes is
in full activity after the liberation of whole fleets of vessels which
have lain frozen up in northern parts during the winter. The young corn
is beginning to clothe the naked furrow, and the various fruits of the
earth are appearing, which only to read and hear of is to fill the eye
with a sense of plenty that half converts a Tory Stock Exchange operator
into an ultra-radical speculator. Under fairly favourable circumstances,
the course of general business during the first half of the year is more
active than during the second six months. The Parliamentary session is
in full swing, and large numbers of people congregate in the capital
towns of all European states to transact business, no small part of
which is the investment of their surplus profits in public securities.
When a new year is fairly on its legs, say in March, if war or such like
causes do not interfere with the natural course of events, between that
month and the end of June, a speculator for the rise should find, on an
average, his greatest opportunities. In the London market more especially
is it so, on account of the effect produced on the money market by the
collection of the revenue, which always keeps the Bank of England’s
reserve at a comparatively higher figure during the period named, a
circumstance of considerable importance. In the first half of the year
also there is more floating capital spread out, and more disposition
to extend credit to catch the profits that are to be gathered when the
nations of the earth are enticed into activity and movement, both for
business and pleasure, by genial weather and long days.

[Sidenote: CAUSES AFFECTING THE VALUE OF ENGLISH RAILWAY STOCKS.]

As regards some stocks, there will be no need to make a special study of
causes which affect the dividend; but this is not the case with railway
stocks. A speculator in railway stocks must watch the course of trade,
the colonial produce, the Manchester and Liverpool markets, and note
the character of the business doing in the great staples of Industry.
Upon the profitable nature of these trades depend very much the traffic
receipts of railways. A speculator devoting his attention especially
to railway stocks will, of course, analyze the reports of the various
companies, carefully noting the weekly published traffic receipts. Then,
again, there are the northern iron and coal districts, the operations in
which affect the price of railway stocks in two ways which are obvious.
A speculator who operates solely in railway stocks should be posted from
hour to hour in such matters, or he will be assuredly “hung up,” as the
saying is, with stock on which he has made a loss.

[Sidenote: THE COURSE TO PURSUE AT THE TURN OF THE HALF-YEAR.]

Whether there be any more rise or not left in public securities as a body
after the turn of the half-year,—we are speaking from a bull point of
view, as that is the way in which the public, in ninety-nine cases out
of a hundred, operate,—we should always recommend a speculator to pack
up his traps and go right away, whether he has won or lost on balance.
If he has lost, which will probably be the case, there is all the more
reason for not continuing, for he is as certain then as the day dawns,
to increase it by going in heavily, or “plunging,” as it is termed. If
he retires from the scene, and permits his nerves to recover, he will
return to be “cleaned” out in a more wholesome frame of mind, which will
enable him finally to quit such haunts without probably resorting to
such desperate measures as might have been adopted, had his coffers been
emptied all at once under a July sun.

At all events, the most methodical and prudent speculator, who manages
to amuse himself, and by extreme care, like good whist players, leaves
off at the end of six months about even, would not dispute the wisdom of
closing his book when all the world was going away for their holidays.

[Sidenote: SECOND HALF OF THE YEAR MORE FAVOURABLE FOR BEAR OPERATIONS.]

As the first half of the year is favourable for the bull speculator, so
the second half is more likely to favour the operations of the bear.
When people have had their outing and spent their money, they return
to business, and to think of the necessity of prudently providing the
comforts needful in the chilly autumn and cold winter. Business begins
to slacken in many important branches with the approach of that period
of the year when the days and nights come to be of equal length all
over the earth, except just under the pole. There may be a good deal of
money about at such periods, and yet very little investment business
going on in the stock markets. It should be remembered that large extra
accumulations of money at the great centres very often mean, in fact,
generally, an unprofitable state of trade; and when the foreign shipments
leave no profit, from the great merchant princes down through every link
in the chain to the labourer at thirty shillings a week, the effect is
felt, and there being no profits, there is obviously nothing in the shape
of surplus gain to invest. On the contrary, most people wish to sell. In
the later months of the year locomotion for nearly all purposes begins
to diminish both as regards business and pleasure, which affects the
receipts of the railway companies. If there should have been a bountiful
harvest, an important favourable influence may thus be exercised; but
even as regards this, it has been evident for many years past that the
harvest question in England is of comparatively diminishing importance,
and there is every prospect that much of the land now under corn will
return by degrees to its primitive state, and will pay better as pasture
for fattening beasts.[23]

As we spoke of the Bank of England becoming temporarily rich, by the
accumulation of revenue early in the year, so it becomes, as a rule,
poor in the autumn. People are getting more used to this ebb and flow in
Threadneedle Street, and the trouble it caused when Mr. Lowe first begun
experimenting is not now experienced to the same extent; but still it is
one of the elements which is disadvantageous, and to be kept in view by
the speculator as a regularly recurring adverse influence.

It is, of course, of the last importance to keep a watch over the foreign
exchanges, as these are affected more or less at certain periods when
the imports and exports of special kinds of produce and manufactures are
active.

Other influences which occur with machine-like regularity will be
referred to as occasion may require, and we now proceed to go more into
detail.

[Sidenote: ACTIVITY AMONG BUYERS.]

[Sidenote: THE BULL SPECULATOR’S GREAT CHANCE.]

[Sidenote: THE GREAT IMPORTANCE OF BEING NOW AND AGAIN ALTOGETHER CLEAR
OF THE MARKETS.]

[Sidenote: THE MOVEMENT OF PRICES NEAR THE SETTLEMENTS.]

We will take activity among buyers:—It is clear that active buying
in any market arises from a strong demand from persons who desire to
purchase for reasons known to themselves. A strong _bona fide_ demand for
securities means that the public is making money, as they do not enter
the Stock markets as _bona fide_ purchasers, unless they have surplus
monies which they desire to invest and put by in the form of savings.
Now, a speculator who is watching for an opportunity to buy should keep
in view one set of circumstances as favourable to his operations in the
same way that a seller should watch for an opposite combination of causes
as favourable for speculative sales. A bull speculator should know that
his great opportunity occurs after securities generally have been driven
down in price by a severe commercial crisis, which has compelled holders
of stocks upon a large scale to realize. In other words, when prosperity
is beginning to revive after a prolonged stagnation, and the prices of
stocks are very low, the bull speculator’s great chance occurs. When the
great industries of a nation seem to rise as from the grave, and where
lifelessness and inactivity ruled before the blows of the hammer resound
and the blast furnace roars, a new life springs through the arteries of
the commercial system, and the result is a rise in public securities. The
solid rise in the price of stocks is that caused by the hard money-buying
by a public that is well to do. At such a time the bull speculator should
be in the van, for then the golden harvest prepared for his special
sickle invites the reaper. Every trade gets its turn to a certainty.
We will say, during a period of prosperity, a general recovery of the
sounder stocks to a level at which they yield on the money invested 4½
per cent. per annum, takes two years from the time the advance had fairly
set in. During that two years is the bull speculator’s opportunity. If he
does not make money then, he never will. Now we come more to the minutiæ:
“Any jackass can take a profit, but it requires a devilish clever fellow
to cut a loss,” is a well-worn expression in the city of London, but
there never was a truer one. During the two years of recovery in prices
to which we have referred, there will be a great number of small periods
of time when the bull speculator should be out of the markets altogether.
To decide when those periods are to be is his _pons asinorum_. After he
has once realized the importance of having his accounts open ready for
the periodical waves to carry him in and land his profit, the difficulty
is to get him to realize the importance of keeping out while the water
sweeps back, carrying with it the greedy speculators, who were not
content to take their profits. After every great rise comes a fall, and
the secret of such success as is possible lies in the buyer getting
out at or near the top and in again at the bottom. It is obvious that
a speculator must watch for the ever-changing circumstances to reveal
themselves and act accordingly. We will suppose nothing extraordinary
happens, such as a war, famine, or pestilence, but that the influences
during the two years are of the ordinary type. There are the settlements.
As a fortnightly settlement approaches, prices as a rule move more or
less in an opposite direction to that which they have taken for some
days previous, the extent being in proportion to the foregoing movement.
For instance, if for the first week of an account prices have fallen
heavily for some reason, such as a sharp bullion drain and a sudden rise
in the value of money, there will almost to a certainty be a recovery,
because a heavy fall is generally occasioned largely by bear speculators,
who will begin to buy back as the account approaches, causing a recovery
in values. If a speculator, therefore, is out of the markets when a fall
is taking place, he is almost sure to make money by buying at the reduced
figures as an account approaches.[24]

Then among minor influences, which are regularly recurring, are the
“drawings” attached to most foreign stocks, and to all that have been
issued for many years past. When a drawing approaches, other things not
being unfavourable, there will probably be some buying for the chance of
getting a bond or two drawn, and the price will improve.[25]




CHAPTER III.

THE RIGHT TEMPERAMENT FOR A PROFESSIONAL SPECULATOR.


A man who wins by haphazard speculation, who chances to operate
successfully until he has filled his pockets, and retires with his gains
from so fascinating an arena, is one in a hundred. Any one who knows
anything of Stock Exchange speculation will confirm the statement that,
to the ordinary run of men, the game is not worth the candle. There
are, however, conditions under which speculation, in a market where ten
or fifty thousand pounds can be lost in half-an-hour, may, under given
conditions, be systematically practised profitably. First, and most
important perhaps of all these conditions, is the temperament of the
speculator, upon which we propose to speak in this chapter.

[Sidenote: COOL-HEADEDNESS AN INDISPENSABLE CONDITION OF SUCCESS.]

A man who is excitable and easily led away from a set purpose will, if he
go deep into speculation, be soon involved in hopeless ruin. A method of
proceeding that has been formed by a careful judgment which has provided
for all contingencies, once adopted, should be adhered to as a rule. To
be able to follow this advice it is necessary that a speculator should
possess a coolness that is not affected by the excitement into which
others are thrown by unexpected events; that he should cultivate the
art of concealing the dissatisfaction felt on sustaining a loss, which
is read at once in the face of a nervous or excitable man; and that he
should have the power of calling forth emotions which are the opposite
of those commonly manifested under given circumstances. In speaking of
the conditions under which speculation may be successfully pursued as
a business, it must be understood that we are referring to the one man
in the hundred—the professional operator—who will frequently in the
elaboration of his arrangements find it necessary to be in the markets
himself, gaining what advantage he can by personally dealing either as a
jobber or a broker. It is obvious that, when a man enters a market with
a view to doing business, his object is to transact it upon the most
favourable terms for himself. He confronts those who are prepared to deal
with him either way, that is, to buy or to sell. According as he “opens”
to the dealers, or, in other words, indicates what he wants to do, the
dealers will make their prices. If he be a buyer, they will try to get
him to pay as high price as possible and _vice versa_. His business
therefore, if he be really a buyer, is to try to look as if he were a
seller. He may enter the market under a variety of influences. He may
know from private sources, for certain, that a stock is about to improve
much, and he may intend to buy as much as he can get at a fixed limit as
regards price. If he is anxious to operate largely, and possess but a
poor control over his countenance, the probabilities are that he will be
read at once, and the market be immediately raised above his limit if he
attempt to buy any considerable sum. In the same way, if being a broker,
he is instructed to get a client out of a large amount of stock for any
particular reason, the suspicion of which he is not able to conceal, the
price will be lowered to him in an instant, unless it be an easy market
to deal in, or by chance an opposite influence springs up at the moment
to improve the price.

Ninety-nine men out of a hundred when they are made stock-brokers are
comparatively young, who make a start for themselves after having been
many years clerks. These men are eager for profit, and commence at
once to go through a course of training which daily saps from their
physical powers the very element upon which a cool temperament rests. The
hurry-scurry, wear and tear strain upon the nerves which is involved in
running from one client to another for orders, deprives a man by degrees
of those qualities, if he ever possessed them, which are indispensable
to the professional speculator. A man whose daily bread for his wife
and family depends upon the execution of a certain amount of business,
must of necessity manifest some degree of eagerness to do the business
intrusted to him, and that eagerness keeps up a strain upon the nerves,
and through them upon his physical powers, which weakens the capacity of
forming very rapidly a correct judgment, and renders the intelligence
liable to become confused under circumstances when to lose the head for
a moment may involve a certain loss of money. Professional speculators
are consequently very seldom men engaged in the business of dealing in
stocks and shares for others, as the kind of labour is incompatible with
the maintenance of the cool temperament which is necessary to success.

[Sidenote: THE USELESSNESS OF HAPHAZARD SPECULATION.]

There is nothing like unsystematic speculation to destroy the cool
temperament of a man. A loss incurred through hasty ill-matured
operations renders him impatient to recover it, which probably leads
to its being doubled. If he chance to recover the loss, instead of
pausing to reflect upon the surprise created in himself by a result
only feverishly hoped for, he goes on blindly tempting fortune, only to
experience ups and downs which unsettle his judgment more and more, until
he begins to “plunge,” when all is soon over.

[Sidenote: ACCURATE FORESIGHT.]

Any one who has moved about at all amongst financial experts, and has
closely observed them, must have noticed that they seem to be men far
above the average as regards penetrative intelligence, appearing to
possess that calm precision of judgment, which, as a rule, is only
secured by the deliberations of many persons. Men who have amassed a
great deal of money, by their own unaided intelligence, have been men
of steady accurate foresight, men who have possessed a large capacity
of judging what the public will do in the Stock markets under certain
circumstances. A great speculator must make it his study to gather into
a focus the various effects that are likely to arise under a given
transformation of circumstances, analyze them, set one against the other,
and calculate out the effect that will be caused when their forces are
spent.

[Sidenote: THE COOL MAN, OR PROFESSIONAL SPECULATOR.]

We will now suppose we are watching the speculator of the cool
calculating temperament, and also the excitable man who is always acting
on new ideas, which, he thinks, will occur to no one else until he
has made money out of them. The cool man sits quietly down and reasons
with himself, and arrives at the conclusion that what is indispensable
to him as ground work is, first, some capital, a sum proportioned to
the contemplated extent of his operations. Without this to commence
with, speculating under any conditions is about as sensible, and about
as likely to be followed by the desired result, as attempting to ferry
people across a deep stream without the aid of a boat. Secondly, early
information is equally necessary from all other markets where the
securities are dealt in in which he contemplates speculating. To render
such information as far as possible trustworthy, a branch house in the
cities where there are important bourses is desirable. These two portions
of the machinery are absolutely indispensable, if success in large
operations is to be the rule and not the exception; and the man with the
cool temperament will probably owe his success as much to the judgment
which showed the necessity of these accessories, as to the well and
timely directed operations which, based upon them, result in profit.

[Sidenote: OBSERVANCE OF THE DAILY PUBLISHED TELEGRAMS FROM ABROAD.]

With the necessary capital and machinery duly prepared for instant
action when a good opportunity occurs, the cool man plants himself in
a prominent position from which he can discern at once the small cloud
on the horizon which warns of the coming storm. The telegrams in the
daily press, as they rise above such hypothetical horizon, are the
harmless or otherwise little clouds which our speculator will scan,
making a note of any which may seem to deserve attention for any special
reason, on account of the effect they may be calculated to have upon
the public mind. Well-conducted journals only admit into their columns
telegrams from trusted correspondents, or from the public companies who
supply them, and whose interest it is to adopt every precaution against
imposition. An important telegram in a high class journal standing on
its merits will always produce more or less effect, and it is of much
consequence, but in the second rank, in the chain of machinery necessary
to insure success for the speculator, that he be posted hourly throughout
the day in the telegraphic news which reaches the seat of his operations.
Side by side with this telegraphic intelligence which appears in the
press, the speculator will receive private telegrams in cipher from his
correspondents abroad, and according to his skill and intelligence in
reading between the lines of the two, and judging of the probable course
of events by their light, will he be able to operate profitably or not.

Pure speculation as a business, the sole object of which is to gain
money, is, from the point of view of risk, removed far out of the
ordinary path in which men labour for profit. Only a small percentage of
men desire, even if they thought they possessed the required exceptional
qualities, to gain their living in such a way. Most men reason that life
is short, and that to spend it always in an atmosphere of excitement,
under circumstances which keep up a constant destructive mental strain,
is a mode of gaining money that involves too heavy sacrifices. The
speculator who deliberately selects that calling must consequently be a
man peculiarly constituted. He is generally a man of rather singular
habits of thought, who thinks it quite legitimate to start a Juggernaut,
and drive it over the crowd, if thereby he can do it profitably.
Perfectly legitimate processes of working a market with him, would be
considered little better than cheating by the ordinary run of men. He
employs systematically all sorts of devices for getting the better of
others who are ignorant and less sharp in foreseeing events than he. He
does not scruple to lay traps, and drive the public into them, by plying
them with fictitious telegrams, if he can get them published, and by
forming syndicates to “rig” the markets. He partakes, indeed, a good deal
of the nature of the bandit, who prepares the way for forcing concession
to his demands by firing a volley into the carriage of the traveller to
whom he is going to give the choice of his money or his life.

[Sidenote: THE SELFISHNESS AND HARD-HEARTEDNESS OF THE PROFESSIONAL
SPECULATOR.]

If he intends to buy a large amount of stock, which he knows is going
to rise, he throws off the cloak of secrecy when he enters the market
to sell, and depresses the price as a preliminary feint, so that the
contemplated rigging of the price may be as little encumbered by bulls
as possible. When it is known in a market that a great speculator is
selling, weak bulls are speedily frightened out, and when he has such
an object in view it is his “game” to intimidate with all the force
of his prestige and the power of his capital. Such a man must have a
concrete hardness of indifference through which nothing can penetrate to
his heart. It is as necessary to the success of his operations that he
possess no more regard for the feelings or pockets of other people than
a hungry tiger would for him if he were airing himself unconcernedly in
a Bengal jungle. He has a purpose in view, just as a surgeon has when the
amputation of a leg has been decided upon. The speculator’s sole aim in
the operation is the profit, towards which he cuts his way, regardless of
the nature of the obstacles to be overcome, just as the knife is plunged
into the flesh, severing the arteries, muscles, and sinews that surround
the bone which it is the object to reach and saw through.

For a man to tread a path in which he must systematically not only
disregard the interest of other people, but deliberately calculate
upon the weaknesses of human nature which characterize the crowd, in
order to work upon them for his own ends, it is obvious that he must be
constituted in a quite exceptional manner, and not in a way that it is
at all desirable that others should attempt to imitate. If uninitiated
people who enter the arena in which some of the professional speculators
flourish, were to spend some months in gathering information and in
close observance of the _modus operandi_, so far as they can get to
see and hear, many of them would soon be persuaded that they were
utterly useless at such work, and would retire, thanking their stars
they had been sensible enough to look on at the game before hazarding
anything themselves. From the very fact that but few are successful
as professional speculators, it can be safely argued that but few are
competent to engage in the business at all, even when educated in all the
tricks and deceptions necessary as collateral aids to the machinery which
we have shown, and shall show more in detail, to be a _sine qua non_.
Those qualities which have, more particularly in the past, characterized
the successful diplomatist are also of the utmost importance to the
speculator. Successful diplomatists in all times, with few exceptions,
have been men who have never scrupled to resort to finessing, chicanery,
and the _ruse de guerre_ in every form under cover of a saintly
innocence that would shame the devil. Deception in all its forms will be
found in the armoury of the professional speculator, and the weapons,
two-edged, are employed with a laboured precision of which a glimpse by
the outsiders is occasionally to be obtained because it is impossible
completely to conceal the fringes of the organisation by which his gains
are netted.

[Sidenote: THE NON-PROFESSIONAL OR HAPHAZARD SPECULATOR.]

We now turn to the non-professional speculator, and what a pitiable
plight is that in which these gentlemen in ninety-nine cases out of one
hundred ultimately find themselves. The members of the Stock Exchange
liken their place of gathering in Capel Court to a barn, and themselves
to fowls inside it, who repair thither every day to pick up the golden
grain thrown in by the public. This description is not exaggerated, and
the more marvellous does it become as one reflects upon the subject. Many
and many is the man that has toiled and earned a fortune to produce him a
competence for the rest of his days, who has been lured into that fatal
vortex, in very many cases because industry had become a habit with him,
and he found retirement irksome. “I amuse myself with a little jobbing
in the stock markets, just to have some object for going up to town
twice a week,” he says to a friend in the train, with whom he chances
to be travelling. Such is the beginning of more sorrow in respectable
households than the world has any idea of. Many a pensive countenance
furrowed by the Stock Exchange, carries in its deep lines the index to
a heavy volume of lugubrious family history, which, partly from shame,
is sealed but to the few who must know its contents. Prosperity brings
wealth in its train, and people put by at first their gains, until
a taste for the excitement of dabbling in the markets grows into a
thirst, and from that into a mania, which is generally the frontier to
be repassed with empty money-bags, and a sad heart, by a wiser, if not
a better man. It is not so easy to be good on nothing after one has had
£5,000 a year, and hence a deal of the mischief that results from the
foundering of Stock Exchange speculators.

The haphazard man, who is the antithesis of the professional speculator,
will generally be found as differently constituted as are the results of
his operations. The man who makes a study and business of speculating,
investigating every detail that it seems necessary to probe until he
has adapted it to the rest of his machinery, will be found to be a
hard-grained man, sailing very close to the wind, while your persistently
haphazard man is mostly a person of flabby character, and no less flabby
mind, as easily frightened off a line that he has set himself to follow,
in the innocence of a heart that expands with a delusive consciousness
of possessing power, as a stray rabbit. Such a class of man is to be
found by hundreds in the haunts of the Stock markets, and they are always
fidgetting in and out, first as little bulls, and then as little bears,
disappearing after a sharp panic like flies from a joint of meat that
is rudely disturbed by the shop-boy, with the important difference that
whereas the flies always get something, the speculators invariably drop
their money.

The following letter which appeared in the _Spectator_ of the 4th
October, 1873, struck us as being _a propos_, as regards a portion of it,
of this part of our subject. It affords another instance of the success
which follows the trial of a haphazard speculator’s “scientific plan.” In
playing against a public bank the gambler should know in these times that
the science of mathematics has been already employed on the side of the
managers, and is arrayed against him as a fixed law, working on the side
of the _croupier_, whether he wills it or not:—

    “A friend of mine who was not with us, but who had had many
    weeks’ experience at Monaco, had communicated a little plan
    for an all but moral certainty of winning, which was founded
    on the most scientific principles, but the only defect of
    which was that the banks gave one no conceivable means of
    carrying it into practice—a defect, indeed, which I believe he
    himself had verified by leaving Monaco a loser, in spite of his
    scientific plan. His idea was this:—It is obvious that even
    where,—say at roulette,—the chance of the next ‘odd’ or ‘even’
    is precisely one in two, or one-half, the chance of a run of
    any given eight results in a _specified_ order,—such as odd,
    odd, even, odd, odd, even, even, even,—will be only one in 2 ×
    2 × 2 × 2 × 2 × 2 × 2 × 2, or one in 256. If, then, my friend
    bethought himself, you could but steadily stake your money so
    as to stake it against the arrival of this highly improbable
    compound event, you would be sure to win. I quite agreed
    in this extremely sagacious principle, but the difficulty,
    unfortunately, was in the application of the theory. The bank
    gives you no chance at all of staking your money against any
    complex event. It admits only of your staking it in favour of
    or against the simple elements of this compound event. And,
    unfortunately, though it always remains highly improbable
    that any specified run of eight will take place, as you can
    only stake your money time by time on each single one of the
    eight component elements of the event, and as, in each of them
    separately, the chance is one in two, and not one in 256, it
    is simply impossible by the rules of the game so to play as
    to have the chances in your favour. I did, indeed, think of
    requesting the bank to let me stake on the result of two or
    three successive twirls of the roulette table, instead of on
    one at a time, but since my French was extremely bad, hardly
    adequate to protesting against the accidental raking up of my
    money when I had actually won, and since, had it been better,
    I had no hope that the authorities would comply with a request
    so very unsafe for themselves,—the drift of which, indeed, the
    croupiers might hardly have caught at the first suggestion,
    but would certainly have suspected,—I reluctantly abandoned my
    friend’s scientific receipt for winning, and was contented to
    lose.

    “The gamblers of our party were but three in number, and all
    firm of purpose not to exceed the small risk we had prescribed
    for ourselves of 125 francs each. I was the eldest and rashest
    of the three, my money being soonest gone, though not for
    two or three hours, and it was never for a moment doubtful
    but that I should be a loser in the end. My companions were
    both cooler and cannier in their play. They did not, like me,
    precipitately put down their money before the croupiers had
    raked up the stakes lost by the previous catastrophe. They did
    not stretch over other players so awkwardly as I did,—indeed,
    the croupiers had to rebuke me mildly, by begging me to use a
    rake; and then, when I did use the rake, I managed to knock the
    most desperate gambler in the room about the head with it, and
    draw forth a fierce remonstrance, which made me recall with
    uncomfortable vividness that there was a pistol-practising
    ground (‘Tir-au pistolet’) in the garden of the hotel, which
    would readily furnish the instruments for a meeting, wherein I
    should hardly have come off with a mere moral lesson. Indeed,
    I felt clear, after watching my companions,—one of them a
    shrewd counsel, learned in the law, the other a cool, sagacious
    Cantab, who came out high in the Tripos the other day,—that
    neither of them had the true gambling instinct as strongly as
    I, though so far as their experience went, it seemed to confirm
    my own. And what was that experience? This chiefly,—that I was
    distinctly conscious of partially attributing to some defect or
    stupidity in my own mind every venture on an issue that proved
    a failure; that I groped about within me for something in me
    like an anticipation or warning (which, of course, was not
    to be found) of what the next event was to be, and generally
    hit upon some vague impulse in my own mind which determined
    me; that whenever I succeeded, I raked up my gains with a
    half-impression that I had been a clever fellow, and had made a
    judicious stake, just as if I had really moved a skilful move
    at chess; and that when I failed, I thought to myself, ‘Ah, I
    knew all the time I was going wrong in selecting that number,
    and yet I was fool enough to stick to it,’ which, of course was
    a pure illusion, for all that I did really know was that the
    chance was even, or much more than even, against me. But this
    illusion followed me throughout. I had a sense of _deserving_
    success when I succeeded, and of having failed through my own
    wilfulness, or wrong-headed caprice of choice, when I failed.
    When, as not unfrequently happened, I put a coin on the corner
    between four numbers, receiving eight times my stake if any of
    the four numbers turned up, I was conscious of an honest glow
    of self-applause. I could see the same flickering impressions
    around me. One man, who was a great winner, evidently thought
    exceedingly well of his own sagacity of head, and others also,
    for they were very apt to follow his lead as to stakes, and
    looked upon him with a sort of temporary and provisional,
    though purely intellectual respect. But what quite convinced
    me of the strength of this curious fallacy of the mind, was
    that when I heard that the youngest of my companions had
    actually come off a slight winner, having at the last moment
    retrieved his previous losses by putting his sole remaining
    two-franc-piece out of a hundred and twenty-five francs he was
    willing to risk, on the number which represented his age, and
    gained in consequence thirty-two times his stake, my respect
    for his shrewdness distinctly rose, and I became sensible
    of obscure self-reproaches for not having made use of like
    arbitrary reasons for the selection of the various numbers on
    which I had staked my money during the period of my own play.
    It was true that there was no number high enough, sad to say,
    for that which would have represented my own age, so that I
    could not have staked on that,—but then, why not have selected
    numbers whereon to stake that had some real relation to my own
    life, the day of the month which gave me birth, or the number
    of the abode in which I work in town? Evidently, in spite of
    the clearest understanding of the chances of the game, the
    moral fallacy which attributes luck or ill-luck to something
    of capacity or gift, or incapacity and deficiency, in the
    individual player, must be profoundly ingrained in us. I am
    convinced that the shadow of merit and demerit is thrown by the
    mind over multitudes of actions which have no more possibility
    of either wisdom or folly in them than—granted, of course,
    the folly of gambling at all—the selection of the particular
    chance on which you win or lose. When you win at one time, and
    lose at another, the mind is almost unable to realize steadily
    that there was no reason accessible to yourself _why_ you won
    and _why_ you lost. And so you invent—what you know perfectly
    well to be a fiction—the conception of some sort of inward
    divining rod which guided you right when you used it properly,
    and failed only because you did not attend adequately to its
    indications.

    “Such is the experience which I carried away with me from
    amidst the objectionable smells, the unsavoury company, the
    malignant gnats, the haggard revelry, and the general moral
    squalor of Saxon-les-Bains; and when my wife reproached me,
    with triumphant references to her own warnings, for the missing
    five pounds, I replied, what I really feel,—though I know I
    shall never convince her of it,—that my experience was not
    dearly bought. Is it the only case in which the fiction that
    we ourselves have _earned_—whether good or evil fortune—forces
    itself with absurd tenacity upon us? Luther himself could
    hardly have desired a better proof than this of the pranks
    which the imagination plays us when dealing with that sense of
    merit and demerit, so closely bound up with our human egotism.
    We give ourselves credit, and get credit, I suspect, for a vast
    deal more both of wisdom and folly in life than we deserve.
    Are nine-tenths of the prizes and the blanks of life at all
    more ascribable to any fine selective purpose or deficiency
    thereof in him who draws them, than my losses, or my friend the
    Cantab’s sudden retrieval of his loss? Yet I still look upon
    that able and thoughtful youth with a deep sense of respect for
    his cleverness in retrieving his losses, and on myself with
    a melancholy consciousness that, like ‘Traddles’ in ‘David
    Copperfield,’ my native awkwardness of mind must have been the
    cause of my very moderate reverses.—I am, Sir, &c.,

                                       “AN INSTRUCTED GAMBLER.”[26]

[Sidenote: THE MISFORTUNE OF EARLY GAINS.]

The greatest misfortune that can happen to the haphazard speculator is
for him to make money the first two or three “accounts.” He will, in
such a case, in the first place believe himself to possess some uncommon
luck, or a shrewdness for selecting a security that was about to move
in the direction he had reckoned upon. The operations of the most stupid
speculator are frequently attended with such results, just as they might
also be on his first essay at pitch-and-toss. Such incipient luck, by
drawing forth the commendations of others, especially of the brokers—who
do not generally err on the side of warning the individual against the
dangers which beset such a path—builds up in him a false estimate of his
powers. Early success associates his mind with the gains and not with the
losses, and the latter are incurred subsequently with a light heart, as
a sort of accident that will be sponged out by the results of the next
throw.

A case came under our notice of the extreme danger of good luck attending
a first operation, but it was in another market. A Spaniard had settled
in London with his wife and family, and had entered into partnership
with another gentleman. Much money had been made in iron, and prices had
attained to an unprecedented figure (it was in 1872). He bought on pure
speculation 30,000 tons, and cleared £6,000 profit. Elated with such
success, his next operation was a purchase of 40,000 tons. The price fell
£1 a ton. He lost all his own and his partner’s money, and fled from the
country leaving his family destitute.

But when two or three losses have been incurred the confidence becomes
somewhat shaken, especially after a large operation has been attempted,
so as to recover the losses on several smaller ones at one _coup_,
and has failed. Then some sort of a system will be tried, but the bad
judgment which has landed the haphazard speculator so far without his
having perceived the necessity of machinery and a system, will prevent
his adhering to any set purpose. Such a man acts on this information and
on that, led away by the plausibility of a wiser head possessed by a
person who goes about like a big fish in the deep waters, disposing of
the smaller fry for his own purposes.

[Sidenote: VERY FEW FAILURES MADE PUBLIC.]

To dig to the bottom of the question without attempting further to
widen it, what are the chances against the haphazard speculator? If
we ask ourselves whether we have known personally any individuals who
have succeeded as haphazard speculators, we must reply emphatically in
the negative. It occurs to us on making this observation that we have
heard of one individual, who may be described as a haphazard speculator
who did get clear off with £100,000, and we believe it to be correct.
Everything he touched chanced to go the right way until one morning he
raised his hat to his friends and the members who were in the markets at
the time, and bid them farewell. He was a solitary instance of a man with
sufficient strength of character to say to himself, “Thus far shalt thou
go and no farther,” and he adhered to it. Many had made as much before,
but they could never stop until it was all lost again. How is it so
little is heard of those who venture and fail, for the practice would be
greatly discouraged if the failures always came to light. All concerned
are interested in keeping such matters quiet for obvious reasons. The
broker who does the business for the speculator can measure his means
pretty well at the outset, and takes care to keep his client informed so
that he may persuade him to diminish his commitments if the times are not
promising. The business is remunerative enough to make it worth while to
run some risk, and as the client will have always something, at least, to
meet his losses with, the broker is generally prepared for accidents. The
speculator will, for his own sake, keep his misfortunes to himself, and
so the new men come on, never knowing how many have gone irretrievably
into the gulf before them until they have passed the fatal barrier of
actual experience from which, in all but a very few cases, there are
_vestigia nulla retrorsum_.

The chances are overwhelmingly against the class of speculator with
whom we are now dealing, for the following reasons: He has no money,
as a rule, worthy of the name of capital, and consequently if he is
caught deep in by any of the thousand and one accidents that may burst
like a thunder-clap on the top of the markets any hour of any day in
the week, he is unable to “see it out,” as the saying goes. Not being
able to take his stock off the market, the settling day occurs before
a sufficient recovery takes place, and he is done for. Where there is
an exposure to such a catastrophe, that may happen at any moment and
sweep away the entire fund, it is obvious that the game is not worth the
shadow of a candle-end, to say nothing of the substance. Yet this is the
common condition of the haphazard speculator. He stands at the edge of a
precipice knowing that a puff of wind will blow him over, and that it may
come at any moment.

Supposing, for the sake of argument, we put such a possibility of
accident out of the question, and imagine the haphazard speculator not to
be exposed to the contingency of such a collapse, what do we find in the
second rank of chances against him? In the first place his attention, as
a rule, will be drawn to a stock by, we will say, its upward movement.
He thinks to himself, “That stock has been getting up, why shouldn’t I
have some of it?” and he buys, allured as are many others who wait to
buy of those who have rigged the market up to a certain price, and then
send the tip round to buy. The haphazard man thus assists probably the
professional and systematic speculator to unload. He has got in at the
top, and only sees his mistake by getting out at the bottom. Secondly, he
very seldom pauses after having taken the decision to operate, owing to
some special circumstance, to reflect upon the minor surroundings which
are very necessary to keep in view. What are these? To buy on the eve
of a settlement is a mistake, as a rule. In Stock Exchange speculation
the exceptions are of the utmost importance, as for instance—When there
has been a very sharp fall in the middle of an account, and it is known
that the depression has been due to any considerable extent to bear
operations, there will nearly always be a recovery on the eve of the
account, caused by the bears taking their profits. The converse will also
necessitate an operation of an exceptional nature, as when values have
been driven up to a high point in an account by the bulls, to sell would
be the line to take as the account approached, because the bulls might be
reckoned on to take their profits in the same way. As a rule, however,
prices tend to droop as the settlement approaches, owing to sales. The
haphazard speculator is always very much discouraged when he has to pull
up a loss, he should consequently avoid as much as possible incurring it.
If he does not keep these important influences in mind, he will assuredly
have to pay for the negligence.

[Sidenote: GREEDINESS INVOLVES LOSS.]

Then there is the fatal blunder made by almost every inexperienced
speculator, of never being satisfied with a moderate profit. If he buys,
and the price rises ½, he cannot make up his mind to take it, but must
wait for ¾; when it has reached that he must have 1 per cent.; and when
that rise has been attained to, he wants another ⅛ or ¼ to cover the
commission. Like the dog, in attempting to grasp the shadow of his bone,
he loses all. This is of daily occurrence in numerous instances, and is
one of the fatal weaknesses bound up in the frailty of human nature, from
which only the strongest and coolest temperaments are able to emancipate
themselves. Speculators never set sufficient value upon the importance of
avoiding a loss: they think only of the profits. As it is with our money
affairs when we say, Look after the pence, the pounds will take care of
themselves; so it is with speculators, look after the losses, the profits
will take care of themselves. “Never refuse a profit,” is a golden motto
for the speculator, which unhappily few of them in their greediness have
the courage to adopt.

[Sidenote: KEEPING ONE’S OWN COUNSEL.]

In parting company, for the present, with the haphazard speculator, to
whom we have yet more to say worthy of his attention, we would strongly
recommend him if he finds it impossible to leave it alone altogether,
_to keep his own counsel_. Do not listen to what other people have to
recommend. People who are engaged in commerce in all its multifarious
ramifications, care only for themselves, and for no other single soul;
it is at all times consequently idle to put any other construction
upon advice to buy a certain stock, tendered apparently, with the most
benevolent motives, than that it is to serve directly, or indirectly,
the purpose of him who recommends the purchase. In business every one is
for himself, and, as the saying is, “the devil take the hindmost.” A man
who takes to speculating, and has not enough stability of character to
lay down certain principles for his guidance, to be rigidly adhered to
as a rule, or is possessed of an excitable temperament, had better flee
from the thought of engaging in so dangerous a vocation, for his ventures
will assuredly result in the speedy dissipation of his inheritance, be it
large or small.

    NOTE.—I made, purposely, no comments on this very interesting
    and important chapter, and trust all the terms will be as
    readily understood by the New York speculator as by the London
    speculator.

                                                           H. W. R.




CHAPTER IV.

THE INCREASE OF SPECULATION IN STOCKS AND SHARES.


[Sidenote: STOCK EXCHANGE GAMBLING INCREASES IN EUROPE WHILE PUBLIC
GAMING-HOUSES ARE ON THE DECLINE.]

The excitement which most men feel in gambling in one shape or another
leads to its being practised to a very large extent, in spite of legal
prohibition and the vigilance of detectives. Public betting houses
have been suppressed, and it seems that betting on horse-racing has
diminished; while on the continent, as governments have found themselves
able to fill the national exchequer in a legitimate manner, Homburg,
Baden-Baden, Ems, and the like, are no longer the chosen resort of
rouge-et-noir players; but the vice has only broken out in other places,
the results of which will be probably far more disastrous at Berlin,
Frankfort and Vienna, in their respective Stock markets, as time goes
on, than ever followed the play in the gilded saloons at the places
mentioned.[27]

[Sidenote: SPECULATION AN OUT-GROWTH OF PROSPEROUS TIMES]

If it be conceded that playing for money, to which end speculation
likewise in any other commodity than stocks and shares is simply the
means, produces a pleasurable sensation in a man, and that very few men
do not experience it some time or other, who have the opportunity of
calling it forth, the greater number of men whose position enables them
to gamble, will probably do it. At every rise and fall in a country’s
prosperity there is a flow and ebb in the tide of speculation, not
only in stocks and shares, but in all markets. We refer now to that
class of speculation which is an excrescence of prosperous times. A
merchant’s business is at all times more or less of a speculative
nature, it cannot be otherwise; but this is very different from the
speculation of outsiders in commodities which they know nothing about.
Many persons would, no doubt, think it strange that there should be a
feverish speculation sometimes carried on in such an article as pepper.
Yet syndicates are occasionally formed for quietly buying up this
article, and ascertaining the exact amount in stock, and the probable
quantity that will reach the market by ship within a given time. When
the syndicate has complete command of the supply, they commence to “rig”
the market, or put the price up, then put the public in and let it down
again. In the stock markets the _bona fide_ operations, as compared with
the speculative, are probably as 1 to 20 at most, and in the colonial
produce and other markets the proportion is only something more. It may
be imagined, therefore, to what an extent the speculative operations in
an article like pepper may be carried when it is considered that the
weekly deliveries for consumption amount to 250 tons.

[Sidenote: COMMERCIAL PROSPERITY UNHEALTHILY FOSTERED BY ILLEGITIMATE
SPECULATION.]

One inevitable evil attending all forms of commercial prosperity is that
they are built up in so large a degree upon a basis of unremunerative
speculation. Such a foundation only serves as a sufficient support to
the superstructure, while the pressure upon it does not pass a certain
limit. If, for example, it be accepted as proved that one Stock Exchange
transaction in twenty is _bona fide_, it is obvious that when the
speculation in those markets shrinks up for the time, which it is sure
to do when it has had its run, a number of stock brokers whose business
has been established by reason of the increase of speculative operations
must fail, unless they have made enough money during the period of
unusual activity to be able to live through the period of stagnation that
intervenes before the next revival. And after every commercial revulsion
a large number of them do fail, and it is not easy to estimate the
mischief that is occasioned by the shock that is communicated to trade
and production by the sudden and complete stoppage of these extra streams
of expenditure.

[Sidenote: THE INFLUENCE OF TRADE PROFITS UPON THE STOCK MARKETS.]

There are great foci whence proceed currents of profit. The currents of
profit may be traced to the great seats of the national industries. The
money made, for example, by the great cotton and iron manufacturers of
this country, distributes itself in a hundred streams from Lancashire
and Yorkshire, to keep within the bounds of two counties.[28] The larger
currents flow into the pockets of two classes, those who are very rich,
and those who are moderately so; while the smaller streams trickle into
the cottages of the labourer and artisan. The wealthy direct their new
gains as they flow in, into the markets for public securities, and the
gains of the labourers follow to some extent in the same direction at
a slower pace, through the lower middle class, whose profits increase
by the augmented consumption of all the primary articles, in which
weekly wages are laid out. In both cases the currents of profit starting
from the great foci of production, spread, embracing all classes of
the community, like the winter’s snows gathered in their wealth in the
mountain heights, which are loosened by the summer sun to flow over and
irrigate the grateful plains below, and are again gathered up to a large
extent for distribution through the Stock Exchanges of Europe.

[Sidenote: AN INCREASE IN THE AMOUNT OF TRADE PROFITS REALISED, CAUSES AN
INCREASE IN THE NUMBER OF SECURITIES.]

When this volume of profit begins to be felt in the Stock markets,
the harvest time for the professional speculator commences, and with
the increase in the amount of the profits of the nation the number of
securities increases also. The public securities quoted in the bourses
of Europe at the present time amount to thousands of millions sterling
more than existed a quarter of a century ago. Side by side with this
increase in Stocks and Shares has the speculation in them increased also.
Such has been the growth, indeed, of speculation that several joint
stock companies have been formed, which are nothing more nor less than
syndicates of speculators who have invited the public to join them in
buying up a number of securities and making a profit by selling them at
enhanced values. A few skilful Stock Exchange practitioners at the head
of these concerns have, in many instances, made an excellent business out
of the operations, by systematically raising the necessary capital and
taking the securities off the market, which practically illustrates in
broad daylight the legitimate method by which speculation may be pursued
as a business, as we have already stated in Chapter III.

[Sidenote: SPECULATION BY ESTABLISHED COMPANIES.]

The fact of speculation having come to be practised by established
companies, where before it was a kind of business that it was considered
necessary to pursue as secretly as possible, proves how strong is the
tendency of the age in which we live to make royal roads to wealth.[29]

Speculation, as we know it in our time, is a very different affair from
what it was fifty, and even thirty, years ago. Value in all markets in
our day is unsettled with the lightning flash that laughs at the bed of
the Atlantic as no better than a span of space, while the forces that
close in on all sides, representing demand and supply, with a responsive
thunder-clap, adjust the new level as each market grasps in a moment the
cause of the disturbance.

[Sidenote: THE DEMORALISATION CAUSED BY TEMPORARY SUCCESS.]

One of the great evils which follow upon the increase of speculation is
the demoralisation it brings in its train. Money easily made is very
often as easily lost, after which it is difficult to rekindle that
healthy desire to work which is fostered by the acquirement of moderately
increasing gains through close application to business. Money that cost
but little trouble to procure is generally carelessly spent, which, as a
rule, does more harm than good to him that gained it.

[Sidenote: THE NEW ERA IN SPECULATION.]

The commencement of a new era in speculation dates from November 13th,
1851, when a telegraph cable was successfully laid across the straits
of Dover, and the opening and closing prices of the funds in Paris were
known at the London Stock Exchange within business hours. From that day
one European bourse after another has joined hands, and the political
shock which affects one market, henceforth acts through the electric
wires, more or less upon all, according to the extent to which the same
securities are dealt in at different cities.

[Sidenote: COLLAPSE THROUGH OVER-SPECULATION IN AUSTRIA.]

Side by side with the acquirement of means by the masses of those
European states which up to a comparatively recent date have been poor,
has speculation as a business grown, and it has been making rapid strides
from the breaking out of the civil war in America, when the augmented
price of cotton laid the foundations for the manufacture of this staple
in parts of Austria and Prussia, where it has taken root, and according
to all accounts flourishes in successful competition as regards certain
descriptions of cotton fabrics with the mills of Lancashire. New seats
of production have been created, and new currents of profit have found
for themselves centres for investment. The sharp little panic which
broke out on the Vienna bourse in April, 1873, was due to the too heavy
superstructure of the new, and much too rapid, speculation, reared
recklessly upon very slender foundations. There, in a city comparatively
innocent of such collapses, might be seen the demoralisation which
follows upon hastily and too easily acquired riches. The effect of the
financial crash, which was mended up in a few weeks so that a spread
of the crisis was for the time arrested, was such, however, upon the
nerves of all classes of the community, that the journals had leaders
written in such desponding phrases, that readers at a distance from the
scene were inclined to believe that the capital of Austria was about
forever to be blotted out from the roll of financial centres. Some little
sympathetic effect was produced at Berlin, where considerable inflation
also existed as a consequence of the activity in commercial affairs,
which followed the large war indemnity payments made by France. There is,
in fact, on all sides evidence that the speculation not only in stocks
and shares, but in all commodities throughout Europe, has been carried on
for several years past, on a scale which was temporarily checked by the
Franco-German war, far exceeding anything ever known or heard of before.

Trustworthy figures give the best and surest estimate of the increase in
the business of the chief Stock markets of Europe, and where we find the
stock brokers and jobbers have increased in number we may safely conclude
that the business that is transacted in the Stock markets has increased
also.[30]

[Sidenote: INCREASE IN THE NUMBER OF MEMBERS OF THE LONDON STOCK
EXCHANGE.]

In the London Stock Exchange we find the number of stock brokers and
jobbers has increased as follows. We start from the year following the
great collapse of 1866, when the ranks were perhaps somewhat thinned:

    The number of Members of the London Stock
      Exchange in 1867 was 1,261
         Ditto    1868     1,297
         Ditto    1869     1,356
         Ditto    1870     1,433
         Ditto    1871     1,442
         Ditto    1872     1,620
         Ditto    1873     1,706

The number of members has increased as follows: From 1867 to 1868, an
increase of 36; from 1868 to 1869, of 59; from 1869 to 1870, of 77; from
1870 to 1871, of 9; the diminished increase during this period being no
doubt traceable to the Franco-German war; from 1871 to 1872 an increase
of 178; and from 1872 to 1873, of 86. It is evident in the increase from
1871 to 1872 that the intention of many persons to become members during
1870 and 1871 was only postponed until the storm raging on the Continent
had passed over. In fact it very soon became apparent from the transfer
of business, especially of a financial nature, to London, that as soon
as the war was concluded the increase in the London Stock Exchange
operations would be larger than would otherwise have been the case, as in
fact it turned out, to speak only of the loan operations of France and
Prussia. It may with tolerable certainty be argued that new stock brokers
and new jobbers in the early part of their career depend very much upon
speculative commission business, and the above figures, therefore, afford
ample evidence of the increase of speculation in these markets.

What are the further obvious deductions from the large increase of
speculation in public securities thus suggested, to confine ourselves to
one kind of market? If the business of the Stock markets were reduced
within safe and legitimate limits, that is, was confined to operations
of a _bona fide_ investment nature, it is certain that no more than
one-tenth, it might be one-twentieth, of the brokers would be required to
execute properly all the orders that come into the markets. It follows,
therefore, assuming this estimate to be approximately accurate, in the
first place that the number of really sound stock brokers, who have a
steady legitimate business, upon which pure speculation is an excrescence
not particularly encouraged or liked, is small compared with the entire
body; secondly, that by far the greater number depend very much for their
means of support upon purely speculative “time bargains;” and thirdly,
that a crying evil of the whole system is that speculators encourage
the establishment of new brokers, who when established are very often
compelled, perhaps against their inclination, to encourage in their turn
gambling, or there would soon be an end of them. It is thus evident
that a large proportion of the brokers in all markets where speculation
is carried on to a large extent, must be always living on the crust of
a volcano, in imminent peril of destruction from the moment the tide
of prosperity, which carried them into their apparently secure and
prosperous position, begins to turn.




CHAPTER V.

MODERN INFLUENCES UPON THE MARKETS.


Unless a speculator, whether in the Stock markets or any other market, is
prepared to lay down all the elaborate machinery, without which, in these
times, it is utterly hopeless to attempt to achieve favourable results in
any degree, he must inevitably in the long run lose his money.[31]

[Sidenote: A FIXED LINE OF ACTION.]

The times are very much changed since the head of a great financial
establishment, long since gone to his rest, set sail from the shores of
France as soon as he was well assured that Wellington was over-powering
the legions of Napoleon in 1815, hastened to London, and bought up
all the Consols he could lay his hands on, and thereby realised a
considerable fortune for himself and his heirs at one _coup_. Here is a
memorable case in point as illustrating the necessity of laying down a
systematic plan of operations and by sheer hard work, and at the risk
of life and limb, carrying it out to a successful issue. The ordinary
speculator is not to be found with these qualities of dogged perseverance
in elaborating a plan of operations, and keeping to strict principles of
action from the outset, never allowing his mind to be diverted from his
system except under certain special circumstances, for which a margin
has been allowed. The electric wire has changed matters very materially
in this respect. There is more ease in these times as regards individual
locomotion for the operator who has keenly to watch the fluctuations in
all markets; he has silent, but at the same time gigantic forces, at his
disposal, which he can exercise in pretty nearly any quarter of the globe
where there is need for them; but it cuts both ways—he can make a fortune
in an hour, or less time, and lose it with the same rapidity, beyond hope
of recall should the second line of judgment condemn the action of the
first.

[Sidenote: CLOSER UNIFORMITY OF VALUES IN ALL MARKETS THROUGH THE
DEVELOPMENT OF THE TELEGRAPH SYSTEM.]

[Sidenote: A SPECULATOR CANNOT HOPE TO SUCCEED IN ANY DEGREE UNLESS HIS
ARRANGEMENTS ARE AS COMPLETE AS THOSE OF A MAN ENGAGED IN BONA FIDE
BUSINESS.]

All the markets of the world are regulated to a greater nicety as regards
value since the more complete development of railroads and of the
telegraph system. Each great article of commerce has its head quarters in
its respective country, and value from that point is regulated at all the
minor stations where it is dealt in, to use a metaphor, in the same way
that the right time is flashed through the electric wire to the principal
clocks in England at one o’clock from the Observatory at Greenwich. It
is the custom consequently for all the leading merchants and dealers to
be supplied by telegram with the prices current of those articles dealt
in in all other markets, in which they are mainly interested. To compete
with those who make a steady profit by buying and selling in obedience
to _bona fide_ orders, a speculator must at least have his arrangements
on a par with the non-speculator, if even then he can expect to hold
his own without a still more elaborate and costly system of obtaining
information, as his necessary profits can in most cases only be secured
by his being in a position to anticipate a coming change.

[Sidenote: THE DIMINUTION OF GLUTS IN ALL MARKETS.]

[Sidenote: MODERN CONDITIONS RENDER IT MORE DIFFICULT THAN FORMERLY FOR
SMALL MERCANTILE HOUSES TO SUCCEED.]

Whatever be the operations of speculators who employ little or no capital
of their own, or the nature of the transactions of those who risk what
they have belonging to them by consigning goods of various descriptions
to distant markets in the future, there can never be the same gluts
that have characterized the trading of former times. It would, indeed,
seem that the commerce of the world must by degrees be carried on more
and more by a smaller number of powerful merchants, relatively to the
increase of populations and the growth of commerce, and less and less by
a greater number of small weak houses. The nature of the system which
is growing up under the new order of things will preclude from serious
competition any but those who can afford from the commencement to start
upon somewhat the same principles of action as those who already carry
on and regulate the trade of the world. What chance, for instance, can
a man have who starts in the Manchester goods trade, with a view to
shipments to the great foreign and colonial markets, unless he can be
in a position, by means of his telegraphic information from all the
necessary quarters, not only to avoid sending from Manchester, goods
to any particular quarter where the market is unfavourable, but also to
divert a shipment already on the passage from its intended destination to
some other point where, in the meantime, prices have risen?

As the system by which the interchange of commodities is effected
becomes more and more perfected, and as the division of labour settles
itself down into a well-defined science by the good and skilful workmen
concentrating their efforts, and by the bad and unfit labourers being
forced to abandon what they are unsuited for, so will the demand for all
the great luxuries and necessities of life be supplied more completely
on the joint stock principle. We see this in all directions growing up
under our eyes. Wherever a large demand exists for any service, such, for
instance, as transport, or for any article of use or consumption, there
will the means of supplying both be organized. We have seen it in armies,
in fleets, and in the government of countries for centuries; and we
have been watching it for forty years in, perhaps, the most astonishing
instance there is, viz., in railways. Formerly everybody drove in his own
coach about the country, now nobody does. We have seen it for years past
in banking, which, from the nature of the business, would be the most
easily reformed upon the joint stock principle. It has also been working
and making inroads upon commercial houses with a force which in the end
will be irresistible, and which from year to year makes it more difficult
for small firms with small capitals, to hold their own against the larger
organisations, just as it is out of the question for any private person
now to start a bank.

[Sidenote: EVERY COMMERCIAL REVULSION DESTROYS HOUSES OF A SPECULATIVE
CHARACTER, AND THROWS THE GOOD BUSINESS INTO THE HANDS OF THE LARGE,
SOUND ESTABLISHMENTS.]

The incalculable mischief that is caused in commercial affairs at certain
periods, arises for the most part from the operations of comparatively
small houses, which have insufficient capital to enable them to lay
down the necessary machinery for duly informing themselves upon all the
needful points about which they should be accurately posted with untiring
continuity. In a great commercial city a thoroughly experienced banker
or money-lender can say very nearly by heart the names of the merchant
houses who are known to be beyond all question good for any amount for
which they may write their signature. Starting from this nucleus, circles
may be drawn defining the various degrees of credit which may be allowed
to commercial houses, until a supposed outermost and largest ring of all
is reached, which includes the shaky, struggling, poor establishments.
Those whose knowledge and experience in such matters is very great could
so classify all traders. Now, it must be evident that when the chaos
which follows a violent commercial revulsion begins to be transformed
into order, the business which the withdrawal of confidence is sure to
throw as much as possible upon the centre or nucleus of firms which are
comparatively unaffected by any revulsion, will commence gradually to
work outwards again, overflowing ring after ring of the supposed lines
which we suggest as defining the degrees of stability. This ebb and flow
of the tide of credit, so to speak, is the result of competition, and
of the fluctuations in commercial affairs, and must always recur with
greater or less force and rapidity. It is an automatic working of the
laws of commercial affairs which characterizes all markets. As the nature
of a large proportion of mercantile business must partake more and more
of the speculative character to keep pace with the keener competition of
greater capitals employed by a larger number of first-class firms, so
must the machinery requisite for each individual firm under the altered
circumstances through which prices are affected in all markets become
more elaborate. If this view be correct it would seem to follow that the
important business of the world must be more and more settling itself
into the hands of large capitalists; and that although new houses in
all departments of trade will always be starting in proportion to the
aggregate growth of the commerce of the world, the large and strong firms
will increase in a greater ratio, and the number of the small ones will
tend to diminish.

Before the invention of the telegraph, a house of straw could paint up
its name, make a show with a few thousand pounds, and enter into very
large commitments for good or for bad, as it might turn out. Shipments
to a large extent could be made, and if all turned out well, a house
might thus, by a stroke of luck, be established to occupy, perhaps, an
eminent position. On the other hand, if the first operations resulted
in ruin, it was worth the risk, and a fresh start was made probably
somewhere else under a new title. Such instances being multiplied in
all the great commercial centres, it is easy to understand how markets
could be glutted, prices raised to a fictitious level, and all the links
forged into the chain which snaps at once, when the tension upon credit
has gone beyond a certain point. Matters however are changed in this
respect, and are changing from day to day. So small is the expense of
obtaining information, compared with the risk of signing a contract with
a house of straw, or of doubtful respectability, that the electric wire
serves accurately enough for the purpose of ascertaining the position of
a new customer who may present himself at a large establishment to do
business. A most salutary effect is thus in process of being worked out.
The great thing in commercial affairs is to keep out the weak speculative
element, and to drive them into subordinate positions to work their way
up in a legitimate manner, to become principals. The means of obtaining
information now is so considerable, that if a man signally fails, almost
the only hope for him is to change his name. In some instances this has
been done, and followed by astonishing success, although the way it was
achieved would, perhaps, hardly bear close investigation.

So far, we have referred more particularly to the altered character of
modern influences upon commercial markets, and we have done so because
the changed conditions which affect the value of one commodity in the
markets of the world more or less affect all; but, as we are specially
writing with reference to Stock markets, we only propose to touch upon
other markets in passing.

[Sidenote: THE EXTENSION OF LONG WIRE TELEGRAPHY.]

The net work of telegraphic communication, in Europe at least, is now,
in the year 1874, so far complete that, when a pressure of business is
felt by the sub-marine telegraphic companies, the complaints of delay are
not frequent. The long wires are also multiplying rapidly. The progress
that has been made in telegraphy was made known to many for the first
time by the circumstances being published, that the Shah of Persia’s
first minister at Teheran was aroused out of his sleep early one morning,
during the visit of his royal master to England, to reply to a message
which, to the minister’s astonishment, he discovered had a few minutes
previously been dispatched by Dr. Siemens, an operator who had been
expressly established for the use of the Shah in Buckingham Palace.

[Sidenote: MONEY FAMINES SHOULD HENCEFORTH BE AS IMPROBABLE OF OCCURRENCE
AS CORN FAMINES.]

[Sidenote: ADVANTAGES DERIVED FROM OPENING UP COMMUNICATIONS WITH THE
CORN-GROWING PROVINCES OF RUSSIA.]

We are of opinion that the complete communication that is now established
between the commercial and monetary markets of Europe will tend
gradually, if not rapidly, which is very probable, to diminish the
effects of what we understand by commercial crises. The opinion embodied
in this sentence which was written before the American financial crisis
of 1873 broke out, has been corroborated by the great assistance afforded
by the Atlantic cable in mitigating the immediate effects of the first
symptoms upon the public mind, and in at once confining the disorder
within limits which would probably have been impossible in the absence
of telegraphic communication. The main reason why we have suffered from
monetary panics so severely during the first three quarters of the
present century has been from the absence of rapid communication with
other monetary and commercial centres, as well as from the absence of
large auxiliary monetary centres holding a good average supply of cash,
to be lent out on good security to the highest bidder for the time. The
facilities which now exist for applying the over-plus of grain at one
centre of population to satisfy the deficiency at another, has done away
with famines. The late exception of Persia proves the rule. Corn is a
commodity, and money is a commodity. What applies to one, as regards
demand and supply, applies also to the other. A strange nervousness
still exists in some quarters about the amount of the Bank reserve,
fears being entertained that it will be found too small when the time of
pressure comes. Persons who are so loud in their protests at reductions
in the Bank rate can never have been buyers of money themselves, or, in
other words, sellers of bills. To keep the value of money the smallest
fraction above what is actually necessary at the time, by the capricious
exercise of a brief authority, is to commit an act of unwarrantable
injustice, and to rob the needy. We say if the Bank directors maintain
a higher rate of discount than is necessary, they rob the needy, and
compel holders of bills to pay an illegitimately high rate of discount.
It is urged in defence of this nervousness, that the attractive power
of a higher rate is slow, and that the till may be exhausted before the
required supply arrives. As and when it may be necessary the Bank should
raise or lower its rate, maintaining a reserve which is sufficient at all
times if it be about one-third of the liabilities. To speculate upon the
future, is to attempt to discount influences which may never be felt.
To maintain for a day a higher rate than is necessary, is to tax the
public for private ends, to reinstate Protection, and to disregard sound
economic principles. To illustrate what we mean, take the case of bread
famines. Almost the only nation that has suffered from the worst kind
of bread famine of late years, has been one altogether outside the pale
of civilization. At the period referred to, the telegraph was only seen
in Persia, because it was necessary to use the territory for putting
up telegraph-poles to carry a through wire to India. As we write, there
is not a steam-whistle to be heard in that country, which is somewhat
astonishing, considering that it is so near to us and that it is twice as
big as France; although it must be said, in justice to His Majesty the
Shah, that he has already seen the benefits to be derived from coming
out of his dominions himself, and by letting civilizers in, with _carte
blanche_ powers, to transform his dominions from a condition, as regards
production, which may well shame the representative of an ancient line
of kings. With the exception of countries situated as Persia is, with
reference to obtaining supplies from other nations, no considerable
centre of population need suffer from bread famine in our time, unless
under circumstances which no human foresight can prevent. This very
important fact was recognized when the first great foreign railway loans
were offered for subscription in England. It was seen that by enabling
Russia to make railways from the great corn-growing districts of her
Baltic provinces to ports to which vessels could gain access during the
winter, we should, in case of need, be able to supply ourselves from this
source. We have not yet had special occasion to prove the inestimable
value of those lines of railway, but one thing is quite certain that,
whatever some authorities may say as to the impolicy of lending largely
to foreign powers to assist them in constructing strategic railways, for
reasons beyond the one given, England never made a better business than
by lending Russia some of her surplus capital. Whether or not we have
now lent sufficient is another matter.

A hunger crisis arises from a scarcity of bread, and a monetary crisis
from a scarcity of money, or what represents it perhaps too largely at
some centres, credit. There are stores of corn kept in larger or smaller
quantities by all civilized nations, and famines have arisen in former
times, not only from the absence of sufficiently rapid communication
making the surplus supply of one centre available for the deficiency of
another, but from the failure of production. It is tolerably certain,
however, that at all times while human beings have existed there has
always been enough food grown for every living creature, if it could have
been distributed according to the varying wants of different populations.
Now that this can be effectually done, famines are unknown except in
lands whose people are such lie-a-bed tories that they prefer to sit in
the sackcloth and ashes of barbarism and want, to humanising the body and
soul by the regenerating influence of modern civilization.

Money is as much a necessity as bread in the world. Indeed, it is of
more; for bread alone carries a man a very little way, according to
modern notions, whereas money is the lever that lifts every obstacle
from the path. It would seem quite reasonable, therefore, to infer that
when the same means have been established for making the surplus at one
monetary centre available to supply the deficiency at another, with the
rapidity which is proportioned to the more sudden pecuniary requirements
that are developed than is the case with corn, the very serious and
prolonged disturbances which have been experienced in the past from such
a cause would gradually be prevented in the future.

[Sidenote: THE GROWTH OF WEALTHY MONETARY CENTRES.]

Apart from the single question of rapid telegraphic communication, there
is another matter deserving of as much consideration, which is the
increase in the number of large monetary and commercial centres. Of late
years the growth of wealthy centres has been rapid, and the reservoirs
of unemployed money have thus been increased so that a deficiency at
one could be supplied from another at a price. Diseases of the body
break out here and there in the world at different periods, and other
centres of population get warning, and by quarantine and strict sanitary
measures, its spread, as in the case of cholera, is checked. Speculation
is a disease of the mind, and like diseases of the body which arise from
indulgence, carelessness, and neglect, it in the same way comes to a
crisis at places where greed of money, folly, and commercial debauchery
hurry people into extravagances and luxury that are sure to result in
a general eruption. The growing wealth of continental states is an
important feature in the altering character of Europe, from a financial
point of view, as we near the last quarter of the nineteenth century. As
monetary centres, both Berlin and Vienna have been taking a much more
prominent part since the Franco-German war than there was any prospect
of their doing before the transfer of so much wealth to Germany by the
war indemnity payments. At the same time, London has risen higher, and
to a level of still greater importance even than she had occupied before
as a trade centre. In proportion as other such centres are growing in
influence with their reserves of floating capital and credit is London
shored-up, so to speak, against the violence of a commercial crisis by
the growth of subsidiary monetary centres, which form the second line
of defence. Such a second line of defence against a sudden collapse of
credit, such as we have experienced several times during this century,
is of the utmost importance to a centre like London, where the existence
of an elaborate system of book-credits causes such an economy of the
currency.

[Sidenote: PRIVATE CIPHER TELEGRAMS AS EXTERIOR INFLUENCES UPON PRIORS.]

Among exterior modern influences is the rapidity with which the large
professional speculators obtain cipher telegrams, informing them of
important events that transpire abroad which are calculated to influence
prices in all markets. The effect of the rapidity with which such events
are thus made known is that, whatever influence they may be calculated to
exercise upon certain values, it will almost always have been discounted
before the ordinary haphazard speculator gets to know anything about it.
Close observers will be able to confirm this by having remarked that all
political information is, as a rule, known sooner at the Stock Exchange
than anywhere else.[32] So it is with all news that is likely to affect
prices that are quoted in the public prints. Many a man has gone quietly
up to the city some morning after studying his newspaper telegrams and
bought or sold some stock on speculation, under the impression he was
stealing into the enemy’s camp while the foe was asleep. On looking
closer into the matter—of course when it is too late—he discovers that
the information he has been so cunningly operating upon is already, for
many hours, perhaps half a day, a matter of history.

[Sidenote: THE ALTERED CHARACTER OF INTERIOR INFLUENCES UPON PRICES.]

[Sidenote: THE CREATION OF SECURITIES TO MEET THE DEMAND.]

[Sidenote: GETTING BEHIND THE SCENES.]

[Sidenote: THE DIFFICULTY OF “CUTTING” A LOSS.]

What is the altered character of the interior influences? One, and
perhaps the most, important, is, that syndicates of powerful speculators
act in conjunction with the dealers in the markets. There are distinct
markets for certain stocks and certain classes of stocks, and the jobbers
confine themselves more or less to dealing in a few descriptions. In
a wealthy community there will probably always be a large number who
cannot control a restless desire to be operating in the markets, who must
now and again try their hands at speculation, as circumstances seem to
present favourable opportunities. There are periods in the prosperity of
every community when individuals are known to have made profits in their
business, and in the natural course of things seek investments for their
gains. Securities at such times are created on a great scale to suit the
taste and appetite of the public. In the first stages of the creation of
new securities considerable profits are made by _bona fide_ investors,
which in course of time attracts the attention of speculators without
means, who think that they have but to venture and they also will gain.
After a time inflation sets in; and we may here ask the speculator if it
ever occurs to his mind that understandings exist between the syndicates
of professional speculators and the dealers, whereby the former get to
know to what extent the public have bought by seeing the jobbers’ books?
It is easy to see the power a syndicate with large means may exercise
by such a system as this, even in a large market, supposing they could
get to see the books only of the larger jobbers. We will suppose, for
instance, the public can be induced to buy a certain stock largely on
some fictitious information. If, at the close of each of three or four
days buying for the rise, it was ascertained by an examination of the
jobbers’ books that accounts were open in a stock to the extent of half
a-million of money by over a hundred different purchasers, it becomes
evident that there is a tree of ripe fruit grown as it were by magic, and
the syndicate has nothing to do but to pluck it. Out of a hundred buyers
at least a third would probably rush out and take their loss at the first
indication of their being on the wrong scent. One of the great faults
which characterises all speculators, with very few exceptions, is that
they cannot summon courage to “cut a loss” at once. The object of buying
was to gain, and the mind is associated with a profit in connection with
a rise on the transaction, and it is very difficult to change about, and
gain, in a negative sense, by not losing more. It is upon this weakness
of speculators individually, in not being able to “cut a loss,” that
bands of marble-hearted riggers lure the public into holes, and squeeze
their purses before they let them out. With such tenacity do speculators
hold on to a stock, hoping for a recovery when they have made a loss,
that they will leave it as a man drops into the sea from a burning ship,
only when he is singed by the flames. Many speculators on discovering
they are on the wrong tack gather themselves up _pour mieux sauter_, and
turn round and sell for the fall, believing they shall be quick enough
to catch it and swim with the downward stream before it is spent. In the
greater number of cases, such speculators watch the fall far enough to
be sure they are right in their view of the way the price is going, and
then they “get in.” What is the usual result? Hesitation in the second
operation has caused them to miss the mark, and the account is closed
with a loss on both transactions; the speculator having bought at or near
the top, and sold at or near the bottom.




CHAPTER VI.

CACOETHES OPERANDI.


[Sidenote: WAITING FOR EXTREMES.]

[Sidenote: REACTION GENERALLY MORE RAPID AFTER A SHARP RISE.]

The bane of nearly all speculators of the soft-grained type—by which we
mean men whose will and judgment bends this way and that, like a reed
that nods allegiance to any quarter of the world according to the blow
of the wind—is, that they are for ever on the itch to do something.
There is no getting them to wait for an opportunity. There are two
sorts of opportunities, and the distinction between them is important.
The speculator feels much more at home in availing himself of one than
of the other. The man who can wait for extremes is the one who will
have the best chance of making extreme profits, provided he can be
fairly sure of a good grasp of the duration of passing influences. One
kind of opportunity is after a sharp fall in prices. As we have before
remarked, most speculators feel more at ease in operating for the rise,
and consequently know best what they are about after a fall in prices,
and they make themselves bulls. The other kind is after a well sustained
rise. But it has been generally observed that speculators sell bears
of stock with more timidity than they buy bulls. One reason, no doubt,
beyond that referred to is, that they have a feeling in their own
minds that in selling for the fall they are going against the current,
which on the surface seems to be a rash proceeding. But in being able
to combat this feeling lies one of the main elements of success. It is
out of the public that successful speculators make their money, and
consequently there must be the greater chance of losing by following
the lead of the public. Of the two opportunities therefore of which a
speculator can avail himself with the most advantage, that of looking
on at a rise and opening a bear account at the new prices is, under
ordinary circumstances, the most worth his attention, as the reaction
is generally more rapid after a sharp rise than after a fall, owing to
there being more new interests engaged in causing it. A rapid rise is
promoted largely by speculators whose operations for purposes of enticing
the public to buy, may be compared to the exertions of a horse in a
great race that is entered to make the running for the favourite. Those
speculators are more anxious, as a rule, to realize their profits as
bulls, off high figures, than they are to close bear accounts; for, when
a panic has driven prices down, some time will elapse before confidence
revives, and in the meantime it may be renewed.

A person who cannot withstand the itching desire to have an interest
in something or other, is almost sure to be a man of that soft texture
of character that yields to influences that are unworthy of serious
attention, and he will consequently be led into error and loss probably
oftener than not, and his operations will end in failure. It must be
obvious to every reflecting mind, that so dangerous a game as Stock
Exchange speculation, or speculation which partakes of the same nature,
in another commodity, entered into, if it be only partly to satisfy a
craving for some sort of excitement, is a very unwholesome pastime.[33]

Of all occupations Stock Exchange Speculation is the last to be thought
of as an amusement for the man who wishes for some light kind of business
that can be done with an off-hand air, and without any of the drudgery
that is the real power in money-making. And yet there is no doubt that a
large proportion who feed the ever copiously flowing stream of profits
that the members of the Stock Exchange are diligently gathering from day
to day, are persons who, having nothing better to do, are drawn by an
insatiable desire for some occupation into the ranks of the haphazard
speculators. Once fairly entangled in the meshes of loss, the struggles
to recover it are usually attended by worse disasters.

It may also be shown that a desire to satisfy a craving for a class of
excitement which partakes somewhat of the nature of sober business, in
its earlier stages at least, allows admission to the mind of an element
which makes havoc with the judgment, and consequently forms an ingredient
in the nature of a speculator, which is almost sure to bring him sooner
or later to grief. Before a man enters upon the business of speculation,
he ought, if he is to have a fair chance, to clear his reasoning powers
from any such unwholesome encumbrances as even the faintest desire
for excitement. Every step a speculator takes should be, as far as
possible, as deliberate as if he knew perfectly well that the slightest
miscalculation would certainly involve him in loss.

[Sidenote: WHAT NOT TO DO.]

In engaging in speculative commitments, the great difficulty that
presents itself is not so much what to buy or sell, as what not to buy or
sell. When to do something, and when to do nothing. Here lies a problem,
the solution of which costs such a number of speculators their money and
their peace of mind afterwards, to say nothing of the chronic dyspepsia
that afflicts them until they are forced to quit the field.

[Sidenote: SPECIAL INFORMATION.]

[Sidenote: MUCH MONEY ONLY OBTAINABLE AS A CERTAINTY BY HARD WORK.]

If the time a man spends in finding out the mistake he has made in
selecting this or that stock haphazard for speculative purposes, were
devoted to obtaining some special information about one particular stock
which he might have good reason for believing was worth attention, his
chances of making money would much improve.[34] This plan is adopted
by the more sensible speculators who sufficiently understand the
difficulties of the business to recognize the importance of laying down
certain principles of action. Money cannot be made for a continuance
with any degree of certainty without hard work. When this proposition
is demonstrated, which it undoubtedly can be, the whole question of
speculation as an occupation, a pastime, or a business, call it what we
will, resolves itself into this, that unless a man devotes the same hard
work to it that is necessary to earn a fortune in any other calling, plus
the possession of an intellect of a special order and considerably above
the average, he must be a fool to speculate at all.

[Sidenote: AN AVERAGE INSTANCE OF HAPHAZARD SPECULATION.]

In order to bring more forcibly home to the mind of a man who may know
nothing of Stock Exchange matters, the wisdom of imprinting upon his
understanding the uselessness, in the long run, of playing at what is
nothing better than pitch-and-toss, we will just sketch a case in point
as an instance:—Supposing a speculator to enter the office of a stock
broker. He has, perhaps, some hazy ideas about the future financial
condition of Spain, for example. He has noticed the stock has fallen
to 19¾, and this seems to be very low for a country which has so far
struggled against the corruption of its rulers, and the laziness and
apathy of its population as a body, and has managed for a long time, by
hook or by crook, to meet the exterior coupons by paying them in other
people’s cash. The probabilities certainly must be, he thinks, in favour
of their paying another half-year’s interest, if after that the deluge
of national insolvency should flood the land. He contents himself with
gathering to a focus the intelligence that stands from morning to morning
in the telegram columns, and comes to the conclusion that something
will turn up to supply the exchequer with another loan to meet the next
dividend, and in that case the stock must at once jump up to 22 at least,
perhaps to 25, as there would then be six months to turn round in. Now,
what we submit is, that to speculate deliberately upon such a system as
this, is not far removed from insanity; and yet it will be acknowledged
by those conversant with the modus operandi of the haphazard speculator,
that his plan of attack is based, for the most part, upon this absurd
system of guess work, no serious trouble being taken to estimate the
extent of the forces opposed. Some fanatical faith is placed in the
doctrine of chances that the fluctuation wished for will occur, and he
shuts his eyes and waits. To sit at home and guess at what the present or
future financial condition of any country may be, and to risk your money
under such conditions, is worse than reckless.

Supposing, on the other hand, the hypothetical speculator, instead of
acting upon the impression made on his mind, by superficial influences,
were to start for Spain and take the trouble to get behind the stock, so
to speak. In one week, if he occupied a position in life sufficiently
high to enable him to get trustworthy information, he would be in a
position almost certainly to know whether there was a chance of such
an event coming off, as for instance, the next coupon being paid. This
would be at least a business-like way of setting out on a speculating
expedition, a method of proceeding such as is pursued by a syndicate
of speculators who propose to purchase a foreign mining property, for
example. A man of sense who buys anything, the value of which depends
upon a set of circumstances operating at a distant spot, naturally
proceeds thither, or satisfies himself through some trusty agent that
such circumstances exist, or that they do not. If he be contented to buy
twenty thousand Spanish Stock at twenty, on the chances of the power that
is, or may be, from one week to another, being able to pay the dividend,
because so far they have just managed to do so, he would be deserving of
no sympathy if he found himself in a couple of weeks with his stock at
17, and his banker’s balance less by six hundred pounds.

The reason why so much money is lost by this loose mode of proceeding is,
because haphazard speculation possesses a peculiar charm for certain
loose natures, which are roused into a pleasureful excitement by running
risks. They defend the viciousness of their lazy amusement by saying
to themselves that the chances must at least be as much _for_ them as
_against_ them, inasmuch as there are but two ways for the price to go—up
and down. Many a man who has fed and encouraged this itching sensation,
which can only be appeased by having passed through the excitement of
running a certain risk, finds himself so bound by its spell that in very
many cases nothing short of absolute ruin succeeds in quenching his
thirst for such excitement.




CHAPTER VII.

THE PIT-FALLS.


[Sidenote: HIDDEN FORCES OPPOSED TO THE SPECULATOR.]

There are perhaps very few speculators of the haphazard type who take
the trouble to find out the extent and power of the hidden forces that
are arrayed against them in the markets. Every stock, it should be
remembered, has either a small or large market to itself. In some stocks
it is possible any time of the day to deal at ⅟₁₆ price,[35] while in
others there may be a difference of 1, 2, 3, or even 5 per cent. under
certain circumstances, between the buying and the selling price. A
speculator operating in a stock in which he can always deal at a close
price is able to undo his bargain with only a trifling loss probably, if
he finds out at once that he has operated under some misapprehension; but
if he has bought a stock the purchase price of which is say 35, and if he
wants to sell he can only get 34, he has incurred a loss of 1 per cent.,
besides the commission, before he can cancel the bargain. This belongs
obviously to the alphabet of the business, but the haphazard speculator
seldom learns his alphabet until the use of it is no longer of any value.

[Sidenote: THE “TURN.”]

A broker, it may be said, should warn his client before putting him into
a stock the price of which is wide; but unfortunately such warnings
do not increase the number of commissions, and, apart from that, if a
speculator does not take the trouble to inform himself accurately upon
such a point, placing no reliance upon the advice of any one, he deserves
to lose his money. Some markets are so small that a speculator once in,
is what is called “roasted” before he is let out again. A particular
man very often is the only dealer in the market in a certain stock of
which perhaps the supply is also very limited. Under such circumstances
a haphazard speculator who may chance to have observed some rather
violent fluctuations thinks there is a good opportunity to make some
money, and he sells a little bear of a couple of thousand pounds nominal
of stock. The round sum, and the channel through which the sale comes,
helps the jobber to read the operation. The decoy-duck in the shape of
the fluctuations in price, lures two or three more sportsmen on to the
dangerous ground, and when they want to get out the price is put up
against them, and they are quietly mulcted of £50 each, without a chance
of getting even a sight of their enemy, or any value for their money but
experience.

[Sidenote: THE DANGER OF TAKING ADVICE.]

A speculator who consults a not over-scrupulous broker as to the best
thing to buy for the rise, runs the risk of taking some stock off the
broker’s hands that he is desirous to get rid of. It is far better that a
broker should not be exposed to such a temptation, and a speculator will
do well to make it one of his maxims to put no trust in any one when he
is engaged in a business in which it is the object of everybody with
whom he comes in contact to make something out of him.

[Sidenote: A DISINTERESTED OPINION.]

Supposing a broker is not directly interested in any particular stock
when a client who is in doubt what to do consults him; it does not then
follow that the client can depend upon getting absolutely disinterested
opinions. The broker may have just put some other clients into a certain
stock, and with a view to his own advantage, by helping to make money for
them, he will lean probably to some extent in the direction of advising
others to purchase the same stock.

[Sidenote: ALL THE EGGS IN ONE BASKET.]

There is an old saying that it is unadvisable to have all your eggs
in one basket, a saw that is constantly quoted among both _bona fide_
investors, as well as among speculators. A broker is not desirous that
his clients who speculate should be interested very largely in one stock.
He prefers to have the liability spread over the market, for obvious
reasons. If a client fancies a particular stock, or has good reasons
for believing it is about to improve, and he goes to his broker with a
view to increase his stake, he will not receive the same encouragement
as if he selected something else. The influence thus brought to bear
arises from selfish motives, and proves again that the client should keep
his own counsel. If he have no decided views himself, it is certain he
had better do nothing, for speculation thus entered upon is doubly and
childishly haphazard.

[Sidenote: TRAPS FOR THE PUBLIC.]

[Sidenote: THE PUBLIC AS SPECULATORS ARE BULLS BY NATURE.]

[Sidenote: A Case of Roasting the Bulls.]

[Sidenote: A Cut off the Loaf and Pass it on.]

The more organized methods of speculation which prevail in these times,
cause the public to be mulcted of their money in a much more wholesale
manner than was the case formerly. They are now driven like sheep, or
rather enticed into a pen, and there mercilessly squeezed until they
are glad, like some of the players at Homberg have been, to have their
third-class fare paid home. A number of brokers or jobbers, or both, in
the markets will be instructed to run a stock up, after a goodly number
of bears have been decoyed in by a gently falling price from day to
day, seasoned with unfavourable reports. Those who are able to command
a sight of the jobber’s books, know of course exactly the position of
affairs, and the price is rigged until the weak speculators for the fall
are simply frightened in. This is done upon even a more extensive scale
in the opposite direction, for the simple reason that the general public
as speculators, are bulls by nature. Bear operations seem to go against
the grain of the average man who acquires a first taste for speculation,
probably by possessing some amount of stock which improves in price after
he has bought. Money thus easily made, as it seems to be, out of nothing,
encourages other purchases with a view to resale before the settling day
arrives. Thus small figures grow to large ones; and small profits, in
frequent attempts to multiply them, usually end in large losses. A good
stock, or the shares of a good company, that has long been discredited
from a cause which may be suddenly removed, has frequently been used
for literally flaying the public when they have rushed in as bulls. A
memorable case in point was the rigging of the shares of the Erie Railway
Company. Upon the occasion of the assassination of Fisk, jun., the shares
were run up and the public enticed in by daily advancing figures far
above the actual merits of the shares, from a dividend point of view.
Numbers of persons were induced to believe the price would range high
from that moment. The quotation subsequently declined, and one by one
the unhappy bulls were disgusted into taking their losses, whilst those
who had rigged the market were following them down as bears, and making
a fine thing out of the affair. The same game was played with the public
when Jay Gould was ousted from the presidency of the Company, when the
price was run up to 57½, and gradually went back, even as low at one
time as to 28, afterwards recovering to about 50. As compared with the
professional tricksters who manage these riggings of the markets, even
the best of the outside speculators, who have had long experience and
think they can stand on one side and profit by the gullibility of the
public, discover themselves frequently the wrong way, when the course of
the market for some time at length reveals unmistakably the drift of the
experts behind the scenes. The man who must speculate should be early in,
and early out, being contented with a cut off the loaf and pass it on;
for it is the profits missed that ruin the speculator.

[Sidenote: SHORT PERIODS IN AND LONG ONES OUT.]

There is scarcely a more important point to which to draw attention, than
that of being contented to watch for an opportunity. It is fatal to the
success of a speculator to be always with stock open in the markets. The
casual observer must be well aware[36] that now and again a small panic
occurs, and the general level of values is knocked down perhaps two,
three, or on serious occasions as much as four per cent., according to
the inflated state of particular stocks at the time. A speculator who has
twenty or thirty thousand pounds nominal of stock open at such a time,
stands in a moment to lose eight or twelve hundred pounds at a blow.
With such a contingency always hanging over him, it must be evident to
the prudent man that in order not to expose himself more than he can
possibly help to such a catastrophe, which may happen at any moment,
he should operate, be contented with a moderate profit, and close.[37]
The obvious advantage of looking on for comparatively long periods, and
having commitments for short periods is, that the chances will be much
more in favour of the speculator when a panic causes a heavy fall. He
is then free to buy at prices which are sure to be unduly depressed,
and instead of the dreary waiting to recover from losses incurred, he
makes in a very short time probably a handsome profit, again retiring
to avoid the reaction that follows a sharp recovery, to await a similar
favourable opportunity. To be overtaken, with large amounts of stock open
for the rise, by a panic which engulphs a speculator’s money and upsets
his judgment at the same time, is among the least excusable faults when
committed by the man who starts upon any system. The haphazard speculator
is almost sure to have accounts open when a panic takes place, because he
is, as a rule, in a fever lest he shall miss a rise, and is, therefore,
never contented unless he is “in the swim,” and hence the severe handling
he gets by never seeing the cataract until he is half way to the bottom.




CHAPTER VIII.

SPECULATION WITH CAPITAL.


[Sidenote: RESTORING THE BALANCE OF ADVANTAGES.]

It is in the nature of free trade, that whatever mathematical advantage
is to be obtained at all is more accessible to the rich speculator
than to the poor one. The rich player consequently can make himself
the stronger one, and the operator with capital has advantage over the
operator without.[38] So far, however, as it is worth while to exercise
at all the natural skill in Stock Exchange speculation, which one
individual may possess beyond another, there can be no doubt that a less
rich, but very skilful operator, would very materially, if not quite, in
the long run, restore the balance of advantages which was against him
at the start. As the haphazard speculator always must enter the lists
at a disadvantage or on unequal terms, it follows that the exercise of
any amount of skill will only bring him somewhat nearer to, or at best
slightly beyond, holding his own; and in that he would fail in the long
run. If he lay down all the machinery necessary to success in ordinary
business, he virtually passes the limit which defines pure speculation
by reducing the risks to such a minimum that they are no more than the
percentage which is an inevitable element in all mercantile transactions.

[Sidenote: THE NECESSITY OF SOME CAPITAL.]

That it is absolutely necessary that a speculator should possess capital
may be illustrated from several points of view, and although we may
become, perhaps, tedious by repetition, as in Chapter III., for instance,
when speaking of the temperament of a speculator, the time spent in
double reflections by the uninitiated may prevent shipwreck, at least
in the first stages. A man who is going to operate on a large scale
will be equally dishonest if he have not a large capital, as a small
speculator who has no more than his £300 a year out of which to save up
if he loses more than he can pay. It seems hardly necessary to state that
a speculator who operates in the Stock markets and loses without having
anything of his own wherewith to pay, inflicts just the same loss upon
the broker who does the business for him, as he would upon a butcher of
whom he purchased a leg of mutton, consumed it, and then declared he had
no money. It is really, however, necessary to make this statement, clear
as is the truth of it, because speculators, as a rule, do not realize
the liability in the same way. There are differences in degrees of
tangibility in these matters, no doubt, and hence the morally injurious
effects of speculation and all kinds of gambling. A leg of mutton is a
solid substance, and the fact of consuming it not only impresses the
circumstance upon the mind, but upon the body too, in the shape of the
recollection that the body benefited by the food. By the aid of the
remembrance of the benefits that grow out of the consumption of the leg
of mutton, the liability to pay for it becomes realizeable in a high
degree, and no man allows himself to dream of escaping from it. It is
not so in the same degree with a liability incurred by “time bargain”
speculation, because what represents exactly the same tangible substance,
was never fully, or even partially, realized as such.

[Sidenote: CAPITAL TO EXPEND IN FEINTS.]

[Sidenote: LA HAUTE FINANCE.]

All large speculators are well known. If they try to operate through
other persons in order to deceive, the truth leaks out some time or
other. Large orders are very difficult of execution, unless the broker is
either of very good standing himself, or hints at the source from which
he receives his instructions. Unless, therefore, it can be shown that
the real operator has a very broad pecuniary back, an attempt to buy or
sell large amounts of stock through brokers is difficult. It is sometimes
necessary to have capital to throw away in feints, before the speculator
commences his operations, just as a general may find it expedient to
throw away a quantity of ammunition, and even the lives of some of his
soldiers, to draw off attention from the real attack. A speculator who
contracts to bring out a new loan, unless the security he has to offer
is of the highest class, runs considerable risk of losing his money, as
he has, as a rule, to pay something down to the borrower as a guarantee
of good faith, and to allow him also to taste the ready cash, as some
immediate consideration for entering upon business, which, if successful,
is of all business the most remunerative. This kind of speculation
belongs to _la haute finance_.

A supply of ready money is essential to the speculator in all markets,
and it is marvelous that there can be so many persons who have to grope
their way by the aid of bitter experience through the thick darkness of
their ignorance to such a shining light of truth as this. And the full
realization of this truth is, in most cases, only obtained at an expense
which renders it impossible to repeat the experiment.

[Sidenote: THE BEST OF ALL CHANCES FOR SPECULATOR WITH CAPITAL.]

[Sidenote: THE MOST LEGITIMATE FORM OF SPECULATION, PAWNING THE STOCK.]

After a severe commercial collapse, like that of 1866 for instance, all
securities are low in price, holders of them have been compelled to
realize through the _debacle_ which has for the time destroyed credit,
turned profits into losses, and frightened everybody into hoarding the
precious metals. When things are beginning to mend, and a resurrection
of industries takes place, the tide of the national profits begins to
turn, and, rippling back into innumerable channels where securities of
all sorts have laid high and dry and neglected, again floats them into
notice. Just as when there is no use for the plough the oxen are idle,
so when the great industries of a nation are stagnant, floating capital
lies idle, and is cheap. In such times the speculator of good judgment,
with ten or twenty thousand pounds can make money without much risk if
he is satisfied to watch the general recovery of prices up to a certain
level, and then realize. We will suppose money at 3 per cent., and the
best English railway stocks some thirty per cent. below the value they
will reach when the country is in the full tide of prosperity. He selects
one hundred thousand pounds worth of the leading stocks, yielding at the
price at which he purchased them, 6 per cent. At different banks where
he keeps accounts for the purpose, he pawns the stock, and gets loans
within 10 per cent. of the market value, which amount to eighty thousand
pounds. The ten thousand pounds he has himself, which enables him to take
the stock off the market. In this way he is virtually the possessor for
the time of this amount of stock, and he profits by the rise in value at
the rate of one thousand pounds for every one per cent. Apart from this
advantage he benefits to the extent of the difference between the yield
on the money value of the stocks, and the interest with which the bankers
debit him on the eighty thousand pounds; and so long as circumstances are
favourable and the value of money does not rise and remain above the rate
which the stocks yield, he enjoys an income from that source with a fair
prospect in a year or so of doubling his ten thousand pounds.

Very large amounts of money are known to have been made in 1870, 1871,
and 1872, in English railway, and also in various other stocks, in this
way in the London market, when money was poured in from France and the
Continent generally on the outbreak of the Franco-German war. Bankers,
moreover, were aware that the large amounts placed with them for safe
keeping might be called for at any time, and sound Stock Exchange
securities, upon which loans could be made from fortnight to fortnight,
were very much in favour. In consequence of such operations as that
referred to, prices were found upon several occasions to be very much
inflated, resulting in some mischief and not a few failures.

[Sidenote: WHEN TO BEGIN AND WHEN TO LEAVE OFF.]

In speculation of this nature, there is a time to begin and a time to
leave off. When stocks have attained a reasonably high level of value
as a result of the recovery of a country’s industry, the chances for
the speculator to profit by a continuous rise are of course gone, and he
seeks in other directions to turn his capital to account; but the example
we have given illustrates perhaps the most legitimate of all forms of
speculation in Stocks, provided always the operator knows his business,
and allows a sufficient margin for contingencies.

[Sidenote: TEST OF A SPECULATOR’S PECUNIARY POSITION.]

The marked difference between Stock Exchange business and other kinds is,
that it is the custom to pay cash for all bargains when the settlement
takes place. Special delays may be agreed to between persons who know
each other well, but it is quite the exception, and certainly should
remain so, for credit is already quite sufficiently extended throughout
all branches of trade and commercial affairs. The one thing that keeps
a tight rein on Stock Exchange operators is the test of their position
which lies in fortnightly cash settlements.[39] The very nature of the
business affords such facilities for incurring very large liabilities
by extensive operations in various securities, that if settlements by
bill accommodation were permitted, extending over two or three months as
in trade, hopeless confusion would soon be the result, apart from the
temptation which an insolvent broker or jobber would lie under further
to involve himself so long as he could get the credit. The remarkably
few failures that take place among stock-jobbers and brokers, when it
is considered how much risk they run, and to what a limited extent they
can make themselves aware, in time to avoid complications, of their
clients’ actual means, reflects much credit upon them as a class. At
the same time it must be admitted that the custom of frequent cash
settlements, by testing the actual position of all concerned, is the
best possible safe-guard against operators getting out of their depth;
and although business generally would be very seriously curtailed if the
custom prevailed in all branches of commerce when distance did not make
it impossible, there can be no doubt that a vast deal of mischief and
dishonesty would be nipped in the bud.




CHAPTER IX.

SPECULATION WITHOUT CAPITAL.


[Sidenote: A FAMILIAR CASE.]

[Sidenote: BITTER EXPERIENCE.]

[Sidenote: THE QUESTION OF SEEING IT OUT.]

We will now suppose a familiar case of a speculator following in the
path of so many wise persons who have gone before to their ruin in the
process of applying some nostrum, which was to make their fortune in a
week. The fortnightly settlements on the Stock Exchange take place about
the middle and end of each month. We will suppose a young speculator,
full of ideas upon such subjects, and having just sufficient knowledge
of the different stocks to make believe that he knows a great deal,
gets introduced to a broker, who on ascertaining that he has two or
three hundred pounds available, intimates his willingness to execute his
orders. The speculator buys £5,000 Turkish 5 per cents of 1865, £5,000
Spanish 3 per cents and £5,000 Egyptian 7 per cents of 1868, being told
that these are easy markets to deal in. We will assume these bargains
are done in the middle of an account. On the day of the purchases the
several stocks rise ¼ to ½ per cent., and he goes home a happy man with
his contracts in his pocket, reckoning the gain he has already made, and
sleeps like a top. He rises with a light heart next morning to devour
his money article and breakfast simultaneously, eagerly searching in the
list for his friends the Turkish, Spanish and Egyptian Stocks. The rise
reported to him by his broker the evening before is confirmed in his
newspaper, and he is in the act of laying it down when his eye catches a
telegram, headed “Defeat and resignation of the French Government.” His
little experience has already taught him that the leading foreign stocks
are largely dealt in on the Continent, and here comes a sinking of the
heart number one. The breakfast is left unfinished, and he hurries to
the city to find the Stock Markets open very flat all around on selling
orders from Paris. The ¼ to ½ per cent. profit had disappeared, and an
additional 1 per cent. into the bargain; so that instead of standing to
gain £30 or £40, he stands to lose £150. A conference with the broker
is somewhat encouraging, as he laughs over the matter, and assures his
client that “they are bound to rally.” Another day passes and there is
no rally. Several days go by, and disorders in the streets are reported
from Paris, causing further sales in the London market, and our friend
sees a loss of £300 on his three purchases.[40] The “carrying over” day
arrives without any recovery having taken place, but the broker is still
cheerful, being himself a man of some means, although suffering from the
prevalent disease of a great weakness for commissions, which has often
caused him heavy losses through negligence in ascertaining the means of
his clients. “It is only a question of seeing it out, sir,” he says, an
observation which disperses with a lightning flash the ignorance under
which our friend had hitherto labored with regard to the necessity of
available capital, or in still plainer terms, ready cash. He goes away to
turn this awkward dilemma in which he finds himself, over in his mind.
Seeing it out, is, of course, waiting for a recovery. In the meantime he
must pay his differences, which amount to £50 more than he possesses.

This one case in point tells the whole tale, and it is therefore
superfluous to take up time and space with other instances. If legitimate
trading business, in which the risk of loss is so reduced as to enable
a man to earn a living at it, cannot be carried on without adequate
capital, how is it possible that pure speculation can be successfully
practised in which the conditions are reversed, and at which experience
shows that no one can succeed except the professional expert, and only
then in some cases under circumstances to which we have before referred?




CHAPTER X.

THE “TIP” TO BUY OR SELL.


[Sidenote: A FRIENDLY “TIP.”]

[Sidenote: UNLOADING AT OTHER PEOPLE’S EXPENSE.]

A fool and his money are soon parted, is an old saw, and it is in a
high degree applicable to the inexperienced speculator who operates in
the markets on a friendly “tip.”[41] It is marvellous to think how many
persons daily and hourly are misled by the same snare and delusion.
If a man, who starts off in an excited state to instruct his broker
in consequence of having received the “tip” to buy a certain stock,
pauses for one moment to reflect, he can hardly fail to doubt the
disinterestedness of the communication. Take an example:—In the first
place a man who gives a “tip” to another to buy some of a certain stock,
must have some motive for so doing. No human being wanders about with,
what he makes out to be, valuable information to distribute gratis among
his friends. One might as well expect the girls who sell oranges, combs,
umbrella-rings, and collar-studs, in Lombard Street, to give them away
for nothing, as expect to obtain disinterested and genuine “tips” from
some wandering philanthropist. Such a person was never heard of, and
never will be. If a man gives the “tip” to buy a certain stock it is
because he wants to “unload” at other people’s expense,[42] and that is
not what is generally understood by philanthropy. The system of sending
round the “tip” to buy or sell, has become very general in all markets,
and it is certain that a vast deal of mischief is done by it. The common
practice is for a number of persons to band together, and put the price
of a certain article or stock up by buying a large quantity and making it
scarce. When the higher price has been maintained for some little time,
so that it meets the public eye in price currents, the process of putting
the public in is commenced. When this benevolent operation has been
sufficiently worked, and the “tip” has been administered to a number of
poor dupes, the price is let down. Those who have advised their friend to
buy, begin to sell and deliberately rob them, in return for the misplaced
confidence.

[Sidenote: THE QUALIFIED “TIP.”]

There is a distinction between the qualified and the unqualified “tip.”
One man is a shade more honest than another, and does not exactly wish
to charge his conscience with having deceived a friend with regard to a
certain event. He merely suggests on general grounds that such a stock is
going up. If he can get the person to whom the suggestion is made to act
on such general advice, he achieves his purpose without exposing himself
to be saddled with direct responsibility in case the result should be
unfavourable. There are numbers of such persons who daily administer
“tips,” not only to their friends, but to strangers who will not trouble
themselves to go farther to obtain any confirmation. Such an important
communication coming from credited quarters, is of course looked upon as
a valuable secret to be acted on silently and immediately.

[Sidenote: THE UNQUALIFIED “TIP.”]

The unqualified “tip” comes from the individual who intends from the
first to drive his horse full of armed men into the town, _vi et armis_,
without too much parleying at the gates. He assumes an optimism of
manner, and displays such a degree of confidence as shall override any
rising objection, gets a promise to act on his advice, and passes on
before the person to be made a tool of has time, or can summon courage,
absolutely to refuse.

[Sidenote: “TIPS” WORKED BY SYNDICATES.]

Then there are “tips,” worked by syndicates, which is a more elaborate
affair. The extent of the increased area over which it is intended
to operate depends upon the magnitude of the amount to be unloaded,
the quality of the security, and the necessity for reaching a certain
class of individuals. A vast deal of the rubbish that is shot away
from the great financing centres is carefully and eagerly laid hold
off by clergymen, and teachers male and female. As a rule, these good
people seldom pause to reflect that what is so studiously brought under
their notice in their rural retreats, is almost sure to lack a market
anywhere else. Is it at all likely that so much trouble would be taken
to recommend investments to people, by means of prospectuses delivered
by the postman, if the statements contained in such prospectuses
were really as true as they profess to be? In large cities there are
innumerable agents for all country districts always on the look out for
sound remunerative investments, and there is no need to recommend them
to people’s attention by thrusting them upon them at their own houses.
Such a process of advertising is obviously to net the unwary, who are
ignorant of what constitutes good security. The “tip” of a syndicate is
passed on, so to speak, for a consideration, in proportion to the amount
bought by the clients of the persons employed.

This branch of the subject can be almost indefinitely elaborated, but
it may be concluded by one remark, which contains the pith of the whole
thing, as applicable to speculation. Speculation as practised by the
multitude is no better, in any market, than pitch and toss, and it is
only by the aid of experience and more native skill, that some in the
long run will lose less than others. One golden rule with reference
to “tips,” no matter from whom they proceed, or by what alleged
incontrovertible facts they are supported, is this: when you are told to
buy go and sell.




CHAPTER XI.

SPECULATION BY MACHINERY.


[Sidenote: MACHINERY IN EXISTENCE FOR DIRECTING HUMAN VOLITION.]

[Sidenote: THE PATRICIAN INVESTOR.]

Everything, in these times, is done by machinery, and there is
consequently no need for astonishment at finding that machinery is in
existence for directing human volition. Such mechanism has for a long
time been in working order, although it is scarcely realized by the
community as a body. The most accomplished professional speculators make
it their business to study the peculiar tendencies of people who have
any money over and above what they immediately require for necessities.
Firms, with numbers of clerks, exist in our day, who have forty, fifty,
and as many sixty thousand names of people duly registered in their
books, with their place of abode, duration of residences, means, style of
living, trade, or profession, and other particulars, enabling a judgment
to be formed of the kind of investment which is likely to suit them.
These names are all duly marshalled under different heads, and when a
certain kind of undertaking is to be brought before the notice of the
public, in the form of a prospectus, that class of people for whom it is
thought a suitable investment, have one sent to them by post. Experience
has shown that it is unwise to scatter prospectuses broadcast over
the country, trusting to some portion of them bringing applications. A
wholesale scattering of prospectuses among a class of people who are
not at all likely to read them even, will injure the credit of the
scheme for which it is desired to raise the capital in proportion to the
number of prospectuses that are thus wasted. As in everything else, in
business great care must be taken to offer the right sort of investment
to the persons addressed. A man, for instance who lives in a fine house
in a country parish, owns land, and moves among the patricians of the
district, would not think of looking at a new undertaking, if he knew a
prospectus had come by the same post to a man who touches his hat to him,
and lives in a small way outside the gates of the great man’s estate. A
man who is higher up in life than his neighbour’s endeavours, as a rule,
to mark the distinction by having everything that belongs to him of a
superior type. The man of high degree would consider himself insulted if
he were classed indiscriminately with the man of low degree, in sending
out twenty thousand prospectuses of a new mine. People are very touchy
in such matters, and therefore, in catering for the public, as regards
investments, great discrimination is necessary. The different classes
of investors must be passed through the speculator’s machine like the
threshed corn, and when the husks and dust have been winnowed from the
solid grain, he proceeds to classify them, and, as far as possible, learn
their taste in the matter of investments.

[Sidenote: ADMINISTERING SHARES TO THE PUBLIC.]

When joint-stock banking came into vogue, promoters of the new
undertakings that were destined gradually to supersede private banks,
and have superseded all but those that have exceptionally deep roots,
and partners left who are very tenacious of ancient customs, were very
tentative in their mode of proceeding. As with all new things for which
the public require to be educated, companies established on the share
system had in the beginning to be brought forward gently and quietly,
so as not to startle people. Persons are easily scared when asked to
become partners in a bank, in the sense of taking much responsibility and
sharing but to a small extent in what are understood to be the honors of
such a position. The finessing which was at first necessary to accustom
the public to joint-stock undertakings was gradually followed by a thirst
for shares, because all such concerns for a considerable time were
associated with a premium. Individual promoters worked at the business of
building up joint-stock schemes, then it grew to syndicates, and now we
have wealthy firms, with large machinery, whose whole time and staff are
devoted to hunting about the world for powers to bring out foreign loans,
for concessions for making railways, docks, harbours, gasworks, and the
like. When they have procured one or the other, they fix the amount of
capital, cut it up into shares, and administer them to the public, by
much the same process as the Strasburgers enlarge the livers of their
geese. Instead of people being asked politely by an advertisement to
become shareholders in a new concern, the axiom of the supply creating a
demand is acted upon in these times, and a man finds in his letter-box
an investment especially suited to his taste and means, at the precise
moment when his half-yearly dividends are falling due. The economy
of capital is thus being pushed to its extremest limits, through the
development of a system by which one man makes it his anxious business
to see that his neighbour’s interest on his capital shall scarcely have
been passed to his credit at the bank before it is snatched away to
fructify in some scheme for benefiting mankind in one or other of the
four quarters of the globe.

Investments provided by machinery can be done on a very large scale, and
when successful are as a consequence very profitable. But unfortunately
it is a kind of avocation that is pretty nearly sure to be followed
by many unscrupulous persons, who will resort to all kinds of deceit
and trickery, in giving a false and dazzling hue to projects that
should never have seen the light. Moreover, the great difficulty that
individuals find in ascertaining the truth of statements, and the
authenticity of facts, causes them too frequently to take for granted
what should be always viewed with more or less suspicion, unless the
people who vouch for such facts are of the most undoubted standing and
respectability; and, as we have remarked, it is seldom that such persons
will lend their names to anything of the kind. During a season of great
prosperity the promotion of new companies is sure to be largely overdone,
and great will be the losses suffered; but there is sure to be more good
done in the world by the dissemination of capital in new parts of the
earth that would otherwise lie for the most part unproductive, than there
is harm done through the misapplication or loss of a part of it. Many
people bewail and lament over the failure of a bank, a discount house,
or joint-stock concern now and again, and when a commercial crisis
takes place one would think the world was coming to an end, as indeed
the Viennese thought when they had a sharp lesson for their money-greed,
early in 1873; but a little sensible reflection will show that calms
and storms alternate in every variety of form on the earth, and are not
confined to seas whose strands occasionally strewed with the produce of
a foreign clime is only an indication of the miscarriage of a minute
portion of the benefits which, in fair weather, are conveyed by the
inhabitants of one land to those of another.

The fact remains, however, that speculation by machinery, or in other
words, the modern system of cramming the public with securities
wholesale, may be attended with a good deal of mischief, and although it
is too much to say that people who launch new undertakings upon such a
system are necessarily unscrupulous, there are strong reasons for looking
very closely at securities known to proceed from the offices of firms
whose business it professedly is to make money by manufacturing stocks
and shares wholesale, and forcing them upon the public. In the first
place, such a business requires a great deal of money to carry it on, and
a good deal of risk must be run, and money paid out of pocket, before
there is a chance of seeing anything back again. Under such circumstances
private enterprises are sought to be purchased at a small price, and sold
to the public at a very large one, so as to secure a considerable margin,
the only object of the speculators by machinery being to fill their own
pockets.

It is astonishing what faith people put in printed certificates, got
up in a style which resembles documents of real value. A sheet of thin
paper resembling that of a bank note, with a large impressed stamp of
a corporation upon it, and filled in with the magic word sterling, is,
as a rule, sufficient dust thrown in the eyes of the general public to
send them home satisfied to make no further inquiries until collapse
reveals the sham that has been prepared for them. Ordinary people go to
market and make an elaborate fuss over a joint of meat before paying
their money, seeing that it is to a Shylockian nicety of weight, but when
they invest a hundred pounds in a mine, there have been cases in which
they hardly knew where the property was,—or even if it existed at all.
It is very wonderful that such an incomprehensible degree of confidence
is placed in concoctors of companies, and it is the knowledge that the
general public is so ludicrously gullible that encourages the formation
of joint-stock concerns upon often the most flimsy bases.




CHAPTER XII.

THE SHIFTING OF SPECULATION FROM THE HIGHER TO THE LOWER CLASSES OF
SECURITIES.


[Sidenote: SPECULATION IN CONSOLS AS A HEDGE.]

Compared with what there used to be in bygone years there is now next to
no speculation in Consols at all. Merchants and bankers once upon a time
used to speculate in the Funds[43] as a hedge. But things have changed,
and such a method of providing against a mercantile loss, which might be
brought about by the same cause that would depress Consols, has gone out
of fashion, doubtless owing in some degree to there being other modes of
protecting themselves against risks which both merchants and bankers must
for all time incur.

The maxim which is adopted by all prudent speculators in the markets,
by which we mean the dealers in the Stock Exchange, who in the nature
of their business must to some extent speculate, or they would lose
business, is to sell when things are dear, and buy when they are cheap,
and pay no attention at all to reports. Men who have had years of
experience, know how to estimate at their just value the _on dits_ that
are for ever floating about their ears. Right or wrong, there is no
money in them in the long run, and it is with the long run that operators
should have to do.

[Sidenote: SPECULATION HAS CHANGED ITS VENUE.]

[Sidenote: INCREASE OF THE INDEBTEDNESS OF THE STATES OF THE WORLD.]

[Sidenote: THE FLUCTUATIONS IN THE PRICE OF GOVERNMENT STOCKS.]

One reason why speculation in Consols has been reduced to a minimum
is, that speculation has of late years changed its venue. The stock
markets now are the field of operations for dealers in the stocks of all
nations and all climes. There are a few countries whose names are still
withheld from Wetenhall’s list, among which China may be mentioned, but
they are few. The extent to which the world has been borrowing within
the last quarter of a century may be judged of from the fact that the
indebtedness of the States of the world has increased from 1851 to
1873 by £2,218,000,000, the proportion of which belonging to Europe is
£1,500,000,000. People have become used to making larger profits, by
which we mean that all the world lives better and makes larger incomes
than they used to. Consequently they do not care to speculate in stocks
unless the fluctuations are somewhat considerable and frequent. The
quieter attitude of England towards foreign states for many years past,
and the absence of any internal disturbances worth mentioning, has
produced much more steadiness in Government securities than was the case
earlier in the century. There is not much exaggeration in the remark that
a fluctuation of two per cent. in a day in Consols is now witnessed once
in a life-time. The process of getting in and getting out of a stock, as
a speculation, cannot be profitable when the fluctuations are so small
and infrequent. Speculation consequently has shifted from the Consol
market, and from the market where the highest class of securities is
dealt in, to departments of the Stock Exchange where a bull or a bear
stands to make something in a reasonable period, if he chance to be
operating the right way. It may be supposed that speculation for this
reason has decreased in extent. The contrary is the fact, speculators
having simply taken up new ground, as they found it useless for any
purpose to speculate in stocks in which the fluctuations were so small.

[Sidenote: HIGH CLASS STOCKS MORE FIRMLY HELD THAN FORMERLY.]

One of the reasons why speculation in high-class securities has more or
less ceased is obviously because Consols and such like stocks are more
firmly held than they used to be when the country was oftener engaged
in wars, or disturbed by semi-revolutionary agitations. Then again,
the very fact of high-class stocks remaining at a uniformly high level
of price, causes a certain class of investors to buy them for simply
absolute security’s sake. There are numbers of people who hold Consols
because they are perfectly certain their £3 odd per cent. per annum will
always be paid. They never trouble themselves about the price of the
stock, and continue entirely apathetic whether the price rises to 120 or
falls to 50. It stands to reason that, as the country grows in wealth,
so do the holders of these high-class stocks increase in number, and as
such securities are purchased largely for permanent holding, and purely
as a means of providing income, so is steadiness imparted to the price,
which tends consequently to be less and less disturbed in the absence
of exceptionally adverse influences. There are always large numbers of
persons in a country like England who are retiring from active life to
live on an income, derived through the medium of public securities of one
form or another, which is hereafter to be a purchasing power dependent
upon the labour of others. One man does his share of work in the world,
and in the process he provides for his future wants through the medium of
saved capital. There can be no doubt that if the English national debt
were to be paid off there would be a considerable commotion among those
holders of Consols who would be satisfied with nothing else half as well.
While the times in which we live therefore, continue quiet, the credit
of the Government is firmly maintained, and the savings of the people
are large, there will be always more buyers than sellers of high-class
securities while the return for the money is not less than about 3
per cent. Buyers would in most cases probably prefer to look in other
directions than pay anything over par for Consols. The fluctuations under
such circumstances are consequently very small, and there is nothing
literally but a bare bone for a speculator to pick, which is not worth
the commission, and he migrates into other markets.




CHAPTER XIII.

THE SHORT “TURNS,” OR, WHO MAKES THE PROFITS?


[Sidenote: THE “TURN” A KNOWN QUANTITY ALWAYS AGAINST THE SPECULATOR.]

Although we have already alluded to this question of “turns,” in
referring to the forces, so to speak, in the markets which are arrayed
against the speculator, we have thought it advisable, subsequently, to
give it a separate chapter. The “turn” is a known quantity about which
there is no doubt, and in which there is no element of chance to be
reckoned upon according to any doctrine of probabilities, as sometimes
favouring one side, and sometimes the other. The “turn” may be described
in brief as the income of the jobber, or in other words that fractional
part of the whole sum which, if a buyer of some stock, he gets by its
sale in excess of what he pays—and if he be on the other hand, a seller,
the “turn” is that proportional part of the whole sum which he gets in
excess on buying back the stock, in order to square his book. Supposing
the two operations of a purchase and a sale proceed first from a bull
speculator, and secondly from a bear; the jobber in the one case covers
himself as soon as he can by a purchase of the stock sold by the first
operation, and by the sale of an amount equal to that bought by the
second operation.

[Sidenote: THE “TURN” A LOSS ON GOING INTO AND ALSO IN COMING OUT OF THE
MARKET.]

The “turn” comes in the second rank of obstacles which stand between the
speculator and the goal, or profit, which it is his aim to reach, and
is the most formidable of the fixed and, it may be said, inevitable,
elements arrayed against him at the start. When a speculator enters the
markets, therefore, he has to do his share of keeping both the broker
and the jobber, and that not only when he commences his operations,
but also when he finishes. There is the “turn” to be paid on going
in, and also on coming out. The same may be said of the broker, only
under certain circumstances. It is customary for a broker to charge no
second commission on closing an operation, if it be done in the same
account as that in which the operation was commenced. As speculators,
however, especially the haphazard kind, are never contented to take small
profits, and get out of the markets, they almost invariably pay a second
commission. Thus there may be said to be two double fixed quantities,
which are piled up against a speculator at the start.[44]

[Sidenote: THE DIFFERENCE IN THE CHARACTER OF THE “TURN” AS COMPARED WITH
FORMER TIMES.]

[Sidenote: SPECIAL DANGER OF SPECULATING IN A STOCK THAT IS QUOTED VERY
WIDE.]

If there be any difference in the character of the “turn” as compared
with former times, it must be allowed that there is a point in favour
of the speculator: whether it be more apparent than real, owing to the
growth of other adverse influences is another matter. But it is certain
that the “turn” is not so great in these times as it used to be, and it
comes from the increase of competition by the larger number of jobbers
in the markets, just as commissions in all businesses have dwindled
down from two and three per cent., and in some cases much more, to
¼ and ½, and in the Stock markets to ⅟₁₆ and even a ⅟₃₂. It should,
however, be remarked that, owing to the great increase in the number
of transactions, the jobber makes more in these times by the smaller
“turns” than he did formerly out of the large ones, the increase being
in a greater ratio than the diminution in the amount of the single
“turn.” Moreover the public, as it is to be hoped should be the case
with the growth of intelligence and the spread of education and wealth,
decline to buy stocks when very wide prices are quoted to them from the
jobbers. It stands to reason that the jobbers rather enjoy dealing in
stocks where there is a good deal of cover for them to play with their
prey. A difference of two or three per cent. between the buying and
selling price affords the jobber much more scope in fixing the “turn”
he is to get out of a transaction. The wide quotations between a buying
and selling price are no doubt to some extent a legitimately justifiable
defence against the sudden and perhaps violent fluctuations to which an
indifferent security is exposed, and it is on this account the price is
made wide. As the public, however, get to know and understand that a
stock which is quoted say 35 to 38, as compared with one that is quoted
85 ⁵⁄₁₆ to ⁷⁄₁₆ is in proportion to the difference between the extremes
of the two figures, a worse security, so they instinctively avoid any
operations at all where there is no knowing from one moment to the other
whether their property is worth one per cent. more or less. In fact many
young operators have been electrified to find that, having purchased on
speculation some stock of the character of that quoted above at 35 to
38, and wishing to get out of the bargain, for some reason or other,
there was a difference between the buying and the selling price of
actually as much as that indicated, viz.: 3 per cent. Ruinous mistakes by
the unwary are thus made. They fancy very naturally that a stock which
is subject to violent fluctuations, and which is seen to fall and rise
two or three per cent. in a day, is a fine field to operate in; but the
compensation which is in all things, soon reveals itself here in the
manner described, so that the speculator stands perhaps even less chance
of making a profit off a widely fluctuating security than he would by one
that moved to a smaller extent over or under a central point of value
from which there was not so much movement.

Then again, a jobber is willing to take a much smaller “turn” on a
transaction which he can depend upon closing in his own book at any
moment, at probably only a fractional difference in price from that at
which he opened it. A speculator wishes, for instance, to buy £10,000
Consols for the rise at 92½. At the time the transaction is done the
jobber knows he can any moment square his book as far as that operation
is concerned, within a trifle of the same figure, and he is accordingly
satisfied with a small “turn.”

On the other hand, a stock that fluctuates violently may leave a buyer
of it a loss of one or two per cent. before he has entered the operation
in his book. The consequence is that a speculator proposing to buy for
the rise £2,000 of a stock which is quoted in the markets at 35 to 38,
will have probably to pay 38 or near about that for it, for the simple
reason that the jobber who sells knows that a widely-quoted stock is
liable to unusual movements in both directions, and he protects himself
accordingly, by declining to sell except at the higher figure, or to
buy except at or below the lowest. The difference may even be wider
than in this hypothetical case. The stock may recently have become very
much depreciated in value, which carries with it the obvious suggestion
that it may fall still further indefinitely, short of the bottom,
for reasons which have so far contributed to depress it. Under such
circumstances, unless the jobbers in the markets have limits at which
to buy such a security, they probably will refuse to purchase from an
outside seller, or from anybody, at any price, unless it come within
the range of a fancy figure. With stocks, therefore, that are liable to
sudden and considerable changes in value, the “turn” assumes dimensions
in proportion, and speculation in such securities is correspondingly
dangerous.

[Sidenote: THE “TURN” THE INCOME OF THE JOBBER.]

For every operation that a speculator enters upon, he contributes to the
income of the jobber. Although this statement is perhaps not literally
accurate, inasmuch as the jobber may sometimes have to sacrifice his
“turn,” and even more, in selling stocks which he has bought in the
course of his business, or in buying back stock which he has sold, it is
sufficiently accurate as demonstrating the position of the speculator.
Whether or not subsequent circumstances deprive the jobber of the turn
he considers himself in the ordinary course of events to have secured,
the speculator has in any case paid it, which is all we are concerned to
show.[45]




CHAPTER XIV.

IN THAT RESPECT IS SPECULATION USEFUL IN MARKETS GENERALLY?


[Sidenote: SPECULATION FOR THE RISE, WHICH IS BOTH LEGITIMATE AND OF
BENEFIT TO THE COMMUNITY.]

[Sidenote: SPECULATION FOR THE FALL, WHICH IS BOTH LEGITIMATE AND OF
BENEFIT TO THE COMMUNITY.]

[Sidenote: A REASONABLE RELATIVE VALUE FOR ALL COMMODITIES.]

The remarks upon speculation in the foregoing chapters may, perhaps, lead
the reader to infer that our object has been to enter upon a crusade
against all speculators, _guerre à mort_. Such an impression would not be
a correct one, and this chapter is intended, just in conclusion, to show
why. Speculation in the sense of buying for cash or on ordinary credit
what the purchaser has very good reason for knowing is uncommonly cheap,
and what he believes will, ere long, improve in price, does not come
under the category of speculation such as that to which the foregoing
remarks refer. There is hardly an individual who buys anything who is not
at times more or less of a speculator, and he has a perfect right so to
be under given conditions, and his being so under such conditions is a
direct benefit also to the community. For instance, take a very homely
article which will serve for an illustration, bacon. Supposing bacon,
through some passing influence, were to fall considerably in price,
very large purchases would at once be made on speculation, because it
is an article almost certain to be directly consumed in a proportion
greater than the production could be increased. Large quantities would
be taken off the market by both retail and wholesale dealers, who would
store it in anticipation of a recovery in value. They probably would
not want it for immediate use, and would be induced to run the risk of
the operation turning out profitable by reason of its being suddenly so
much cheaper than they had been accustomed to buy it. They would, in one
word, speculate in bacon, just as some people speculate in stocks after a
heavy fall. Unless something had happened to permanently depreciate the
value of bacon this rush of buyers, the great majority of whom would soon
settle their operations by cash payments, would speedily cause at least
a partial recovery in value, which might be followed by a further rise
or relapse according to circumstances. Whether anything serious had been
at work to depreciate value or not, the innumerable interests that would
have suffered by the decline in value would thus be protected at least
for a time by the speculative operations referred to. The price would be
kept up above what it would have been in the absence of such speculative
operations, while either the real or fictitious agency at work in
causing a fall were discovered and analysed. So in a converse sense, if
for some reason or other the price of corn were driven up very rapidly
several shillings per quarter above the value ruling at a particular
period, without holders of large stocks being able to discover sufficient
cause, many of them would hurry to market and sell what was still even
unthrashed. They would be so tempted by the very high price that they
would speculate upon such a high quotation being followed by a low one,
and they would sell all they could manage to deliver in a given time.
The speculator in the bacon would be playing in a legitimate sense the
part of the bull, and the speculator in corn that of the bear. It will be
admitted that there is what we know as a reasonable price for all things,
and that it is better for all concerned that a reasonable relative
value is maintained for all articles than that anything becomes either
extravagantly dear or so cheap that it is worth no one’s while to produce
it. Every article of those consumed by mankind in their several stations
has its fitting place either as a necessity or as a luxury. A necessity
for some reason may in course of time become a luxury, while, what is
much oftener the case, luxuries may by degrees come under the category
of necessities. The value of the one or the other may in relation to
other necessities or luxuries change, but it will probably change only
gradually, and during the process of change there will be a reasonable
relative value for such articles. It is important then in order to
satisfy the rational desires of all members of the community that the
reasonable relative values of all commodities should, if disturbed by
any cause, remain so as short a time as possible. The undue inflation
or depression of prices will be counteracted by speculative operations
such as we have referred to, and in that sense, speculation is directly
of immense benefit, as it is one limb of a body of law which administers
justice silently but surely to any one who has left one weak point in
his armour when attempting by violent or fraudulent means to snatch a
profit by unjustifiably raising or depressing prices. The one condition,
however, of such speculation being of direct benefit in keeping prices at
a level which is in accord with the existing state of supply in relation
to the demand at any period is, that the speculative operations shall
partake as nearly as possible of the nature of _bona fide_ operations.
The great benefit which is caused by the one kind of speculation is the
antithesis of the evil which results from the system of “time-bargain”
speculation as practised in all markets. The one kind of speculation is
the legitimate advantage taken of being able to buy any article cheap, or
to sell any commodity that is dear, whereas the other is nothing better
than pitch and toss in disguise.

The kind of speculation which is of benefit to the community may be
termed corrective speculation, as implying a restoration of prices,
through its agency, to a reasonable relative level. Such speculation
would come from buyers who had good reason to know that what they bought
they would be able again to sell, and that its purchase speculatively was
simply the supply of their ordinary requirements in anticipation, owing
to a favourable opportunity having presented itself. In proportion as
speculation proceeds from simply time-bargain operators will the price
be driven up or down, according to circumstances to an injurious degree,
as compared with a corrective degree, the influence of the one set of
speculators doing good and that of the other set harm.

[Sidenote: THE THREE CLASSES INTO WHICH SPECULATORS MAY BE DIVIDED.]

Speculators may be divided into three classes which about embraces all
the phases of speculation. First, we have the legitimate speculator
who spends all or some of his surplus capital in taking off the market
what he believes will give him a gain by holding it for some time.
That is the legitimate speculator who is a benefit to the community as
a leveller up of prices. Then we have the legitimate speculator of the
same stamp, with a difference that he is a leveller down of prices, and
is equally of service to society by immediately throwing on the market
all the stock of a certain article he may hold of be able to get for
the purpose, when it rises to a price above what he calculated on being
able to obtain, and which his experience told him was an unusually high
figure. Such speculators as these not only do not hurt themselves, but
directly benefit themselves by speculating, and in so doing protect the
interests of their neighbours and the community at large. Such as these
this book is not written for. We are concerned with those who, classified
as illegitimate speculators, and reckless speculators, which, second
term may have to be moved a point or two according to circumstances, are
over the border-line, whose _dictum_ is “Heads I win, tails you lose.”
The illegitimate speculator is the one who starts with a small capital
and with some method, with the idea of increasing it upon a system of
incurring risks which, in the ordinary course of the market he may
operate in, will enable him in case he has wrongly calculated the course
of prices, to pay his losses and go on again. His intention is never
_bona fide_ sale or _bona fide_ purchase. The reckless speculator is the
man who with little more than he stands up in makes a great pretence,
imposes upon the weak and credulous, enters the Stock markets and
operates to right and left up to the hilt so far as he may be trusted. So
long as he may enjoy a run of luck he rakes in the coin; when it turns
he leaves his dupes to pay and goes up the country, as they say of the
native Indian merchants when the telegraph announces to them that the
goods shipped to Europe for which they have drawn, will leave a loss.

We have then one class of speculators which is of direct use and value
in all markets, while the other two, the nature of whose operations we
have endeavoured to lay bare, cause an infinite deal of mischief, and
get in ninety-nine cases out of a hundred no good for themselves in the
long run, whether their transactions are entered upon carelessly, and are
allowed simply to take their chance, or an attempt be made to achieve
success by some exercise or skill.




FOOTNOTES


[1] In speaking of taking profits, the question arises, what is a
profit? Some people might say a profit is ½ per cent., and others 10 per
cent. Now, of course, it is impossible to give an exact answer to this
question. As a general rule, a transaction should not be made unless
the chances of a gain are greater than the chances of a loss, but there
may occasions occur when it would be advisable to take a small profit.
All depends on the condition and temper of the market; but one rule I
found to work well, and would recommend to every speculator, namely,
that at the moment when a doubt arises in your mind, and you begin to
ask yourself whether you ought to take your profit or not, then do not
lose one moment’s time, but take your profit, because you can never make
a very serious mistake by doing so, while you might possibly make a very
serious one by refusing it.

[2] Where it says “for the account,” it applies to the custom of the
London Stock Exchange, where all the buying and selling is for the
account, say generally the middle or end of the month.

                                                                 H. W. R.

[3] According to this principle, operations conducted on options are more
certain to result in profits in the long run than margin operations. If
I assume to make a profit in only one out of every three operations,
and each option costs me 1¼ per cent., I will make a profit, if the
third option only yields me a profit of more than 3¾ per cent., which is
nothing unusual.

                                                                 H. W. R.

[4] This depends whether it is a bull or a bear market.

                                                                 H. W. R.

[5] See definitions of these terms, page 20.

[6] Operators means here, what is called in New York, “Insiders” and
members of the Stock Exchange.

                                                                 H. W. R.

[7] I consider this most important, and maintain that “options enable
the operator to hold out for the event, or at least for a long time,
especially if the process is once or oftener repeated.”

                                                                 H. W. R.

[8] Very important.

                                                                 H. W. R.

[9] This hardly applies to the New York market. The so-called larger
operators and traders take here the place of the London jobber.

[10] The settlement does not exist in the New York market.

[11] Contango is equal to New York carrying charges—in New York so much
per cent. per annum, fixed daily; in London a certain sum from one
settling day until the next.

                                                                 H. W. R.

[12] Equal here to borrowing stock flat, or even paying for the use of it.

                                                                 H. W. R.

[13] Backwardation is equal to the paying for the use of borrowed stock
at the New York Stock Exchange.

                                                                 H. W. R.

[14] In New York, “flat.”

                                                                 H. W. R.

[15] Called “straddle” in New York.

                                                                 H. W. R.

[16] In London all options are for a fixed date; at New York they are
generally made so that the option can be exercised at any time during the
pending of the contract.

[17] This may be true in a certain sense, but if options are considered
as an insurance feature, it is generally expected and hoped that they may
not have to be exercised, and will simply answer the purpose of insurance
and margin.

[18] This does not apply to the New York market.

                                                                 H. W. R.

[19] In London all options are made at about the current market price,
and the premium paid varies with the character of the stock and length
of time, while in New York puts, calls, or spreads are generally so
much above or below the market price, and the premium consequently much
smaller than at London. The only exception here is the “straddle.”

                                                                 H. W. R.

[20] This is not considered so in New York, where we generally expect a
so-called “January rise,” which, however, sometimes does not come; and
also sometimes expect a bear market in the fall of the year, when money
is employed to move crops, which, however, also very often disappoints
the operator.

[21] Somewhat superstitious. I have often observed it just the other way,
although generally a very dull market is expected during the hot summer
months.

                                                                 H. W. R.

[22] This about corresponds with our spring and fall trade, when the
newspapers teem with interviews with prominent merchants and bankers.

                                                                 H. W. R.

[23] Of course, this applies, in a general way, more to the London than
to the New York Stock Exchange.

                                                                 H. W. R.

[24] This applies also to the New York market in so far as that after a
large bull speculation there will be heavy realizations, and after a bear
campaign or attack the covering process will take place.

[25] This applies to the so-called “lottery loans.”

                                                                 H. W. R.

[26] Letter to “_Spectator_,” of October 4th, 1873, Saxon-les-Bains: a
Study in the Psychology of Gambling.

[27] In New York we have now any number of “bucket shops,” which
certainly deserve the name of “gambling hells.”

                                                                 H. W. R.

[28] To a certain degree the agricultural industry of the United
States takes the place of the manufacturing industries in England.
Our manufacturing industries, however, are not unworthy of serious
consideration.

                                                                 H. W. R.

[29] I do not think that this has been done yet in this country,
principally because the necessary charter cannot be obtained, unless
companies similar to the Oregon Transcontinental may be classed as such.

                                                                 H. W. R.

[30] The generally large increase in speculation in the United States and
all the incidents connected therewith are too well known, and too fresh
in the minds of the reader, to need enumeration here.

                                                                 H. W. R.

[31] This is now generally done for the customer by his broker, who
endeavors to collect, as far as possible, reliable information and
statistics for the benefit of his clients.

                                                                 H. W. R.

[32] This also applies to important changes or other matters affecting
all kinds of corporate property, &c.

                                                                 H. W. R.

[33] These remarks apply with the same force, if not more so, to grain,
provisions, cotton, petroleum, &c.

                                                                 H. W. R.

[34] I think his remark is worthy of serious consideration.

                                                                 H. W. R.

[35] At the New York Exchange nothing less than ⅛.

                                                                 H. W. R.

[36] Even such fluctuations are considered as unworthy of consideration
in American railroad stocks, where fluctuations of 10 per cent, and even
more, within a comparatively short time, are of frequent occurrence.

                                                                 H. W. R.

[37] Or through Options at least insure himself against loss.

                                                                 H. W. R.

[38] In Options, however, the poorer speculator virtually borrows, for a
fair consideration, the capital and credit of the rich operator.

                                                                 H. W. R.

[39] As said before, the settlement in New York is daily.

                                                                 H. W. R.

[40] All these experiences happen also in the New York Stock market, only
in different form, such as railroad wars, law-suits, injunctions, &c.

                                                                 H. W. R.

[41] Point.

                                                                 H. W. R.

[42] Sometimes also for the purpose of encouraging first a following, and
to unload later on.

                                                                 H. W. R.

[43] Government Securities.

                                                                 H. W. R.


[44] The usage at the New York Stock Exchange is different.

                                                                 H. W. R.

[45] The real type of the London Jobber does not, however, exist in the
New York Stock market.

                                                                 H. W. R.

       *       *       *       *       *

    OPINION AS TO VALIDITY OF “PUTS,” “CALLS,” &c.

                                         Law Offices of SIMON STERNE,
                                                   29 William Street,
                                           NEW YORK, July 24th, 1886.

    H. W. ROSENBAUM, ESQ., 60 Exchange Place, New York,

    DEAR SIR:

    You ask my opinion as to time contracts known as “puts,”
    “calls,” and “straddles” or “spreads,” in relation to stocks,
    bonds, etc. The inquiry is prompted by the apprehension that
    such contracts may be regarded by the law as of a gambling
    character, and therefore not enforceable.

    Contracts partake of the nature of wagers only when there is no
    intention either to deliver or to receive the goods, stocks,
    or bonds, which form the subject matter of the contract. That
    in point of fact and as a matter of local custom, differences
    are sometimes paid on the settlement of time contracts instead
    of delivery being actually made, does not affect the original
    transaction, and does not invalidate it. So long as there was
    not a clear intention, either express or implied, that the
    things themselves were not, under any circumstances, either to
    be called for or to be delivered, and so long as the holder
    of the “call” has the right to demand the actual delivery of
    the stocks or bonds mentioned in the contract, or the holder
    of the “put” has the right to insist upon the actual delivery
    of the stocks, bonds or merchandise represented by the “put,”
    the transaction can, in no sense, be considered a gambling one
    or partake of the nature of a wager, although, instead of the
    actual delivery, differences may and sometimes are, as a matter
    of compromise, accepted for convenience, at the time when the
    contract is to be enforced.

    This practice of paying differences is, as I understand it,
    much rarer, however, than the actual delivery of the stocks or
    bonds mentioned in the contract. The courts have of late years,
    with great uniformity, dealt with these contracts with the
    disposition to uphold and maintain them, and have discredited
    the defence of their being of the nature of a wager, and have
    held the contracting parties to their agreements in the same
    manner as in every other contract for which a reasonable
    consideration had passed.

    The decision of the Courts of this State, of Massachusetts,
    Pennsylvania and Illinois, and in the Federal tribunals, where,
    in one form or another, these contracts have been the subject
    matter of examination, have been so uniform in that direction
    that we can now regard this as settled law.

    It was only in the infancy of those larger and more complicated
    mercantile transactions incident upon the development of the
    modern industrial world, that doubts as to the moral aspect
    of these contracts could arise. Political science proves, and
    the law has followed the conclusion, that these time contracts
    now form a necessary part and perform a conservative function
    in the economy of a fully developed commercial life. They
    are an as yet undeveloped form of insurance of values to a
    purchaser, for which the purchaser pays a fair equivalent, and
    in process of time such insurances must perform a larger and
    more important function in the purchase of commodities or of
    representatives of value which have a tendency to fluctuate
    largely in price.

    For a time it was supposed that the ordinary policy of fire
    insurance partook of the nature of a bet, and there was doubt
    as to whether the Courts would enforce contracts of insurance,
    because it looked as though the insurer was saying to a man who
    wanted to have his house insured against fire, “I will bet you
    the value of you house that it does not burn down.” But we have
    long since departed from this infantile mode of looking at the
    situation and have learned to regard insurance as one of the
    conservative elements of modern civilized life, by which heavy
    losses are evenly distributed instead of coming with crushing
    effect upon the persons suffering the misfortune.

    The capitalist who sells a “put” or a “call” performs precisely
    the same function as an insurer. He receives an equivalent
    therefor, and it is a means by which he can turn the securities
    in his hands with an intermediate profit, without serious
    risk, except that in the case of a “call” he may be compelled
    to change the character of his securities, or replace the
    securities which he has called from him, and in the case of a
    “put” he may be compelled to re-acquire the securities that
    he has parted with; but, distributed over a very large mass,
    and through different classes, of securities, these “calls”
    and “puts” will balance themselves and leave, if intelligently
    pursued, a resultant profit to the operator in the “puts” and
    “calls,” with a prevention of disaster to the purchaser of the
    privileges, as against excessive fluctuations in the market.

                         Respectfully yours,

                                                      SIMON STERNE.

       *       *       *       *       *

    H. W. ROSENBAUM,

    60 EXCHANGE PLACE, NEW YORK,

    Broker and Dealer in Options on Bonds and Stocks

    Besides the usual Options (Puts, Calls and Spreads) with prices
    fixed at a certain distance from the market price of the Stocks
    or Bonds, I devote especial attention to the negotiation of
    Options (Puts, Calls and Straddles), with price fixed at the
    current market price of the Stocks, etc., which latter class of
    Options my experience has proven to be the most advantageous
    and ultimately cheapest.

    I will also contract _Insurances against loss_ on purchases or
    short sales of Stocks or Bonds, made through me, during periods
    ranging from one week to sixty days, and in quantities of from
    100 shares ($10,000 Bonds), upwards.

    The Premiums to be paid for such Insurance range from $112.50
    per 100 shares upwards, according to length of time and
    character of security, and cover the whole loss which the
    speculator may incur on this transaction.

    Circulars, Rates and Information furnished on application.

    H. W. ROSENBAUM, 60 Exchange Place, New York.