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STOCK PRICES

FACTORS IN THEIR RISE AND FALL

 

ILLUSTRATED WITH CHARTS

BY

FREDERIC DREW BOND

VOLUME VI OF “THE INVESTOR’S LIBRARY”

OTHER VOLUMES OF THIS LIBRARY ARE:

ART OF WALL STREET INVESTING CYCLES OF SPECULATION
PITFALLS OF SPECULATION INVESTOR'S PRIMER
MINING INVESTMENTS AND HOW TO JUDGE THEM

NEW YORK

MOODY’S MAGAZINE BOOK DEPT.

1911
v,
Copyright, 1911, by
A. W. FERRIN
STOCK PRICES
FACTORS IN THEIR RISE AND FALL
By FREDERIC DREW BOND

Cloth, $1.00

CONTENTS
CHAPTER I.

THE DISTRIBUTION OF SECURITIES...............004-
Stocks and Bonds—What They Represent—Investment vs.
Speculation—How Stocks are Floated and How Sold on
the Exchanges—The New York Stock Exchange; Methods
of Trading There—Investment Stocks—Ratio of Invest-
ment to Speculative Transactions—Marginal Trading.

CHAPTER II.

FACTORS OF SHARE PRICES. i .cca<senseastacsaatbeuseas
The Mental Factor—Prices the Resultant of the Interac-
tion of the Hopes and Fears of All Traders—The Relation
of Speculators to the Banks—The Actual Distribution of
Stocks at a Given Time.

CHAPTER III.

THE TREND OF THE MARKBET........-.. ccc eece ee eenee
Varieties of Traders—Who Makes the Trend?—What the
Tape Shows—Anticipating the Long Swings—Funda-
mental Indications—Investment Buying—Advantages of
the “insiders.”

CHAPTER IV.

THE PRIORITY OF STOCK PRICES........ ce eeeeeeeeee
How the Stock Market Discounts the Future—Bank Clear-
ings as an Index of Business Prosperity or Depression—
The Significance of Railway Gross Earnings—Signs in
the Action of Stock Prices Themselves.

17

23

34
CHAPTER VI.

THE: PLOATING SUPPUY esi. cicsiissieceue ave sig doecece bvestileleuecsnceceucua
Bearing on Prices of Amount of Stock Not Permanently
Lodged—tTypical Illustrations—What Stocks Are Most
Easily Marked Up and Down—Speculative Favorites,

CHAPTER VII.

SIA AIO 4 + aa eatinway oh ce eh ERR eee a eo RS
Importance of Manipulation Exaggerated—Its Purpose—
How the Big Pools Operate—Depressing Stocks for Accu-
mulation—Interesting the Public—Indications of Manipu-
lation—Manipulation in Unlisted Stocks,

CHAPTER VIII.

RISING AND FALLING MARKRETS........... 0. cece eee
The Great Swings—Secondary and Tertiary Movements—
The Peculiarities of Bull and Bear Markets—Relative
Length and Extent—The Function of Short Selling—
Recent Big Movements Analyzed.

CHAPTER IX.

THE DISTRIBUTION OF PROFIT AND LOSS IN THE
MARIE .asu ua ses ep RR eRe Me BREE Ee Seay Ne Ras
Short Selling Further Explained—Possibilities of Gains
of Bears and Bulls—What 500 Actual Trading Accounts
Show—Percentage of Profitable Transactions—Profits of
Successful Traders Compared with Profits in Commer-
cial Lines—Size of Margins Necessary.

CHAPTER X.

THE PSYCHOLOGY OF SPRCURATION ©. ckncsucnwewe see es
Temperament of the Trader Important Factor—Who
Should Speculate and Who Should Not—Speculation
Should Not be Regarded as a “Gamble”’—Study of Meth-
ods, Conditions and Values Necessary—Caution as Requi-
site as in Any Business—The Value of Experience—Tests
of Speculative Ability—The Successful Trader.

17

86

100
Ll.

The Distribution of Securities

HE stock of a corporation is its ownership; its
bonds are the evidence of its funded debt. Usual-
ly, for business purposes, the stock of a company

is represented by certificates, each of one or more of the
shares into which the stock as a whole is divided. All
the shares of a company’s stock thus represent the whole
ownership, and each share represents such part of the
ownership as it is part of the whole number of shares.

Shares of stock sell without entailing liability on the
purchaser beyond such as is involved in a possible decline
in price. The advantages in the power to transfer any
part of the ownership of a concern without necessarily
interfering with the conduct of the business and without
the purchaser assuming risk beyond an impairment of
the worth of his purchase money, are the chief causes of
the strong disposition, in the last two decades, to prefer
the corporate form of business to the older partnership
form.

Formerly, a business man owned one concern or a cer-
tain share of it as a partner; occasionally, he might have
interests in another property, but even this was rather
rare. At the present time, the ability to buy and sell the
stock of a corporation in small parcels has distributed the
ownership of these companies among very many holders.

Tr
2 STOCK PRICES.

There is now probably not a steam road of importance
whose stockholders do not number well into the hun-
dreds, while in the case of the great railways the owners
are to be counted by the thousands till they reach their
maximum in the number of the Pennsylvania Railroad
stockholders, over 55,000 in December, 1909. Not only
is one concern owned by many persons, but, conversely,
many persons may each own a small parcel of very many
concerns. In this way a community of business interests
arises, which reaches its apex in the case of great capital-
ists with interlocked holdings in very many huge cor-
porations.

Shares are often of two sorts: preferred and common.
Shares of preferred stock have usually a limited claim on
the yearly earnings of a corporation prior to the claims
of the common stock. In the event of the company’s
liquidation, preferred stock has, also, very often, prefer-
ence as to the assets. Common stockholders, as a rule,
get whatever earnings may be distributed as dividends
after the preferred shareholders have received their lim-
ited but prior distribution. When there is but one class
of stock it has, of course, all the rights of ownership.

Since the days of early railroading, it has been the
custom in America to let the nominal, or par, value of
bonds and preferred stock represent roughly the valua-
tion of a corporation, or, sometimes, the actual capital
invested at its start. In this way, the common stock
means merely the business possibilities of the concern at
its inception. When a company is successful, the common
stockholders receive ultimately the lion’s share of the
DISTRIBUTION OF SECURITIES. 3

profits, but if the concern fails such stock is not infre-
quently totally valueless. This method of capitalizing
has been objected to on the ground that the nominal, or
par, valuation (usually $100) of a share gives the im-
pression of a real value, which does not exist, and that
the pressure which the desire to earn dividends on a mass
of overrated shares exercises on managers leads to det-
rimental business practices. Stock, whether common or
not, which, in this manner, has, at the outset of a con-
cern, little or no actual equity in the assets and earnings
has been termed “‘watered stock.” But the price paid for
such shares by any buyer represents his estimate of the
business possibilities they connote, and is not based on
the nominal value of the share or on the number of
shares issued. Of course, the nominal capitalization
should not exceed the value of the actual condition into
which, in the end, it is believed these possibilities will
issue. The shares of Adams Express Company and of
some other concerns have no nominal valuation, but rep-
resent, each, a certain percentage of the whole stock;
such shares sell at about $100 apiece whenever the num-
ber of dollars received on each, yearly, as a dividend, is
regarded as a fair percentage return on its class of
business.

In commerce the things dealt with are concrete. Com-
modities have value in exchange because of their value in
use to the last purchaser, or consumer ; they are produced
to satisfy a want and used up in its satisfaction. But the
use of stock, on which its value in exchange depends, is
simply to increase or conserve wealth by affording an in-
4 STOCK PRICES.

come to a holder or through a change in price. Strictly
speaking, stock, or ownership, can be neither produced,
in an economic sense, nor consumed; it is a business re
lation which appears and disappears in accordance with
other business facts and relations.

Holders of stocks are investors and speculators. A
desire to avoid the latter term has led to a tendency to
make the word “investor” cover more than it rightly
should. An investor is one who buys a bond for its in-
come or stock for its dividends. A speculator buys or
sells in hope of a change in price which will redound to
his advantage. The difference between investor and
speculator is thus one of intention, not of outward fact.
An investor may change his mind about shares purchased
for dividends and sell them at a speculative gain. Con-
versely, a speculator buying in hope of a rise in price
may determine to hold the stock bought, permanently for
the sake of its dividends. The only usual outward dif-
ference between the two sorts of purchasers is that an
investor, as a rule, holds his stock very much longer than
a speculator does his, and that operations for a fall in
prices are always speculative. The element of difference
in length of holding as well as the different motives actu-
ating the two sorts of buyers renders the distinction one
which clarifies discussion. Between speculation and
gambling, the common element of uncertainty and the
frequent similarity of the motives of the participants have
caused some confusion. Gambling, however, “consists
in placing money on artificially-created risks of some for-
tuitous event, speculation consists in assuming the inevi-
DISTRIBUTION OF SECURITIES, 5

table economic risks of changes in value.” Gambling is
always betting: speculation, no matter what the intention
of the trader may be, always vests in him the rights and
duties of a property owner.

A corporation may offer its stock for sale in part or in
whole; or, the shares may be sold privately or on the ex-
changes. Stock sold in the first instance directly by a
corporation is afterwards subject to sale, usually through
private transaction or on the exchanges only. The stock
exchanges of the different cities—which are organiza-
tions, sometimes incorporated, sometimes, like the New
York Stock Exchange, having the status of a private
club—are limited to a certain number of members who
assemble together at certain hours each day and execute
with one another orders of customers to buy and sell
stocks and bonds. The stocks traded in on each exchange
are limited to those formally admitted to such privilege.
Nearly every large city in America has a stock exchange
of more or less local prominence, but those of Boston and
New York only stand in the first rank. Boston is the
centre of trading in the mining stocks of the country,
particularly those of copper; New York in the railroads
and industrials. As the two latter classes of business are
much the more extensive of the three sorts, the New
York Stock Exchange is, by far, the most important in
the country. .

On the New York Stock Exchange the number of
brokers is limited to 1,100. Many members are con-
nected with firms in which there are other partners, not
members of the Exchange. Besides the New York City
6 STOCK PRICES.

offices, there are branch offices of Exchange firms in all
of the important Eastern cities and in not a few of the
Western. Probably several hundred members of the
Exchange, known as “room traders,” are engaged in the
business of speculation for themselves alone. The ma-
jority of these room traders are “scalpers”; that is, they
buy and sell stocks for their own account and then close
the transaction the same day whether it shows a loss or a
gain. In this way, they rarely have commitments open
overnight. It may be added that some of the stocks trad-
ed in on the New York Stock Exchange are bought and
sold on other exchanges, also.

On the New York Stock Exchange, the dealings are
ordinarily in 100 share lots or simple multiples of such
amount. Many brokers refuse to buy a smaller number
of shares unless they are to be paid for in full at once
and taken off the market. Stock bought for speculation
is usually purchased with the aid of the broker’s re-
sources, the customer depositing a sum, called his ‘“‘mar-
gin,” equal to so many “points” (or dollars a share) on
the purchase price of the stock; the certificates purchased
are retained as a pledge by the broker and are generally
repledged by him at his bank. When the price of stocks
bought on margin declines below the number of points
covered by the margin, the shares pledged with the
broker are either sold by him to ensure himself against
loss or, further margin is obtained from the customer.

It is customary on the exchanges to trade not only for
a rise in stock prices, but for a fall. A trader who be-
lieves that a stock is selling too high and who thinks the
DISTRIBUTION OF SECURITIES. ?

price will decline, may “sell short” shares of that security.
In doing this through a broker, the latter contracts to de-
liver the shares in question to a purchaser before a fixed
time, generally the usual time for stock deliveries, or a
quarter past two the afternoon of the next full business
day. He then borrows the stock of some owner, putting
up against it, as security, the full amount, in cash, of its
selling price. The stock so borrowed is then delivered
at the appointed time to its purchaser. This completes
the first part of a short sale. When it is wished to close
the operation, the broker buys in the same amount of
shares as he had previously sold short and delivers them
to the person of whom he had borrowed them, receiving
back his security money, usually with interest. The price
between which the broker sold the borrowed shares short,
and the price at which he bought them back to return
them to the lender shows whether a gain or a loss has
been made by the transaction. If the shares have fullen
in prise, the short seller makes the difference between
the higher price at which he sold them short and the
lower price at which he bought them back for their lend-
er; if the price rises, he loses the difference between the
lower price at which he sold them short and the higher
price at which he was obliged to re-purchase them. When
a customer engages in this transaction the usual margin
is still required by the broker, because, if the shares go
up in price, the lender may demand them back, and the
broker be forced to buy them in at the higher price, at
a loss to himself unless protected by margin of his cus-

tomer.
‘

8 STOCK PRICES.

The advance of funds by the broker against the pledge
of shares is simply the extension to speculative opera-
tions of the principle of credit. It enables the purchaser
to take larger risks and obtain, if successful, greater
gains than his own capital would allow him to do; in do-
ing this, it offers, also, speculative chances to many who,
otherwise, would be unable to enter into commitments of
sufficient size to warrant the making. In a marginal
market the commitments are, therefore, much more ex-
tensive than in a market void of this sort of speculation.
How much larger is difficult to estimate exactly. As
$100, or par, is probably about a fair average price of the
shares sold on the Exchange from year to year, and as
one-tenth of this sum, or $10 a share, is the usual margin
required, it might be hazarded that the trading in a mar-
ket such as the New York Stock Exchange, were there
no marginal dealings, would be but one-tenth in amount
of what it now is. But, probably, it would be much less,
as many traders would not deal speculatively at all if
their possible profits were divided by ten, and they, them-
selves, forced to pay in full on all their commitments.
In any event, the transactions in a market where mar-
ginal trading obtains are very much more frequent than
in a market of similar size for the same stocks but de-
void of this species of trading.

Stocks which for years pay good dividends go more
and more into permanent investment hands. Pennsyl-
vania Railroad stock, which has never failed to receive a
dividend of some size since the beginning of the com-
pany, has its 317 millions of dollars of shares owned by
DISTRIBUTION OF SECURITIES. 9

over 55,000 registered holders; while Union Pacific com-
mon, though paying Io per cent dividends against Penn-
sylvania’s 6 per cent, has its 214 millions of dollars of
shares held by but 10,000 registered holders. (Decem-
ber, 1909). ‘Generally speaking, the better thought-of
a stock, the greater the number of its registered holders
and the less the amount of the average holding of each.
The Journal of Commerce of New York City has for
some years past compiled annually a list of the regis-
tered holders of the great corporations, its information
being furnished directly by such concerns as are willing
to afford publicity to their figures. From these statistics
it appears that the average number of shares, at the close
of 1909, of Pennsylvania stockholders is about 60; of
Lackawanna, 180; of Delaware and Hudson, 70; of New
York Central, 110. On the other hand, a speculative
stock like Union Pacific has average holdings of about
zoo shares; Southern Pacific, 240; Southern Railway,
300, and Reading, nearly 700 (par $50 in this case). As
the stocks, with the large average holdings, are the specu-
lative leaders, and as those with the smaller average hold-
ings are the ones thought best of by investors, it is evi-
dent that the better a stock is thought-of by investors the
smaller become its average holdings as the number of
share owners increases.

When shares are bought by investors and taken off the
market, almost invariably they are registered on the
transfer books of the company in the investor’s name and
a new certificate is issued to him. He wants the certifi-
cate in his own name, both as a token of ownership and so
10 STOCK PRICES.

that the dividends paid will come to him directly instead
of going first to some previous owner, in whose name the
shares stood before purchased by the investor in question.
But, when stock is bought for speculation, “on margin,”
a transfer on the company’s books is infrequent. Let us
suppose that shares have been sold by Jones in whose
name they are registered. Smith, the customer of a brok-
erage firm, buys in these shares for speculative purposes
through his broker. Jones’ signature on the back of the
certificate has been witnessed by his broker and the shares
thereby made a “good delivery.” In this condition they
are received by Smith’s broker. But Smith has no in-
tention of keeping these shares. Soon he sells them. The
speculator buying them of him, also, holds them but a
short time before he sells. In this way the shares are
hande¢ successively from one broker to another, each of
whom executes speculative orders in connection with
them for his own customer. All the time, the certificates
are in the physical possession, not of anyone of the spec-
ulators, but of either a broker or a bank at which the
broker pledges them as security for loans. If the shares
are “cleared”—that is, if the purchases and sales are off-
set against each other through a “clearing house,” the ac-
tual certificates may pass into the hands of a brokerage
house which has nothing at all to do with their particular
purchase or sale but which received them in settlement,
in part or in whole, of its own dealings in the shares of
that stock. But, in any event, whether the shares are
“cleared” or not, they may during all this period stand
in the name of Jones, their first, registered owner. But,
DISTRIBUTION OF SECURITIES, II

it is mote probable that they will soon be transferred,
for convenience, into the name of some broker, and in
this shape undergo their successive passages from hand
to hand. In this way, the great bulk of the stock floating
around Wall Street stands in the name of a member of
the New York Stock Exchange. Unless the stock is
bought by an investor, a transfer, afterwards, on cor-
poration books will be made simply for the sake of get-
ting the dividends directly from the corporation instead
of having the trouble of applying to the broker in whose
name the shares stand.

It thus appears that while all investment stock, the
country over, is transferred almost invariably on the cor-
poration books, speculative stock is thus registered very
infrequently and usually only for convenience in obtain-
ing dividends. Thus, the number of shares transferred
during the year on the books of a company will neces-
sarily be greater than the number of investment trades,
because a certain indefinite number of shares carried
speculatively on margin will also be transferred. Now,
if the great corporations published the number of shares
registered by them year by year, it would be easy in any
instance to state at least the maximum relation between
the amount of investment and the amount of the total
dealings, by simply comparing the amount of stock reg-
istered with all the stock sold during the year. The
figure arrived at would be too high because some of the
registered stock, as already said, is for speculation; but
it would be still near the exact facts. By comparing the
Journal of Commerce figures from year to year with the
12 STOCK PRICES.

average stockholdings in that sort of business, the coun-
try over, and with the quantity of shares sold on the New
York Stock Exchange, a close approximation in the mat-
ter can still be arrived at.

For example, during 1909 the registered stockholders
of Reading common decreased 750 in number. That
same year, general railroad stockholdings all over the
country averaged about 150 shares per holder. Reading
shares being “half shares” (par, $50 instead of $100), it
is easy to see that probably a quarter of a million shares
(750 X 150 X 2) of the stock sold all over the country,
were that year transferred on the company’s books.

But, during 1909, no less than 28 million shares of
Reading common were sold on the New York Stock Ex-
change alone. In other words, the investment dealings
in this stock all over America must have been less than
I per cent (250,000 divided by 28,000,000) of the total
transactions in the stocks on the New York Stock Ex-
change.

In this calculation the number 150 as the total average
amount of stockholdings in all the important roads is
obtained by dividing the capitalization of all these roads
by the number of registered stockholders they report.
Reading’s own average is several times greater (350
shares), but as a large amount of the stock is held for
purposes of control it seems fairer to take the average
holdings in all roads. To the calculation itself, the only
objection that can be made is that the figure represent-
ing the decrease, 750, is necessarily a net figure and that
it may simply represent the remainder of a large number
DISTRIBUTION OF SECURITIES. Iz

of increases and decreases. But this is not quite so; dur-
ing that year the stockholdings in nearly all the roads
decreased, and moreover, such inaccuracy as necessarily
exists in the matter is probably more than offset by the fact
that this figure includes decreases arising from registra-
tions of speculative stock. A broker, for instance, com-
ing into possession of ten “odd lots” of shares aggregat-
ing 100 shares, will have them tranferred into a single
100-share certificate, this amount being the unit of trad-
ing on the exchange.

To test the correctness of this mode of estimating, let
us apply the same method to Pennsylvania, Atchison and
Union Pacific. Pennsylvania stockholdings in 1909 de-
creased about 3,500. The same year the sales on the
New York Stock Exchange were nearly 6 millions. Per-
forming the calculation as before, we get (150 X 3,500 X
2 divided by 6,000,000) 1714 per cent as result. It is
worth notice that, whereas, if instead of the figure of
150, the Reading’s own average stockholdings were used
our result in that case would be several times larger—in
the case of the Pennsylvania, that road’s own average
holdings, about 60 shares, would greatly reduce the pro-
portion shown of investment to speculative dealings.
Reading, it may be added, is the most speculative great
railroad stock on the exchange and Pennsylvania the
most favored by investors, so these two extremes of 1
per cent and 1734 per cent correspond with the trend of
facts. Proceeding similarly with Union Pacific and
Atchison, we obtain in the former case (4,000 X 150 di-
vided by 21,000,000) nearly 3 per cent, and in the latter
14 STOCK PRICES.

case (700 X 150 divided by 5,500,000) about 2 per cent—
as representing the percentage of investment dealings
everywhere to speculative dealings on the New York
Stock Exchange. It should be observed that the par of
both these stocks is $100, so that the number of shares
in these two last calculations does not need to be multi-
plied by two, as in the case of Reading and Pennsylvania.
Also, that, in all the calculations, an investment deal is
assumed to be one in which at least one of the parties
is an investor. No attempt has been made to distinguish
the case where investor sells to investor, separately.

These percentages are estimates. In some instances
they may be too high, in others too low. But taking them
all in all, noticing how generally consistently they work
out, it is a fair conclusion that on the New York Stock
Exchange, the total of investment dealings, at least in the
great railway securities, is considerably below 5 per cent
of the total transactions.

It might be expected that the multitude of transactions
on the New York Stock Exchange would ensure sales at
every allowable figure between the upper and lower
prices of the day. An inspection of the daily sales list
(published, for instance, in the New York Evening Sun)
shows this to be so. Stocks frequently traded in are sold
at every eighth of a dollar fluctuation between the high-
est and lowest prices of the day, and would be sold at
even closer differences did the Exchange permit sales ‘at
prices involving sums of less than an even eighth of a
dollar a share. A stock like Union Pacific will move by
eighths of a dollar a share on every trading day, unless
DISTRIBUTION OF SECURITIES. 15

in the event of a stidden panic or of some other unusual
and potent market influence; while shares of a much less
active stock, such as Wabash, may be sold a few times
during the day’s session at differences between each sale
of a quarter of a dollar a share, a half or more. Lastly,
the inactive stocks—often largely confined to investment
dealings—are often without any sales on many days and
frequently vary from transaction to transaction by sev-
eral dollars a share. The greater the amount of specu-
lative trading, the greater the activity in a stock; and
the greater the activity, the more continuous its price
range; the less active, the more disjointed this range.
Marginal trading thus affords not only an instant mar-
ket for stocks, but a market of minimum difference be-
tween successive sales.

‘Without stock speculation, investment dealings in
stocks would take on the same character as purchases
and sales of a partnership in a firm. The relatively very
small amount of investment buying at one time compared
with the amount of speculative, shows how few shares
would be bought at the outset of a company if they had
to be taken on the basis of the dividend returns now cus-
tomary. It is the speculator who, in consideration of the
chance of profit, is willing to take the burden and the
risk at the inception of an enterprise. To dispose of the
stock of a new railroad or industrial company to the
“public” without the intermediation of speculators, re-
turns analogous to those offered by partnerships would
have to be paid as dividends to attract sufficient buyers
to the spot. Only in the course of years does a stock
16 STOCK PRICES.

pass slowly into permanent investment hands, after it
has long paid good dividends and has become valued not
only for these dividends themselves, but for the certainty
of their return. Indeed, shares disposed of to investors
by new corporations not listed on the Exchanges, are
readily sold only when large dividends are paid at the
very start, or when emphatic statements (whether true
or false) that such will be paid are made and believed.
But large dividends in the case of great corporations
would mean much smaller capitalizations, and, in par-
ticular, the extinguishment of the peculiar speculative
position so often held in American finance by common
shares,
II

Factors of Share Prices

A speculator wishes to make as much money as he
can; an investor, to get as large an income as pos-
sible. The dealings of each in the stock market are
a reflection of their wishes. But both wish, also, to
avoid loss; hence another motive impelling them to
action. On the beliefs of speculators and investors,
therefore, and on their consequent hopes and fears
depend the prices paid for stocks. and the stocks
bought and sold. As this is true of everyone in the
market, it follows that prices are but the resultant of
the interaction of the hopes and fears of all traders.
As the late Walter Bagehot put it, in the stock market,
and there only, does the “economic man” of political
economy, actuated solely by the desire for gain, cease
to be a convenient fiction and become a reality.

To say that nothing affects stock prices save through
the minds of buyers and sellers might seem a mere
platitude, but, as a matter of fact, it is common to
hear a rise in the rate of interest, the defeat of a nation
in war, an earthquake or some other notable event
ascribed as a cause of stock movements; the seeming
implication being, often, that in some vague way these
facts do, of themselves, make the prices. In a sense,
indeed, such statements, as well as the metaphor which

17
18 STOCK PRICES

speaks of the stock market as the “barometer of busi-
ness,” are convenient shorthand expressions, but, in
another sense, they are not infrequently the token of
a confusion of thought. A puzzling feature of the
market to many is its occasional opposite response at
different times to the same sort of business happen-
ings; thus, in December, 1905, the steadiness of quo-
tations in the face of call money rates of extreme
stiffness was a source of excessive perplexity to those
aware of the singularity of the fact but who failed to
note that it is not an event itself but its influence in
affecting the acts of the market participants which
determines the course of prices. The knowledge of an
occurrence and the feelings which it singly awakens,
mingle with a host of other ideas and feelings in each
trader and modify the resultant of their interactions.

It is this mental factor which judges that railroad
shares are better investments than industrial, though,
in certain respects, the justness of this inference may
be open to challenge. Dividend paying stocks sell
ordinarily at about prices which net the purchaser not
so far from the current interest rates for money ex-
pected on the security they offer. Stocks guaranteed
by high-grade companies and those which have come
to be held entirely by investors, or almost so, pay a
return on the purchase price little, if at all, higher
than that derived from a first-class bond or mortgage
or from the highest sort of commercial discounts.
Railway stocks paying dividends of from 4 to 7 per
cent are expected in good times to net the investor
FACTORS OF SHARE PRICES 19

from about 434 to 6 per cent, while from 6 to 8 per
cent return is generally looked for from industrial
shares paying dividends of from 5 to 10 per cent. The
ease of investment and the absence of personal lia-
bility make dividend paying shares on the great
exchanges a receptacle for the spare funds of the
community in exactly the same way as real estate,
mortgages, bonds and deposit accounts.

For these reasons, no matter how “watered” the
stock of a company may be at its outset, if it comes
to pay dividends at about the rate expected in its class
of corporate business, and if its earnings seem likely
to enable it to continue such disbursements straight
on, the share price will approximate toward par, and
the stock, as time goes on, will become more and more
absorbed by investors, the extent of such absorption
depending largely on the quantity of stock outstand-
ing. The history of the common stock of the United
States Steel Corporation furnishes a good example of
this state of things.

The investment valuation of a share by its security,
its dividend rate and its absence of attached liability,
offer the explanation of a fact which has puzzled
many. It has been observed that a responsible trading
company which, if sold outright to another merchant
or merchants, would be expected to return, say, about
25 per cent yearly on the investment, when converted
into a corporation, can be sold on an exchange or dis-
posed of through other means of wide publicity, in
blocks of shares, at terms which net the buyers often
20 STOCK PRICES

less than 8 or 10 per cent annually, and which mean
for the former partners very much greater sums than
they would have been at all likely to obtain by sale of
the concern while a partnership. Some years ago the
large department store of Lit Brothers, in Philadel-
phia, incorporated and offered a trifle less than half
the capital stock at about par, the size of the capitali-
zation ($2,500,000) being fixed so that at least 7 per
cent dividends could be paid. The shares were readily
absorbed on these terms, and have paid Io per cent
yearly from the start. It may safely be said that had
half the partnership been sold to one or more pur-
chasers without incorporation, such a price would have
been wholly unattainable. Good stocks are not bought
by investors to return partnership profits, but as places
for the deposit and for income growth of funds.

But though the price of shares has a general con-
nection with the income afforded, or expected soon to
be afforded, yet, even in the case of excellent stocks,
this connection is ‘usually only general. The prices of
stocks may fluctuate around a central figure, upwards
and downwards, with no change whatever in the divi-
dend rate or any likelihood of any, and with frequently
no discernible alteration of moment in the business
standing and prospects of the corporation. Pennsyl-
vania, whose par is $50, may sell one day at $65 a share,
or 130 points on the New York Exchange, which
counts by percentage of par; the next month at $70 a
share, or 140 points, though, meanwhile, the business
has not changed in value. From year to year prices
FACTORS OF SHARE PRICES 21

of stocks in the premier rank on the Exchange vary
$15, $20, $25 and more between high and low prices,
while shares of less established value fluctuate still
more widely. A comparison of the prices of 20 railway
stocks on the Exchange has shown that the yearly
fluctuation has been, on the average, from about $20
to $35 ever since 1900.

Thus, within the vague limit imposed by their
security and dividend rate, the prices of stocks are
truly arbitrary. They reflect the business standing of
their companies only in a general way, till wholly
absorbed by investors. Within the limits of their
yearly fluctuations they are the reflection of the hopes,
fears and necessities of traders in their money-making
Another instance of the influence of this mental factor
is that when a stock for the first time is run up some
ten or fifteen points in a day or so, to a new high level,
it usually reacts violently on sales, to obtain profits,
made by purchasers at some lower prices. It may be
that the new high price is really justified by the busi-
ness position of the corporation whose stock is in
question. Usually this makes no difference. The quo-
tation is too new for speculators to be “used to it” and
to hold out for it or for something like it. But if,
after this first advance and reaction, the stuck should
again go up to the previous high price, its fluctuations,
even on the same number of realizing sales, will
almost always be much less violent than before.
Traders have become accustomed to the new high
price, and this fact shapes a willingness before non-
existent to hold out more firmly for it.
aa STOCK PRICES

The capital of a speculator and the ease, difficulty
or impossibility which he experiences in raising funds
on his collateral necessarily affect his stock market
position. So, too, his commitments are conditioned by
the quantity of stock in the market for sale at a given
price. Stock prices are thus made by three factors.
There is, first, the mental element of the hopes and
fears of traders as these arise from their knowledge and
beliefs, and are expressed in their trading (chapters
3 and 4); secondly, there is the relation of speculators
to the banks as it affects this trading (chapter 5) ; and,
thirdly, there is the actual manner in which, at a given
time, stocks are distributed and held, to be considered
(chapters 6, 7 and 8). These three factors will be
taken up in turn,
Hl
The Trend of the Market

Besides the professional room traders, who specu-
late for their own account, all others who deal in stocks
are necessarily customers of one or more of the bro-
kerage houses possessing membership on the New York
Stock Exchange. Some Exchange members prefer to
handle bond rather than stock transactions, some have a
limited and old established clientele with which they are
content, while others make every effort to attract business
and to open accounts with anyone of means with the de-
sire to trade in securities. This latter sort of houses,
especially, has frequently branch offices in the upper part
of New York City as well as in out-of-town localities,
such as the chief Eastern and Middle West cities.

The great majority of a broker’s customers dealing on
margin trade in his “customers’ room,” so as to be posted
by ticker or blackboard on the current stock quotations on
the Exchange. The richest traders, however, usually
transmit their orders over telephones, often by private
wire, or by personal interview with a member of the firm.
Great professional operators, moneyed individuals with
interests beyond their own business, banks, trust com-
panies and capitalists interested in corporation securities

23
24 STOCK PRICES

—make up this wealthier clientele. Though the crowd:
which congregates in the customers’ room of the broker-
age houses is, man for man, usually much less well-to-do
than the other customers as well as less farsighted, yet,
in an advancing market it is often much more numerous.
In boom times, such as the Spring of 1901 or most of
1905 and 1906, it makes up what is known as the public,
while in less active times it may shrink down to-semi-
professional habitues of the stock market—men often
with some slack occupation or who are, for a time or
wholly, at leisure from other business.

Now, whether the market be watched by means of
ticker or blackboard or by the trading of the brokers on
the floor of the Exchange, experienced observers recog-
nize that at times usually rather infrequent, the course of
prices may be foreseen a day or two ahead from the char-
acter of the trading at the moment. In various ways the
dominance of buying or of selling orders may be indi-
cated. Such signs are of varied sorts, and those able to
appreciate their significance might be at some loss to de-
scribe them on the spur of the moment. The character
of the market thus expressed may be the effect of the
orders of a number of interests working, unknown to one
another, to the same or to similar ends; or it may be the
effect of a concerted plan of a group of wealthy traders;
or, again, both conditions may co-exist. Quotations may
come faster or slower than previously, may show more
or less steadiness or irregularity in the time of their ap-
pearance; may evince a change in the volume of transac-
tions. Without entering into technicalities of these sorts,
THE TREND OF THE MARKET 25

it is sufficient to call attention to the fact that at times the.
trend of the market can be discerned for a short period
ahead simply from its present action—the fact implying,
of course, that the forces responsible for the present trend
are not likely to pull up abruptly or to change their inten-
tions.

Now, as commission house customers assemble to
watch the ticker or blackboard it is on the current fluctua-
tions of the market that their commitments are based.
Whether they discern its immediate course correctly or
not, all traders can always see one thing—whether the
market is advancing or declining. It is on this single un-
equivocal fact that the great majority of the commitments
in customers’ rooms are made. The longer the market
keeps going up and, consequently, the nearer it must be
to its top, the more speculators—the more of the “public”
—enter on the scene and buy shares, attracted by the
great activity and by stories of gains and all hoping for
still higher and higher prices. Thus whether successful
or not, the great mass of commission house traders who
attempt to discern the coming trend of the market simply
from what it is doing at the moment, do not make the
current trend themselves. They follow it. It is true that
by this trailing behind the market, an ever growing mass
of speculators have, at rather rare intervals, become re-
sponsible by their combined buying for a rise of prices to
heights which, otherwise, they could not have touched.
An instance of this sort of things was in April, 19go1,
though, even here, their uniform, if incoherent, action
was sustained and directed by the concerted activity of
26 THE TREND OF THE MARKET

wealthy individuals and interests concerned in the course
of prices. But in any event, no matter how the specula-
tive “public” may enhance and protract the trend of the
market, they follow it as it presents itself to them; they
do not make it.

But if the public do not make the trend of the market,
neither do the few hundred room traders on the Ex-
change floor, whose commitments are usually cleaned up
over night. Of course, individuals among them may antic-
ipate the course of prices and by acting on this anticipa-
tion help to create it. Moreover, it is true that this picked
body of speculators discern the signs of the day-to-day
trend earlier and far better than the average commission
house customer; but, generally speaking, the fact that
room traders are usually thus alert to seize the course of
prices is, in itself, a statement that though they may rein-
force this course, they do not make it.

It was noticed in a previous article that a stock tends
to sell at prices which net something not very far re-
moved from the rate of interest which would be expected
on such security as it affords. But experience shows that
investors, buying with the idea of security in their minds,
are not very apt to buy when stocks are at very low fig-
ures, because the general business situation is then either
Strained or generally thought to be so, and the investor,
above all things, wants security. Apparent exceptions to
this rule will be found mostly to concern stocks of such
speculative position that, even when held after purchase
for the dividends they afford, the idea of income alone
could hardly have been paramount in the intention of the
THE TREND OF THE MARKET 27

purchaser, else more conservative transactions would
have been effected. It has been shown that strict invest-
ment buying is very small in amount compared to specu-
lative and is very different in different stocks. The
largest amount of investment buying occurs not when
stocks are very low, but, rather, when they have
about completed a rise, as 1901, 1905 or 1909. The
relative stability of prices is then an inducement
to buy, to the man who looks chiefly for income
and who is not so much concerned with the
quotation for the stock as with the steadiness of this
income. Confirmation of this view is afforded by the fact
that it has been at such times that the bond market which,
of course, is dominated by investment buying, has been
strong and active. When stocks advance too far, though
their security is undiminished, they cease to be attractive
to investors owing to the small net return they afford.
This was the case in the fall of 1902 and in the opening
month of 1906. At the former time, it has been com-
puted, twenty-eight dividend paying railroad stocks yield-
ed 3.2% on the investment, while, again, in 1906, thirty-
nine dividend paying railroad stocks net on an average
only 3.5%. Returns of these sorts are safer from bonds
and savings banks. Thus, while investment transactions
limit, in the end, the upward course of the market, they
do not make its trend any more than do the commission
house marginal customers.

It is thus evident that the speculators and the investors
who go with the trend of the market, do not make it in
28 STOCK PRICES

any instance. Evidently, then, the upward or downward
trend must be made by specuators whose commitments
take place when the market is either moving downwards
or upwards, respectively, or is at a standstill. Such trad-
ers buy when prices are low and sell when they are high.
The speculative investors who buy, as a rule, in odd lots
and pay outright have already been referred to. From its
yearly returns, the Journal of Commerce draws the con-
clusion that “American stocks were most widely distribu-
ted after the panic of 1907’’; in 1906, its reports showed
an average in all roads from which figures could be ob-
tained, of 3,825 stockholders; before the panic, this num-
ber had risen to 4,627; after the panic it reached the num-
ber of 10,086, which in 1908 had shrunken to 5,647. At
the end of 1909 it was 5,336. These comparisons are not
exact, as the number of roads reporting to the Journal
rises from year to year. For the present purpose, they
are, however, sufficient. Such purchases and sales are
the record of all the successful transactions during that
period, which were registered in transfer books of the
corporations. The great mass of others likewise success-
ful were of the same type. Whether he be the buyer of
two shares or of two thousand or of twenty thousand, it
is the holder financially strong in proportion to the size
of his holdings, and with the foresight to deal as just
stated, who makes up the accumulated number of specula-
tors on the right side of the market and who creates its
trend.

Apart from “scalping” from room traders and others,
successful commitments are, thus, not based on observa-
THE TREND OF THE MARKET 29

tion of the course of the stock market, only. Such obser-
vation, at the best, indicates fluctuations usually of but
a day or two in duration; and the successful speculator
holds his shares for a legitimate profit which generally
takes much longer than a day or two to accumulate. The
speculator, large or small, financially, who has the mental
make-up which ensures his action on the right side of the
market, is not the typical commission house trader, who
pops in and out the market with every breath of rumor
or short-time fluctuations on the ticker. In the most gen-
eral sense, it may be said that, whether made by “bargain
hunters” or by wealthy magnates, successful commit-
ments are based on the expectation of business improve-
ment, or, in the case of short selling, of business depres-
sion. Of course, such expectation is more or less ex-
plicitly thought-out and more or less exact, according to
the character and the knowledge of each trader. After a
severe business let-up, as in the opening months of 1908,
the same actual amount of goods, except in so far as con-
sumed, are in existence as before; so, too, the same
amount of money on which to base credit transaction§,
except in so far as gold may have been exported or im-
ported. But buyers and sellers have gotten out of touch
with one another. The producer cannot find a quick mar-
ket for his commodity, the consumer has more than he
wants—at least at the old prices. Hence, a picking up of
business after a depression is a resumption of the de-
mands of the great consumers, those, for instance, of iron
and copper. Large crops tend to force the resumption
from the side of production by the amount of capital they
30 STOCK PRICES

evoke from the earth. A foresight of a revival of trade
in the steel and copper trades and of the advent of large
harvests are the expectations on which when financially
backed, long upward swings of the market are normally
based.

The beginnings of recuperation in the great industries
are not, however, so evident to the outsider as they are
to those experienced in the trades themselves. A great
mass, if not the majority, of successful “public” commit-
ments, are, therefore, probably based more on the gen-
eral fact that stock prices, judged by net income returns
and by the financial status of corporations, are too high or
too low, than on more special knowledge. Great corpora-
tion interests and their immediate circles can see more
clearly and more definitely. Prices of the United States
steel stocks began to improve, in 1904, some months be-
fore outsiders could discern an improvement in the iron
industry. Again, Amalgamated Copper shares reached
what were practically top figures in the opening of 1906,
a full year before the price of the metal had attained its
apex. The same stock (in company, of course, with the
rest of the market) began its downward journey in 1907
before the price of the metal began to break wide open.
In all three cases, the conditions in the trade were fore-
seen by successful “inside” traders in the stock. The
capitalists in a great corporation are likely to foresee bet-
ter than others the coming expansion or contraction of
their business. But the industries of a country rise and
fall pretty much together. Thus, ap:¥. from precon-
certed action (which may also obtain), the great moneyed
THE TREND OF THE MARKET 31

interests of the country, desiring to profit by a rise in the
business status of the trades with which they are affilia-
ted, act to the same end in the stock market, at the same
or nearly the same time.

Thus, in the case of each class of traders considered,
their stock market commitments arise from their knowl-
edge or beliefs as these arouse their hopes and fears. The
commission house customer bases his beliefs on the trend.
of the market as he sees it from day to day, seconded in
his decisions, possibly, by other considerations equally un-
certain, such as the hearing of “tips.” The investor
grounds his purchases and sales on his wish for security
and for a fair sized net return, while the thoughtful spec-
ulative element of the community—the “speculative in-
vestors” and “wise” marginal traders—act hand in hand
with the great capitalists in perceiving the right time to
buy and the right time to sell to obtain the wished-for
profits.

There are always two sides to the market: the wrong
side and the right side. Those on the right side are al-
ways opposed to those who are wrong, gaining where
they lose or where they fail to gain. But this opposition,
as a general individual rule, is not intentional, though the
fact of its existence may be relied on by those who fore-
see correctly ; but it depends, in the end, on the fact that
the one side, in being right, must necessarily be opposed
to the other side, in being wrong. Where the former buy
or sell or do nothing, the latter do one of the three when
something undone was the proper course.
Iv.

The Priority of Stock Prices

After a period of commercial depression, such as that
which occurred in the early part of 1908, stocks be-
gin to advance in price before a recovery in trade
becomes manifest. Likewise, as in 1907, share prices fell
previous to the coming of commercial disaster. This fact
is known as the “priority” or “anteriority” of stock prices,
or as the process by which the stock market “discounts”
the future. The general proof of the occurrence of this
situation is best given by a comparison for years past of
bank clearings and gross railway earnings with stock
prices. Of all the indices of general prosperity or of
general depression the country over, none is so immediate
and so certain as the quantity of bank clearings, because
this quantity is nothing but the amount of cheques which
change hands, or the very aggregate sum of all important
sales themselyes. The following table gives the bank
clearings of the United States by months since 1900, six
ciphers being omitted in each number, so that, for exam-
ple, the first month’s clearings in full should read $7,643,-
000,000 :

32
PRIORITY OF STOCK PRICES 33

U. S. BANK CLEARINGS.
January. February.March. April. May. June.

W900 ose.vovuieee 7,643 6,482 7,625 | 7,472 7,310 6,667
Lt) a 10,716 8358 10,003 12,010 12,825 10,105
DDO 2 66:0 5 siatestie 10,659 8,359 8,882 10,926 10,386 8,208
WS eee ca sceccis 11,088 8468 9,582 9,581 9,118 9,422
T9046. sect asys 9,436 7,713 8,383 8,309 8,215 8,058
1905.......... 11,848 10,650 12,918 12,735 12,059 10,815
1906.......... 16,321 12,462 12,993 12,884 13,218 12,230
VQOT soa ecctcoes 15,020 11,792 14,625 12,636 12,382 11,136
W908 ese ccs ccsiees 11,359 8,756 9,777 9,764 10,858 9,825
F909). 2 ese eee 14,035 11,244 12,606 13,664 12,889 14,134
T9102: serecwees 17,186 13,105 15,017 14,001 13,142 13,810

July. Aug. Sept. Oct. Nov. Dec.
1900........-. 6,256 5,707 = 5,626 ~— 7,621 8,758 9,071
LOO eich eeces 9,369 7,990 7,971 9,536 9,853 9,810
W902 ssciees s cass 10,170 8943 10,157 11,357 10,087 9,894
1908 wisccie sce tes 9,767 7,921 7,673 9,176 8,169 9,295
FOO vcs .ic cesta 8,660 8,008 8,844 11,509 12,505 12,804
LOOB ears ewes 10,866 10,902 10,885 12,624 13,149 14,452
1906.......... 11,639 13,181 12,497 14,529 13,633 14,265
TOOT iscineaece acess 12,348 11,527 10,551 13,779 9,659 9,407
1908 esti tease, Sa 11,071 10,248 11,112 12,136 12,975 14,364
W909 feiss se soe 13,450 13,494 13,523 15,851 14,761 15,843
QO. 6s sees 13,287 11,508 11,861 15,787 18,595 13,932

The accompanying diagram gives a graphic representa-
tion of the course of the two series. The amounts of
the bank clearings are derived from the Financial Chron-
icle’s compilations; the stock prices are the average of
the twenty roads whose quotations are reported in this
form day by day by the Wall Street Journal.

In examining the table and diagram it should be re-
membered that the winter months are likely to show
heavier business dealings than the summer months. The
truest comparisons, therefore, are of the clearings of a
month with those of the same month in the previous year
—something shown at once by the table.

It will be seen, first, that general business activity, as
Btock = STOCK PRICES AND U. S. BANK CLEARINGS.

 

 

tndollare 1200 1901 4y09 1903 1904 1905 1906 1907 1908 1909 1910
per share
140
138
130
126 Us
120 120
nb Ms
n0 tio
105 105,
100 100
8 95
90 90
85 85
80 80
28
70
US
bank
clearings
in
billions
of dollars
16
18
“4 M4
13 13
qa 2
n u
10 0
9 9
8 s
7 1
6 6
‘ 5

Each square represents ome quarter of each year. Upper line shows average price of 20 railway shares from 1968 to 1910.
‘Lower line shows amount of United States bank clearings, month by month, during the same period; each dot Indicates the emount
PRIORITY OF STOCK PRICES 35

measured by the volume of clearings, has been preceded
by a rise in stock prices and that general business de-
pression has been preceded by a fall in the prices of
securities. Thus, the rise in stock prices in 1900 began
in the early fall, when clearings were at their lowest, and
culminated for a time in April, 1901, after which prices
reached their extreme top in September, 1902, after a
year and a half of backing and filling with an upward
trend. But, comparing the bank clearings, month by
month, it will be seen that each month’s record was
higher than that of the corresponding month of the pre-
vious year till after the opening of 1903, the only excep-
tions being a few months in the bull market of the first
half of 1901.

Stock prices reached bottom in the latter half of 1903,
when bank clearings had just begun to fall off largely,
and had risen many points by September, 1904, when
bank clearings picked up quickly. Compared with the
months of previous years, clearings did not show signs
of falling off again till August, 1907, although stocks
had then been going down for months and had, indeed,
reached their top point, some in the “Union Pacific
boom” of August to October, 1906, some in January of
the same year. Till the middle of 1908, clearings showed
a steady falling off, though stocks had been rising since
November of the preceding year in many cases, and in
all, since the opening of 1908. Again, stocks began to
fall after August, 1909, but clearings not till a year later.
It will be noted that the fall in stock prices in 1903 was
not followed by so extreme a commercial depression as
36 STOCK PRICES

in 1907. Business was, relatively, but slightly affected.

If, during the ten years under consideration, railway
gross earnings be examined, the priority of stock prices
to commercial conditions as reflected by these earnings
will again become manifest. Railway earnings by regis-
tering the distribution of commodities are next to clear-
ings probably the best index to the status of general
business. The following table, compiled from the Finan-
cial Chronicle, shows the percentage increase or de-
crease in gross earnings for,every month since the be-
ginning of 1900, over the corresponding month of the
preceding year. As the same roads have not always re-
ported in each month during this period, and as the
Chronicle has been able to give much fuller reports in
recent years than formerly, the table is not minutely
accurate, though more than sufficiently so for the present
purpose. In all months the returns include those of the
greatest systems and cover usually from three-quarters
to four-fifths of the whole country’s mileage.

PERCENTAGE VARIATION OF RAILWAY GROSS EARNINGS
OVER CORRESPONDING MONTH OF PRECEDING YEAR.
Jan. Feb. March. April. May. June.

1900........... 15.14 19.86 12.50 12.69 10.67 9.23
TOOT sds acoutelatone 7.94 7.50 7.43 8.94 9.41 6.80
190 2a gesiecs ceva 7.61 3.92 6.30 11.03 9.18 7.16
0B emceiaws xe 9.40 13.86 14.42 13.67 11.98 14.02
WQ04 sicisnnrends —4.55 2.60 —0.06 —3.18 —2.77 —0.81
1905........... 6.58 —3.01 9.73 7.35 11.09 9.66
0 re 20.88 26.36 10.61 6.78 9.83 12.11
VOOT scciece'sceaverere 6.51 6.05 9.65 21.45 18.12 13.59
1908. oxite iea wes —12.49 —11.79 —13.37 —18.89 —22.67 --18.47
L909 i cs eewen ae 5.54 8.34 12.13 12.50 15.58 14.33

July. Aug. Sept. Oct. Nov. Dec.
1900........... 3.86 6.14 2.21 5.03 2.14 9.06
PRIORITY OF STOCK PRICES. { 37
1901, cosa ssn ens 3.40 12.67 10.46 11.87 12.22 5.65
1902. wissssccs ds 7.65 4.76 9.55 6.71 6.97 9.86
1903, oneness 11.96 9.18 6.98 5.34 4.03 4.66
N08 crys cives —5.35 0.51 2.81 3.21 9.51 7.20
1908 faces 4 10.02 9.23 9.28 8.54 10.35 9.64
TDDB ssiscaces ane 13.73 12.11 7.58 10.77 6.24 — 7.90
BOOT ecttiesh ues 14.28 12.97 9.71 8.56 3.14 —6.20
MOS a resaceuxe —14.87 —16.64 —6.23 —6.95 —2.92 5.42
ADB ces iexcee 12.66 14.35 12.35 11.80 16.51 6.39

It will be seen from this table that stock prices were
falling during 1903 and 1907, while at both times gross
earnings were expanding largely. And that, when earn-
ings began, in 1904 and still more so in 1908, to fall
off, they continued to decrease long after stocks had
reached bottom and were again commencing to go up-
wards. This is very clear in 1908, when earnings,
which did not begin to fall till after the end of the finan-
cial panic in October, continued to decline till the very
last month of 1908.

But while the priority of stock prices to general busi-
ness expansion and contraction is thus unmistakable, and
while from the point of view that in a bull market this
priority is the expression of speculative foresight, it
seems not only reasonable but almost inevitable, from
another standpoint this priority of prices appears a
paradox.

Stocks are bought for investment and for specula-
tion. But both investment and speculative purchases,
whether made by individuals or by corporations, are
made, in the case of new commitments, out of their sur-
plus capital—with resources whose use is not essential
to the maintenance of the company or individual and
38 STOCK PRICES

which are not already tied up. In other words, it would
seem that shares could be bought in large quantities at
advancing prices only when there is much spare cap-
ital on hand with which to buy them, and that this could
be the case only when commercial prosperity was well
in the ascendant. In the same way, it might be expected
that the pinch of commercial stringency would have to
be felt before investment and speculative holdings began
to be sacrificed in large amounts. Far from “discount-
ing” the future, it appears, from this consideration taken
by itself, that stock prices should do the reverse—should
have their variations preceded by the business changes.
To explain this apparent contradiction, some facts re-
garding marginal accounts should be kept in mind.

In the usual brokerage transaction it is customary
for the speculator to supply about ten points of the stock
price, for the broker to supply an additional ten points,
and for the remaining sum to be lent by the broker’s
bank against the re-pledge of the customers certificates
as collateral security. On the whole, it may be said
that the New York national banks, which, as a rule,
handle nearly all city loans of this sort, lend from about
75 per cent to 80 per cent of the funds to finance the
carrying of stock for a rise. Let us see how this affects.
the course of prices.

Stocks, as has been seen, begin to rise before the ad-
vent of renewed or of greatly enhanced prosperity. At
such times, they are in the strong hands of investors, of
speculative investors and of individuals and groups of
speculators, mostly wealthy, but, in all cases, able to
PRIORITY OF STOCK PRICES K

carry easily the shares, few or many, which they hold.
A portion of stocks, both dividend paying and otherwise,
is held by them, as at other times, for purposes of cor-
poration control, and is, consequently, not for sale. But
besides this stock and that of the genuine investors, the
remaining shares, held for speculative purposes, are car-
ried by owners firmly believing in an appreciation in
prices. The existence of this confidence at such times is
not a more or less probable fact ; it is a definite certainty ;
for those who do not have it, or who have not had the
capital to hold stocks, have necessarily sold out by the
end of a long decline. It is a case of the survival of
the fittest.

When stocks are thus in strong hands, after falls of
many months, such as those of 1903 and 1907, a period
of dullness is likely to precede an upward movement in
quotations. Thus, August and September, 1900, both
dull months, preceded the great bull market of 1900 to
1901; May and June of 1904 were followed by the bull
market of 1904 to January, 1906, while, finally, dull-
ness of November, 1907, signallized the end of the long
decline of that year. After a rise in December, renewed
liquidation of weak holders, watching their chance to get
out as best they could, brought about another decline in
January, 1908, to be followed again by a dull February,
after which the long advance of 1908 to August, 1909,
began. Facts of the same sort, on a lesser scale, are true
of the shorter swings of the market. Dullness occurs
after the end of a fall because offers to sell stock have
40 STOCK PRICES

ceased to predominate over bids to buy, while both have
greatly lessened in number and importance.

It being to the interest of a bank to lend on collateral
as much as is consistent with proper security and, as in
times of dullness following a long decline, great quan-
tities of stock are carried by banks for wealthy and in-
fluential depositors—often their own stockholders and
directors—policy as well as the knowledge of the low
range of prices obtaining induces banking institutions to
be liberal in their loans.

At the beginning of an upward movement of large
extent—of which the months named above offer good
instances—the stock carried speculatively is, when not
held outright, often pledged directly with banks instead
of through brokerage houses; indeed, the remark of a
broker has become well known, namely, that the only
sure sign of a long advance in the market he had ever
been able to detect was when commission houses carried
little or no customers’ stock for a rise. When stocks
begin to move upwards, the price has.to be frequently
bid up a fraction to effect a purchase. There is an in-
clination, especially among the room traders, rather to
buy on a quarter’s advance than to sell on a quarter’s
recession. And this feeling growing, slowly or fast,
prices rise while the volume of sales swells in size over
that of the dull period.

In an advance from low prices to high such as occurred
in the three years repeatedly referred to—z1g900, 1904
and 1908—relatively few men, even of the wealthy, on
the right side of the market have a definite idea of how
‘ PRIORITY OF STOCK PRICES 41

long the advance which they foresee will persist. Ex-
perienced stock market observers, however, find that
pressure to sell stock has ceased and that offers of short
sales produce little or no effect on the market, as the
offers are readily accepted at every concession of a frac-
tion and are with difficulty covered, save with a loss.
Everyone soon accepts the basic fact that the market
has reached bottom, in other words, that no one wants
to part with shares at the prices obtaining.

The speculative impetus in an upward movement is
made possible by the aid of the banks, A stock in which
there is no speculative interest, assisted by bank funds,
moves with extreme sluggishness from year to year, and
follows the market very slowly and quietly. Such a stock
was Western Union up to 1907, when it fell heavily,
probably through investment liquidation, aided by short
selling. The company lost very much business in 1908
and finally cut the dividend.

The priority of a decline in stock prices to a decline
in general business is as certain as the converse situation
just discussed, but the business depression does not neces-
sarily take place on such an extended scale as might
have been conjectured by an observer of the decline in the
stock market; for instance, the stock decline of 1903 was
so much more severe than the commercial decline that
this fall in share prices has been spoken of as a “dis-
count” by the market of a situation which never even-
tuated. Although in a stock decline preceding a busi-
ness contraction the element of foresight leads some in-
vestors to sell the stocks owned of such companies as
2 STOCK PRICES

they think may decline in prosperity, and although such
liquidation may be strengthened in its pressure on the
market by short selling, yet the priority of a long decline
in share prices (as aside from the fact of the decline
itself) is caused by other factors involved in the relations
of the banks to stock prices. (See next chapter.) Here,
it will be sufficient to say that just as relatively great
dullness precedes an advance, so relatively great activ-
ity at the top of an advanced or advancing market, other
things being the same, is likely to precede a decline;
and, in a declining market, to mark its consummation,
for the moment or for good. The top points in April,
1901, September, 1902, January and August-September,
1906, are evidence of this as far as extended swings are
concerned, and it will be found to be true of swings
shorter in duration; although other factors seem more
frequently to interfere with the working of this prin-
ciple than with that of the converse one of dullness pre-
ceding an advancing market. Activity at top notch fig-
ures for any time is generally the distribution of stocks
by those who are on the right side of the market at
that time and who are taking their profits by sale to the
less farsighted. But why it should be apt to be followed
at once with a fall without an intervening period of dull-
ness, as is the case at the beginning of an advancing
market, will appear more clearly later on, when short
selling is discussed in full. It should, however, be said
at once that there is nothing whatever to the nature
itself of the stock market to prevent dullness being fol-
lowed by a decline as well as by an advance, and that
PRIORITY OF STOCK PRICES 43

this sometimes happens. Thus, both February, 1907, and
February, 1908, were dull months relatively to those
before and after, but the former was followed by the
great smash-up of March, 1907, and the latter by the
beginning of the upward movement for 1908. Simply,
certain general characteristics of rising and falling mar-
kets cause dullness much more frequently to precede
rises than falls.

Thus the ‘priority of stock prices receives an explana-
tion as far as an advance is concerned through the as-
sistance given to speculation in stocks by the banks.
Banks always have most to lend when the rest of the
country has least. While the speculative funds of in-
vestors and speculators are smaller in depressed than in
inflated times, this is not true of banking institutions.
The more business a bank does, the more its loans rise
in amount, and the more difficult does it become, because
of legal restrictions, to add to them. But the less busi-
ness it does the more spare funds it has on hand, and the
easier it is for it to make a loan. As the bank lends
up to a certain percentage of the exchange price of a
stock, the burden of the increased valuation of the stock
as soon as it begins to advance is borne by the bank,
while the speculator, whose margin with the bank is the
same or nearly so whether the price of the stock be 50
points or 75, does little more than register the advance
in higher quotations and pay a slightly larger interest
for the use of superadded funds as the share price ad-
vances,
44 STOCK PRICES

If, for instance, a speculator has borrowed $8,000
from a bank on a stock when it was selling at par and
the stock rises on the Exchange to $120 a share he can
probably borrow $2,000 more on the same stock, his only
additional burden being the interest charge on this
$2,000. This “pyramiding” of loans on stock collateral,
a very important factor in a speculative market, is more
fully discussed in the next chapter.
V.

The Banks and the Exchange

The total amount of money held by all the banks in
the country varies with the increase of Government
coinage, with the imports and exports of gold, with
the sum in circulation and with the amount of hoard-
ing by individuals. From year to year the whole
amount of money held by banks slowly increases. In-
deed, it is evident that the actual money of a country,
except as bullion or as precious metal, per se, is not of
use in foreign countries.

In the absence of gold and silver movements, a gen-
eral swelling of bank deposits (as distinct from a mere
shifting of deposits from one bank to another) means
that the banks are making more loans and are placing
the proceeds of these loans to the credit of the de-
positors to whom they are made. When such loans
are paid off, both the loans and the deposits arising
from them are cancelled together. In the event of the
winding up of a bank’s affairs, the liquidation of its
loans is a necessary preliminary to the payment in
cash of its depositors, though. the majority of the de-
posits are ordinarily cancelled through the payment
of the loans by which they came into existence. Be-
fore the great development of banking in the nineteenth

45
46 STOCK PRICES

century, a bank loan was generally a loan in the pop-
ular sense of the word; the borrower either received
actual money or bank notes or drew actual money from
the bank as wanted (as he may, of course, still do). But
in coming to lend far beyond the amount of money which
they possess at one time, banks have come to lend
what is really credit, not money. A bank loan has
really become a publicly received endorsement that a
borrower’s security—stock collateral, notes or his own
responsibility—has, at least, such and such a present
cash value, which the bank permits him to barter, by,
means of checks, for such other goods as he desires,
instead of obtaining these goods by the clumsier and
often impracticable methods of the tender of promis-
sory notes, shares, or by waiting for the indebtedness
to him of others to mature.

While in theory a bank’s loans might expand to any
amount provided they be made on proper security, in
practice loans are limited in amount both by a popular
misconception of the real nature of a bank loan and by
Federal and State laws. National banks in the three
“central reserve” cities (New York, Chicago and St.
Louis) are required by Federal law to keep on hand
in money (specie and legal tenders) 25% of their
deposits. Any money over and above this amount is
known as the bank’s surplus reserve. By this law a
limit is placed on the ability of banks to increase loans
beyond a certain amount. For, as soon as a National
bank in New York lends when its reserves are just
BANKS AND THE EXCHANGE 47

25% of its deposits, either (1) this new loan is placed
as a deposit to the credit of the borrower and then
the bank has less than the required 25% of deposits in
money; or, (2), the loan is paid out and then the cash
reserve is depleted that much and falls below the
required 25% figure, again. As no bank wants to
reduce good deposits save through the extinction of
loans, it can increase its lending capacity otherwise only
through obtaining more actual money, else it must keep
its loans within this percentage.

As a bank’s deposits arise from its loans and from
the receipt, in the end, of actual cash against such
deposits as are not offset by the outgo of other
cheques through the clearing house or otherwise, every
payment of a loan reduces the deposit account of a
bank toward the point where it is covered entirely by
actual money. These deposits arising from loans, it
may be noted, have their real nature better understood
in Europe, where they are carefully distinguished,
under the title of “current accounts,” from deposits of
actual money or of cheques on other banks.

The total deposits the country over have thus against
them loans, money, and other resources (such as stocks,
niortgages, etc.) belonging to the bank. When deposits
in a bank fall in amount below loans, this means that
money has been withdrawn from that bank against these
loans, against other deposits not arising from loans, or
has been invested by the bank itself. But when loans are
greater than deposits it also means that the sums so
8 STOCK PRICES

withdrawn must be greater than the sum of all remaining
deposits which do not arise from loans.

In the three central reserve cities, National banks must
keep, as already stated, 25 per cent of their deposits in
money in their vaults. In the reserve cities, including the
large municipalities, National banks must keep the same
reserve, but instead of retaining it all in their own vaults
they may deposit one-half of it in National banks in the
three central reserve cities. The country National banks
must keep 15 per cent of their deposits in money as a
reserve, but of this 15 per cent, three-fifths may be de-
posited in National banks in the reserve or in the central
reserve cities. Thus, the country National banks need
keep on hand in actual money only 6 per cent of their
deposits, and banks in the reserve cities need keep on hand
in actual money but 1214 per cent of their deposits. Now,
as money is very frequently easier to lend in New York
than elsewhere, this situation brings it about that many
interior banks leave large balances, as part of their legal
reserve, with banks in New York City, and, to a lesser
extent, with banks in Chicago and St. Louis. But this
money is counted by the National banks in these three
cities as part of their legal reserve. Hence, when a call
from the interior banks for this money is made to replete
their own reserves, stich a call entails a great and imme-
diate drain on the reserves of the National banks in the
three cities mentioned, and especially in New York.

Every year such a drain occurs sometime in the Fall.
To move the crops, farm hands must be paid in cash, and
BANKS AND THE EXCHANGE 49

to get this cash the interior banks are drawn on. These

"having but little money on hand draw on their balances
in the reserve cities and in the central reserve cities, but
chiefly in New York, where the great balances of this
sort accumulate. The result of the situation is, that if a
great demand for cash arises in New York at the same
time as a great demand for cash in the interior, the New
York banks bear the brunt of the situation. At such
times, as in 1907, to get money New York banks must
import gold from abroad or get it from the United States
Government by its deposit with them of Government
funds,

In Europe, when a great demand arises for actual cash,
the banks issue bank notes to meet the drain. European
bank notes may be issued against discounts of commercial
drafts or of drafts accepted by a bank. The brisker
business is, the more such paper will come to the banks .
for discount or for loan, and the more credit balances
will increase or the more bank notes will be paid out, as
wished by the seller of the draft. In times of a panic,
when the demand will be for cash, bank notes will issue
to meet such demand. Of such an elastic currency system
there is ‘hardly a trace in America, though the Aldrich
currency plan submitted to the National Monetary Com-
mission early in 1911 will probably lead to action by Con-
gress along such lines. But, as things stand, our National
banks can now issue bank notes only by first buying
Government bonds, then depositing these with the United
States Treasury and taking out in return bank notes equal
50 STOCK PRICES

to their face value. As the bonds cost more than their
face, or par value, in the market, this usually involves a
loss to the bank unless current interest rates are so low
that it can recoup by means of the interest paid it by the
bonds. But this situation also withdraws money from the
banks which they need as reserves against their deposits.
It takes more than $10,000 for a National bank to take
out $10,000 worth of bank notes, but this $10,000 if held
by the bank might have been a reserve against $40,000
of loans in New York, if these loans were placed to the
depositor’s credit, i. e., if he did not want to withdraw
actual money for his loan. Evidently, just when we need
bank notes most—in times of panic—the banks have to
hold on to every cent of their money as a reserve to cover
their deposits.

We may now take up the connection of bank loans in
New York with stock exchange collapses. To understand
this thoroughly, the function of call loans in the New
York money market must be taken into consideration. A
stock market rise, as has been seen, involves the extension
of credit by the banks against securities to about 80 per
cent of their price on the Exchange. Now, when New
York banks have liquidated many of their loans, cleaned
up the deposits based on them and received back on de-
posit from the interior a large amount of money as
reserves for the interior banks, or for the sake of metro-
politan investments, the New York -banks have large
reserves against which large credit loans—large “current
accounts”—may be made. This is their position at the
BANKS AND THE EXCHANGE 51

wind-up of financial crises generally. When this is the
case, the deposits of the New York banks will show an
excess in amount over their loans. This excess is known
as the “surplus deposits,” and it may be worth while, first,
to note its variation compared with market fluctuations.

If the diagram be examined, the relations between
surplus deposits of the New York national banks and
stock prices will be apparent almost at a glance. In
Igo2 and in 1905 to 1906 falling surplus deposits pre-
cede falling stock prices. In 1903 to 1904 and in 1907
to 1908 rising surplus deposits precede a stock appre-
ciation, The facts can be examined closer and the
same relation will be found to hold. In 1903 and 1907
the surplus deposits reached their highest minus point
at just about the culmination of the decline. Again,
they were highest, positively, in 1901 before the great
Spring rise of that year, in 1904 when they furnished
the ammunition for the bull campaign of 1905, and
since the end of 1907 when they shot up like a rocket,
at the beginning of 1908.

Why an excess of loans over deposits is undesirable
from a stock market standpoint may be still clearer
from the following considerations. The loans of banks
at such times may be, it is true, thoroughly sound, and
even beneficial as far as the banks are concerned. But
such a condition necessarily implies that some of the
deposits (arising from the proceeds of the loans) have
been depleted by the withdrawal of actual money.
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BANKS AND THE .EXCHANGE 53

their loans, a greater or less number of customers will
be unable to cancel their indebtedness by drawing
checks against their credit balances—a liquidation of
their securities pledged as collateral for their loans
will be enforced, with a depressing effect on prices of
securities, as explained more fully in the following
paragraphs.

In Europe the bulk of bank loans are made on com-
mercial transactions. The seller of goods draws on his
bank, his draft is accepted by his bank and may pass
by endorsement through many hands or may be dis-
counted by a note dealer and afterwards re-discounted
by a central bank. In America the promissory note
of a purchaser of goods may be endorsed by the seller
of the goods and discounted at the latter’s bank, but
there the matter ends. The bank can do nothing with
the note till its maturity. Drafts on a bank accepted
by the bank and made the basis of discounts and re-
discounts by other parties are practically unknown
with us. This primal difference between the practice
of banking in Europe and in America is the cause of
the fact that with us a vast bulk of ‘bank loans is
made on securities listed on the stock exchanges.
From this fact another of great importance flows. In
Europe stock settlements are made fortnightly or
monthly, but on the New York Stock Exchange they
are made daily through the Stock Exchange Clearing
House. Hence the necessity in New York of con-
stantly shifting, extinguishing and remaking loans
84 STOCK PRICES

concurrent with the sale and transfer of shares carried
by brokers on margin. From this situation has devel-
oped our call loan market on stock as collateral, which
has no analogy in Europe, where loans on stock, fol-
lowing the course of the fortnightly stock settlements,
are made for two weeks or longer.

Call loans on shares in America are payable on de-
mand by the lender; or, more collateral may be de-
manded or a higher rate of interest, or both, and a
new loan made. By Chapter 237 of the New York
State laws of 1882, call money rates may be of any
percentage on loans of $5,000 and upwards. If, in the
case of the call of a loan, the money or more security
is not forthcoming, the collateral may be sold by the
lender to defray the loan. So, too, with time loans on
stock, it is provided that if the lender wish, he can
demand more stock as collateral before the maturity
of the loan. Now, in times of large surplus reserves
(over 25% of the deposits) the banks make time loans at
low rates of interest very freely on stock exchange col-
lateral. Through the aid of these loans stock prices
advance on the Exchange (as outlined in the preced-
ing chapter), and, having thus advanced, more money
is lent on the same security, on the basis of the higher
prices which the prior loans have brought about. In
other words, by “pyramiding” their loans on stock
exchange collateral, banks create the very valuations
on which they rely to lend. As loans expand, call
money rates may advance. Finally, when, through
BANKS AND THE EXCHANGE 5h

the drain from interior points or from other reasons,
the New York National banks can no longer increase
the amount of their loans without falling below their
25% surplus reserve mark, they may begin to restrict
loans both by increasing the rate of interest and by
demanding more and more stock collateral of the same
sort for a loan of the same amount. But these de-
mands of the banks for more stock collateral or for
settlement of their loans, bring about sales of shares
on the exchange to effect the cancellation of the loans
—the sales, of course, being largely of the collateral
pledged by the borrowers with the banks making the
calls. At first, this stock may be mostly that of weak-
ened brokerage accounts carried on margin, but re-
hypothecated by the brokers carrying it with their
banks. But such sales causing a fall in prices by the
selling offers which they occasion, more loans are
called by banks, as the collateral with them is now
below its former nominal value as estimated by the
exchange quotations. Thus, more and more collateral
is called for, to secure already existing loans and to
cover the shrinkage in exchange valuation brought
about through the previous calls. And this recurrent
process may continue until the lending power of the
banking community is restored by the influx of actual
money from other localities or until the loans and
deposits, lessening hand-in-hand, become low enough
to raise the surplus reserves well above the 25% danger
line.
56 STOCK PRICES

Thus, by their reliance on stock exchange quotations
as measuring the true value of the stock collateral which
they hold, the banks build up the very exchange prices
on which they rely to lend, and, again, when they are
in strained positions, they, themselves, destroy those
very prices. Here, then, is a main cause of the pri-
ority of our stock market declines to commercial
troubles; the banking strain seeks relief by throwing
off its stock market burden, inducing liquidation, and,
in doing so, it crumbles stock exchange quotations.
Only a minor part in the matter can be granted to
those traders who, foreseeing and accompanying with
their commitments the genuine sales brought about
by the banks’ demands, sell stocks short to accelerate
the decline.

But it is possible that a great fall in prices, though
dependent on the connection of bank loans with spec-
ulation, may start from the side of the speculators. It
may, in other words, reflect not so much a weakened
condition of the banks as an over-extended position of
speculators brought about by previous over-extended
bank loans. The exploitation of vast enterprises in
America has had the effect, again and again, of tying
up liquid capital; or, to speak more concretely, of
bringing about a situation where, at current prices,
goods of one sort were not readily exchangeable for
goods of other sorts. Such was the case as regards
exchange securities in 1903. In that year the “undi-
gested securities” which their nominal owners could
BANKS AND THE EXCHANGE 37

neither hold outright, sell to others at current quota-
tions nor carry any longer on banking terms, were
mostly listed on the Exchange. In 1910 the over-
supply was more of securities of other sorts into which
the surplus capital of the country became largely
drawn, leaving too little to absorb standard issues at
previous prices, when they were offered for sale.

In Europe, it is true, the same custom prevails as
with us of lending on the basis of the bourse valuation
of a security. But as our call loan system on stock as col-
lateral does not obtain there, the same drastic situation
is not occasioned. Loans on shares in Europe being
made from fortnight to fortnight, or from month to
month, are, for that length of time, based on a valuation
which they, themselves, will not help to alter in the
meanwhile. Moreover, European banking conservatism
will not lend on the basis of bourse prices where these
differ radically from true values.

Call loans in New York City have been stated by
an authority as about 35 per cent of all loans on securi-
ties. They are particularly plentiful both in times of
financial ease and of financial stringency. In the
former case, borrowers prefer to accept funds in this
manner to get the advantage of the lower interest
rates, and also, because, as the banks are then strongly
entrenched, there is practically no apprehension of
loans being called or more collateral being demanded.
The banks, also, have then no objection to lending on
call, as a call rate can be advanced at any time, if it
58 STOCK PRICES

-

should become expedient to do so. On the other hand,
in a stringency, banks prefer call to time loans because
they can raise the rate of interest as much as they
please or close the loan for good instead of demanding
more collateral, if they wish. Firfally, when money is
neither very easy nor very tight, borrowers prefer time
loans because of the more reliable condition of a fixed
rate of interest, while the banks, on their part, have
as yet no objections to accommodating them in this
way.

When surplus reserves are high, call money rates
are likely to be low, and vice versa. The point cannot
be pressed too far, because banks sometimes show
singular inability to provide against a coming crisis
and continue to lend over-freely much too long. Again,
at a time when there has been much liquidation, call
rates may become low, as the loans already made are
strongly buttressed and there is little demand for
new ones. The period between 1900 and the present
time, however, illustrates the relation sufficiently well.
It may ‘be thought that time loans on commercial
paper are likely to exhibit banking difficulties even
better than those on call on collateral, as the demand
for commercial accommodation is more genuine and
is not to be disguised through the medium of nominal
quotations or through the advent of times when few
loans are demanded. Both sorts of loans, however,
point in the same direction. The table at the end of the
chapter shows the highest rates of call loans each month,
BANKS AND THE EXCHANGE 59

the highest rate for time loans on stock exchange col-
lateral and the range of rates on choice double name com-
mercial paper for 60 to go days.

A drain on reserves precedes a panic, and this drain
is unlikely to cease till the panic’s very end, when the
situation is relieved by a drastic clearing up. Money
rates are thus apt to be at their highest at the very
height of a financial crisis, as in the Fall of 1907. But
it does not follow in general that because rates are
high, the stock market must immediately turn. Specu-
lators can pay high rates if they wish, just as long as
the banks will lend on the collateral tendered. Again,
the coming of easy money may be “discounted” by
speculators, willing to pay, temporarily, very high
rates—witness the instance of December, 1905. Once
more, the size of the surplus deposits or of the surplus
reserves may suggest the coming of very high rates
and of much calling of loans, and speculators on the
long side of the market may get out of their commit-
ments and onto the short side before the arrival of the
conditions which they foresee. Money rates, by them-
selves, are more often the symptom of the momentary
condition of the banks than they are any sure sign,
either of an immediate expansion or contraction of
credit or of stock market movements.

When the lending power of banks grows less, the
stress of the situation is apt to fall on wealthy inter-
este -estopping their plans of finance or reorganiza-
tion and preventing them from taking up new ones.
6a STOCK PRICES

The speculation in the early Fall of 1902, engineered
by Messrs. Talbot J. Taylor & Co. in Southern Pacific
and by Mr. John W. Gates and associates in St. Paul
and other stocks, came to an end through the inability
of the speculators to secure further loans from the
banks. “The demands, both of legitimate business
and of the speculators,” says Mr. Henry Hall in his
study of “Two Stock Market Culminations,” “had
utterly exhausted the loaning power of the American
banks. Five brokerage houses in New York had alone
borrowed $100,000,000. Mr. Gates hurried to London,
in September, hoping to secure further advances of
money at that center to go on with'the bull campaign.
He was unsuccessful, At the New York Clearing
House banks, surplus deposits had fallen from $98,-
000,000 in 1901 to $1,300,000 in September, 1902, going
below zero the next month. Surplus reserves had van-
ished; and there was an actual deficit in the week end-
ing September 20. The natural consequence was tight
money. Call loans touched 8, 20, 20, 25 and 35 per
cent in successive weeks, and for time loans 7 per cent
was demanded.” This was the beginning of the great
decline of 1903.

Again, in the same brochure, the same writer pro-
ceeds as follows: “In the Fall of 1906 the position of
the banks was frightfully strained. Call money touched
from 12 to 36 per cent in every week in November and
December, and while stocks reacted in consequence,
in the latter months of 1906, eminent financiers refused
BANKS AND THE EXCHANGE 61

to believe that the bull market had ended, or lay aside
their plans for railroad déals of various sorts. They
made a diligent effort to induce President Roosevelt
to modify his hostility to corporations or to issue some
statement, which would reassure investors. They also
tried to secure an emergency currency law. Failing in
both completely, they finally resolved definitely to let
matters take their course. In 1907, a few more promi-
ment corporations increased’ their dividends and
manipulation was continued, all for. the purpose of
‘holding the market as’strong as possible, but mean-
while there was a quiet but persistent and tremendous
unloading of stocks by pools, inside interests and mar-
ket operators’—prior to the great fall of the year
which, to a greater or less degree, they foresaw.

As the relation of the banks to ‘the Exchange is ‘at
the very bottom of an understanding of the stock mar-
ket, it may be well to recapitulate the argument of
the present chapter. A bank loan is a loan of credit
based on goods sold, on personal responsibility or on
collateral. Bank loans in New York are limited by the
provision which compels the national banks to keep in
money 25 per cent of their deposits. As New York
is the market pur excellence for ‘securities, the
New York banks are the first to be put in a‘ posi-
tion where it is difficult for them to add to their loans.
The amount of surplus reserves and of the surplus of
deposits over loans are the best indices to their condi-
tion. When surplus reserves are high, call money is
6a STOCK PRICES

apt to be easy; when low or minus, call money is very
likely to be high. The daily settlements and clear-
ances on the Exchange, call loans, valuation of stocks
on the basis of current exchange quotations, and the
necessity for the banks to keep a 25 per cent reserve—
all act together to bring about the peculiar conditions
under which a stock boom and a stock collapse occur.
When a drastic financial situation rights itself without the
infliction of grave commercial losses, the business contrac-
tion will be much less severe than might have been looked
for from the decline in stock prices. This was the case
in 1904 following the 1903 collapse in the stock market.

It is thus evident, with our present bank methods
in New York of investing the bulk of bank commitments
in loans on stock, rather than in commercial discounts,
as in Europe, that our great overdone bull and bear mar-
kets are to be expected recurrently, unless an elimination
is made of the practice of extending bank credits merely
on the basis of exchange quotations instead of lending
on the basis of:conservative appraisement, as with all
other sorts of security. A change of this latter sort
would, in the end, mean that brokerage houses would
have to demand larger margins from customers than
now, to cover part of the sums now advanced on the
shares by the banks.

As conditions now stand, inflation of financial loans
enhances stock prices; deflation reduces them. By an
extension of over-liberal credit on stock collateral, the
banks bring about a boom; by its withdrawal, they
necessitate a collapse.
BANKS AND THE EXCHANGE 63

Range on
Highest Highest choice double
call loans time name paper
on Exchange. _loans. 60 to 90 days.
1900
ODS ccticanden ruched y 12 6 4 to6
ED isdkheiaeuctes 3 5 4 to 44
Mari ic asiscauestneswan 7 5 4%, to 5
JADE? ehsniecigtecha els Gusta 5 4 4 to4%
MAY, 2 csiclanmintoneser ss 3 4 3% to 4
JUNE: comeraaas eae 2 414 38% to 4
DULY: gies ss eatrete nes ees 2 4iy 334 to 4%
AUB) 2 ses nrrieataeeeies3 2 4%, 4 to4y4
SED b e525 6 usseutusan heoy due 2 4V, 4 tod
OCs. sxc cname anes <4 6 5 5 to 5%
NOVE) sei Be cieaigant eae 25 5 414 to 5
DeOGi sox teasinse vows eee 6% 5 4%, to 5
1901
PAN ole oe Mhisdaisinie ote lne a 6 44, 38% to 5
WEDS. 9: visio erenes genase 24 4 312 to 4
Moar. pics destewnes eases 3 4 38% to 4
ADT Keciediiewiacn daa tue bs 4 3% to 4
May os alaissecitiingiadeiasn 75 5 334 to 4
PUNE: ec. redieesigs os 15 4 3 to 4%
POLY oy eo oy Sere eee acs 25 5 4 to4%
ANG oe sche picid aes tenses ¢ 4 5 44
Bepts. eos teennedacs, 10 5 434 to 5
Octs: aoeeciee rhein aes 414 5 4%, to 434
NOVs: acta: Renton eds 5 5 4% to 3
DeGs sa iiec dais eee eee 12 5Y% 5
1902
Jatt hse iibavistes 15 5i, 4 tod
Peabo etrsid ss seyacner 3 44 4
MGR. «25 nigh auionasnnes 5 434, 4 to
ADE Soo tenses schalenen nt ba 7 434 4 tod
64 STOCK PRICES

; Range on
Highest Highest choice double
call loans _ time name paper
on Exchange. _ loans. 60 to 90 days.
1902.
MAY sce startenentucsen ns 25 5 4%, to 434
JUNG? beeen’ 5 5 4 to 4y%
JULY Sy: dace ereuiare ss 7 5 4%, to 5
AUIBS or devia an deed 51% 5Y 44 to 5
Septins adios erisines» 25 7 *5 to 6
Obes ijesss a cea ecbaais 35 7 *51% to 6
NOV) shige checcteyiee aaa ets 7 t 5% to 6
DOG.) 22320333 eh ae 13 6 *6
1903
TON drinsicetenmuaoseaas 15 6 434 to 6
Heb: ecusagey rom Gane 4 5 434 to 5%
Mary yc eteine wateeiass 8 6 54 to 6%
Apres. Si hastet ene: 15 534 5 to 5%
May. 2idenni natin 3 434 4, to 5
June .. 2. cece eee ee 41, BY, 5 to 5%
TULY’: gisttec were esse ead 10 3% to 6 5 to 534
AUB Rad 4a geebees 3 6 534 .to 6
DSepbi ine ntcece seas 3 6 6
etal cto neiemenaniints 5 BY 5% to 6
Wetts. aur wun ins ves eeu 9 6 534 to 6
DEG een ameestenn es 9 6 5% to 6
1904
PAM reins Be eresaee. 6 5 4, to 5%
Rebctaniaoten sc tnron eee 2 4, 4% to 5
Mare cata jo stinhedionas 2 4%, 4y% to 5
INDE se creghdotrie av bea 134 4 3%, to 4%
May’ ac says eaceuakiees 2u, 44, 3% to 4%
TUNE caus se visti tones 1% 3%, 3% to 4%
MLW? ee dentied Meiek te aeaaias 1% 383, 38% to 334

BANGS ios car sted 1% 8y% 8% to 4
BANKS AND THE EXCHANGE 65

Highest
call loans
on Exchange.
1904
Sept, scaigacgueaecses 2y,
Otte wassmmanmncedan ss 24%
NOV: 2a:saa ieee canvas 4
DECK ro os ice ceculaintia 5
1905
JOD we ciprshsple sm ecee since 31%
Hebe: ssszenteridwe umes 3
MSs. ctidcs cscs s rites 4
ADT) Oy ticoceiieacadnnsas 7
MAY? sccmnstaciedovig ye eae 3%
JUNE: 2evsnuwere dias: 6
DULY? seco ab shugrwereneae Tee 31%
BUGS circcannigrevpennesndls 3
Septs egies sscwsnyened os 7
OGtS seceeeeseerinens 8
INOW. se desdeccvssees Reeaencdvs 25
DGG ids aeons enced poi dua 125
1906.
JAW sccsecus ciate esta aa ts 60
ODS. seiedet-eiivivindacains eS 8
Mary disap eimai 9
Apr sasseesagense pt 30
MAY? ocoepcndec chanaiees 12
PUIG? sissies Sad eobyanies tloss irene 6
July” saceecns regen vies 8
AUG: scie seemless 12
Sep bic esaensh: sean suacinannens 40
Oe be sa avira ee raeertanasenetetalans 9
Nov. 27

Range on
Highest choice double
time name paper
loans. 60 to 90 days.
4 3% to 4%
4 4 to 4%
4 3% to 4%
4 4 to 4%
3% 4%, to 6
3% 4%, to 5%
4 5% to 6
4 5 to 5%
4 4% to 5
4 5 to 5%
4¥, 5 to 5%
4 5% to 6
41% 6
43 5Y, to 6
6 5% to 6
6 51% to 6
8y, 4% to 51%
5 4% to 5
5% 5 to 5%
6 4% to 5%
5Y% 4%, to 6
5% 5 to 5%
6 5 to 5%
6 5% to7
TY 6 to7
6% 6 to7
61% 6 to 6%
7 6 to 6%
66 STOCK PRICES

 

Range on
Highest Highest choice double
call loans time name paper
on Exchange. loans. 60 to 90 days.
1907.
JOD. sadauee cae csnseass 45 7 5% to 61%
EDS oeciwaeoaeeydaanes 6 bY, 5% to 6%
Mar. .....0c cece eee 25 8 6%
Ts cee esas b cta ceed ie ge 4y, 5 5% to 6
May 4 43), 51% to 6
DUNG: cerictratindio naw sea e aia 12 6 54% to 6
Lye seside akon ona ees 16 6 5% to 6
UB 6 cepestctrooncnstn nis auedioiars 6 7 6 to 6%
Sept. « siurciavceavaa nas 61, 6° 6% to 7
Oct: sesuaeaarsscsseiesy 125 7 *7 to 7%
NOVS. eieitcctavsuitactiaee 75 16 *T to 8
DEG: recoicanintate hive 25 18 +8
*Mostly nominal. tPractically no business.
1908.
DADs. vie eh dhmeomeanewas» 20 7 5% to 71,
Reba Ax renaeeaneas ay, 5Y, AY, to BY,
Mats os34 anpantoerniey se 2u, 5 51% to 6
APES e5a su said eeuntes 2 5 4 to 5%
IME Sa 2s. sk exaetedccsuoet hie 2 43, 3% to 4
DUNE: oo reeies amare aes 1% 4y, 8% to 3%
DULY. ccccses ches ates a 1344 4 3% to 4
MU: shea bwasuase wean 1% 4 3 to4
ISO Pte. G55, adie tesensginy on Mea-ces 24, 334 31, to 4
OCE sicsien snd vin shanties 2 4 4 to4%
NOVA setsu x cat atenieks 3 4 3%, to 4%
Dees. vse tay ye ot ete AY, 4 312 to 4
1909.
DaMs, wan dan eens dee cust 3 3% 3% to 4
Feébs sarcialwmaae vice 3 3% 3% to 354
BANKS AND THE EXCHANGE 67

Highest
call loans
on Exchange
1909.

MAT Sais cede Gacasrotcwdeonayedantcs 2%
BASU A tats Spccective aupoepeneeae 2
MOY? vixgins meeutanaed 23 24.
JUNE- 3 corr eweureaewen hs 2%
SMW 3s Sessscsueucna cdicdintoniedes 2
Aug. 24
Sept: scecseranianingeia se 3

Oct: sivas can eeaees 6

INOVE gains oasecaxemeocaves 6

DOG e sNaictncdebee musrteoanateonets 7

1910.

JON. sexe csemeneed sac 14

PODs cede kiasencd diets 3
IMR. alee acces aeecuanug dies 38%
BAD saci eitcacceeunte hee’ 7
May: 21.22. geeeenaraes 6
JUNE ccc st Ree 3%

IU G -5.5 scactusapontuentues ots anes 3
BUG pistes Bids septtentenals 2
Bepts .ciscnmnsaneeies s 3

Octs. 2iecemus semawenes 4

INOWe secs Fa pauierarenbawe 434,

Range on
Highest choice double
time name paper
loans. 60 to 90 days.
3% 314 to 3%4
3y 3 to 38%
334 3 to 3%
3% 3 to 3%
334 3 to 38%
4 4 to 4%
5 334 to 4%
5 4%, to 5%
5% 5 to 5%
5 4% to 5%
43, 4% to 5
4y, 4 to 43%
4, 4 tod
5 4% to 5
5 4%, to 5
434, 4% to 5
5 5 to 5%
5 5 to 5%
5 5% to 6
5 5Y, to 6
54% 4y to 6
44, 4 to 5%
VI.

The Floating Supply

The floating supply of a stock may be best defined as
that part of the outstanding capitalization which is held
for a speculative advance. Its amount in the market
varies with each change in quotations ; some stock not for
sale at the current price may come out a point or two
above, or be forced out, from lack of margin, a point or
two below, while still other shares will require a fluctua-
tion of many points before they are for sale. In general,
the floating supply may be taken to be all stock outstand-
ing except that held for investment purposes, whether it
be dividend paying or whether dividends are merely hoped
for, and except that further portion of stock held for
purposes of control. As ‘here defined, probably most of
the floating supply of listed stocks is carried on a margin
with brokers or is pledged at banks, though some of it is
held outright; on the other hand, of the fixed supply—
that held for investment or control—a portion also is to be
considered as always in pledge.

In some stocks the floating supply is very small; in
others it comprises all the shares except the few held for
purposes of control. Figures at all exact on this subject
are, as a rule, known only to the general officers and direc-
tors of a road and those whom they may choose to take

68
vous of

 

3

 

DATES:. dur? 578.9 30 uw

RISE OF CHICAGO, ROCK ISLAND & PACIFIC IN 1902.
70 STOCK PRICES

into their confidence. Not that they are always known to
them, for sometimes stock, even for investment, changes
hands without transfer on the company’s books. Never-
theless, while exact figures on this matter are out of the
question, something approximate may be sometimes
guessed at. Thus, from the large number of investors in
Standard Oil stock it may be inferred that its fixed capital-
ization is large and its floating supply relatively very
small, while from the vast dealings in such stocks as
Reading in recent times and St. Paul some years ago, it
might be conjectured that a very large amount of these
stocks was afloat in the Street.

It is often said that a stock closely held is easy to mark
up; and, taken literally, the statement is true, for if there
are few outsiders’ shares to come to the market for sale,
it is obvious that it must be easy for the manipulators to
mark up the price of such as they possess by the simple
expedient of a few matched orders. But in practice the
facts do not work out this way. It will be found that a
stock is rarely manipulated upwards unless its floating
supply is quite large in amount, whether or not it be also
relatively large to the amount of the fixed supply. True,
a stock with a small, closely held floating supply is easy to
mark up. But then to whose advantage is it? On the
hypothesis, those responsible for the manipulation can
accumulate at the start little more of the stock than they
already own, so that their object, if the stock have no in-
vestment value, is simply to dispose of their own holdings.
But if the number of shares of the stock is small this is
THE FLOATING SUPPLY 7X

hard to do at the top prices ; the same certificates, to make
anything like a market, have to be sold over and over
again; room traders and brokers’ customers are alike shy.
of the stock; violent fluctuations occur on any attempt to
liquidate by an outsider who has purchased a certain
amount, and not infrequently the whole boom goes to utter
collapse at the top through the efforts of some green
insider to get the public to relieve him of his holdings.
On the other hand, a stock whose floating supply is
small, because the shares have a high investment value,
presents another situation, but one also which tends to
prevent manipulation of a successful sort. An attempt to
bull a stock of this sort results in one of two things. If
the stock is very high grade the manipulators may mark
up the price without reaction of large moment, as was
done some years since in Lackawanna; here the price
touched at once the figure which, had the stock been left to
the ordinary demand of investors, it would have reached
anyway, though no doubt much later on. But in this
situation what the manipulators have for sale is too scanty
in amount for them to make much out of it, nor can they
hope to interest the public to any extent into buying a
high-grade investment stock at the very high price it has
reached. In the second case, mentioned above, if the stock
has simply a very large number of investors who own a
large percentage of its shares, then it will be hard in this
case, also, for the manipulators to accumulate a good-sized
line to dispose of except at prices higher than they want
to give; besides this, as the bulling is apt to bring stock
7a STOCK PRICES

from unexpected sources, both investment and speculative,
on the market, the pool may have to buy at the prices to
which they have put the shares, more than they feel like
taking care of. The first thing in all manipulation for the
rise is to clean up the floating supply or to see that it is
tied up so as not to come prematurely to market; but in
the case of a stock like Pennsylvania this is impossible.
Thus a stock with a large fixed supply held by many in-
vestors offers little attraction to a syndicate which thinks
of manipulating it. For these reasons Pennsylvania stock,
the last and slowest to go down in a panic, is one of the
hardest to put up rapidly in a bull market. (See chart.)

Shares closely held may be kept at prices which seem
hardly justified by the conditions; provided that the hold-
ers generally are inclined, as they sometimes are when few
in number, to acquiese in the valuation and not to sell. This
explains the prices at present of Lackawanna and of Lake
Shore. Something of the same sort in the past has been
the case with the stocks of the Chicago & Northwestern,
the Great Northern, the Northern Pacific and the New
York, New Haven and Hartford among railroads and the
General Electric among industrials. New York, New
Haven and Hartford has paid 8 per cent yearly for many
years past. In 1902 it rose to 255 in April; since then it
has fallen steadily and now sells at about 140. Its capitaliza-
tion has increased from 80 millions in 1900 to over 300
millions by 1910. So, Northwestern in 1902 sold at 270,
though then paying 7 per cent as now. There has been an
increase of 80 millions in its securities. Seven per cent
Fold out
THE FLOATING SUPPLY 73

Great Northern in February, 1906, rose to 348 and, later
on, in September, to 341. Seven per cent Northern Pacific
in the same year rose to 232%4. General Electric, then as
now, an 8 per cent stock, rose in 1902 to 334. None of
these extreme rises would have been possible save through
banking aid extended (as described in Chapter V) to the
interests bulling these stocks.

St. Paul used to be one of the easiest of all stocks to
manipulate. The investment holdings of it were not well
distributed, but confined to a few wealthy interests whose
investment stock did not come readily to market. More-
over, the great owners were, also, to a large extent those
interested in the “rigging.” The same men or their lieu-
tenants, who owned great blocks of the stock, would accu-
mulate a large line of that floating in the Street; this was
advanced rapidly in price, and then it and as much of the
original holdings as desired were disposed of to outsiders
whose hopes had been raised to a high pitch for all sorts
of melons to come. As this process of accumulation and
distribution of St. Paul was done time and again, a cer-
tain amount of the stock each time passed into bona fide
investment hands and was taken off the market. Less
and less of the stock was left floating, and with the devel-
opment of the road the shares gradually lost much of
their market importance, which is now held by Union
Pacific and Reading. In general, it may be stated that
a good corporation stock is likely to become increasingly
difficult to manipulate as time goes on, because the float-
ing supply, which furnishes the profits to pools, becomes
74 STOCK PRICES

smaller and smaller and because the investment supply
has become very large (as in the case of Pennsylvania).
As a country increases in wealth, the stocks and bonds of
established corporations tend to belong entirely to the in-
vesting classes and to be kept out of the speculative
market.

While at the top of an advance the floating supply in
the Street becomes small, because distributed among the
public, which usually retain some of it permanently if the
stock be of real value, at the bottom of the market, on
the other hand, and at various intermediate points, the
shares held by outsiders were partly acquired by them
at the top in the hopes of a farther rise. The owners of
such shares, which areeusually carried on margin, grad-
ually part with their high-priced stock in disgust, as quo-
tations pursue their downward course. But stock of this
sort does not, as a rule, lodge at once in the hands of
those strong enough to hold it till another advance is
engineered. Such shares are for the time being more
likely to be absorbel ‘by floor traders on the exchange, by
other speculators or by investors. When the bottom has
at length been reached the accumulative process may be-
gin again, either then or later.

Manipulated stocks like Reading and Union Pacific at
present and St. Paul in the past move over a much wider
range than those which are not or cannot be taken in hand
by speculative pools. The former go much higher in a
bull market and much lower in a bear market than the
latter. Thus the difference between the low prices of
THE FLOATING SUPPLY 75

1907 and the high prices of 1908 was 85 points for Union
Pacific, 72 for Reading, 60 for Southern Pacific and 59
for St. Paul (this stock being still speculative in its move-
ments) ; while for Pennsylvania the difference was 2814
points and for New York Central 27. Of course, the
volume of sales in a manipulated stock greatly exceeds
that in stocks moving more normally; in 1908 the sales
of Union Pacific were 21,100,000 shares, of Reading
35,300,000, and of Southern Pacific 8,800,000, while of
Pennsylvania they were but 4,100,000 and of New York
Central 1,800,000.

Thus it would seem that to be a speculative favorite a
stock should have a large floating supply and should be
held by but few investors. This explains the difference
in the movements of Reading and Union Pacific on the
one hand and of New York Central and Pennsylvania on
the other, for it may be put down as sure that these two
well-known stocks would be natural market leaders if it
were possible to make them so. It may be thought
strange that Reading is not largely held by investors, but
as a matter of fact this road has never recovered the
prestige it once had with the small investors ; especially in
Pennsylvania, where the stock would find a natural lodg-
ing place, are its past failures held in memory.

It is worth noticing that in an advancing market a con-
servative stock like Pennsylvania is practically certain to
show a small gain for the buyer who wants but little risk.
For speculation on a small margin it is hard to pick a
much surer stock than one of this character, unless, in-
76 STOCK PRICES

deed, a very low priced one is chosen, where, however, the
danger of adverse fluctuations is almost as great, count-
ing by points and is greater, counting by percentages.
High grade, slow moving stocks have also the ad-
vantage that they are rarely influenced by special
causes and that when they are so, as by a new
stock issue, the matter is soon public. The man with
$5,000 with which to speculate who buys Pennsylvania on
a ten point margin in the hopes of a five point rise is
wiser than he who buys Union Pacific on the same size
margin looking for a ten or fifteen point profit. The lat-
ter may, to be sure, make largely, but he takes unwise
risks; the former, if careful at all, can hardly, at the
worst, lose more than a point or two and stands a good
chance to make a profit.

Dealing, therefore, in a stock of large capitalization,
held largely by investors, and with a floating supply small
as compared with that of other stocks of equal or nearly
equal capitalization and prestige, affords one of the safest
opportunities for the man whose margin is small, meas-
ured either by what is in his broker’s hands or by his
whole available capital. For these reasons, Pennsylvania,
and a very few other stocks offer peculiar advantages
to the small speculator of conservative ways of thinking.
VII.
Manipulation

As a rule, speculative buying when successful involves
awaiting a favorable opportunity to make purchases
cheap and speculative selling awaiting a time to sell
when market prices are high. When, however, a specu-
lator, or a coterie of speculators, not content with such
waiting methods, endeavor to bring about cheap prices
for stock they wish to buy and high prices for stock they
wish to sell, we have what is called “manipulation” in
America, in England, “rigging the market.” The popu-
lar impression as to the immense importance which pro-
ceedings to these ends. possess is apt to be exaggerated.
A speculative purchase may be the same in amount
whether made by many speculators personally unknown
to one another, but who are, each of them, on the right
side of the market, or whether made by all in concert
and knowingly. The traders who are right in unison are
likely to be right separately. The momentum of manipu-
lative buying in a stock may be resolved into the separate
upward thrusts which otherwise might have been made
separately, and which, in any event, would probably have
been made in some securities with the same general up-
ward effect on the market as a whole. The importance of
manipulation lies in the selection of a stock for accumula-

77
78 STOCK PRICES

tion at low figures and in its distribution at higher figures
and in the fitting times to make such purchases and sales.
It also depends on the general methods by which the im-
pression is given the public that they should buy when the
manipulators wish to sell and sell when they wish to buy.

Speculative tactics of the first sort usually have their
expression through a pool in a stock, where a number of
separate traders or, occasionally, firms and financial in-
terests, agree to be responsible for such a number of
shares of the security in question, the prices at which and
the time when the shares are to be purchased and sold
being generally left to the discretion of one or of a few
members of the pool supposed to be versed in market
matters. Sometimes the stock has only to be quietly
bought up, the promoters of the deal taking all offerings
of the shares but not bidding for any stock till it becomes
evident that at the particular range of quotations obtain-
ing, no more of the shares are for sale. Bids at slowly
rising prices are then put in till the requisite number of
shares are obtained or until it is evident that no more can
be accumulated at sufficiently low prices. Sometimes,
however, the shares have not to be bought in the market
at all. They may be already the property of members of
the pool given them at the organization of the corpora-
tion or for services, later on, of some sort or another.
Or they may simply be shares which have been long in
the possession of the owners without having found the
ready market which it is now desired to create.

In other cases, to obtain a large holding of shares it
MANIPULATION 79

may be necessary to make the present holders sell. The
stock as it stands may be too high priced to be worth the
expense of accumulating. To reduce the price of a stock
for this purpose, a judicious amount of short selling ap-
pears, and if the manipulators ‘have control of the com-
pany, its dividends may be cut, hands laid off or even the
plant shut down, till the public, alarmed and disgusted
with the course of things, throws its shares on the mar-
ket for what they will bring.

But, however procured, the distribution of a line of
stock means exciting interest in the public in -connection
with that stock. The methods of doing this are manifold.
In the end, however diversified, they amount to creating
a market appearance of activity-and strength in the stock,
which in the end will lead the public to buy ‘heavily in
the hope of still higher prices. It is worth noticing that
neither strength nor activity by itself will lead the public
into the market; the two must be combined. This is a
fact which has not infrequently been forgotten by would-
be manipulators with the laudable but impracticable in-
tention of husbanding their resources and making no
more fictitious purchases and sales than seem necessary
to keep the stock in public view. The attempt, some
years ago, to arouse a market for the shares of the
American Ice Securities Company failed for this reason.
The advance in the stock price was steady, continued and
without any dangerous reactions fitted to scare the public
off. But the trading was too scanty and the effect given
was exactly what should have been most concealed, viz.,
80 STOCK PRICES

that the shares were the plaything of a very small coterie
who could do with their price whatever was wanted. The
stock which touched 977% in December, 1906, fell to 8%
in October the next year, and has hovered in the twenties
and thirties most of the time since then.

During the upward course of a stock, dividends, if
possible, may be increased, rosy reports made of earn-
ings and in every possible way the public incited to buy
the quickly booming property. When a large and broad
market is made for the stock, when the public is coming
more and more into the security with buying orders, en-
thusiastic about the very high prices soon to exist—at
such time the members of the poo! sell.

Speculative pools in important stocks arise only when
the general market itself has an upward trend. This is
also true to a very great extent of pools in smaller stocks,
such exceptions to it as have occurred having done so
chiefly through the ill-timed judgment of their sponsors.
To endeavor to buy cheaply in a raging bull market is im-
possible ; not less so is it to sell dear amid generally de-
pressed prices of other securities. The whole market
moves very much as a unit; the differences between vari-
ous stocks being not that they move at the same time in
opposite directions, but that one moves faster than an-
other in the same direction. Pools may be regarded not
so much as causes of this general market movement as
specialized expressions of the character of its speculative
activity. If there were no pools, the present members
would still exert their financial strength in the market,
MANIPULATION 81

though, it may be, possibly in other directions. A pool
simply concentrates financial power into one channel and
uses it for a definite, fixed purpose with less waste than
would be incurred through the disjointed efforts of many
individuals.

Manipulation, in the sense of the conscious direction,
by concerted ‘holders, of capital exists at almost all times
in the market to a greater or less extent. But it exists
successfully only in so far as the manipulators correctly
foresee the general tendencies of the future. Interest
for any length of time cannot be excited in a stock which
has no real future before it. The facts leak out. Add to
this, that with great corporations their conditions nowa-
days can be concealed only up to a certain point, though
it must be confessed, from certain events in the last few
years, that this concealment can take place to an extent
which one would be inclined to think impossible without
knowledge of the actual facts.

In a successful manipulation, it is not exactly true
that the public are deceived. To a large extent, they
deceive themselves, with hopes of vast dividends, melons,
and so on; though, no doubt, the sponsors of a market
movement count on this very self-deception occurring.
The public think the shares will have very much higher
prices and would not buy except as laboring under this
delusion. Even when the public happen to buy at prices
fair from an investment standpoint or as representing
the equity of the shares in the total gross valuation of the
concern, the manipulators accumulated the shares at
prices very much lower.
82 STOCK PRICES

In the case of certain stocks the public almost year after
year buy at the high prices what the same interests or
their successors buy at lower figures. The stock of the
American Sugar Refining Company used to go through
upward and downward movements with extreme regu-
larity, though with much wider swings one time than
another. For years past Brooklyn Rapid Transit has per-
formed similar evolutions; at times the distribution was
in the year following the accumulation. There are very
few stocks of which a chart from 1899 to 1909 presents
such an odd appearance to those conversant with market
movements. ‘The object of the manipulators seems to
have been, to obtain at least 15 to 20 points profit each
year. The whole gist of the matter is that manipulators
take advantage of the tendency on the part of the public
to buy on the basis of present conditions, that is, not to
speculate, “look ahead,” at all.

Manipulative activity explains the tendency in a rising
market for stocks to go up one or two rapidly at a time,
instead of all together. The chief speculative coteries are
at the moment dominant in the stocks whose prices are
quickly advancing. Very frequently, a group of the same
traders, particularly of those very wealthy coteries known
popularly as the “Standard Oil crowd,” the “Union
Pacific following,” the “Morgan interests,” and so on,
will, with the aid of the banks as described in Chapter V,
put up the price of one stock after another, when they
expect that the public will shortly become interested in
the market. In these cases, it is the higher grade stocks
which move first.
MANIPULATION 83

In the case of the activity of these great interests, man-
ipulative tactics sometimes take on a different form. The
principle of allowing the public to deceive themselves is
applied in a more subtle form. For example: From
the beginning till now, affairs of the United States Steel
Corporation have been conducted in a manner above
board; yet, the public bought the stocks at the outset, in
1901, with the idea that dividends would be paid straight
on. Few experienced persons in the steel business be-
‘lieved this to be possible in connection with the common
shares, but, likewise, no one of importance in the business,
proclaimed this belief. On the contrary, the “insiders”
sold their stock at the high prices made possible by the
belief, and, afterwards, when the price of both sorts of
shares had fallen immensely, bought them back for a song
and waited serenely for the trade revival, then already on
the way. In other cases, the manipulation off the Ex-
change has been more directly deceptive. Of very few
important shares is this truer than of those of the
Amalgamated Copper Company in 1901 and 1902.

It might be enquired what would be the result if the
public became practically familiar with the situation in
Wall Street. The only answer can be that the processes-
of accumulation and distribution would be confined to a
much smaller range of prices and that the quotations for
stocks would, consequently, not fluctuate so far as they
now do from the central figure which may be regarded as
giving a fair idea of their value. But it does not appear
that such farniliarity will obtain. Haphazard speculators
84 STOCK PRICES

are, many of them, quite capable of understanding the
facts of the situation; but they fail to identify the phases
of such situation when, afterwards, it presents itself to
them anew.

Manipulation in stocks which are not traded in on the
great exchanges differs necessarily in some important
features from such as obtains in the case of listed securi-
ties. In the former instance, the manipulators can rarely
obtain much assistance from banks; they have, conse-
quently, to bear the brunt of the financing themselves.
Manipulation off the exchanges, therefore, is almost al-
ways confined to stocks of rather small capitalizations,
unless, of course, the capitalization be a merely nominal
one. As the pool can obtain nothing like the percentage
of profit on its holdings for the same size rise as it would
have obtained had the burden been largely borne by the
banks (which would have allowed the purchase of many
more shares), it follows that speculative coteries in such
shares nearly always endeavor to put them to extreme
price heights, to make, in this way, a good sized profit.
As they can carry only few shares, they try to get the
biggest sort of a gain on each. In such cases it should
be noted there are no marginal accounts to be quickly dis-
turbed. Consequently, as long as a general fright does
not occur, markets of this sort are apt to rise to heights
unheard of in similar situations on the exchange. The
New York Curb has witnessed some sensational flights in
the prices of stocks which had little or no collateral value
with banks, and which pools and public alike had, there-
MANIPULATION 8s

fore, to carry outright or almost so. In 1906, the price
of the Nipissing shares was run up from par at $5 to
about $34—an increase of nearly 600%. Flights almost
equally as wild were performed about the same time by
other Cobalt shares. Lawson’s campaigns in some mining
stocks are also worth notice here. In the year just men-
tioned the price of Trinity ($25 par) shot up from $10 to
$40 in a few weeks—a rise of about 300%. In this rise
it should be noted that the well-known speculator in-
structed his followers to buy for cash only, and that, as a
matter-of fact, so great was the suspicion of Mr. Lawson
in brokerage and banking circles in New York as well as
elsewhere, that it was almost impossible, in many places
totally so, to buy any other way.

It thus appears that the differences between marginal
and non-marginal markets and between manipulation in
the two depend on the way the floating supply of shares
is carried in each case.
VIII.
Rising and Falling Markets

It was pointed out, years ago, by the late Charles H.
Dow, that market movements divide themselves into
three classes as regards length and duration of upward
and downward swings; there are, first, the great swings,
cuch as those from September, 1900, to August, 1902, or
from 1904 to 1906, which rarely cover a period of less
than a year or two and are sometimes longer. Then,
there are the shorter swings of a month, two, three or
more months, such as may be seen in plenty between May,
1901, and August, 1902, in the generally rising bull mar-
ket. Finally, there are the minor variations from day to
day, which form part of the secondary swings, just re-
ferred to, in the same manner as they form part of the
great primary swings. No doubt, smaller fluctuations, or
swings of a few hours or a day’s movement could be
fitted into the tertiary swings as they are into the
secondary. The whole appearance of the market from
year to year might be compared to the waves of the ocean
where the great waves are crossed by smaller ones which,
again, are swept by lesser ones and so on down to minute
and scarcely perceptible wavelets. The primary swings
mean movements in the market in one direction of fifteen,
twenty, thirty or more points, the secondary of four, six,

86
RISING AND FALLING MARKETS 87

eight or more points. The day-to-day variations within
these secondary swings, are of a point to a few points—
very often mere reactions from the course of the sec-
“ondary swings which they follow. Of course, it should
be understood that large secondary swings may occur
within a day or two or even within a few hours, as wit-
ness the two hours’ panic on May 9, Igor.

It is worth notice that the market swings are now much
more extended than they were years ago and that the
great swings in the eighties and nineties are barely the
size of our secondary swings. This is because the general
price level of stocks was then much lower. There were
then no great railroad stocks selling over $200 a share
and very few selling at par, while the great majority were
much below.

In considering the peculiarities of bull and bear mar-
kets, a careful distinction should be made between an up-
ward secondary swing which is a rally in a bear market
(as in April, 1903 or in March and April, 1907,) and a
great, upward, primary swing, such as that which ran
from the end of 1907 to August, 1909. At the end of
a secondary swing in the same direction as, and a
part of, its primary swing, a reaction of about one-half to
three-quarters of its extent usually occurs in the oppo-
site direction. For examples see (on the charts in Chap-
ter IX) the rallies in March and in March-April, 1907,
that in June and that in August of the same year; in an
advancing market, that of October, 1906, and September,
1905, May-June, 1908, and August-September of the same
88 STOCK PRICES

year. It will be observed that such reactions are some-
times broken by short tertiary swings within themselves
in the direction of the primary movement. It should,
further, be observed that a reaction at the top of a move-
ment may pass into the beginning of a swing in the oppo-
site direction, whether such swing be of primary or of
secondary duration. Thus, in September, 1902, and in
October, 1906, the recession passed into the beginning of
the great downward swings of 1903 and 1907, respec-
tively. The forces dominating the market have changed
in character. It was noticed in a previous chapter that
this reversal of the character of the market was usually
preceded by dullness after a falling market, but accom-
panied by activity in a rising market. In other words,
bear markets may follow at once on the heels of a culmin-
ation of a bull movement, but this is not so of a brit!
market following on a bear.

To understand why these differences should subsist
between bull and bear markets and to get a better under-
standing of what is, after all, the greatest difference from
the speculator’s standpoint, it will be necessary to exam-
ine somewhat closely the function of short selling in the
market.

Short selling represents the views of the conservative
interests in the market. It is a brake on undue inflation,
the check which halts a too rapid speculative rise. Com-
mission house customers, individual financiers and great
financial interests are relatively seldom short sellers; the
customer because he lacks courage and knowledge and
RISING AND FALLING MARKETS 89

the large financial interests because speculation is but an
adjunct to the flotation and distribution of the shares of
their enterprises, and, consequently, their primary aim is
to enhance, not to depress prices. Of course, great finan-
ciers have at times allowed or encouraged a depression,
whether long or short, with the object, or, at least, the
intention, of taking back shares at lower prices, them-
selves.

Nor, save sometimes at the end of a long decline, are
brokers given to encouraging short selling by their clients.
To encourage it, is to favor pessimism, and experience
has shown that the chief result of a firm’s encouraging
‘pessimistic feeling is simply to keep its own customers
from trading at all.

The most obvious thing connected with short selling is
the small number of persons engaged in it at any one
time whatever, compared with the number of those who
are bulls at nearly any time. The chronic short sellers
are, in fact, limited to those members of the exchange
who are room traders and to a certain, probably small,
proportion of the professional and semi-professional
traders.

In a steady market, therefore ; in an advancing market ;
and, almost always, even in a declining market (unless
the decline has long progressed), those long of stocks
greatly outnumber (with much larger aggregate of com-
mitments in shares) those short, the former class compris-
ing, as it does, not only all speculators for the rise but
the great army of investors. Hence a slump is nearly
90 STOCK PRICES

always more necessitated by conditions, more independ-
ent, that is, of the wishes of the great majority of buyers
and sellers, than is a bulge. In a bulge nearly everyone
interested is glad to see prices go up; in a slump, save,
possibly, sometimes in an active long-continued bear mar-
ket—few like to see prices go down. In a day’s slump,
all that is necessary for prices to decline, is that the hold-
ers of stocks should do nothing, and they will see the
prices of their shares go down. Soon marginal holders
begin to let go of their constantly weakening accounts
and all they can do now is what they are forced to do—
liquidate. Hence the reason that an active rising market
may be the immediate precursor of a bear movement, but
that a bull movement is preceded, not by activity with
weakness, but dullness: the bear market is forced; the
bull market is brought about by intentional participation,
and, after a great fall neither financial circumstances nor
sentiments are apt to permit of an instant reversal of the
weight of the trading.

Thus, at the top of an upward movement, whether it be
an advance of a few days or of months, whether it be
great or small, there are two classes—the bears and the
profit takers—to retard the continuance of the advance.
But in a declining market the profit takers—here, the
successful short sellers—are, indeed, there, though few in
number compared with the profit takers on a rise, because
the short seller is rarer than the buyer for the rise; but
there is no class to correspond to the bears in an advanc-
ing market, no class, in other words, to endeavor sys-
RISING AND FALLING MARKETS 91

tematically in a falling market to stop the fall and reverse
its course as the bears in an advancing market endeavor
to stop the advance and reverse the course of the bull
movement. Once again, to the same point is the fact
that the average room customer, who is a bull, usually
takes small profits when he takes them at all. Usually he
fidgets in-and-out of the market. But the professional
short seller, when not a scalper, stays with the market (as
of course, does the “wise” bull in his proper time) and
lets his profits reasonably run.

In a bull market the public repeat and re-repeat their
commitments on the long side, but in a bear market
after once closing out they do not, as a general rule,
re-enter as buyers for some time thereafter. The pur-
chases by the public in a bull market mark the beginning
of a transaction which has to be closed by a sale unless
the stock is taken out of the market, but the sales by the
public in a bear market mean the end not only of that
particular account, but usually of any account for some
time to come. There are no large public purchases in a
bear market to give it repeated upward thrusts.

To put the whole matter in a nutshell, there is always
a large reserve of prospective selling in a bull market
which, as higher and higher prices are reached, tends
to retard the speed of the movement; but in a bear mar-
ket the reserve of buying strength is much smaller in
proportion to the extent of the price movement.

From the foregoing we may draw a preliminary con-
92 STOCK PRICES

clusion that prices go up slower in a dull market than
they go down in a bear market.

If we take the great bear market of 1907 we shall find
that railway stocks as measured by the average prices
of twenty rails, fell 56 points net between December 11,
1906, and November 21, 1907—a total of 345 days, in-
cluding Sundays and holidays. On the other hand, the
bull market of 1908 and 1909, counting from February
13, 1908, to August 17, 1909, rose 47 points net, as meas-
ured by these averages, in 551 days. Thus, the twenty
rails rose on an average .085 points a day in the bull
market and fell on an average .160 points a day in the
bear market—or about twice as rapidly.

Or, if omitting swings of less than two points in either
direction, we count up bull days and bear days in both
markets, we find that in the bear market of 1907 there
were 213 days of fall, totaling 92 points, and 132 days of
rise, totaling 51 points. (The difference between these
figures is not the true net of 56 points on account of the
omission of swings of less than two points.) On the
other hand, in the bull market of 1908 and 1909 there
were 432 days of rise, totaling 90 points, and 119 days
of fall, totaling 42 points. Thus, as before, we arrive at
about the same result, namely, that a rise in a bull mar-
ket takes twice as long as a fall of an equal number of
points in a bear market; or the average daily rise in a
bull market is only half the average daily fall in a bear
market.

Daily slumps in a declining market are not the same
RISING AND FALLING MARKETS 93

aS bulges in an advancing market. Examine the day-to-
day prices of some active stock during the bull move-
ment of 1900 to I901 or the advance from February,
1908. With these courses of prices, compare those in
1903 and 1907. In the bull markets, it will be found
that the rises in price (the upward secondary move-
ments), take up as a rule a much longer time for the
same number of points advance than do the declines in
the bear markets. That, indeed, in the bear markets, the
decline goes on not so much by a continuous retrogres-
sion as by a series of acute downward fits and starts.
Both bull and bear markets may be marked by smart
reactions; but, here, too, the rally in the bear market,
like its rapid precedent fall, is relatively quicker in the
time of its occurrence than is the recession in the bull
market after the precedent rise. When the downward
movement in a bear market abates, prices, after the rally,
fluctuate about the same points till a recurrence of selling
pressure induces another break.

Yet even the foregoing figures do not fully show the
great difference in rapidity of price movement in bull
and bear markets.

The upward progressions in prices in 1900 to 1901 and
in 1908 to 1909 lasted for weeks and months continu-
ously with a few reactions also of considerable duration
but moderate in their extent. But, on the contrary, in
1903 and in 1907, the great downward swings which gave
the character to the whole bear movement of each year,
took place in very few days. The breaks on a few days
04 STOCK PRICES

in January, 1907, on March 14, March 25, August 7 and
8, October 14 to 30 (but not on every day of this in-
terval) make up nearly the whole bear market of 1907.
There were declines at other times and a pessimistic
feeling throughout the year (to say nothing of the facts
outside the Exchange) which indicated that the down-
ward forces were still in the ascendancy, but it was to
these days that the real decline was very largely confined.
It is worth adding that, as is evident from the above, a
great volume of sales on any day is far more effective in
a bear than in a bull market. Great record days on the
Exchange are much more frequent in bull than in bear
markets and much less important. It is worth adding, as
a corollary to the above paragraphs, that a very great
general fall may occur at once on the top of a great
general rise, as in May, 1901, but that an advance so
huge in the number of points could hardly, even as a
rally, occur in a bear market; for, if it did, it would mean
that the entire market was practically cornered.

If the rises in 1900 to 1901, in 1904 and in 1908 be con-
sidered, it will be seen that in all three instances prices at
the beginning, advanced very continuously and generally
speaking, much more rapidly than later on. This indi-
cates the willingness with which banking institutions
financed the rise. But, from May, 1901 to August, 1902,
from March, 1905, to November, 1906, and from August,
1909, to March, 1910, the market, while, on the whole,
showing an upward tendency, reflects a state of backing
and filling in prices.
RISING AND FALLING MARKETS 95

The first two instances culminated in the bull up-
shoots of August to September, 1902, and of August to
October, 1906. During these long periods of backing and
filling, the secondary swings which mark the reactions:
are almost as prolonged in the price-range as the second-
ary swings which are a part of the great upward primary
swing. Such a condition reflects the growth in the market
of positive forces making for an opposite movement in
prices.

There are points in connection with market movements
which deserve a word of explanation. One of these is
the tendency when a movement upwards or downwards
has come to an end for the price, after reacting, to come
back to the former high or low figure. Sometimes this
happens more than once in succession. Such price move-
ments are known as double tops or double bottoms and
are often cited as affording evidence when they occur, of
a cessation, for a time at least, of the movement. These
double tops and double bottoms are easiest noted at the
culmination of a long secondary price swing. In effect
they represent the profit taking of those on the right side
of the market. Their closing commitments account for
the rally, after which prices deprived of further support
or attack tend to sink back in a downward market, be-
cause there is no more buying, but if the level has really
been reached offerings are taken freely at the lowest
prices.

Another feature is what is called breaking through pre-
vious high or low prices. After a rally in the course of a
fo) STOCK PRICES

decline, if prices fall again and pass below the former low
point, there is a good chance they will go still lower. Of
course the reason is, that marginal holders, undis-
turbed before, will be affected by the new decline which
is commencing to weaken margins unimpaired before. On
the other hand, in an upward movement, a further
advance through the preceding high point denotes an
accession of fresh buying power which is not exhausted
by the mere breaking through, but will persist further.
These facts form the basis of much chart trading. It is
hardly necessary to say that it is easy enough to imagine
situations where these signs might occur without being
followed by such consequences.

There are some practical consequences from the fore-
going paragraphs which are worth indicating. One is
that a few days’ decline gives as much profit to a short
seller as many days of rise to a bull. Again, in a declin-
ing or vacillating market, while the day of a good fall
may, at times, be safely called, it is less easy to do this in
a bull market as regards a smart bulge. For, while it may
be obvious that an advance is due or is actually in prog-
ress, the day of an acute rise depends on the mental atti-
tude of a host of more or less unknown participants and
a number of pools whose intentions are seldom firmly re-
vealed. On the other hand, the perception of the immi-
nence, even if, not necessarily, of the exact day of, an
acute fall means simply the knowledge that the market is
honeycombed with weak accounts for the rise and that
the buying impetus has ceased. The short sellers are
RISING AND FALLING MARKETS 97

always present and may be relied on to seize the occa-
sion.

It all comes to what has been already said, that in a
rise the mass of the speculators pecuniarily interested are,
and must be, active; in a fall they have only to be, and
usually are compelled to be, passive, save when unwill-
ingly forced to part with their commitments. A curious
example of this state of things and of a forecast immedi-
ately verified occurred after the late President McKinley’s
death. It will be recollected that on the news of his pass-
ing away becoming public, the Exchange was ordered
closed. On its reopening, a few days later, prices were
at once bid up several points above the last closing.
Large financial interests were holding up the market to
avert a disturbance. After the opening, however, prices
ceased to advance, and on a succeeding day, when the
situation had become clarified, one of the best known
financial dailies stated that the market was artificial and
“a sale’—which prediction was, that same day, verified.

It appears that the statement may be hazarded that
when the right time seems to be present, either for a bull
purchase or for a short sale, the percentage of safety is
larger in the case of the sale when that is indicated than in
the case of the purchase should the latter seem timely—
for, at least, the likelihood of some profit. The data on
which to call a fall being more explicit in the long run,
there is a greater chance, on the theory of probabilities,
of the commitment going the wished-for way. Again, a
bear does not have to pay interest on his commitments

-
98 STOCK PRICES

and the loss of dividends on the stocks of which he is
short is not of importance save for a very long pull—for
a stock normally falls off the extent of the dividend when
it sells ex-dividend. On the other hand, it is plain that a
bear requires to watch the market closely as his increased
percentage of success is based on his knowledge of cur-
rent technical conditions and his capability, by its aid, of
foretelling the sudden sharp falls.

There are several points in connection with the activity
of the public in the market which need attention. Almost
invariably, shares bought by a haphazard speculator go
up at least a little after his purchase, for the simple reason
that he does not purchase except when prices are going
up. But either he buys so near the top that the market
shortly after starts to sink, or else, what amounts to the
same thing, he takes a very small profit by selling his
stock, and then waits till it or some other share has still
further advanced in price when he re-purchases once
more. Other speculators of about the same calibre will
at once overtrade on finding themselves with a profit.
The question thus arises, What is the market effect of the
profit taking of these numerous speculators and of their
still much more heavy losses? As long as the market is
going upward, it is evident that the stock passes from
hand to hand at advancing prices, while the former owner
takes over some other shares a little later. Thus, the
fact of such public gains as there are, exerts no influence
on the market calling for separate discussion. But in |
the case of the public losses an interesting question arises:
RISING AND FALLING MARKETS 99

Why, if these shares have been generally bought by the
public at somewhat lower prices, do not the losses at the
top produce a fall corresponding to the rise above the
rough figure at which the public entered? The answer is,
that, sometimes, they do produce some such fall, but that,
where the fall is not nearly so large as might be thus
looked for, a large part of the stock is either held by
investors or is obstinately held onto by public owners
despite its fall. More generally, though, it may be said
that the prices reached at the top of a great advance
represent the opinion of those qualified to judge of the
upper limit of the values of shares. The prices at which.
the “wise” sell to the public are regarded by them not as
grossly unfair but, usually, as about the highest possible
from an investment standpoint. Stocks, then, simply
react, after which they fluctuate at relatively narrow fig-
ures compared to their range in the preceding rise. Such
was the condition of things in the long period between
May, 1901, and August, 1902.
IX.
The Distribution of Profit and Loss in the Market

It is obvious that as long as stock prices move in one
direction, those traders who go with the current may all
gain and none of them lose. The shares pass from hand
to hand at continuously advancing prices. But, if a stock
be taken whose shares are selling say, at $100 each, and
the price be considered as advancing say, to $150, and
then as falling back to the former figure of $100, the
losses made in that stock during such an equal up-and-
down movement will be exactly equal to the gains, al-
though the profits of no one participant may be exactly
equal to the gains of any other, and although in very few
cases can one individual gain be balanced against another
individual loss, as this would imply that two sales of the’
same amount of the same stock, first as a purchase on
either side and then as sold, were made between two iden-
tical speculators. But, that the sum, during such a period,
of the gains must be just equal to the sum of the losses
will become clearer if the holders who have the stock at
the start be viewed as having acquired their shares at the
prices first considered, and if the final holders (whether
the same or not, in any case, as the former) be viewed as
having sold when the price returned to the figure first
considered. The proposition of the equality of the gains

100
PROFIT AND LOSS 101

and losses then becomes almost self-evident ; some of the
profits and losses may, it is true, be on paper only, but
they are instantly convertible, if wished or if necessitated,
into cash. Thus, the popular conception that someone
must always lose in stock speculation when another makes
is true only in the case of an up-and-down movement.
When a stock quotation has advanced above the price, in
money or an equivalent, for which it was first issued by
its corporation, the rise must have afforded to the owners
as a whole greater gains than losses, although the gain
may have been to fewer individuals than the losses. This
..is true with regard to any price arbitrarily selected as a
starting point, if the view be restricted to the gains and
losses during the period of up-and-down movement con-
sidered—that is, if gains and losses at the beginning of
the period or any previously made, be ignored as irrele-
vant. It thus becomes evident that the great appreciation
in price of Exchange stocks since 1900 has been the
source of very much greater gains than losses.

To the distribution of loss and gain as caused by price
movement, short selling superadds a feature of its own.
This mode of trading is often likened to a contract for
the future delivery of commodities—such as obtains in
the grain markets. But this is not quite correct; stock
sold short must be delivered at once, not at some time in
the future. It must, therefore, be borrowed for delivery.
If the “lender” of the stock be regarded as disposing of
his shares to the short seller with the proviso of a double
“call” on both side, it is easier to understand how this
102 STOCK PRICES

method of trading affects the distribution of loss and gain
in the market. The “lender” may be considered to have a
“call” on the same amount of stock if the price goes up,

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Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dede:

and the short seller to have a “call” on the amount of
money he deposited if the price goes down. That this is
PROFIT AND LOSS . | 103

a legitimate way of regarding the transaction. will be
evident by reflecting that the short seller need not sell
short at all in order to borrow stock. To be sure, the
borrowing by itself would be futile, as the same shares in
the end would have to be returned to the “lender.” But
the act is an economic whole which is actually possible
by itself. The short seller makes what the “lender” loses
through the depreciation of his shares when returned to
him, or he loses what the “lender” makes by getting back
shares salable for more than the amount of the money
deposited with him by the short’seller. Two different
certificates (or their equivalent) for the same number of
shares are almost always involved in short selling—the
one at the beginning borrowed from the “lender” and
handed to the buyer of the short stock; and the one at
the end bought in by the short seller and by him handed
over to the “lender.” But these two opening and closing
transactions in which the certificates change hands (or at
least are cleared) may be regarded as simply two sales.
The easiest way, then, to understand the distribution of
profit and loss occasioned by short selling is to regard it
as an arrangement by which the profit which the “lender”
would have made (by selling his stock at the higher
price) goes to the short seller, or the loss which the
“lender” would have incurred by letting his stock go at
the lower price becomes the short seller’s loss. Short
selling, then, is a sort of an arrangement by which a profit
ot a loss on paper which, without its occurrence, would
accrue to another trader (the “lender”) is handed over
104 i STOCK. PRICES

in cash to someone else (the short seller). The situation
produced by short selling is not really complicated nor
hard to understand, but the facts leading up to it have
some involved features which necessitate rather close
attention to perceive their full bearings.

1906

180
137
136
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134
333
as2
asi

‘aso
pt)
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320
“gen, Ped. War, Apr. May dune duly Aug, Sept. Oct. Nov, Deo.

Such being the mode in which profits and losses are
distributed in the market, we have next to ask among
whom is the actual distribution made and in what propor-
tions. Here, as regards the first question, we may avail
PROFIT AND LOSS 105

ourselves of the analysis of 500 accounts made by Mr.
Thomas Gibson and described in his “Pitfalls of Specula-
tion.” These accounts were all in United States Steel
common and represent commitments made between July,
1901, and March, 1903. At the former date the stock
price was 37 and the same price was touched at the later
time. During the intervening period the stock price
ranged between 2934 and 4634. Mr. Gibson’s words
follow:

“Three hundred and forty-three accounts resulted
in a net loss at their termination; 88 accounts re-
sulted in a net profit; 52 accounts were even or
showed inconsiderable differences. The result of 17
accounts is unknown, as the Steel stocks represented
were taken up by the purchasers, in all cases at a
considerable paper loss.

“The total deficit on all losing accounts was,
$1,245,000; the total gain on all profitable accounts,
$288,000 ; leaving a net deficit of $957,000.

“The total number of shares handled was 1,112,000.
of which 820,000 shares were originally purchases,
and 292,000 originally short sales.

“The total brokerage charges, commissions, inter-
est, etc., were $275,000, which amount is included in
the total loss.

“The comparative losses on short sales, share for
share, were about 20% greater than the losses on
purchases.
 

Jen. Fob. Mar. Apr:
PROFIT AND LOSS 107

“The favorite method of operation was to purchase
or sell on slight reactions from high or low prices.

“The average price of all purchases for long ac-
count was 425 and the average price of all short
sales was 3534.”

That 343 accounts showed losses to 88 showing gains,
and that the gains were bit 20% of the net results is but
a reiteration of the familiar fact of the “public’s” losses.
Who the relatively few winners in stock speculation are
has been incidentally noticed, several times, in the preced-
ing chapters. But the losers seem to have changed in
character since the famous ‘00m of I901. There is little
question that then almost everyone of speculative ten-
dencies and the wherewithal to trade who could reach a
brokerage house or even a “bucket shop” (of which there
were then many) was interested in the rise that Spring.
But, in recent years, trading has shown a tendency to be
confined to the decidedly well-to-do members of the com-
munity. Certainly, the iosers on the New York Stock
Exchange are not the oft-quoted “widows and orphans,”
etc. Indeed it seems hardly worth while repeating that
very few Exchange houses will take speculative accounts
of less than 100 shares which means a minimum margin
of $1,000. No doubt, there is a considerable amount of
trading on the Consolidated Exchange for the accounts of
smaller speculators. But the transactions on this Exchange
are on an average probably less than I in 10 compared
with those on the “large board.” To those who have had
relations with brokerage firms in recent years there is
|

(
108 STOCK PRICES
L

little doubt of what is the tru@ answer to the question
concerning the identity of the ld@sers in stock exchange
speculation. They are the success ful business men of the

‘aso.

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- 105
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‘Jan. Feb. Mar. Apr. May June July A3- Sept. Oct. Nov. Dec.

community and their losses are the sur]us gains, in whole
or in part, from their own occupation. It is the wealthy
or well-to-do annuitant from a trust or frm his own cap-
PROFIT AND LOSS To9

ital, the successful attorney, real estate man, publisher,
merchant, doctor and other high-grade business or pro-
fessional man, who comes regularly to Wall Street to dis-
pose of his surplus money. Here, too, is a curious con-
firmation of the fact mentioned in the third chapter, when
referring to the priority of stock prices to the business
situation. At the end of a long decline in stock prices,
those who have let go of stocks are not in a position to
enter the market for some time, even when assisted by
the banks. But when business picks up, large surplus
balances ready for speculation again appear. Meanwhile
stock prices have been advancing through the foresight of
the “wise” assisted by the resources of the banks. It is
the old story of the reapers being ready just when the
harvest is ripe. 2B uaa
It might be intéresting to enquire just what proportion
speculators successful in the long run bear to those un-
successful. No doubt the number would vary from year
to year, but even for a rough approximation to the facts
the data do not seem to be present. On Mr. Gibson’s 500
_accounts, the loss of $682,000 ($957,000 less the commis-
‘sions, etc., of $275,000) on transactions in 1,112,000
shares comes to but a trifle over 50 cents a share. This
would give an average loss of about $1,300 to each specu-
lator. In this analysis the number of shares traded in by
the 343 unsuccessful speculators is not given, so that an
exacter result cannot be figured out. An investigation of
a large firm’s books would exhibit interesting facts in
connection with this matter and would, also, show how
110 STOCK PRICES

the average percentage of loss on each losing commit-
ment compares with the average percentage of gain on
each winning account. The ratio would at once furnish a
good inference as regards the size of the average winning
commitment compared with the average losing commit-
ment. In the absence of such assistance we are restricted

TIM.

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Jan., Feb. Mar. Apr. May June July Apze Sept. Oct. Nov. Dede

to a consideration of what percentage of profits is ob-
tained in the market by the winners.

In considering this question it should be noticed, first of
all, that in all business the profit increases as the risk
grows. This is true even of the mere investment bond-
holder. From Government bonds returning 3% or less
PROFIT AND LOSS MII

on the investment down to the lowest grade of preferred
shares returning 7, 8 and 9% on the investment, there is
a steady increase in the return as the risk grows. Look-
ing at the matter a little closer, it will be found that, not
only actual security but prestige, has much to do with the
net return afforded by stock and bonds. Also, that a
lesser speculative importance not infrequently keeps the
prices of a security below the figures at which, in consid-
eration of the financial strength and commercial prestige
of the corporation, they might be expected to sell.

When, from corporations whose shares are listed on an
exchange, we turn to trading companies the percentage of
profits is found to have risen immensely. The causes
back of this difference have already been discussed. Firms
which have a capital of $500 to $5,000 make, as a rule,
between 50% for the barely existing to 150% and 200%
for the successful. Indeed, it is obvious that this percent-
age is indispensable to cover the living expenses of their
owners. Retail druggists, grocers and other small mer-
chants net yearly profits which probably fluctuate between
100% and 150%.

Now, of all businesses, that of stock seeationt is most
hazardous. It might therefore be expected that those
successful in it would demand profits of large magnitude.
Before attempting to decide what profits are, in fact,
actually made by those on the right side of the market,
year in and year out, the writer from experience and
observation decided, simply as a conjecture, that 30 points
profit a year was, on the average, about as much as could
112 STOCK PRICES

be hoped for. How far this guess agrees with the results
of the analysis will immediately appear.

The five diagrams given with this chapter show the
average fluctuations of twenty railroad stocks listed on
the New York Stock Exchange, in the years 1905 to 1909,
inclusive. The data for these diagrams were obtained
from the Massachusetts Publishing Company, but the
diagrams are constructed on a slightly different principle
from that generally made use of, as will be explained
below. Ee

In constructing the charts the fluctuations of the same
stocks were used as those employed in the diagrams in
Chapters IV and V. These stocks are: Atchison, Balti-
more and Ohio, Brooklyn Rapid Transit, Canadian Pa-
cific, Delaware and Hudson, Erie, Illinois Central, Louis-
ville and Nashville, Metropolitan Street Railway, Mis-
souri Pacific, New York Central, Norfolk and Western,
Northern Pacific, Northwestern, Pennsylvania, Reading,
Southern Pacific, Southern Railway, St. Paul, Union
Pacific. The charts do not show all the movements but
simply those, usually over three points—reasonably avail-
able for speculative purposes. Smaller variations have
been noted in a few instances where their omission would
give a misleading appearance to the market in any month.

In 1905, it is certain that a man conversant with the
market would still be on the bull side which had been in
the ascendant since the latter part of 1903. We may
assume he would be on his watch for the top but well
aware that this is a matter, in a long swing, not of weeks
PROFIT AND LOSS 113

but, often, of many months of backing and filling con-
sumed in the secondary and still smaller swings. If we
examine the diagram for this year it may be assumed that
the successful speculator was long from February till
March for a profit of 94 points. On the principle that it
is unwise to be short. in a bull market he might refrain
from selling short in March, when the insurance scandals
and some other financial quarrels came to a head. Let us
assume the speculator long again in May till August for
17 points profit. As a fall in stock prices in Autumn is
almost regular on the Exchange, owing to the demand for
funds for crop moving, he might go short in the last
named month. Again the very bad money market in
November might have led him to take the short side
again. In December, in the face of the strength in stocks
-with very high money rates, he might have stayed out of
the market. The two falls in August and November
would give ten points more to his credit, or 3634 points in
all for the year. But against this gain there are some
technical factors to be taken into account. A speculator
seldom strikes the exact top or bottom of a movement, he
loses on interest charges when long and on accruing divi-
dends when short. Moreover, errors at the opening and
closing of accounts, necessitating small losses, are to be
reckoned with. If then, we throw off three points from
each commitment we shall be more conservative. In this
way we arrive at 2634 points profit for the year. This is
hardly too high in the case of the speculators who were
actually successful that year, because the trader might not
1l4 STOCK PRICES

unreasonably have done even better. He might have gone
short at the beginning of the troubles in the Spring and
have risked being long in the market in December in view
of the assurances of big interests that it would not be
suffered to fall. On the other hand, had he adopted the
first of these courses, he might have been mistaken about
the rise in May, for it is a difficult matter to change
from the bull to the bear side or vice versa, and keep one’s
head clear.

In 1906, we may reasonably assume that our speculator
saw what was apparent to almost all experienced observ-
ers, namely, that the market, in any event for the time
being, was near its top. He would have been likely, con-
sequently, to be short in the latter part of January. If he
covered in May he would get 1714 points profit. If he
stayed out of the market on the ensuing rise and again
went short in June, another 9% points profit would be to
his credit. On the recovery in July he could hardly have
failed to see that something very unusual was brewing,
and if he had some sources of good information, as is
usual with those successful, he would have seen good
reason to be long of Union Pacific. Indeed the market
action of the stock almost called aloud for participation.
But confining his commitments to the average stock in
which we are imagining him as dealing, we may allow
him 15 points profit. In October and again in December
he is short, making 13% points. Aggregating the win-
nings on these five commitments, we have 55 points and
throwing off 3 points as before on each commitment, we
PROFIT AND LOSS 115

reach 40 points profit for the year. Probably, this amount
is still too high, as both 1906 and the preceding year, with
their backing and filling, made difficult markets to deal in.

In 1907, an examination of the chart for that year will
render it evident that a speculator might have fairly ex-
pected a profit of 50 to 60 points. In 1908, if we assume
that the speculator was long, after February, the whole
year, we may credit him fairly with 30 points. The two
opening months presented a less obvious course of action.
On the whole, however, 1908, like 1907, was a much less
difficult year to trade in than either 1905 or 1906. Nearly
all well informed observers anticipated a decline of mag-
nitude in 1907 and a rise proportioned to the great 1907
fall which actually occurred, in 1908; 1909 was evidently
a difficult trading year, due to the sharp February fall and
the uncertainty of the market after August. Hardly more
than from 15 to 25 points profit can be allowed, except to
those actually in the forefront of market events.

It may be objected to the foregoing analysis that it is
based on average movements, while, actually, trading is
done in certain definite stocks. But, it must be remem-
bered that a speculator usually deals in several stocks and
that this method gives the easiest way of an approxima-
tion to his net results. Moreover, while the higher priced
a stock, the more rapid is its fluctuation, the greater, also,
is the risk, and the greater the margin required. The
estimates given may be taken as fairly representative of
the results of successful dealings in the years considered,
in stocks selling at not so far from par. It may be added
116 STOCK PRICES

that the fact that a trader in high priced securities (such
as Great Northern preferred in 1905 and 1906), may
make more points profit does not imply that he is making
a larger cash gain. The necessity of holding in reserve a
much larger margin may reduce his profits.

It seems worth while to throw into percentage form the
foregoing results of successful trading. For speculating
in a stock selling near par, a trader will probably want
an available margin of, say, at least 25 points, of which
to may be in the hands of his broker. If a speculator is
dealing in 100 share lots, his capital would thus be $2,500
as a minimum; if in 500 share lots, $12,500, and if in
1,000 share lots $25,000. Taking the first case, that of the
trader in 100 share lots, let us see what percentage profit
is indicated in each of these five years. In 1905 he would
have made about 25 points on his capital, or 100% profits ;
in 1906, possibly 40 points, or about 160%; in 1907, 55
points, or 220%; in 1908, 30 points, or 120%; while,
finally, in 1909, if we allow him 20 points, his profits
would be $2,000, or 80%. Ifa more conservative total
capital of the equivalent, say, of 30 to 40 points, be kept
back of the trades, the percentage of profit would be
correspondingly reduced. No definite average can be
given, even in the roughest fashion. Some wealthy trad-
ers take very large risks, while others are always in a
position to buy outright every share they deal in.
X.
The Psychology of Speculation

What temperament a successful speculator should
have, what knowledge and what resources, are matters
which have been much discussed. As a matter of fact,
traders with a large knowledge of finance and the stock
market, both win and lose. So, too, as regards tempera-
ment: the nervous man and the phlegmatic; the hopeful
and the pessimistic; all may make and lose. The ques-
tions of knowledge and temperament do not quite get to
the core of the matter. Here, the subject arises only as
illustrating how prices are actually made by those whose
action is dominant in the market.

Ignorance, over-speculation and carelessness have been
assigned as the chief causes of speculative loss. But the
whole gist of the matter seems to lie in the fact that the
attitude, as a rule, of those on the losing side of the mar-
ket, is hopelessly wrong. It is doubtful if there is a cus-
tomers’ room manager who, at times at least, has not
been literally astounded at the manner in which successful
business men, often of the closest-grained sort, throw
away their money at the suggestion of irresponsible tips
and chatter. The usual commission house customer, pop-
ping in and out of the market at every rumor, reminds one
of nothing so much, as an English writer puts it, as of
those flies about a piece of beef disturbed by the butcher

117
118 STOCK PRICES

boy’s approach. The ignorance, the over-speculation and
the carelessness of such customers are often the plainest
sort of facts, but they are not the bottom of the trouble.
The futile and fatuous commitments of men who in their
own business readily amass thousands are not to be dis-
missed with so easy an explanation. At bottom, the aver-
age customer of a commission house does not regard
speculation as a possible business in any sense of the
word. He regards it as a gamble—a word, by the way,
which he is very prone to use, and which more than any-
thing else as brief, explains the character of his commit-
ments. That stock speculation is a matter wholly useless
to study, is another oft-heard remark of the same tenor.

But the fact that so very few traders take the trouble
to attempt to deal in the market as with a business propo-
sition, leads to the likelihood that, to many men, this
is literally impossible. The simple operation of
short selling is explainable with extreme difficulty to
most commission house customers, often those of years’
standing—a proof, not of mental obtuseness but that the
most elementary stock market operations belong to a
class of dealings which their commercial training has
left wholly alien to them.

Two matters thus arise for discussion in connection with
successful speculation. What experience does it normal-
ly imply? and, What is the attitude actually taken to-
wards their commitments by those right in the market?

In all trades and studies, experience supplies the abil-
ity to discern the practical bearings of one’s knowledge
PSYCHOLOGY OF SPECULATION 119

and to act at once on this discernment. Without experi-
ence there is wanting the facility to carry easily into
practice the theory illustrating the matter in hand. The
French have a maxim, “One can’t think of everything,”
and it is just because he cannot think of every detail
and of how to meet it on the instant when it should be
thought of and met, that the speculator without experi-
ence is necessarily left in the lurch, no matter how gifted
naturally he may be. Observation of what should be
seen and execution of what should be done, come,
through many repetitions, to be almost a reflex physical
act to the experienced trader. No matter how phleg-
matic and thoughtful an operator he be, one lacking ex-
perience will almost certainly, in a difficult position, lose
his head to the extent, at least, that he will not be able
to apprehend and to carry out at the time the line of
action which his own afterthought may readily show
him to be the right one. It is true that, without the in-
nate capacity of being trained to this rapid decision and
action, no man is likely to succeed in speculation. But
the training is just as necessary as the capacity, and with-
out the former successes can be regarded only as mere
windfalls of luck, sure to be reversed in the end when
difficult days come.

The value of experience in the market has been neg-
lected, because it is evident that the only way to get
this sort of experience is to pay for it in the market it-
self; and those who, with considerable capital, start to
acquire it this way are likely to desist, owing to the im-
120 STOCK PRICES

possibility of paying further. Small commitments dur-
ing the time of one’s early trading might be suggested,
but, however acquired, the experience must be attained.
It only remains to be added that it is not to be acquired
on paper. No one can learn to speculate simply by watch-
ing the market, because no one acts the same when he
has put up a real, and when only an imaginary stake.

If, now, we turn to the mental attitude of the specu-
lator on the right side of the market, in each and every
case not assisted by sheer luck, it will be found to be,
what that of those on the wrong side is but nominally—
a true “speculation.” Really to speculate for a rise means
to buy now because in the future prices are expected to
be higher; and prices in the future are expected to be
thus, because conditions then, not now, will warrant
higher prices. But, it is merely an expansion of what
has gone before, to insist on the point that the average
speculator buys because conditions now are good. “Busi-
nees looks great; stocks can’t help going up,” is one of
the most frequently heard remarks of a general sort in
the average customers’ room. But, on the contrary, the
truth is, that, if business now looks great, the prices have
already advanced to meet this “greatness’—have “dis-
counted it.” Stocks do not go up only because business
is now “great,” though they may stand still on that ac-
count, and may often, as shown previously, go down
while this state persists in its entirety. If an advance
in stocks is “backed” by the experienced, it is not at all on
the bare fact that, say, railroad earnings are now very
large, but because it is believed that they will be still
PSYCHOLOGY OF SPECULATION lal

larger in the future. The knowledge which the success-
ful trader seeks is that of the condition of things (as far
as attainable) months ahead. That of things at present
simply give him a point of comparison from which to
shape his view.

If we turn to the right mental attitude at the opening
of an account, it might be said that this means a vivid
and exact imaging of what is expected to happen and of
what is expected not to happen. A speculator believes
Atchison will advance in price. Why? It may be be-
cause of special facts connected with the Atchison
finances; or, it may be because of a bettering business
situation; or, because of a good technical market situa-
tion; or, because two or more of these facts may concur.
Again, a complete comprehension of the situation in-
volves a clear idea of when the shares are expected to
change in price. If a speculator thinks Atchison will
advance in price shortly, without information as to just
how soon, his grasp of the situation ‘is very different
from what it would be did he think the price would ad-
vance at once; and, if, in either case, it did not advance
at once. In the former case, he has made no etror in
judgment; but, in the latter, either his forecast was wrong
throughout, or events which he failed to appraise rightly,
operated against the causes on which he had relied for
the fulfilment of his views.

A definite image of the unfavorable contingencies be-
lieved to be excluded from the situation is likely to be
formed by those marketwise. For, if such contingencies,
122 STOCK PRICES

contrary to one’s opinion, eventuate, it is a sure sign of
erroneous thinking or of a lack of data on which to go.
In the latter case, the trader habitually on the right side
of the market, if he opens a commitment, will do so
with the clear consciousness that his act is here a gamble.
To see clearly the odds against one is a capacity hardly
to be found lacking among the successful.

It is legitimate for a speculator to test the market if
he clearly realizes that he is doing so. He may feel sure
of a rise but uncertain of the time of its beginning and
may not want to run the risk of missing it. A forecast,
in a quiet market, that a rise is due in a month or two
may be inadequate, even if true. Something may turn
up in a month to abort the situation. But the idea that
a rise is due, either in a month or two, or else
now, calls for the further consideration as to what
circumstances may occur which will show the speculator
he was mistaken. Futile efforts to boom the market,
liquidation, signs of trouble ahead, may be some of these
circumstances; and the trader who buys on the situation
as it stands, with no clear idea of just when it will change
as he forecasts that it will change, may carry with him
the intent to alter the direction of his commitment should
the situation change before the prices do. He may get
out if things become merely doubtful, go short if things
become plainly black.

The mere number of successful commitments is no test
of speculative ability. A loss on a poor commitment may
be as large as the gain on five or ten good commitments
PSYCHOLOGY OF SPECULATION 123

(as a matter of fact, something of this sort very often
happens). The amount of money made is, of course,
the decisive test of ability in the long run, but not nec-
essarily in a short run. The gains may be due, partially
or wholly, to luck. The test soonest applicable is the
percentage of the number, of times the speculator suc-
ceeds because what he forecast would happen, does hap-
pen; and what he forecast would not happen, does not
happen.

The foregoing paragraph may throw some light on a
statement attributed to Mr. James R. Keene, that he has
been successful but four times out of seven. If Mr.
Keene ever made this remark, it is to be hoped his con-
versation threw some light on what he meant by it; for,
as it stands, it is not perspicuous. If it means that out
of the wealth adventured by him his gains have been
to his losses as four to three, it may or may not be true,
but, in either case, it is here irrelevant. But, if it means
that out of an average of seven commitments, he has
won four, there are successful speculators, especially
those who often take small losses, who win much less
frequently, and unsuccessful ones who have won much
more frequently. The number of commitments won or
lost is, by itself, no more necessarily a test of success
than it is of ability.

When do successful traders close accounts? When
do they take profits? A good deal depends on whether
the price-change is due to general or to special causes.
In the case of a stock merely moving upwards in price,
124 STOCK PRICES

along with the general stream of quotations, the question
is, to determine when the stream stops flowing in an
upward direction. In the case of a stock in which there
is also manipulative control, it may be possible to obtain
some idea of the price to which the pool intends to put
the shares; if not, it may be stated generally, that where
a stock sells clearly above its investment worth, it is time
to think of closing the commitment. In regard to this, as
to the other details of the market, it may be added that
the trader fitted for the business does not, ordinarily,
reflect on this or that rule or principle. Taking a survey
of the whole matter, he sees at once the bearings of each
fact, and trained, as he is, by previous experience and
thought, perceives and takes the proper course of action.
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