I’m going to re-print one chapter of this book, in 4 parts to make it easier to read. Written in 1911, it still rings true in today’s market. Human psychology hasn’t changed at all in a hundred years!
As author G.S. Selden says in his original preface, “This book is based upon the belief that the movements of prices on the exchanges are dependent to a very large degree on the mental attitude of the investing and trading public.”
Originally published in 1912.
The Speculative Cycle, continued
…Those selling at this stage are not, as a rule, the largest holders. The largest holders are usually those whose judgment is sound enough, or whose connections are good enough, so that they have made a good deal of money; and neither a sound judgment nor the best advisers are likely to favor selling so early in the advance, when much larger profits can be secured by simply holding on.
The height to which prices can now be carried depends on the underlying conditions. If money is easy and general business prosperous a prolonged bull movement may result, while strained banking resources or depressed trade will set a definite limit to the possible advance. If conditions are bearish, the driving of the biggest shorts to cover will practically end the rise; but in a genuine bull market the advance will continue until checked by sales of stocks held of investment, which come upon the market only when prices are believed to be unduly high.
In a sense, the market is always a contest between investors and speculators. The real investor, looking chiefly to interest return, buy by no means unwilling to make a profit by buying low and selling high, is ready, perhaps, to buy his favorite stock at a price which will yield him six per cent on his investment, or to sell at a price yielding only four per cent. He wants to buy before prices go up and to sell short before they go down. He would as soon buy at the top of a big rise as at any other time, provided prices are going still higher.
As the market advances, therefore, one investor after another sees his limit reached and his stock sold. Thus the volume of stocks to be carried or tossed from hand to hand by bullish speculators is constantly rolling up like a snowball. On the ordinary intermediate fluctuations, covering five to twenty dollars a share, these sales by investors are small compared with the speculative business. In one hundred shares of a stock selling at 150, the investor has $15,000; but with this sum the speculator can carry ten times that number of share.
The reason why sales by investors are so effective is not because of the actual amount of stock thrown on the market, but because this stock is a permanent load, which will not be got rid of again until prices have suffered a severe decline. What the speculative sells he or some other trader may buy back tomorrow.
The time comes when everybody seems to be buying. Prices become confused. One stock leaps upward in a way to strike terror to the heart of the last surviving short. Another appears almost equally strong, but slips back unobtrusively when nobody is looking, like the frog jumping out of the well in the arithmetic of our boyhood. Still another churns violently in one place, like a side-wheeler stuck on a sandbar.
Then the market gives a sudden lurch downward, as though in danger of spilling out its unwieldy contents. This is hailed as “healthy reaction,” though it is a mystery whom it can be healthy for, unless it is the shorts. Prices recover again, with everybody happy except a few disgruntled bears, who are regarded with contemptuous amusement.
Curiously, however, there seems to be stock enough for all comers, and the few cranks who have time to bother with such things notice that the general average of prices is now rising very slowly, if at all. The largest speculative holders of stocks, finding a market big enough to absorb their sales, are letting go. And there are always stocks enough to around. Our big capitalists are seldom entirely out of stocks. They merely have more stocks when prices are low and fewer when prices are high. Moreover, long before there is any danger of the supply running out, plenty of new issues are created.
When there is a general public interest in the stock market, an immense amount of realizing will often be absorbed within three or four days or a week, after which the deluge; but if speculation is narrow, prices may remain around top figures for weeks or months, while big holdings are fed out, a few hundred shares here and a few hundred there, and even then a balance may be left to be thrown over on the ensuing decline at whatever prices can be obtained. Great speculative leaders are far from infallible. They have often sold out too soon and later have seen the market run way to unexpected heights, or have held on too long and have suffered severe losses before they could get out…