The Psychology of the Stock Market by G.C. Selden

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.

Part 1 — Part 2 — Part 3 — Part 4

CHAPTER 1
The Speculative Cycle, continued

…As a convenient starting point it may be well to trace briefly the history of the typical speculative cycle, which runs its course over and over, year after year, with infinite variations but with substantial similarity, on every stock exchange and in every speculative market of the world – and presumably will continue to do so as long as prices are fixed by the competition of buyers and sellers, and as long as human beings seek a profit and fear a loss.

Beginning with a condition of dullness and interest in the market, mostly, at this time, of the activity, with small fluctuations and very slight public interest, prices begin to rise, at first almost imperceptibly. No special reason appears for the advance, and it is generally thought to be merely temporary, due to small professional operations. There is of course, some short interest. An active speculative stock is never entirely free from shorts.

As there is so little public speculation at this period in the cycle, there are but few who are willing to sell out on so small an advance, hence prices are not met by any large volume of profit taking. The smaller professionals take the short side for a turn, with the idea that trifling fluctuations are the best that can be hoped for at the moment and must be taken advantage of if any profits are to be secured.

Soon another unostentatious upward movement begins, carrying prices a trifle higher than the first. A few shrewd traders take the long side, but the public is still unmoved and the sleeping short interest – most of it originally put out at a much higher figure – still refuses to waken. Gradually prices harden further and finally advance somewhat sharply. A few of the more timid shorts cover, perhaps to save a part of their profits or to prevent their trades from running into a loss. The fact that a bull turn is coming now penetrates through another layer of intellectual density and another wave of traders take the long side. The public notes the advance and begins to think some further upturn is possible, but there will be plenty of opportunities to buy on substantial reactions.

Strangely enough, these reactions, except of the most trifling character, do not appear. Waiting buyers do not get a satisfactory chance to take hold. Prices begin to move up faster. There is a halt from time to time, but when a real reaction finally comes the market looks “too weak to buy”, and when it starts up again it often does so with a sudden leap that leaves would-be purchasers far in the rear.

At length the more stubborn bears become alarmed and begin to cover in large volume. The market “boils”, and to the short who is watching the tape, seems likely to shoot through the ceiling at almost any moment. However firm may be his bearish convictions, his nervous system eventually gives out under this continual pounding, and he covers everything “at the market” with a sigh of relief that his losses are no greater.

About this time the outside public begins to reach the conclusion that the market is “too strong to react much”, and that the only thing to do is to “buy ’em everywhere.” From this source comes another wave of buying, which soon carries prices to new high levels, and purchasers congratulate themselves on their quick and easy profits.

For every buyer there must be a seller – or, more accurately, for every one hundred shares bought one hundred shares must be sold, as the actual number of personsl buying at this stage is likely to be much greater than the number of persons selling. Early in the advance the supply of stocks is small and comes from scattered sources, but as prices rise, more and more holders become satisfied with their profits and are willing to sell. The bears, also, begin to fight the advance by selling short on every quick rise. A stubborn bear will often be forced to cover again and again, with a small loss each time, before he finally locates the top and secures a liberal profit on the ensuing decline…