The Business of Professional Stock Market Speculation

Continued from...Manipulation and Professional Trading.

A Speculator's Reasoning

Assumption of an unfair advantage for the professional is absolutely baseless. The reasoning of a professional like Jesse Livermore is merely the reasoning presented in this and preceding articles, backed by a study of general conditions. He said on October 3, 1921, that he had been buying, and, giving him the credence of ordinary courtesy for such a voluntary statement, it is clear that he was trying to shape in his own mind what the investing and speculating public would think at a date as far ahead as he could see.

This is not manipulation. These speculators are not creating any false market or deceptive appearance of activity to lure the public into the game, like the "barker" outside a Midway show. On October 3d Jesse Livermore was quoted in the columns of Barron's as saying that "all market movements are based on sound reasoning. Unless a man can anticipate future events his ability to speculate successfully is limited." And he went on to add: "Speculation is a business. It is neither guesswork nor a gamble. It is hard work and plenty of it."

Dow's Clear Definition

Let us compare this with the words of Charles H. Dow in The Wall Street Journal twenty years before. In tlie editorial of July 20, 1901, he said:

"The market is not like a balloon plunging hither and thither in the wind. As a whole, it represents a serious, well-considered effort on the part of farsighted and well-informed men to adjust prices to such values as exist or which are expected to exist in the not too remote future. The thought with great operators is not whether a price can be advanced, but whether the value of property which they propose to buy will lead investors and speculators six months hence to take stock at figures from ten to twenty points above present prices."

Observe how the none too deftly expressed thought of Livermore parallels the more perfectly shaped definition of the detached and dispassionate Dow. Bernard M. Baruch, after the war, gave evidence before a Congressional committee as to a market operation by which he had largely profited. He showed in the simplest manner that he had merely analyzed a known cause and foreseen clearly its probable market effect. He showed, what nobody who knows him would question, that he had no "inside information," so called, and that no employee in a Washington department had sold the secrets of his office. Wall Street holds such secrets as of little value. They may give an unfair advantage so far as individual stocks are concerned, but they could be entirely neglected with imperceptible loss, even if the secret were not generally as worthless as the seller of it.

A Good Loser

What is there that was done by James R. Keene or Jay Gould, by Addison Cammack, or other great market figure of the past, which could not have been done, in the fairest way, by men of equal brains and intelligence, willing to pay the price of arduous study for the knowledge necessary to success? What is there that Jesse Livermore or Bernard M. Baruch do which is open to criticism? They pay the seller his price, but they do not accept stock sold "with a string to it." The vendor thinks his reasons for selling as good as theirs for buying what he sells. If he were a jobber in the woolen trade, selling his investment in American Woolen stock, or a banker selling United States Steel common on the devastating foreign competition which he thinks he foresees, he would consider his own sources of information better than those of the speculators. They take the same risks that he does. They are often wrong, but they do not whimper about it. I have known many operators of this kind, and I never heard them whine when they lost, or boast greatly when they won.

and a Bad One

But the little gambler who takes the gutter view of Wall Street pits his wits against trained minds, not merely those of the speculators and the professional traders on the floor of the Stock Exchange, but the minds of men whose business requires them to study business conditions. This kind of gambler is a bad loser, and is often highly articulate. He, or those dependent upon him, is lucky if he receives such a lesson at his first venture that he confines his future relation with Wall Street to denouncing it as a gambling hell. It would be all that if the stock-market were made by him or people like him. To the everlasting credit of the country, we may confidently assume that it is not.

Refusing a Partnership With Jay Gould

Charles H. Dow, who knew Jay Gould well and enjoyed his confidence as much as any newspaper man of the time, largely because of his incorruptible independence, says in one of his editorials that Gould based his position in the stock market primarily on values. He tested that market with purchases of sufficient stock to show whether there was a public response - whether he had correctly foreseen the public appreciation of values which he thought he had recognized. If the response was not what he expected he would not hesitate to take loss after loss of a point or so, in order to reconsider his position from a detached point of view. Some years ago ,there was a pathetic derelict in New Street, one of the unlovely fringe of any speculative market, who could truthfully say that he had once been offered a partnership by Jay Gould. I have missed his face in recent years, but not a great many years ago he was a promising young member of the Stock Exchange. His execution of orders on the floor was remarkably good. It is a difficult and exacting task. It requires about that combination of instantaneous judgment and action which would mark a star player in big-league baseball.

To this broker a number of Jay Gould's orders were entrusted. No broker, it is needless to say, saw all of them. Gould was so pleased with the way his business was done that he sent for the young man and offered him a limited partnership. To Mr. Gould's surprise, it was refused. The broker actually said: "Mr. Gould, I have executed a great many of your orders and you seem to me to make more losses than profits. That is not a business I want to share." He could not see that his vision was restricted to only one side of Gould's many-sided activities. Opportunity knocked at his door - tried to kick it in - but the young man showed that he could do only one thing well. His administrative judgment would have been worthless, as indeed it afterwards proved, for he drifted out of the Stock Exchange into New Street and from there, I suppose, into oblivion. Truly, many are called but few are chosen.

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From The Stock Market Barometer by William P. Hamilton, published in 1922