The Psychology of Speculation

While there are various danger signals which indicate the culmination of a bull market, just as there are others which mark the final stages of a bear market, it must not be supposed that these signals stand out like so many red lights placed in front of a ditch at the roadside; on the contrary they are of the most deceptive and decoying nature to all except experienced and dispassionate observers. And even the best judges are frequently deceived. On this point one of the most reliable financial writers in the country says: "Not all of the economic indicia ever turn together at any peak or bottom in the securities markets. Always the case is that some of the indicia disclose the change, while others do not. The public usually keeps on expecting a bull movement to continue, no matter how unreasonably high stocks may sell. This persistence of bullish sentiment greatly facilitates distribution by wealthy holders. " This timely note of warning was written early in January of the present year, when a great bull market after running about two years was at the boiling-over point; but very few bullish traders ever pay any attention to such counsel; nor would they if the danger signals stood out like beacon lights along a treacherous shore. A few days later the following bit of good advice was issued by a Boston broker:

"For fifteen months this country has enjoyed clear skies, politically, economically and financially. Washington Irving begins his essay on the Mississippi Bubble with the phrase, ‘There was not a cloud on the horizon,' and then goes on to state that the prudent mariner takes cognizance of such ideal conditions and prepares for the inevitable change. Today, after fifteen months of national sunshine and cloudless skies in all directions, we believe it behooves a man of affairs to take counsel with himself relative to his investment and speculative position. Many business men who should have learned better by past experience, still take the business situation as a guide to their stock market operations in spite of the fact that all stock exchange history shows that the market turns up long before a period of business depression has run its course and likewise turns down six months or more before prosperity comes to a pause."