The Psychology of Speculation

Traders and investors too often become stubbornly insistent on recouping their stock market losses in the same identical securities in which they lost their money. After having lost a large sum of money there is undoubtedly a special gratification in seeing it return by the same channel through which it escaped, but the enjoyment of this peculiar satisfaction is hardly commensurate with the risk that many people run in attaining it. In discussing this point some years ago with a friend who owned a thousand shares of stock in a bankrupt railway company which had cost him $50 a share, and was then selling at $15 a share, with a fifty to one chance that the road would go into receivership, I argued that while the loss of $35,000 was a large and bitter pill to swallow, the chances were that it would not be made smaller or more palatable by the inevitable receivership, and that he might as well salvage what he could from the wreckage of his investment. After all, there were dozens of really _good_ stocks that had declined more than $35 a share; stocks that would eventually "come back" when the market turned about; whereas with his stock there was a probable assessment of $10 to $15 a share staring him in the face, and after paying that, the stock was likely to sell at a figure less than the assessment to be paid, judging by past performance of the stocks of other companies in receivership. The road was tremendously over-bonded, over-capitalized, encumbered with every conceivable sort of debt, and not earning its fixed charges. He vehemently declared, -- "No, I'll be damned if I'll allow those thieves to do me out of that money; they shall pay it all back, and more with it! " He held tenaciously to his resolution, the road fell into receivership, and a few months later he could have bought the stock in the open market at two dollars a share less than he had paid in on the assessment.

A favorite and amusing pastime with a multitude of traders is to cajole themselves into believing that when some stock they own becomes increasingly active after a considerable advance, the renewed activity is a sure indication that "bankers and insiders" are accumulating it for a still further advance. It is well to remember, however, that bankers and insiders do most of their accumulating before the rise begins, and while the outside public is doing its accumulating the bankers and insiders are quietly supplying the stocks. It is quite clear that if the insiders pursued the same tactics as the public they would soon be relegated to the ranks of the outsiders.