The Psychology of the Stock Market
By G. C. Selden
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The Psychology of the Stock Market - G. C. Selden
THE
PSYCHOLOGY
OF THE
STOCK MARKET
G.C. SELDEN
NEW YORK
The Psychology of the Stock Market was originally published by Ticker Publishing Company in 1912.
Cover design © 2005 Cosimo, Inc. Cover design by www.wiselephant.com
ISBN: 978-1-61640-987-6
All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without prior written permission except in the case of brief quotations embodied in critical articles or reviews. For information, visit our website:
www.cosimobooks.com
Library of Congress Cataloging-in-Publication Data
A Catalog record for this book is available from the Library of Congress.
Table of Contents
CHAPTER I. The Speculative Cycle
CHAPTER II. Inverted Reasoning And Its Consequences
CHAPTER III. They.
CHAPTER IV. Confusing the Present with the Future—Discounting
CHAPTER V. Confusing the Personal with the General
CHAPTER VI. The Panic and the Boom
CHAPTER VII. The Impulsive versus the Phlegmatic Operator
CHAPTER VIII. The Mental Attitude of the Individual
CHAPTER I.
The Speculative Cycle
MOST experienced professional traders in the stock market will readily admit that the minor fluctuations, amounting to perhaps five or ten dollars a share in the active speculative issues, are chiefly psychological. They result from varying attitudes of the public mind, or, more strictly, from the mental attitudes of those persons who are interested in the market at the time.
Such fluctuations may be, and often are, based on fundamental
conditions—that is, on real changes in the dividend prospects of the stocks affected or on variations in the earning power of the corporations represented-and again they may not. The broad movements of the market, covering periods of months or even years, are always the result of general financial conditions; but the smaller intermediate fluctuations represent changes in the state of the public mind, which may or may not coincide with alterations in basic factors.
To bring out dearly the degree to which psychology enters into the stock market problem from day to day, it is only necessary to reproduce a conversation between professional traders, such as may be heard almost arty day in New street or in the neighboring cafes.
Well, what do you know?
says one trader to the other.
Just covered my Steel,
is the reply. Too much company. Everybody seems to be short.
Everybody I’ve seen thinks just as you do. Each one has covered because he thinks every body else is short-still the market doesn’t rally much. I don’t believe there’s much short interest left, and if that’s the case we shall get another break.
Yes, that’s what they all say—and they’ve all sold short again because they think everybody else has covered. I believe there’s just as much short interest now as there was before.
It is evident that this series of inversions might be continued indefinitely. These alert mental acrobats are doing a succession of flip flops, each one of which leads up logically to the next, without ever arriving at a final stopping place.
The main point of their argument is that the state of mind of a man short of the market is radically different from the state of mind of one who is long. Their whole study, in such a conversation, is the mental attitude of those interested in the market. If a majority of the volatile class of in-and-out traders are long, many of them will hasten to sell on any sign of weakness and a decline will result. If the majority are short, they will buy on any development of strength and an advance may be expected.
The psychological aspects of speculation may be considered from two points of view, equally important. One question is, ‘What effect do varying mental attitudes of the public have upon the course of prices? How is the character of the market influenced by psychological conditions?
A second consideration is, How does the mental attitude of the individual trader affect his chances of success? To what extent, and how, can he overcome the obstacles placed in his pathway by his own hopes and fears, his timidities and his obstinacies ?
These two points of view are so closely involved and intermingled that it is almost impossible to consider either one alone. It will be necessary to take up first the subject of speculative psychology as a whole and later to attempt to draw conclusions both as to its effect upon the market and its influence upon the fortunes of the individual trader.
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.¹
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,