Speculating in markets, and losing, is as old as the hills. So are the solutions to curb it.
It should come as no surprise that market bubbles are inflated on mass speculation. After the bubble bursts, and the dust settles, the calls to prevent it from happening again grow louder.
The most transformative of these episodes followed the 1929 crash. Congress held hearings and blame was passed.
Edwin Lefevre wrote a scathing piece against speculation just two months shy of the 1932 bottom. In it, he pointed out the culprits behind the biggest bubble in history:
After more than thirty years of studying stock speculation and speculators, I have arrived at the conclusion that, in the order of their importance, the principal contributory causes to the public’s losses during all booms are the following:
- The public itself. I mean the motives that make the public go to Wall Street. This is true of rich and poor, of heads of business houses and of salaried clerks, since all of them overstay the market. By “all” I really mean only 99.7 percent. Those who didn’t lose in ’29 lost in ’30 or ’31.
- Remediable evils. You might say, old trade customs, to Wall Street’s antiquated point of view. Many things are done or left undone by commission houses which tend to make more certain the certainty of losses by their customers. Nevertheless, I am convinced that commission brokers did less to damage the public that speculated than those banks and banking houses which worked by themselves or in association with promoters and pools and syndicates. They perceived that the public’s capacity for absorbing stocks was practically unlimited and they overcapitalized that appetite the way they overcapitalized everything else. Some day the history of the worse than blindness of our banks, bankers, and corporation heads in 1928 and 1929 will be written — and not believed.
- The average stockbroker’s perfectly human desire to do as much business as he can, when he remembers the long spells of fasting that go with the occasional gorging.
Eventually, Congress passed a few big laws. Glass-Steagall, enacted in 1933, separated commercial and investment banks (it’s since been undone). A year later, the Securities Exchange Act created the SEC. Those two acts did a lot to eliminate the worst offenses.
But the laws did nothing to prevent human nature from following a similar course again. So Lefevre offered some real solutions that might sound familiar.
The Brokers. When income is dependent on the number of transactions, there may be a conflict of interest. In other words, commissions often incentivize bad practices.
To keep some customers from losing money, it would be necessary for the broker to lose the customer.
There are fewer stockbrokers around today, but the point rings true. Anyone helping you buy and sell stocks should be required to do a little more than the bare minimum for their customers. Maybe a “moral obligation” to do so. Someone who can help minimize mistakes, and losses, is not only good for the customer but good for business too.
The Brokerages. Similar to brokers, brokerages are built to encourage transactions. News, tips, predictions, research, and “advice,” were set up in a way to induce trading and gambling. Which is not much different from today, really.
Anything that helps to make addicts out of occasional traders should be avoided as if it were the bubonic plague.
Unfortunately, what’s good for the brokerages is not so good for the customer. Anything that encourages trading, can lead to over-trading, and severe losses. Not logging into your brokerage account every day is the simplest way to do nothing.
The Ticker. Back in the day, advances in communications brought the tape to every corner of the country. The relayed stock quotes gave people minute by minute changes in stock prices. At the height of the ’29 boom, tickers were everywhere. People were attracted to it, but the constant flow of stock quotes incited action. Unnecessary action in most cases. Which led to over-trading.
Intelligent speculators and investors who do not play the market feverishly do not need to spend the day beside a ticker or before a quotation board.
Today, the ticker resides in your pocket. Limited access to stock quotes is probably the best way to prevent over-trading and avoid losses.
The News. It weaves a story around the facts. Except most of the news is less than helpful in most cases because it spreads rumors, conjecture, opinions, and predictions presented as “news.” It pulls on our emotions. It’s an unlimited supply of reasons to act.
All the news that should be printed could, as a rule, be carried on one page — exclusive of the tables, of course.
Imagine if news organizations followed through on that. Instead, it’s only gotten worse. The hardest part is deciphering what’s important from all the garbage. You can try to keep up with it all or do what the news sources won’t. Condensing your news intake is a great start.
Blame the Broker, Saturday Evening Post 1932
- A Speech – J. Zweig
- Portfolio Turnover is the Price of Progress – MicroCapClub
- FANMAG Envy – Verdad
- Inflation to the Rescue – E. Chancellor
- Riding Dead Horses – Klement on Investing
- The Role of Expectations in Investing – ValIdea
- The Economics of Vending Machines – The Hustle
- Matthew Holland: Zero Day (podcast) – Knowledge Project
- The Lloyd’s Register Foundation World Risk Poll – LRF
- The 100 Sequences That Shaped Animation – Vulture