Fred C. Kelly wrote an almost weekly column for Barron’s from December 1936 to June 1937. It was well-timed.
His column began near the tail end of a four-year bull market. The stock market bottomed in June 1932 — June 8th for the Dow at 41.2. Then it took off. The next four years saw the Dow rise 337% off the bottom.
However, 1937 would end that run with a 33% loss on the Dow. The Dow hit a high for the year on March 10th, proceeded to decline 15% over the next three months, then almost recovered completely. The ’37 crash hit two months after his column ended.
Kelly’s column offered some well-timed behavioral advice that happens to still be relevant today.
On Human Nature.
Human nature is much the same wherever found. Hence it always responds to the same kind of stimuli. Some people require a little more prodding than others do before they will move. But in a general way if you knew all the different kinds of stimuli brought to bear on a certain average group, you could tell just what they would do.
On Being Part of the Crowd and Why Stocks Bottom.
We often think it is a strange coincidence that just after we sell our stock it quits going down… But the answer is much simpler than that. The price we take for our stock isn’t the bottom price just because we sold there — but because a great mass of other people sold there.
An outstanding reason why so many other people picked the same day and sold at about the same price we did is because they are like us — average folk. The same propaganda, the same news that influenced you and me, influenced thousands of others.
If you re a normal, average person, then you are a member of the largest group on earth and are likely to buy and sell when the rest of this group does.
On Being Contrarian.
Market success depends partly on an ability to distrust one’s natural impulses and go contrary to them. We must be cautious and fearful at the very time we are inclined to feel most hopeful — and to show courage when scared. We must go contrary to the common belief, for nothing on earth is so elusive as truth, and only a small minority are ever able to think clearly enough to arrive at sound conclusions. It is fatal to follow the crowd blindly, for the crowd is almost sure to be wrong.
On Selling Winners and Holding Losers.
It is human nature to have vanity, to be reluctant to admit that one has behaved foolishly, and vanity is one of the worst foes to a man trying to make money in the market… Vanity makes men sell good stocks and keep poor ones in times of distress. They don’t mind disposing of gilt-edged stocks which show a profit — the very ones which might finally make up the losses on others.
On Avoiding Bull Market Euphoria.
Crowd enthusiasm, always greatest at the peak of a market more often leads sensible men to behave foolishly. Nevertheless, the aim should be to have one’s self well enough in hand to be immune to outbursts of mass emotion.
On Weighing Probabilities.
Sucess is somewhat in proportion to one’s ability to replace chance and guesses by facts. Amateur speculators always take chances that would terrify the trained market student. Smart operators even plan well in advance just what they will do if the unexpected should happen. Rich men risk their money with far more care than poor men. That’s why they’re rich!
On Impatient Trading.
Human psychology, influencing the stockholder, is well illustrated… At times, he rushes too soon to seize large profits long hoped for. Later, in chagrin over his too hasty selling, he buys back, resolving never to let go again. Or, he may buy on the way down, because, feeling sure prices will return some day to their former high level, each new low price seems to him alluring.
On Buying Because of “Low Prices.”
A stock is never too high to buy if conditions are right; and never too low to sell if affairs are turning from bad to worse. Traders who buy stocks simply because prices are lower than they have been for a number of years may make an occasional profit; but following this rule eventually spells ruin. It is probable that more money was lost after the panic of ’29 than during the panic, because prices then seemed so low that people didn’t pause to consider whether prices were low on the way up or on the way down.
On the Difficulty of Watching Others Make Money.
We may forgive ourselves for owning a market dullard when the rest of the market is also in the doldrums, but it is disheartening to see one’s favorite resting as quietly as a castor-oil bottle while the rest of the market goes gaily upward.
On Faulty Predictions.
Just before the crash of ’29, I heard a young man declaring that the bull market still had a long upswing ahead because increased use of machinery enabled manufacturers to produce goods so cheaply that they could find markets among groups of people who formerly could not afford to buy. Later, after three years of declining stock prices, this same young man expressed his strong belief that the bear market still had a long way to go — all on account of the mechanical age in which we find ourselves… He pointed out that, because of machine production, a great mass of people, no longer needed in industry, have lost their buying power, with consequent reduction of business activity. He used the same facts to prove diametrically opposite opinions.