Buy the Book: Thomas Gibson’s 1906 classic is the result of studying thousands of speculative accounts over a ten-year period. It sits as a timeless warning on the numerous mistakes investors make in the stock market.
The Notes
- “The trader, therefore, who takes ‘flyers’ with no knowledge of his subject, or the properties in which he deals, merely gambles on the ultimate rise and fall of the market; but the trader, who, after careful investigation and study, purchases a property, either outright or on margins, because he has reasons for believing it to be cheap, and that it will enhance in value, is a speculator. Those composing the gambling element are in the majority, and it is needless to say, are the greatest losers…”
- “A great number of amateur, or semi-professional traders, buy a certain commodity for no better reason than that the stock has declined, or, more frequently, from a participation in a period of speculative intoxication. They can give reasons for their ventures, but they are without foundation and are no more worthy of consideration than the reasons given by the roulette player for ‘staking’ upon a certain number.”
- Gibson studied thousands of speculative accounts over a ten year period:
- 3 key points stood out:
- 80% of the accounts sat at loss.
- the accounts tended to buy at the market top and sell at the bottom.
- “most of the operations appeared to be of a purely gambling character. The further fact was established that success almost invariably led to excesses.”
- Gibson’s further observations:
- The greatest causes of loss in speculation are ignorance, over-speculation, and carelessness, of importance in the order named.
- The popular fallacy that business methods are not applicable to speculation is wholly erroneous.
- Not one speculator in a thousand applies ordinary business precautions to his trades, nor founds his ventures upon knowledge of any value.
- The correct trader has little to fear, and much to gain from manipulative tactics.
- While extremes of prices move in irregular cycles, no “system” for judging changes is possible, or tenable, as such mechanical attempts to forecast price changes do not contemplate changed conditions, or provide for accident. The advocates of the “Chart System” are legion, and yet it is impossible to find a single permanent and substantial gain made by this method.
- The general idea that the actual value, and probable future of a property cannot be intelligently based, is erroneous.
- The greatest speculative profits are made in stocks, and the greatest speculative losses, in staples: wheat, corn, cotton, etc.
- There are certain technical stages, or conditions of markets which are followed by certain invariable results, the study and recognition of which is valuable, and not difficult. These “ear-marks” are in some cases very plain, and do not in any way smack of the “systems” deprecated above, but are more or less visible signs of effects following certain causes.
- Almost every general idea of speculation is the exact reverse of the truth. Sometimes this is caused by false reasoning, but most frequently by the innate false appearance of the market quotations. For example, great est activity and interest in a market occurs around top prices; while dullness and stagnation are invariable when properties are unreasonably low in price.
- Persistent short-selling of stocks is fashionable in a certain class of semi-professional traders, and almost invariably results in loss.
- Tips are illogical. Any wide-spread dissemination of advance information as to a projected movement would defeat its own object. The so-called “tip” is usually mere guess work. The general consensus of public opinion on this subject is correct, i.e., tips are valueless; and yet the public continues to use them largely as a basis of trading.
- Too great facilities for obtaining information and executing orders, is, to the ordinary trader, of no advantage, and is frequently a source of loss. (The accounts mentioned above show the most intelligent trading to have been done by traders who were without facilities to interfere with their own original plans through fright or confusion.)
- Speculation is a safe business when business methods are applied to it. The changes in prices of standard properties offer yearly greater opportunities for profit than any other field. That is to say, for reasonable profits, not for the amassing of fortunes on small capital, in a brief period, but for steady accumulation of money and valuable knowledge. So great are the opportunities offered by speculative changes, that with proper methods and self-control, the poor man cannot afford to overlook them.
- 3 key points stood out:
- “Ignorance, over-speculation, and the innate false appearance of market stages are the principal causes of speculative loss, and are, in truth, the principal causes of the great cycles of speculative extremes.”
- “Conditions change, accidents occur, and manipulation exists, and all have their effect; but unless these factors were supplemented by alternate waves of general over-confidence, and subsequent undue depression, the fluctuations in market quotations for standard properties would be confined to such narrow limits that the repeated opportunities to purchase such properties at prices far below and to sell them at prices far above a normal value, would be eliminated.”
- “Over-speculation, the composite result of ignorance, greed, and false appearances, may be classed as the primary cause of wide variations in prices, for as much too high as a market is carried by rash participation at high prices, just as much too low will it sink in the ensuing decline.”
- “The ill-advised traders who rush in at high prices with inadequate capital are the first to suffer; their overthrow topples over other weak accounts, and so on down the line until the last of the wobbly row of bricks has fallen.”
- “The innate false appearance of speculative surroundings does much to influence public participation at the wrong period. When stocks are low in price the brokerage offices are deserted, the newspapers say little of speculative affairs, transactions are limited, and those who have been worsted in the preceding decline speak in pessimistic terms of the future. A long period of dullness almost invariably follows a severe decline, new lambs must be born and the old ones suffered to grow a new fleece, and dullness is always unattractive. But at the crest of a great movement all is activity. Excited groups gather about the tickers and predict future events founded principally on illusions or hope, and stories of quickly acquired gains are heard on every hand. A fever of speculation fills the air and men who had no thought of venturing during the time of depression and low prices, now purchase anything and everything at prices that are very high.”
- The operations of the “shrewd and successful” are founded “on study and knowledge of past precedent, present conditions and future probabilities.”
- “To result successfully, speculative ventures must be based on sound reasoning and a knowledge of correct normal values; on a willingness to confine operations to reasonable limits and upon emancipation from the moving influences of general exhilaration or depression.”
- “Everything depends upon an intelligent basis of normal valuation, for to that basis, if correctly estimated, the price of his holdings will eventually revert.”
- “While accident is frequently made the excuse for speculative declines, it is seldom the cause, and that if conditions are sound and prices low, any sharp decline brought about by unforeseen happenings creates opportunities which would otherwise not have existed.” (Gibson refers to accidents as unexpected events or surprises.)
- “If a business, or an interest in a business; is to be purchased, the past, present and probable future of that business are carefully examined. The assets and liabilities are compared, the record of past sales and profits are considered, and the probable future of the community, or territory from which the business draws its revenue, is given particular attention, and also, the danger of a decimation of profits through competition is considered. The character of the individuals concerned as partners or managers is weighed, and if found wanting, the proposition is discarded, as confidence between men is the foundation of all successful combinations.”
- “The difference between expecting from the market what is reasonable, and expecting too much; and between buying what can be reasonably protected, and even increased, and plunging, is exactly the difference between success and failure.”
- “Many men with sound ideas, and whose ventures have proved ultimately the correctness of their views, have, by the one fault of overtrading, become paupers, when, with business methods, they might have become millionaires.”
- “Many traders whose long-range views of values and approaching conditions are good, get their noses so close to the ticker as to shut out the true perspective. They deceive themselves into the belief that they are keeping well posted by haunting the brokerage offices and following the mass of good, bad and indifferent gossip, conflicting opinions, canards, and predictions, as well as being swayed by the innumerable flurries which occur almost daily, and are always accompanied by an excuse. For a man is human, and no matter how phlegmatic by nature or cultivation, is more or less moved by these pernicious influences.”
- “Summing up, the man who speculates in a business-like way trades only in standard properties with whose history, physical condition, earnings and prospects he has thoroughly familiarized himself; forms for himself a careful estimate of normal value and uses this value as a gauge by which to decide when prices are too low and too high; takes into consideration also the technical condition of the market, and does not embark with bad company, even at low prices; is not misled by the thrills of inflation, or the chills of depression; operates, not for the purpose of gathering a small profit from many transactions, but to gather a large profit from a few; trades with responsible middle-men, and, above all things, is patient. In short, he maps out for himself an intelligent and well-founded plan of operation, contemplating all that may occur, and having mapped it out, follows it. Very few speculate in this manner, and very few succeed.”
- “The great majority of so-called tips are…founded on nothing better than guesswork or pure invention. Although valueless, openly distributed and untraceable to any reliable source, they are always clothed in a garb of mystery and importance and are capable of much mischief, for there is a considerable speculative element who possess no individual ideas of importance and who will act rashly on the most ill-founded advice.”
- “The average speculator may safely assume that a ‘ decline from the point he considers low is probable. If he happens to catch the low price it is an accident and not because of his method, whose virtues must be reserved for future usefulness. He may congratulate himself on an unusually fortunate purchase and be satisfied with his comparatively small but quickly acquired gains.”
- “Written large between the lines of every disastrous speculative account are the reasons for failure. True, this is cold comfort, for the losses represented cannot be recovered by analysis, but the lesson may be of great value in its bearing on future ventures. Discovering and charting submerged and dangerous rocks by a process of shipwrecking is an unpleasant method of acquiring knowledge, but a most forcible one.”
- “In approaching the first phase of the question — What to buy – it may be well to employ the time-honored method of elimination and to consider primarily what not to buy.”
- “The great basic principle of speculation, the foundation upon which the entire structure rests, is the recognition of value. No sustained success is possible without this knowledge, and most failures are traceable to the lack of it. Yet so generally is this important element disregarded, or refuted, that we find it playing only a small part, or no part at all, in the operations of the average speculator. In the speculative world we find many men capable of clear thinking, correct analysis, and sound business judgment falling over each other in the rush to make purchases of properties of which they know nothing.”
