Severn years before Edwin Lefevre began a series of articles that would become Reminiscences of a Stock Operator, he warned of the perils in speculation. He likened it to gambling on an unbeatable game.
His reason was no different than what’s been repeated millions of times since. Speculators are more likely to beat themselves before they ever beat the market.
What makes the game of stock speculation the most dangerous of all is the variety of pleasing disguises it is able to assume. Being born of greed, it feeds on greed, and thereby waxes greater. If that were all it did, of if it did this openly, it would not be so dangerous; but besides the additional lure of adventure there is the irresistible appeal to vanity, the challenge to pit your wits against other wits, and even against Nature and the vagaries of the weather and the weaknesses of men. It most often masquerades as a legitimate business operation, subject to and governed by the ordinary rules of ordinary business.
Greed, vanity, and ignorance make for a bad combination for speculators. It leads to all the familiar mistakes — chasing “easy money,” over trading, unable to quit while ahead — that inevitably lead to their downfall.
Lefevre warned readers about all of this in 1915, then relayed the 10 Hells:
- A good tip that was not followed.
- A profit that was taken too soon — that is, the money he did not make because he was in too great a hurry to cash in.
- Of two tips, following the wrong one.
- To see your stock motionless while others are rising.
- The “stop order” just reached before a rise — that is, where caution was a crime.
- A bull market ruined by avarice.
- A bull market ruined by accident.
- Playing for a reaction and losing stock.
- A bull market clearly foreseen — when you are broke and unable to back your convictions.
- Thrown out of the market by “inside information.”
The trouble with the game of stock speculation is that, strictly speaking, it is not a hazard in which the element of chance can be figured out with mathematical exactitude. The very fact that nobody has ever beaten the game of stock speculation is not regarded as an argument against it. Moreover, the line of demarcation between investment and what you might call intelligent speculation is not clearly indicated to the average mind.
The stock speculator, as a rule, is beaten by himself!
The reason why the speculator beats himself is to be found in his motives quite as much as in the inherent difficulties of guessing accurately… The motive is greed.
The man who tries to beat the game begins by actually taking great pains to make two formidable enemies before he starts; these enemies are ignorance and cupidity. As a matter of fact, the average man won’t speculate unless he enlists these two factors as his steadfast allies. No man who really know what the game is and didn’t want something for nothing would ever dream of speculating in stocks on a shoestring margin.
Let it be kept in mind from the start that there is no such thing as easy money in this world… Of all the delusions, that of easy money is beyond question the greatest. The Irish have a saying that a man pays for what he gets in “meal or malt.” That is to say, you either work for your money or your worry for your money. The less work you do for your money the greater your risk and, therefore, the greater your worry. The less risk and worry, the greater your work. This is never remembered by the man who goes down to Wall Street to buy or sell stocks on a ten-point margin.
The brand of greed that artuates the majority of stock speculators is peculiarly dangerous because it is so mixed with vanity. The average man realizes that it takes brains to do anything. He has always heard of the hordes of people who have been ruined by the ticker. By assuming that he can beat the game he necessarily assures himself that he is not as they. “They” were fools, reckless gamblers, blind asses. He has taken pains to study fundamental conditions; the trend of the market is obvious to him and, moreover, he is peculiarly wise because he, of all men, is not a hog. He is not going to let the profit get away from him; anybody that overstays his market is an ass and deserves no sympathy.
Even when the same wise man has lost his stake he never reproaches himself for his greed that took him to the Street, but listens to the suggestions of his vanity. In short, he is thoroughly convinced that it wasn’t the game that beat him, but the crooks and the crooked devices of the malefactors of great wealth who didn’t give him a square deal. For that reason you hear so much about the evils of stock manipulation, without which it is perfectly clear that anybody could beat the game in Wall Street.
Of course, the only way to win is to not play. Or as Lefevre says, be an investor:
The investor who…buys when the speculator sells, and sells when the speculator buys. This seems a trite remark, but it is not. I took pains to investigate this point and I ascertained what I had always suspected — to wit, that the familiar bargain hunter, the man who goes down with his pocketful of cash during a slump and buys securities because they are cheap, because they yield him a good income, seldom deviates from his practice of buying only when things are very cheap…
It is when stocks are cheap that a man must buy if he wishes to make a profit.
The Unbeatable Game of Stock Speculation, Saturday Evening Post, 1915