Misbehavior often gets in the way of investing profits. To say it’s been a longstanding problem is an understatement. Arthur Crump pointed it out in 1875 and little has changed since.
Crump is an Englishman who wrote about speculating in stock markets based on his observations of London markets. His book, The Theory of Stock Exchange Speculation, warned about the common mistakes “haphazard operators” made, and lost money on, almost 150 years ago.
And he doesn’t hold back. You may even recognize a few:
On rumors and news.
The maxim which is adopted by all prudent speculators in the markets…is to sell when things are dear, and buy when they are cheap, and pay no attention at all to reports. Men who have had years of experience, know how to estimate at their just value the on dits that are for ever floating about their ears. Right or wrong, there is no money in them in the long run, and it is with the long run that operators should have to do.
On researching investments.
Ordinary people go to market and make an elaborate fuss over a joint of meat before paying their money, seeing that it is to a Shylockian nicety of weight, but when they invest a hundred pounds in a mine, there have been cases in which they hardly knew where the property was, — or even if it existed at all. It is very wonderful that such an incomprehensible degree of confidence is placed in concocters of companies, and it is the knowledge that the general public is so ludicrously gullible that encourages the formation of joint stock concerns upon often the most flimsy bases.
Peter Lynch shared a similar view. People take days or weeks to learn everything about an appliance or car before buying it but wait mere seconds before dumping their life savings into a stock on a tip. The unwillingness to wait for riches is their ultimate demise.
A fool and his money are soon parted, is an old saw, and it is in a high degree applicable to the inexperienced speculator who operates in the markets on a friendly “tip.” It is marvellous to think how many persons daily and hourly are misled by the same snare and delusion.
On the profitability and difficulty of not following the crowd.
It has been generally observed that speculators sell bears of stock with more timidity than they buy bulls. One reason, no doubt, beyond that referred to is, that they have a feeling in their own minds that in selling for the fall they are going against the current, which on the surface seems to be a rash proceeding. But in being able to combat this feeling lies one of the main elements of success. It is out of the public that successful speculators make their money, and consequently there must be the greater chance of losing by following the lead of the public.
On scratching the itch for excitement and action.
Before a man enters upon the business of speculation he ought, if he is to have a fair chance, to clear his reasoning powers from any such unwholesome encumbrances as even the faintest desire for excitement. Every step a speculator takes should be, as far as possible, as deliberate as if he knew perfectly well that the slightest miscalculation would certainly involve him in loss.
In engaging in speculative commitments, the great difficulty that presents itself is not so much what to buy or sell, as what not to buy or sell. When to do something, and when to do nothing. Here lies a problem, the solution of which costs such a number of speculators their money and their peace of mind afterwards, to say nothing of the chronic dyspepsia that afflicts them until they are forced to quit the field.
On cutting losses.
One of the great faults which characterize all speculators, with very few exceptions, is that they cannot summon courage to “cut a loss” at once… With such tenacity do speculators hold on to a stock, hoping for a recovery when they have made a loss, that they will leave it as a man drops into the sea from a burning ship, only when he is singed by the flames. Many speculators on discovering they are on the wrong tack gather themselves up pour mieux sauter, and turn round and sell for the fall, believing they shall be quick enough to catch it and swim with the downward stream before it is spent. In the greater number of cases, such speculators watch the fall far enough to be sure they are right in their view of the way the price is going, and then they “get in.” What is the usual result? Hesitation in the second operation has caused them to miss the mark, and the account is closed with a loss on both transactions; the speculator having bought at or near the top, and sold at or near the bottom.
On prioritizing avoiding loss over profits.
Then there is the fatal blunder made by almost every inexperienced speculator, of never being satisfied with a moderate profit… Like the dog, in attempting to grasp the shadow of his bone, he loses all. This is of daily occurrence in numerous instances, and is one of the fatal weaknesses bound up in the frailty of human nature, from which only the strongest and coolest temperaments are able to emancipate them selves. Speculators never set sufficient value upon the importance of avoiding a loss: they think only of the profits. As it is with our money affairs, when we say, Look after the pence, the pounds will take care of themselves; so it is with speculation, look after the losses, the profits will take care of themselves.
On the downside of early success.
The greatest misfortune that can happen to the haphazard speculator is for him to make money the first two or three “accounts.” He will, in such a case, in the first place believe himself to possess some uncommon luck, or a shrewdness for selecting a security that was about to move in the direction he had reckoned upon. The operations of the most stupid speculator are frequently attended with such results, just as they might also be on his first essay at pitch-and-toss. Such incipient luck, by drawing forth the commendations of others…builds up in him a false estimate of his powers. Early success associates his mind with the gains and not with the losses, and the latter are incurred subsequently with a light heart, as a sort of accident that will be sponged out by the results of the next throw.