Friday, February 17, 2006

The Pitfalls of Speculation

History is not kind to the corporate entity, just as speculation is typically the bane of the amatuer or inexperienced investor. Moody's is a notable exception and survivor - still in the financial publishing business after more than a century. 2006 marks the 100th anniversary of a little known "book" (pamphlet) published by The Moody's Corporation, penned by one Thomas Gibson and entitled "The Pitfalls of Speculation", which has generously been reprinted by the son of a former Chase Manahttan Bank Chairman, who is now the proprietor at Fraser Publishing, located ironically in the socialist capital of America: Burlington Vermont.

What is fascinating about Mr Gibson's market musings is that despite the on-rush of modernity, rather little has changed in the world of stock market speculation. Recall that 1906 was before the jarring market 1907 break to occur the following year; before the first world war and market carnage, before the roaring twenties, before the crash and subsequent depression, and of course before computers, Fidelity and yes even Louis Ruykeyser hard as that may be to believe. In honor of the centennary of Mr Gibson's observations, I will summarize his thirteen major observations here for you (as he did in his foreword), after which you can make your judgements as to the extent to which the speculative state of affairs might have changed.

1. The greatest causes of loss in speculation are ignorance, over-speculation, and carelessness (listed in order of importance)

2. The popular fallacy that business methods are not applicable to speculation is wholly erroneous.

3. Not 1 speculator in 1000 applies ordinary business precaution to his trades nor founds his ventures on values.

4. The correct trader has little to fear and much to gain from manipulative tactics.

5. While extremes of prices move in irregular cycles, no "system" for judging changes is possible or tenable as such mechanical attempts to forecast prices changes do not contemplate changed conditions , or provide for accident.

6. The general idea that actual value and probable future value of a property cannot be intelligently based, is erroneous

7. The greatest speculative profits are made in stocks. The greatest speculative losses are made in commodities.

8. There are certain technical stages or conditions of markets which are followed by invariable results, the study and recognition of which is valuable, and not difficult.

9. Almost every general idea of speculation is the exact reverse of the truth. Somethimes this is caused by false reasoning, but most frequently as a result of false appearances of market quotations.

10. Persistent short-selling is fashionable amongst certain classes of semi-professional traders, but almost invariably results in loss.

11. "Tips" are illogical. Any widespread dissemination of advance information as to a projected movement would defeat its own object. The so-called "tip" is mere guess-work, yet the public continues to use them largely as a basis for trading.

12. Too great facilities for obtaining information and executing orders is, to the ordinary trader, of no advantage, and is frequently a source of loss.

13. 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 value and knowledge.

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