Speculation As A Fine Art

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Essential Qualities of the Speculator

1. Self-Reliance. A man must think for himself, must follow his own convictions. George MacDonald says: A man cannot have another mans ideas any more than he can another mans soul or another mans body. Self-trust is the foundation of successful effort.

2. Judgment. That equipoise, that nice adjustment of the faculties one to the other, which is called good judgment, is an essential to the speculator.

3. Courage. That is, confidence to act on the decisions of the mind. In speculation there is value in Mirabeaus dictum: Be bold, still be bold; always be bold.

4. Prudence. The power of measuring the danger, together with a certain alertness and watchfulness, is very important. There should be a balance of these two, Prudence and Courage; Prudence in contemplation, Courage in execution. Lord Bacon says: In meditation all dangers should be seen; in execution one, unless very formidable. Connected with these qualities, properly an outgrowth of them, is a third, viz: promptness. The mind convinced, the act should follow. In the words of Macbeth; Henceforth the very firstlings of my heart shall be the firstlings of my hand. Think, act, promptly.

5. Pliability. The ability to change an opinion, the power of revision. He who observes, says Emerson, and observes again, is always formidable.



Laws Absolute

1. Never Overtrade. To take an interest larger than the capital justifies is to invite disaster. With such an interest a fluctuation in the market unnerves the operator, and his judgment becomes worthless.

2. Never Double Up; that is, never completely and at once reverse a position. Being long, for instance, do not sell out and go as much short. This may occasionally succeed, but is very hazardous, for should the market begin again to advance, the mind reverts to its original opinion and the speculator covers up and goes long again. Should this last change be wrong, complete demoralization ensues. The change in the original position should have been made moderately, cautiously, thus keeping the judgment clear and preserving the balance of the mind.

3. Run Quickly, or not at all; that is to say, act promptly at the first approach of danger, but failing to do this until others see the danger, hold on or close out part of the interest.

4. Another rule is, when doubtful, reduce the amount of the interest; for either the mind is not satisfied with the position taken, or the interest is too large for safety. One man told another that he could not sleep on account of his position in the market; his friend judiciously and laconically replied: Sell down to a sleeping point.

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Rules Conditional   
These rules are subject to modification
according to the circumstances, individualuality and
temperament of the operator.

1. It is better to "average up" than to "average down." This
opinion is contrary to the one commonly held and acted
upon; it being the practice to buy and on a decline to buy
more. This reduces the average. Probably four times out
five this method will result in a reaction in the market
that will prevent loss, but the fifth time, meeting with a
permanently declining market, the operator loses his head
and closes out, making a heavy loss - a loss so great as to
bring complete demoralization, often ruin.
But "buying up: is the reverse of the method just
explained; that is to say, buying at first moderately, and
as the market advances adding slowly and cautiously to
the "line." This is a way of speculation that requires great
care and watchfulness, for the market will often
(probably four times out of five) react to point of
"average." Here lies the danger. Failure to close out at the
point of average destroys the safety of the whole
operation. Occasionally (probably once out of five times)
a permanently advancing market is met with and a profit
secured. In such an operation the original risk is small,
the danger at no time great, and when successful the  
profit is large. This method should only be employed
when an important advance or decline is expected, and
with a moderate capital can be undertaken with
comparative safety.

2. To “buy down” requires a long purse and a strong nerve
and money. The stronger the nerve, the more probability
of staying too long. There is, however, a class of 5
successful operators who “buy down” and hold on. They
deal usually in relatively small amounts. Entering the
market prudently with the determination of holding on for
long periods, they are not disturbed by its fluctuations.
They are men of good judgement, who buy in times of
depression to hold for a general revival of business – an
investing rather than a speculative class.

3. In all ordinary circumstances our advice would be to buy
at once an amount that is within the proper limits of
capital, etc., “selling out” at a loss or profit according to
judgement. The rule is to stop losses and let profits run. If
small profits are taken then small losses must be taken.
Not to have the courage to accept a loss, and to be too
eager to take a profit, is fatal. It is the ruin of many.

4. Public opinion is not to be ignored. A strong speculative
current is for the time overwhelming, and should be
closely watched. The rule is to act cautiously with public
opinion; against it, boldly. To go with the market, even
when the basis is a good one, is dangerous. It may at any
time turn and rend you. Every speculator knows the
danger of too much company.” It is equally necessary to
exercise caution in going against the market. This caution
should be continued to the point of wavering – of loss of
confidence – when the market should be boldly
encountered to the full extent of strength, nerve and
capital. The market has a pulse, on which the hand of the
operator should be placed as that of the physician on the
wrist of the patient. The pulse-beat must be the guide
when and how to act.

5. Quiet, weak markets are good markets to sell. They  
ordinarily develop into declining markets. But when a
market has gone through the stages of quiet and weak to
active and declining, then on to semi-panic or panic, it
should be bought freely. When, vice versa, a quiet and
firm market develops into activity, and strength, then into
excitement, it should be sold with great confidence. 6

6. In forming an opinion of the markets, the element of
chance ought not to be omitted. There is a doctrine of
chances – Napoleon in his campaigns allowed a margin
for chance – for the accidents that come in to destroy or
modify the best calculation. Calculation must measure the
incalculable. In the “reproof of chance lies the true proof
of men.” It is better to act on general than special
information (it is not misleading). viz.: The state of the
country, the condition of the crops, manufacturers, etc.
Statistics are valuable, but they must be kept subordinate
to a comprehensive view of the whole situation. Those
who confine themselves too closely to statistics are poor
guides. “There is nothing,” said Canning, “so fallacious
as facts, except figures.” “When in doubt do nothing.”
Don’t enter the market on half convictions; wait till the
convictions are fully matured.

7. We have written to little purpose unless we have left the
impression that the fundamental principle that lies at the
base of all speculation is this: Act so as to keep the mind
clear, its judgement trustworthy. A reserve force should,
therefore, be maintained and kept for supreme moments
the full strength of the whole man should be put on the
stroke delivered.
It may be thought that the carrying out of these rules is
difficult. As we said in the outset, the gifted man only can
apply them. To the artist alone are the rules of his art
valuable.