I had learned my first lesson in money making – that people who try to get rich from mining often put more into the ground than they take out of it. (page 81)
Above all else, in other words, the stock market is people. It is people trying to read the future. And it is this intensely human quality that makes the stock market so dramatic an arena in which men and women pit their conflicting judgements, their hopes and fears, strengths and weaknesses, greeds and ideals. (page 85)
I began a habit I was never to forsake – of analysing my losses to determine where I had made my mistakes. This was a practice I was to develop ever more systematically as my operations grew in size. After each major – undertaking – and particularly when things had turned sour – I would shake loose from Wall Street and go off to some quiet place where I could review what I had done and where I had gone wrong. At such times I never sought to excuse myself but was concerned solely with guarding against a repetition of the same error.
Periodic self-examination of this sort is something all of us need, in both private and governmental affairs. It is always wise for individuals and governments to stop and ask whether we should rush on blindly as in the past. Have new conditions arisen which require a change of direction or pace? Have we lost sight of the essential problem and are we simply wasting our energies on distractions? What have we learned that may help us avoid repeating the same old errors? Also, the more we know of our own failings, the easier it becomes to understand other people and whey they act as they do.
There are two principal mistakes that nearly all amateurs in the stock market make. The first is to have an inexact knowledge of the securities in which one is dealing, to know too little about a company’s management, its earnings and prospects for future growth.
The second mistake is to trade beyond one’s financial resources, to try to run up a fortune on shoestring. That was my main error at the outset. I had virtually no “capital” to start with. When I bought stocks I put up so small a margin that a change of a few points would wipe out my equity. What I really was doing was little more than betting whether a stock would go up or down. I might be right sometimes, but any sizable fluctuation would wipe me out. (page 91)
During a depression people come to feel that better times never will come. They cannot see through their despair to the sunny future that lies behind the fog. At such times a basic confidence in the country’s future pay off, if one purchases securities and holds them until prosperity returns.
From what I saw, heard, and read, I knew that was exactly what the giants of finance and industry were doing. They were quietly acquiring interests in properties which had defaulted but which would pay out under competent management once normal economic conditions were restored. I tried to do the same thing with my limited means. (page 92)
Modern usage has made the term “speculator” a synonym for gambler and plunger. Actually the word comes from the Latin speculari, which means to spy out and observe.
I have defined a speculator as a man who observes the future and acts before it occurs. To be able to do this successfully – and it is an ability of priceless value in all human affairs, including the making of peace and war – three things are necessary:
First, one must get the facts of a situation or problem.
Second, one must form a judgement as to what those facts portend.
Third, one must just act in time – before it is too late.
I have heard many men talk intelligently, even brilliantly, about something – only to see them proven powerless when it comes to acting on what they believe. (page 105)
Both my failure in whiskey and my success in copper emphasized one thing – the importance of getting the facts of a situation free from tips, inside dope, or wishful thinking. In the search for facts I learned that one had to be as unimpassioned as a surgeon. And if one had the facts right, one could stand with confidence against the will or whims of those who were supposed to know best. (page 131)
Father gave me a photograph of himself inscribed with these words: “Let unswerving integrity always be your watchword.” (page 189)
The success of Utah Copper is also evidence of the importance of individual initiative and character. Jackling was only thirty years old when he got his great idea for doubling the world’s copper output. It took him five years to find financial backers and four more years to justify those backers had in him. (page 228)
This crowd madness recur so frequently in human history that they must reflect some deeply rooted trait of human nature. Perhaps it is the same kind of force that motivates the migrations of birds or the mass performances of whole species of ocean eels. There seems to be a cyclical rhythm in these movements. A bull market, for example, will be sweeping along and then something will happen – trivial or important – and first one man will sell and then other will sell and the continuity of thought toward higher prices is broken.
“Continuity of thought” – what a wonderful expression that is. It did not originate with me.
Another strange thing about this crowd madness is that education and high rank is no immunization against the virus. Mackay’s book is full of examples of how kings and princes, merchants and professors have succumbed to these crazes. In our own day the stock market madness of 1927 to 1929 swept through every level of society. (page 243)
In the dark years that followed I reread Mackay and found his tales curiously encouraging. For if his book showed how baseless are man’s moods of wild hope, it also showed that man’s moods of black despair are equally unfounded. Always in the past, no matter how black the outlook, things got better.
Whatever men attempt, they seem driven to try to overdo. When hopes are soaring I always repeat to myself, “Two and two still make four and no one has ever invented a way of getting something for nothing.” When the outlook is steeped in pessimism I remind myself, “Two and two still make four and you can’t keep mankind down for long.” (page 245)
As I already have pointed out, the true speculator is one who observes the future and acts before it occurs. Like a surgeon he must be able to search through a mass of complex and contradictory details to the significant facts. Then, still like a surgeon, he must be able to operate coldly, clearly, and skilfully on the basis of the facts before him.
What makes this task finding so difficult is that in the stock market the facts of any situation come to us through a curtain of human emotions. What drive the prices of stocks up and down are not impersonal economic forces or changing events but the human reactions to these happenings. The constant problem of the speculator or analyst is how to disentangle the cold, hard economic facts from the rather warm feelings of the people dealing with these facts.
Few things are more difficult to do. The main obstacle lies in disentangling ourselves from our own emotions.
I have known men who could see through the motivations of others with the skill of a clairvoyant, only to prove blind to their own mistakes. (page248)
In stock market the first loss is usually the smallest. One of the worst mistakes anyone can make is to hold on blindly and refuse to admit that his judgement has been wrong. (page 252)
Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.
Learn how to take losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.
Don’t buy too many different securities. Better have only a few investments which can be watched.
Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects.
Always keep a good part of your capital in a cash reserve. Never invest all your funds.
Don’t try to be a jack of all investments. Stick to the field you know best. (page 254)
No general keeps his troops fighting all the time; nor does he go into battle without some part of his forces held back in reserve.
Another common illusion some people have is that they can do anything – buy and sell stocks, dabble in real estate, run a business, engage in politics – all at once. My own experience is that few men can do more than one thing at a time – and do it well. A skilled operator in any field acquires an almost instinctive “feel” which enables him to sense many things even without being able to explain them. (page 260)
The stock market does not determine the health of our economy. Largely because of the 1929 crash, the impression got built up that the stock market itself is the cause of economic booms and busts. Actually, the Stock Exchange is simply a market place where buyers and sellers of securities meet. All the market does is register the judgements of these sellers and buyers on what business is like and what it will be like in the future.
The stock market, in short, is the thermometer and not the fever. If the country is suffering from the effects of inflation or from a weakening of the government’s credit, the effect will show up in the stock market. But the causes of the trouble will not lies in the stock market itself. (page 263)
Also, in Wall Street, I had learned that planning a successful financial operation was much like planning a military operation. Before going into action, one had to know both the strengths and weaknesses of the opposing forces. (page 312)
During my eighty-seven years I have witnessed a whole succession of technological revolutions. But none of them has done away the need for character in the individual or the ability to think. (page 320)
To be able to exercise sound judgement, one must keep the total picture in focus. Almost nothing in our world stands alone. Everything tends to cut athwart of everything else. If action on any particular front is to be truly effective, usually a host of other actions are required on supporting fronts. (page 322)