The operations of “bears” in the great speculative markets and the practice of “short selling” are riddles which the layman but dimly comprehends. Buying in the hope of selling at a profit, and if need be, “holding the baby” for a long time and “nursing” it until the profit appears, is simple enough; but an Oedipus is required to solve the enigma of selling what one does not possess, and of buying it at a profit after the price has cheapened. It is the most complicated of all ordinary commercial transactions. How the thing can be done at all is a mystery; how such a man can serve a really useful economic purpose by this process is unfathomable. The layman who tries to figure it out thinks there is an Ethiopian somewhere in the wood-pile; the thing is unreal and fictitious. The only way he can understand it is to turn bear himself and learn by experience.
Why there should be so many bulls and so few bears can only be explained on the ground that optimism is the basis of speculation, and hope the essence of it. Yet the market can only go two ways: it is quite as likely to go down as up. Since sentiment should have no place in speculation one would think there should be as many bears as bulls, more of them, in fact, because the market almost always goes down faster than it goes up, and because nine out of ten of the unforeseen things that occur result in lower prices.
Accidents like diplomatic entanglements, rumors of war, earthquakes, and drought are constantly occurring to upset the plans of bulls and bring fat profits to bears in a hurry, while matters that bring about higher markets are generally things long anticipated, in which the profits that accrue to the bulls come about slowly and laboriously, and always with the attendant risk that a disturbance in any corner of the globe may bring on a sudden smash that will undo the upbuilding of months. In theory, therefore, there should be at least as many bears as bulls in all active markets, but in practice the large majority are always bulls, to whose sanguine and credulous natures the bear is a thing apart—a gloomy and misanthropic person hovering about like a vulture awaiting the carrion of a misfortune in the hope of a profit. Naturally the layman cannot understand him, and would like to suppress him.
Despite the fact that the odds seem to favor the bears, there is an old and true saying that no Ursa Major ever retired with a fortune. Wall Street has seen many of them, and with perhaps one exception the records agree that the chronic pessimists have not succeeded. Fortune seems to have smiled on them at intervals; in the country’s early days of construction and development mistakes were made that brought about disaster, but in the long run such tremendous progress has resulted in America as to defeat the aspirations of any man or group of men who stood in its way. The big bears, as a rule, have “over-stayed the market.” Imbued with the hope that worse things were in store, they have been swept away by the forces they sought to oppose. One of them, a power in his day, was so obsessed with the notion that all prices were inflated, that he has been known to sell stocks short “for investment.” One night when a lady at his side remarked on the beauty of the moon, he is said to have replied with that absent-minded mechanical skepticim inherent in the bear, “yes, but it’s too high; it must come down.”
One would think the ideal temperament for a speculator would be absolute impartiality, with an open mind uninfluenced by sentiment, ever ready to take advantage of all fluctuations as they occur. The ups and downs of a stock market always show, on average long periods, a practically equivalent swing each way, so it would seem that the speculator most likely to profit by these fluctuations would be one without preconceived prejudices, ready at all times to turn bull or bear as the occasion required. As a matter of fact, this type is the rarest of all, being confined, generally speaking, to the professional “traders” on the large exchanges, necessarily a very small minority of the speculative group, yet withal perhaps the most uniformly successful. These men, it must be understood, are not speculators, but traders, a nice distinction involving “catching a turn,” as opposed to the speculative habit of “taking a position.”
In active times I have known one of them to operate simultaneously in the New York Stock market, in the cotton market, and in the wheat market, trading at the same time in London and Paris, “shifting his position,” or “switching” from the bull to the bear side twice in a single day, and closing all his trades at three o’clock with a total net profit of less than a thousand dollars on a turnover of 30,000 shares, to say nothing of the transactions in cotton and grain. It goes without saying that to do all these things in one day requires a curiously mercurial temperament, and calls for nerve and celerity altogether foreign to the average speculator. Such a man, moreover, contributes but little to the making of prices and values, which is the function of large markets; his chief economic usefulness lies rather in the enormous revenues he pays to the State. The man whose operations I have just described contributed in a single year $75,000 to the State Government in stock-transfer taxes.
The scientific way to measure the value of speculators in wide markets is to consider the bull as one whose purchases in times of falling prices serve to minimize the decline, and the bear as one who serves a doubly useful purpose in minimizing the advance by his short sales and in checking the decline by covering those sales. All these operations serve useful economic purposes, since the more buyers and sellers there are, the greater the stability of prices and the nearer the approach of prices to values.
This, as I have said, is the scientific way to look at it, and the correct way, but the popular way is something quite different. From this point of view the man who sells property he does not immediately possess is thought to be a menace, who depresses prices artificially and works a disadvantage to the investor or, in the produce markets, to the producer. Nothing could be more fallacious than this, because of the fact that just as every routine sale of actual stock requires a buyer, so every short sale by a bear requires a purchase by him of equal magnitude. And it is precisely these repurchasing or “covering” operations of the bears that do the utmost good in the way of checking declines in times of panic or distress.
When there are no bears, or when their position is so slight as to be inconsequential, declines are apt to run to extreme lengths and play havoc with bulls. One often hears among acute and clever speculators the expression “the bears are the market’s best friends,” and, though this may seem incongruous, it is quite true. In the month in which these lines are written there has occurred, for example, a really severe break in prices on the Stock Exchanges at London, Paris, and Berlin, arising from the periodic Balkan crisis. This decline ran to disproportionate extremes, and, in fact, approached such demoralization that more than 300,000 shares of American securities held abroad were thrown on the New York market for what they would bring. The reason for the severity of this decline was easily explained. The outstanding speculative account at all European centres, while not actually unwieldy, was almost entirely in the nature of commitments for the rise. There was no bear account. Therefore all Stock Exchanges were supersensitive since they lacked the steadying influence which covering by the bears invariably brings about. The bears are then, in truth the market’s best friends, and the more there are of them, the better for all concerned when trouble comes.
Throughout all the political agitation in Germany which culminated in that disastrous failure, the Bourse Law of 1896, there appears to have been very little opposition to the bear and the practice of short selling; nevertheless in that section of the law which prohibited dealings for future delivery the bears found their activities restricted. The law has now been amended, having proved a wretched fiasco, but in the decade which attended its enforcement it was curious to note the unanimous cry that went up in Germany for the restoration of the bear. His usefulness in the stock market no less than in the commodity market was recognized; his suppression was deplored. It was found that just as his activities were restricted so the tendency toward inflated advance and ultimate collapse was increased. The market became one-sided, and hence lop-sided; quotations thus established were unreal and fictitious. Moreover there was an incentive to dishonesty, for unscrupulous persons could open a short account in one office and a long account in another, and if the bear side lost they could refuse to settle on the ground customarily resorted to by welchers.
“The prices of all industrial securities have fallen,” said the Deutsche Bank in 1900, “and this decline has been