More on "The ABC of Stock Speculation" - part 2: "get rich quick" schemes vs patience and prudence

disadvantage of the small operator in following this policy is that he seldom provides sufficient capital for his requirementsContinuing the idea I started here, I'll keep irregularly doing some posts based on quotes from Nelson's 1902 book -- all the quotes in this and other posts of this ilk are from Google Books' scans, except for typo corrections I'm making along the way.

It is an old saying in Wall Street that the man who begins to speculate in stocks with the intention of making a fortune, usually goes broke, whereas the man who trades with a view of getting good interest on his money, sometimes gets rich.

This is only another way of saying that money is made by conservative trading rather than by the effort to get large profits by taking large risks.

Nelson's core idea for this "conservative trading"

starts with the assumption that the operator knows approximately the value of the stock in which he proposes to deal. It assumes that he has considered the tendency of the general market; that he realizes whether the stock in which he proposes to deal is relatively up or down, and that he feels sure of its value for at least months to come.
Suppose this to exist: The operator lays out his plan of campaign on the theory that he will buy his first lot of stock at what he considers the right price and the right time, and will then buy an equal amount every 1 per cent. down as far as the decline may go.

This systematic "averaging down" procedure, of course, when compared to simply buying your whole position (whatever total amount you're comfortable investing in the stock) when the stock reaches "the right price and the right time", saddles you with far more in commissions (and that was even truer in Nelson's time, when commissions were more substantial -- nowadays, depending on your broker &c, you may get a number of commission-free operations, or pay a very small amount even for non-commission-free ones).

More importantly, it makes the overall size of your position highly dependent on Mr Market's whims -- after all, as Nelson says, "Any operator proposing to follow a stock down, buying on a scale, should make his preparations for a possible fall of from 20 to 30 points. Assuming that he does not begin to buy until his stock is 5 points down from the top, there is still a possibility of having to buy 20 lots before the turn will come" (!). So, if you're prepared (say) to invest a total of $10,000 in stock X, you must do it in $500 increments... and may end up owning only $500 or $1000 of it if the decline on which you start buying lasts but a short time!

Whether these substantial strategic disadvantages are compensated by reducing your overall cost basis by up to 10% downwards (buying 20 lots "on a scale" at price points decreasing by 1% each time) may depend on individual tastes... to me, though, this sounds like a procedure for trading, not one for investing. I'm definitely not a great trader -- and I find it heartening to read in George Soros' fascinating book "The Alchemy of Finance" (highly recommended, BTW) that he disparages his own trading (short-term market-timing, &c) skills in even less-uncertain terms (!). Maybe (said he self-soothingly) there's a negative correlation there...?-)

Nevertheless, net of specific procedures, I think that the core messages -- "money is made by conservative trading rather than by the effort to get large profits by taking large risks", and "don't over-trade!" -- or, as Nelson puts it, that the

disadvantage of the small operator in following this policy is that he seldom provides sufficient capital for his requirements

(i.e., he over-trades, over-margins himself, and so forth) -- remain, after more than a century, immortal principles to live by.