Sunday, August 23, 2009

Watts, Speculation as a Fine Art, part 1

If you haven’t read Speculation as a Fine Art by Dickson G. Watts you’ve missed a real gem. Written in the 1880s by a successful cotton trader and president of the New York Cotton Exchange between 1878 and 1880, the pamphlet effectively disappeared until parts of it were republished in 1965 by Traders Press and then reprinted several times by Fraser Publishing. In eight pages Watts analyzes, advises, and admonishes. I’m going to spend two posts summarizing and quoting from his pamphlet, in part because I want to burn some of his ideas into my own brain.

Although Watts admits that speculation and gambling have elements in common—for instance, speculation has elements of chance and gambling has elements of reason, he defines speculation as a venture based upon calculation.

What qualities must the speculator possess? A well-balanced combination of five attributes is essential, Watts maintains. First, self-reliance. “Self-trust is the foundation of successful effort.” Second, judgment. Third, courage. “In speculation there is value in Mirabeau’s dictum: ‘Be bold, still be bold; always be bold.’” Fourth, 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.” And, Watts adds, promptness. “Think, act, promptly.” The fifth and final necessary quality is pliability, “the ability to change an opinion, the power of revision.”

Watts then outlines four absolute laws of speculative trading. First, never overtrade. By “overtrading” Watts doesn’t mean trading too frequently but rather taking on too large a position. Second, never “double up.” That is, do not sell (or stop) and reverse. “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.” Third, run quickly or not at all. That is, “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.’” And finally, when in doubt, reduce the size of the position. “Sell down to a sleeping point.”

In my next post I’ll cover Watts’ conditional rules—that is, rules that are “subject to modification according to the circumstances, individuality and temperament of the operator.”

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