(1) As a result of the gradual increase in the
proportion of the equity in the community's aggregate capital
investment which is owned by persons who do not manage and have no
special knowledge of the circumstances, either actual or
prospective, of the business in question, the element of real
knowledge in the valuation of investments by whose who own them or
contemplate purchasing them has seriously declined.
(2) Day-to-day fluctuations in the profits of
existing investments, which are obviously of an ephemeral and
non-significant character, tend to have an altogether excessive,
and even an absurd, influence on the market. It is said, for
example, that the shares of American companies which manufacture
ice tend to sell at a higher price in summer when their profits are
seasonally high than in winter when no one wants ice. The
recurrence of a bank-holiday may raise the market valuation of the
British railway system by several million pounds.
(3) A conventional valuation which is established as
the outcome of the mass psychology of a large number of ignorant
individuals is liable to change violently as the result ofa sudden
fluctuation of opinion due to factors which do not really make much
difference to the prospective yield; since there will be no strong
roots of conviction to hold it steady. In abnormal times in
particular, when the hypothesis of an indefinite continuance of the
existing state of affairs is less plausible than usual even though
there are no express grounds to anticipate a definite change, the
market will be subject to waves of optimistic and pessimistic
sentiment, which are unreasoning and yet in a sense legitimate
where no solid basis exists for a reasonable calculation.
(4) But there is one feature in particular which
deserves our attention. It might have been supposed that
competition between expert professionals, possessing judgment and
knowledge beyond that of the average private investor, would
correct the vagaries of the ignorant individual left to himself. It
happens, however, that the energies and skill of the professional
investor and speculator are mainly occupied otherwise. For most of
these persons are, in fact, largely concerned, not with making
superior long-term forecasts of the probable yield of an investment
over its whole life, but with foreseeing changes in the
conventional basis of valuation a short time ahead of the general
public. They are concerned, not with what an investment is really
worth to a man who buys it 'for keeps', but with what the market
will value it at, under the influence of mass psychology, three
months or a year hence. Moreover, this behaviour is not the outcome
of a wrong-headed propensity. It is an inevitable result of an
investment market organised along the lines described. For it is
not sensible to pay 25 for an investment of which you believe the
prospective yield to justify a value of 30, if you also believe
that the market will value it at 20 three months hence.
Thus the professional investor is forced to concern himself with
the anticipation of impending changes, in the news or in the
atmosphere, of the kind by which experience shows that the mass
psychology of the market is most influenced. This is the inevitable
result of investment markets organised with a view to so-called
'liquidity'. Of the maxims of orthodox finance none, surely, is
more anti-social than the fetish of liquidity, the doctrine that it
is a positive virtue on the part of investment institutions to
concentrate their resources upon the holding of 'liquid'
securities. It forgets that there is no such thing as liquidity of
investment for the community as a whole. The social object of
skilled investment should be to defeat the dark forces of time and
ignorance which envelop our future. The actual, private object of
the most skilled investment to-day is 'to beat the gun', as the
Americans so well express it, to outwit the crowd, and to pass the
bad, or depreciating, half-crown to the other fellow.
This battle of wits to anticipate the basis of conventional
valuation a few months hence, rather than the prospective yield of
an investment over a long term of years, does not even require
gulls amongst the public to feed the maws of the
professional;-it can be played by professionals amongst
themselves. Nor is it necessary that anyone should keep his simple
faith in the conventional basis of valuation having any genuine
long-term validity. For it is, so to speak, a game of Snap, of Old
Maid, of Musical Chairs-a pastime in which he is victor who
says Snap neither too soon nor too late, who passed the
Old Maid to his neighbour before the game is over, who secures a
chair for himself when the music stops. These games can be played
with zest and enjoyment, though all the players know that it is the
Old Maid which is circulating, or that when the music stops some of
the players will find themselves unseated.
Or, to change the metaphor slightly, professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.