“Yes,” I said, “but that does not alter the fact that the orders have
to be executed by somebody, and nobody living can guarantee how the
market will be or how close the ticker’s prices are to the actual
prices on the floor of the Exchange. By the time a man gets the
quotation here and he hands in an order and it’s telegraphed to New
York, some valuable time has gone. I might better go back to New York
and lose my money there in respectable company.”
“I don’t know anything about losing money; our customers don’t acquire
that habit. They make money. We take care of that.”
“Your customers?”
“Well, I take an interest in the firm, and if I can turn some business
their way I do so because they’ve always treated me white and I’ve made
a good deal of money through them. If you wish I’ll introduce you to
the manager.”
“What’s the name of the firm?” I asked him.
He told me. I had heard about them. They ran ads in all the papers,
calling attention to the great profits made by those customers who
followed their inside information on active stocks. That was the firm’s
great specialty. They were not a regular bucket shop, but bucketeers,
alleged brokers who bucketed their orders but nevertheless went through
an elaborate camouflage to convince the world that they were regular
brokers engaged in a legitimate business. They were one of the oldest
of that class firms.
They were the prototype at that time of the same sort of brokers that
went broke this year by the dozen. The general principles and methods
were the same, though the particular devices for fleecing the public
differed somewhat, certain details having been changed when the old
tricks became too well known.
These people used to send out tips to buy or sell a certain
stock--hundreds of telegrams advising the instant purchase of a certain
stock and hundreds recommending other customers to sell the same stock,
on the old racing-tipster plan. Then orders to buy and sell would come
in. The firm would buy and sell, say, a thousand of that stock through
a reputable Stock Exchange firm and get a regular report on it. This
report they would show to any doubting Thomas who was impolite enough
to speak about bucketing customers’ orders.
They also used to form discretionary pools in the office and as a
great favor allowed their customers to authorize them, in writing, to
trade with the customer’s money and in the customer’s name, as they in
their judgment deemed best. That way the most cantankerous customer
had no legal redress when the money disappeared. They’d bull a stock,
on paper, and put the customers in and then they’d execute one of the
old-fashioned bucket-shop drives and wipe out hundreds of shoe-string
margins. They did not spare anyone, women, school-teachers and old men
being their best bet.
“I’m sore on all brokers,” I told the tout. “I’ll have to think this
over,” and I left him so he wouldn’t talk any more to me.
I inquired about this firm. I learned that they had hundreds of
customers and although there were the usual stories I did not find any
case of a customer not getting his money from them if he won any. The
difficulty was in finding anybody who had ever won in that office; but
I did. Things seemed to be going their way just then, and that meant
that they probably would not welsh if a trade went against them. Of
course most concerns of that kind eventually go broke. There are times
when there are regular epidemics of bucketeering bankruptcies, like
the old-fashioned runs on several banks after one of them goes up.
The customers of the others get frightened and they run to take their
money out. But there are plenty of retired bucket-shop keepers in this
country.
Well, I heard nothing alarming about the tout’s firm except that they
were on the make, first, last and all the time, and that they were not
always truthful. Their specialty was trimming suckers who wanted to
get rich quick. But they always asked their customers’ permission, in
writing, to take their rolls away from them.
One chap I met did tell me a story about seeing six hundred telegrams
go out one day advising customers to get aboard a certain stock and six
hundred telegrams to other customers strongly urging them to sell that
same stock, at once.
“Yes, I know the trick,” I said to the chap who was telling me.
“Yes,” he said. “But the next day they sent telegrams to the same
people advising them to close out their interest in everything and
buy--or sell--another stock. I asked the senior partner, who was in the
office, ‘Why do you do that? The first part I understand. Some of your
customers are bound to make money on paper for a while, even if they
and the others eventually lose. But by sending out telegrams like this
you simply kill them all. What’s the big idea?’
“‘Well,’ he said, ‘the customers are bound to lose their money anyhow,
no matter what they buy, or how or where or when. When they lose their
money I lose the customers. Well, I might as well get as much of their
money as I can--and then look for a new crop.’”
Well, I admit frankly that I wasn’t concerned with the business ethics
of the firm. I told you I felt sore on the Teller concern and how it
tickled me to get even with them. But I didn’t have any such feeling
about this firm. They might be crooks or they might not be as black as
they were painted. I did not propose to let them do any trading for me,
or follow their tips or believe their lies. My one concern was with
getting together a stake and returning to New York to trade in fair
amounts in an office where you did not have to be afraid the police
would raid the joint, as they did the bucket shops, or see the postal
authorities swoop down and tie up your money so that you’d be lucky to
get eight cents on the dollar a year and a half later.
Anyhow, I made up my mind that I would see what trading advantages of
this firm offered over what you might call the legitimate brokers. I
didn’t have much money to put up as margin, and firms that bucketed
orders were naturally much more liberal in that respect, so that a few
hundred dollars went much further in their offices.
I went down to their place and had a talk with the manager himself.
When he found out that I was an old trader and had formerly had
accounts in New York with Stock Exchange houses and that I had lost
all I took with me he stopped promising to make a million a minute for
me if I let them invest my savings. He figured that I was a permanent
sucker, the ticker-hound kind that always plays and always loses; a
steady-income provider for brokers, whether they were the kind that
bucket your orders or modestly content themselves with the commissions.
I just told the manager that what I was looking for was decent
execution, because I always traded at the market and I didn’t want to
get reports that showed a difference of a half or a whole point from
the ticker price.
He assured me on his word of honor that they would do whatever I
thought was right. They wanted my business because they wanted to show
me what high-class brokering was. They had in their employ the best
talent in the business. In fact, they were famous for their execution.
If there was any difference between the ticker price and the report
it was always in favor of the customer, though of course they didn’t
guarantee that. If I opened an account with them I could buy and sell
at the price which came over the wire, they were so confident of their
brokers.
Naturally that meant that I could trade there to all intents and
purposes as though I were in a bucket shop--that is, they’d let me
trade at the next quotation. I didn’t want to appear too anxious, so I
shook my head and told him I guessed I wouldn’t open an account that
day, but I’d let him know. He urged me strongly to begin right way as
it was a good market to make money in. It was--for them; a dull market
with prices seesawing slightly, just the kind to get customers in and
then wipe them out with a sharp drive in the tipped stock. I had some
trouble in getting away.
I had given him my name and address, and that very same day I began to
get prepaid telegrams and letters urging me to get aboard of some stock
or other in which they said they knew an inside pool was operating for
a fifty-point rise.
I was busy going around and finding out all I could about several other
brokerage concerns of the same bucketing kind. It seemed to me that if
I could be sure of getting my winnings out of their clutches the only
way of my getting together some real money was to trade in these near
bucket shops.
When I had learned all I could I opened accounts with three firms. I
had taken a small office and had direct wires run to the three brokers.
I traded in a small way so they wouldn’t get frightened off at the very
start. I made money on balance and they were not slow in telling me
that they expected real business from customers who had direct wires to
their offices. They did not hanker for pikers. They figured that the
more I did the more I’d lose, and the more quickly I was wiped out the
more they’d make. It was a sound enough theory when you consider that
these people necessarily dealt with averages and the average customer
was never long-lived, financially speaking. A busted customer can’t
trade. A half-crippled customer can whine and insinuate things and make
trouble of one or another kind that hurts business.
I also established a connection with a local firm that had a direct
wire to its New York correspondent, who were also members of the New
York Stock Exchange. I had a stock ticker put in and I began to trade
conservatively. As I told you, it was pretty much like trading in
bucket shops, only it was a little slower.
It was a game that I could beat, and I did. I never got it down to
such a fine point that I could win ten times out of ten; but I won on
balance, taking it week in and week out. I was again living pretty
well, but always saving something, to increase the stake that I was
to take back to Wall Street. I got a couple of wires into two more of
these bucketing brokerage houses, making five in all--and, of course,
my good firm.
There were times when my plans went wrong and my stocks did not run
true to form, but they did the opposite of what they should have done
if they had kept up their regard for precedent. But they did not hit
me very hard--they couldn’t, with my shoestring margins. My relations
with my brokers were friendly enough. Their accounts and records did
not always agree with mine, and the differences uniformly happened to
be against me. Curious coincidence--not! But I fought for my own and
usually had my way in the end. They always had the hope of getting
away from me what I had taken from them. They regarded my winnings as
temporary loans, I think.
They really were not sporty, being in the business to make money by
hook or by crook instead of being content with the house percentage.
Since suckers always lose money when they gamble in stocks--they never
really speculate--you’d think these fellows would run what you might
call a legitimate illegitimate business. But they didn’t. “Copper your
customers and grow rich” is an old and true adage, but they did not
seem ever to have heard of it and didn’t stop at plain bucketing.
Several times they tried to double-cross me with the old tricks. They
caught me a couple of times because I wasn’t looking. They always did
that when I had taken no more than my usual line. I accused them of
being short sports or worse, but they denied it and it ended by my
going back to trading as usual. The beauty of doing business with a
crook is that he always forgives you for catching him, so long as you
don’t stop doing business with him. It’s all right as far as he is
concerned. He is willing to meet you more than half-way. Magnanimous
souls!
Well, I made up my mind that I couldn’t afford to have the normal rate
of increase of my stake impaired by crooks’ tricks, so I decided to
teach them a lesson. I picked out some stock that after having been
a speculative favorite had become inactive. Water-logged. If I had
taken one that never had been active they would have suspected my
play. I gave out buying orders on this stock to my five bucketeering
brokers. When the orders were taken and they were waiting for the next
quotation to come out on the tape I sent in an order through my Stock
Exchange house to sell a hundred shares of that particular stock at
the market. I urgently asked for quick action. Well, you can imagine
what happened when the selling order got to the floor of the Exchange;
a dull inactive stock that a commission house with out-of-town
connections wanted to sell in a hurry. Somebody got cheap stock. But
the transaction as it would be printed on the tape was the price that I
would pay on my five buying orders. I was long on balance four hundred
shares of that stock at a low figure. The wire house asked me what
I’d heard, and I said I had a tip on it. Just before the close of the
market I sent an order to my reputable house to buy back that hundred
shares, and not waste any time; that I didn’t want to be short under
any circumstances; and I didn’t care what they paid. So they wired to
New York and the order to buy that hundred quick resulted in a sharp
advance. I of course had put in selling orders for the five hundred
shares that my friends had bucketed. It worked very satisfactorily.
Still, they didn’t mend their ways, and so I worked that trick on
them several times. I did not dare punish them as severely as they
deserved, seldom more than a point or two on a hundred shares. But it
helped to swell my little hoard that I was saving for my next Wall
Street venture. I sometimes varied the process by selling some stock
short, without overdoing it. I was satisfied with my six or eight
hundred clear for each crack.
One day the stunt worked so well that it went far beyond all
calculations for a ten-point swing. I wasn’t looking for it. As a
matter of fact it so happened that I had two hundred shares instead
of my usual hundred at one broker’s, though only a hundred in the four
other shops. That was too much of a good thing--for them. They were
sore as pups about it and they began to say things over the wires. So
I went and saw the manager, the same man who had been so anxious to
get my account, and so forgiving every time I caught him trying to put
something over on me. He talked pretty big for a man in his position.
“That was a fictitious market for that stock, and we won’t pay you a
damned cent!” he swore.
“It wasn’t a fictitious market when you accepted my order to buy. You
let me in then, all right, and now you’ve got to let me out. You can’t
get around that for fairness, can you?”
“Yes, I can!” he yelled. “I can prove that somebody put up a job.”
“Who put up a job?” I asked.
“Somebody!”
“Who did they put it up on?” I asked.
“Some friends of yours were in it as sure as pop,” he said.
But I told him, “You know very well that I play a lone hand. Everybody
in this town knows that. They’ve known it ever since I started trading
in stocks. Now I want to give you some friendly advice: you just send
and get that money for me. I don’t want to be disagreeable. Just do
what I tell you.”
“I won’t pay it. It was a rigged-up transaction,” he yelled.
I got tired of his talk. So I told him: “You’ll pay it to me right now
and here.”
Well, he blustered a little more and accused me flatly of being
the guilty thimblerigger; but he finally forked over the cash. The
others were not so rambunctious. In one office the manager had been
studying these inactive-stock plays of mine and when he got my order
he actually bought the stock for me and then some for himself in the
Little Board, and he made some money. These fellows didn’t mind being
sued by customers on charges of fraud, as they generally had a good
technical legal defense ready. But they were afraid I’d attach the
furniture--the money in the bank I couldn’t because they took care not
to have any funds exposed to that danger. It would not hurt them to be
known as pretty sharp, but to get a reputation for welshing was fatal.
For a customer to lose money at his broker’s is no rare event. But for
a customer to make money and then not get it is the worst crime on the
speculators’ statute books.
I got my money from all; but that ten-point jump put an end to the
pleasing pastime of skinning skinners. They were on the lookout for the
little trick that they themselves had used to defraud hundreds of poor
customers. I went back to my regular trading; but the market wasn’t
always right for my system--that is, limited as I was by the size of
the orders they would take, I couldn’t make a killing.
I had been at it over a year, during which I used every device that I
could think of to make money trading in those wire houses. I had lived
very comfortably, bought an automobile and didn’t limit myself about
my expenses. I had to make a stake, but I also had to live while I was
doing it. If my position on the market was right I couldn’t spend as
much as I made, so that I’d always be saving some. If I was wrong I
didn’t make any money and therefore couldn’t spend. As I said, I had
saved up a fair-sized roll, and there wasn’t so much money to be made
in the five wire houses; so I decided to return to New York.
I had my own automobile and I invited a friend of mine who also was a
trader to motor to New York with me. He accepted and we started. We
stopped at New Haven for dinner. At the hotel I met an old trading
acquaintance, and among other things he told me there was a shop in
town that had a wire and was doing a pretty good business.
We left the hotel on our way to New York, but I drove by the street
where the bucket shop was to see what the outside looked like. We found
it and couldn’t resist the temptation to stop and have a look at the
inside. It wasn’t very sumptuous, but the old blackboard was there, and
the customers, and the game was on.
The manager was a chap who looked as if he had been an actor or a stump
speaker. He was very impressive. He’d say good morning as though he
had discovered the morning’s goodness after ten years of searching for
it with a microscope and was making you a present of the discovery as
well as of the sky, the sun and the firm’s bank roll. He saw us come
up in the sporty-looking automobile, and as both of us were young and
careless--I don’t suppose I looked twenty--he naturally concluded we
were a couple of Yale boys. I didn’t tell him we weren’t. He didn’t
give me a chance, but began delivering a speech. He was very glad to
see us. Would we have a comfortable seat? The market, we would find,
was philanthropically inclined that morning; in fact, clamoring to
increase the supply of collegiate pocket money, of which no intelligent
undergraduate ever had a sufficiency since the dawn of historic time.
But here and now, by the beneficence of the ticker, a small initial
investment would return thousands. More pocket money than anybody could
spend was what the stock market yearned to yield.
Well, I thought it would be a pity not to do as the nice man of the
bucket shop was so anxious to have us do, so I told him I would do as
he wished, because I had heard that lots of people made lots of money
in the stock market.
I began to trade, very conservatively, but increasing the line as I
won. My friend followed me.
We stayed overnight in New Haven and the next morning found us at the
hospitable shop at five minutes to ten. The orator was glad to see us,
thinking his turn would come that day. But I cleaned up within a few
dollars of fifteen hundred. The next morning when we dropped in on the
great orator, and handed him an order to sell five hundred Sugar he
hesitated, but finally accepted it--in silence! The stock broke over a
point and I closed out and gave him the ticket. There was exactly five
hundred dollars coming to me in profits, and my five hundred dollar
margin. He took twenty fifties from the safe, counted them three times
very slowly, then he counted them again in front of me. It looked as if
his fingers were sweating mucilage the way the notes seemed to stick to
him, but finally he handed the money to me. He folded his arms, bit his
lower lip, kept it bit, and stared at the top of a window behind me.
I told him I’d like to sell two hundred Steel. But he never stirred.
He didn’t hear me. I repeated my wish, only I made it three hundred
shares. He turned his head. I waited for the speech. But all he did was
to look at me. Then he smacked his lips and swallowed--as if he was
going to start an attack on fifty years of political misrule by the
unspeakable grafters of the opposition.
Finally he waved his hand toward the yellow-backs in my hand and said,
“Take away that bauble!”
“Take away what?” I said. I hadn’t quite understood what he was driving
at.
“Where are you going, student?” He spoke very impressively.
“New York,” I told him.
“That’s right,” he said, nodding about twenty times. “That is ex-actly
right. You are going away from here all right, because now I know two
things--two, student! I know what you are not, and I know what you are.
Yes! Yes! Yes!”
“Is that so?” I said very politely.
“Yes. You two--” He paused; and then he stopped being in Congress
and snarled: “You two are the biggest sharks in the United States of
America! Students? Ye-eh! You must be Freshmen! Ye-eh!”
We left him talking to himself. He probably didn’t mind the money so
much. No professional gambler does. It’s all in the game and the luck’s
bound to turn. It was his being fooled in us that hurt his pride.
That is how I came back to Wall Street for a third attempt. I had
been studying, of course, trying to locate the exact trouble with my
system that had been responsible for my defeats in A. R. Fullerton &
Co.’s office. I was twenty when I made my first ten thousand, and I
lost that. But I knew how and why--because I traded out of season all
the time; because when I couldn’t play according to my system, which
was based on study and experience, I went in and gambled. I hoped to
win, instead of knowing that I ought to win on form. When I was about
twenty-two I ran up my stake to fifty thousand dollars; I lost it on
May ninth. But I knew exactly why and how. It was the laggard tape
and the unprecedented violence of the movements that awful day. But
I didn’t know why I had lost after my return from St. Louis or after
the May ninth panic. I had theories--that is, remedies for some of the
faults that I thought I found in my play. But I needed actual practice.
There is nothing like losing all you have in the world for teaching you
what not to do. And when you know what not to do in order not to lose
money, you begin to learn what to do in order to win. Did you get that?
_You begin to learn!_
_V_
The average ticker hound--or, as they used to call him, tape-worm--goes
wrong, I suspect, as much from over-specialization as from anything
else. It means a highly expensive inelasticity. After all, the game
of speculation isn’t all mathematics or set rules, however rigid the
main laws may be. Even in my tape reading something enters that is more
than mere arithmetic. There is what I call the behavior of a stock,
actions that enable you to judge whether or not it is going to proceed
in accordance with the precedents that your observation has noted. If a
stock doesn’t act right don’t touch it; because, being unable to tell
precisely what is wrong, you cannot tell which way it is going. No
diagnosis, no prognosis. No prognosis, no profit.
It is a very old thing, this of noting the behavior of a stock and
studying its past performances. When I first came to New York there
was a broker’s office where a Frenchman used to talk about his chart.
At first I thought he was a sort of pet freak kept by the firm because
they were good-natured. Then I learned that he was a persuasive and
most impressive talker. He said that the only thing that didn’t lie
because it simply couldn’t was mathematics. By means of his curves
he could forecast market movements. Also he could analyse them, and
tell, for instance, why Keene did the right thing in his famous
Atchison preferred bull manipulation, and later why he went wrong in
his Southern Pacific pool. At various times one or another of the
professional traders tried the Frenchman’s system--and then went back
to their old unscientific methods of making a living. Their hit-or-miss
system was cheaper, they said. I heard that the Frenchman said Keene
admitted that the chart was 100 per cent right but claimed that the
method was too slow for practical use in an active market.
Then there was one office where a chart of the daily movement of prices
was kept. It showed at a glance just what each stock had done for
months. By comparing individual curves with the general market curve
and keeping in mind certain rules the customers could tell whether the
stock on which they got an unscientific tip to buy was fairly entitled
to a rise. They used the chart as a sort of complementary tipster.
To-day there are scores of commission houses where you find trading
charts. They come ready-made from the offices of statistical experts
and include not only stocks but commodities.
I should say that a chart helps those who can read it or rather who can
assimilate what they read. The average chart reader, however, is apt to
become obsessed with the notion that the dips and peaks and primary and
secondary movements are all there is to stock speculation. If he pushes
his confidence to its logical limit he is bound to go broke. There is
an extremely able man, a former partner of a well-known Stock Exchange
house, who is really a trained mathematician. He is a graduate of a
famous technical school. He devised charts based upon a very careful
and minute study of the behaviour of prices in many markets--stocks,
bonds, grain, cotton, money, and so on. He went back years and years
and traced the correlations and seasonal movements--oh, everything. He
used his charts in his stock trading for years. What he really did was
to take advantage of some highly intelligent averaging. They tell me he
won regularly--until the World War knocked all precedents into a cocked
hat. I heard that he and his large following lost millions before they
desisted. But not even a world war can keep the stock market from
being a bull market when conditions are bullish, or a bear market when
conditions are bearish. And all a man needs to know to make money is to
appraise conditions.
I didn’t mean to get off the track like that, but I can’t help it when
I think of my first few years in Wall Street. I know now what I did not
know then, and I think of the mistakes of my ignorance because those
are the very mistakes that the average stock speculator makes year in
and year out.
After I got back to New York to try for the third time to beat the
market in a Stock Exchange house I traded quite actively. I didn’t
expect to do as well as I did in the bucket shops, but I thought that
after a while I would do much better because I would be able to swing
a much heavier line. Yet, I can see now that my main trouble was my
failure to grasp the vital difference between stock gambling and stock
speculation. Still, by reason of my seven years’ experience in reading
the tape and a certain natural aptitude for the game, my stake was
earning not indeed a fortune but a very high rate of interest. I won
and lost as before, but I was winning on balance. The more I made the
more I spent. This is the usual experience with most men. No, not
necessarily with easy-money pickers, but with every human being who is
not a slave of the hoarding instinct. Some men, like old Russell Sage,
have the money-making and the money-hoarding instinct equally well
developed, and of course they die disgustingly rich.
The game of beating the market exclusively interested me from ten to
three every day, and after three, the game of living my life. Don’t
misunderstand me. I never allowed pleasure to interfere with business.
When I lost it was because I was wrong and not because I was suffering
from dissipation or excesses. There never were any shattered nerves or
rum-shaken limbs to spoil my game. I couldn’t afford anything that kept
me from feeling physically and mentally fit. Even now I am usually in
bed by ten. As a young man I never kept late hours, because I could
not do business properly on insufficient sleep. I was doing better than
breaking even and that is why I didn’t think there was any need to
deprive myself of the good things of life. The market was always there
to supply them. I was acquiring the confidence that comes to a man
from a professionally dispassionate attitude toward his own method of
providing bread and butter for himself.
The first change I made in my play was in the matter of time. I
couldn’t wait for the sure thing to come along and then take a point
or two out of it as I could in the bucket shops. I had to start much
earlier if I wanted to catch the move in Fullerton’s office. In other
words, I had to study what was going to happen; to anticipate stock
movements. That sounds asininely commonplace, but you know what I
mean. It was the change in my own attitude toward the game that was of
supreme importance to me. It taught me, little by little, the essential
difference between betting on fluctuations and anticipating inevitable
advances and declines, between gambling and speculating.
I had to go further back than an hour in my studies of the
market--which was something I never would have learned to do in the
biggest bucket shop in the world. I interested myself in trade reports
and railroad earnings and financial and commercial statistics. Of
course I loved to trade heavily and they called me the Boy Plunger;
but I also liked to study the moves. I never thought that anything was
irksome if it helped me to trade more intelligently. Before I can solve
a problem I must state it to myself. When I think I have found the
solution I must prove I am right. I know of only one way to prove it;
and that is, with my own money.
Slow as my progress seems now, I suppose I learned as fast as I
possibly could, considering that I was making money on balance. If I
had lost oftener perhaps it might have spurred me to more continuous
study. I certainly would have had more mistakes to spot. But I am not
sure of the exact value of losing, for if I had lost more I would have
lacked the money to test out the improvements in my methods of trading.
Studying my winning plays in Fullerton’s office I discovered that
although I often was 100 per cent right on the market--that is, in my
diagnosis of conditions and general trend--I was not making as much
money as my market “rightness” entitled me to. Why wasn’t I?
There was as much to learn from partial victory as from defeat.
For instance, I had been bullish from the very start of a bull market,
and I had backed my opinion by buying stocks. An advance followed,
as I had clearly foreseen. So far, all very well. But what else did
I do? Why, I listened to the elder statesmen and curbed my youthful
impetuousness. I made up my mind to be wise and play carefully,
conservatively. Everybody knew that the way to do that was to take
profits and buy back your stocks on reactions. And that is precisely
what I did, or rather what I tried to do; for I often took profits and
waited for a reaction that never came. And I saw my stock go kiting up
ten points more and I sitting there with my four-point profit safe in
my conservative pocket. _They say you never grow poor taking profits.
No, you don’t. But neither do you grow rich taking a four-point profit
in a bull market._
Where I should have made twenty thousand dollars I made two thousand.
That was what my conservatism did for me. About the time I discovered
what a small percentage of what I should have made I was getting I
discovered something else, and that is that suckers differ among
themselves according to the degree of experience.
The tyro knows nothing, and everybody, including himself, knows it.
But the next, or second, grade thinks he knows a great deal and makes
others feel that way too. He is the experienced sucker, who has
studied--not the market itself but a few remarks about the market made
by a still higher grade of suckers. The second-grade sucker knows how
to keep from losing his money in some of the ways that get the raw
beginner. It is this semisucker rather than the 100 per cent article
who is the real all-the-year-round support of the commission houses.
He lasts about three and a half years on an average, as compared with
a single season of from three to thirty weeks, which is the usual Wall
Street life of a first offender. It is naturally the semisucker who is
always quoting the famous trading aphorisms and the various rules of
the game. _He knows all the don’ts that ever fell from the oracular
lips of the old stagers--excepting the principal one, which is: Don’t
be a sucker!_
_This semisucker is the type that thinks he has cut his wisdom teeth
because he loves to buy on declines._ He waits for them. He measures
his bargains by the number of points it has sold off from the top. In
big bull markets the plain unadulterated sucker, utterly ignorant of
rules and precedents, buys blindly because he hopes blindly. He makes
most of the money--until one of the healthy reactions takes it away
from him at one fell swoop. But the Careful Mike sucker does what I
did when I thought I was playing the game intelligently--according to
the intelligence of others. I knew I needed to change my bucket-shop
methods and I thought I was solving my problem with any change,
particularly one that assayed high gold values according to the
experienced traders among the customers.
Most--let us call ’em customers--are alike. You find very few who can
truthfully say that Wall Street doesn’t owe them money. In Fullerton’s
there were the usual crowd. All grades! Well, there was one old chap
who was not like the others. To begin with, he was a much older man.
Another thing was that he never volunteered advice and never bragged of
his winnings. He was a great hand for listening very attentively to the
others. He did not seem very keen to get tips--that is, he never asked
the talkers what they’d heard or what they knew. But when somebody gave
him one he always thanked the tipster very politely. Sometimes he
thanked the tipster again--when the tip turned out O.K. But if it went
wrong he never whined, so that nobody could tell whether he followed it
or let it slide by. It was a legend of the office that the old jigger
was rich and could swing quite a line. But he wasn’t donating much to
the firm in the way of commissions; at least not that anyone could see.
His name was Partridge, but they nicknamed him Turkey behind his back,
because he was so thick-chested and had a habit of strutting about the
various rooms, with the point of his chin resting on his breast.
The customers, who were all eager to be shoved and forced into doing
things so as to lay the blame for failure on others, used to go to old
Partridge and tell him what some friend of a friend of an insider had
advised them to do in a certain stock. They would tell him what they
had not done with the tip so he would tell them what they ought to do.
But whether the tip they had was to buy or to sell, the old chap’s
answer was always the same.
The customer would finish the tale of his perplexity and then ask:
“What do you think I ought to do?”
Old Turkey would cock his head to one side, contemplate his fellow
customer with a fatherly smile, and finally he would say very
impressively, “You know, it’s a bull market!”
Time and again I heard him say, “Well, this is a bull market, you
know!” as though he were giving to you a priceless talisman wrapped up
in a million-dollar accident-insurance policy. And of course I did not
get his meaning.
One day a fellow named Elmer Harwood rushed into the office, wrote out
an order and gave it to the clerk. Then he rushed over to where Mr.
Partridge was listening politely to John Fanning’s story of the time he
overheard Keene give an order to one of his brokers and all that John
made was a measly three points on a hundred shares and of course the
stock had to go up twenty-four points in three days right after John
sold out. It was at least the fourth time that John had told him that
tale of woe, but old Turkey was smiling as sympathetically as if it was
the first time he heard it.
Well, Elmer made for the old man and, without a word of apology to
John Fanning, told Turkey, “Mr. Partridge, I have just sold my Climax
Motors. My people say the market is entitled to a reaction and that
I’ll be able to buy it back cheaper. So you’d better do likewise. That
is, if you’ve still got yours.”
Elmer looked suspiciously at the man to whom he had given the original
tip to buy. The amateur, or gratuitous, tipster always thinks he owns
the receiver of his tip body and soul, even before he knows how the tip
is going to turn out.
“Yes, Mr. Harwood, I still have it. Of course!” said Turkey gratefully.
It was nice of Elmer to think of the old chap.
“Well, now is the time to take your profit and get in again on the
next dip,” said Elmer, as if he had just made out the deposit slip
for the old man. Failing to perceive enthusiastic gratitude in the
beneficiary’s face, Elmer went on: “I have just sold every share I
owned!”
From his voice and manner you would have conservatively estimated it at
ten thousand shares.
But Mr. Partridge shook his head regretfully and whined, “No! No! I
can’t do that!”
“What?” yelled Elmer.
“I simply can’t!” said Mr. Partridge. He was in great trouble.
“Didn’t I give you the tip to buy it?”
“You did, Mr. Harwood, and I am very grateful to you. Indeed, I am,
sir. But----”
“Hold on! Let me talk! And didn’t that stock go up seven points in ten
days? Didn’t it?”
“It did, and I am much obliged to you, my dear boy. But I couldn’t
think of selling that stock.”
“You couldn’t?” asked Elmer, beginning to look doubtful himself. It is
a habit with most tip givers to be tip takers.
“No, I couldn’t.”
“Why not?” And Elmer drew nearer.
“Why, this is a bull market!” The old fellow said it as though he had
given a long and detailed explanation.
“That’s all right,” said Elmer, looking angry because of his
disappointment. “I know this is a bull market as well as you do. But
you’d better slip them that stock of yours and buy it back on the
reaction. You might as well reduce the cost to yourself.”
“My dear boy,” said old Partridge, in great distress--“my dear boy, _if
I sold that stock now I’d lose my position; and then where would I be_?”
Elmer Harwood threw up his hands, shook his head and walked over to me
to get sympathy: “Can you beat it?” he asked me in a stage whisper. “I
ask you!”
I didn’t say anything. So he went on: “I give him a tip on Climax
Motors. He buys five hundred shares. He’s got seven points’ profit and
I advise him to get out and buy ’em back on the reaction that’s overdue
even now. And what does he say when I tell him? He says that if he
sells he’ll lose his job. What do you know about that?”
“I beg your pardon, Mr. Harwood; I didn’t say I’d lose my job,” cut in
old Turkey. “I said I’d lose my position. And when you are as old as I
am and you’ve been through as many booms and panics as I have, you’ll
know that to lose your position is something nobody can afford; not
even John D. Rockefeller. I hope the stock reacts and that you will be
able to repurchase your line at a substantial concession, sir. But I
myself can only trade in accordance with the experience of many years.
I paid a high price for it and I don’t feel like throwing away a second
tuition fee. But I am as much obliged to you as if I had the money in
the bank. It’s a bull market, you know.” And he strutted away, leaving
Elmer dazed.
What old Mr. Partridge said did not mean much to me until I began
to think about my own numerous failures to make as much money as I
ought to when I was so right on the general market. The more I studied
the more I realized how wise that old chap was. He had evidently
suffered from the same defect in his young days and knew his own
human weaknesses. He would not lay himself open to a temptation that
experience had taught him was hard to resist and had always proved
expensive to him, as it was to me.
I think it was a long step forward in my education when I realized at
last that when old Mr. Partridge kept on telling the other customers,
“Well, you know this is a bull market!” he really meant to tell them
that the big money was not in the individual fluctuations but in the
main movements--that is, not in reading the tape but in sizing up the
entire market and its trend.
And right here let me say one thing: After spending many years in
Wall Street and after making and losing millions of dollars I want to
tell you this: _It never was my thinking that_ made the big money for
me. _It was always my sitting._ Got that? My sitting tight! _It is no
trick at all to be right on the market. You always find lots of early
bulls in bull markets and early bears in bear markets._ I’ve known
many men who were right at exactly the right time, and began buying or
selling stocks when prices were at the very level which should show the
greatest profit. And their experience invariably matched mine--that is,
they made no real money out of it. Men who can both be right and sit
tight are uncommon. I found it one of the hardest things to learn. But
it is only after a stock operator has firmly grasped this that he can
make big money. It is literally true that millions come easier to a
trader after he knows how to trade than hundreds did in the days of his
ignorance.
The reason is that a man may see straight and clearly and yet become
impatient or doubtful _when the market takes its time about doing
as he figured it must do_. That is why so many men in Wall Street,
who are not at all in the sucker class, not even in the third grade,
nevertheless lose money. The market does not beat them. They beat
themselves, because though they have brains _they cannot sit tight_.
Old Turkey was dead right in doing and saving what he did. He had not
only the courage of his convictions but the intelligent patience to sit
tight.
Disregarding the big swing and trying to jump in and out was fatal to
me. _Nobody can catch all the fluctuations._ In a bull market your game
is to buy and hold until you believe that the bull market is near its
end. To do this you must study the general conditions and not tips or
special factors affecting individual stocks. Then get out of all your
stocks; get out for keeps! Wait until you see--or if you prefer, until
you think you see--the turn of the market; the beginning of a reversal
of general conditions. You have to use your brains and your vision to
do this; otherwise my advice would be as idiotic as to tell you to buy
cheap and sell dear. _One of the most helpful things that anybody can
learn is to give up trying to catch the last eighth--or the first.
These two are the most_ expensive eighths in the world. They have cost
stock traders, in the aggregate, enough millions of dollars to build a
concrete highway across the continent.
Another thing I noticed in studying my plays in Fullerton’s office
after I began to trade less unintelligently was that my initial
operations seldom showed me a loss. That naturally made me decide to
start big. It gave me confidence in my own judgment before I allowed
it to be vitiated by the advice of others or even by my own impatience
at times. Without faith in his own judgment no man can go very far
in this game. That is about all I have learned--to study general
conditions, _to take a position and stick to it. I can wait without
a twinge of impatience. I can see a setback without being shaken,
knowing that it is only temporary._ I have been short one hundred
thousand shares and I have seen a big rally coming. I have figured--and
figured correctly--that such a rally as I felt was inevitable, and even
wholesome, would make a difference of one million dollars in my paper
profits. And I nevertheless have stood pat and seen half my paper
profit wiped out, without once considering the advisability of covering
my shorts to put them out again on the rally. I knew that if I did I
might lose my position and with it the certainty of a big killing. It
is the big swing that makes the big money for you.
If I learned all this so slowly it was because I learned by my
mistakes, _and some time always elapses between making a mistake
and realizing it_, and more time between realizing it and exactly
determining it. But at the same time I was faring pretty comfortably
and was very young, so that I made up in other ways. Most of my
winnings were still made in part through my tape reading because the
kind of markets we were having lent themselves fairly well to my
method. I was not losing either as often or as irritatingly as in the
beginning of my New York experiences. It wasn’t anything to be proud
of, when you think that I had been broke three times in less than two
years. And as I told you, being broke is a very efficient educational
agency.
I was not increasing my stake very fast because I lived up to the
handle all the time. I did not deprive myself of many of the things
that a fellow of my age and tastes would want. I had my own automobile
and I could not see any sense in skimping on living when I was taking
it out of the market. The ticker only stopped Sundays and holidays,
which was as it should be. Every time I found the reason for a loss or
the why and how of another mistake, I added a brand-new _Don’t!_ to
my schedule of assets. And the nicest way to capitalize my increasing
assets was by not cutting down on my living expenses. Of course I had
some amusing experiences and some that were not so amusing, but if I
told them all in detail I’d never finish. As a matter of fact, the only
incidents that I remember without special effort are those that taught
me something of definite value to me in my trading; something that
added to my store of knowledge of the game--and of myself!
_VI_
In the spring of 1906 I was in Atlantic City for a short vacation. I
was out of stocks and was thinking only of having a change of air and
a nice rest. By the way, I had gone back to my first brokers, Harding
Brothers, and my account had got to be pretty active. I could swing
three or four thousand shares. That wasn’t much more than I had done in
the old Cosmopolitan shop when I was barely twenty years of age. But
there was some difference between my one-point margin in the bucket
shop and the margin required by brokers who actually bought or sold
stocks for my account on the New York Stock Exchange.
You may remember the story I told you about that time when I was
short thirty-five hundred Sugar in the Cosmopolitan and I had a hunch
something was wrong and I’d better close the trade? Well, I have often
had that curious feeling. As a rule, I yield to it. But at times I have
pooh-poohed the idea and have told myself that it was simply asinine
to follow any of these sudden blind impulses to reverse my position.
I have ascribed my hunch to a state of nerves resulting from too many
cigars or insufficient sleep or a torpid liver or something of that
kind. When I have argued myself into disregarding my impulse and have
stood pat I have always had cause to regret it. A dozen instances
occur to me when I did not sell as per hunch, and the next day I’d go
downtown and the market would be strong, or perhaps even advance, and
I’d tell myself how silly it would have been to obey the blind impulse
to sell. But on the following day there would be a pretty bad drop.
Something had broken loose somewhere and I’d have made money by not
being so wise and logical. The reason plainly was not physiological but
psychological.
I want to tell you only about one of them because of what it did for
me. It happened when I was having that little vacation in Atlantic City
in the spring of 1906. I had a friend with me who also was a customer
of Harding Brothers. I had no interest in the market one way or another
and was enjoying my rest. I can always give up trading to play, unless
of course it is an exceptionally active market in which my commitments
are rather heavy. It was a bull market, as I remember it. The outlook
was favorable for general business and the stock market had slowed down
but the tone was firm and all indications pointed to higher prices.
One morning after we had breakfasted and had finished reading all the
New York morning papers, and had got tired of watching the sea gulls
picking up clams and flying up with them twenty feet in the air and
dropping them on the hard wet sand to open them for their breakfast, my
friend and I started up the Boardwalk. That was the most exciting thing
we did in the daytime.
It was not noon yet, and we walked up slowly to kill time and breathe
the salt air. Harding Brothers had a branch office on the Boardwalk and
we used to drop in every morning and see how they’d opened. It was more
force of habit than anything else, for I wasn’t doing anything.
The market, we found, was strong and active. My friend, who was quite
bullish, was carrying a moderate line purchased several points lower.
He began to tell me what an obviously wise thing it was to hold stocks
for much higher prices. I wasn’t paying enough attention to him to take
the trouble to agree with him. I was looking over the quotation board,
noting the changes--they were mostly advances--until I came to Union
Pacific. I got a feeling that I ought to sell it. I can’t tell you
more. I just felt like selling it. I asked myself why I should feel
like that, and I couldn’t find any reason whatever for going short of
UP.
I stared at the last price on the board until I couldn’t see any
figures or any board or anything else, for that matter. All I knew
was that I wanted to sell Union Pacific and I couldn’t find out why I
wanted to.
I must have looked queer, for my friend, who was standing alongside of
me, suddenly nudged me and asked, “Hey, what’s the matter?”
“I don’t know,” I answered.
“Going to sleep?” he said.
“No,” I said. “I am not going to sleep. What I am going to do is to
sell that stock.” I had always made money following my hunches.
I walked over to a table where there were some blank order pads. My
friend followed me. I wrote out an order to sell a thousand Union
Pacific at the market and handed it to the manager. He was smiling when
I wrote it and when he took it. But when he read the order he stopped
smiling and looked at me.
“Is this right?” he asked me. But I just looked at him and he rushed it
over to the operator.
“What are you doing?” asked my friend.
“I’m selling it!” I told him.
“Selling what?” he yelled at me. If he was a bull how could I be a
bear? Something was wrong.
“A thousand UP.,” I said.
“Why?” he asked me in great excitement.
I shook my head, meaning I had no reason. But he must have thought I’d
got a tip, because he took me by the arm and led me outside into the
hall, where we could be out of sight and hearing of the other customers
and rubbering chairwarmers.
“What did you hear?” he asked me.
He was quite excited. UP. was one of his pets and he was bullish on it
because of its earnings and its prospects. But he was willing to take a
bear tip on it at second hand.
“Nothing!” I said.
“You didn’t?” He was skeptical and showed it plainly.
“I didn’t hear a thing.”
“Then why in blazes are you selling?”
“I don’t know,” I told him. I spoke gospel truth.
“Oh, come across, Larry,” he said.
He knew it was my habit to know why I traded. I had sold a thousand
shares of Union Pacific. I must have a very good reason to sell that
much stock in the face of the strong market.
“I don’t know,” I repeated. “I just feel that something is going to
happen.”
“What’s going to happen?”
“I don’t know. I can’t give you any reason. All I know is that I want
to sell that stock. And I’m going to let ’em have another thousand.”
I walked back into the office and gave an order to sell a second
thousand. If I was right in selling the first thousand I ought to have
out a little more.
“What could possibly happen?” persisted my friend, who couldn’t make up
his mind to follow my lead. If I’d told him that I had heard UP. was
going down he’d have sold it without asking me from whom I’d heard it
or why. “What could possibly happen?” he asked again.
“A million things could happen. But I can’t promise you that any of
them will. I can’t give you any reasons and I can’t tell fortunes,” I
told him.
“Then you’re crazy,” he said. “Stark crazy, selling that stock without
rime or reason. You don’t know why you want to sell it?”
“I don’t know why I want to sell it. I only know I do want to,” I
said. “I want to, like everything.” The urge was so strong that I sold
another thousand.
That was too much for my friend. He grabbed me by the arm and said,
“Here! Let’s get out of this place before you sell the entire capital
stock.”
I had sold as much as I needed to satisfy my feeling, so I followed him
without waiting for a report on the last two thousand shares. It was a
pretty good jag of stock for me to sell even with the best of reasons.
It seemed more than enough to be short of without any reason whatever,
particularly when the entire market was so strong and there was nothing
in sight to make anybody think of the bear side. But I remembered that
on previous occasions when I had the same urge to sell and didn’t do it
I always had reasons to regret it.
I have told some of these stories to friends, and some of them tell me
it isn’t a hunch but the subconscious mind, which is the creative mind,
at work. That is the mind which makes artists do things without their
knowing how they came to do them. Perhaps with me it was the cumulative
effect of a lot of little things individually insignificant but
collectively powerful. Possibly my friend’s unintelligent bullishness
aroused a spirit of contradiction and I picked on UP. because it had
been touted so much. I can’t tell you what the cause or motive for
hunches may be. All I know is that I went out of the Atlantic City
branch office of Harding Brothers short three thousand Union Pacific in
a rising market, and I wasn’t worried a bit.
I wanted to know what price they’d got for my last two thousand shares.
So after luncheon we walked up to the office. I had the pleasure of
seeing that the general market was strong and Union Pacific higher.
“I see your finish,” said my friend. You could see he was glad he
hadn’t sold any.
The next day the general market went up some more and I heard nothing
but cheerful remarks from my friend. But I felt sure I had done right
to sell UP., and I never get impatient when I feel I am right. What’s
the sense? That afternoon Union Pacific stopped climbing, and toward
the end of the day began to go off. Pretty soon it got down to a point
below the level of the average of my three thousand shares. I felt more
positive than ever that I was on the right side, and since I felt that
way I naturally had to sell some more. So, toward the close, I sold an
additional two thousand shares.
There I was, short five thousand shares of UP. on a hunch. That was
as much as I could sell in Harding’s office with the margin I had
up. It was too much stock for me to be short of, on a vacation; so
I gave up the vacation and returned to New York that very night.
There was no telling what might happen and I thought I’d better be
Johnny-on-the-spot. There I could move quickly if I had to.
The next day we got the news of the San Francisco earthquake. It was
an awful disaster. But the market opened down only a couple of points.
_The bull forces were at work, and the public never is independently
responsive to news. You see that all the time. If there is a solid
bull foundation, for instance, whether or not what the papers call
bull manipulation is going on the same time, certain news items fail
to have the effect they would have if the Street was bearish._ It is
all in the state of sentiment at the time. In this case the Street did
not appraise the extent of the catastrophe because it didn’t wish to.
Before the day was over prices came back.
I was short five thousand shares. The blow had fallen, but my stock
hadn’t. My hunch was of the first water, but my bank account wasn’t
growing; not even on paper. The friend who had been in Atlantic City
with me when I put out my short line in UP. was glad and sad about it.
He told me: “That was some hunch, kid. But, say, when the talent and
the money are all on the bull side what’s the use of bucking against
them? They are bound to win out.”
“Give them time,” I said. I meant prices. I wouldn’t cover because I
knew the damage was enormous and the Union Pacific would be one of the
worst sufferers. _But it was exasperating to see the blindness of the
Street._
“Give ’em time and your skin will be where all the other bear hides are
stretched out in the sun, drying,” he assured me.
“What would you do?” I asked him. “Buy UP. on the strength of the
millions of dollars of damage suffered by the Southern Pacific and
other lines? Where are the earnings for dividends going to come from
after they pay for all they’ve lost? The best you can say is that the
trouble may not be as bad as it is painted. But is that a reason for
buying the stocks of the roads chiefly affected? Answer me that.”
But all my friend said was: “Yes, that listens fine. But I tell you,
the market doesn’t agree with you. The tape doesn’t lie, does it?”
“_It doesn’t always tell the truth on the instant_,” _I said._
“Listen. A man was talking to Jim Fisk a little before Black Friday,
giving ten good reasons why gold ought to go down for keeps. He got so
encouraged by his own words that he ended by telling Fisk that he was
going to sell a few million. And Jim Fisk just looked at him and said,
“Go ahead! Do! Sell it short and invite me to your funeral.”
“Yes,” I said; “and if that chap had sold it short, look at the killing
he would have made! Sell some UP. yourself.”
“Not I! I’m the kind that thrives best on not rowing against wind and
tide.”
On the following day, when fuller reports came in, the market began to
slide off, but even then not as violently as it should. Knowing that
nothing under the sun could stave off a substantial break I doubled up
and sold five thousand shares. Oh, by that time it was plain to most
people, and my brokers were willing enough. It wasn’t reckless of them
or of me, not the way I sized up the market. On the day following, the
market began to go for fair. There was the dickens to pay. Of course I
pushed my luck for all it was worth. I doubled up again and sold ten
thousand shares more. It was the only play possible.
I wasn’t thinking of anything except that I was right--100 per cent
right--and that this was a heaven-sent opportunity. It was up to me to
take advantage of it. I sold more. Did I think that with such a big
line of shorts out, it wouldn’t take much of a rally to wipe out my
paper profits and possibly my principal? I don’t know whether I thought
of that or not, but if I did it didn’t carry much weight with me. I
wasn’t plunging recklessly. I was really playing conservatively. There
was nothing that anybody could do to undo the earthquake, was there?
They couldn’t restore the crumpled buildings overnight, free, gratis,
for nothing, could they? All the money in the world couldn’t help much
in the next few hours, could it?
I was not betting blindly. I wasn’t a crazy bear. I wasn’t drunk with
success or thinking that because Frisco was pretty well wiped off the
map the entire country was headed for the scrap heap. No, indeed! I
didn’t look for a panic. Well, the next day I cleaned up. I made two
hundred and fifty thousand dollars. It was my biggest winnings up to
that time. It was all made in a few days. The Street paid no attention
to the earthquake the first day or two. They’ll tell you that it was
because the first despatches were not so alarming, but I think it was
because it took so long to change the point of view of the public
toward the securities markets. Even the professional traders for the
most part were slow and shortsighted.
I have no explanation to give you, either scientific or childish. I am
telling you what I did, and why, and what came of it. I was much less
concerned with the mystery of the hunch than with the fact that I got a
quarter of a million out of it. It meant that I could now swing a much
bigger line than ever, if or when the time came for it.
That summer I went to Saratoga Springs. It was supposed to be a
vacation for me, but I kept an eye on the market. To begin with,
I wasn’t so tired that it bothered me to think about it. And then,
everybody I knew up there had or had had an active interest in it.
We naturally talked about it. I have noticed that there is quite a
difference between talking and trading. Some of these chaps remind you
of the bold clerk who talks to his cantankerous employer as to a yellow
dog--when he tells you about it.
Harding Brothers had a branch office in Saratoga. Many of their
customers were there. But the real reason, I suppose, was the
advertising value. Having a branch office in a resort is simply
high-class billboard advertising. I used to drop in and sit around
with the rest of the crowd. The manager was a very nice chap from the
New York office who was there to give the glad hand to friends and
strangers and, if possible, to get business. It was a wonderful place
for tips--all kinds of tips, horse-race, stock-market, and waiters’.
The office knew I didn’t take any, so the manager didn’t come and
whisper confidentially in my ear what he’d just got on the q. t. from
the New York office. He simply passed over the telegrams, saying, “This
is what they’re sending out,” or something of the kind.
Of course I watched the market. With me, to look at the quotation board
and to read the signs is one process. My good friend Union Pacific, I
noticed, looked like going up. _The price was high, but the stock acted
as if it were being accumulated._ I watched it a couple of days without
trading in it, and the more I watched it the more convinced I became
that it was being bought on balance by somebody who was no piker,
somebody who not only had a big bank roll but knew what was what. Very
clever accumulation, I thought.
As soon as I was sure of this I naturally began to buy it, at about
160. It kept on acting all hunky, and so I kept on buying it, five
hundred shares at a clip. _The more I bought the stronger it got,
without any spurt, and I was feeling very comfortable._ I couldn’t see
any reason why that stock shouldn’t go up a great deal more; not with
what I read on the tape.
All of a sudden the manager came to me and said they’d got a message
from New York--they had a direct wire of course--asking if I was in
the office, and when they answered yes, another came saying: “Keep him
there. Tell him Mr. Harding wants to speak to him.”
I said I’d wait, and bought five hundred shares more of UP. I couldn’t
imagine what Harding could have to say to me. I didn’t think it was
anything about business. My margin was more than ample for what I was
buying. Pretty soon the manager came and told me that Mr. Harding
wanted me on the long-distance telephone.
“Hello, Ed,” I said.
But he said, “What the devil’s the matter with you? Are you crazy?”
“Are you?” I said.
“What are you doing?” he asked.
“What do you mean?”
“Buying all that stock.”
“Why, isn’t my margin all right?”
“It isn’t a case of margin, but of being a plain sucker.”
“I don’t get you.”
“Why are you buying all that Union Pacific?”
“It’s going up,” I said.
“Going up, hell! Don’t you know that the insiders are feeding it out to
you? You’re just about the easiest mark up there. You’d have more fun
losing it on the ponies. Don’t let them kid you.”
“Nobody is kidding me,” I told him. “I haven’t talked to a soul about
it.”
But he came back at me: “You can’t expect a miracle to save you every
time you plunge into that stock. Get out while you’ve still got a
chance,” he said. “It’s a crime to be long of that stock at this
level--when these highbinders are shoveling it out by the ton.”
“The tape says they’re buying it,” I insisted.
“Larry, I got heart disease when your orders began to come in. For the
love of Mike, don’t be a sucker. Get out! Right away. It’s liable to
bust wide open any minute. I’ve done my duty. Good-by!” And he hung up.
Ed Harding was a very clever chap, unusually well-informed and a real
friend, disinterested and kind-hearted. And what was even more, I knew
he was in position to hear things. All I had to go by, in my purchases
of UP., was my years of studying the behaviour of stocks and my
perception of certain symptoms which experience had taught me usually
accompanied a substantial rise. _I don’t know what happened to me,
but I suppose I must have concluded that my tape reading told me the
stock was being absorbed simply because very clever manipulation by the
insiders made the tape tell a story that wasn’t true._ Possibly I was
impressed by the pains Ed Harding took to stop me from making what he
was so sure would be a colossal mistake on my part. Neither his brains
nor his motives were to be questioned. Whatever it was that made me
decide to follow his advice, I cannot tell you; but follow it, I did.
I sold out all my Union Pacific. _Of course if it was unwise to be long
of it, it was equally unwise not to be short of it. So after I got rid
of my long stock I sold four thousand shares short. I put out most of
it around 162._
The next day the directors of the Union Pacific Company declared a 10
per cent dividend on the stock. At first nobody in Wall Street believed
it. It was too much like the desperate manœuvre of cornered gamblers.
All the newspapers jumped on the directors. But while the Wall Street
talent hesitated to act the market boiled over. Union Pacific led, and
on huge transactions made a new high-record price. Some of the room
traders made fortunes in an hour and I remember later hearing about
a rather dull-witted specialist who made a mistake that put three
hundred and fifty thousand dollars in his pocket. He sold his seat the
following week and became a gentleman farmer the following month.
Of course I realised, the moment I heard the news of the declaration
of the unprecedented 10 per cent dividend, that I got what I deserved
for disregarding the voice of experience and listening to the voice of
a tipster. _My own convictions I had set aside for the suspicions of a
friend, simply because he was disinterested and as a rule knew what he
was doing._
As soon as I saw Union Pacific making new high records I said to
myself, “This is no stock for me to be short of.”
All I had in the world was up as margin in Harding’s office. I was
neither cheered nor made stubborn by the knowledge of that fact. What
was plain was that I had read the tape accurately and that I had been a
ninny to let Ed Harding shake my own resolution. There was no sense in
recriminations, because I had no time to lose; and besides, what’s done
is done. So I gave an order to take in my shorts. The stock was around
165 when I sent in that order to buy in the four thousand UP. at the
market. I had a three-point loss on it at that figure. Well, my brokers
paid 172 and 174 for some of it before they were through. I found when
I got my reports that Ed Harding’s kindly intentioned interference cost
me forty thousand dollars. _A low price for a man to pay for not having
the courage of his own convictions! It was a cheap lesson._
I wasn’t worried, because the tape said still higher prices. It was
an unusual move and there were no precedents for the action of the
directors, but I did this time what I thought I ought to do. As soon
as I had given the first order to buy four thousand shares to cover my
shorts I decided to profit by what the tape indicated and so I went
along. I bought four thousand shares and held that stock until the next
morning. Then I got out. I not only made up the forty thousand dollars
I had lost but about fifteen thousand besides. If Ed Harding hadn’t
tried to save me money I’d have made a killing. But he did me a very
great service, for it was the lesson of that episode that, I firmly
believe, _completed_ my education as a trader.
It was not that all I needed to learn was not to take tips but follow
my own inclination. _It was that I gained confidence in myself and I
was able finally to shake off the old method of trading._ That Saratoga
experience was my last haphazard, hit-or-miss operation. From then on
I began to think of basic conditions instead of individual stocks. I
promoted myself to a higher grade in the hard school of speculation. It
was a long and difficult step to take.
_VII_
I never hesitate to tell a man that I am bullish or bearish. But I do
not tell people to buy or sell any particular stock. In a bear market
all stocks go down and in a bull market they go up. I don’t mean of
course that in a bear market caused by a war, ammunition shares do not
go up. I speak in a general sense. But the average man doesn’t wish to
be told that it is a bull or a bear market. What he desires is to be
told specifically which particular stock to buy or sell. He wants to
get something for nothing. He does not wish to work. He doesn’t even
wish to have to think. It is too much bother to have to count the money
that he picks up from the ground.
Well, I wasn’t that lazy, but I found it easier to think of individual
stocks than of the general market and therefore of individual
fluctuations rather than of general movements. _I had to change and I
did._
_People don’t seem to grasp easily the fundamentals of stock trading. I
have often said that to buy on a rising market is the most comfortable
way of buying stocks. Now, the point is not so much to buy as cheap as
possible or go short at top prices, but to buy or sell at the right
time. When I am bearish and I sell a stock, each sale must be at a
lower level than the previous sale. When I am buying, the reverse is
true. I must buy on rising scale. I don’t buy long stock on a scale
down, I buy on a scale up._
Let us suppose, for example, that I am buying some stock. _I’ll buy
two thousand shares at 110. If the stock goes up to 111 after I buy
it I am, at least temporarily, right in my operation, because it is a
point higher; it shows me a profit. Well, because I am right I go in
and buy another two thousand shares._ If the market is still rising I
buy a third lot of two thousand shares. Say the price goes up to 114.
I think it is enough for the time being. I now have a trading basis to
work from. I am long six thousand shares at an average of 111¾, and
the stock is selling at 114. I won’t buy any more just then. I wait
and see. I figure that at some stage of the rise there is going to be
a reaction. I want to see how the market takes care of itself after
that reaction. It will probably react to where I got my third lot. Say
that after going higher it falls back to 112¼, and then rallies. Well,
just as it goes back to 113¾ I shoot an order to buy four thousand--at
the market of course. Well, if I get that four thousand at 113¾ I know
something is wrong and I’ll give a testing order--that is, I’ll sell
one thousand shares to see how the market takes it. But suppose that of
the order to buy the four thousand shares that I put in when the price
was 113¾ I get two thousand at 114 and five hundred at 114½ and the
rest on the way up so that for the last five hundred I pay 115½. Then
I know I am right. It is the way I get the four thousand shares that
tells me whether I am right in buying that particular stock at that
particular time--_for of course I am working on the assumption that I
have checked up general conditions pretty well and they are bullish. I
never want to buy stocks too cheap or too easily._
I remember a story I heard about Deacon S. V. White when he was one of
the big operators of the Street. He was a very fine old man, clever as
they make them, and brave. He did some wonderful things in his day,
from all I’ve heard.
It was in the old days when Sugar was one of the most continuous
purveyors of fireworks in the market. H. O. Havemeyer, president of the
company, was in the heyday of his power. I gather from talks with the
old-timers that H.O. and his following had all the resources of cash
and cleverness necessary to put through successfully any deal in their
own stock. They tell me that Havemeyer trimmed more small professional
traders in that stock than any other insider in any other stock. As a
rule, the floor traders are more likely to thwart the insiders’ game
than help it.
One day a man who knew Deacon White rushed into the office all excited
and said, “Deacon, you told me if I ever got any good information to
come to you at once with it and if you used it you’d carry me for a few
hundred shares.” He paused for breath and for confirmation.
The deacon looked at him in that meditative way he had and said, “I
don’t know whether I ever told you exactly that or not, but I am
willing to pay for information that I can use.”
“Well, I’ve got it for you.”
“Now, that’s nice,” said the deacon, so mildly that the man with the
info swelled up and said, “Yes, sir, deacon.” Then he came closer so
nobody else would hear and said, “H. O. Havemeyer is buying Sugar.”
“Is he?” asked the deacon quite calmly.
It peeved the informant, who said impressively: “Yes, sir. Buying all
he can get, deacon.”
“My friend, are you sure?” asked old S.V.
“Deacon, I know it for a positive fact. The old inside gang are buying
all they can lay their hands on. It’s got something to do with the
tariff and there’s going to be a killing in the common. It will cross
the preferred. And that means a sure thirty points for a starter.”
“D’you really think so?” And the old man looked at him over the top of
the old-fashioned silver-rimmed spectacles that he had put on to look
at the tape.
“Do I think so? No, I don’t think so; I know so. Absolutely! Why,
deacon, when H. O. Havemeyer and his friends buy Sugar as they’re doing
now they’re never satisfied with anything less than forty points net. I
shouldn’t be surprised to see the market get away from them any minute
and shoot up before they’ve got their full lines. There ain’t as much
of it kicking around the brokers’ offices as there was a month ago.”
“He’s buying Sugar, eh?” repeated the deacon absently.
“Buying it? Why, he’s scooping it in as fast as he can without putting
up the price on himself.”
“So?” said the deacon. That was all.
But it was enough to nettle the tipster, and he said, “Yes, sir-ree!
And I call that very good information. Why, it’s absolutely straight.”
“Is it?”
“Yes; and it ought to be worth a whole lot. Are you going to use it?”
“Oh, yes. I’m going to use it.”
“When?” asked the information bringer suspiciously.
“Right away.” And the deacon called: “Frank!” It was the first name of
his shrewdest broker, who was then in the adjoining room.
“Yes, sir,” said Frank.
“I wish you’d go over to the Board and sell ten thousand Sugar.”
“Sell?” yelled the tipster. There was such suffering in his voice that
Frank, who had started out at a run, halted in his tracks.
“Why, yes,” said the deacon mildly.
“But I told you H. O. Havemeyer was buying it!”
“I know you did, my friend,” said the deacon calmly; and turning to the
broker: “Make haste, Frank!”
The broker rushed out to execute the order and the tipster turned red.
“I came in here,” he said furiously, “with the best information I ever
had. I brought it to you because I thought you were my friend, and
square. I expected you to act on it--”
“I am acting on it,” interrupted the deacon in a tranquillising voice.
“But I told you H.O. and his gang were buying!”
“That’s right. I heard you.”
“Buying! Buying! I said buying!” shrieked the tipster.
“Yes, buying! That is what I understood you to say,” the deacon assured
him. He was standing by the ticker, looking at the tape.
“But you are selling it.”
“Yes; ten thousand shares.” And the deacon nodded. “Selling it, of
course.”
He stopped talking to concentrate on the tape and the tipster
approached to see what the deacon saw, for the old man was very foxy.
While he was looking over the deacon’s shoulder a clerk came in with a
slip, obviously the report from Frank. The deacon barely glanced at it.
He had seen on the tape how his order had been executed.
It made him say to the clerk, “Tell him to sell another ten thousand
Sugar.”
“Deacon, I swear to you that they really are buying the stock!”
“Did Mr. Havemeyer tell you?” asked the deacon quietly.
“Of course not! He never tells anybody anything. He would not bat an
eyelid to help his best friend make a nickel. But I know this is true.”
“Do not allow yourself to become excited, my friend.” And the deacon
held up a hand. He was looking at the tape. The tip-bringer said,
bitterly:
“If I had known you were going to do the opposite of what I expected
I’d never have wasted your time or mine. But I am not going to feel
glad when you cover that stock at an awful loss. I’m sorry for you,
deacon. Honest! If you’ll excuse me I’ll go elsewhere and act on my own
information.”
“I’m acting on it. I think I know a little about the market; not as
much, perhaps, as you and your friend H. O. Havemeyer, but still a
little. What I am doing is what my experience tells me is the wise
thing to do with that information you brought me. After a man has been
in Wall Street as long as I have he is grateful for anybody who feels
sorry for him. Remain calm, my friend.”
The man just stared at the deacon, for whose judgment and nerve he had
great respect.
Pretty soon the clerk came in again and handed a report to the deacon,
who looked at it and said: “Now tell him to buy thirty thousand Sugar.
Thirty thousand!”
The clerk hurried away and the tipster just grunted and looked at the
old gray fox.
“My friend,” the deacon explained kindly, “I did not doubt that you
were telling me the truth as you saw it. But even if I had heard H. O.
Havemeyer tell you himself, I still would have acted as I did. For
there was only one way to find out if anybody was buying the stock in
the way you said H. O. Havemeyer and his friends were buying it, and
that was to do what I did. The first ten thousand shares went fairly
easily. It was not quite conclusive. But the second ten thousand was
absorbed by a market that did not stop rising. The way the twenty
thousand shares were taken by somebody proved to me that somebody was
in truth willing to take all the stock that was offered. It doesn’t
particularly matter at this point who that particular somebody may be.
So I have covered my shorts and am long ten thousand shares, and I
think that your information was good as far as it went.”
“And how far does it go?” asked the tipster.
“You have five hundred shares in this office at the average price of
the ten thousand shares,” said the deacon. “Good day, my friend. Be
calm the next time.”
“Say, deacon,” said the tipster, “won’t you please sell mine when you
sell yours? I don’t know as much as I thought I did.”
That’s the theory. _That is why I never buy stocks cheap._ Of course I
always try to buy effectively--in such a way as to help my side of the
market. When it comes to selling stocks, it is plain that nobody can
sell unless somebody wants those stocks.
If you operate on a large scale you will have to bear that in mind all
the time. A man studies conditions, plans his operations carefully and
proceeds to act. He swings a pretty fair line and he accumulates a big
profit--on paper. Well, that man can’t sell at will. You can’t expect
the market to absorb fifty thousand shares of one stock as easily as
it does one hundred. He will have to wait until he has a market there
to take it. There comes the time when he thinks the requisite buying
power is there. When that opportunity comes he must seize it. As a
rule he will have been waiting for it. _He has to sell when he can,
not when he wants to._ To learn the time, he has to watch and test. It
is no trick to tell when the market can take what you give it. But in
starting a movement it is unwise to take on your full line unless you
are convinced that conditions are exactly right. _Remember that stocks
are never too high for you to begin buying or too low to begin selling.
But after the initial transaction, don’t make a second unless the first
shows you a profit. Wait and watch._ That is where your tape reading
comes in--to enable you to decide as to the proper time for beginning.
_Much depends upon beginning at exactly the right time._ It took me
years to realize the importance of this. It also cost me some hundreds
of thousands of dollars.
I don’t mean to be understood as advising persistent pyramiding. _A
man can pyramid and make big money that he couldn’t make if he didn’t
pyramid; of course._ But what I meant to say was this: Suppose a man’s
line is five hundred shares of stock. I say that he ought not to buy
it all at once; not if he is speculating. If he is merely gambling the
only advice I have to give him is, don’t!
Suppose he buys his first hundred, and that promptly shows him a loss.
Why should he go to work and get more stock? He ought to see at once
that he is in wrong; at least temporarily.
_VIII_
The Union Pacific incident in Saratoga in the summer of 1906 made me
more independent than ever of tips and talk--that is, of the opinions
and surmises and suspicions of other people, however friendly or
however able they might be personally. Events, not vanity, proved
for me that I could read the tape more accurately than most of the
people about me. I also was better equipped than the average customer
of Harding Brothers in that I was utterly free from speculative
prejudices. The bear side doesn’t appeal to me any more than the bull
side, or vice versa. My one steadfast prejudice is against being wrong.
Even as a lad I always got my own meanings out of such facts as I
observed. It is the only way in which the meaning reaches me. I cannot
get out of facts what somebody tells me to get. They are my facts,
don’t you see? If I believe something you can be sure it is because
I simply must. When I am long of stocks it is because my reading of
conditions has made me bullish. But you find many people, reputed to be
intelligent, who are bullish because they have stocks. I do not allow
my possessions--or my prepossessions either--to do any thinking for me.
That is why I repeat that I never argue with the tape. To be angry at
the market because it unexpectedly or even illogically goes against you
is like getting mad at your lungs because you have pneumonia.
I had been gradually approaching the full realization of how much more
than tape reading there was to stock speculation. Old man Partridge’s
insistence on the vital importance of being continuously bullish in a
bull market doubtless made my mind dwell on the need above all other
things of determining the kind of market a man is trading in. _I began
to realize that the big money must necessarily be in the big swing.
Whatever might seem to give a big swing its initial impulse, the fact
is that its continuance is not the result of manipulations by pools
or artifice by financiers, but depends upon basic conditions. And no
matter who opposes it, the swing must inevitably run as far and as fast
and as long as the impelling forces determine._
After Saratoga I began to see more clearly--perhaps I should say more
maturely--that since the entire list moves in accordance with the
main current there was not so much need as I had imagined to study
individual plays or the behaviour of this or the other stock. Also,
by thinking of the swing a man was not limited in his trading. He
could buy or sell the entire list. In certain stocks a short line is
dangerous after a man sells more than a certain percentage of the
capital stock, the amount depending on how, where and by whom the stock
is held. But he could sell a million shares of the general list--if he
had the price--without the danger of being squeezed. A great deal of
money used to be made periodically by insiders in the old days out of
the shorts and their carefully fostered fears of corners and squeezes.
_Obviously the thing to do was to be bullish in a bull market and
bearish in a bear market._ Sounds silly, doesn’t it? But I had to grasp
that general principle firmly before I saw that to put it into practice
really meant to anticipate probabilities. It took me a long time to
learn to trade on those lines. But in justice to myself I must remind
you that up to then I had never had a big enough stake to speculate
that way. A big swing will mean big money if your line is big, and to
be able to swing a big line you need a big balance at your broker’s.
I always had--or felt that I had--to make my daily bread out of the
stock market. It interfered with my efforts to increase the stake
available for the more profitable but slower and therefore more
immediately expensive method of trading on swings.
But not only did my confidence in myself grow stronger but my brokers
ceased to think of me as a sporadically lucky Boy Plunger. They had
made a great deal out of me in commissions, but now I was in a fair way
to become their star customer and as such to have a value beyond the
actual volume of my trading. _A customer who makes money is an asset to
any broker’s office._
The moment I ceased to be satisfied with merely studying the tape I
ceased to concern myself exclusively with the daily fluctuations in
specific stocks, and when that happened I simply had to study the game
from a different angle. I worked back from the quotation to first
principles; from price-fluctuations to basic conditions.
Of course I had been reading the daily dope regularly for a long time.
All traders do. But much of it was gossip, some of it deliberately
false, and the rest merely the personal opinion of the writers. The
reputable weekly reviews when they touched upon underlying conditions
were not entirely satisfactory to me. The point of view of the
financial editors was not mine as a rule. It was not a vital matter for
them to marshal their facts and draw their conclusions from them, but
it was for me. Also there was a vast difference in our appraisal of the
element of time. _The analysis of the week that had passed was less
important to me than the forecast of the weeks that were to come._
For years I had been the victim of an unfortunate combination of
inexperience, youth and insufficient capital. But now I felt the
elation of a discoverer. My new attitude toward the game explained my
repeated failures to make big money in New York. But now with adequate
resources, experience and confidence, I was in such a hurry to try
the new key that I did not notice that there was another lock on the
door--_a time lock!_ It was a perfectly natural oversight. I had to pay
the usual tuition--a good whack per each step forward.
I studied the situation in 1906 and I thought that the money outlook
was particularly serious. Much actual wealth the world over had
been destroyed. Everybody must sooner or later feel the pinch, and
therefore nobody would be in position to help anybody. It would not
be the kind of hard times that comes from the swapping of a house
worth ten thousand dollars for a carload of race horses worth eight
thousand dollars. It was the complete destruction of the house by fire
and of most of the horses by a railroad wreck. It was good hard cash
that went up in cannon smoke in the Boer War, and the millions spent
for feeding nonproducing soldiers in South Africa meant no help from
British investors as in the past. Also, the earthquake and the fire in
San Francisco and other disasters touched everybody--manufacturers,
farmers, merchants, labourers and millionaires. The railroads must
suffer greatly. I figured that nothing could stave off one peach of a
smash. _Such being the case there was but one thing to do--sell stocks!_
I told you I had already observed that my initial transaction, after I
made up my mind which way I was going to trade, was apt to show me a
profit. And now when I decided to sell I plunged. Since we undoubtedly
were entering upon a genuine bear market I was sure I should make the
biggest killing of my career.
The market went off. Then it came back. It shaded off and then it began
to advance steadily. My paper profits vanished and paper losses grew.
One day it looked as if not a bear would be left to tell the tale
of the strictly genuine bear market. _I couldn’t stand the gaff. I
covered. It was just as well. If I hadn’t I wouldn’t have had enough to
buy a postal card. I lost most of my fur, but it was better to live to
fight another day._
I had made a mistake. But where? I was bearish in a bear market.
That was wise. I had sold stocks short. That was proper. _I had sold
them too soon. That was costly. My position was right but my play was
wrong._ However, every day brought the market nearer to the inevitable
smash. So I waited and when the rally began to falter and pause I let
them have as much stock as my sadly diminished margins permitted. _I
was right this time--for exactly one whole day_, for on the next there
was another rally. Another big bite out of yours truly! So I read the
tape and covered and waited. In due course I sold again--and again they
went down promisingly and then they rudely rallied.
It looked as if the market were doing its best to make me go back to
my old and simple ways of bucket-shop trading. _It was the first time
I had worked with a definite forward-looking plan embracing the entire
market instead of one or two stocks._ I figured that I must win if
I held out. Of course at that time I had not developed my system of
placing my bets or I would have put out my short line on a declining
market, as I explained to you the last time. I would not then have lost
so much of my margin. _I would have been wrong but not hurt._ You see,
I had observed certain facts but had not learned to co-ordinate them.
My incomplete observation not only did not help but actually hindered.
_I have always found it profitable to study my mistakes._ Thus I
eventually discovered that it was all very well not to lose your bear
position in a bear market, but that at all times the tape should be
read to determine the propitiousness of the time for operating. If
you begin right you will not see your profitable position seriously
menaced; and then you will find no trouble in sitting tight.
Of course to-day I have greater confidence in the accuracy of my
observations--in which neither hopes nor hobbies play any part--and
also I have greater facilities for verifying my facts as well as
for variously testing the correctness of my views. But in 1906 the
succession of rallies dangerously impaired my margins.
I was nearly twenty-seven years old. I had been at the game twelve
years. _But the first time I traded because of a crisis that was still
to come I found that I had been using a telescope._ Between my first
glimpse of the storm cloud and the time for cashing in on the big break
the stretch was evidently so much greater than I had thought that I
began to wonder whether I really saw what I thought I saw so clearly.
_We had had many warnings and sensational ascensions in call-money
rates._ Still some of the great financiers talked hopefully--at least
to newspaper reporters--and the ensuing rallies in the stock market
gave the lie to the calamity howlers. Was I fundamentally wrong in
being bearish or merely temporarily wrong in having begun to sell short
too soon?
I decided that I began too soon, but that I really couldn’t help it.
Then the market began to sell off. That was my opportunity. I sold all
I could, and then stocks rallied again, to quite a level.
It cleaned me out.
There I was--right and busted!
I tell you it was remarkable. What happened was this: I looked ahead
and saw a big pile of dollars. Out of it stuck a sign. It had “Help
yourself,” on it, in huge letters. Beside it stood a cart with
“Lawrence Livingston Trucking Corporation” painted on its side. I had
a brand-new shovel in my hand. There was not another soul in sight,
so I had no competition in the gold-shoveling, which is one beauty of
seeing the dollar-heap ahead of others. The people who might have seen
it if they had stopped to look were just then looking at baseball games
instead, or motoring or buying houses to be paid for with the very
dollars that I saw. That was the first time that I had seen big money
ahead, and I naturally started toward it on the run. Before I could
reach the dollar-pile my wind went back on me and I fell to the ground.
The pile of dollars was still there, but I had lost the shovel, and the
wagon was gone. So much for sprinting too soon! I was too eager to
prove to myself that I had seen real dollars and not a mirage. I saw,
and knew that I saw. Thinking about the reward for my excellent sight
kept me from considering the distance to the dollar-heap. I _should
have walked and not sprinted._
That is what happened. I didn’t wait to determine whether or not the
time was right for plunging on the bear side. On the one occasion when
I should have invoked the aid of my tape-reading I didn’t do it. That
is how I came to learn that even _when one is properly bearish at the
very beginning of a bear market it is well not to begin selling in bulk
until there is no danger of the engine back-firing_.
I had traded in a good many thousands of shares at Harding’s office in
all those years, and, moreover, the firm had confidence in me and our
relations were of the pleasantest. I think they felt that I was bound
to be right again very shortly and they knew that with my habit of
pushing my luck all I needed was a start and I’d more than recover what
I had lost. They had made a great deal of money out of my trading and
they would make more. So there was no trouble about my being able to
trade there again as long as my credit stood high.
The succession of spankings I had received made me less aggressively
cocksure; perhaps I should say less careless, for of course I knew
I was just so much nearer to the smash. All I could do was wait
watchfully, as I should have done before plunging. It wasn’t a case of
locking the stable after the horse was stolen. I simply had to be sure,
the next time I tried. _If a man didn’t make mistakes he’d own the
world in a month. But if he didn’t profit by his mistakes he wouldn’t
own a blessed thing._
Well, sir, one fine morning I came downtown feeling cocksure once more.
There wasn’t any doubt this time. I had read an advertisement in the
financial pages of all the newspapers that was the high sign I hadn’t
had the sense to wait for before plunging. It was the announcement
of a new issue of stock by the Northern Pacific and Great Northern
roads. The payments were to be made on the installment plan for the
convenience of the stockholders. This consideration was something new
in Wall Street. It struck me as more than ominous.
For years the unfailing bull item on Great Northern preferred had
been the announcement that another melon was to be cut, said melon
consisting of the right of the lucky stockholders to subscribe at par
to a new issue of Great Northern stock. These rights were valuable,
since the market price was always way above par. But now _the money
market_ was such that the most powerful banking houses in the country
were none too sure the stockholders would be able to pay cash for the
bargain. And Great Northern preferred was selling at about 330!
As soon as I got to the office I told Ed Harding, “The time to sell is
right now. This is when I should have begun. Just look at that ad, will
you?”
He had seen it. I pointed out what the bankers’ confession amounted to
in my opinion, but he couldn’t quite see the big break right on top of
us. He thought it better to wait before putting out a very big short
line by reason of the market’s habit of having big rallies. If I waited
prices might be lower, but the operation would be safer.
“Ed,” I said to him, “the longer the delay in starting the sharper the
break will be when it does start. That ad is a signed confession on
the part of the bankers. What they fear is what I hope. This is a sign
for us to get aboard the bear wagon. It is all we needed. If I had ten
million dollars I’d stake every cent of it this minute.”
I had to do some more talking and arguing. He wasn’t content with the
only inferences a sane man could draw from that amazing advertisement.
It was enough for me, but not for most of the people in the office. I
sold a little; too little.
A few days later St. Paul very kindly came out with an announcement of
an issue of its own; either stocks or notes, I forget which. But that
doesn’t matter. What mattered then was that I noticed the moment I read
it that the date of payment was set ahead of the Great Northern and
Northern Pacific payments, which had been announced earlier. It was as
plain as though they had used a megaphone that grand old St. Paul was
trying to beat the other two railroads to what little money there was
floating around in Wall Street. The St. Paul’s bankers quite obviously
feared that there wasn’t enough for all three and they were not saying,
“After you, my dear Alphonse!” If money already was that scarce--and
you bet the bankers knew--what would it be later? The railroads needed
it desperately. It wasn’t there. What was the answer?
Sell ’em! Of course! The public, with their eyes fixed on the stock
market, saw little--that week. The wise stock operators saw much--that
year. That was the difference.
For me, that was the end of doubt and hesitation. I made up my mind
for keeps then and there. That same morning I began what really was
my first campaign along the lines that I have since followed. I told
Harding what I thought and how I stood, and he made no objections to
my selling Great Northern preferred at around 330, and other stocks at
high prices. I profited by my earlier and costly mistakes and sold more
intelligently.
My reputation and my credit were reestablished in a jiffy. That is the
beauty of being right in a broker’s office, whether by accident or not.
But this time I was cold-bloodedly right, not because of a hunch or
from skillful reading of the tape, but as a result of my analysis of
conditions affecting the stock market in general. I wasn’t guessing.
I was anticipating the inevitable. It did not call for any courage to
sell stocks. I simply could not see anything but lower prices, and I
had to act on it, didn’t I? What else could I do?
The whole list was soft as mush. Presently there was a rally and people
came to me to warn me that the end of the decline had been reached.
The big fellows, knowing the short interest to be enormous, had decided
to squeeze the stuffing out of the bears, and so forth. It would set
us pessimists back a few millions. It was a cinch that the big fellows
would have no mercy. I used to thank these kindly counsellors. I
wouldn’t even argue, because then they would have thought that I wasn’t
grateful for the warnings.
The friend who had been in Atlantic City with me was in agony. He could
understand the hunch that was followed by the earthquake. He couldn’t
disbelieve in such agencies, since I had made a quarter of a million
by intelligently obeying my blind impulse to sell Union Pacific. He
even said it was Providence working in its mysterious way to make me
sell stocks when he himself was bullish. And he could understand my
second UP. trade in Saratoga because he could understand any deal that
involved one stock, on which the tip definitely fixed the movement
in advance, either up or down. But this thing of predicting that all
stocks were bound to go down used to exasperate him. What did that kind
of dope do anybody? How in blazes could a gentleman tell what to do?
I recalled old Partridge’s favourite remark--“Well, this is a bull
market, you know”--as though that were tip enough for anybody who
was wise enough; as in truth it was. It was very curious how, after
suffering tremendous losses from a break of fifteen or twenty points,
people who were still hanging on, welcomed a three-point rally and were
certain the bottom had been reached and complete recovery begun.
One day my friend came to me and asked me, “Have you covered?”
“Why should I?” I said.
“For the best reason in the world.”
“What reason is that?”
“To make money. They’ve touched bottom and what goes down must come up.
Isn’t that so?”
“Yes,” I answered. “First they sink to the bottom. Then they come up;
but not right away. They’ve got to be good and dead a couple of days.
It isn’t time for these corpses to rise to the surface. They are not
quite dead yet.”
An old-timer heard me. He was one of those chaps that are always
reminded of something. He said that William R. Travers, who was
bearish, once met a friend who was bullish. They exchanged market
views and the friend said, “Mr. Travers, how can you be bearish with
the market so stiff?” and Travers retorted, “Yes! Th-the s-s-stiffness
of d-death!” It was Travers who went to the office of a company and
asked to be allowed to see the books. The clerk asked him, “Have you an
interest in this company?” and Travers answered, “I sh-should s-say I
had! I’m sh-short t-t-twenty thousand sh-shares of the stock!”
Well, the rallies grew feebler and feebler. I was pushing my luck
for all I was worth. Every time I sold a few thousand shares of
Great Northern preferred the price broke several points. I felt out
weak spots elsewhere and let ’em have a few. All yielded, with one
impressive exception; and that was Reading.
When everything else hit the toboggan slide Reading stood like the Rock
of Gibraltar. Everybody said the stock was cornered. It certainly acted
like it. They used to tell me it was plain suicide to sell Reading
short. There were people in the office who were now as bearish on
everything as I was. But when anybody hinted at selling Reading they
shrieked for help. I myself had sold some short and was standing pat
on it. At the same time I naturally preferred to seek and hit the soft
spots instead of attacking the more strongly protected specialties. My
tape reading found easier money for me in other stocks.
I heard a great deal about the Reading bull pool. It was a mighty
strong pool. To begin with they had a lot of low-priced stock, so that
their average was actually below the prevailing level, according to
friends who told me. Moreover, the principal members of the pool had
close connections of the friendliest character with the banks whose
money they were using to carry their huge holdings of Reading. As
long as the price stayed up the bankers’ friendship was staunch and
steadfast. One pool member’s paper profit was upward of three millions.
That allowed for some decline without causing fatalities. No wonder
the stock stood up and defied the bears. Every now and then the room
traders looked at the price, smacked their lips and proceeded to test
it with a thousand shares or two. They could not dislodge a share, so
they covered and went looking elsewhere for easier money. Whenever
I looked at it I also sold a little more--just enough to convince
myself that I was true to my new trading principles and wasn’t playing
favourites.
In the old days the strength of Reading might have fooled me. The tape
kept on saying, “Leave it alone!” But my reason told me differently. I
was anticipating a general break, and there were not going to be any
exceptions, pool or no pool.
I have always played a lone hand. I began that way in the bucket shops
and have kept it up. It is the way my mind works. I have to do my
own seeing and my own thinking. But I can tell you after the market
began to go my way I felt for the first time in my life that I had
allies--the strongest and truest in the world: underlying conditions.
They were helping me with all their might. Perhaps they were a trifle
slow at times bringing up the reserves, but they were dependable,
provided I did not get too impatient. I was not pitting my tape-reading
knack or my hunches against chance. The inexorable logic of events was
making money for me.
The thing was to be right; to know it and to act accordingly. General
conditions, my true allies, said “Down!” and Reading disregarded the
command. It was an insult to us. It began to annoy me to see Reading
holding firmly, as though everything was serene. It ought to be the
best short sale in the entire list because it had not gone down and the
pool was carrying a lot of stock that it would not be able to carry
when the money stringency grew more pronounced. Some day the bankers’
friends would fare no better than the friendless public. The stock
must go with the others. If Reading didn’t decline, then my theory was
wrong; I was wrong; facts were wrong; logic was wrong.
I figured that the price held because the Street was afraid to sell it.
So one day I gave to two brokers each an order to sell four thousand
shares, at the same time.
You ought to have seen that cornered stock, that it was sure suicide
to go short of, take a headlong dive when those competitive orders
struck it. I let ’em have a few thousand more. The price was 111 when I
started selling it. Within a few minutes I took in my entire short line
at 92.
I had a wonderful time after that, and in _February of 1907 I cleaned
up_. Great Northern preferred had gone down sixty or seventy points,
and other stocks in proportion. _I had made a good bit, but the reason
I cleaned up was that I figured that the decline had discounted the
immediate future._ I looked for a fair recovery, but I wasn’t bullish
enough to play for a turn. I wasn’t going to lose my position entirely.
The market would not be right for me to trade in for a while. The first
ten thousand I made in the bucket shops _I lost because I traded in
and out of season, every day, whether or not conditions were right. I
wasn’t making that mistake twice._ Also, don’t forget that I had gone
broke a little while before because I had seen this break too soon
and started selling before it was time. Now when I had a big profit I
wanted to cash in so that I could feel I had been right. The rallies
had broken me before. I wasn’t going to let the next rally wipe me out.
Instead of sitting tight I went to Florida. I love fishing and I needed
a rest. I could get both down there. And besides, there are direct
wires between Wall Street and Palm Beach.
_IX_
I cruised off the coast of Florida. The fishing was good. I was out of
stocks. My mind was easy. I was having a fine time. One day off Palm
Beach some friends came alongside in a motor boat. One of them brought
a newspaper with him. I hadn’t looked at one in some days and had not
felt any desire to see one. I was not interested in any news it might
print. But I glanced over the one my friend brought to the yacht, and I
saw that the market had had a big rally; ten points and more.
I told my friends that I would go ashore with them. Moderate rallies
from time to time were reasonable. But the bear market was not over;
and here was Wall Street or the fool public or desperate bull interests
disregarding monetary conditions and marking up prices beyond reason or
letting somebody else do it. It was too much for me. I simply had to
take a look at the market. I didn’t know what I might or might not do.
But I knew that my pressing need was the sight of the quotation board.
My brokers, Harding Brothers, had a branch office in Palm Beach. When
I walked in I found there a lot of chaps I knew. Most of them were
talking bullish. They were of the type that trade on the tape and want
quick action. Such traders don’t care to look ahead very far because
they don’t need to with their style of play. I told you how I’d got to
be known in the New York office as the Boy Plunger. Of course people
always magnify a fellow’s winnings and the size of the line he swings.
The fellows in the office had heard that I had made a killing in New
York on the bear side and they now expected that I again would plunge
on the short side. They themselves thought the rally would go to a good
deal further, but they rather considered it my duty to fight it.
I had come down to Florida on a fishing trip. I had been under a pretty
severe strain and I needed my holiday. But the moment I saw how far the
recovery in prices had gone I no longer felt the need of a vacation.
I had not thought of just what I was going to do when I came ashore.
But now I knew I must sell stocks. I was right, and I must prove it in
my old and only way--by saying it with money. To sell the general list
would be a proper, prudent, profitable and even patriotic action.
The first thing I saw on the quotation board was that Anaconda was on
the point of crossing 300. It had been going up by leaps and bounds
and there was apparently an aggressive bull party in it. It was an old
trading theory of mine that when a stock crosses _100 or 200 or 300
for the first time the price does not stop at the even figure but goes
a good deal higher, so that if you buy it as soon as it crosses the
line it is almost certain to show you a profit_. Timid people don’t
like to buy a stock at a new high record. But I had the history of such
movements to guide me.
Anaconda was only quarter stock--that is, the par of the shares was
only twenty-five dollars. It took four hundred shares of it to equal
the usual one hundred shares of other stocks, the par value of which
was one hundred dollars. I figured that when it crossed 300 it ought to
keep on going and probably touch 340 in a jiffy.
I was bearish, remember, but I was also a tape-reading trader. I knew
Anaconda, if it went the way I figured, would move very quickly.
Whatever moves fast always appeals to me. I have learned patience and
how to sit tight, but my personal preference is for fleet movements,
and Anaconda certainly was no sluggard. My buying it because it
crossed 300 was prompted by the desire, always strong in me, of
confirming my observations.
Just then the tape was saying that the buying was stronger than the
selling, and therefore the general rally might easily go a bit further.
It would be prudent to wait before going short. Still I might as well
pay myself wages for waiting. This would be accomplished by taking a
quick thirty points out of Anaconda. Bearish on the entire market and
bullish on that one stock! So I bought thirty-two thousand shares of
Anaconda--that is, eight thousand full shares. It was a nice little
flyer but I was sure of my premises and I figured that the profit would
help to swell the margin available for bear operations later on.
On the next day the telegraph wires were down on account of a storm
up North or something of the sort. I was in Harding’s office waiting
for news. The crowd was chewing the rag and wondering all sorts of
things, as stock traders will when they can’t trade. Then we got a
quotation--the only one that day: Anaconda, 292.
There was a chap with me, a broker I had met in New York. He knew I
was long eight thousand full shares and I suspect that he had some of
his own, for when we got that one quotation he certainly had a fit.
He couldn’t tell whether the stock at that very moment had gone off
another ten points or not. The way Anaconda had gone up it wouldn’t
have been anything unusual for it to break twenty points. But I said to
him, “Don’t you worry, John. It will be all right to-morrow.” That was
really the way I felt. But he looked at me and shook his head. He knew
better. He was that kind. So I laughed, and I waited in the office in
case some quotation trickled through. But no, sir. That one was all we
got: Anaconda, 292. It meant a paper loss to me of nearly one hundred
thousand dollars. I had wanted quick action. Well, I was getting it.
The next day the wires were working and we got the quotations as usual.
Anaconda opened at 298 and went up to 302¾, but pretty soon it began
to fade away. Also, the rest of the market was not acting just right
for a further rally. I made up my mind that if Anaconda went back to
301 I must consider the whole thing a fake movement. On a legitimate
advance the price should have gone to 310 without stopping. If instead
it reacted it meant that precedents had failed me and I was wrong; _and
the only thing to do when a man is wrong is to be right by ceasing to
be wrong_. I had bought eight thousand full shares in expectation of a
thirty or forty point rise. It would not be my first mistake; nor my
last.
Sure enough, Anaconda fell back to 301. The moment it touched that
figure I sneaked over to the telegraph operator--they had a direct wire
to the New York office--and I said to him, “Sell all my Anaconda, eight
thousand shares.” I said it in a low voice. I didn’t want anybody else
to know what I was doing.
He looked up at me almost in horror. But I nodded and said, “All I’ve
got!”
“Surely, Mr. Livingston, you don’t mean at the market?” and he looked
as if he was going to lose a couple of millions of his own through bum
execution by a careless broker. But I just told him, “Sell it! Don’t
argue about it!”
The two Black boys, Jim and Ollie, were in the office, out of hearing
of the operator and myself. They were big traders who had come
originally from Chicago, where they had been famous plungers in wheat,
and were now heavy traders on the New York Stock Exchange. They were
very wealthy and were high rollers for fair.
As I left the telegraph operator to go back to my seat in front of the
quotation board Oliver Black nodded to me and smiled.
“You’ll be sorry, Larry,” he said.