Coffee Exchange to close just then. If the committee had let coffee
alone the price undoubtedly would have risen for the reasons I have
already stated, which had nothing to do with any alleged corner.
But the high price--which need not have been exorbitant--would have
been an incentive to attract supplies to this market. I have heard
Mr. Bernard M. Baruch say that the War Industries Board took into
consideration this factor--the insuring of a supply--in fixing prices,
and for that reason some of the complaints about the high limit on
certain commodities were unjust. When the Coffee Exchange resumed
business, later on, coffee sold at twenty-three cents. The American
people paid that price because of the small supply, and the supply
was small because the price had been fixed too low, at the suggestion
of philanthropic shorts, to make it possible to pay the high ocean
freights and thus insure continued importations.
I have always thought that my coffee deal was the most legitimate of
all my trades in commodities. I considered it more of an investment
than a speculation. I was in it over a year. If there was any gambling
it was done by the patriotic roasters with German names and ancestry.
They had coffee in Brazil and they sold it to me in New York. The Price
Fixing Committee fixed the price of the only commodity that had not
advanced. They protected the public against profiteering before it
started, but not against the inevitable higher prices that followed.
Not only that, but even when green coffee hung around nine cents a
pound, roasted coffee went up with everything else. It was only the
roasters who benefited. If the price of green coffee had gone up two or
three cents a pound it would have meant several millions for me. And it
wouldn’t have cost the public as much as the later advance did.
Post-mortems in speculation are a waste of time. They get you nowhere.
But this particular deal has a certain educational value. It was as
pretty as any I ever went into. The rise was so sure, so logical,
that I figured that I simply couldn’t help making several millions of
dollars. But I didn’t.
On two other occasions I have suffered from the action of exchange
committees making rulings that changed trading rules without warning.
But in those cases my own position, while technically right, was not
quite so sound commercially as in my coffee trade. You cannot be dead
sure of anything in a speculative operation. It was the experience I
have just told you that made me add the unexpectable to the unexpected
in my list of hazards.
After the coffee episode I was so successful in other commodities
and on the short side of the stock market, that I began to suffer
from silly gossip. The professionals in Wall Street and the
newspaper writers got the habit of blaming me and my alleged raids
for the inevitable breaks in prices. At times my selling was called
unpatriotic--whether I was really selling or not. The reason for
exaggerating the magnitude and the effect of my operations, I suppose,
was the need to satisfy the public’s insatiable demand for reasons for
each and every price movement.
As I have said a thousand times, no manipulation can put stocks down
and keep them down. There is nothing mysterious about this. The reason
is plain to everybody who will take the trouble to think about it
half a minute. Suppose an operator raided a stock--that is, put the
price down to a level below its real value--what would inevitably
happen? Why, the raider would at once be up against the best kind of
inside buying. The people who know what a stock is worth will always
buy it when it is selling at bargain prices. _If the insiders are not
able to buy, it will be because general conditions are against their
free command of their own resources, and such conditions are not bull
conditions._ When people speak about raids the inference is that the
raids are unjustified; almost criminal. But selling a stock down to
a price much below what it is worth is mighty dangerous business. It
is well to bear in mind that a raided stock that fails to rally is
not getting much inside buying and where there is a raid--that is,
unjustified short selling--there is usually apt to be inside buying;
and when there is that, the price does not stay down. I should say
that in ninety-nine cases out of a hundred, so-called raids are really
legitimate declines, accelerated at times but not primarily caused by
the operations of a professional trader, however big a line he may be
able to swing.
The theory that most of the sudden declines or particular sharp breaks
are the results of some plunger’s operations probably was invented
as an easy way of supplying reasons to those speculators who, being
nothing but blind gamblers, will believe anything that is told them
rather than do a little thinking. The raid excuse for losses that
unfortunate speculators so often receive from brokers and financial
gossipers is really an inverted tip. The difference lies in this: A
bear tip is distinct, positive advice to sell short. But the inverted
tip--that is, the explanation that does not explain--serves merely to
keep you from wisely selling short. _The natural tendency when a stock
breaks badly is to sell it. There is a reason--an unknown reason but a
good reason; therefore, get out._ But it is not wise to get out when
the break is the result of a raid by an operator, because the moment he
stops the price must rebound. Inverted tips!
_XVI_
Tips! How people want tips! They crave not only to get them but to
give them. There is greed involved, and vanity. It is very amusing,
at times, to watch really intelligent people fish for them. And the
tip-giver need not hesitate about the quality, for the tip-seeker
is not really after good tips, but after any tip. If it makes good,
fine! If it doesn’t, better luck with the next. I am thinking of the
average customer of the average commission house. There is a type of
promoter or manipulator that believes in tips first, last and all the
time. A good flow of tips is considered by him as a sort of sublimated
publicity work, the best merchandising dope in the world, for, since
tip-seekers and tip-takers are invariably tip-passers, tip-broadcasting
becomes a sort of endless-chain advertising. The tipster-promoter
labours under the delusion that no human being breathes who can resist
a tip if properly delivered. He studies the art of handing them out
artistically.
I get tips by the hundreds every day from all sorts of people. I’ll
tell you a story about Borneo Tin. You remember when the stock was
brought out? It was at the height of the boom. The promoter’s pool had
taken the advice of a very clever banker and decided to float the new
company in the open market at once instead of letting an underwriting
syndicate take its time about it. It was good advice. The only mistake
the members of the pool made came from inexperience. They did not know
what the stock market was capable of doing during a crazy boom and at
the same time they were not intelligently liberal. They were agreed
on the need of marking up the price in order to market the stock, but
they started the trading at a figure at which the traders and the
speculative pioneers could not buy it without misgivings.
By rights the promoters ought to have got stuck with it, but in the
wild bull market their hoggishness turned out to be rank conservatism.
The public was buying anything that was adequately tipped. Investments
were not wanted. The demand was for easy money; for the sure gambling
profit. Gold was pouring into this country through the huge purchases
of war material. They tell me that the promoters, while making their
plans for bringing out Borneo stock, marked up the opening price three
different times before their first transaction was officially recorded
for the benefit of the public.
I had been approached to join the pool and I had looked into it but I
didn’t accept the offer because if there is any market manoeuvring to
do, I like to do it myself. I trade on my own information and follow my
own methods. When Borneo Tin was brought out, knowing what the pool’s
resources were and what they had planned to do, and also knowing what
the public was capable of, I bought ten thousand shares during the
first hour of the first day. Its market début was successful at least
to that extent. As a matter of fact the promoters found the demand so
active that they decided it would be a mistake to lose so much stock
so soon. They found out that I had acquired my ten thousand shares
about at the same time that they found out that they would probably
be able to sell every share they owned if they merely marked up the
price twenty-five or thirty points. They therefore concluded that the
profit on my ten thousand shares would take too big a chunk out of the
millions they felt were already as good as banked. So they actually
ceased their bull operations and tried to shake me out. But I simply
sat tight. They gave me up as a bad job because they didn’t want the
market to get away from them, and then they began to put up the price,
without losing any more stock than they could help.
They saw the crazy height that other stocks rose to and they began to
think in billions. Well, when Borneo Tin got up to 120 I let them have
my ten thousand shares. It checked the rise and the pool managers let
up on their jacking-up process. On the next general rally they again
tried to make an active market for it and disposed of quite a little,
but the merchandising proved to be rather expensive. Finally they
marked it up to 150. But the bloom was off the bull market for keeps,
so the pool was compelled to market what stock it could on the way down
to those people who love to buy after a good reaction, on the fallacy
that a stock that has once sold at 150 must be cheap at 130 and a great
bargain at 120. Also, they passed the tip to the floor traders, who
often are able to make a temporary market, and later to the commission
houses. Every little helped and the pool was using every device known.
The trouble was that the time for bulling stocks had passed. The
suckers had swallowed other hooks. The Borneo bunch didn’t or wouldn’t
see it.
I was down in Palm Beach with my wife. One day I made a little
money at Gridley’s and when I got home I gave Mrs. Livingston a
five-hundred-dollar bill out of it. It was a curious coincidence, but
that same night she met at a dinner the president of the Borneo Tin
Company, a Mr. Wisenstein, who had become the manager of the stock
pool. We didn’t learn until some time afterward that this Wisenstein
deliberately manœuvred so that he sat next to Mrs. Livingston at
dinner.
He laid himself out to be particularly nice to her and talked most
entertainingly. In the end he told her, very confidentially, “Mrs.
Livingston, I’m going to do something I’ve never done before. I am very
glad to do it because you know exactly what it means.” He stopped and
looked at Mrs. Livingston anxiously, to make sure she was not only
wise but discreet. She could read it on his face, plain as print. But
all she said was, “Yes.”
“Yes, Mrs. Livingston. It has been a very great pleasure to meet you
and your husband, and I want to prove that I am sincere in saying this
because I hope to see a great deal of both of you. I am sure I don’t
have to tell you that what I am going to say is strictly confidential!”
Then he whispered, “If you will buy some Borneo Tin you will make a
great deal of money.”
“Do you think so?” she asked.
“Just before I left the hotel,” he said, “I received some cables with
news that won’t be known to the public for several days at least. I am
going to gather in as much of the stock as I can. If you get some at
the opening to-morrow you will be buying it at the same time and at
the same price as I. I give you my word that Borneo Tin will surely
advance. You are the only person that I have told this to. Absolutely
the only one!”
She thanked him and then she told him that she didn’t know anything
about speculating in stocks. But he assured her it wasn’t necessary for
her to know any more than he had told her. To make sure she heard it
correctly he repeated his advice to her:
“All you have to do is to buy as much Borneo Tin as you wish. I can
give you my word that if you do you will not lose a cent. I’ve never
before told a woman--or a man, for that matter--to buy anything in my
life. But I am so sure the stock won’t stop this side of 200 that I’d
like you to make some money. I can’t buy all the stock myself, you
know, and if somebody besides myself is going to benefit by the rise
I’d rather it was you than some stranger. Much rather! I’ve told you in
confidence because I know you won’t talk about it. Take my word for it,
Mrs. Livingston, and buy Borneo Tin!”
He was very earnest about it and succeeded in so impressing her that
she began to think she had found an excellent use for the five hundred
dollars I had given her that afternoon. That money hadn’t cost me
anything and was outside of her allowance. In other words, it was easy
money to lose if the luck went against her. But he had said she would
surely win. It would be nice to make money on her own hook--and tell me
all about it afterwards.
Well, sir, the very next morning before the market opened she went into
Harding’s office and said to the manager:
“Mr. Haley, I want to buy some stock, but I don’t want it to go in my
regular account because I don’t wish my husband to know anything about
it until I’ve made some money. Can you fix it for me?”
Haley, the manager, said, “Oh, yes. We can make it a special account.
What’s the stock and how much of it do you want to buy?”
She gave him the five hundred dollars and told him, “Listen, please.
I do not wish to lose more than this money. If that goes I don’t want
to owe you anything; and remember, I don’t want Mr. Livingston to know
anything about this. Buy me as much Borneo Tin as you can for the
money, at the opening.”
Haley took the money and told her he’d never say a word to a soul, and
bought her a hundred shares at the opening. I think she got it at 108.
The stock was very active that day and closed at an advance of three
points. Mrs. Livingston was so delighted with her exploit that it was
all she could do to keep from telling me all about it.
It so happened that I had been getting more and more bearish on the
general market. The unusual activity in Borneo Tin drew my attention to
it. I didn’t think the time was right for any stock to advance, much
less one like that. I had decided to begin my bear operations that very
day, and I started by selling about ten thousand shares of Borneo. If I
had not I rather think the stock would have gone up five or six points
instead of three.
On the very next day I sold two thousand shares at the opening and two
thousand shares just before the close, and the stock broke to 102.
Haley, the manager of Harding Brothers’ Palm Beach Branch, was waiting
for Mrs. Livingston to call there on the third morning. She usually
strolled in about eleven to see how things were, if I was doing
anything.
Haley took her aside and said, “Mrs. Livingston, if you want me to
carry that hundred shares of Borneo Tin for you you will have to give
me more margin.”
“But I haven’t any more,” she told him.
“I can transfer it to your regular account,” he said.
“No,” she objected, “because that way L.L. would learn about it.”
“But the account already shows a loss of--” he began.
“But I told you distinctly I didn’t want to lose more than the five
hundred dollars. I didn’t even want to lose that,” she said.
“I know, Mrs. Livingston, but I didn’t want to sell it without
consulting you, and now unless you authorise me to hold it I’ll have to
let it go.”
“But it did so nicely the day I bought it,” she said, “that I didn’t
believe it would act this way so soon. Did you?”
“No,” answered Haley, “I didn’t.” They have to be diplomatic in
brokers’ offices.
“What’s gone wrong with it, Mr. Haley?”
Haley knew, but he could not tell her without giving me away, and a
customer’s business is sacred. So he said, “I don’t hear anything
special about it, one way or the other. There she goes! That’s low for
the move!” and he pointed to the quotation board.
Mrs. Livingston gazed at the sinking stock and cried: “Oh, Mr. Haley! I
don’t want to lose my five hundred dollars! What shall I do?”
“I don’t know, Mrs. Livingston, but if I were you I’d ask Mr.
Livingston.”
“Oh, no! He doesn’t want me to speculate on my own hook. He told me
so. He’ll buy or sell stock for me, if I ask him, but I’ve never before
done trading that he did not know all about. I wouldn’t dare tell him.”
“That’s all right,” said Haley soothingly. “He is a wonderful trader
and he’ll know just what to do.” Seeing her shake her head violently he
added devilishly: “Or else you put up a thousand or two to take care of
your Borneo.”
The alternative decided her then and there. She hung about the office,
but as the market got weaker and weaker she came over to where I sat
watching the board and told me she wanted to speak to me. We went into
the private office and she told me the whole story. So I just said to
her: “You foolish little girl, you keep your hands off this deal.”
She promised that she would, and so I gave her back her five hundred
dollars and she went away happy. The stock was par by that time.
I saw what had happened. Wisenstein was an astute person. He figured
that Mrs. Livingston would tell me what he had told her and I’d study
the stock. He knew that activity always attracted me and I was known to
swing a pretty fair line. I suppose he thought I’d buy ten or twenty
thousand shares.
It was one of the most cleverly planned and artistically propelled
tips I’ve ever heard of. But it went wrong. It had to. In the first
place, the lady had that very day received an unearned five hundred
dollars and was therefore in a much more venturesome mood than usual.
She wished to make some money all by herself, and womanlike dramatised
the temptation so attractively that it was irresistible. She knew how I
felt about stock speculation as practised by outsiders, and she didn’t
dare mention the matter to me. Wisenstein didn’t size up her psychology
right.
He also was utterly wrong in his guess about the kind of trader I
was. I never take tips and I was bearish on the entire market. The
tactics that he thought would prove effective in inducing me to buy
Borneo--that is, the activity and the three-point rise--were precisely
what made me pick Borneo as a starter when I decided to sell the entire
market.
After I heard Mrs. Livingston’s story I was keener than ever to sell
Borneo. Every morning at the opening and every afternoon just before
closing I let him have some stock regularly, until I saw a chance to
take in my shorts at a handsome profit.
It has always seemed to me the height of damfoolishness to trade on
tips. I suppose I am not built the way a tip-taker is. I sometimes
think that tip-takers are like drunkards. There are some who can’t
resist the craving and always look forward to those jags which they
consider indispensable to their happiness. It is so easy to open your
ears and let the tip in. To be told precisely what to do to be happy
in such a manner that you can easily obey is the next nicest thing to
being happy--which is a mighty long first step toward the fulfilment of
your heart’s desire. It is not so much greed made blind by eagerness as
it is hope bandaged by the unwillingness to do any thinking.
And it is not only among the outside public that you find inveterate
tip-takers. The professional trader on the floor of the New York Stock
Exchange is quite as bad. I am definitely aware that no end of them
cherish mistaken notions of me because I never give anybody tips. If
I told the average man, “Sell yourself five thousand Steel!” he would
do it on the spot. But if I tell him I am quite bearish on the entire
market and give him my reasons in detail, he finds trouble in listening
and after I’m done talking he will glare at me for wasting his time
expressing my views on general conditions instead of giving him a
direct and specific tip, like a real philanthropist of the type that is
so abundant in Wall Street--the sort who loves to put millions into the
pockets of friends, acquaintances and utter strangers alike.
The belief in miracles that all men cherish is born of immoderate
indulgence in hope. There are people who go on hope sprees periodically
and we all know the chronic hope drunkard that is held up before us as
an exemplary optimist. Tip-takers are all they really are.
I have an acquaintance, a member of the New York Stock Exchange, who
was one of those who thought I was a selfish, cold-blooded pig because
I never gave tips or put friends into things. One day--this was some
years ago--he was talking to a newspaper man who casually mentioned
that he had had it from a good source that G.O.H. was going up. My
broker friend promptly bought a thousand shares and saw the price
decline so quickly that he was out thirty-five hundred dollars before
he could stop his loss. He met the newspaper man a day or two later,
while he was still sore.
“That was a hell of a tip you gave me,” he complained.
“What tip was that?” asked the reporter, who did not remember.
“About G.O.H. You said you had it from a good source.”
“So I did. A director of the company who is a member of the finance
committee told me.”
“Which of them was it?” asked the broker vindictively.
“If you must know,” answered the newspaper man, “it was your own
father-in-law, Mr. Westlake.”
“Why in Hades didn’t you tell me you meant him!” yelled the broker.
“You cost me thirty-five hundred dollars!” He didn’t believe in family
tips. The farther away the source the purer the tip.
Old Westlake was a rich and successful banker and promoter. He ran
across John W. Gates one day. Gates asked him what he knew. “If you
will act on it I’ll give you a tip. If you won’t I’ll save my breath,”
answered old Westlake grumpily.
“Of course I’ll act on it,” promised Gates cheerfully.
“Sell Reading! There is a sure twenty-five points in it, and possibly
more. But twenty-five absolutely certain,” said Westlake impressively.
“I’m much obliged to you,” and Bet-you-a-million Gates shook hands
warmly and went away in the direction of his broker’s office.
Westlake had specialized on Reading. He knew all about the company and
stood in with the insiders so that the market for the stock was an open
book to him and everybody knew it. Now he was advising the Western
plunger to go short of it.
Well, Reading never stopped going up. It rose something like one
hundred points in a few weeks. One day old Westlake ran smack up
against John W. in the Street, but he made out he hadn’t seen him and
was walking on. John W. Gates caught up with him, his face all smiles
and held out his hand. Old Westlake shook it dazedly.
“I want to thank you for that tip you gave me on Reading,” said Gates.
“I didn’t give you any tip,” said Westlake, frowning.
“Sure you did. And it was a Jim Hickey of a tip too. I made sixty
thousand dollars.”
“Made sixty thousand dollars?”
“Sure! Don’t you remember? You told me to sell Reading; so I bought it!
I’ve always made money coppering your tips, Westlake,” said John W.
Gates pleasantly. “Always!”
Old Westlake looked at the bluff Westerner and presently remarked
admiringly, “Gates, what a rich man I’d be if I had your brains!”
The other day I met Mr. W. A. Rogers, the famous cartoonist, whose
Wall Street drawings brokers so greatly admire. His daily cartoons in
the New York _Herald_ for years gave pleasure to thousands. Well, he
told me a story. It was just before we went to war with Spain. He was
spending an evening with a broker friend. When he left he picked up his
derby hat from the rack, at least he thought it was his hat, for it was
the same shape and fitted him perfectly.
The Street at that time was thinking and talking of nothing but war
with Spain. Was there to be one or not? If it was to be war the market
would go down; not so much on our own selling as on pressure from
European holders of our securities. If peace, it would be a cinch to
buy stocks, as there had been considerable declines prompted by the
sensational clamorings of the yellow papers. Mr. Rogers told me the
rest of the story as follows:
“My friend, the broker, at whose house I had been the night before,
stood in the Exchange the next day anxiously debating in his mind which
side of the market to play. He went over the pros and cons, but it
was impossible to distinguish which were rumors and which were facts.
There was no authentic news to guide him. At one moment he thought war
was inevitable, and on the next he almost convinced himself that it
was utterly unlikely. His perplexity must have caused a rise in his
temperature, for he took off his derby to wipe his fevered brow. He
couldn’t tell whether he should buy or sell.
“He happened to look inside of his hat. There in gold letters was
the word WAR. That was all the hunch he needed. Was it not a tip
from Providence via my hat? So he sold a raft of stock, war was duly
declared, he covered on the break and made a killing.” And then W. A.
Rogers finished, “I never got back that hat!”
But the prize tip story of my collection concerns one of the most
popular members of the New York Stock Exchange, J. T. Hood. One day
another floor trader, Bert Walker, told him that he had done a good
turn to a prominent director of the Atlantic & Southern. In return the
grateful insider told him to buy all the A. & S. he could carry. The
directors were going to do something that would put the stock up at
least twenty-five points. All the directors were not in the deal, but
the majority would be sure to vote as wanted.
Bert Walker concluded that the dividend rate was going to be raised. He
told his friend Hood and they each bought a couple of thousand shares
of A. & S. The stock was very weak, before and after they bought, but
Hood said that was obviously intended to facilitate accumulation by
the inside clique, headed by Bert’s grateful friend.
On the following Thursday, after the market closed, the directors of
the Atlantic & Southern met and passed the dividend. The stock broke
six points in the first six minutes of trading Friday morning.
Bert Walker was sore as a pup. He called on the grateful director, who
was broken-hearted about it and very penitent. He said that he had
forgotten that he had told Walker to buy. That was the reason he had
neglected to call him up to tell him of a change in the plans of the
dominant faction in the board. The remorseful director was so anxious
to make up that he gave Bert another tip. He kindly explained that a
couple of his colleagues wanted to get cheap stock and against his
judgment resorted to coarse work. He had to yield to win their votes.
But now that they all had accumulated their full lines there was
nothing to stop the advance. It was a double-riveted, lead-pipe cinch
to buy A. & S. now.
Bert not only forgave him but shook hands warmly with the high
financier. Naturally he hastened to find his friend and fellow-victim,
Hood, to impart the glad tidings to him. They were going to make a
killing. The stock had been tipped for a rise before and they bought.
But now it was fifteen points lower. That made it a cinch. So they
bought five thousand shares, joint account.
As if they had rung a bell to start it, the stock broke badly on
what quite obviously was inside selling. Two specialists cheerfully
confirmed the suspicion. Hood sold out their five thousand shares. When
he got through Bert Walker said to him, “If that blankety-blank blanker
hadn’t gone to Florida day before yesterday I’d lick the stuffing out
of him. Yes, I would. But you come with me.”
“Where to?” asked Hood.
“To the telegraph office. I want to send that skunk a telegram that
he’ll never forget. Come on.”
Hood went on. Bert led the way to the telegraph office. There, carried
away by his feelings--they had taken quite a loss on the five thousand
shares--he composed a masterpiece of vituperation. He read it to Hood
and finished, “That will come pretty near to showing him what I think
of him.”
He was about to slide it toward the waiting clerk when Hood said, “Hold
on, Bert!”
“What’s the matter?”
“I wouldn’t send it,” advised Hood earnestly.
“Why not?” snapped Bert.
“It will make him sore as the dickens.”
“That’s what we want, isn’t it?” said Bert, looking at Hood in surprise.
But Hood shook his head disapprovingly and said in all seriousness,
“We’ll never get another tip from him if you send that telegram!”
A professional trader actually said that. Now what’s the use of talking
about sucker tip-takers? Men do not take tips because they are bally
asses but because they like those hope cocktails I spoke of. Old Baron
Rothschild’s recipe for wealth winning applies with greater force than
ever to speculation. Somebody asked him if making money in the Bourse
was not a very difficult matter, and he replied that, on the contrary,
he thought it was very easy.
“That is because you are so rich,” objected the interviewer.
“Not at all. I have found an easy way and I stick to it. I simply
cannot help making money. I will tell you my secret if you wish. It is
this: _I never buy at the bottom and I always sell too soon_.”
Investors are a different breed of cats. Most of them go in strong for
inventories and statistics of earnings and all sorts of mathematical
data, as though that meant facts and certainties. _The human factor
is minimised as a rule._ Very few people like to buy into a one-man
business. But the wisest investor I ever knew was a man who began by
being a Pennsylvania Dutchman and followed it up by coming to Wall
Street and seeing a great deal of Russell Sage.
He was a great investigator, an indefatigable Missourian. He believed
in asking his own questions and in doing his seeing with his own eyes.
He had no use for another man’s spectacles. This was years ago. It
seems he held quite a little Atchison. Presently he began to hear
disquieting reports about the company and its management. He was told
that Mr. Reinhart, the president, instead of being the marvel he was
credited with being, in reality was a most extravagant manager whose
recklessness was fast pushing the company into a mess. There would be
the deuce to pay on the inevitable day of reckoning.
This was precisely the kind of news that was as the breath of life
to the Pennsylvania Dutchman. He hurried over to Boston to interview
Mr. Reinhart and ask him a few questions. The questions consisted of
repeating the accusations he had heard and then asking the president of
the Atchison, Topeka & Santa Fe Railroad if they were true.
Mr. Reinhart not only denied the allegations emphatically but said
even more: He proceeded to prove by figures that the allegators
were malicious liars. The Pennsylvania Dutchman had asked for exact
information and the president gave it to him, showing him what the
company was doing and how it stood financially, to a cent.
The Pennsylvania Dutchman thanked President Reinhart, returned to New
York and promptly sold all his Atchison holdings. A week or so later he
used his idle funds to buy a big lot of Delaware, Lackawanna & Western.
Years afterward we were talking of lucky swaps and he cited his own
case. He explained what prompted him to make it.
“You see,” he said, “I noticed that President Reinhart, when he wrote
down figures, took sheets of letter paper from a pigeonhole in his
mahogany roll-top desk. It was fine heavy linen paper with beautifully
engraved letterheads in two colors. It was not only very expensive
but worse--it was unnecessarily expensive. He would write a few
figures on a sheet to show me exactly what the company was earning on
certain divisions or to prove how they were cutting down expenses or
reducing operating costs, and then he would crumple up the sheet of
the expensive paper and throw it in the waste-basket. Pretty soon he
would want to impress me with the economies they were introducing and
he would reach for a fresh sheet of the beautiful notepaper with the
engraved letterheads in two colors. A few figures--and bingo, into the
waste-basket! More money wasted without a thought. It struck me that
if the president was that kind of a man he would scarcely be likely
to insist upon having or rewarding economical assistants. I therefore
decided to believe the people who had told me the management was
extravagant instead of accepting the president’s version and I sold
what Atchison stock I held.
“It so happened that I had occasion to go to the offices of the
Delaware, Lackawanna & Western a few days later. Old Sam Sloan was the
president. His office was the nearest to the entrance and his door
was wide open. It was always open. Nobody could walk into the general
offices of the D.L.&W. in those days and not see the president of the
company seated at his desk. Any man could walk in and do business with
him right off, if he had any business to do. The financial reporters
used to tell me that they never had to beat around the bush with old
Sam Sloan, but would ask their questions and get a straight yes or
no from him, no matter what the stock-market exigencies of the other
directors might be.
“When I walked in I saw the old man was busy. I thought at first that
he was opening his mail, but after I got inside close to the desk I saw
what he was doing. I learned afterwards that it was his daily custom to
do it. After the mail was sorted and open, instead of throwing away the
empty envelopes he had them gathered up and taken to his office. In
his leisure moments he would rip the envelope all around. That gave him
two bits of paper, each with one clean blank side. He would pile these
up and then he would have them distributed about, to be used in lieu of
scratch pads for such figuring as Reinhart had done for me on engraved
notepaper. No waste of empty envelopes and no waste of the president’s
idle moments. Everything utilised.
“It struck me that if that was the kind of man the D.L.&W. had for
president, the company was managed economically in all departments. The
president would see to that! Of course I knew the company was paying
regular dividends and had a good property. I bought all the D.L.&W.
stock I could. Since that time the capital stock has been doubled
and quadrupled. My annual dividends amount to as much as my original
investment. I still have my D.L.&W. And Atchison went into the hands of
a receiver a few months after I saw the president throwing sheet after
sheet of linen paper with engraved letterheads in two colors into the
waste-basket to prove to me with figures that he was not extravagant.”
And the beauty of that story is that it is true and that no other stock
that the Pennsylvania Dutchman could have bought would have proved to
be so good an investment as D.L.&W.
_XVII_
One of my most intimate friends is very fond of telling stories about
what he calls my hunches. He is forever ascribing to me powers that
defy analysis. He declares I merely follow blindly certain mysterious
impulses and thereby get out of the stock market at precisely the
right time. His pet yarn is about a black cat that told me, at his
breakfast-table, to sell a lot of stock I was carrying, and that after
I got the pussy’s message I was grouchy and nervous until I sold every
share I was long of. I got practically the top prices of the movement,
which of course strengthened the hunch theory of my hard-headed friend.
I had gone to Washington to endeavor to convince a few Congressmen that
there was no wisdom in taxing us to death and I wasn’t paying much
attention to the stock market. My decision to sell out my line came
suddenly, hence my friend’s yarn.
I admit that I do get irresistible impulses at times to do certain
things in the market. It doesn’t matter whether I am long or short of
stocks. I must get out. I am uncomfortable until I do. I myself think
that what happens is that I see a lot of warning-signals. Perhaps not
a single one may be sufficiently clear or powerful to afford me a
positive, definite reason for doing what I suddenly feel like doing.
Probably that is all there is to what they call “ticker-sense” that
old traders say James R. Keene had so strongly developed and other
operators before him. Usually, I confess, the warning turns out to be
not only sound but timed to the minute. But in this particular instance
there was no hunch. The black cat had nothing to do with it. What he
tells everybody about my getting up so grumpy that morning I suppose
can be explained--if I in truth was grouchy--by my disappointment. I
knew I was not convincing the Congressman I talked to and the Committee
did not view the problem of taxing Wall Street as I did. I wasn’t
trying to arrest or evade taxation on stock transactions but to suggest
a tax that I as an experienced stock operator felt was neither unfair
nor unintelligent. I didn’t want Uncle Sam to kill the goose that
could lay so many golden eggs with fair treatment. Possibly my lack of
success not only irritated me but made me pessimistic over the future
of an unfairly taxed business. But I’ll tell you exactly what happened.
At the beginning of the bull market I thought well of the outlook in
both the Steel trade and the Copper market and I therefore felt bullish
on stocks of both groups. So I started to accumulate some of them.
I began by buying 5000 shares of Utah Copper and stopped because it
didn’t act right. That is, it did not behave as it should have behaved
to make me feel I was wise in buying it. I think the price was around
114. I also started to buy United States Steel at almost the same
price. I bought in all 20,000 shares the first day because it did act
right. I followed the method I have described before.
Steel continued to act right and I therefore continued to accumulate
it until I was carrying 72,000 shares of it in all. But my holdings of
Utah Copper consisted of my initial purchase. I never got above the
5000 shares. Its behaviour did not encourage me to do more with it.
Everybody knows what happened. We had a big bull movement. I knew
the market was going up. General conditions were favourable. Even
after stocks had gone up extensively and my paper profit was not to
be sneezed at, the tape kept trumpeting: _Not yet! Not yet!_ When I
arrived in Washington the tape was still saying that to me. Of course,
I had no intention of increasing my line at that late day, even though
I was still bullish. At the same time, the market was plainly going my
way and there was no occasion for me to sit in front of a quotation
board all day, in hourly expectation of getting a tip to get out.
Before the clarion call to retreat came--barring an utterly unexpected
catastrophe, of course--the market would hesitate or otherwise prepare
me for a reversal of the speculative situation. That was the reason why
I went blithely about my business with my Congressman.
At the same time, prices kept going up and that meant that the end of
the bull market was drawing nearer. I did not look for the end on any
fixed date. That was something quite beyond my power to determine. But
I needn’t tell you that I was on the watch for the tip-off. I always
am, anyhow. It has become a matter of business habit with me.
I cannot swear to it but I rather suspect that the day before I sold
out, seeing the high prices made me think of the magnitude of my
paper profit as well as of the line I was carrying and, later on, of my
vain efforts to induce our legislators to deal fairly and intelligently
by Wall Street. That was probably the way and the time the seed was
sown within me. The subconscious mind worked on it all night. In the
morning I thought of the market and began to wonder how it would act
that day. When I went down to the office I saw not so much that prices
were still higher and that I had a satisfying profit but that there
was a great big market with a tremendous power of absorption. I could
sell any amount of stock in that market; and, of course, when a man
is carrying his full line of stocks, he must be on the watch for an
opportunity to change his paper profit into actual cash. He should try
to lose as little of the profit as possible in the swapping. Experience
has taught me that a man can always find an opportunity to make his
profits real and that this opportunity usually comes at the end of the
move. That isn’t tape-reading or a hunch.
Of course, when I found that morning a market in which I could sell
out all my stocks without any trouble I did so. When you are selling
out it is no wiser or braver to sell fifty shares than fifty thousand;
but fifty shares you can sell in the dullest market without breaking
the price and fifty thousand shares of a single stock is a different
proposition. I had seventy-two thousand shares of U.S. Steel. This may
not seem a colossal line, but you can’t always sell that much without
losing some of that profit that looks so nice on paper when you figure
it out and that hurts as much to lose as if you actually had it safe in
the bank.
I had a total profit of about $1,500,000 and I grabbed it while the
grabbing was good. But that wasn’t the principal reason for thinking
that I did the right thing in selling out when I did. The market proved
it for me and that was indeed a source of satisfaction for me. It was
this way: I succeeded in selling my entire line of seventy-two thousand
shares of U.S. Steel at a price which averaged me just one point from
the top of the day and of the movement. It proved that I was right, to
the minute. But when, on the very same hour of the very same day I came
to sell my 5000 shares of Utah Copper, the price broke five points.
Please recall that I began buying both stocks at the same time and that
I acted wisely in increasing my line of U.S. Steel from twenty thousand
shares to seventy-two thousand, and equally wisely in not increasing
my line of Utah from the original 5000 shares. The reason why I didn’t
sell out my Utah Copper before was that I was bullish on the copper
trade and it was a bull market in stocks and I didn’t think that Utah
would hurt me much even if I didn’t make a killing in it. But as for
hunches, there weren’t any.
The training of a stock trader is like a medical education. The
physician has to spend long years learning anatomy, physiology, materia
medica and collateral subjects by the dozen. He learns the theory
and then proceeds to devote his life to the practice. He observes and
classifies all sorts of pathological phenomena. He learns to diagnose.
If his diagnosis is correct--and that depends upon the accuracy of
his observation--he ought to do pretty well in his prognosis, always
keeping in mind, of course, that human fallibility and the utterly
unforeseen will keep him from scoring 100 per cent of bull’s-eyes.
And then, as he gains in experience, he learns not only to do the
right thing but to do it instantly, so that many people will think he
does it instinctively. It really isn’t automatism. It is that he has
diagnosed the case according to his observations of such cases during
a period of many years; and, naturally, after he has diagnosed it, he
can only treat it in the way that experience has taught him is the
proper treatment. You can transmit knowledge--that is, your particular
collection of card-indexed facts--but not your experience. _A man may
know what to do and lose money--if he doesn’t do it quickly enough._
Observation, experience, memory and mathematics--these are what the
successful trader must depend on. He must not only observe accurately
but remember at all times what he has observed. He cannot bet on
the unreasonable or on the unexpected, however strong his personal
convictions may be about man’s unreasonableness or however certain
he may feel that the unexpected happens very frequently. He must bet
always on probabilities--that is, try to anticipate them. Years of
practice at the game, of constant study, of always remembering, enable
the trader to act on the instant when the unexpected happens as well as
when the expected comes to pass.
A man can have great mathematical ability and an unusual power of
accurate observation and yet fail in speculation unless he also
possesses _the experience and the memory_. And then, like the physician
who keeps up with the advances of science, _the wise trader never
ceases to study general conditions, to keep track of developments
everywhere that are likely to affect or influence the course of the
various markets_. After years at the game it becomes a habit to keep
posted. He acts almost automatically. He requires the invaluable
professional attitude and that enables him to beat the game--at times!
This difference between the professional and the amateur or occasional
trader cannot be overemphasised. I find, for instance, that memory
and mathematics help me very much. Wall Street makes its money on a
mathematical basis. I mean, _it makes its money by dealing with facts
and figures_.
When I said that a trader has to keep posted to the minute and that he
must take a purely professional attitude toward all markets and all
developments, I merely meant to emphasise again that hunches and the
mysterious ticker-sense haven’t so much to do with success. Of course,
it often happens that an experienced trader acts so quickly that he
hasn’t time to give all his reasons in advance--but nevertheless they
are good and sufficient reasons, because they are based on facts
collected by him in his years of working and thinking and seeing things
from the angle of the professional, to whom everything that comes
to his mill is grist. Let me illustrate what I mean by professional
attitude.
I keep track of the commodities markets, always. It is a habit of
years. As you know, the Government reports indicated a winter wheat
crop about the same as last year and a bigger spring wheat crop than
in 1921. The condition was much better and we probably would have an
earlier harvest than usual. When I got the figures of condition and
I saw what we might expect in the way of yield--mathematics--I also
thought at once of the coal miner’s strike and the railroad shopmen’s
strike. I couldn’t help thinking of them because my mind always thinks
of all developments that have a bearing on the markets. It instantly
struck me that the strike which had already affected the movement of
freight everywhere must affect wheat prices adversely. I figured this
way: There was bound to be considerable delay in moving winter wheat
to market by reason of the strike-crippled transportation facilities,
and by the time those improved the spring wheat crop would be ready to
move. That meant that when the railroads were able to move wheat in
quantity they would be bringing in both crops together--the delayed
winter and the early spring wheat--and that would mean a vast quantity
of wheat pouring into the market at one fell swoop. Such being the
facts of the case--the obvious probabilities--the traders, who would
know and figure as I did, would not bull wheat for a while. They would
not feel like buying it unless the price declined to such figures as
made the purchase of wheat a good investment. With no buying power in
the market, the price ought to go down. Thinking the way I did I must
find whether I was right or not. As old Pat Hearne used to remark, “You
can’t tell till you bet.” Between being bearish and selling there is no
need to waste time.
_Experience has taught me that the way a market behaves is an excellent
guide for an operator to follow. It is like taking a patient’s
temperature and pulse or noting the colour of the eyeballs and the
coating of the tongue._
Now, ordinarily a man ought to be able to buy or sell a million bushels
of wheat within a range of ¼ cent. On this day when I sold the 250,000
bushels to test the market for timeliness, the price went down ¼ cent.
Then, since the reaction did not definitely tell me all I wished to
know, I sold another quarter of a million bushels. I noticed that it
was taken in driblets; that is, the buying was in lots of 10,000 or
15,000 bushels instead of being taken in two or three transactions
which would have been the normal way. In addition to the homeopathic
buying the price went down 1¼ cents on my selling. Now, I need not
waste my time pointing out that the way in which the market took my
wheat and the disproportionate decline on my selling told me that there
was no buying power there. Such being the case, what was the only
thing to do? Of course, to sell a lot more. Following the dictates
of experience may possibly fool you, now and then. But not following
them invariably makes an ass of you. So I sold 2,000,000 bushels and
the price went down some more. A few days later the market’s behaviour
practically compelled me to sell an additional 2,000,000 bushels and
the price declined further still; a few days later wheat started to
break badly and slumped off 6 cents a bushel. And it didn’t stop there.
It has been going down, with short-lived rallies.
Now, I didn’t follow a hunch. Nobody gave me a tip. It was my habitual
or professional mental attitude toward the commodities markets that
gave me the profit and that attitude came from my years at this
business. I study because my business is to trade. The moment the tape
told me that I was on the right track my business duty was to increase
my line. I did. That is all there is to it.
I have found that experience is apt to be a steady dividend payer in
this game and that observation gives you the best tips of all. The
behaviour of a certain stock is all you need at times. You observe it.
Then experience shows you how to profit by variations from the usual,
that is, from the probable. For example, we know _that all stocks do
not move one way together but that all the stocks of a group will move
up in a bull market and down in a bear market_. This is a common-place
of speculation. It is the commonest of all self-given tips and the
commission houses are well aware of it and pass it on to any customer
who has not thought of it himself; I mean, the advice to trade in those
stocks which have lagged behind other stocks of the same group. Thus,
if U.S. Steel goes up, it is logically assumed that it is only a matter
of time when Crucible or Republic or Bethlehem will follow suit. Trade
conditions and prospects should work alike with all stocks of a group
and the prosperity should be shared by all. On the theory, corroborated
by experience times without number, that every dog has his day in the
market, the public will buy A.B. Steel because it has not advanced
while C.D. Steel and X.Y. Steel have gone up.
I never buy a stock even in a bull market, if it doesn’t act as it
ought to act in that kind of market. I have sometimes bought a stock
during an undoubted bull market and found out that other stocks in the
same group were not acting bullishly and I have sold out my stock. Why?
_Experience tells me that it is not wise to buck against what I may
call the manifest group-tendency._ I cannot expect to play certainties
only. I must reckon on probabilities--and anticipate them. An old
broker once said to me: “If I am walking along a railroad track and
I see a train coming toward me at sixty miles an hour, do I keep on
walking on the ties? Friend, I sidestep. And I don’t even pat myself on
the back for being so wise and prudent.”
Last year, after the general bull movement was well under way, I
noticed that one stock in a certain group was not going with the rest
of the group, though the group with that one exception was going with
the rest of the market. I was long a very fair amount of Blackwood
Motors. Everybody knew that the company was doing a very big business.
The price was rising from one to three points a day and the public
was coming in more and more. This naturally centered attention on the
group and all the various motor stocks began to go up. One of them,
however, persistently held back and that was Chester. It lagged behind
the others so that it was not long before it made people talk. The low
price of Chester and its apathy was contrasted with the strength and
activity in Blackwood and other motor stocks and the public logically
enough listened to the touts and tipsters and wise-acres and began to
buy Chester on the theory that it must presently move up with the rest
of the group.
Instead of going on this moderate public buying, Chester actually
declined. Now, it would have been no job to put it up in that bull
market, considering that Blackwood, a stock of the same group, was one
of the sensational leaders of the general advance and we were hearing
nothing but the wonderful improvement in the demand for automobiles of
all kinds and the record output.
It was thus plain that the inside clique in Chester were not doing any
of the things that inside cliques invariably do in a bull market. For
this failure to do the usual thing there might be two reasons. Perhaps
the insiders did not put it up because they wished to accumulate more
stock before advancing the price. But this was an untenable theory if
you analysed the volume and character of the trading in Chester. The
other reason was that they did not put it up because they were afraid
of getting stock if they tried to.
When the men who ought to want a stock don’t want it, why should I want
it? I figured that no matter how prosperous other automobile companies
might be, it was a cinch to sell Chester short. _Experiences had taught
me to beware of buying a stock that refuses to follow the group-leader._
I easily established the fact that not only there was no inside
buying but that there was actually inside selling. There were other
symptomatic warnings against buying Chester, though all I required was
its inconsistent market behaviour. It was again the tape that tipped
me off and that was why I sold Chester short. One day, not very long
afterward, the stock broke wide open. Later on we learned--officially,
as it were--that insiders had indeed been selling it, knowing full
well that the condition of the company was not good. The reason, as
usual, was disclosed after the break. But the warning came before the
break. _I don’t look out for the breaks; I look out for the warnings._
I didn’t know what was the trouble with Chester; neither did I follow a
hunch. I merely knew that something must be wrong.
Only the other day we had what the newspapers called a sensational
movement in Guiana Gold. After selling on the Curb at 50 or close to
it, it was listed on the Stock Exchange. It started there at around 35,
began to go down and finally broke 20.
Now, I’d never have called that break sensational because it was fully
to be expected. If you had asked you could have learned the history of
the company. No end of people knew it. It was told to me as follows: A
syndicate was formed consisting of a half dozen extremely well-known
capitalists and a prominent banking house. One of the members was the
head of the Belle Isle Exploration Company, which advanced Guiana over
$10,000,000 cash and received in return bonds and 250,000 shares out
of a total of one million shares of the Guiana Gold Mining Company.
The stock went on a dividend basis and it was mighty well advertised.
The Belle Isle people thought it well to cash in and they gave a call
on their 250,000 shares to the bankers, who arranged to try to market
that stock and some of their own holdings as well. They thought of
entrusting the market manipulation to a professional whose fee was to
be one third of the profits from the sale of the 250,000 shares above
36. I understand that the agreement was drawn up and ready to be signed
but at the last moment the bankers decided to undertake the marketing
themselves and save the fee. So they organized an inside pool. The
bankers had a call on the Belle Isle holdings of 250,000 at 36. They
put this in at 41. That is, insiders paid their own banking colleagues
a 5-point profit to start with. I don’t know whether they knew it or
not.
It is perfectly plain that to the bankers the operation had every
semblance of a cinch. We had run into a bull market and the stocks of
the group to which Guiana Gold belonged were among the market leaders.
The company was making big profits and paying regular dividends. This
together with the high character of the sponsors made the public regard
Guiana almost as an investment stock. I was told that about 400,000
shares were sold to the public all the way up to 47.
The gold group was very strong. But presently Guiana began to sag.
It declined ten points. That was all right if the pool was marketing
stock. But pretty soon the Street began to hear that things were not
altogether satisfactory and the property was not bearing out the high
expectations of the promoters. Then, of course, the reason for the
decline became plain. But before the reason was known I had the warning
and had taken steps to test the market for Guiana. The stock was acting
pretty much as Chester Motors did. I sold Guiana. The price went down.
I sold more. The price went still lower. The stock was repeating the
performance of Chester and of a dozen other stocks whose clinical
history I remembered. The tape plainly told me that there was something
wrong--something that kept insiders from buying it--insiders who knew
exactly why they should not buy their own stock in a bull market. On
the other hand, outsiders, who did not know, were now buying because
having sold at 45 and higher the stock looked cheap at 35 and lower.
The dividend was still being paid. The stock was a bargain.
Then the news came. It reached me, as important market news often does,
before it reached the public. But the confirmation of the reports of
striking barren rock instead of rich ore merely gave me the reason for
the earlier inside selling. I myself didn’t sell on the news. I had
sold long before, on the stock’s behaviour. My concern with it was
not philosophical. I am a trader and therefore looked for one sign:
Inside buying. There wasn’t any. I didn’t have to know why the insiders
did not think enough of their own stock to buy it on the decline. It
was enough that their market plans plainly did not include further
manipulation for the rise. That made it a cinch to sell the stock
short. The public had bought almost a half million shares and the only
change in ownership possible was from one set of ignorant outsiders who
would sell in the hope of stopping losses to another set of ignorant
outsiders who might buy in the hope of making money.
I am not telling you this to moralise on the public’s losses through
their buying of Guiana or on my profit through my selling of it, but
to emphasise how important the study of group-behaviourism is and how
its lessons are disregarded by inadequately equipped traders, big and
little. And it is not only in the stock market that the tape warns you.
It blows the whistle quite as loudly in commodities.
I had an interesting experience in cotton. I was bearish on stocks and
put out a moderate short line. At the same time I sold cotton short;
50,000 bales. My stock deal proved profitable and I neglected my
cotton. The first thing I knew I had a loss of $250,000 on my 50,000
bales. As I said, my stock deal was so interesting and I was doing
so well in it that I did not wish to take my mind off it. Whenever I
thought of cotton I just said to myself: “I’ll wait for a reaction and
cover.” The price would react a little but before I could decide to
take my loss and cover, the price would rally again, and go higher than
ever. So I’d decide again to wait a little and I’d go back to my stock
deal and confine my attention to that. Finally I closed out my stocks
at a very handsome profit and went away to Hot Springs for a rest and a
holiday.
That really was the first time that I had my mind free to deal with the
problem of my losing deal in cotton. The trade had gone against me.
There were times when it almost looked as if I might win out. I noticed
that whenever anybody sold heavily there was a good reaction. But
almost instantly the price would rally and make a new high for the move.
Finally, by the time I had been in Hot Springs a few days, I was a
million to the bad and no let up in the rising tendency. I thought
over all I had done and had not done and I said to myself: “I must be
wrong!” With me to feel that I am wrong and to decide to get out are
practically one process. So I covered, at a loss of about one million.
The next morning I was playing golf and not thinking of anything else.
I had made my play in cotton. I had been wrong. I had paid for being
wrong and the receipted bill was in my pocket. I had no more concern
with the cotton market than I have at this moment. When I went back
to the hotel for luncheon I stopped at the broker’s office and took a
look at the quotations. I saw that cotton had gone off 50 points. That
wasn’t anything. But I also noticed that it had not rallied as it had
been in the habit of doing for weeks, as soon as the pressure of the
particular selling that had depressed it eased up. This had indicated
that the line of least resistance was upward and it had cost me a
million to shut my eyes to it.
Now, however, the reason that had made me cover at a big loss was no
longer a good reason since there had not been the usual prompt and
vigorous rally. So I sold 10,000 bales and waited. Pretty soon the
market went off 50 points. I waited a little while longer. There was no
rally. I had got pretty hungry by now, so I went into the dining-room
and ordered my luncheon. Before the waiter could serve it, I jumped up,
went to the broker’s office, I saw that there had been no rally and so
I sold 10,000 bales more. I waited a little and had the pleasure of
seeing the price decline 40 points more. That showed me I was trading
correctly so I returned to the dining-room ate my luncheon and went
back to the broker’s. There was no rally in cotton that day. That very
night I left Hot Springs.
It was all very well to play golf but I had been wrong in cotton in
selling when I did and in covering when I did. So I simply had to get
back on the job and be where I could trade in comfort. The way the
market took my first ten thousand bales made me sell the second ten
thousand, and the way the market took the second made me certain the
turn had come. It was the difference in behaviour.
Well, I reached Washington and went to my brokers’ office there, which
was in charge of my old friend Tucker. While I was there the market
went down some more. I was more confident of being right now than I had
been of being wrong before. So I sold 40,000 bales and the market went
off 75 points. It showed that there was no support there. That night
the market closed still lower. The old buying power was plainly gone.
There was no telling at what level that power would again develop, but
I felt confident of the wisdom of my position. The next morning I left
Washington for New York by motor. There was no need to hurry.
When we got to Philadelphia I drove to a broker’s office. I saw that
there was the very dickens to pay in the cotton market. Prices had
broken badly and there was a small-sized panic on. I didn’t wait to get
to New York. I called up my brokers on the long distance and I covered
my shorts. As soon as I got my reports and found that I had practically
made up my previous loss, I motored on to New York without having to
stop en route to see any more quotations.
Some friends who were with me in Hot Springs talk to this day of
the way I jumped up from the luncheon table to sell that second lot
of 10,000 bales. But again that clearly was not a hunch. It was an
impulse that came from the conviction that the time to sell cotton
had now come, however great my previous mistake had been. I had to
take advantage of it. It was my chance. The subconscious mind probably
went on working, reaching conclusions for me. The decision to sell in
Washington was the result of my observation. My years of experience in
trading told me that the line of least resistance had changed from up
to down.
I bore the cotton market no grudge for taking a million dollars out of
me and I did not hate myself for making a mistake of that calibre any
more than I felt proud for covering in Philadelphia and making up my
loss. My trading mind concerns itself with trading problems and I think
I am justified in asserting that I made up my first loss because I had
the experience and the memory.
_XVIII_
History repeats itself all the time in Wall Street. Do you remember a
story I told you about covering my shorts at the time Stratton had corn
cornered? Well, another time I used practically the same tactics in the
stock market. The stock was Tropical Trading. I have made money bulling
it and also bearing it. It always was an active stock and a favourite
with adventurous traders. The inside coterie has been accused time and
again by the newspapers of being more concerned over the fluctuations
in the stock than with encouraging permanent investment in it. The
other day one of the ablest brokers I know asserted that not even
Daniel Drew in Erie or H. O. Havemeyer in Sugar developed so perfect a
method for milking the market for a stock as President Mulligan and his
friends have done in Tropical Trading. Many times they have encouraged
the bears to sell TT short and then have proceeded to squeeze them with
business-like thoroughness. There was no more vindictiveness about the
process than is felt by a hydraulic press--or no more squeamishness,
either.
Of course, there have been people who have spoken about certain
“unsavory incidents” in the market career of TT stock. But I dare
say these critics were suffering from the squeezing. Why do the room
traders, who have suffered so often from the loaded dice of the
insiders, continue to go up against the game? Well, for one thing they
like action and they certainly get it in Tropical Trading. No prolonged
spells of dullness. No reasons asked or given. No time wasted. No
patience strained by waiting for the tipped movement to begin. Always
enough stock to go around--except when the short interest is big enough
to make the scarcity worthwhile. One born every minute!
It so happened some time ago that I was in Florida on my usual winter
vacation. I was fishing and enjoying myself without any thought of the
markets excepting when we received a batch of newspapers. One morning
when the semi-weekly mail came in I looked at the stock quotations and
saw that Tropical Trading was selling at 155. The last time I’d seen a
quotation in it, I think, was around 140. My opinion was that we were
going into a bear market and I was biding my time before going short of
stocks. But there was no mad rush. That was why I was fishing and out
of hearing of the ticker. I knew that I’d be back home when the real
call came. In the meanwhile nothing that I did or failed to do would
hurry matters a bit.
The behaviour of Tropical Trading was the outstanding feature of the
market, according to the newspapers I got that morning. It served to
crystallise my general bearishness because I thought it particularly
asinine for the insiders to run up the price of TT in the face of the
heaviness of the general list. There are times when the milking process
must be suspended. What is abnormal is seldom a desirable factor in
a trader’s calculations and it looked to me as if the marking up of
that stock were a capital blunder. Nobody can make blunders of that
magnitude with impunity; not in the stock market.
After I got through reading the newspapers I went back to my fishing
but I kept thinking of what the insiders in Tropical Trading were
trying to do. That they were bound to fail was as certain as that a man
is bound to smash himself if he jumps from the roof of a twenty-story
building without a parachute. I couldn’t think of anything else and
finally I gave up trying to fish and sent off a telegram to my brokers
to sell 2000 shares of TT at the market. After that I was able to go
back to my fishing. I did pretty well.
That afternoon I received the reply to my telegram by special courier.
My brokers reported that they had sold the 2000 shares of Tropical
Trading at 153. So far so good. I was selling short on a declining
market, which was as it should be. But I could not fish any more. I was
too far away from a quotation board. I discovered this after I began
to think of all the reasons why Tropical Trading should go down with
the rest of the market instead of going up on inside manipulation. I
therefore left my fishing camp and returned to Palm Beach; or, rather,
to the direct wire to New York.
The moment I got to Palm Beach and saw what the misguided insiders
were still trying to do, I let them have a second lot of 2000 TT. Back
came the report and I sold another 2000 shares. The market behaved
excellently. That is, it declined on my selling. Everything being
satisfactory I went out and had a chair ride. But I wasn’t happy. The
more I thought the unhappier it made me to think that I hadn’t sold
more. So back I went to the broker’s office and sold another 2000
shares.
I was happy only when I was selling that stock. Presently I was short
10,000 shares. Then I decided to return to New York. I had business to
do now. My fishing I would do some other time.
When I arrived in New York I made it a point to get a line on the
company’s business, actual and prospective. What I learned strengthened
my conviction that the insiders had been worse than reckless in jacking
up the price at a time when such an advance was not justified either by
the tone of the general market or by the company’s earnings.
The rise, illogical and ill-timed though it was, had developed some
public following and this doubtless encouraged the insiders to pursue
their unwise tactics. Therefore I sold more stock. The insiders ceased
their folly. So I tested the market again and again, in accordance with
my trading methods, until finally I was short 30,000 shares of the
stock of the Tropical Trading Company. By then the price was 133.
I had been warned that the TT insiders knew the exact whereabouts of
every stock certificate in the Street and the precise dimensions and
identity of the short interest as well as other facts of tactical
importance. They were able men and shrewd traders. Altogether it was
a dangerous combination to go up against. But facts are facts and the
strongest of all allies are conditions.
Of course, on the way down from 153 to 133 the short interest had grown
and the public that buys on reactions began to argue as usual: That
stock had been considered a good purchase at 153 and higher. Now 20
points lower, it was necessarily a much better purchase. Same stock;
same dividend rate; same officers; same business. Great bargain!
The public’s purchases reduced the floating supply and the insiders,
knowing that a lot of room traders were short, thought the time
propitious for a squeezing. The price was duly run up to 150. I daresay
there was plenty of covering but I stayed pat. Why shouldn’t I? The
insiders might know that a short line of 30,000 shares had not been
taken in but why should that frighten me? The reasons that had impelled
me to begin selling at 153 and keep at it on the way down to 133, not
only still existed but were stronger than ever. The insiders might
desire to force me to cover but they adduced no convincing arguments.
Fundamental conditions were fighting for me. It was not difficult to
be both fearless and patient. A speculator must have faith in himself
and in his judgment. The late Dickson G. Watts, ex-President of the
New York Cotton Exchange and famous author of “Speculation as a Fine
Art,” says that courage in a speculator is merely confidence to act on
the decision of his mind. With me, I cannot fear to be wrong because
I never think I am wrong until I am proven wrong. In fact, I am
uncomfortable unless I am capitalising my experience. The course of
the market at a given time does not necessarily prove me wrong. It is
the character of the advance--or of the decline--that determines for me
the correctness or the fallacy of my market position. I can only rise
by knowledge. If I fall it must be by my own blunders.
There was nothing in the character of the rally from 133 to 150 to
frighten me into covering and presently the stock, as was to be
expected, started down again. It broke 140 before the inside clique
began to give it support. Their buying was coincident with a flood
of bull rumors about the stock. The company, we heard, was making
perfectly fabulous profits, and the earnings justified an increase in
the regular dividend rate. Also, the short interest was said to be
perfectly huge and the squeeze of the century was about to be inflicted
on the bear party in general and in particular on a certain operator
who was more than over-extended. I couldn’t begin to tell you all I
heard as they ran the price up ten points.
The manipulation did not seem particularly dangerous to me but when
the price touched 149 I decided that it was not wise to let the Street
accept as true all the bull statements that were floating around. Of
course, there was nothing that I or any other rank outsider could say
that would carry conviction either to the frightened shorts or to
those credulous customers of commission houses that trade on hearsay
tips. The most effective retort courteous is that which the tape alone
can print. People will believe that when they will not believe an
affidavit from any living man, much less one from a chap who is short
30,000 shares. So I used the same tactics that I did at the time of the
Stratton corner in corn, when I sold oats to make the traders bearish
on corn. Experience and memory again.
When the insiders jacked up the price of Tropical Trading with a view
to frightening the shorts I didn’t try to check the rise by selling
that stock. I was already short 30,000 shares of it which was as big
a percentage of the floating supply as I thought wise to be short of.
I did not propose to put my head into the noose so obligingly held
open for me--the second rally was really an urgent invitation. What I
did when TT touched 149 was to sell about 10,000 shares of Equatorial
Commercial Corporation. This company owned a large block of Tropical
Trading.
Equatorial Commercial, which was not as active a stock as TT, broke
badly on my selling, as I had foreseen; and, of course, my purpose was
achieved. When the traders--and the customers of the commission houses
who had listened to the uncontradicted bull dope on TT--saw that the
rise in Tropical synchronised with heavy selling and a sharp break in
Equatorial, they naturally concluded that the strength of TT was merely
a smoke-screen--a manipulated advance obviously designed to facilitate
inside liquidation in Equatorial Commercial, which was largest holder
of TT stock. It must be both long stock and inside stock in Equatorial,
because no outsider would dream of selling so much short stock at the
very moment when Tropical Trading was so very strong. So they sold
Tropical Trading and checked the rise in that stock, the insiders
very properly not wishing to take all the stock that was pressed for
sale. The moment the insiders took away their support the price of TT
declined. The traders and principal commission houses now sold some
Equatorial also and I took in my short line in that at a small profit.
I hadn’t sold it to make money out of the operation but to check the
rise in TT.
Time and again the Tropical Trading insiders and their hard-working
publicity man flooded the Street with all manner of bull items and
tried to put up the price. And every time they did I sold Equatorial
Commercial short and covered it with TT reacted and carried EC with
it. It took the wind out of the manipulators’ sails. The price of TT
finally went down to 125 and the short interest really grew so big that
the insiders were enabled to run it up 20 or 25 points. This time it
was a legitimate enough drive against an over-extended short interest;
but while I foresaw the rally I did not cover, not wishing to lose my
position. Before Equatorial Commercial could advance in sympathy with
the rise in TT I sold a raft of it short--with the usual results. This
gave the lie to the bull talk in TT which had got quite boisterous
after the latest sensational rise.
By this time the general market had grown quite weak. As I told you,
it was the conviction that we were in a bear market that started me
selling TT short in the fishing-camp in Florida. I was short of quite a
few other stocks but TT was my pet. Finally, general conditions proved
too much for the inside clique to defy and TT hit the toboggan slide.
It went below 120 for the first time in years; then below 110; below
par; and still I did not cover. One day when the entire market was
extremely weak Tropical Trading broke 90 and on the demoralisation I
covered. Same old reason! I had the opportunity--the big market and the
weakness and the excess of sellers over buyers. I may tell you, even
at the risk of appearing to be monotonously bragging of my cleverness,
that I took in my 30,000 shares of TT at practically the lowest prices
of the movement. But I wasn’t thinking of covering at the bottom. I was
intent on turning my paper profits into cash without losing much of the
profit in the changing.
I stood pat throughout because I knew my position was sound. I wasn’t
bucking the trend of the market or going against basic conditions but
the reverse, and that was what made me so sure of the failure of an
over-confident inside clique. What they tried to do others had tried
before and it had always failed. The frequent rallies, even when I knew
as well as anybody that they were due, could not frighten me. I knew
I’d do much better in the end by staying pat than by trying to cover to
put out a new short line at a higher price. By sticking to the position
that I felt was right I made over a million dollars. I was not indebted
to hunches or to skillful tape reading or to stubborn courage. It was a
dividend declared by my faith in my judgment and not by my cleverness
or by my vanity. Knowledge is power and power need not fear lies--not
even when the tape prints them. The retraction follows pretty quickly.
A year later, TT was jacked up again to 150 and hung around there for
a couple of weeks. The entire market was entitled to a good reaction
for it had risen uninterruptedly and it did not bull any longer. I
know because I tested it. Now, the group to which TT belonged had been
suffering from very poor business and I couldn’t see anything to bull
those stocks on anyhow, even if the rest of the market were due for a
rise, which it wasn’t. So I began to sell Tropical Trading. I intended
to put out 10,000 shares in all. The price broke on my selling. I
couldn’t see that there was any support whatever. Then suddenly, the
character of the buying changed.
I am not trying to make myself out a wizard when I assure you that I
could tell the moment support came in. It instantly struck me that if
the insiders in that stock, who never felt a moral obligation to keep
the price up, were now buying the stock in the face of a declining
general market there must be a reason. They were not ignorant asses nor
philanthropists nor yet bankers concerned with keeping the price up to
sell more securities over the counter. The price rose notwithstanding
my selling and the selling of others. At 153 I covered my 10,000 shares
and at 156 I actually went long because by that time the tape told me
the line of least resistance was upward. I was bearish on the general
market but I was confronted by a trading condition in a certain stock
and not by a speculative theory in general. The price went out of
sight, above 200. It was the sensation of the year. I was flattered by
reports spoken and printed that I had been squeezed out of eight or
nine millions of dollars. As a matter of fact, instead of being short
I was long of TT all the way up. In fact, I held on a little too long
and let some of my paper profits get away. Do you wish to know why I
did? Because I thought the TT insiders would naturally do what I would
have done had I been in their place. But that was something I had no
business to think because my business is to trade--that is, to stick to
the facts before me and not to what I think other people ought to do.
_XIX_
I do not know when or by whom the word “manipulation” was first used
in connection with what really are no more than common merchandising
processes applied to the sale in bulk of securities on the Stock
Exchange. Rigging the market to facilitate cheap purchases of a stock
which it is desired to accumulate is also manipulation. But it is
different. It may not be necessary to stoop to illegal practices,
but it would be difficult to avoid doing what some would think
illegitimate. How are you going to buy a big block of a stock in a
bull market without putting up the price on yourself? That would be
the problem. How can it be solved? It depends upon so many things that
you can’t give a general solution unless you say: possibly by means
of very adroit manipulation. For instance? Well, it would depend upon
conditions. You can’t give any closer answer than that.
I am profoundly interested in all phases of my business, and of course
I learn from the experience of others as well as from my own. But it
is very difficult to learn how to manipulate stocks to-day from such
yarns as are told of an afternoon in the brokers’ offices after the
close. Most of the tricks, devices and expedients of bygone days are
obsolete and futile; or illegal and impracticable. Stock Exchange
rules and conditions have changed, and the story--even the accurately
detailed story--of what Daniel Drew or Jacob Little or Jay Gould could
do fifty or seventy-five years ago is scarcely worth listening to.
The manipulator to-day has no more need to consider what they did
and how they did it than a cadet at West Point need study archery as
practiced by the ancients in order to increase his working knowledge of
ballistics.
On the other hand there is profit in studying the human factors--the
ease with which human beings believe what it pleases them to believe;
and how they allow themselves--indeed, urge themselves--to be
influenced by their cupidity or by the dollar-cost of the average man’s
carelessness. Fear and hope remain the same; therefore the study of
the psychology of speculators is as valuable as it ever was. Weapons
change, but strategy remains strategy, on the New York Stock Exchange
as on the battlefield. I think the clearest summing up of the whole
thing was expressed by Thomas F. Woodlock when he declared: “The
principles of successful stock speculation are based on the supposition
that people will continue in the future to make the mistakes that they
have made in the past.”
In booms, which is when the public is in the market in the greatest
numbers, there is never any need of subtlety, so there is no sense of
wasting time discussing either manipulation or speculation during such
times; it would be like trying to find the difference in raindrops
that are falling synchronously on the same roof across the street. The
sucker has always tried to get something for nothing, and the appeal
in all booms is always frankly to the gambling instinct aroused by
cupidity and spurred by a pervasive prosperity. People who look for
easy money invariably pay for the privilege of proving conclusively
that it cannot be found on this sordid earth. At first, when I listened
to the accounts of old-time deals and devices I used to think that
people were more gullible in the 1860’s and ’70’s than in the 1900’s.
But I was sure to read in the newspapers that very day or the next
something about the latest Ponzi or the bust-up of some bucketing
broker and about the millions of sucker money gone to join the silent
majority of vanished savings.
When I first came to New York there was a great fuss made about wash
sales and matched orders, for all that such practices were forbidden
by the Stock Exchange. At times the washing was too crude to deceive
anyone. The brokers had no hesitation in saying that “the laundry
was active” whenever anybody tried to wash up some stock or other,
and, as I have said before, more than once they had what were frankly
referred to as “bucket-shop drives,” when a stock was offered down two
or three points in a jiffy just to establish the decline on the tape
and wipe up the myriad shoe-string traders who were long of the stock
in the bucket shops. As for matched orders, they were always used
with some misgivings by reason of the difficulty of coordinating and
synchronising operations by brokers, all such business being against
Stock Exchange rules. A few years ago a famous operator canceled the
selling but not the buying part of his matched orders, and the result
was that an innocent broker ran up the price twenty-five points or so
in a few minutes, only to see it break with equal celerity as soon as
his buying ceased. The original intention was to create an appearance
of activity. Bad business, playing with such unreliable weapons. You
see, you can’t take your best brokers into your confidence--not if you
want them to remain members of the New York Stock Exchange. Then also,
the taxes have made all practices involving fictitious transactions
much more expensive than they used to be in the old times.
The dictionary definition of manipulation includes corners. Now, a
corner might be the result of manipulation or it might be the result of
competitive buying, as, for instance, the Northern Pacific corner on
May 9, 1901, which certainly was not manipulation. The Stutz corner was
expensive to everybody concerned, both in money and in prestige. And it
was not a deliberately engineered corner, at that.
As a matter of fact very few of the great corners were profitable to
the engineers of them. Both Commodore Vanderbilt’s Harlem corners
paid big, but the old chap deserved the millions he made out of a
lot of short sports, crooked legislators and aldermen who tried to
double-cross him. On the other hand, Jay Gould lost in his Northwestern
corner. Deacon S. V. White made a million in his Lackawanna corner,
but Jim Keene dropped a million in the Hannibal & St. Joe deal. The
financial success of a corner of course depends upon the marketing of
the accumulated holdings at higher than cost, and the short interest
has to be of some magnitude for that to happen easily.
I used to wonder why corners were so popular among the big operators of
a half-century ago. They were men of ability and experience, wide-awake
and not prone to childlike trust in the philanthropy of their fellow
traders. Yet they used to get stung with an astonishing frequency. A
wise old broker told me that all the big operators of the ’60’s and
’70’s had one ambition, and that was to work a corner. In many cases
this was the offspring of vanity; in others, of the desire for revenge.
At all events, to be pointed out as the man who had successfully
cornered this or the other stock was in reality recognition of brains,
boldness and boodle. It gave the cornerer the right to be haughty. He
accepted the plaudits of his fellows as fully earned. It was more than
the prospective money profit that prompted the engineers of corners to
do their damnedest. It was the vanity complex asserting itself among
cold-blooded operators.
Dog certainly ate dog in those days with relish and ease. I think I
told you before that I have managed to escape being squeezed more than
once, not because of the possession of a mysterious ticker-sense but
because I can generally tell the moment the character of the buying in
the stock makes it imprudent for me to be short of it. This I do by
common-sense tests, which must have been tried in the old times also.
Old Daniel Drew used to squeeze the boys with some frequency and make
them pay high prices for the Erie “sheers” they had sold short to him.
He was himself squeezed by Commodore Vanderbilt in Erie, and when old
Drew begged for mercy the Commodore grimly quoted the Great Bear’s own
deathless distich:
_He that sells what isn’t hisn
Must buy it back or go to prisn._
Wall Street remembers very little of an operator who for more than a
generation was one of its Titans. His chief claim to immortality seems
to be the phrase “watering stock.”
Addison G. Jerome was the acknowledged king of the Public Board in
the spring of 1863. His market tips, they tell me, were considered as
good as cash in bank. From all accounts he was a great trader and made
millions. He was liberal, to the point of extravagance and had a great
following in the Street--until Henry Keep, known as William the Silent,
squeezed him out of all his millions in the Old Southern corner. Keep,
by the way, was the brother-in-law of Gov. Roswell P. Flower.