“Yeh! Thirty-one and a quarter, and I’ve got a raft of it.”
“I know you have sixty thousand shares. You have had it a long time,
because when you originally bought your Gray Stove----”
But he didn’t let me finish. He said, “But I bought a lot more. Some of
it cost me as high as 40! And I’ve got it yet!”
He was glaring at me so hostilely that I said, “I didn’t tell you to
buy it.”
“You didn’t what?”
“I didn’t tell you to load up with it.”
“I didn’t say you did. But you were going to put it up----”
“Why was I?” I interrupted.
He looked at me, unable to speak for anger. When he found his voice
again, he said, “You were going to put it up. You had the money to buy
it.”
“Yes. But I didn’t buy a share,” I told him.
That was the last straw.
“You didn’t buy a share, and you had over four millions in cash to buy
with? You didn’t buy any?”
“Not a share!” I repeated.
He was so mad by now that he couldn’t talk plainly. Finally he managed
to say, “What kind of a game do you call that?”
He was inwardly accusing me of all sorts of unspeakable crimes. I sure
could see a long list of them in his eyes. It made me say to him: “What
you really mean to ask me, Wolff, is, why I didn’t buy from you above
50 the stock you bought below 40. Isn’t that it?”
“No, it isn’t. You had a call at 40 and four millions in cash to put up
the price with.”
“Yes, but I didn’t touch the money and the syndicate has not lost a
cent by my operations.”
“Look here, Livingston--” he began.
But I didn’t let him say any more.
“You listen to me, Wolff. You knew that the two hundred thousand shares
you and Gordon and Kane held were tied up, and that there wouldn’t be
an awful lot of floating stock to come on the market if I put up the
price, as I’d have to do for two reasons: The first to make a market
for the stock; and the second to make a profit out of the call at 40.
But you weren’t satisfied to get 40 for the sixty thousand shares you’d
been lugging for months or with your share of the syndicate profits, if
any; so you decided to take on a lot of stock under 40 to unload on me
when I put the price up with the syndicate’s money, as you were sure
I meant to do. You’d buy before I did and you’d unload before I did;
in all probability I’d be the one to unload on. I suspect you figured
on my having to put the price up to 60. It was such a cinch that you
probably bought ten thousand shares strictly for unloading purposes,
and to make sure somebody held the bag if I didn’t, you tipped off
everybody in the United States, Canada and Mexico without thinking
of my added difficulties. All your friends knew what I was supposed
to do. Between their buying and mine you were going to be all hunky.
Well, your intimate friends to whom you gave the tip passed it on to
their friends after they had bought their lines, and the third stratum
of tip-takers planned to supply the fourth, fifth and possibly sixth
strata of suckers, so that when I finally came to do some selling I’d
find myself anticipated by a few thousands of wise speculators. It was
a friendly thought, that notion of yours, Wolff. You can’t imagine
how surprised I was when Consolidated Stove began to go up before I
even thought of buying a single share; or how grateful, either, when
the underwriting syndicate sold one hundred thousand shares around 40
to the people who were going to sell those same shares to me at 50 or
60. I sure was a sucker not to use the four millions to make money for
them, wasn’t I? The cash was supplied to buy stock with, but only if I
thought it necessary to do so. Well, I didn’t.”
Joshua had been in Wall Street long enough not to let anger interfere
with business. He cooled off as he heard me, and when I was through
talking he said in a friendly tone of voice, “Look here, Larry, old
chap, what shall we do?”
“Do whatever you please.”
“Aw, be a sport. What would you do if you were in our place?”
“If I were in your place,” I said solemnly, “do you know what I’d do?”
“What?”
“I’d sell out!” I told him.
He looked at me a moment, and without another word turned on his heel
and walked out of my office. He’s never been in it since.
Not long after that, Senator Gordon also called. He, too, was quite
peevish and blamed me for their troubles. Then Kane joined the anvil
chorus. They forgot that their stock had been unsalable in bulk when
they formed the syndicate. All they could remember was that I didn’t
sell their holdings when I had the syndicate’s millions and the stock
was active at 44, and that now it was 30 and dull as dishwater. To
their way of thinking I should have sold out at a good fat profit.
Of course they also cooled down in due time. The syndicate wasn’t out
a cent and the main problem remained unchanged: to sell their stock. A
day or two later they came back and asked me to help them out. Gordon
was particularly insistent, and in the end I made them put in their
pooled stock at 25½. My fee for my services was to be one-half of
whatever I got above that figure. The last sale had been at about 30.
There I was with their stock to liquidate. Given general market
conditions and specifically the behaviour of Consolidated Stove, there
was only one way to do it, and that was, of course, to sell on the way
down and without first trying to put up the price, and I certainly
would have got stock by the ream on the way up. But on the way down
I could reach those buyers who always argue that a stock is cheap
when it sells fifteen or twenty points below the top of the movement,
particularly when that top is a matter of recent history. A rally is
due, in their opinion. After seeing Consolidated Stove sell up to close
to 44 it sure looked like a good thing below 30.
It worked out as always. Bargain hunters bought it in sufficient volume
to enable me to liquidate the pool’s holdings. But do you think that
Gordon or Wolff or Kane felt any gratitude? Not a bit of it. They are
still sore at me, or so their friends tell me. They often tell people
how I did them. They cannot forgive me for not putting up the price on
myself, as they expected.
As a matter of fact I never would have been able to sell the bank’s
hundred thousand shares if Wolff and the rest had not passed around
those red-hot bull tips of theirs. If I had worked as I usually
do--that is, in a logical natural way--I would have had to take
whatever price I could get. I told you we ran into a declining market.
The only way to sell on such a market is to sell not necessarily
recklessly but really regardless of price. No other way was possible,
but I suppose they do not believe this. They are still angry. I am not.
Getting angry doesn’t get a man anywhere. More than once it has been
borne in on me that a speculator who loses his temper is a goner. In
this case there was no aftermath to the grouches. But I’ll tell you
something curious. One day Mrs. Livingston went to a dressmaker who had
been warmly recommended to her. The woman was competent and obliging
and had a very pleasing personality. At the third or fourth visit, when
the dressmaker felt less like a stranger, she said to Mrs. Livingston:
“I hope Mr. Livingston puts up Consolidated Stove soon. We have some
that we bought because we were told he was going to put it up, and we’d
always heard that he was very successful in all his deals.”
I tell you it isn’t pleasant to think that innocent people may have
lost money following a tip of that sort. Perhaps you understand why I
never give any myself. That dressmaker made me feel that in the matter
of grievances I had a real one against Wolff.
_XXIII_
Speculation in stocks will never disappear. It isn’t desirable that
it should. It cannot be checked by warnings as to its dangers. You
cannot prevent people from guessing wrong no matter how able or how
experienced they may be. Carefully laid plans will miscarry because the
unexpected and even the unexpectable will happen. Disaster may come
from a convulsion of nature or from the weather, from your own greed
or from some man’s vanity; from fear or from uncontrolled hope. But
apart from what one might call his natural foes, a speculator in stocks
has to contend with certain practices or abuses that are indefensible
normally as well as commercially.
As I look back and consider what were the common practices twenty-five
years ago when I first came to Wall Street, I have to admit that there
have been many changes for the better. The old-fashioned bucket shops
are gone, though bucketeering “brokerage” houses still prosper at the
expense of men and women who persist in playing the game of getting
rich quick. The Stock Exchange is doing excellent work not only in
getting after these out-and-out swindlers but in insisting upon strict
adherence to its rules by its own members. Many wholesome regulations
and restrictions are now strictly enforced but there is still room for
improvement. The ingrained conservatism of Wall Street rather than
ethical callousness is to blame for the persistence of certain abuses.
Difficult as profitable stock speculation always has been it is
becoming even more difficult every day. It was not so long ago when a
real trader could have a good working knowledge of practically every
stock on the list. In 1901, when J. P. Morgan brought out the United
States Steel Corporation, which was merely a consolidation of lesser
consolidations most of which were less than two years old, the Stock
Exchange had 275 stocks on its list and about 100 in its “unlisted
department”; and this included a lot that a chap didn’t have to know
anything about because they were small issues, or inactive by reason
of being minority or guaranteed stocks and therefore lacking in
speculative attractions. In fact, an overwhelming majority were stocks
in which there had not been a sale in years. Today there are about 900
stocks on the regular list and in our recent active markets about 600
separate issues were traded in. Moreover, the old groups or classes
of stocks were easier to keep track of. They not only were fewer but
the capitalization was smaller and the news a trader had to be on the
lookout for did not cover so wide a field. But today, a man is trading
in everything; almost every industry in the world is represented. It
requires more time and more work to keep posted and to that extent
speculation has become much more difficult for those who operate
intelligently.
There are many thousands of people who buy and sell stocks
speculatively but the number of those who speculate profitably is
small. As the public always is “in” the market to some extent,
it follows that there are losses by the public all the time. The
speculator’s deadly enemies are: Ignorance, greed, fear and hope. All
the statute books in the world and all the rules of all the Exchanges
on earth cannot eliminate these from the human animal. Accidents which
knock carefully conceived plans skyhigh also are beyond regulation by
bodies of cold-blooded economists or warm-hearted philanthropists.
There remains another source of loss and that is, deliberate
misinformation as distinguished from straight tips. And because it is
apt to come to a stock trader variously disguised and camouflaged, it
is the more insidious and dangerous.
The average outsider, of course, trades either on tips or on rumours,
spoken or printed, direct or implied. Against ordinary tips you cannot
guard. For instance, a lifelong friend sincerely desires to make you
rich by telling you what he has done, that is, to buy or sell some
stock. His intent is good. If the tip goes wrong what can you do? Also
against the professional or crooked tipster the public is protected to
about the same extent that he is against gold-bricks or wood-alcohol.
But against the typical Wall Street rumours, the speculating public
has neither protection nor redress. Wholesale dealers in securities,
manipulators, pools and individuals resort to various devices to aid
them in disposing of their surplus holdings at the best possible
prices. The circulation of bullish items by the newspapers and the
tickers is the most pernicious of all.
Get the slips of the financial news-agencies any day and it will
surprise you to see how many statements of an implied semi-official
nature they print. The authority is some “leading insider” or “a
prominent director” or “a high official” or someone “in authority” who
presumably knows what he is talking about. Here are today’s slips. I
pick an item at random. Listen to this: “A leading banker says it is
too early yet to expect a declining market.”
Did a leading banker really say that and if he said it why did he say
it? Why does he not allow his name to be printed? Is he afraid that
people will believe him if he does?
Here is another one about a company the stock of which has been active
this week. This time the man who makes the statement is a “prominent
director.” Now which--if any--of the company’s dozen directors is doing
the talking? It is plain that by remaining anonymous nobody can be
blamed for any damage that may be done by the statement.
Quite apart from the intelligent study of speculation everywhere the
trader in stocks must consider certain facts in connection with the
game in Wall Street. In addition to trying to determine how to make
money one must also try to keep from losing money. It is almost as
important to know what not to do as to know what should be done. It
is therefore well to remember that manipulation of some sort enters
into practically all advances in individual stocks and that such
advances are engineered by insiders with one object in view and one
only and that is to sell at the best profit possible. However, the
average broker’s customer believes himself to be a business man from
Missouri if he insists upon being told why a certain stock goes up.
Naturally, the manipulators “explain” the advance in a way calculated
to facilitate distribution. I am firmly convinced that the public’s
losses would be greatly reduced if no anonymous statements of a bullish
nature were allowed to be printed. I mean statements calculated to make
the public buy or hold stocks.
The overwhelming majority of the bullish articles printed on the
authority of unnamed directors or insiders convey unreliable and
misleading impressions to the public. The public loses many millions of
dollars every year by accepting such statements as semi-official and
therefore trustworthy.
Say for example that a company has gone through a period of depression
in its particular line of business. The stock is inactive. The
quotation represents the general and presumably accurate belief of its
actual value. If the stock were too cheap at that level somebody would
know it and buy it and it would advance. If too dear somebody would
know enough to sell it and the price would decline. As nothing happens
one way or another nobody talks about it or does anything.
The turn comes in the line of business the company is engaged in. Who
are the first to know it, the insiders or the public? You can bet it
isn’t the public. What happens next? Why, if the improvement continues
the earnings will increase and the company will be in position to
resume dividends on the stock; or, if dividends were not discontinued,
to pay a higher rate. That is, the value of the stock will increase.
Say that the improvement keeps up. Does the management make public
that glad fact? Does the president tell the stockholders? Does a
philanthropic director come out with a signed statement for the benefit
of that part of the public that reads the financial page in the
newspapers and the slips of the news agencies? Does some modest insider
pursuing his usual policy of anonymity come out with an unsigned
statement to the effect that the company’s future is most promising?
Not this time. Not a word is said by anyone and no statement whatever
is printed by newspapers or tickers.
The value-making information is carefully kept from the public while
the now taciturn “prominent insiders” go into the market and buy all
the cheap stock they can lay their hands on. As this well-informed
but unostentatious buying keeps on, the stock rises. The financial
reporters, knowing that the insiders ought to know the reason for the
rise, ask questions. The unanimously anonymous insiders unanimously
declare that they have no news to give out. They do not know that there
is any warrant for the rise. Sometimes they even state that they are
not particularly concerned with the vagaries of the stock market or the
actions of stock speculators.
The rise continues and there comes a happy day when those who know have
all the stock they want or can carry. The Street at once begins to hear
all kinds of bullish rumours. The tickers tell the traders “on good
authority” that the company has definitely turned the corner. The same
modest director who did not wish his name used when he said he knew
no warrant for the rise in the stock is now quoted--of course not by
name--as saying that the stockholders have every reason to feel greatly
encouraged over the outlook.
Urged by the deluge of bullish news items the public begins to buy
the stock. These purchases help to put the price still higher. In due
course the predictions of the uniformly unnamed directors come true
and the company resumes dividend payments; or increases the rate, as
the case may be. With that the bullish items multiply. They not only
are more numerous than ever but much more enthusiastic. A “leading
director,” asked point blank for a statement of conditions, informs
the world that the improvement is more than keeping up. A “prominent
insider,” after much coaxing, is finally induced by a news-agency
to confess that the earnings are nothing short of phenomenal. A
“well-known banker,” who is affiliated in a business way with the
company, is made to say that the expansion in the volume of sales
is simply unprecedented in the history of the trade. If not another
order came in the company would run night and day for heaven knows how
many months. A “member of the finance committee,” in a double-leaded
manifesto, expresses his astonishment at the public’s astonishment over
the stock’s rise. The only astonishing thing is the stock’s moderation
in the climbing line. Anybody who will analyse the forthcoming annual
report can easily figure how much more than the market-price the
book-value of the stock is. But in no instance is the name of the
communicative philanthropist given.
As long as the earnings continue good and the insiders do not discern
any sign of a let up in the company’s prosperity they sit on the stock
they bought at the low prices. There is nothing to put the price
down, so why should they sell? But the moment there is a turn for the
worse in the company’s business, what happens? Do they come out with
statements or warnings or the faintest of hints? Not much. The trend
is now downward. Just as they bought without any flourish of trumpets
when the company’s business turned for the better, they now silently
sell. On this inside selling the stock naturally declines. Then the
public begins to get the familiar “explanations.” A “leading insider”
asserts that everything is O.K. and the decline is merely the result of
selling by bears who are trying to affect the general market. If on
one fine day, after the stock has been declining for some time, there
should be a sharp break, the demand for “reasons” or “explanations”
becomes clamorous. Unless somebody says something the public will fear
the worst. So the news-tickers now print something like this: “When
we asked a prominent director of the company to explain the weakness
in the stock, he replied that the only conclusion he could arrive at
was that the decline today was caused by a bear drive. Underlying
conditions are unchanged. The business of the company was never better
than at present and the probabilities are that unless something
entirely unforeseen happens in the meanwhile, there will be an increase
in the rate at the next dividend meeting. The bear party in the market
has become aggressive and the weakness in the stock was clearly a raid
intended to dislodge weakly held stock.” The news-tickers, wishing to
give good measure, as likely as not will go on to state that they are
“reliably informed” that most of the stock bought on the day’s decline
was taken by inside interests and that the bears will find that they
have sold themselves into a trap. There will be a day of reckoning.
In addition to the losses sustained by the public through believing
bullish statements and buying stocks, there are the losses that come
through being dissuaded from selling out. The next best thing to
having people buy the stock the “prominent insider” wishes to sell
is to prevent people from selling the same stock when he does not
wish to support or accumulate it. What is the public to believe after
reading the statement of the “prominent director?” What can the average
outsider think? Of course, that the stock should never have gone down;
that it was forced down by bear-selling and that as soon as the bears
stop the insiders will engineer a punitive advance during which the
shorts will be driven to cover at high prices. The public properly
believes this because it is exactly what would happen if the decline
had in truth been caused by a bear raid.
The stock in question, notwithstanding all the threats or promises of a
tremendous squeeze of the over-extended short interest, does not rally.
It keeps on going down. It can’t help it. There has been too much stock
fed to the market from the inside to be digested.
And this inside stock that has been sold by the “prominent directors”
and “leading insiders” becomes a football among the professional
traders. It keeps on going down. There seems to be no bottom for it.
The insiders knowing that trade conditions will adversely affect the
company’s future earnings do not dare to support that stock until the
next turn for the better in the company’s business. Then there will be
inside buying and inside silence.
I have done my share of trading and have kept fairly well posted on
the stock market for many years and I can say that I do not recall
an instance when a bear raid caused a stock to decline extensively.
What was called bear raiding was nothing but selling based on accurate
knowledge of real conditions. But it would not do to say that the stock
declined on inside selling or on inside non-buying. Everybody would
hasten to sell and when everybody sells and nobody buys there is the
dickens to pay.
The public ought to grasp firmly this one point: That the real reason
for a protracted decline is never bear raiding. When a stock keeps on
going down you can bet there is something wrong with it, either with
the market for it or with the company. If the decline were unjustified
the stock would soon sell below its real value and that would bring in
buying that would check the decline. As a matter of fact, the only time
a bear can make big money selling a stock is when that stock is too
high. And you can gamble your last cent on the certainty that insiders
will not proclaim that fact to the world.
Of course, the classic example is the New Haven. Everybody knows today
what only a few knew at the time. The stock sold at 255 in 1902 and
was the premier railroad investment of New England. A man in that
part of the country measured his respectability and standing in the
community by his holdings of it. If somebody had said that the company
was on the road to insolvency he would not have been sent to jail
for saying it. They would have clapped him in an insane asylum with
other lunatics. But when a new and aggressive president was placed in
charge by Mr. Morgan and the débâcle began, it was not clear from the
first that the new policies would land the road where it did. But as
property after property began to be saddled in the Consolidated Road
at inflated prices, a few clear sighted observers began to doubt the
wisdom of the _Mellen_ policies. A trolley system was bought for two
million and sold to the New Haven for $10,000,000; whereupon a reckless
man or two committed lèse majesté by saying that the management was
acting recklessly. Hinting that not even the New Haven could stand such
extravagance was like impugning the strength of Gibraltar.
Of course, the first to see breakers ahead were the insiders. They
became aware of the real condition of the company and they reduced
their holdings of the stock. On their selling as well as on their
non-support, the price of New England’s gilt-edged railroad stock began
to yield. Questions were asked, and explanations were demanded as
usual; and the usual explanations were promptly forthcoming. “Prominent
insiders” declared that there was nothing wrong that they knew of and
that the decline was due to reckless bear selling. So the “investors”
of New England kept their holdings of New York, New Haven & Hartford
stock. Why shouldn’t they? Didn’t insiders say there was nothing wrong
and cry bear selling? Didn’t dividends continue to be declared and paid?
In the meantime the promised squeeze of the bears did not come but
new low records did. The insider selling became more urgent and less
disguised. Nevertheless public spirited men in Boston were denounced as
stock-jobbers and demagogues for demanding a genuine explanation for
the stock’s deplorable decline that meant appalling losses to everybody
in New England who had wanted a safe investment and a steady dividend
payer.
That historic break from $255 to $12 a share never was and never
could have been a bear drive. It was not started and it was not kept
up by bear operations. The insiders sold right along and always at
higher prices than they could have done if they had told the truth or
allowed the truth to be told. It did not matter whether the price was
250 or 200 or 150 or 100 or 50 or 25, it still was too high for that
stock, and the insiders knew it and the public did not. The public
might profitably consider the disadvantages under which it labours
when it tries to make money buying and selling the stock of a company
concerning whose affairs only a few men are in position to know the
whole truth.
The stocks which have had the worst breaks in the past 20 years did
not decline on bear raiding. But the easy acceptance of that form of
explanation has been responsible for losses by the public amounting to
millions upon millions of dollars. It has kept people from selling who
did not like the way his stock was acting and would have liquidated
if they had not expected the price to go right back after the bears
stopped their raiding. I used to hear Keene blamed in the old days.
Before him they used to accuse Charley Woerishoffer or Addison Cammack.
Later on I became the stock excuse.
I recall the case of Intervale Oil. There was a pool in it that put the
stock up and found some buyers on the advance. The manipulators ran the
price to 50. There the pool sold and there was a quick break. The usual
demand for explanations followed. Why was Intervale so weak? Enough
people asked this question to make the answer important news. One of
the financial news tickers called up the brokers who knew the most
about Intervale Oil’s advance and ought to be equally well posted as
to the decline. What did these brokers, members of the bull pool, say
when the news agency asked them for a reason that could be printed and
sent broadcast over the country? Why, that Larry Livingston was raiding
the market! And that wasn’t enough. They added that they were going to
“get” him. But of course, the Intervale pool continued to sell. The
stock only stood then about $12 a share and they could sell it down to
10 or lower and their average selling price would still be above cost.
It was wise and proper for insiders to sell on the decline. But for
outsiders who had paid 35 or 40, it was a different matter. Reading
what the tickers printed there outsiders held on and waited for Larry
Livingston to get what was coming to him at the hands of the indignant
inside pool.
In a bull market and particularly in booms the public at first makes
money which it later loses simply by overstaying the bull market. This
talk of “bear raids” helps them to overstay. The public should beware
of explanations that explain only what unnamed insiders wish the public
to believe.
_XXIV_
The public always wants to be told. That is what makes tip-giving and
tip-taking universal practices. It is proper that brokers should give
their customers trading advice through the medium of their market
letters as well as by word of mouth. But brokers should not dwell too
strongly on actual conditions because the course of the market is
always from six to nine months ahead of actual conditions. Today’s
earnings do not justify brokers in advising their customers to buy
stocks unless there is some assurance that six or nine months from
today the business outlook will warrant the belief that the same rate
of earnings will be maintained. If on looking that far ahead you can
see, reasonably clearly, that conditions are developing which will
change the present actual power, the argument about stocks being cheap
today will disappear. The trader must look far ahead, but the broker
is concerned with getting commissions now; hence the inescapable
fallacy of the average market letter. Brokers make their living out
of commissions from the public and yet they will try to induce the
public through their market letters or by word of mouth to buy the same
stocks in which they have received selling orders from insiders or
manipulators.
It often happens that an insider goes to the head of a brokerage
concern and says: “I wish you’d make a market in which to dispose of
50,000 shares of my stock.”
The broker asks for further details. Let us say that the quoted price
of that stock is 50. The insider tells him: “I will give you calls on
5000 shares at 45 and 5000 shares every point up for the entire fifty
thousand shares. I also will give you a put on 50,000 shares at the
market.”
Now, this is pretty easy money for the broker, if he has a large
following and of course this is precisely the kind of broker the
insider seeks. A house with direct wires to branches and connections
in various parts of the country can usually get a large following in
a deal of that kind. Remember that in any event the broker is playing
absolutely safe by reason of the put. If he can get his public to
follow he will be able to dispose of his entire line at a big profit in
addition to his regular commissions.
I have in mind the exploits of an “insider” who is well-known in Wall
Street.
He will call up the head customers’ man of a large brokerage house. At
times he goes even further and calls up one of the junior partners of
the firm. He will say something like this:
“Say, old man, I want to show you that I appreciate what you have done
for me at various times. I am going to give you a chance to make some
real money. We are forming a new company to absorb the assets of one
of our companies and we’ll take over that stock at a big advance over
present quotations. I’m going to send in to you 500 shares of Bantam
Shops at $65. The stock is now quoted at 72.”
The grateful insider tells the thing to a dozen of the headmen in
various big brokerage houses. Now since these recipients of the
insider’s bounty are in Wall Street what are they going to do when they
get that stock that already shows them a profit? Of course, advise
every man and woman they can reach to buy that stock. The kind donor
knew this. They will help to create a market in which the kind insider
can sell his good things at high prices to the poor public.
There are other devices of stock-selling promoters that should be
barred. The Exchanges should not allow trading in listed stocks that
are offered outside to the public on the partial payment plan. To have
the price officially quoted gives a sort of sanction to any stock.
Moreover, the official evidence of a free market, and at times the
difference in prices, is all the inducement needed.
Another common selling device that costs the unthinking public many
millions of dollars and sends nobody to jail because it is perfectly
legal, is that of increasing the capital stock exclusively by reason of
market exigencies. The process does not really amount to much more than
changing the color of the stock certificates.
The juggling whereby 2 or 4 or even 10 shares of new stock are given in
exchange for one of the old, is usually prompted by a desire to make
the old merchandise easily vendible. The old price was $1 per pound
package and hard to move. At 25 cents for a quarter-pound box it might
go better; and perhaps at 27 or 30 cents.
Why does not the public ask why the stock is made easy to buy? It is a
case of the Wall Street philanthropist operating again, but the wise
trader bewares of the Greeks bearing gifts. It is all the warning
needed. The public disregards it and loses millions of dollars annually.
The law punishes whoever originates or circulates rumors calculated to
affect adversely the credit or business of individuals or corporations,
that is, that tend to depress the values of securities by influencing
the public to sell. Originally, the chief intention may have been to
reduce the danger of panic by punishing anyone who doubted aloud the
solvency of banks in times of stress. But of course, it serves also to
protect the public against selling stocks below their real value. In
other words the law of the land punishes the disseminator of bearish
items of that nature.
How is the public protected against the danger of buying stocks above
their real value? Who punishes the distributor of unjustified bullish
news items? Nobody; and yet, the public loses more money buying stocks
on anonymous inside advice when they are too high than it does selling
out stocks below their value as a consequence of bearish advice during
so-called “raids.”
If a law were passed that would punish bull liars as the law now
punishes bear liars, I believe the public would save millions.
Naturally, promoters, manipulators and other beneficiaries of anonymous
optimism will tell you that anyone who trades on rumors and unsigned
statements has only himself to blame for his losses. One might as well
argue that any one who is silly enough to be a drug addict is not
entitled to protection.
The Stock Exchange should help. It is vitally interested in protecting
the public against unfair practices. If a man in position to know
wishes to make the public accept his statements of fact or even his
opinions, let him sign his name. Signing bullish items would not
necessarily make them true. But it would make the “insiders” and
“directors” more careful.
The public ought always to keep in mind the elementals of stock
trading. When a stock is going up no elaborate explanation is needed
as to why it is going up. It takes continuous buying to make a stock
keep on going up. As long as it does so, with only small and natural
reactions from time to time, it is a pretty safe proposition to trail
along with it. But if after a long steady rise a stock turns and
gradually begins to go down, with only occasional small rallies, it is
obvious that the line of least resistance has changed from upward to
downward. Such being the case why should any one ask for explanations?
There are probably very good reasons why it should go down, but these
reasons are known only to a few people who either keep those reasons to
themselves, or else actually tell the public that the stock is cheap.
The nature of the game as it is played is such that the public should
realise that the truth cannot be told by the few who know.
Many of the so-called statements attributed to “insiders” or officials
have no basis in fact. Sometimes the insiders are not even asked to
make a statement, anonymous or signed. These stories are invented by
somebody or other who has a large interest in the market. At a certain
stage of an advance in the market-price of a security the big insiders
are not averse to getting the help of the professional element to trade
in that stock. But while the insider might tell the big plunger the
right time to buy, you can bet he will never tell when is the time
to sell. That puts the big professional in the same position as the
public, only he has to have a market big enough for him to get out on.
Then is when you get the most misleading “information.” Of course,
there are certain insiders who cannot be trusted at any stage of the
game. As a rule the men who are the head of big corporations may act in
the market upon their inside knowledge, but they don’t actually tell
lies. They merely say nothing, for they have discovered that there are
times when silence is golden.
I have said many times and cannot say it too often that the experience
of years as a stock operator has convinced me that no man can
consistently and continuously beat the stock market though he may
make money in individual stocks on certain occasions. No matter how
experienced a trader is the possibility of his making losing plays is
always present because speculation cannot be made 100 per cent safe.
Wall Street professionals know that acting on “inside” tips will break
a man more quickly than famine, pestilence, crop failures, political
readjustments or what might be called normal accidents. There is no
asphalt boulevard to success in Wall Street or anywhere else. Why
additionally block traffic?