Reminiscences of a Stock Operator
THE Union Pacific incident
in Saratoga in the summer of 1906
made me more independent
than ever of tips and talk that is, of
the opinions and surmises
and suspicions of other people,
however friendly or however
able they might be personally.
Events, not vanity, proved
for me that I could read the tape
more accurately than most
of the people about me. I also was
better equipped than the
average customer of Harding Brothers in
that I was utterly free
from speculative prejudices. The bear
side doesn't appeal to me
any more than the bull side, or vice
versa. My one steadfast
prejudice is against being wrong.
Even as a lad I always got
my own meanings out of such
facts as I observed. It is
the only way in which the meaning
reaches me. I cannot get
out of facts what somebody tells me to
get. They are my facts,
don't you see? If I believe something
you can be sure it is
because I simply must. When I am long of
stocks it is because my
reading of conditions has made me
bullish. But you find many
people, reputed to be intelligent,
who are bullish because
they have stocks. I do not allow my
possessions or my
prepossessions either to do any thinking for
me. That is why I repeat
that I never argue with the tape. To be
angry at the market because
it unexpectedly or even illogically
goes against you is like
getting mad at your lungs because you
have pneumonia.
I had been gradually
approaching the full realization of
how much more than tape
reading there was to stock speculation.
Old man Partridge's
insistence on the vital importance of being
continuously bullish in a
bull market doubtless made my mind
dwell on the need above all
other things of determining the kind
of market a man is trading
in. I began to realize that the big
money must necessarily be
in the big swing. Whatever might seem
to give a big swing,
initial impulse, the fact is that its
continuance is not the
result of manipulation by pools or
artifice by financiers, but
depends upon basic conditions. And
no matter who opposes it,
the swing must inevitably run as far
and as fast and as long as
the impelling forces determine.
After Saratoga I began to
see more clearly perhaps I should
say more maturely that
since the entire list moves in accordance
with the main current there
was not so much need as I had
imagined to study
individual plays or the behaviour of this or
the other stock. Also, by
thinking of the swing a man was not
limited in his trading. He
could buy or sell the entire list. In
certain stocks a short line
is dangerous after a man sells more
than a certain percentage
of the capital stock, the amount
depending upon how, where
and by whom the stock is held. But he
could sell a million shares
of the general list if he had the
price without the danger of
being squeezed. A great deal of
money used to be made
periodically by insiders in the old days
out of the shorts and their
carefully fostered fears of corners
and squeezes.
Obviously the thing to do
was to be bullish in a bull
market and bearish in a
bear market. Sounds silly, doesn't it?
But I had to grasp that
general principle firmly before I saw
that to put it into
practice really meant to anticipate
probabilities. It took me a
long time to learn to trade on those
lines. But in justice to
myself I must remind you that up to
then I had never had a big
enough stake to speculate that way. A
big swing will mean big
money if your line is big, and to be
able to swing a big line
you need a big balance at your
broker's.
I always had or felt that I
had to make my daily bread out
of the stock market. It
interfered with my efforts to increase
the stake available for the
more profitable but slower and
therefore more immediately
expensive method of trading on
swings.
But now not only did my
confidence in myself grow stronger
but my brokers ceased to
think of me as a sporadically lucky Boy
Plunger. They had made a
great deal out of me in commissions,
but now I was in a fair way
to become their star customer and as
such to have a value beyond
the actual volume of my trading. A
customer who makes money is
an asset to any broker's office.
The moment I ceased to be
satisfied with merely studying
the tape I ceased to
concern myself exclusively with the daily
fluctuations in specific
stocks, and when that happened I simply
had to study the game from
a different angle. I worked back from
the quotation to first
principles; from price fluctuations to
basic
conditions.
Of course I had been
reading the daily dope regularly for a
long time. All traders do.
But much of it was gossip, some of it
deliberately false, and the
rest merely the personal opinion of
the writers. The reputable
weekly reviews when they touched upon
underlying conditions were
not entirely satisfactory to me. The
point of view of the
financial editors was not mine as a rule.
It was not a vital matter
for them to marshal their facts and
draw their conclusions from
them, but it was for me. Also there
was a vast difference in
our appraisal of the element of time.
The analysis of the week
that had passed was less important to
me than the forecast of the
weeks that were to come.
For years I had been the
victim of an unfortunate
combination of
inexperience, youth and insufficient capital. But
now I felt the elation of a
discoverer. My new attitude toward
the game explained my
repeated failures to make big money in New
York. But now with adequate
resources, experience and
confidence, I was in such a
hurry to try the new key that I did
not notice that there was
another lock on the door time lock! It
was a perfectly natural
oversight. I had to pay the usual
tuition a good whack per
each step forward.
I studied the situation in
1906 and I thought that the
money outlook was
particularly serious. Much actual wealth the
world over had been
destroyed. Everybody must sooner or later
feel the pinch, and
therefore nobody would be in position to
help anybody. It would not
be the kind of hard times that comes
from the swapping of a
house worth ten thousand dollars for a
carload of racehorses worth
eight thousand dollars. It was the
complete destruction of the
house by fire and of most of the
horses by a railroad wreck.
It was good hard cash that went up
in cannon smoke in the Boer
War, and the millions spent for
feeding nonproducing
soldiery in South Africa meant no help from
British investors as in the
past. Also, the earthquake and the
fire in San Francisco and
other disasters touched everybody --
manufacturers, farmers,
merchants, labourers and millionaires.
The railroads must suffer
greatly. I figured that nothing could
stave off one peach of a
smash. Such being the case there was
but one thing to do sell
stocks!
I told you I had already
observed that my initial
transaction, after I made
up my mind which way I was going to
trade, was apt to show me a
profit. And now when I decided to
sell I plunged. Since we
undoubtedly were entering upon a
genuine bear market I was
sure I should make the biggest killing
of my career.
The market went off. Then
it came back. It shaded off and
then it began to advance
steadily. My paper profits vanished and
my paper losses grew. One
day it looked as if not a bear would
be left to tell the tale of
the strictly genuine bear market. I
couldn't stand the gaff. I
covered. It was just as well. If I
hadn't I wouldn't have had
enough left to buy a postal card. I
lost most of my fur, but it
was better to live to fight another
day.
I had made a mistake. But
where? I was bearish in a bear
market. That was wise. I
had sold stocks short. That was proper.
I had sold them too soon.
That was costly. My position was right
but my play was wrong.
However, every day brought the market
nearer to the inevitable
smash. So I waited and when the rally
began to falter and pause I
let them have as much stock as my
sadly diminished margins
permitted. I was right this time for
exactly one whole day, for
on the next there was another rally.
Another big bite out of
yours truly! So I read the tape and
covered and waited. In due
course I sold again and again they
went down promisingly and
then they rudely rallied.
It looked as if the market
were doing its best to make me
go back to my old and
simple ways of bucket-shop trading. It was
the first time I had worked
with a definite forward looking plan
embracing the entire market
instead of one or two stocks. I
figured that I must win if
I held out. Of course at that time I
had not developed my system
of placing my bets or I would have
put out my short line on a
declining market, as I explained to
you the last time. I would
not then have lost so much of my
margin. I would have been
wrong but not hurt. You see, I had
observed certain facts but
had not learned to co-ordinate them.
My incomplete observation
not only did not help but actually
hindered.
I have always found it
profitable to study my mistakes.
Thus I eventually
discovered that it was all very well not to
lose your bear position in
a bear market, but that at all times
the tape should be read to
determine the propitiousness of the
time for operating. If you
begin right you will not see your
profitable position
seriously menaced; and then you will find no
trouble in sitting
tight.
Of course today I have
greater confidence in the accuracy
of my observations in which
neither hopes nor hobbies play any
part and also I have
greater facilities for verifying my facts
as well as 'for variously
testing the correctness of my views.
But in i9o6 the succession
of rallies dangerously impaired my
margins.
I was nearly twenty-seven
years old. I had been at the game
twelve years. But the first
time I traded because of a crisis
that was still to come I
found that I had been using a
telescope. Between my first
glimpse of the storm cloud and the
time for cashing in on the
big break the stretch was evidently
so much greater than I had
thought that I began to wonder
whether I really saw what I
thought I saw so clearly. We had had
many warnings and
sensational ascensions in call money rates.
Still some of the great
financiers talked hopefully at least to
newspaper reporters and the
ensuing rallies in the stock market
gave the lie to the
calamity howlers. Was I fundamentally wrong
in being bearish or merely
temporarily wrong in having begun to
sell short too
soon?
I decided that I began too
soon, but that I really couldn't
help it. Then the market
began to sell off. That was my
opportunity. I sold all I
could, and then stocks rallied again,
to quite a high
level.
It cleaned me
out.
There I was -- right and
busted!
I tell you it was
remarkable. What happened was this I
looked ahead and saw a big
pile of dollars. Out of it stuck a
sign. It had "Help
yourself," on it, in huge letters. Beside it
stood a cart with "Lawrence
Livermore Trucking Corporation"
painted on its side. I had
a brand-new shovel in my hand. There
was not another soul in
sight, so I had no competition in the
gold-shoveling, which is
one beauty of seeing the dollar-heap
ahead of others. The people
who might have seen it if they had
stopped to look were just
then looking at baseball games
instead, or motoring or
buying houses to be paid for with the
very dollars that I saw.
That was the first time that I had seen
big money ahead, and I
naturally started toward it on the run.
Before I could reach the
dollar-pile my wind went back on me and
I fell to the ground. The
pile of dollars was still there, but I
had lost the shovel, and
the wagon was gone. So much for
sprinting too soon ! I was
too eager to prove to myself that I
had seen real dollars and
not a mirage. I saw, and knew that I
saw. Thinking about the
reward for my excellent sight kept me
from considering the
distance to the dollar-heap. I should have
walked and not
sprinted.
That is what happened. I
didn't wait to determine whether or not
the time was right for
plunging on the bear side. On the one
occasion when I should have
invoked the aid of my tape-reading I
didn't do it. That is how I
came to learn that even when one is
properly bearish at the
very beginning of a bear market it is
well not to begin selling
in bulk until there is no danger of
the engine
back-firing.
I had traded in a good many
thousands of shares at Harding's
office in all those years,
and,
moreover, the firm had
confidence in me
and our relations were of
the
pleasantest. I think they
felt that I was bound to be right
again very shortly and they
knew that with my habit of pushing
my luck all I needed was a
start and I'd more than recover what
I had lost
They had made a great deal
of money out of my trading and
they would make more. So
there was no trouble about my being
able to trade there again
as long as my credit stood high.
The succession of spankings
I had received made me less
aggressively cocksure;
perhaps I should say less careless, for
of course I knew I was just
so much nearer to the smash. All I
could do was wait
watchfully, as I should have done before
plunging. It wasn't a case
of locking the stable after the horse
was stolen. I simply had to
be sure, the next time I tried. If a
man didn't make mistakes
he'd own the world in a month. But if
he didn't profit by his
mistakes he wouldn't own a blessed
thing.
Well, sir, one fine morning
I came downtown feeling cocksure
once more. There wasn't any
doubt this time. I had read an
advertisement in the
financial pages of all the newspapers that
was the high sign I hadn't
had the sense to wait for before
plunging. It was the
announcement of a new issue of stock by the
Northern Pacific and Great
Northern roads. The payments were to
be made on the installment
plan for the convenience of the
stockholders. This
consideration was something new in Wall
Street. It struck me as
more than ominous.
For years the unfailing
bull item on Great Northern preferred
had been the announcement
that another melon was to be
cut, said melon consisting
of the right of the lucky
stockholders to subscribe
at par to a new issue of Great
Northern stock. These
rights were valuable, since the market
price was always way above
par. But now the money market was
such that the most powerful
banking houses in the country were
none too sure the
stockholders would be able to pay cash for the
bargain. And Great Northern
preferred was selling at about 330!
As soon as I got to the
office I told Ed Harding, "The time
to sell is right now. This
is when I should have begun. Just
look at that ad, will
you?"
He had seen it. I pointed
out what the bankers' confession
amounted to in my opinion,
but he couldn't quite see the big
break right on top of us.
He thought it better to wait before
putting out a very big
short line by reason of the market's
habit of having big
rallies. If I waited prices might be lower,
but the operation would be
safer.
"Ed," I said to him, "the
longer the delay in starting the
sharper the break will be
when it does start. That ad is a
signed confession on the
part of the bankers. What they fear is
what I hope. This is a sign
for us to get aboard the bear wagon.
It is all we needed. If I
had ten million dollars I'd stake
every cent of it this
minute."
I had to do some more
talking and arguing. He wasn't
content with the only
inferences a sane man could draw from that
amazing advertisement. It
was enough for me, but not for most of
the people in the office. I
sold a little; too little.
A few days later St. Paul
very kindly came out with an
announcement of an issue of
its own; either stock or notes, I
forget which. But that
doesn't matter. What mattered then was
that I noticed the moment I
read it that the date of payment was
set ahead of the Great
Northern and Northern Pacific payments,
which had been announced
earlier. It was as plain as though they
had used a megaphone that
grand old St. Paul was trying to beat
the two other railroads to
what little money there was floating
around in Wall Street. The
St. Paul's bankers quite obviously
feared that there wasn't
enough for all three and they were not
saying, "After you, my dear
Alphonse!" If money already was that
scarce and you bet the
bankers knew-what would it be later? The
railroads needed it
desperately. It wasn't there. What was the
answer?
Sell 'em! Of course! The
public, with their eyes fixed on
the stock market, saw
little that week. The wise stock operators
saw much that year. That
was the difference.
For me, that was the end of
doubt and hesitation. I made up
my mind for keeps then and
there. That same morning I began what
really was my first
campaign along the lines that I have since
followed. I told Harding
what I thought and how I stood, and he
made no objections to my
selling Great Northern preferred at
around 330, and other
stocks at high prices. I profited by my
earlier and costly mistakes
and sold more intelligently.
My reputation and my credit
were reestablished in a jiffy.
That is the beauty of being
right in a broker's office, whether
by accident or not. But
this time I was cold-bloodedly right,
not because of a hunch or
from skilful reading of the tape, but
as the result of my
analysis of conditions affecting the stock
market in general. I wasn't
guessing. I was anticipating the
inevitable. It did not call
for any courage to sell stocks. I
simply could not see
anything but lower prices, and I had to act
on it, didn't I? What else
could I do?
The whole list was soft as
mush. Presently there was a
rally and people came to me
to warn me that the end of the
decline had been reached.
The big fellows, knowing the short
interest to be enormous,
had decided to squeeze the stuffing out
of the bears, and so forth.
It would set us pessimists back a
few millions. It was a
cinch that the big fellows would have no
mercy. I used to thank
these kindly counselors. I wouldn't even
argue, because then they
would have thought that I wasn't
grateful for the
warnings.
The friend who had been in
Atlantic City with me was in
agony. He could understand
the hunch that was followed by the
earthquake. He couldn't
disbelieve in such agencies, since I had
made a quarter of a million
by intelligently obeying my blind
impulse to sell Union
Pacific. He even said it was Providence
working in its mysterious
way to make me sell stocks when he
himself was bullish. And he
could understand my second UP. trade
in Saratoga because he
could understand any deal that involved
one stock, on which the tip
definitely fixed the movement in
advance, either up or down.
But this thing of predicting that
all stocks were bound to go
down used to exasperate him. What
good did that kind of dope
do anybody? How in blazes could a
gentleman tell what to
do?
I recalled old Partridge's
favourite remark -- "Well, this
is a bull market, you know"
-- as though that were tip enough
for anybody who was wise
enough; as in truth it was. It was very
curious how, after
suffering tremendous losses from a break of
fifteen or twenty points,
people who were still hanging on,
welcomed a three-point
rally and were certain the bottom had
been reached and complete
recovery begun.
One day my friend came to
me and asked me, "Have you
covered?"
"Why should I?" I
said
"For the best reason in the
world."
"What reason is
that?"
"To make money. They've
touched bottom and what goes down
must come up. Isn't that
so?"
"Yes," I answered. "First
they sink to the bottom. Then
they come up; but not right
away. They've got to be good and
dead a couple of days. It
isn't time for these corpses to rise
to the surface. They are
not quite dead yet."
An old-timer heard me. He
was one of those chaps that are
always reminded of
something. He said that William R. Travers,
who was bearish, once met a
friend who was bullish. They
exchanged market views and
the friend said, "Mr. Travers, how
can you be bearish with the
market so stiff?" and Travers
retorted, "Yes! Th-the
s-s-stiffness of d-death!" It was Travers
who went to the office of a
company and asked to be allowed to
see the booxs. The clerk
asked him, "Have you an interest in
this company?" and Travers
answered, "I sh-should s-say I had!
I'm sh-short t-t-twenty
thousand sh-shares of the stock !"
Well, the rallies grew
feebler and feebler. I was pushing
my luck for all I was
worth. Every time I sold a few thousand
shares of Great Northern
preferred the price broke several
points. I felt out weak
spots elsewhere and let 'em have a few.
All yielded, with one
impressive exception; and that was
Reading.
When everything else hit
the toboggan slide Reading stood
like the Rock of Gibraltar.
Everybody said the stock was
cornered. It certainly
acted like it. They used to tell me it
was plain suicide to sell
Reading short. There were people in
the office who were now as
bearish on everything as I was. But
when anybody hinted at
selling Reading they shrieked for help. I
myself had sold some short
and was standing pat on it. At the
same time I naturally
preferred to
seek and hit the soft spots
instead of attacking the more
strongly protected
specialties. My tape reading found easier
money for me in other
stocks.
I heard a great deal about
the Reading bull pool. It was a
mighty strong pool. To
begin with they had a lot of low-priced
stock, so that their
average was actually below the prevailing
level, according to friends
who told me. Moreover, the principal
members of the pool had
close connections of the friendliest
character with the banks
whose money they were using to carry
their huge holdings of
Reading. As long as the price stayed up
the bankers' friendship was
staunch and steadfast. One pool
member's paper profit was
upward of three millions. That allowed
for some decline without
causing fatalities. No wonder the stock
stood up and defied the
bears. Every now and then the room
traders looked at the
price, smacked their lips and proceeded to
test it with a thousand
shares or two. They could not dislodge a
share, so they covered and
went looking elsewhere for easier
money. Whenever I looked at
it, I also sold a little more --
just enough to convince
myself that I was true to my new trading
principles and wasn't
playing favourites.
In the old days the
strength of Reading might have fooled
me. The tape kept on
saying, "Leave it alone!" But my reason
told me differently. I was
anticipating a general break, and
there were not going to be
any exceptions, pool or no pool.
I have always played a lone
hand. I began that way in the
bucket shops and have kept
it up. It is the way my mind works. I
have to do my own seeing
and my own thinking. But I can tell you
after the market began to
go my way I felt for the first time in
my life that I had allies
-- the strongest and truest in the
world: underlying
conditions. They were helping me with all
their might. Perhaps they
were a trifle slow at times in
bringing up the reserves,
but they were dependable, provided I
did not get too impatient.
I was not pitting my tape-reading
knack or my hunches against
chance. The inexorable logic of
events was making money for
me.
The thing was to be right;
to know it and to act
accordingly. General
conditions, my true allies, said "Down!"
and Reading disregarded the
command. It was an insult to us. It
began to annoy me to see
Reading holding firmly, as though
everything were serene. It
ought to be the best short sale in
the entire list because it
had not gone down and the pool was
carrying a lot of stock
that it would not be able to carry when
the money stringency grew
more pronounced. Some day the bankers'
friends would fare no
better than the friendless public. The
stock must go with the
others. If Reading didn't decline, then
my theory was wrong; I was
wrong; facts were wrong; logic was
wrong.
I figured that the price
held because the Street was afraid
to sell it. So one day I
gave to two brokers each an order to
sell four thousand shares,
at the same time.
You ought to have seen that
cornered stock, that it was sure
suicide to go short of,
take a headlong dive when those competitive
orders struck it. I let 'em
have a few thousand more.
The price was 111 when I
started selling it. Within a few
minutes I took in my entire
short line at 92.
I had a wonderful time
after that, and in February of 1907 I
cleaned up. Great Northern
preferred had gone down sixty or
seventy points, and other
stocks in proportion. I had made a
good bit, but the reason I
cleaned up was that I figured that
the decline had discounted
the immediate future. I looked for a
fair recovery, but I wasn't
bullish enough to play for a turn. I
wasn't going to lose my
position entirely. The market would not
be right for me to trade in
for a while. The first ten thousand
dollars I made in the
bucket shops I lost because I traded in
and out of season, every
day, whether or not conditions were
right. I wasn't making that
mistake twice. Also, don't forget
that I had gone broke a
little while before because I had seen
this break too soon and
started selling before it was time. Now
when I had a big profit I
wanted to cash in so that I could feel
I had been right. The
rallies had broken me before. I wasn't
going to let the next rally
wipe me out. Instead of sitting
tight I went to Florida. I
love fishing and I needed a rest. I
could get both down there.
And besides, there are direct wires
between Wall Street and
Palm Beach.
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