Reminiscences of a Stock Operator
specific stocks, and when that happened I simply had to study the game
from a different angle. I worked back from the quotation to first
principles; from price-fluctuations to basic conditions.
Of course I had been reading the daily dope regularly for a long time.
All traders do. But much of it was gossip, some of it deliberately
false, and the rest merely the personal opinion of the writers. The
reputable weekly reviews when they touched upon underlying conditions
were not entirely satisfactory to me. The point of view of the
financial editors was not mine as a rule. It was not a vital matter for
them to marshal their facts and draw their conclusions from them, but
it was for me. Also there was a vast difference in our appraisal of the
element of time. _The analysis of the week that had passed was less
important to me than the forecast of the weeks that were to come._
For years I had been the victim of an unfortunate combination of
inexperience, youth and insufficient capital. But now I felt the
elation of a discoverer. My new attitude toward the game explained my
repeated failures to make big money in New York. But now with adequate
resources, experience and confidence, I was in such a hurry to try
the new key that I did not notice that there was another lock on the
door--_a time lock!_ It was a perfectly natural oversight. I had to pay
the usual tuition--a good whack per each step forward.
I studied the situation in 1906 and I thought that the money outlook
was particularly serious. Much actual wealth the world over had
been destroyed. Everybody must sooner or later feel the pinch, and
therefore nobody would be in position to help anybody. It would not
be the kind of hard times that comes from the swapping of a house
worth ten thousand dollars for a carload of race horses worth eight
thousand dollars. It was the complete destruction of the house by fire
and of most of the horses by a railroad wreck. It was good hard cash
that went up in cannon smoke in the Boer War, and the millions spent
for feeding nonproducing soldiers in South Africa meant no help from
British investors as in the past. Also, the earthquake and the fire in
San Francisco and other disasters touched everybody--manufacturers,
farmers, merchants, labourers and millionaires. The railroads must
suffer greatly. I figured that nothing could stave off one peach of a
smash. _Such being the case there was but one thing to do--sell stocks!_
I told you I had already observed that my initial transaction, after I
made up my mind which way I was going to trade, was apt to show me a
profit. And now when I decided to sell I plunged. Since we undoubtedly
were entering upon a genuine bear market I was sure I should make the
biggest killing of my career.
The market went off. Then it came back. It shaded off and then it began
to advance steadily. My paper profits vanished and paper losses grew.
One day it looked as if not a bear would be left to tell the tale
of the strictly genuine bear market. _I couldn’t stand the gaff. I
covered. It was just as well. If I hadn’t I wouldn’t have had enough to
buy a postal card. I lost most of my fur, but it was better to live to
fight another day._
I had made a mistake. But where? I was bearish in a bear market.
That was wise. I had sold stocks short. That was proper. _I had sold
them too soon. That was costly. My position was right but my play was
wrong._ However, every day brought the market nearer to the inevitable
smash. So I waited and when the rally began to falter and pause I let
them have as much stock as my sadly diminished margins permitted. _I
was right this time--for exactly one whole day_, for on the next there
was another rally. Another big bite out of yours truly! So I read the
tape and covered and waited. In due course I sold again--and again they
went down promisingly and then they rudely rallied.
It looked as if the market were doing its best to make me go back to
my old and simple ways of bucket-shop trading. _It was the first time
I had worked with a definite forward-looking plan embracing the entire
market instead of one or two stocks._ I figured that I must win if
I held out. Of course at that time I had not developed my system of
placing my bets or I would have put out my short line on a declining
market, as I explained to you the last time. I would not then have lost
so much of my margin. _I would have been wrong but not hurt._ You see,
I had observed certain facts but had not learned to co-ordinate them.
My incomplete observation not only did not help but actually hindered.
_I have always found it profitable to study my mistakes._ Thus I
eventually discovered that it was all very well not to lose your bear
position in a bear market, but that at all times the tape should be
read to determine the propitiousness of the time for operating. If
you begin right you will not see your profitable position seriously
menaced; and then you will find no trouble in sitting tight.
Of course to-day I have greater confidence in the accuracy of my
observations--in which neither hopes nor hobbies play any part--and
also I have greater facilities for verifying my facts as well as
for variously testing the correctness of my views. But in 1906 the
succession of rallies dangerously impaired my margins.
I was nearly twenty-seven years old. I had been at the game twelve
years. _But the first time I traded because of a crisis that was still
to come I found that I had been using a telescope._ Between my first
glimpse of the storm cloud and the time for cashing in on the big break
the stretch was evidently so much greater than I had thought that I
began to wonder whether I really saw what I thought I saw so clearly.
_We had had many warnings and sensational ascensions in call-money
rates._ Still some of the great financiers talked hopefully--at least
to newspaper reporters--and the ensuing rallies in the stock market
gave the lie to the calamity howlers. Was I fundamentally wrong in
being bearish or merely temporarily wrong in having begun to sell short
too soon?
I decided that I began too soon, but that I really couldn’t help it.
Then the market began to sell off. That was my opportunity. I sold all
I could, and then stocks rallied again, to quite a level.
It cleaned me out.
There I was--right and busted!
I tell you it was remarkable. What happened was this: I looked ahead
and saw a big pile of dollars. Out of it stuck a sign. It had “Help
yourself,” on it, in huge letters. Beside it stood a cart with
“Lawrence Livingston Trucking Corporation” painted on its side. I had
a brand-new shovel in my hand. There was not another soul in sight,
so I had no competition in the gold-shoveling, which is one beauty of
seeing the dollar-heap ahead of others. The people who might have seen
it if they had stopped to look were just then looking at baseball games
instead, or motoring or buying houses to be paid for with the very
dollars that I saw. That was the first time that I had seen big money
ahead, and I naturally started toward it on the run. Before I could
reach the dollar-pile my wind went back on me and I fell to the ground.
The pile of dollars was still there, but I had lost the shovel, and the
wagon was gone. So much for sprinting too soon! I was too eager to
prove to myself that I had seen real dollars and not a mirage. I saw,
and knew that I saw. Thinking about the reward for my excellent sight
kept me from considering the distance to the dollar-heap. I _should
have walked and not sprinted._
That is what happened. I didn’t wait to determine whether or not the
time was right for plunging on the bear side. On the one occasion when
I should have invoked the aid of my tape-reading I didn’t do it. That
is how I came to learn that even _when one is properly bearish at the
very beginning of a bear market it is well not to begin selling in bulk
until there is no danger of the engine back-firing_.
I had traded in a good many thousands of shares at Harding’s office in
all those years, and, moreover, the firm had confidence in me and our
relations were of the pleasantest. I think they felt that I was bound
to be right again very shortly and they knew that with my habit of
pushing my luck all I needed was a start and I’d more than recover what
I had lost. They had made a great deal of money out of my trading and
they would make more. So there was no trouble about my being able to
trade there again as long as my credit stood high.
The succession of spankings I had received made me less aggressively
cocksure; perhaps I should say less careless, for of course I knew
I was just so much nearer to the smash. All I could do was wait
watchfully, as I should have done before plunging. It wasn’t a case of
locking the stable after the horse was stolen. I simply had to be sure,
the next time I tried. _If a man didn’t make mistakes he’d own the
world in a month. But if he didn’t profit by his mistakes he wouldn’t
own a blessed thing._
Well, sir, one fine morning I came downtown feeling cocksure once more.
There wasn’t any doubt this time. I had read an advertisement in the
financial pages of all the newspapers that was the high sign I hadn’t
had the sense to wait for before plunging. It was the announcement
of a new issue of stock by the Northern Pacific and Great Northern
roads. The payments were to be made on the installment plan for the
convenience of the stockholders. This consideration was something new
in Wall Street. It struck me as more than ominous.
For years the unfailing bull item on Great Northern preferred had
been the announcement that another melon was to be cut, said melon
consisting of the right of the lucky stockholders to subscribe at par
to a new issue of Great Northern stock. These rights were valuable,
since the market price was always way above par. But now _the money
market_ was such that the most powerful banking houses in the country
were none too sure the stockholders would be able to pay cash for the
bargain. And Great Northern preferred was selling at about 330!
As soon as I got to the office I told Ed Harding, “The time to sell is
right now. This is when I should have begun. Just look at that ad, will
you?”
He had seen it. I pointed out what the bankers’ confession amounted to
in my opinion, but he couldn’t quite see the big break right on top of
us. He thought it better to wait before putting out a very big short
line by reason of the market’s habit of having big rallies. If I waited
prices might be lower, but the operation would be safer.
“Ed,” I said to him, “the longer the delay in starting the sharper the
break will be when it does start. That ad is a signed confession on
the part of the bankers. What they fear is what I hope. This is a sign
for us to get aboard the bear wagon. It is all we needed. If I had ten
million dollars I’d stake every cent of it this minute.”
I had to do some more talking and arguing. He wasn’t content with the
only inferences a sane man could draw from that amazing advertisement.
It was enough for me, but not for most of the people in the office. I
sold a little; too little.
A few days later St. Paul very kindly came out with an announcement of
an issue of its own; either stocks or notes, I forget which. But that
doesn’t matter. What mattered then was that I noticed the moment I read
it that the date of payment was set ahead of the Great Northern and
Northern Pacific payments, which had been announced earlier. It was as
plain as though they had used a megaphone that grand old St. Paul was
trying to beat the other two railroads to what little money there was
floating around in Wall Street. The St. Paul’s bankers quite obviously
feared that there wasn’t enough for all three and they were not saying,