Reminiscences of a Stock Operator
cotton or wheat or corn or oats.
You watch the market--that is, the course of prices as recorded by the
tape--with one object: to determine the direction--that is, the price
tendency. Prices, we know, will move either up or down according to the
resistance they encounter. For purposes of easy explanation we will
say that _prices, like everything else, move along the line of least
resistance_. They will do whatever comes easiest, therefore they will
go up if there is less resistance to an advance than to a decline; and
vice versa.
Nobody should be puzzled as to whether a market is a bull market or a
bear market after it fairly starts. The trend is evident to a man who
has an open mind and reasonably clear sight, for it is never wise for a
speculator to fit his facts to his theories. Such a man will, or ought
to, know whether it is a bull or a bear market, and if he knows that he
knows whether to buy or to sell. It is therefore at the very inception
of the movement that a man needs to know whether to buy or to sell.
Let us say, for example, that the market, as it usually does in those
between-swings times, fluctuates within a range of ten points; up to
130 and down to 120. It may look very weak at the bottom; or, on the
way up, after a rise of eight or ten points, it may look as strong as
anything. A man ought not to be led into trading by tokens. _He should
wait until the tape tells him that the time is ripe. As a matter of
fact, millions upon millions of dollars have been lost by men who
bought stocks because they looked cheap or sold them because they
looked dear. The speculator is not an investor. His object is not to
secure a steady return on his money at a good rate of interest, but to
profit by either a rise or a fall in the price of whatever he may be
speculating in. Therefore the thing to determine is the speculative
line of least resistance at the moment of trading; and what he should
wait for is the moment when that line defines itself, because that is
his signal to get busy._
Reading the tape merely enables him to see that at 130 the selling had
been stronger than the buying and a reaction in the price logically
followed. Up to the point where the selling prevailed over the buying,
superficial students of the tape may conclude that the price is not
going to stop short of 150, and they buy. But after the reaction
begins to hold on, or sell out at a small loss, or they go short and
talk bearish. But at 120 there is stronger resistance to the decline.
The buying prevails over the selling, there is a rally and the shorts
cover. The public is so often whipsawed that one marvels at their
persistence in not learning their lesson.
Eventually something happens that increases the power of either the
upward or the downward force and the point of greatest resistance moves
up or down--that is, the buying at 130 will for the first time be
stronger than the selling, or the selling at 120 be stronger than the
buying. The price will break through the old barrier or movement-limit
and go on. As a rule, there is always a crowd of traders who are short
at 120 because it looked so weak, or long at 130 because it looked so
strong, and, when the market goes against them they are forced, after a
while, either to change their minds and turn or to close out. In either
event they help to define even more clearly the price line of least
resistance. Thus the intelligent trader who has patiently waited to
determine this line will enlist the aid of fundamental trade conditions
and also of the force of the trading of that part of the community that
happened to guess wrong and must now rectify mistakes. Such corrections
tend to push prices along the line of least resistance.
And right here I will say that, though I do not give it as a
mathematical certainty or as an axiom of speculation, my experience
has been that accidents--that is, the unexpected or unforeseen--have
always helped me in my market position whenever the latter has been
based upon my determination of the line of least resistance. Do you
remember that Union Pacific episode at Saratoga that I told you about?
Well, I was long because I found out that the line of least resistance
was upward. I should have stayed long instead of letting my broker tell
me that insiders were selling stocks. It didn’t make any difference
what was going on in the directors’ minds. That was something I
couldn’t possibly know. But I could and did know that the tape said:
“Going up!” And then came the unexpected raising of the dividend rate
and the thirty-point rise in the stock. At 164 prices looked mighty
high, but as I told you before, _stocks are never too high to buy
or too low to sell_. _The price_, per se, _has nothing to do with
establishing my line of least resistance._
You will find in actual practice that if you trade as I have indicated
any important piece of news given out between the closing of one market
and the opening of another is usually in harmony with the line of
least resistance. _The trend has been established before the news is
published, and in bull markets bear items are ignored and bull news
exaggerated, and vice versa._ Before the war broke out the market was
in a very weak condition. There came the proclamation of Germany’s
submarine policy. I was short one hundred and fifty thousand shares of
stock, not because I knew the news was coming, but because I was going
along the line of least resistance. What happened came out of a clear
sky, as far as my play was concerned. Of course I took advantage of the
situation and I covered my shorts that day.
It sounds very easy to say that all you have to do is to watch the
tape, establish your resistance points and be ready to trade along the
line of least resistance as soon as you have determined it. _But in
actual practice a man has to guard against many things, and most of all
against himself_--that is, against human nature. That is the reason
why I say that the man who is right always has two forces working in
his favor--_basic conditions and the men who are wrong_. _In a bull
market bear factors are ignored._ That is human nature, and yet human
beings profess astonishment at it. People will tell you that the wheat
crop has gone to pot because there has been bad weather in one or two
sections and some farmers have been ruined. When the entire crop is
gathered and all the farmers in all the wheat-growing sections begin
to take their wheat to the elevators the bulls are surprised at the
smallness of the damage. They discover that they merely have helped the
bears.
When a man makes his play in a commodity market he must not permit
himself set opinions. He must have an open mind and flexibility. _It
is not wise to disregard the message of the tape, no matter what
your opinion of crop conditions or of the probable demand may be._
I recall how I missed a big play just by trying to anticipate the
starting signal. I felt so sure of conditions that I thought it was not
necessary to wait for the line of least resistance to define itself. I
even thought I might help it arrive, because it looked as if it merely
needed a little assistance.
I was very bullish on cotton. It was hanging around twelve cents,
running up and down within a moderate range. It was in one of those
in-between places and I could see it. I knew I really ought to wait.
But I got to thinking that if I gave it a little push it would go
beyond the upper resistance point.
I bought fifty thousand bales. Sure enough, it moved up. And sure
enough, as soon as I stopped buying it stopped going up. Then it began
to settle back to where it was when I began buying it. I got out and
it stopped going down. I thought I was now much nearer the starting
signal, and presently I thought I’d start it myself again. I did.
The same thing happened. I bid it up, only to see it go down when I
stopped. I did this four or five times until I finally quit in disgust.
It cost me about two hundred thousand dollars. I was done with it. It
wasn’t very long after that when it began to go up and never stopped
till it got to a price that would have meant a killing for me--if I
hadn’t been in such a great hurry to start.
This experience has been the experience of so many traders so many
times that I can give this rule: _In a narrow market, when prices
are not getting anywhere to speak of but move within a narrow range,
there is no sense in trying to anticipate what the next big movement
is going to be--up or down._ The thing to do is to watch the market,
read the tape to determine the limits of the get-nowhere prices, and
make up your mind that you will not take an interest until the price
breaks through the limit in either direction. A speculator must concern
himself with making money out of the market and not with insisting that
the tape must agree with him. Never argue with it or ask it for reasons
or explanations. _Stock-market post-mortems don’t pay dividends._
Not so long ago I was with a party of friends. They got to talking
wheat. Some of them were bullish and others bearish. Finally they asked
me what I thought. Well, I had been studying the market for some time.
I knew they did not want any statistics or analyses of conditions. So I
said: “If you want to make some money out of wheat I can tell you how
to do it.”
They all said they did and I told them, “If you are sure you wish to
make money in wheat just you watch it. Wait. The moment it crosses
$1.20 buy it and you will get a nice quick play in it!”
“Why not buy it now, at $1,14?” one of the party asked.
“Because I don’t know yet that it is going up at all.”
“Then why buy it at $1.20? It seems a mighty high price.”
“Do you wish to gamble blindly in the hope of getting a great big
profit or do you wish to speculate intelligently and get a smaller but
much more probable profit?”
They all said they wanted the smaller but surer profit, so I said,
“Then do as I tell you. If it crosses $1.20 buy.”
As I told you, I had watched it a long time. For months it sold between
$1.10 and $1.20, getting nowhere in particular. Well, sir, one day it
closed at above $1.19. I got ready for it. Sure enough the next day it
opened at $1.20½, and I bought. It went to $1.21, to $1.22, to $1.23,
to $1.25, and I went with it.
Now I couldn’t have told you at the time just what was going on. I
didn’t get any explanations about its behaviour during the course of
the limited fluctuations. I couldn’t tell whether the breaking through
the limit would be up through $1.20 or down through $1.10, though I
suspected it would be up because there was not enough wheat in the
world for a big break in prices.
As a matter of fact, it seems Europe had been buying quietly and a lot
of traders had gone short of it at around $1.19. Owing to the European
purchases and other causes, a lot of wheat had been taken out of the
market, so that finally the big movement got started. The price went
beyond the $1.20 mark. That was all the point I had and it was all
I needed. I knew that when it crossed $1.20 it would be because the
upward movement at last had gathered force to push it over the limit
and something had to happen. In other words, by crossing $1.20 the line
of least resistance of wheat prices was established. It was a different
story then.
I remember that one day was a holiday with us and all our markets were
closed. Well, in Winnipeg wheat opened up six cents a bushel. When our
market opened on the following day, it also was up six cents a bushel.
The price just went along the line of least resistance.
What I have told you gives you the essence of my trading system as
based on studying the tape. I merely learn the way prices are most
probably going to move. I check up my own trading by additional tests,