Reminiscences of a Stock Operator
to determine the psychological moment. _I do that by watching the way
the price acts after I begin._
It is surprising how many experienced traders there are who look
incredulous when I tell them that when I buy stocks for a rise I like
to pay top prices and when I sell I must sell low or not at all. It
would not be so difficult to make money if a trader always stuck to his
speculative guns--that is, waited for the line of least resistance to
define itself and began buying only when the tape said up or selling
only when it said down. _He should accumulate his line on the way up._
Let him buy one-fifth of his full line. If that does not show him a
profit he must not increase his holdings because he has obviously begun
wrong; he is wrong temporarily and there is no profit in being wrong
at any time. The same tape that said UP did not necessarily lie merely
because it is now saying NOT YET.
In cotton I was very successful in my trading for a long time. I had my
theory about it and I absolutely lived up to it. Suppose I had decided
that my line would be forty to fifty thousand bales. Well, I would
study the tape as I told you, watching for an opportunity either to
buy or to sell. Suppose the line of least resistance indicated a bull
movement. Well, I would buy ten thousand bales. After I got through
buying that, if the market _went up ten points over my initial purchase
price, I would take on another ten thousand bales_. Same thing. Then,
if I could get twenty points’ profit, or one dollar a bale, I would
buy twenty thousand more. That would give me my line--my basis for my
trading. But if after buying the first ten or twenty thousand bales,
it showed me a loss, out I’d go. I was wrong. It might be I was only
temporarily wrong. But as I have said before _it doesn’t pay to start
wrong in anything_.
What I accomplished by sticking to my system was that I always had a
line of cotton in every real movement. In the course of accumulating
my full line I might chip out fifty or sixty thousand dollars in these
feeling-out plays of mine. This looks like a very expensive testing,
but it wasn’t. After the real movement started, how long would it take
me to make up the fifty thousand dollars I had dropped in order to
make sure that I began to load up at exactly the right time? No time at
all! _It always pays a man to be right at the right time._
As I think I also said before, this describes what I may call my system
for placing my bets. It is simple arithmetic to prove that it is a wise
thing to have the big bet down only when you win, and when you lose to
lose only a small exploratory bet, as it were. If a man trades in the
way I have described, he will always be in the profitable position of
being able to cash in on the big bet.
Professional traders have always had some system or other based
upon their experience and governed either by their attitude toward
speculation or by their desires. I remember I met an old gentleman in
Palm Beach whose name I did not catch or did not at once identify. I
knew he had been in the Street for years, way back in Civil War times,
and somebody told me that he was a very wise old codger who had gone
through so many booms and panics that he was always saying there was
nothing new under the sun and least of all in the stock market.
The old fellow asked me a lot of questions. When I got through telling
him about my usual practice in trading he nodded and said, “Yes! Yes!
You’re right. The way you’re built, the way your mind runs, makes your
system a good system for you. It comes easy for you to practice what
you preach, because the money you bet is the least of your cares. I
recollect Pat Hearne. Ever hear of him? Well, he was a very well-known
sporting man and he had an account with us. Clever chap and nervy. He
made money in stocks, and that made people ask him for advice. He would
never give any. If they asked him point-blank for his opinion about
the wisdom of their commitments he used a favorite race-track maxim of
his: ‘You can’t tell till you bet.’ He traded in our office. He would
buy one hundred shares of some active stock and when, or if, it went up
1 per cent he would buy another hundred. On another point’s advance,
another hundred shares; and so on. He used to say he wasn’t playing the
game to make money for others and therefore he would put in a stop-loss
order one point below the price of his last purchase. When the price
kept going up he simply moved up his stop with it. On a 1 per cent
reaction he was stopped out. He declared he did not see any sense in
losing more than one point, whether it came out of his original margin
or out of his paper profits.
“You know, a professional gambler is not looking for long shots,
but for sure money. Of course long shots are fine when they come
in. In the stock market Pat wasn’t after tips or playing to catch
twenty-points-a-week advances, but sure money in sufficient quantity
to provide him with a good living. Of all the thousands of outsiders
that I have run across in Wall Street, Pat Hearne was the only one who
saw in stock speculation merely a game of chance like faro or roulette,
but, nevertheless, had the sense to stick to a relatively sound betting
method.
“After Hearne’s death one of our customers who had always traded with
Pat and used his system made over one hundred thousand dollars in
Lackawanna. Then he switched over to some other stock and because he
had made a big stake he thought he need not stick to Pat’s way. When a
reaction came, instead of cutting short his losses he let them run--as
though they were profits. Of course every cent went. When he finally
quit he owed us several thousand dollars.
“He hung around for two or three years. He kept the fever long after
the cash had gone; but we did not object as long as he behaved himself.
I remember that he used to admit freely that he had been ten thousand
kinds of an ass not to stick to Pat Hearne’s style of play. Well, one
day he came to me greatly excited and asked me to let him sell some
stock short in our office. He was a nice enough chap who had been a
good customer in his day and I told him I personally would guarantee
his account for one hundred shares.
“He sold short one hundred shares of Lake Shore. That was the time Bill
Travers hammered the market, in 1875. My friend Roberts put out that
Lake Shore at exactly the right time and kept selling it on the way
down as he had been wont to do in the old successful days before he
forsook Pat Hearne’s system and instead listened to hope’s whispers.
“Well, sir, in four days of successful pyramiding, Roberts’ account
showed him a profit of fifteen thousand dollars. Observing that he had
not put in a stop-loss order I spoke to him about it and he told me
that the break hadn’t fairly begun and he wasn’t going to be shaken
out by any one-point reaction. This was in August. Before the middle
of September he borrowed ten dollars from me for a baby carriage--his
fourth. He did not stick to his own proved system. That’s the trouble
with most of them,” and the old fellow shook his head at me.
And he was right. I sometimes think that speculation must be an
unnatural sort of business, because I find that the average speculator
has arrayed against him his own nature. The weaknesses that all men
are prone to are fatal to success in speculation--usually those very
weaknesses that make him likable to his fellows or that he himself
particularly guards against in those other ventures of his where
they are not nearly so dangerous as when he is trading in stocks or
commodities.
_The speculator’s chief enemies are always boring from within. It is
inseparable from human nature to hope and to fear._ In speculation when
the market goes against you you hope that every day will be the last
day--and you lose more than you should had you not listened to hope--to
the same ally that is so potent a success-bringer to empire builders
and pioneers, big and little. And when the market goes your way you
become fearful that the next day will take away your profit, and you
get out--too soon. _Fear keeps you from making as much money as you
ought to._ The successful trader has to fight these two deep-seated
instincts. He has to reverse what you might call his natural impulses.
_Instead of hoping he must fear; instead of fearing he must hope._ He
must fear that his loss may develop into a much bigger loss, and hope
that his profit may become a big profit. _It is absolutely wrong to
gamble in stocks the way the average man does._
I have been in the speculative game ever since I was fourteen. It is
all I have ever done. I think I know what I am talking about. And the
conclusion that I have reached after nearly thirty years of constant
trading, both on a shoestring and with millions of dollars back of
me, is this: A man may beat a stock or a group at a certain time, but
no man living can beat the stock market! A man may make money out of
individual deals in cotton or grain, but no man can beat the cotton
market or the grain market. It’s like the track. A man may beat a horse
race, but he cannot beat horse racing.
If I knew how to make these statements stronger or more emphatic I
certainly would. It does not make any difference what anybody says to
the contrary. I know I am right in saying these are incontrovertible
statements.
_XI_
And now I’ll get back to October, 1907. I bought a yacht and made all
preparations to leave New York for a cruise in Southern waters. I am
really daffy about fishing and this was the time when I was going to
fish to my heart’s content from my own yacht, going wherever I wished
whenever I felt like it. Everything was ready. I had made a killing in
stocks, but at the last moment corn held me back.
I must explain that before the money panic which gave me my first
million I had been trading in grain at Chicago. I was short ten million
bushels of wheat and ten million bushels of corn. I had studied the
grain markets for a long time and was as bearish on corn and wheat as I
had been on stocks.
Well, they both started down, but while wheat kept on declining the
biggest of all the Chicago operators--I’ll call him Stratton--took it
into his head to run a corner in corn. After I cleaned up in stocks
and was ready to go South on my yacht I found that wheat showed me a
handsome profit, but in corn Stratton had run up the price and I had
quite a loss.
I knew there was much more corn in the country than the price
indicated. The law of demand and supply worked as always. But the
demand came chiefly from Stratton and the supply was not coming at
all, because there was an acute congestion in the movement of corn. I
remember that I used to pray for a cold spell that would freeze the
impassable roads and enable the farmers to bring their corn into the
market. But no such luck.
There I was, waiting to go on my joyously planned fishing trip and that
loss in corn holding me back. I couldn’t go away with the market as it
was. Of course Stratton kept pretty close tabs on the short interest.
He knew he had me, and I knew it quite as well as he did. But, as I
said, I was hoping I might convince the weather that it ought to get
busy and help me. Perceiving that neither the weather nor any other
kindly wonder-worker was paying any attention to my needs I studied how
I might work out of my difficulty by my own efforts.
I closed out my line of wheat at a good profit. But the problem in corn
was infinitely more difficult. If I could have covered my ten million
bushels at the prevailing prices I instantly and gladly would have done
so, large though the loss would have been. But, of course, the moment I
started to buy in my corn Stratton would be on the job as squeezer in