Reminiscences of a Stock Operator
_And there is another thing to remember, and that is that a market
does not culminate in one grand blaze of glory. Neither does it end
with a sudden reversal of form. A market can and does often cease to
be a bull market long before prices generally begin to break._ My long
expected warning came to me when I noticed that, one after another,
_those stocks which had been the leaders of the market reacted several
points from the top and--for the first time in many months--did not
come back_. Their race evidently was run, and that clearly necessitated
a change in my trading tactics.
It was simple enough. In a bull market the trend of prices, of course,
is decidedly and definitely upward. Therefore whenever a stock goes
against the general trend you are justified in assuming that there
is something wrong with that particular stock. It is enough for the
experienced trader to perceive that something is wrong. He must not
expect the tape to become a lecturer. His job is to listen for it to
say “Get out!” and not wait for it to submit a legal brief for approval.
As I said before, _I noticed that stocks which had been the leaders
of the wonderful advance had ceased to advance. They dropped six or
seven points and stayed there. At the same time the rest of the market
kept on advancing under new standard bearers._ Since nothing wrong had
developed with the companies themselves, the reason had to be sought
elsewhere. Those stocks had gone with the current for months. When they
ceased to do so, though the bull tide was still running strong, it
meant that for those particular stocks the bull market was over. For
the rest of the list the tendency was still decidedly upward.
There was no need to be perplexed into inactivity, for there were
really no cross currents. I did not turn bearish on the market then,
because the tape didn’t tell me to do so. The end of the bull market
had not come, though it was within hailing distance. Pending its
arrival there was still bull money to be made. _Such being the case,
I merely turned bearish on the stocks which had stopped advancing and
as the rest of the market had rising power behind it I both bought and
sold._
The leaders that had ceased to lead I sold. I put out a short line of
five thousand shares in each of them; and then I went long of the new
leaders. The stocks I was short of didn’t do much, but my long stocks
kept on rising. When finally these in turn ceased to advance I sold
them out and went short--five thousand shares of each. By this time I
was more bearish than bullish, because obviously the next big money was
going to be made on the down side. While I felt certain that the bear
market had really begun before the bull market had really ended, I knew
the time for being a rampant bear was not yet. There was no sense in
being more royalist than the king; especially in being so too soon. The
tape merely said that patrolling parties from the main bear army had
dashed by. Time to get ready.
I kept on both buying and selling until after about a month’s trading
I had out a short line of sixty thousand shares--five thousand shares
each in a dozen different stocks which earlier in the year had been the
public’s favourites because they had been the leaders of the great bull
market. It was not a very heavy line; but don’t forget that neither was
the market definitely bearish.
Then one day the entire market became quite weak and prices of all
stocks began to fall. When I had a profit of at least four points in
each and every one of the twelve stocks that I was short of, I knew
that I was right. The tape told me it was now safe to be bearish, so I
promptly doubled up.
I had my position. I was short of stocks in a market that now was
plainly a bear market. There wasn’t any need for me to push things
along. The market was bound to go my way, and, knowing that, I could
afford to wait. After I doubled up I didn’t make another trade for a
long time. About seven weeks after I put out my full line, we had the
famous “leak,” and stocks broke badly. It was said that somebody had
advance news from Washington that President Wilson was going to issue
a message that would bring back the dove of peace to Europe in a hurry.
Of course the war-bride boom was started and kept up by the World War,
and peace was a bear item. When one of the cleverest traders on the
floor was accused of profiting by advance information he simply said he
had sold stocks not on any news but because he considered that the bull
market was overripe. I myself had doubled my line of shorts seven weeks
before.
On the news the market broke badly and I naturally covered. It was the
only play possible. _When something happens on which you did not count
when you made your plans it behooves you to utilise the opportunity
that a kindly fate offers you._ For one thing, on a bad break like
that you have a big market, one that you can turn around in, and that
is the time to turn your paper profits into real money. Even in a bear
market a man cannot always cover one hundred and twenty thousand shares
of stock without putting up the price on himself. He must wait for the
market that will allow him to buy that much at no damage to his profit
as it stands him on paper.
I should like to point out that I was not counting on that particular
break at that particular time for that particular reason. But, as I
have told you before, my experience of thirty years as a trader is that
such _accidents are usually along the line of least resistance on_
which I base my position in the market. Another thing to bear in mind
is this: _Never try to sell at the top._ It isn’t wise. _Sell after a
reaction if there is no rally._
I cleared about three million dollars in 1916 by being bullish as long
as the bull market lasted and then by being bearish when the bear
market started. As I said before, a man does not have to marry one side
of the market till death do them part.
That winter I went South, to Palm Beach, as I usually do for a
vacation, because I am very fond of salt-water fishing. I was short
of stocks and wheat, and both lines showed me a handsome profit. There
wasn’t anything to annoy me and I was having a good time. Of course
unless I go to Europe I cannot really be out of touch with the stock or
commodities markets. For instance, in the Adirondacks I have a direct
wire from my broker’s office to my house.
In Palm Beach I used to go to my broker’s branch office regularly.
I noticed that cotton, in which I had no interest, was strong and
rising. About that time--this was in 1917--I heard a great deal about
the efforts that President Wilson was making to bring about peace. The
reports came from Washington, both in the shape of press dispatches and
private advice to friends in Palm Beach. That is the reason why one
day I got the notion that the course of the various markets reflected
confidence in Mr. Wilson’s success. With peace supposedly close at
hand, stocks and wheat ought to go down and cotton up. I was all set as
far as stocks and wheat went, but I had not done anything in cotton in
some time.
At 2:20 that afternoon I did not own a single bale, but at 2:25 my
belief that peace was impending made me buy fifteen thousand bales as
a starter. I proposed to follow my old system of trading--that is, of
buying my full line--which I have already described to you.
That very afternoon, after the market closed, we got the Unrestricted
Warfare note. There wasn’t anything to do except to wait for the market
to open the next day. I recall that at Gridley’s that night one of the
greatest captains of industry in the country was offering to sell any
amount of United States Steel at five points below the closing price
that afternoon. There were several Pittsburgh millionaires within
hearing. Nobody took the big man’s offer. They knew there was bound to
be a whopping big break at the opening.
Sure enough, the next morning the stock and commodity markets were in
an uproar, as you can imagine. Some stocks opened eight points below
the previous night’s close. To me that meant a heaven-sent opportunity
to cover all my shorts profitably. As I said before, _in a bear
market it is always wise to cover if complete demoralisation suddenly
develops_. That is the only way, if you swing a good-sized line, of
turning a big paper profit into real money both quickly and without
regrettable reductions. For instance, I was short fifty thousand shares
of United States Steel alone. Of course I was short of other stocks,
and when I saw I had the market to cover in, I did. My profits amounted
to about one and a half million dollars. It was not a chance to
disregard.
Cotton, of which I was long fifteen thousand bales, bought in the last
half hour of the trading the previous afternoon, opened down five
hundred points. Some break! It meant an overnight loss of three hundred
and seventy-five thousand dollars. While it was perfectly clear that
the only wise play in stocks and wheat was to cover on the break I was
not so clear as to what I ought to do in cotton. There were various
things to consider, and while I always take my loss the moment I am
convinced I am wrong, I did not like to take that loss that morning.
Then I reflected that I had gone South to have a good time fishing
instead of perplexing myself over the course of the cotton market. And,
moreover, I had taken such big profits in my wheat and in stocks that
I decided to take my loss in cotton. I would figure that my profit had
been a little more than one million instead of over a million and a
half. It was all a matter of bookkeeping, as promoters are apt to tell
you when you ask too many questions.
If I hadn’t bought that cotton just before the market closed the day
before, I would have saved that four hundred thousand dollars. It shows
you how quickly a man may lose big money on a moderate line. My main
position was absolutely correct and I benefited by an accident of a
nature diametrically opposite to the considerations that led me to
take the position I did in stocks and wheat. Observe, please, that the
speculative line of least resistance again demonstrated its value to
a trader. Prices went as I expected, notwithstanding the unexpected
market factor introduced by the German note. If things had turned out
as I had figured I would have been 100 per cent right in all three of
my lines, for with peace stocks and wheat would have gone down and
cotton would have gone kiting up. I would have cleaned up in all three.
Irrespective of peace or war, I was right in my position on the stock
market and in wheat and that is why the unlooked-for event helped.
In cotton I based my play on something that might happen outside
of the market--that is, I bet on Mr. Wilson’s success in his peace
negotiations. It was the German military leaders who made me lose the
cotton bet.
When I returned to New York early in 1917 I paid back all the money
I owed, which was over a million dollars. It was a great pleasure to
me to pay my debts. I might have paid it back a few months earlier,
but I didn’t for a very simple reason. I was trading actively and
successfully and I needed all the capital I had. I owed it to myself as
well as to the men I considered my creditors to take every advantage of
the wonderful markets we had in 1915 and 1916. I knew that I would make
a great deal of money and I wasn’t worrying because I was letting them
wait a few months longer for money many of them never expected to get
back. I did not wish to pay off my obligations in driblets or to one
man at a time, but in full to all at once. So as long as the market was
doing all it could for me I just kept on trading on as big a scale as
my resources permitted.
I wished to pay interest, but all those creditors who had signed