Reminiscences of a Stock Operator
in 1921. The condition was much better and we probably would have an
earlier harvest than usual. When I got the figures of condition and
I saw what we might expect in the way of yield--mathematics--I also
thought at once of the coal miner’s strike and the railroad shopmen’s
strike. I couldn’t help thinking of them because my mind always thinks
of all developments that have a bearing on the markets. It instantly
struck me that the strike which had already affected the movement of
freight everywhere must affect wheat prices adversely. I figured this
way: There was bound to be considerable delay in moving winter wheat
to market by reason of the strike-crippled transportation facilities,
and by the time those improved the spring wheat crop would be ready to
move. That meant that when the railroads were able to move wheat in
quantity they would be bringing in both crops together--the delayed
winter and the early spring wheat--and that would mean a vast quantity
of wheat pouring into the market at one fell swoop. Such being the
facts of the case--the obvious probabilities--the traders, who would
know and figure as I did, would not bull wheat for a while. They would
not feel like buying it unless the price declined to such figures as
made the purchase of wheat a good investment. With no buying power in
the market, the price ought to go down. Thinking the way I did I must
find whether I was right or not. As old Pat Hearne used to remark, “You
can’t tell till you bet.” Between being bearish and selling there is no
need to waste time.
_Experience has taught me that the way a market behaves is an excellent
guide for an operator to follow. It is like taking a patient’s
temperature and pulse or noting the colour of the eyeballs and the
coating of the tongue._
Now, ordinarily a man ought to be able to buy or sell a million bushels
of wheat within a range of ¼ cent. On this day when I sold the 250,000
bushels to test the market for timeliness, the price went down ¼ cent.
Then, since the reaction did not definitely tell me all I wished to
know, I sold another quarter of a million bushels. I noticed that it
was taken in driblets; that is, the buying was in lots of 10,000 or
15,000 bushels instead of being taken in two or three transactions
which would have been the normal way. In addition to the homeopathic
buying the price went down 1¼ cents on my selling. Now, I need not
waste my time pointing out that the way in which the market took my
wheat and the disproportionate decline on my selling told me that there
was no buying power there. Such being the case, what was the only
thing to do? Of course, to sell a lot more. Following the dictates
of experience may possibly fool you, now and then. But not following
them invariably makes an ass of you. So I sold 2,000,000 bushels and
the price went down some more. A few days later the market’s behaviour
practically compelled me to sell an additional 2,000,000 bushels and
the price declined further still; a few days later wheat started to
break badly and slumped off 6 cents a bushel. And it didn’t stop there.
It has been going down, with short-lived rallies.
Now, I didn’t follow a hunch. Nobody gave me a tip. It was my habitual
or professional mental attitude toward the commodities markets that
gave me the profit and that attitude came from my years at this
business. I study because my business is to trade. The moment the tape
told me that I was on the right track my business duty was to increase
my line. I did. That is all there is to it.
I have found that experience is apt to be a steady dividend payer in
this game and that observation gives you the best tips of all. The
behaviour of a certain stock is all you need at times. You observe it.
Then experience shows you how to profit by variations from the usual,
that is, from the probable. For example, we know _that all stocks do
not move one way together but that all the stocks of a group will move
up in a bull market and down in a bear market_. This is a common-place
of speculation. It is the commonest of all self-given tips and the
commission houses are well aware of it and pass it on to any customer
who has not thought of it himself; I mean, the advice to trade in those
stocks which have lagged behind other stocks of the same group. Thus,
if U.S. Steel goes up, it is logically assumed that it is only a matter
of time when Crucible or Republic or Bethlehem will follow suit. Trade
conditions and prospects should work alike with all stocks of a group
and the prosperity should be shared by all. On the theory, corroborated
by experience times without number, that every dog has his day in the
market, the public will buy A.B. Steel because it has not advanced
while C.D. Steel and X.Y. Steel have gone up.
I never buy a stock even in a bull market, if it doesn’t act as it
ought to act in that kind of market. I have sometimes bought a stock
during an undoubted bull market and found out that other stocks in the
same group were not acting bullishly and I have sold out my stock. Why?
_Experience tells me that it is not wise to buck against what I may
call the manifest group-tendency._ I cannot expect to play certainties
only. I must reckon on probabilities--and anticipate them. An old
broker once said to me: “If I am walking along a railroad track and
I see a train coming toward me at sixty miles an hour, do I keep on
walking on the ties? Friend, I sidestep. And I don’t even pat myself on
the back for being so wise and prudent.”
Last year, after the general bull movement was well under way, I
noticed that one stock in a certain group was not going with the rest
of the group, though the group with that one exception was going with
the rest of the market. I was long a very fair amount of Blackwood
Motors. Everybody knew that the company was doing a very big business.
The price was rising from one to three points a day and the public
was coming in more and more. This naturally centered attention on the
group and all the various motor stocks began to go up. One of them,
however, persistently held back and that was Chester. It lagged behind
the others so that it was not long before it made people talk. The low
price of Chester and its apathy was contrasted with the strength and
activity in Blackwood and other motor stocks and the public logically
enough listened to the touts and tipsters and wise-acres and began to
buy Chester on the theory that it must presently move up with the rest
of the group.
Instead of going on this moderate public buying, Chester actually
declined. Now, it would have been no job to put it up in that bull
market, considering that Blackwood, a stock of the same group, was one
of the sensational leaders of the general advance and we were hearing
nothing but the wonderful improvement in the demand for automobiles of
all kinds and the record output.
It was thus plain that the inside clique in Chester were not doing any
of the things that inside cliques invariably do in a bull market. For
this failure to do the usual thing there might be two reasons. Perhaps
the insiders did not put it up because they wished to accumulate more
stock before advancing the price. But this was an untenable theory if
you analysed the volume and character of the trading in Chester. The
other reason was that they did not put it up because they were afraid
of getting stock if they tried to.
When the men who ought to want a stock don’t want it, why should I want
it? I figured that no matter how prosperous other automobile companies
might be, it was a cinch to sell Chester short. _Experiences had taught
me to beware of buying a stock that refuses to follow the group-leader._
I easily established the fact that not only there was no inside
buying but that there was actually inside selling. There were other
symptomatic warnings against buying Chester, though all I required was
its inconsistent market behaviour. It was again the tape that tipped
me off and that was why I sold Chester short. One day, not very long
afterward, the stock broke wide open. Later on we learned--officially,
as it were--that insiders had indeed been selling it, knowing full
well that the condition of the company was not good. The reason, as
usual, was disclosed after the break. But the warning came before the
break. _I don’t look out for the breaks; I look out for the warnings._
I didn’t know what was the trouble with Chester; neither did I follow a
hunch. I merely knew that something must be wrong.
Only the other day we had what the newspapers called a sensational
movement in Guiana Gold. After selling on the Curb at 50 or close to
it, it was listed on the Stock Exchange. It started there at around 35,
began to go down and finally broke 20.
Now, I’d never have called that break sensational because it was fully
to be expected. If you had asked you could have learned the history of
the company. No end of people knew it. It was told to me as follows: A
syndicate was formed consisting of a half dozen extremely well-known
capitalists and a prominent banking house. One of the members was the
head of the Belle Isle Exploration Company, which advanced Guiana over
$10,000,000 cash and received in return bonds and 250,000 shares out
of a total of one million shares of the Guiana Gold Mining Company.
The stock went on a dividend basis and it was mighty well advertised.
The Belle Isle people thought it well to cash in and they gave a call
on their 250,000 shares to the bankers, who arranged to try to market
that stock and some of their own holdings as well. They thought of
entrusting the market manipulation to a professional whose fee was to
be one third of the profits from the sale of the 250,000 shares above
36. I understand that the agreement was drawn up and ready to be signed
but at the last moment the bankers decided to undertake the marketing
themselves and save the fee. So they organized an inside pool. The
bankers had a call on the Belle Isle holdings of 250,000 at 36. They
put this in at 41. That is, insiders paid their own banking colleagues
a 5-point profit to start with. I don’t know whether they knew it or
not.
It is perfectly plain that to the bankers the operation had every
semblance of a cinch. We had run into a bull market and the stocks of
the group to which Guiana Gold belonged were among the market leaders.
The company was making big profits and paying regular dividends. This
together with the high character of the sponsors made the public regard
Guiana almost as an investment stock. I was told that about 400,000
shares were sold to the public all the way up to 47.
The gold group was very strong. But presently Guiana began to sag.
It declined ten points. That was all right if the pool was marketing
stock. But pretty soon the Street began to hear that things were not
altogether satisfactory and the property was not bearing out the high
expectations of the promoters. Then, of course, the reason for the
decline became plain. But before the reason was known I had the warning
and had taken steps to test the market for Guiana. The stock was acting
pretty much as Chester Motors did. I sold Guiana. The price went down.
I sold more. The price went still lower. The stock was repeating the
performance of Chester and of a dozen other stocks whose clinical
history I remembered. The tape plainly told me that there was something
wrong--something that kept insiders from buying it--insiders who knew
exactly why they should not buy their own stock in a bull market. On
the other hand, outsiders, who did not know, were now buying because
having sold at 45 and higher the stock looked cheap at 35 and lower.
The dividend was still being paid. The stock was a bargain.
Then the news came. It reached me, as important market news often does,