Reminiscences of a Stock Operator
company’s business, actual and prospective. What I learned strengthened
my conviction that the insiders had been worse than reckless in jacking
up the price at a time when such an advance was not justified either by
the tone of the general market or by the company’s earnings.
The rise, illogical and ill-timed though it was, had developed some
public following and this doubtless encouraged the insiders to pursue
their unwise tactics. Therefore I sold more stock. The insiders ceased
their folly. So I tested the market again and again, in accordance with
my trading methods, until finally I was short 30,000 shares of the
stock of the Tropical Trading Company. By then the price was 133.
I had been warned that the TT insiders knew the exact whereabouts of
every stock certificate in the Street and the precise dimensions and
identity of the short interest as well as other facts of tactical
importance. They were able men and shrewd traders. Altogether it was
a dangerous combination to go up against. But facts are facts and the
strongest of all allies are conditions.
Of course, on the way down from 153 to 133 the short interest had grown
and the public that buys on reactions began to argue as usual: That
stock had been considered a good purchase at 153 and higher. Now 20
points lower, it was necessarily a much better purchase. Same stock;
same dividend rate; same officers; same business. Great bargain!
The public’s purchases reduced the floating supply and the insiders,
knowing that a lot of room traders were short, thought the time
propitious for a squeezing. The price was duly run up to 150. I daresay
there was plenty of covering but I stayed pat. Why shouldn’t I? The
insiders might know that a short line of 30,000 shares had not been
taken in but why should that frighten me? The reasons that had impelled
me to begin selling at 153 and keep at it on the way down to 133, not
only still existed but were stronger than ever. The insiders might
desire to force me to cover but they adduced no convincing arguments.
Fundamental conditions were fighting for me. It was not difficult to
be both fearless and patient. A speculator must have faith in himself
and in his judgment. The late Dickson G. Watts, ex-President of the
New York Cotton Exchange and famous author of “Speculation as a Fine
Art,” says that courage in a speculator is merely confidence to act on
the decision of his mind. With me, I cannot fear to be wrong because
I never think I am wrong until I am proven wrong. In fact, I am
uncomfortable unless I am capitalising my experience. The course of
the market at a given time does not necessarily prove me wrong. It is
the character of the advance--or of the decline--that determines for me
the correctness or the fallacy of my market position. I can only rise
by knowledge. If I fall it must be by my own blunders.
There was nothing in the character of the rally from 133 to 150 to
frighten me into covering and presently the stock, as was to be
expected, started down again. It broke 140 before the inside clique
began to give it support. Their buying was coincident with a flood
of bull rumors about the stock. The company, we heard, was making
perfectly fabulous profits, and the earnings justified an increase in
the regular dividend rate. Also, the short interest was said to be
perfectly huge and the squeeze of the century was about to be inflicted
on the bear party in general and in particular on a certain operator
who was more than over-extended. I couldn’t begin to tell you all I
heard as they ran the price up ten points.
The manipulation did not seem particularly dangerous to me but when
the price touched 149 I decided that it was not wise to let the Street
accept as true all the bull statements that were floating around. Of
course, there was nothing that I or any other rank outsider could say
that would carry conviction either to the frightened shorts or to
those credulous customers of commission houses that trade on hearsay
tips. The most effective retort courteous is that which the tape alone
can print. People will believe that when they will not believe an
affidavit from any living man, much less one from a chap who is short
30,000 shares. So I used the same tactics that I did at the time of the
Stratton corner in corn, when I sold oats to make the traders bearish
on corn. Experience and memory again.
When the insiders jacked up the price of Tropical Trading with a view
to frightening the shorts I didn’t try to check the rise by selling
that stock. I was already short 30,000 shares of it which was as big
a percentage of the floating supply as I thought wise to be short of.
I did not propose to put my head into the noose so obligingly held
open for me--the second rally was really an urgent invitation. What I
did when TT touched 149 was to sell about 10,000 shares of Equatorial
Commercial Corporation. This company owned a large block of Tropical
Trading.
Equatorial Commercial, which was not as active a stock as TT, broke
badly on my selling, as I had foreseen; and, of course, my purpose was
achieved. When the traders--and the customers of the commission houses
who had listened to the uncontradicted bull dope on TT--saw that the
rise in Tropical synchronised with heavy selling and a sharp break in
Equatorial, they naturally concluded that the strength of TT was merely
a smoke-screen--a manipulated advance obviously designed to facilitate
inside liquidation in Equatorial Commercial, which was largest holder
of TT stock. It must be both long stock and inside stock in Equatorial,
because no outsider would dream of selling so much short stock at the
very moment when Tropical Trading was so very strong. So they sold
Tropical Trading and checked the rise in that stock, the insiders
very properly not wishing to take all the stock that was pressed for
sale. The moment the insiders took away their support the price of TT
declined. The traders and principal commission houses now sold some
Equatorial also and I took in my short line in that at a small profit.
I hadn’t sold it to make money out of the operation but to check the
rise in TT.
Time and again the Tropical Trading insiders and their hard-working
publicity man flooded the Street with all manner of bull items and
tried to put up the price. And every time they did I sold Equatorial
Commercial short and covered it with TT reacted and carried EC with
it. It took the wind out of the manipulators’ sails. The price of TT
finally went down to 125 and the short interest really grew so big that
the insiders were enabled to run it up 20 or 25 points. This time it
was a legitimate enough drive against an over-extended short interest;
but while I foresaw the rally I did not cover, not wishing to lose my
position. Before Equatorial Commercial could advance in sympathy with
the rise in TT I sold a raft of it short--with the usual results. This
gave the lie to the bull talk in TT which had got quite boisterous
after the latest sensational rise.
By this time the general market had grown quite weak. As I told you,
it was the conviction that we were in a bear market that started me
selling TT short in the fishing-camp in Florida. I was short of quite a
few other stocks but TT was my pet. Finally, general conditions proved
too much for the inside clique to defy and TT hit the toboggan slide.
It went below 120 for the first time in years; then below 110; below
par; and still I did not cover. One day when the entire market was
extremely weak Tropical Trading broke 90 and on the demoralisation I
covered. Same old reason! I had the opportunity--the big market and the
weakness and the excess of sellers over buyers. I may tell you, even
at the risk of appearing to be monotonously bragging of my cleverness,
that I took in my 30,000 shares of TT at practically the lowest prices
of the movement. But I wasn’t thinking of covering at the bottom. I was
intent on turning my paper profits into cash without losing much of the
profit in the changing.
I stood pat throughout because I knew my position was sound. I wasn’t
bucking the trend of the market or going against basic conditions but
the reverse, and that was what made me so sure of the failure of an
over-confident inside clique. What they tried to do others had tried
before and it had always failed. The frequent rallies, even when I knew
as well as anybody that they were due, could not frighten me. I knew
I’d do much better in the end by staying pat than by trying to cover to
put out a new short line at a higher price. By sticking to the position
that I felt was right I made over a million dollars. I was not indebted
to hunches or to skillful tape reading or to stubborn courage. It was a
dividend declared by my faith in my judgment and not by my cleverness
or by my vanity. Knowledge is power and power need not fear lies--not
even when the tape prints them. The retraction follows pretty quickly.
A year later, TT was jacked up again to 150 and hung around there for
a couple of weeks. The entire market was entitled to a good reaction
for it had risen uninterruptedly and it did not bull any longer. I
know because I tested it. Now, the group to which TT belonged had been
suffering from very poor business and I couldn’t see anything to bull
those stocks on anyhow, even if the rest of the market were due for a
rise, which it wasn’t. So I began to sell Tropical Trading. I intended
to put out 10,000 shares in all. The price broke on my selling. I
couldn’t see that there was any support whatever. Then suddenly, the
character of the buying changed.
I am not trying to make myself out a wizard when I assure you that I
could tell the moment support came in. It instantly struck me that if
the insiders in that stock, who never felt a moral obligation to keep
the price up, were now buying the stock in the face of a declining
general market there must be a reason. They were not ignorant asses nor
philanthropists nor yet bankers concerned with keeping the price up to
sell more securities over the counter. The price rose notwithstanding
my selling and the selling of others. At 153 I covered my 10,000 shares
and at 156 I actually went long because by that time the tape told me
the line of least resistance was upward. I was bearish on the general
market but I was confronted by a trading condition in a certain stock
and not by a speculative theory in general. The price went out of
sight, above 200. It was the sensation of the year. I was flattered by
reports spoken and printed that I had been squeezed out of eight or
nine millions of dollars. As a matter of fact, instead of being short
I was long of TT all the way up. In fact, I held on a little too long
and let some of my paper profits get away. Do you wish to know why I
did? Because I thought the TT insiders would naturally do what I would
have done had I been in their place. But that was something I had no
business to think because my business is to trade--that is, to stick to
the facts before me and not to what I think other people ought to do.
_XIX_
I do not know when or by whom the word “manipulation” was first used
in connection with what really are no more than common merchandising
processes applied to the sale in bulk of securities on the Stock
Exchange. Rigging the market to facilitate cheap purchases of a stock
which it is desired to accumulate is also manipulation. But it is
different. It may not be necessary to stoop to illegal practices,
but it would be difficult to avoid doing what some would think
illegitimate. How are you going to buy a big block of a stock in a
bull market without putting up the price on yourself? That would be
the problem. How can it be solved? It depends upon so many things that