Reminiscences of a Stock Operator
sell. On this inside selling the stock naturally declines. Then the
public begins to get the familiar “explanations.” A “leading insider”
asserts that everything is O.K. and the decline is merely the result of
selling by bears who are trying to affect the general market. If on
one fine day, after the stock has been declining for some time, there
should be a sharp break, the demand for “reasons” or “explanations”
becomes clamorous. Unless somebody says something the public will fear
the worst. So the news-tickers now print something like this: “When
we asked a prominent director of the company to explain the weakness
in the stock, he replied that the only conclusion he could arrive at
was that the decline today was caused by a bear drive. Underlying
conditions are unchanged. The business of the company was never better
than at present and the probabilities are that unless something
entirely unforeseen happens in the meanwhile, there will be an increase
in the rate at the next dividend meeting. The bear party in the market
has become aggressive and the weakness in the stock was clearly a raid
intended to dislodge weakly held stock.” The news-tickers, wishing to
give good measure, as likely as not will go on to state that they are
“reliably informed” that most of the stock bought on the day’s decline
was taken by inside interests and that the bears will find that they
have sold themselves into a trap. There will be a day of reckoning.
In addition to the losses sustained by the public through believing
bullish statements and buying stocks, there are the losses that come
through being dissuaded from selling out. The next best thing to
having people buy the stock the “prominent insider” wishes to sell
is to prevent people from selling the same stock when he does not
wish to support or accumulate it. What is the public to believe after
reading the statement of the “prominent director?” What can the average
outsider think? Of course, that the stock should never have gone down;
that it was forced down by bear-selling and that as soon as the bears
stop the insiders will engineer a punitive advance during which the
shorts will be driven to cover at high prices. The public properly
believes this because it is exactly what would happen if the decline
had in truth been caused by a bear raid.
The stock in question, notwithstanding all the threats or promises of a
tremendous squeeze of the over-extended short interest, does not rally.
It keeps on going down. It can’t help it. There has been too much stock
fed to the market from the inside to be digested.
And this inside stock that has been sold by the “prominent directors”
and “leading insiders” becomes a football among the professional
traders. It keeps on going down. There seems to be no bottom for it.
The insiders knowing that trade conditions will adversely affect the
company’s future earnings do not dare to support that stock until the
next turn for the better in the company’s business. Then there will be
inside buying and inside silence.
I have done my share of trading and have kept fairly well posted on
the stock market for many years and I can say that I do not recall
an instance when a bear raid caused a stock to decline extensively.
What was called bear raiding was nothing but selling based on accurate
knowledge of real conditions. But it would not do to say that the stock
declined on inside selling or on inside non-buying. Everybody would
hasten to sell and when everybody sells and nobody buys there is the
dickens to pay.
The public ought to grasp firmly this one point: That the real reason
for a protracted decline is never bear raiding. When a stock keeps on
going down you can bet there is something wrong with it, either with
the market for it or with the company. If the decline were unjustified
the stock would soon sell below its real value and that would bring in
buying that would check the decline. As a matter of fact, the only time
a bear can make big money selling a stock is when that stock is too
high. And you can gamble your last cent on the certainty that insiders
will not proclaim that fact to the world.
Of course, the classic example is the New Haven. Everybody knows today
what only a few knew at the time. The stock sold at 255 in 1902 and
was the premier railroad investment of New England. A man in that
part of the country measured his respectability and standing in the
community by his holdings of it. If somebody had said that the company
was on the road to insolvency he would not have been sent to jail
for saying it. They would have clapped him in an insane asylum with
other lunatics. But when a new and aggressive president was placed in
charge by Mr. Morgan and the débâcle began, it was not clear from the
first that the new policies would land the road where it did. But as
property after property began to be saddled in the Consolidated Road
at inflated prices, a few clear sighted observers began to doubt the
wisdom of the _Mellen_ policies. A trolley system was bought for two
million and sold to the New Haven for $10,000,000; whereupon a reckless
man or two committed lèse majesté by saying that the management was
acting recklessly. Hinting that not even the New Haven could stand such
extravagance was like impugning the strength of Gibraltar.
Of course, the first to see breakers ahead were the insiders. They
became aware of the real condition of the company and they reduced
their holdings of the stock. On their selling as well as on their
non-support, the price of New England’s gilt-edged railroad stock began
to yield. Questions were asked, and explanations were demanded as
usual; and the usual explanations were promptly forthcoming. “Prominent
insiders” declared that there was nothing wrong that they knew of and
that the decline was due to reckless bear selling. So the “investors”
of New England kept their holdings of New York, New Haven & Hartford
stock. Why shouldn’t they? Didn’t insiders say there was nothing wrong
and cry bear selling? Didn’t dividends continue to be declared and paid?
In the meantime the promised squeeze of the bears did not come but
new low records did. The insider selling became more urgent and less
disguised. Nevertheless public spirited men in Boston were denounced as
stock-jobbers and demagogues for demanding a genuine explanation for
the stock’s deplorable decline that meant appalling losses to everybody
in New England who had wanted a safe investment and a steady dividend
payer.
That historic break from $255 to $12 a share never was and never
could have been a bear drive. It was not started and it was not kept
up by bear operations. The insiders sold right along and always at
higher prices than they could have done if they had told the truth or
allowed the truth to be told. It did not matter whether the price was
250 or 200 or 150 or 100 or 50 or 25, it still was too high for that
stock, and the insiders knew it and the public did not. The public
might profitably consider the disadvantages under which it labours
when it tries to make money buying and selling the stock of a company
concerning whose affairs only a few men are in position to know the
whole truth.
The stocks which have had the worst breaks in the past 20 years did
not decline on bear raiding. But the easy acceptance of that form of
explanation has been responsible for losses by the public amounting to
millions upon millions of dollars. It has kept people from selling who
did not like the way his stock was acting and would have liquidated
if they had not expected the price to go right back after the bears
stopped their raiding. I used to hear Keene blamed in the old days.
Before him they used to accuse Charley Woerishoffer or Addison Cammack.
Later on I became the stock excuse.
I recall the case of Intervale Oil. There was a pool in it that put the
stock up and found some buyers on the advance. The manipulators ran the
price to 50. There the pool sold and there was a quick break. The usual
demand for explanations followed. Why was Intervale so weak? Enough
people asked this question to make the answer important news. One of
the financial news tickers called up the brokers who knew the most
about Intervale Oil’s advance and ought to be equally well posted as
to the decline. What did these brokers, members of the bull pool, say
when the news agency asked them for a reason that could be printed and
sent broadcast over the country? Why, that Larry Livingston was raiding
the market! And that wasn’t enough. They added that they were going to
“get” him. But of course, the Intervale pool continued to sell. The
stock only stood then about $12 a share and they could sell it down to
10 or lower and their average selling price would still be above cost.
It was wise and proper for insiders to sell on the decline. But for
outsiders who had paid 35 or 40, it was a different matter. Reading
what the tickers printed there outsiders held on and waited for Larry
Livingston to get what was coming to him at the hands of the indignant
inside pool.
In a bull market and particularly in booms the public at first makes
money which it later loses simply by overstaying the bull market. This
talk of “bear raids” helps them to overstay. The public should beware
of explanations that explain only what unnamed insiders wish the public
to believe.
_XXIV_
The public always wants to be told. That is what makes tip-giving and
tip-taking universal practices. It is proper that brokers should give
their customers trading advice through the medium of their market
letters as well as by word of mouth. But brokers should not dwell too
strongly on actual conditions because the course of the market is
always from six to nine months ahead of actual conditions. Today’s
earnings do not justify brokers in advising their customers to buy
stocks unless there is some assurance that six or nine months from
today the business outlook will warrant the belief that the same rate
of earnings will be maintained. If on looking that far ahead you can
see, reasonably clearly, that conditions are developing which will
change the present actual power, the argument about stocks being cheap
today will disappear. The trader must look far ahead, but the broker
is concerned with getting commissions now; hence the inescapable
fallacy of the average market letter. Brokers make their living out
of commissions from the public and yet they will try to induce the
public through their market letters or by word of mouth to buy the same
stocks in which they have received selling orders from insiders or
manipulators.
It often happens that an insider goes to the head of a brokerage
concern and says: “I wish you’d make a market in which to dispose of
50,000 shares of my stock.”
The broker asks for further details. Let us say that the quoted price
of that stock is 50. The insider tells him: “I will give you calls on
5000 shares at 45 and 5000 shares every point up for the entire fifty
thousand shares. I also will give you a put on 50,000 shares at the
market.”
Now, this is pretty easy money for the broker, if he has a large
following and of course this is precisely the kind of broker the
insider seeks. A house with direct wires to branches and connections
in various parts of the country can usually get a large following in
a deal of that kind. Remember that in any event the broker is playing
absolutely safe by reason of the put. If he can get his public to
follow he will be able to dispose of his entire line at a big profit in
addition to his regular commissions.
I have in mind the exploits of an “insider” who is well-known in Wall
Street.
He will call up the head customers’ man of a large brokerage house. At