If it hadn’t been for their refusing to take my business I never would have stopped trading with them. And then I never would have learned that there was much more to the game of stock speculation than to play for fluctuations of a few points.
_III_
It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation.
I have heard of people who amuse themselves conducting imaginary operations in the stock market to prove with imaginary dollars how right they are. Sometimes these ghost gamblers make millions. It is very easy to be a plunger that way. It is like the old story of the man who was going to fight a duel the next day.
His second asked him, “Are you a good shot?”
“Well,” said the duelist, “I can snap the stem of a wineglass at twenty paces,” and he looked modest.
“That’s all very well,” said the unimpressed second. “But can you snap the stem of the wineglass while the wineglass is pointing a loaded pistol straight at your heart?”
With me I must back my opinions with my money. My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat. But if I cannot advance I do not move at all. I do not mean by this that a man should not limit his losses when he is wrong. He should. But that should not breed indecision. All my life I have made mistakes, but in losing money I have gained experience and accumulated a lot of valuable don’ts. I have been flat broke several times, but my loss has never been a total loss. Otherwise, I wouldn’t be here now. I always knew I would have another chance and that I would not make the same mistake a second time. I believed in myself.
A man must believe in himself and his judgment if he expects to make a living at this game. That is why I don’t believe in tips. If I buy stocks on Smith’s tip I must sell those same stocks on Smith’s tip. I am depending on him. Suppose Smith is away on a holiday when the selling time comes around? No, sir, nobody can make big money on what someone else tells him to do. _I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgment. It took me five years to learn to play the game intelligently enough to make big money when I was right._
I didn’t have as many interesting experiences as you might imagine. I mean, the process of learning how to speculate does not seem very dramatic at this distance. I went broke several times, and that is never pleasant, but the way I lost money is the way everybody loses money who loses money in Wall Street. Speculation is a hard and trying business, and a speculator must be on the job all the time or he’ll soon have no job to be on.
My task, as I should have known after my early reverses at Fullerton’s, was very simple: To look at speculation from another angle. But I didn’t know that there was much more to the game than I could possibly learn in the bucket shops. There I thought I was beating the game when in reality I was only beating the shop. At the same time the tape-reading ability that trading in bucket-shops developed in me and the training of my memory have been extremely valuable. Both of these things came easy to me. I owe my early success as a trader to them and not to my brains or knowledge, because my mind was untrained and my ignorance was colossal. The game taught me the game. And it didn’t spare the rod while teaching.
I remember my very first day in New York. I told you how the bucket shops, by refusing to take my business, drove me to seek a reputable commission house. One of the boys in the office where I got my first job was working for Harding Brothers, members of the New York Stock Exchange. I arrived in this city in the morning, and before one o’clock that same day I had opened an account with the firm and was ready to trade.
I didn’t explain to you how natural it was for me to trade there exactly as I had done in the bucket shops, where all I did was to bet on fluctuations and catch small but sure changes in prices. Nobody offered to point out the essential differences or set me right. If somebody had told me my method would not work I nevertheless would have tried it out to make sure for myself, for when I am wrong only one thing convinces me of it, and that is, to lose money. And I am only right when I make money. That is speculating.
They were having some pretty lively times those days and the market was very active. That always cheers up a fellow. I felt at home right away. There was the old familiar quotation board in front of me, talking a language that I had learned before I was fifteen years old. There was a boy doing exactly the same thing I used to do in the first office I ever worked in. There were the customers--same old bunch--looking at the board or standing by the ticket calling out the prices and talking about the market. The machinery was to all appearances the same machinery that I was used to. The atmosphere was the atmosphere I had breathed since I had made my first stock-market money--$3.12 in Burlington. The same kind of ticker and the same kind of traders, therefore the same kind of game. And remember, I was only twenty-two. I suppose I thought I knew the game from A to Z. Why shouldn’t I?
I watched the board and saw something that looked good to me. It was behaving right. I bought a hundred at 84. I got out at 85 in less than a half hour. Then I saw something else I liked, and I did the same thing; took three-quarters of a point net within a very short time. I began well, didn’t I?
Now mark this: On that, my first day as a customer of a reputable Stock Exchange house, and only two hours of it at that, I traded in eleven hundred shares of stock, jumping in and out. And the net result of the day’s operations was that I lost exactly eleven hundred dollars. That is to say, on my first attempt, nearly one-half of my stake went up the flue. And remember, some of the trades showed me a profit. But I quit eleven hundred dollars minus for the day.
It didn’t worry me, because I couldn’t see where there was anything wrong with me. My moves, also, were right enough, and if I had been trading in the old Cosmopolitan shop I’d have broken better than even. That the machine wasn’t as it ought to be, my eleven hundred vanished dollars plainly told me. But as long as the machinist was all right there was no need to stew. Ignorance at twenty-two isn’t a structural defect.
After a few days I said to myself, “I can’t trade this way here. The ticker doesn’t help as it should!” But I let it go at that without getting down to bed rock. I kept it up, having good days and bad days, until I was cleaned out. I went to old Fullerton and got him to stake me to five hundred dollars. And I came back from St. Louis, as I told you, with money I took out of the bucket shops there--a game I could always beat.
I played more carefully and did better for a while. As soon as I was in easy circumstances I began to live pretty well. I made friends and had a good time. I was not quite twenty-three, remember; all alone in New York with easy money in my pockets and the belief in my heart that I was beginning to understand the new machine.
I was making allowances for the actual execution of my orders on the floor of the Exchange, and moving more cautiously. But I was still sticking to the tape--that is, I was still ignoring general principles; and as long as I did that I could not spot the exact trouble with my game.
We ran into the big boom of 1901 and I made a great deal of money--that is, for a boy. You remember those times? The prosperity of the country was unprecedented. We not only ran into an era of industrial consolidations and combinations of capital that beat anything we had had up to that time, but the public went stock mad. In previous flush times, I have heard, Wall Street used to brag of two-hundred-and-fifty-thousand-share days, when securities of a par value of twenty-five million dollars changed hands. But in 1901 we had a three-million-share day. Everybody was making money. The steel crowd came to town, a horde of millionaires with no more regard for money than drunken sailors. The only game that satisfied them was the stock market. We had some of the biggest high rollers the Street ever saw: John W. Gates, of ‘Bet-you-a-million’ fame, and his friends, like John A. Drake, Loyal Smith, and the rest; the Reid-Leeds-Moore crowd, who sold part of their steel holdings and with the proceeds bought in the open market the actual majority of the stock of the great Rock Island system; and Schwab and Frick and Phipps and the Pittsburg coterie; to say nothing of scores of men who were lost in the shuffle but would have been called great plungers at any other time. A fellow could buy and sell all the stock there was. Keene made a market for the U.S. Steel shares. A broker sold one hundred thousand shares in a few minutes. A wonderful time! And there were some wonderful winnings. And no taxes to pay on stock sales! And no day of reckoning in sight.
Of course, after a while, I heard a lot of calamity howling and the old stagers said everybody--except themselves--had gone crazy. But everybody except themselves was making money. I knew, of course, there must be a limit to the advances and an end to the crazy buying of A.O.T.--Any Old Thing--and I got bearish. But every time I sold I lost money, and if it hadn’t been that I ran darn quick I’d have lost a heap more. I looked for a break, but I was playing safe--making money when I bought and chipping it out when I sold short--so that I wasn’t profiting by the boom as much as you’d think when you consider how heavily I used to trade, even as a boy.
There was one stock that I wasn’t short of, and that was Northern Pacific. My tape reading came in handy. I thought most stocks had been bought to a standstill, but Little Nipper behaved as if it were going still higher. We know now that both the common and the preferred were being steadily absorbed by the Kuhn-Loeb-Harriman combination. Well, I was long a thousand shares of Northern Pacific common, and held it against the advice of everybody in the office. When it got to about 110 I had thirty points profit, and I grabbed it. It made my balance at my brokers’ nearly fifty thousand dollars, the greatest amount of money I had been able to accumulate up to that time. It wasn’t so bad for a chap who had lost every cent trading in that selfsame office a few months before.
If you remember, the Harriman crowd notified Morgan and Hill of their intention to be represented in the Burlington-Great Northern-Northern Pacific combination, and then the Morgan people at first instructed Keene to buy fifty thousand shares of N.P. to keep the control in their possession. I have heard that Keene told Robert Bacon to make the order one hundred and fifty thousand shares and the bankers did. At all events, Keene sent one of his brokers, Eddie Norton, into the N.P. crowd and he bought one hundred thousand shares of the stock. This was followed by another order, I think, of fifty thousand shares additional, and the famous corner followed. After the market closed on May 8, 1901, the whole world knew that a battle of financial giants was on. No two such combinations of capital had ever opposed each other in this country. Harriman against Morgan; an irresistible force meeting an immovable object.
There I was on the morning of May ninth with nearly fifty thousand dollars in cash and no stocks. As I told you, I had been very bearish for some days, and here was my chance at last. I knew what would happen--an awful break and then some wonderful bargains. There would be a quick recovery and big profits--for those who had picked up the bargains. It didn’t take Sherlock Holmes to figure this out. We were going to have an opportunity to catch them coming and going, not only for big money but for sure money.
Everything happened as I had foreseen. I was dead right and--I lost every cent I had! I was wiped out by something that was unusual. If the unusual never happened there would be no difference in people and then there wouldn’t be any fun in life. The game would become merely a matter of addition and subtraction. It would make of us a race of bookkeepers with plodding minds. It’s the guessing that develops a man’s brain power. Just consider what you have to do to guess right.
The market fairly boiled, as I had expected. The transactions were enormous and the fluctuations unprecedented in extent. I put in a lot of selling orders at the market. When I saw the opening prices I had a fit, the breaks were so awful. My brokers were on the job. They were as competent and conscientious as any; but by the time they executed my orders the stocks had broken twenty points more. The tape was way behind the market and reports were slow in coming in by reason of the awful rush of business. When I found out that the stocks I had ordered sold when the tape said the price was, say, 100 and they got mine off at 80, making a total decline of thirty or forty points from the previous night’s close, it seemed to me that I was putting out shorts at a level that made the stocks I sold the very bargains I had planned to buy. The market was not going to drop right through to China. So I decided instantly to cover my shorts and go long.
My brokers bought; not at the level that had made me turn, but at the prices prevailing in the Stock Exchange when their floor man got my orders. They paid an average of fifteen points more than I had figured on. A loss of thirty-five points in one day was more than anybody could stand.
The ticker beat me by lagging so far behind the market. I was accustomed to regarding the tape as the best little friend I had because I bet according to what it told me. But this time the tape double-crossed me. The divergence between the printed and the actual prices undid me. It was the sublimation of my previous unsuccess, the selfsame thing that had beaten me before. It seems so obvious now that tape reading is not enough, irrespective of the brokers’ execution, that I wonder why I didn’t then see both my trouble and the remedy for it.
I did worse than not see it; I kept on trading, in and out, regardless of the execution. You see, I never could trade with a limit. I must take my chances with the market. That is what I am trying to beat--the market, not the particular price. When I think I should sell, I sell. When I think stocks will go up, I buy. My adherence to that general principle of speculation saved me. To have traded at limited prices simply would have been my old bucket-shop method inefficiently adapted for use in a reputable commission broker’s office. I would never have learned to know what stock speculation is, but would have kept on betting on what a limited experience told me was a sure thing.
Whenever I did try to limit the prices in order to minimize the disadvantages of trading at the market when the ticker lagged, I simply found that the market got away from me. This happened so often that I stopped trying. I can’t tell you how it came to take me so many years to learn that instead of placing piking bets on what the next few quotations were going to be, my game was to anticipate what was going to happen in a big way.
After my May ninth mishap I plugged along, using a modified but still defective method. If I hadn’t made money some of the time I might have acquired market wisdom quicker. But I was making enough to enable me to live well. I liked friends and a good time. I was living down the Jersey Coast that summer, like hundreds of prosperous Wall Street men. My winnings were not quite enough to offset both my losses and my living expenses.
I didn’t keep on trading the way I did through stubbornness. I simply wasn’t able to state my own problem to myself, and, of course, it was utterly hopeless to try to solve it. I harp on this topic so much to show what I had to go through before I got to where I could really make money. My old shotgun and BB shot could not do the work of a high-power repeating rifle against big game.
Early that fall I not only was cleaned out again but I was so sick of the game I could no longer beat that I decided to leave New York and try something else some other place. I had been trading since my fourteenth year. I had made my first thousand dollars when I was a kid of fifteen, and my first ten thousand before I was twenty-one. I had made and lost a ten-thousand-dollar stake more than once. In New York I had made thousands and lost them. I got up to fifty thousand dollars and two days later that went. I had no other business and knew no other game. After several years I was back where I began. No--worse, for I had acquired habits and a style of living that required money; though that part didn’t bother me as much as being wrong so consistently.
_IV_
Well, I went home. But the moment I was back I knew that I had but one mission in life and that was to get a stake and go back to Wall Street. That was the only place in the country where I could trade heavily. Some day, when my game was all right, I’d need such a place. When a man is right he wants to get all that is coming to him for being right.
I didn’t have much hope, but, of course, I tried to get into the bucket shops again. There were fewer of them and some of them were run by strangers. Those who remembered me wouldn’t give me a chance to show them whether I had gone back as a trader or not. I told them the truth, that I had lost in New York whatever I had made at home; that I didn’t know as much as I used to think I did; and that there was no reason why it should not now be good business for them to let me trade with them. But they wouldn’t. And the new places were unreliable. Their owners thought twenty shares was as much as a gentleman ought to buy if he had any reason to suspect he was going to guess right.
I needed the money and the bigger shops were taking in plenty of it from their regular customers. I got a friend of mine to go into a certain office and trade. I just sauntered in to look them over. I again tried to coax the order clerk to accept a small order, even if it was only fifty shares. Of course he said no. I had rigged up a code with this friend so that he would buy or sell when and what I told him. But that only made me chicken feed. Then the office began to grumble about taking my friend’s orders. Finally one day he tried to sell a hundred St. Paul and they shut down on him.
We learned afterward that one of the customers saw us talking together outside and went in and told the office, and when my friend went up to the order clerk to sell that hundred St. Paul the guy said:
“We’re not taking any selling orders in St. Paul, not from you.”
“Why, what’s the matter, Joe?” asked my friend.
“Nothing doing, that’s all,” answered Joe.
“Isn’t that money any good? Look it over. It’s all there.” And my friend passed over the hundred--my hundred--in tens. He tried to look indignant and I was looking unconcerned; but most of the other customers were getting close to the combatants, as they always did when there was loud talking or the slightest semblance of a scrap between the shop and any customer. They wanted to get a line on the merits of the case in order to get a line on the solvency of the concern.
The clerk, Joe, who was a sort of assistant manager, came out from behind his cage, walked up to my friend, looked at him and then looked at me.
“It’s funny,” he said slowly--“it’s damned funny that you never do a single thing here when your friend Livingston isn’t around. You just sit and look at the board by the hour. Never a peep. But after he comes in you get busy all of a sudden. Maybe you are acting for yourself; but not in this office any more. We don’t fall for Livingston tipping you off.”
Well, that stopped my board money. But I had made a few hundred more than I had spent and I wondered how I could use them, for the need of making enough money to go back to New York with was more urgent than ever. I felt that I would do better the next time. I had had time to think calmly of some of my foolish plays; and then, one can see the whole better when one sees it from a little distance. The immediate problem was to make the new stake.
One day I was in a hotel lobby, talking to some fellows I knew, who were pretty steady traders. Everybody was talking stock market. I made the remark that nobody could beat the game on account of the rotten execution he got from his brokers, especially when he traded at the market, as I did.
A fellow piped up and asked me what particular brokers I meant.
I said, “The best in the land,” and he asked who might they be. I could see he wasn’t going to believe I ever dealt with first-class houses.
But I said, “I mean, any member of the New York Stock Exchange. It isn’t that they are crooked or careless, but when a man gives an order to buy at the market he never knows what that stock is going to cost him until he gets a report from the brokers. There are more moves of one or two points than of ten and fifteen. But the outside trader can’t catch the small rises or drops because of the execution. I’d rather trade in a bucket shop any day in the week, if they’d only let a fellow trade big.”
The man who had spoken to me I had never seen before. His name was Roberts. He seemed very friendly disposed. He took me aside and asked me if I had ever traded in any of the other exchanges, and I said no. He said he knew some houses that were members of the Cotton Exchange and the Produce Exchange and the smaller stock exchanges. These firms were very careful and paid special attention to the execution. He said that they had confidential connections with the biggest and smartest houses on the New York Stock Exchange and through their personal pull and by guaranteeing a business of hundreds of thousands of shares a month they got much better service than an individual customer could get.
“They really cater to the small customer,” he said. “They make a specialty of out-of-town business and they take just as much pains with a ten-share order as they do with one for ten thousand. They are very competent and honest.”
“Yes. But if they pay the Stock Exchange house the regular eighth commission, where do they come in?”
“Well, they are supposed to pay the eighth. But--you know!” He winked at me.
“Yes,” I said. “But the one thing a Stock Exchange firm will not do is to split commissions. The governors would rather a member committed murder, arson and bigamy than to do business for outsiders for less than a kosher eighth. The very life of the Stock Exchange depends upon their not violating that one rule.”
He must have seen that I had talked with Stock Exchange people, for he said, “Listen! Every now and then one of those pious Stock Exchange houses is suspended for a year for violating that rule, isn’t it? There are ways and ways of rebating so nobody can squeal.” He probably saw unbelief in my face, for he went on: “And besides, on certain kinds of business we--I mean, these wire houses--charge a thirty-second extra, in addition to the eighth commission. They are very nice about it. They never charge the extra commission except in unusual cases, and then only if the customer has an inactive account. It wouldn’t pay them, you know, otherwise. They aren’t in business exclusively for their health.”
By that time I knew he was touting for some phony brokers.
“Do you know any reliable house of that kind?” I asked him.
“I know the biggest brokerage firm in the United States,” he said. “I trade there myself. They have branches in seventy-eight cities in the United States and Canada. They do an enormous business. And they couldn’t very well do it year in and year out if they weren’t strictly on the level, could they?”
“Certainly not,” I agreed. “Do they trade in the same stocks that are dealt in on the New York Stock Exchange?”
“Of course; and on the curb and on any other exchange in this country, or Europe. They deal in wheat, cotton, provisions; anything you want. They have correspondents everywhere and memberships in all the exchanges, either in their own name or on the quiet.”
I knew by that time, but I thought I’d lead him on.
“Yes,” I said, “but that does not alter the fact that the orders have to be executed by somebody, and nobody living can guarantee how the market will be or how close the ticker’s prices are to the actual prices on the floor of the Exchange. By the time a man gets the quotation here and he hands in an order and it’s telegraphed to New York, some valuable time has gone. I might better go back to New York and lose my money there in respectable company.”
“I don’t know anything about losing money; our customers don’t acquire that habit. They make money. We take care of that.”
“Your customers?”
“Well, I take an interest in the firm, and if I can turn some business their way I do so because they’ve always treated me white and I’ve made a good deal of money through them. If you wish I’ll introduce you to the manager.”
“What’s the name of the firm?” I asked him.
He told me. I had heard about them. They ran ads in all the papers, calling attention to the great profits made by those customers who followed their inside information on active stocks. That was the firm’s great specialty. They were not a regular bucket shop, but bucketeers, alleged brokers who bucketed their orders but nevertheless went through an elaborate camouflage to convince the world that they were regular brokers engaged in a legitimate business. They were one of the oldest of that class firms.
They were the prototype at that time of the same sort of brokers that went broke this year by the dozen. The general principles and methods were the same, though the particular devices for fleecing the public differed somewhat, certain details having been changed when the old tricks became too well known.
These people used to send out tips to buy or sell a certain stock--hundreds of telegrams advising the instant purchase of a certain stock and hundreds recommending other customers to sell the same stock, on the old racing-tipster plan. Then orders to buy and sell would come in. The firm would buy and sell, say, a thousand of that stock through a reputable Stock Exchange firm and get a regular report on it. This report they would show to any doubting Thomas who was impolite enough to speak about bucketing customers’ orders.