The next day we got the news of the San Francisco earthquake. It was an awful disaster. But the market opened down only a couple of points. _The bull forces were at work, and the public never is independently responsive to news. You see that all the time. If there is a solid bull foundation, for instance, whether or not what the papers call bull manipulation is going on the same time, certain news items fail to have the effect they would have if the Street was bearish._ It is all in the state of sentiment at the time. In this case the Street did not appraise the extent of the catastrophe because it didn’t wish to. Before the day was over prices came back.
I was short five thousand shares. The blow had fallen, but my stock hadn’t. My hunch was of the first water, but my bank account wasn’t growing; not even on paper. The friend who had been in Atlantic City with me when I put out my short line in UP. was glad and sad about it.
He told me: “That was some hunch, kid. But, say, when the talent and the money are all on the bull side what’s the use of bucking against them? They are bound to win out.”
“Give them time,” I said. I meant prices. I wouldn’t cover because I knew the damage was enormous and the Union Pacific would be one of the worst sufferers. _But it was exasperating to see the blindness of the Street._
“Give ’em time and your skin will be where all the other bear hides are stretched out in the sun, drying,” he assured me.
“What would you do?” I asked him. “Buy UP. on the strength of the millions of dollars of damage suffered by the Southern Pacific and other lines? Where are the earnings for dividends going to come from after they pay for all they’ve lost? The best you can say is that the trouble may not be as bad as it is painted. But is that a reason for buying the stocks of the roads chiefly affected? Answer me that.”
But all my friend said was: “Yes, that listens fine. But I tell you, the market doesn’t agree with you. The tape doesn’t lie, does it?”
“_It doesn’t always tell the truth on the instant_,” _I said._
“Listen. A man was talking to Jim Fisk a little before Black Friday, giving ten good reasons why gold ought to go down for keeps. He got so encouraged by his own words that he ended by telling Fisk that he was going to sell a few million. And Jim Fisk just looked at him and said, “Go ahead! Do! Sell it short and invite me to your funeral.”
“Yes,” I said; “and if that chap had sold it short, look at the killing he would have made! Sell some UP. yourself.”
“Not I! I’m the kind that thrives best on not rowing against wind and tide.”
On the following day, when fuller reports came in, the market began to slide off, but even then not as violently as it should. Knowing that nothing under the sun could stave off a substantial break I doubled up and sold five thousand shares. Oh, by that time it was plain to most people, and my brokers were willing enough. It wasn’t reckless of them or of me, not the way I sized up the market. On the day following, the market began to go for fair. There was the dickens to pay. Of course I pushed my luck for all it was worth. I doubled up again and sold ten thousand shares more. It was the only play possible.
I wasn’t thinking of anything except that I was right--100 per cent right--and that this was a heaven-sent opportunity. It was up to me to take advantage of it. I sold more. Did I think that with such a big line of shorts out, it wouldn’t take much of a rally to wipe out my paper profits and possibly my principal? I don’t know whether I thought of that or not, but if I did it didn’t carry much weight with me. I wasn’t plunging recklessly. I was really playing conservatively. There was nothing that anybody could do to undo the earthquake, was there? They couldn’t restore the crumpled buildings overnight, free, gratis, for nothing, could they? All the money in the world couldn’t help much in the next few hours, could it?
I was not betting blindly. I wasn’t a crazy bear. I wasn’t drunk with success or thinking that because Frisco was pretty well wiped off the map the entire country was headed for the scrap heap. No, indeed! I didn’t look for a panic. Well, the next day I cleaned up. I made two hundred and fifty thousand dollars. It was my biggest winnings up to that time. It was all made in a few days. The Street paid no attention to the earthquake the first day or two. They’ll tell you that it was because the first despatches were not so alarming, but I think it was because it took so long to change the point of view of the public toward the securities markets. Even the professional traders for the most part were slow and shortsighted.
I have no explanation to give you, either scientific or childish. I am telling you what I did, and why, and what came of it. I was much less concerned with the mystery of the hunch than with the fact that I got a quarter of a million out of it. It meant that I could now swing a much bigger line than ever, if or when the time came for it.
That summer I went to Saratoga Springs. It was supposed to be a vacation for me, but I kept an eye on the market. To begin with, I wasn’t so tired that it bothered me to think about it. And then, everybody I knew up there had or had had an active interest in it. We naturally talked about it. I have noticed that there is quite a difference between talking and trading. Some of these chaps remind you of the bold clerk who talks to his cantankerous employer as to a yellow dog--when he tells you about it.
Harding Brothers had a branch office in Saratoga. Many of their customers were there. But the real reason, I suppose, was the advertising value. Having a branch office in a resort is simply high-class billboard advertising. I used to drop in and sit around with the rest of the crowd. The manager was a very nice chap from the New York office who was there to give the glad hand to friends and strangers and, if possible, to get business. It was a wonderful place for tips--all kinds of tips, horse-race, stock-market, and waiters’. The office knew I didn’t take any, so the manager didn’t come and whisper confidentially in my ear what he’d just got on the q. t. from the New York office. He simply passed over the telegrams, saying, “This is what they’re sending out,” or something of the kind.
Of course I watched the market. With me, to look at the quotation board and to read the signs is one process. My good friend Union Pacific, I noticed, looked like going up. _The price was high, but the stock acted as if it were being accumulated._ I watched it a couple of days without trading in it, and the more I watched it the more convinced I became that it was being bought on balance by somebody who was no piker, somebody who not only had a big bank roll but knew what was what. Very clever accumulation, I thought.
As soon as I was sure of this I naturally began to buy it, at about 160. It kept on acting all hunky, and so I kept on buying it, five hundred shares at a clip. _The more I bought the stronger it got, without any spurt, and I was feeling very comfortable._ I couldn’t see any reason why that stock shouldn’t go up a great deal more; not with what I read on the tape.
All of a sudden the manager came to me and said they’d got a message from New York--they had a direct wire of course--asking if I was in the office, and when they answered yes, another came saying: “Keep him there. Tell him Mr. Harding wants to speak to him.”
I said I’d wait, and bought five hundred shares more of UP. I couldn’t imagine what Harding could have to say to me. I didn’t think it was anything about business. My margin was more than ample for what I was buying. Pretty soon the manager came and told me that Mr. Harding wanted me on the long-distance telephone.
“Hello, Ed,” I said.
But he said, “What the devil’s the matter with you? Are you crazy?”
“Are you?” I said.
“What are you doing?” he asked.
“What do you mean?”
“Buying all that stock.”
“Why, isn’t my margin all right?”
“It isn’t a case of margin, but of being a plain sucker.”
“I don’t get you.”
“Why are you buying all that Union Pacific?”
“It’s going up,” I said.
“Going up, hell! Don’t you know that the insiders are feeding it out to you? You’re just about the easiest mark up there. You’d have more fun losing it on the ponies. Don’t let them kid you.”
“Nobody is kidding me,” I told him. “I haven’t talked to a soul about it.”
But he came back at me: “You can’t expect a miracle to save you every time you plunge into that stock. Get out while you’ve still got a chance,” he said. “It’s a crime to be long of that stock at this level--when these highbinders are shoveling it out by the ton.”
“The tape says they’re buying it,” I insisted.
“Larry, I got heart disease when your orders began to come in. For the love of Mike, don’t be a sucker. Get out! Right away. It’s liable to bust wide open any minute. I’ve done my duty. Good-by!” And he hung up.
Ed Harding was a very clever chap, unusually well-informed and a real friend, disinterested and kind-hearted. And what was even more, I knew he was in position to hear things. All I had to go by, in my purchases of UP., was my years of studying the behaviour of stocks and my perception of certain symptoms which experience had taught me usually accompanied a substantial rise. _I don’t know what happened to me, but I suppose I must have concluded that my tape reading told me the stock was being absorbed simply because very clever manipulation by the insiders made the tape tell a story that wasn’t true._ Possibly I was impressed by the pains Ed Harding took to stop me from making what he was so sure would be a colossal mistake on my part. Neither his brains nor his motives were to be questioned. Whatever it was that made me decide to follow his advice, I cannot tell you; but follow it, I did.
I sold out all my Union Pacific. _Of course if it was unwise to be long of it, it was equally unwise not to be short of it. So after I got rid of my long stock I sold four thousand shares short. I put out most of it around 162._
The next day the directors of the Union Pacific Company declared a 10 per cent dividend on the stock. At first nobody in Wall Street believed it. It was too much like the desperate manœuvre of cornered gamblers. All the newspapers jumped on the directors. But while the Wall Street talent hesitated to act the market boiled over. Union Pacific led, and on huge transactions made a new high-record price. Some of the room traders made fortunes in an hour and I remember later hearing about a rather dull-witted specialist who made a mistake that put three hundred and fifty thousand dollars in his pocket. He sold his seat the following week and became a gentleman farmer the following month.
Of course I realised, the moment I heard the news of the declaration of the unprecedented 10 per cent dividend, that I got what I deserved for disregarding the voice of experience and listening to the voice of a tipster. _My own convictions I had set aside for the suspicions of a friend, simply because he was disinterested and as a rule knew what he was doing._
As soon as I saw Union Pacific making new high records I said to myself, “This is no stock for me to be short of.”
All I had in the world was up as margin in Harding’s office. I was neither cheered nor made stubborn by the knowledge of that fact. What was plain was that I had read the tape accurately and that I had been a ninny to let Ed Harding shake my own resolution. There was no sense in recriminations, because I had no time to lose; and besides, what’s done is done. So I gave an order to take in my shorts. The stock was around 165 when I sent in that order to buy in the four thousand UP. at the market. I had a three-point loss on it at that figure. Well, my brokers paid 172 and 174 for some of it before they were through. I found when I got my reports that Ed Harding’s kindly intentioned interference cost me forty thousand dollars. _A low price for a man to pay for not having the courage of his own convictions! It was a cheap lesson._
I wasn’t worried, because the tape said still higher prices. It was an unusual move and there were no precedents for the action of the directors, but I did this time what I thought I ought to do. As soon as I had given the first order to buy four thousand shares to cover my shorts I decided to profit by what the tape indicated and so I went along. I bought four thousand shares and held that stock until the next morning. Then I got out. I not only made up the forty thousand dollars I had lost but about fifteen thousand besides. If Ed Harding hadn’t tried to save me money I’d have made a killing. But he did me a very great service, for it was the lesson of that episode that, I firmly believe, _completed_ my education as a trader.
It was not that all I needed to learn was not to take tips but follow my own inclination. _It was that I gained confidence in myself and I was able finally to shake off the old method of trading._ That Saratoga experience was my last haphazard, hit-or-miss operation. From then on I began to think of basic conditions instead of individual stocks. I promoted myself to a higher grade in the hard school of speculation. It was a long and difficult step to take.
_VII_
I never hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any particular stock. In a bear market all stocks go down and in a bull market they go up. I don’t mean of course that in a bear market caused by a war, ammunition shares do not go up. I speak in a general sense. But the average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think. It is too much bother to have to count the money that he picks up from the ground.
Well, I wasn’t that lazy, but I found it easier to think of individual stocks than of the general market and therefore of individual fluctuations rather than of general movements. _I had to change and I did._
_People don’t seem to grasp easily the fundamentals of stock trading. I have often said that to buy on a rising market is the most comfortable way of buying stocks. Now, the point is not so much to buy as cheap as possible or go short at top prices, but to buy or sell at the right time. When I am bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on rising scale. I don’t buy long stock on a scale down, I buy on a scale up._
Let us suppose, for example, that I am buying some stock. _I’ll buy two thousand shares at 110. If the stock goes up to 111 after I buy it I am, at least temporarily, right in my operation, because it is a point higher; it shows me a profit. Well, because I am right I go in and buy another two thousand shares._ If the market is still rising I buy a third lot of two thousand shares. Say the price goes up to 114. I think it is enough for the time being. I now have a trading basis to work from. I am long six thousand shares at an average of 111¾, and the stock is selling at 114. I won’t buy any more just then. I wait and see. I figure that at some stage of the rise there is going to be a reaction. I want to see how the market takes care of itself after that reaction. It will probably react to where I got my third lot. Say that after going higher it falls back to 112¼, and then rallies. Well, just as it goes back to 113¾ I shoot an order to buy four thousand--at the market of course. Well, if I get that four thousand at 113¾ I know something is wrong and I’ll give a testing order--that is, I’ll sell one thousand shares to see how the market takes it. But suppose that of the order to buy the four thousand shares that I put in when the price was 113¾ I get two thousand at 114 and five hundred at 114½ and the rest on the way up so that for the last five hundred I pay 115½. Then I know I am right. It is the way I get the four thousand shares that tells me whether I am right in buying that particular stock at that particular time--_for of course I am working on the assumption that I have checked up general conditions pretty well and they are bullish. I never want to buy stocks too cheap or too easily._
I remember a story I heard about Deacon S. V. White when he was one of the big operators of the Street. He was a very fine old man, clever as they make them, and brave. He did some wonderful things in his day, from all I’ve heard.
It was in the old days when Sugar was one of the most continuous purveyors of fireworks in the market. H. O. Havemeyer, president of the company, was in the heyday of his power. I gather from talks with the old-timers that H.O. and his following had all the resources of cash and cleverness necessary to put through successfully any deal in their own stock. They tell me that Havemeyer trimmed more small professional traders in that stock than any other insider in any other stock. As a rule, the floor traders are more likely to thwart the insiders’ game than help it.
One day a man who knew Deacon White rushed into the office all excited and said, “Deacon, you told me if I ever got any good information to come to you at once with it and if you used it you’d carry me for a few hundred shares.” He paused for breath and for confirmation.
The deacon looked at him in that meditative way he had and said, “I don’t know whether I ever told you exactly that or not, but I am willing to pay for information that I can use.”
“Well, I’ve got it for you.”
“Now, that’s nice,” said the deacon, so mildly that the man with the info swelled up and said, “Yes, sir, deacon.” Then he came closer so nobody else would hear and said, “H. O. Havemeyer is buying Sugar.”
“Is he?” asked the deacon quite calmly.
It peeved the informant, who said impressively: “Yes, sir. Buying all he can get, deacon.”
“My friend, are you sure?” asked old S.V.
“Deacon, I know it for a positive fact. The old inside gang are buying all they can lay their hands on. It’s got something to do with the tariff and there’s going to be a killing in the common. It will cross the preferred. And that means a sure thirty points for a starter.”
“D’you really think so?” And the old man looked at him over the top of the old-fashioned silver-rimmed spectacles that he had put on to look at the tape.
“Do I think so? No, I don’t think so; I know so. Absolutely! Why, deacon, when H. O. Havemeyer and his friends buy Sugar as they’re doing now they’re never satisfied with anything less than forty points net. I shouldn’t be surprised to see the market get away from them any minute and shoot up before they’ve got their full lines. There ain’t as much of it kicking around the brokers’ offices as there was a month ago.”
“He’s buying Sugar, eh?” repeated the deacon absently.
“Buying it? Why, he’s scooping it in as fast as he can without putting up the price on himself.”
“So?” said the deacon. That was all.
But it was enough to nettle the tipster, and he said, “Yes, sir-ree! And I call that very good information. Why, it’s absolutely straight.”
“Is it?”
“Yes; and it ought to be worth a whole lot. Are you going to use it?”
“Oh, yes. I’m going to use it.”
“When?” asked the information bringer suspiciously.
“Right away.” And the deacon called: “Frank!” It was the first name of his shrewdest broker, who was then in the adjoining room.
“Yes, sir,” said Frank.
“I wish you’d go over to the Board and sell ten thousand Sugar.”
“Sell?” yelled the tipster. There was such suffering in his voice that Frank, who had started out at a run, halted in his tracks.
“Why, yes,” said the deacon mildly.
“But I told you H. O. Havemeyer was buying it!”
“I know you did, my friend,” said the deacon calmly; and turning to the broker: “Make haste, Frank!”
The broker rushed out to execute the order and the tipster turned red.
“I came in here,” he said furiously, “with the best information I ever had. I brought it to you because I thought you were my friend, and square. I expected you to act on it--”
“I am acting on it,” interrupted the deacon in a tranquillising voice.
“But I told you H.O. and his gang were buying!”
“That’s right. I heard you.”
“Buying! Buying! I said buying!” shrieked the tipster.
“Yes, buying! That is what I understood you to say,” the deacon assured him. He was standing by the ticker, looking at the tape.
“But you are selling it.”
“Yes; ten thousand shares.” And the deacon nodded. “Selling it, of course.”
He stopped talking to concentrate on the tape and the tipster approached to see what the deacon saw, for the old man was very foxy. While he was looking over the deacon’s shoulder a clerk came in with a slip, obviously the report from Frank. The deacon barely glanced at it. He had seen on the tape how his order had been executed.
It made him say to the clerk, “Tell him to sell another ten thousand Sugar.”
“Deacon, I swear to you that they really are buying the stock!”
“Did Mr. Havemeyer tell you?” asked the deacon quietly.
“Of course not! He never tells anybody anything. He would not bat an eyelid to help his best friend make a nickel. But I know this is true.”
“Do not allow yourself to become excited, my friend.” And the deacon held up a hand. He was looking at the tape. The tip-bringer said, bitterly:
“If I had known you were going to do the opposite of what I expected I’d never have wasted your time or mine. But I am not going to feel glad when you cover that stock at an awful loss. I’m sorry for you, deacon. Honest! If you’ll excuse me I’ll go elsewhere and act on my own information.”
“I’m acting on it. I think I know a little about the market; not as much, perhaps, as you and your friend H. O. Havemeyer, but still a little. What I am doing is what my experience tells me is the wise thing to do with that information you brought me. After a man has been in Wall Street as long as I have he is grateful for anybody who feels sorry for him. Remain calm, my friend.”
The man just stared at the deacon, for whose judgment and nerve he had great respect.
Pretty soon the clerk came in again and handed a report to the deacon, who looked at it and said: “Now tell him to buy thirty thousand Sugar. Thirty thousand!”
The clerk hurried away and the tipster just grunted and looked at the old gray fox.
“My friend,” the deacon explained kindly, “I did not doubt that you were telling me the truth as you saw it. But even if I had heard H. O. Havemeyer tell you himself, I still would have acted as I did. For there was only one way to find out if anybody was buying the stock in the way you said H. O. Havemeyer and his friends were buying it, and that was to do what I did. The first ten thousand shares went fairly easily. It was not quite conclusive. But the second ten thousand was absorbed by a market that did not stop rising. The way the twenty thousand shares were taken by somebody proved to me that somebody was in truth willing to take all the stock that was offered. It doesn’t particularly matter at this point who that particular somebody may be. So I have covered my shorts and am long ten thousand shares, and I think that your information was good as far as it went.”
“And how far does it go?” asked the tipster.
“You have five hundred shares in this office at the average price of the ten thousand shares,” said the deacon. “Good day, my friend. Be calm the next time.”
“Say, deacon,” said the tipster, “won’t you please sell mine when you sell yours? I don’t know as much as I thought I did.”
That’s the theory. _That is why I never buy stocks cheap._ Of course I always try to buy effectively--in such a way as to help my side of the market. When it comes to selling stocks, it is plain that nobody can sell unless somebody wants those stocks.
If you operate on a large scale you will have to bear that in mind all the time. A man studies conditions, plans his operations carefully and proceeds to act. He swings a pretty fair line and he accumulates a big profit--on paper. Well, that man can’t sell at will. You can’t expect the market to absorb fifty thousand shares of one stock as easily as it does one hundred. He will have to wait until he has a market there to take it. There comes the time when he thinks the requisite buying power is there. When that opportunity comes he must seize it. As a rule he will have been waiting for it. _He has to sell when he can, not when he wants to._ To learn the time, he has to watch and test. It is no trick to tell when the market can take what you give it. But in starting a movement it is unwise to take on your full line unless you are convinced that conditions are exactly right. _Remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don’t make a second unless the first shows you a profit. Wait and watch._ That is where your tape reading comes in--to enable you to decide as to the proper time for beginning. _Much depends upon beginning at exactly the right time._ It took me years to realize the importance of this. It also cost me some hundreds of thousands of dollars.
I don’t mean to be understood as advising persistent pyramiding. _A man can pyramid and make big money that he couldn’t make if he didn’t pyramid; of course._ But what I meant to say was this: Suppose a man’s line is five hundred shares of stock. I say that he ought not to buy it all at once; not if he is speculating. If he is merely gambling the only advice I have to give him is, don’t!
Suppose he buys his first hundred, and that promptly shows him a loss. Why should he go to work and get more stock? He ought to see at once that he is in wrong; at least temporarily.
_VIII_
The Union Pacific incident in Saratoga in the summer of 1906 made me more independent than ever of tips and talk--that is, of the opinions and surmises and suspicions of other people, however friendly or however able they might be personally. Events, not vanity, proved for me that I could read the tape more accurately than most of the people about me. I also was better equipped than the average customer of Harding Brothers in that I was utterly free from speculative prejudices. The bear side doesn’t appeal to me any more than the bull side, or vice versa. My one steadfast prejudice is against being wrong.