Part 19

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.

Even as a lad I always got my own meanings out of such facts as I observed. It is the only way in which the meaning reaches me. I cannot get out of facts what somebody tells me to get. They are my facts, don’t you see? If I believe something you can be sure it is because I simply must. When I am long of stocks it is because my reading of conditions has made me bullish. But you find many people, reputed to be intelligent, who are bullish because they have stocks. I do not allow my possessions--or my prepossessions either--to do any thinking for me. That is why I repeat that I never argue with the tape. To be angry at the market because it unexpectedly or even illogically goes against you is like getting mad at your lungs because you have pneumonia.

I had been gradually approaching the full realization of how much more than tape reading there was to stock speculation. Old man Partridge’s insistence on the vital importance of being continuously bullish in a bull market doubtless made my mind dwell on the need above all other things of determining the kind of market a man is trading in. I began to realize that the big money must necessarily be in the big swing. Whatever might seem to give a big swing its initial impulse, the fact is that its continuance is not the result of manipulations by pools or artifice by financiers, but depends upon basic conditions. And no matter who opposes it, the swing must inevitably run as far and as fast and as long as the impelling forces determine.

After Saratoga I began to see more clearly--perhaps I should say more maturely--that since the entire list moves in accordance with the main current there was not so much need as I had imagined to study individual plays or the behaviour of this or the other stock. Also, by thinking of the swing a man was not limited in his trading. He could buy or sell the entire list. In certain stocks a short line is dangerous after a man sells more than a certain percentage of the capital stock, the amount depending on how, where and by whom the stock is held. But he could sell a million shares of the general list--if he had the price--without the danger of being squeezed. A great deal of money used to be made periodically by insiders in the old days out of the shorts and their carefully fostered fears of corners and squeezes.

Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn’t it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities. It took me a long time to learn to trade on those lines. But in justice to myself I must remind you that up to then I had never had a big enough stake to speculate that way. A big swing will mean big money if your line is big, and to be able to swing a big line you need a big balance at your broker’s.

I always had--or felt that I had--to make my daily bread out of the stock market. It interfered with my efforts to increase the stake available for the more profitable but slower and therefore more immediately expensive method of trading on swings.

But not only did my confidence in myself grow stronger but my brokers ceased to think of me as a sporadically lucky Boy Plunger. They had made a great deal out of me in commissions, but now I was in a fair way to become their star customer and as such to have a value beyond the actual volume of my trading. A customer who makes money is an asset to any broker’s office.

The moment I ceased to be satisfied with merely studying the tape I ceased to concern myself exclusively with the daily fluctuations in specific stocks, and when that happened I simply had to study the game from a different angle. I worked back from the quotation to first principles; from price-fluctuations to basic conditions.

Of course I had been reading the daily dope regularly for a long time. All traders do. But much of it was gossip, some of it deliberately false, and the rest merely the personal opinion of the writers. The reputable weekly reviews when they touched upon underlying conditions were not entirely satisfactory to me. The point of view of the financial editors was not mine as a rule. It was not a vital matter for them to marshal their facts and draw their conclusions from them, but it was for me. Also there was a vast difference in our appraisal of the element of time. The analysis of the week that had passed was less important to me than the forecast of the weeks that were to come.

For years I had been the victim of an unfortunate combination of inexperience, youth and insufficient capital. But now I felt the elation of a discoverer. My new attitude toward the game explained my repeated failures to make big money in New York. But now with adequate resources, experience and confidence, I was in such a hurry to try the new key that I did not notice that there was another lock on the door--a time lock! It was a perfectly natural oversight. I had to pay the usual tuition--a good whack per each step forward.

I studied the situation in 1906 and I thought that the money outlook was particularly serious. Much actual wealth the world over had been destroyed. Everybody must sooner or later feel the pinch, and therefore nobody would be in position to help anybody. It would not be the kind of hard times that comes from the swapping of a house worth ten thousand dollars for a carload of race horses worth eight thousand dollars. It was the complete destruction of the house by fire and of most of the horses by a railroad wreck. It was good hard cash that went up in cannon smoke in the Boer War, and the millions spent for feeding nonproducing soldiers in South Africa meant no help from British investors as in the past. Also, the earthquake and the fire in San Francisco and other disasters touched everybody--manufacturers, farmers, merchants, labourers and millionaires. The railroads must suffer greatly. I figured that nothing could stave off one peach of a smash. Such being the case there was but one thing to do--sell stocks!

I told you I had already observed that my initial transaction, after I made up my mind which way I was going to trade, was apt to show me a profit. And now when I decided to sell I plunged. Since we undoubtedly were entering upon a genuine bear market I was sure I should make the biggest killing of my career.

The market went off. Then it came back. It shaded off and then it began to advance steadily. My paper profits vanished and paper losses grew. One day it looked as if not a bear would be left to tell the tale of the strictly genuine bear market. I couldn’t stand the gaff. I covered. It was just as well. If I hadn’t I wouldn’t have had enough to buy a postal card. I lost most of my fur, but it was better to live to fight another day.

I had made a mistake. But where? I was bearish in a bear market. That was wise. I had sold stocks short. That was proper. I had sold them too soon. That was costly. My position was right but my play was wrong. However, every day brought the market nearer to the inevitable smash. So I waited and when the rally began to falter and pause I let them have as much stock as my sadly diminished margins permitted. I was right this time--for exactly one whole day, for on the next there was another rally. Another big bite out of yours truly! So I read the tape and covered and waited. In due course I sold again--and again they went down promisingly and then they rudely rallied.

It looked as if the market were doing its best to make me go back to my old and simple ways of bucket-shop trading. It was the first time I had worked with a definite forward-looking plan embracing the entire market instead of one or two stocks. I figured that I must win if I held out. Of course at that time I had not developed my system of placing my bets or I would have put out my short line on a declining market, as I explained to you the last time. I would not then have lost so much of my margin. I would have been wrong but not hurt. You see, I had observed certain facts but had not learned to co-ordinate them. My incomplete observation not only did not help but actually hindered.

I have always found it profitable to study my mistakes. Thus I eventually discovered that it was all very well not to lose your bear position in a bear market, but that at all times the tape should be read to determine the propitiousness of the time for operating. If you begin right you will not see your profitable position seriously menaced; and then you will find no trouble in sitting tight.

Of course to-day I have greater confidence in the accuracy of my observations--in which neither hopes nor hobbies play any part--and also I have greater facilities for verifying my facts as well as for variously testing the correctness of my views. But in 1906 the succession of rallies dangerously impaired my margins.

I was nearly twenty-seven years old. I had been at the game twelve years. But the first time I traded because of a crisis that was still to come I found that I had been using a telescope. Between my first glimpse of the storm cloud and the time for cashing in on the big break the stretch was evidently so much greater than I had thought that I began to wonder whether I really saw what I thought I saw so clearly. We had had many warnings and sensational ascensions in call-money rates. Still some of the great financiers talked hopefully--at least to newspaper reporters--and the ensuing rallies in the stock market gave the lie to the calamity howlers. Was I fundamentally wrong in being bearish or merely temporarily wrong in having begun to sell short too soon?

I decided that I began too soon, but that I really couldn’t help it. Then the market began to sell off. That was my opportunity. I sold all I could, and then stocks rallied again, to quite a level.

It cleaned me out.

There I was--right and busted!

I tell you it was remarkable. What happened was this: I looked ahead and saw a big pile of dollars. Out of it stuck a sign. It had “Help yourself,” on it, in huge letters. Beside it stood a cart with “Lawrence Livingston Trucking Corporation” painted on its side. I had a brand-new shovel in my hand. There was not another soul in sight, so I had no competition in the gold-shoveling, which is one beauty of seeing the dollar-heap ahead of others. The people who might have seen it if they had stopped to look were just then looking at baseball games instead, or motoring or buying houses to be paid for with the very dollars that I saw. That was the first time that I had seen big money ahead, and I naturally started toward it on the run. Before I could reach the dollar-pile my wind went back on me and I fell to the ground. The pile of dollars was still there, but I had lost the shovel, and the wagon was gone. So much for sprinting too soon! I was too eager to prove to myself that I had seen real dollars and not a mirage. I saw, and knew that I saw. Thinking about the reward for my excellent sight kept me from considering the distance to the dollar-heap. I should have walked and not sprinted.

That is what happened. I didn’t wait to determine whether or not the time was right for plunging on the bear side. On the one occasion when I should have invoked the aid of my tape-reading I didn’t do it. That is how I came to learn that even when one is properly bearish at the very beginning of a bear market it is well not to begin selling in bulk until there is no danger of the engine back-firing.

I had traded in a good many thousands of shares at Harding’s office in all those years, and, moreover, the firm had confidence in me and our relations were of the pleasantest. I think they felt that I was bound to be right again very shortly and they knew that with my habit of pushing my luck all I needed was a start and I’d more than recover what I had lost. They had made a great deal of money out of my trading and they would make more. So there was no trouble about my being able to trade there again as long as my credit stood high.

The succession of spankings I had received made me less aggressively cocksure; perhaps I should say less careless, for of course I knew I was just so much nearer to the smash. All I could do was wait watchfully, as I should have done before plunging. It wasn’t a case of locking the stable after the horse was stolen. I simply had to be sure, the next time I tried. If a man didn’t make mistakes he’d own the world in a month. But if he didn’t profit by his mistakes he wouldn’t own a blessed thing.