Part 42

Investors are a different breed of cats. Most of them go in strong for inventories and statistics of earnings and all sorts of mathematical data, as though that meant facts and certainties. The human factor is minimised as a rule. Very few people like to buy into a one-man business. But the wisest investor I ever knew was a man who began by being a Pennsylvania Dutchman and followed it up by coming to Wall Street and seeing a great deal of Russell Sage.

He was a great investigator, an indefatigable Missourian. He believed in asking his own questions and in doing his seeing with his own eyes. He had no use for another man’s spectacles. This was years ago. It seems he held quite a little Atchison. Presently he began to hear disquieting reports about the company and its management. He was told that Mr. Reinhart, the president, instead of being the marvel he was credited with being, in reality was a most extravagant manager whose recklessness was fast pushing the company into a mess. There would be the deuce to pay on the inevitable day of reckoning.

This was precisely the kind of news that was as the breath of life to the Pennsylvania Dutchman. He hurried over to Boston to interview Mr. Reinhart and ask him a few questions. The questions consisted of repeating the accusations he had heard and then asking the president of the Atchison, Topeka & Santa Fe Railroad if they were true.

Mr. Reinhart not only denied the allegations emphatically but said even more: He proceeded to prove by figures that the allegators were malicious liars. The Pennsylvania Dutchman had asked for exact information and the president gave it to him, showing him what the company was doing and how it stood financially, to a cent.

The Pennsylvania Dutchman thanked President Reinhart, returned to New York and promptly sold all his Atchison holdings. A week or so later he used his idle funds to buy a big lot of Delaware, Lackawanna & Western.

Years afterward we were talking of lucky swaps and he cited his own case. He explained what prompted him to make it.

“You see,” he said, “I noticed that President Reinhart, when he wrote down figures, took sheets of letter paper from a pigeonhole in his mahogany roll-top desk. It was fine heavy linen paper with beautifully engraved letterheads in two colors. It was not only very expensive but worse--it was unnecessarily expensive. He would write a few figures on a sheet to show me exactly what the company was earning on certain divisions or to prove how they were cutting down expenses or reducing operating costs, and then he would crumple up the sheet of the expensive paper and throw it in the waste-basket. Pretty soon he would want to impress me with the economies they were introducing and he would reach for a fresh sheet of the beautiful notepaper with the engraved letterheads in two colors. A few figures--and bingo, into the waste-basket! More money wasted without a thought. It struck me that if the president was that kind of a man he would scarcely be likely to insist upon having or rewarding economical assistants. I therefore decided to believe the people who had told me the management was extravagant instead of accepting the president’s version and I sold what Atchison stock I held.

“It so happened that I had occasion to go to the offices of the Delaware, Lackawanna & Western a few days later. Old Sam Sloan was the president. His office was the nearest to the entrance and his door was wide open. It was always open. Nobody could walk into the general offices of the D.L.&W. in those days and not see the president of the company seated at his desk. Any man could walk in and do business with him right off, if he had any business to do. The financial reporters used to tell me that they never had to beat around the bush with old Sam Sloan, but would ask their questions and get a straight yes or no from him, no matter what the stock-market exigencies of the other directors might be.

“When I walked in I saw the old man was busy. I thought at first that he was opening his mail, but after I got inside close to the desk I saw what he was doing. I learned afterwards that it was his daily custom to do it. After the mail was sorted and open, instead of throwing away the empty envelopes he had them gathered up and taken to his office. In his leisure moments he would rip the envelope all around. That gave him two bits of paper, each with one clean blank side. He would pile these up and then he would have them distributed about, to be used in lieu of scratch pads for such figuring as Reinhart had done for me on engraved notepaper. No waste of empty envelopes and no waste of the president’s idle moments. Everything utilised.

“It struck me that if that was the kind of man the D.L.&W. had for president, the company was managed economically in all departments. The president would see to that! Of course I knew the company was paying regular dividends and had a good property. I bought all the D.L.&W. stock I could. Since that time the capital stock has been doubled and quadrupled. My annual dividends amount to as much as my original investment. I still have my D.L.&W. And Atchison went into the hands of a receiver a few months after I saw the president throwing sheet after sheet of linen paper with engraved letterheads in two colors into the waste-basket to prove to me with figures that he was not extravagant.”

And the beauty of that story is that it is true and that no other stock that the Pennsylvania Dutchman could have bought would have proved to be so good an investment as D.L.&W.

XVII

One of my most intimate friends is very fond of telling stories about what he calls my hunches. He is forever ascribing to me powers that defy analysis. He declares I merely follow blindly certain mysterious impulses and thereby get out of the stock market at precisely the right time. His pet yarn is about a black cat that told me, at his breakfast-table, to sell a lot of stock I was carrying, and that after I got the pussy’s message I was grouchy and nervous until I sold every share I was long of. I got practically the top prices of the movement, which of course strengthened the hunch theory of my hard-headed friend.

I had gone to Washington to endeavor to convince a few Congressmen that there was no wisdom in taxing us to death and I wasn’t paying much attention to the stock market. My decision to sell out my line came suddenly, hence my friend’s yarn.

I admit that I do get irresistible impulses at times to do certain things in the market. It doesn’t matter whether I am long or short of stocks. I must get out. I am uncomfortable until I do. I myself think that what happens is that I see a lot of warning-signals. Perhaps not a single one may be sufficiently clear or powerful to afford me a positive, definite reason for doing what I suddenly feel like doing. Probably that is all there is to what they call “ticker-sense” that old traders say James R. Keene had so strongly developed and other operators before him. Usually, I confess, the warning turns out to be not only sound but timed to the minute. But in this particular instance there was no hunch. The black cat had nothing to do with it. What he tells everybody about my getting up so grumpy that morning I suppose can be explained--if I in truth was grouchy--by my disappointment. I knew I was not convincing the Congressman I talked to and the Committee did not view the problem of taxing Wall Street as I did. I wasn’t trying to arrest or evade taxation on stock transactions but to suggest a tax that I as an experienced stock operator felt was neither unfair nor unintelligent. I didn’t want Uncle Sam to kill the goose that could lay so many golden eggs with fair treatment. Possibly my lack of success not only irritated me but made me pessimistic over the future of an unfairly taxed business. But I’ll tell you exactly what happened.

At the beginning of the bull market I thought well of the outlook in both the Steel trade and the Copper market and I therefore felt bullish on stocks of both groups. So I started to accumulate some of them. I began by buying 5000 shares of Utah Copper and stopped because it didn’t act right. That is, it did not behave as it should have behaved to make me feel I was wise in buying it. I think the price was around 114. I also started to buy United States Steel at almost the same price. I bought in all 20,000 shares the first day because it did act right. I followed the method I have described before.

Steel continued to act right and I therefore continued to accumulate it until I was carrying 72,000 shares of it in all. But my holdings of Utah Copper consisted of my initial purchase. I never got above the 5000 shares. Its behaviour did not encourage me to do more with it.

Everybody knows what happened. We had a big bull movement. I knew the market was going up. General conditions were favourable. Even after stocks had gone up extensively and my paper profit was not to be sneezed at, the tape kept trumpeting: Not yet! Not yet! When I arrived in Washington the tape was still saying that to me. Of course, I had no intention of increasing my line at that late day, even though I was still bullish. At the same time, the market was plainly going my way and there was no occasion for me to sit in front of a quotation board all day, in hourly expectation of getting a tip to get out. Before the clarion call to retreat came--barring an utterly unexpected catastrophe, of course--the market would hesitate or otherwise prepare me for a reversal of the speculative situation. That was the reason why I went blithely about my business with my Congressman.

At the same time, prices kept going up and that meant that the end of the bull market was drawing nearer. I did not look for the end on any fixed date. That was something quite beyond my power to determine. But I needn’t tell you that I was on the watch for the tip-off. I always am, anyhow. It has become a matter of business habit with me.

I cannot swear to it but I rather suspect that the day before I sold out, seeing the high prices made me think of the magnitude of my paper profit as well as of the line I was carrying and, later on, of my vain efforts to induce our legislators to deal fairly and intelligently by Wall Street. That was probably the way and the time the seed was sown within me. The subconscious mind worked on it all night. In the morning I thought of the market and began to wonder how it would act that day. When I went down to the office I saw not so much that prices were still higher and that I had a satisfying profit but that there was a great big market with a tremendous power of absorption. I could sell any amount of stock in that market; and, of course, when a man is carrying his full line of stocks, he must be on the watch for an opportunity to change his paper profit into actual cash. He should try to lose as little of the profit as possible in the swapping. Experience has taught me that a man can always find an opportunity to make his profits real and that this opportunity usually comes at the end of the move. That isn’t tape-reading or a hunch.

Of course, when I found that morning a market in which I could sell out all my stocks without any trouble I did so. When you are selling out it is no wiser or braver to sell fifty shares than fifty thousand; but fifty shares you can sell in the dullest market without breaking the price and fifty thousand shares of a single stock is a different proposition. I had seventy-two thousand shares of U.S. Steel. This may not seem a colossal line, but you can’t always sell that much without losing some of that profit that looks so nice on paper when you figure it out and that hurts as much to lose as if you actually had it safe in the bank.

I had a total profit of about $1,500,000 and I grabbed it while the grabbing was good. But that wasn’t the principal reason for thinking that I did the right thing in selling out when I did. The market proved it for me and that was indeed a source of satisfaction for me. It was this way: I succeeded in selling my entire line of seventy-two thousand shares of U.S. Steel at a price which averaged me just one point from the top of the day and of the movement. It proved that I was right, to the minute. But when, on the very same hour of the very same day I came to sell my 5000 shares of Utah Copper, the price broke five points. Please recall that I began buying both stocks at the same time and that I acted wisely in increasing my line of U.S. Steel from twenty thousand shares to seventy-two thousand, and equally wisely in not increasing my line of Utah from the original 5000 shares. The reason why I didn’t sell out my Utah Copper before was that I was bullish on the copper trade and it was a bull market in stocks and I didn’t think that Utah would hurt me much even if I didn’t make a killing in it. But as for hunches, there weren’t any.

The training of a stock trader is like a medical education. The physician has to spend long years learning anatomy, physiology, materia medica and collateral subjects by the dozen. He learns the theory and then proceeds to devote his life to the practice. He observes and classifies all sorts of pathological phenomena. He learns to diagnose. If his diagnosis is correct--and that depends upon the accuracy of his observation--he ought to do pretty well in his prognosis, always keeping in mind, of course, that human fallibility and the utterly unforeseen will keep him from scoring 100 per cent of bull’s-eyes. And then, as he gains in experience, he learns not only to do the right thing but to do it instantly, so that many people will think he does it instinctively. It really isn’t automatism. It is that he has diagnosed the case according to his observations of such cases during a period of many years; and, naturally, after he has diagnosed it, he can only treat it in the way that experience has taught him is the proper treatment. You can transmit knowledge--that is, your particular collection of card-indexed facts--but not your experience. A man may know what to do and lose money--if he doesn’t do it quickly enough.

Observation, experience, memory and mathematics--these are what the successful trader must depend on. He must not only observe accurately but remember at all times what he has observed. He cannot bet on the unreasonable or on the unexpected, however strong his personal convictions may be about man’s unreasonableness or however certain he may feel that the unexpected happens very frequently. He must bet always on probabilities--that is, try to anticipate them. Years of practice at the game, of constant study, of always remembering, enable the trader to act on the instant when the unexpected happens as well as when the expected comes to pass.

A man can have great mathematical ability and an unusual power of accurate observation and yet fail in speculation unless he also possesses the experience and the memory. And then, like the physician who keeps up with the advances of science, the wise trader never ceases to study general conditions, to keep track of developments everywhere that are likely to affect or influence the course of the various markets. After years at the game it becomes a habit to keep posted. He acts almost automatically. He requires the invaluable professional attitude and that enables him to beat the game--at times! This difference between the professional and the amateur or occasional trader cannot be overemphasised. I find, for instance, that memory and mathematics help me very much. Wall Street makes its money on a mathematical basis. I mean, it makes its money by dealing with facts and figures.

When I said that a trader has to keep posted to the minute and that he must take a purely professional attitude toward all markets and all developments, I merely meant to emphasise again that hunches and the mysterious ticker-sense haven’t so much to do with success. Of course, it often happens that an experienced trader acts so quickly that he hasn’t time to give all his reasons in advance--but nevertheless they are good and sufficient reasons, because they are based on facts collected by him in his years of working and thinking and seeing things from the angle of the professional, to whom everything that comes to his mill is grist. Let me illustrate what I mean by professional attitude.

I keep track of the commodities markets, always. It is a habit of years. As you know, the Government reports indicated a winter wheat crop about the same as last year and a bigger spring wheat crop than in 1921. The condition was much better and we probably would have an earlier harvest than usual. When I got the figures of condition and I saw what we might expect in the way of yield--mathematics--I also thought at once of the coal miner’s strike and the railroad shopmen’s strike. I couldn’t help thinking of them because my mind always thinks of all developments that have a bearing on the markets. It instantly struck me that the strike which had already affected the movement of freight everywhere must affect wheat prices adversely. I figured this way: There was bound to be considerable delay in moving winter wheat to market by reason of the strike-crippled transportation facilities, and by the time those improved the spring wheat crop would be ready to move. That meant that when the railroads were able to move wheat in quantity they would be bringing in both crops together--the delayed winter and the early spring wheat--and that would mean a vast quantity of wheat pouring into the market at one fell swoop. Such being the facts of the case--the obvious probabilities--the traders, who would know and figure as I did, would not bull wheat for a while. They would not feel like buying it unless the price declined to such figures as made the purchase of wheat a good investment. With no buying power in the market, the price ought to go down. Thinking the way I did I must find whether I was right or not. As old Pat Hearne used to remark, “You can’t tell till you bet.” Between being bearish and selling there is no need to waste time.

Experience has taught me that the way a market behaves is an excellent guide for an operator to follow. It is like taking a patient’s temperature and pulse or noting the colour of the eyeballs and the coating of the tongue.