Chapter Four - Table of Contents - Chapter Six
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The average ticker hound—or, as they
used to call him, tape-worm—goes wrong, I suspect, as much from
over-specialization as from anything else. It means a highly expensive
inelasticity. After all, the game of speculation isn't all mathematics
or set rules, however rigid the main laws may be. Even in my tape
reading something enters that is more than mere arithmetic. There is
what I call the behavior of a stock, actions that enable you to judge
whether or not it is going to proceed in accordance with the precedents
that your observation has noted. If a stock doesn't act right don't
touch it; because, being unable to tell precisely what is wrong, you
cannot tell which way it is going. No diagnosis, no prognosis. No
prognosis, no profit.
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It is a very old thing, this of
noting the behavior of a stock and studying its past performances. When I
first came to New York there was a broker's office where a Frenchman
used to talk about his chart. At first I thought he was a sort of pet
freak kept by the firm because they were good-natured. Then I learned
that he was a persuasive and most impressive talker. He said that the
only thing that didn't lie because it simply couldn't was mathematics.
By means of his curves he could forecast market movements. Also he could
analyse them, and tell, for instance, why Keene did the right thing in
his famous Atchison preferred bull manipulation, and later why he went
wrong in his Southern Pacific pool. At various times one or another of
the professional traders tried the Frenchman's system—and then went back
to their old unscientific methods of making a living. Their hit-or-miss
system was cheaper, they said. I heard that the Frenchman said Keene
admitted that the chart was 100 per cent right but claimed that the
method was too slow for practical use in an active market.
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Then there was one office where a
chart of the daily movement of prices was kept. It showed at a glance
just what each stock had done for months. By comparing individual curves
with the general market curve and keeping in mind certain rules the
customers could tell whether the stock on which they got an unscientific
tip to buy was fairly entitled to a rise. They used the chart as a sort
of complementary tipster.
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To-day there are scores of
commission houses where you find trading charts. They come ready-made
from the offices of statistical experts and include not only stocks but
commodities.
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"I should say that a chart helps
those who can read it or rather who can assimilate what they read. The
average chart reader, however, is apt to become obsessed with the notion
that the dips and peaks and primary and secondary movements are all
there is to stock speculation. If he pushes his confidence to its
logical limit he is bound to go broke. There is an extremely able man, a
former partner of a well-known Stock Exchange house, who is really a
trained mathematician. He is a graduate of a famous technical school. He
devised charts based upon a very careful and minute study of the
behaviour of prices in many markets—stocks, bonds, grain, cotton, money,
and so on. He went back years and years and traced the correlations and
seasonal movements—oh, everything. He used his charts in his stock
trading for years.
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What he really did was to take
advantage of some highly intelligent averaging. They tell me he won
regularly—until the World War knocked all precedents into a cocked hat. I
heard that he and his large following lost millions before they
desisted. But not even a world war can keep the stock market from being a
bull market when conditions are bullish, or a bear market when
conditions are bearish. And all a man needs to know to make money is to
appraise conditions.
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I didn't mean to get off the
track like that, but I can't help it when I think of my first few years
in Wall Street. I know now what I did not know then, and I think of the
mistakes of my ignorance because those are the very mistakes that the
average stock speculator makes year in and year out.
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After I got back to New York to
try for the third time to beat the market in a Stock Exchange house I
traded quite actively. I didn't expect to do as well as I did in the
bucket shops, but I thought that after a while I would do much better
because I would be able to swing a much heavier line. Yet, I can see now
that my main trouble was my failure to grasp the vital difference
between stock gambling and stock speculation. Still, by reason of my
seven years' experience in reading the tape and a certain natural
aptitude for the game, my stake was earning not indeed a fortune but a
very high rate of interest. I won and lost as before, but I was winning
on balance. The more I made the more I spent. This is the usual
experience with most men. No, not necessarily with easy-money pickers,
but with every human being who is not a slave of the hoarding instinct.
Some men, like old Russell Sage, have the money-making and the
money-hoarding instinct equally well developed, and of course they die
disgustingly rich.
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The game of beating the market
exclusively interested me from ten to three every day, and after three,
the game of living my life. Don't misunderstand me. I never allowed
pleasure to interfere with business.
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When I lost it was because I was wrong and not because I was suffering from dissipation or excesses.
There never were any shattered
nerves or rum-shaken limbs to spoil my game. I couldn't afford anything
that kept me from feeling physically and mentally fit. Even now I am
usually in bed by ten. As a young man I never kept late hours, because I
could not do business properly on insufficient sleep. I was doing
better than breaking even and that is why I didn't think there was any
need to deprive myself of the good things of life. The market was always
there to supply them. I was acquiring the confidence that comes to a
man from a professionally dispassionate attitude toward his own method
of providing bread and butter for himself.
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The first change I made in my
play was in the matter of time. I couldn't wait for the sure thing to
come along and then take a point or two out of it as I could in the
bucket shops. I had to start much earlier if I wanted to catch the move
in Fullerton's office. In other words, I had to study what was going to
happen; to anticipate stock movements. That sounds asininely
commonplace, but you know what I mean. It was the change in my own
attitude toward the game that was of supreme importance to me. It taught
me, little by little, the essential difference between betting on
fluctuations and anticipating inevitable advances and declines, between
gambling and speculating.
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I had to go further back than an
hour in my studies of the market—which was something I never would have
learned to do in the biggest bucket shop in the world. I interested
myself in trade reports and railroad earnings and financial and
commercial statistics. Of course I loved to trade heavily and they
called me the Boy Plunger; but I also liked to study the moves. I never
thought that anything was irksome if it helped me to trade more
intelligently. Before I can solve a problem I must state it to myself.
When I think I have found the solution I must prove I am right. I know
of only one way to prove it; and that is, with my own money.
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Slow as my progress seems now, I
suppose I learned as fast as I possibly could, considering that I was
making money on balance. If I had lost oftener perhaps it might have
spurred me to more continuous study. I certainly would have had more
mistakes to spot. But I am not sure of the exact value of losing, for if
I had lost more I would have lacked the money to test out the
improvements in my methods of trading.
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Studying my winning plays in
Fullerton's office I discovered that although I often was 100 per cent
right on the market—that is, in my diagnosis of conditions and general
trend—I was not making as much money as my market "tightness" entitled
me to. Why wasn't I?
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There was as much to learn from partial victory as from defeat.
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For instance, I had been bullish
from the very start of a bull market, and I had backed my opinion by
buying stocks. An advance followed, as I had clearly foreseen. So far,
all very well. But what else did I do? Why, I listened to the elder
statesmen and curbed my youthful impetuousness. I made up my mind to be
wise and play carefully, conservatively. Everybody knew that the way to
do that was to take profits and buy back your stocks on reactions. And
that is precisely what I did, or rather what I tried to do; for I often
took profits and waited for a reaction that never came. And I saw my
stock go kiting up ten points more and I sitting there with my
four-point profit safe in my conservative pocket. They say you never
grow poor taking profits. No, you don't. But neither do you grow rich
taking a four-point profit in a bull market.
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Where I should have made twenty
thousand dollars I made two thousand. That was what my conservatism did
for me. About the time I discovered what a small percentage of what I
should have made I was getting I discovered something else, and that is
that suckers differ among themselves according to the degree of
experience.
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The tyro knows nothing, and
everybody, including himself, knows it. But the next, or second, grade
thinks he knows a great deal and makes others feel that way too. He is
the experienced sucker, who has studied—not the market itself but a few
remarks about the market made by a still higher grade of suckers.
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The second-grade sucker knows
how to keep from losing his money in some of the ways that get the raw
beginner. It is this semisucker rather than the 100 per cent article who
is the real all-the-year-round support of the commission houses. He
lasts about three and a half years on an average, as compared with a
single season of from three to thirty weeks, which is the usual Wall
Street life of a first offender. It is naturally the semisucker who is
always quoting the famous trading aphorisms and the various rules of the
game. He knows all the don'ts that ever fell from the oracular lips of
the old stagers—excepting the principal one, which is: Don't be a
sucker!
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This semisucker is the type that thinks he has cut his wisdom teeth because he loves to buy on declines.
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He waits for them. He measures
his bargains by the number of points it has sold off from the top. In
big bull markets the plain unadulterated sucker, utterly ignorant of
rules and precedents, buys blindly because he hopes blindly. He makes
most of the money—until one of the healthy reactions takes it away from
him at one fell swoop. But the Careful Mike sucker does what I did when I
thought I was playing the game intelligently—according to the
intelligence of others. I knew I needed to change my bucket-shop methods
and I thought I was solving my problem with any change, particularly
one that assayed high gold values according to the experienced traders
among the customers.
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Most—-let us call 'em
customers—-are alike. You find very few who can truthfully say that Wall
Street doesn't owe them money. In Fullerton's there were the usual
crowd. All grades! Well, there was one old chap who was not like the
others. To begin with, he was a much older man. Another thing was that
he never volunteered advice and never bragged of his winnings. He was a
great hand for listening very attentively to the others. He did not seem
very keen to get tips—that is, he never asked the talkers what they'd
heard or what they knew. But when somebody gave him one he always
thanked the tipster very politely. Sometimes he thanked the tipster
again—when the tip turned out O.K. But if it went wrong he never whined,
so that nobody could tell whether he followed it or let it slide by. It
was a legend of the office that the old jigger was rich and could swing
quite a line. But he wasn't donating much to the firm in the way of
commissions; at least not that anyone could see. His name was Partridge,
but they nicknamed him Turkey behind his back, because he was so
thick-chested and had a habit of strutting about the various rooms, with
the point of his chin resting on his breast.
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The customers, who were all
eager to be shoved and forced into doing things so as to lay the blame
for failure on others, used to go to old Partridge and tell him what
some friend of a friend of an insider had advised them to do in a
certain stock. They would tell him what they had not done with the tip
so he would tell them what they ought to do. But whether the tip they
had was to buy or to sell, the old chap's answer was always the same.
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The customer would finish the tale of his perplexity and then ask: "What do you think I ought to do?"
Old Turkey would cock his head
to one side, contemplate his fellow customer with a fatherly smile, and
finally he would say very impressively, "You know, it's a bull market!"
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Time and again I heard him say,
"Well, this is a bull market, you know!" as though he were giving to you
a priceless talisman wrapped up in a million-dollar accident-insurance
policy. And of course I did not get his meaning.
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One day a fellow named Elmer
Harwood rushed into the office, wrote out an order and gave it to the
clerk. Then he rushed over to where Mr. Partridge was listening politely
to John Fanning's story of the time he overheard Keene give an order to
one of his brokers and all that John made was a measly three points on a
hundred shares and of course the stock had to go up twenty-four points
in three days right after John sold out. It was at least the fourth time
that John had told him that tale of woe, but old Turkey was smiling as
sympathetically as if it was the first time he heard it.
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Well, Elmer made for the old man
and, without a word of apology to John Fanning, told Turkey, "Mr.
Partridge, I have just sold my Climax Motors. My people say the market
is entitled to a reaction and that I'll be able to buy it back cheaper.
So you'd better do likewise. That is, if you've still got yours."
Elmer looked suspiciously at the
man to whom he had given the original tip to buy. The amateur, or
gratuitous, tipster always thinks he owns the receiver of his tip body
and soul, even before he knows how the tip is going to turn out.
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"Yes, Mr. Harwood, I still have it. Of course!" said Turkey gratefully. It was nice of Elmer to think of the old chap.
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"Well, now is the time to take
your profit and get in again on the next dip," said Elmer, as if he had
just made out the deposit slip for the old man. Failing to perceive
enthusiastic gratitude in the beneficiary's face Elmer went on: "I have
just sold every share I owned!"
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From his voice and manner you would have conservatively estimated it at ten thousand shares.
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But Mr. Partridge shook his head regretfully and whined, "No! No! I can't do that!"
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"What?" yelled Elmer.
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"I simply can't!" said Mr. Partridge. He was in great trouble.
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"Didn't I give you the tip to buy it?"
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"You did, Mr. Harwood, and I am very grateful to you.
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Indeed, I am, sir. But "
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"Hold on! Let me talk! And didn't that stock go op seven points in ten days? Didn't it?"
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"It did, and I am much obliged to you, my dear boy. But I couldn't think of selling that stock."
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"You couldn't?" asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers.
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"No, I couldn't."
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"Why not?" And Elmer drew nearer.
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"Why, this is a bull market!" The old fellow said it as though he had given a long and detailed explanation.
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"That's all right," said Elmer,
looking angry because of his disappointment. "I know this is a bull
market as well as you do. But you'd better slip them that stock of yours
and buy it back on the reaction. You might as well reduce the cost to
yourself."
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"My dear boy," said old
Partridge, in great distress—"my dear boy, if I sold that stock now I'd
lose my position; and then where would I be?"
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Elmer Harwood threw up his
hands, shook his head and walked over to me to get sympathy: "Can you
beat it?" he asked me in a stage whisper. "I ask you 1"
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I didn't say anything. So he went on: "I give him a tip on Climax Motors. He buys five hundred shares. He's got seven points' profit
and I advise him to get out and buy 'em back on the reaction that's
overdue even now. And what does he say when I tell him? He says that if
he sells he'll lose his job. What do you know about that?"
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"I beg your pardon, Mr. Harwood;
I didn't say I'd lose my job," cut in old Turkey. "I said I'd lose my
position. And when you are as old as I am and you've been through as
many booms and panics as I have, you'll know that to lose your position
is something nobody can afford; not even John D. Rockefeller. I hope the
stock reacts and that you will be able to repurchase your line at a
substantial concession, sir. But I myself can only trade in accordance
with the experience of many years. I paid a high price for it and I
don't feel like throwing away a second tuition fee. But I am as much
obliged to you as if I had the money in the bank. It's a bull market,
you know." And he strutted away, leaving Elmer dazed.
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What old Mr. Partridge said did
not mean much to me until I began to think about my own numerous
failures to make as much money as I ought to when I was so right on the
general market. The more I studied the more I realized how wise that old
chap was. He had evidently suffered from the same defect in his young
days and knew his own human weaknesses. He would not lay himself open to
a temptation that experience had taught him was hard to resist and had
always proved expensive to him, as it was to me.
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I think it was a long step
forward in my trading education when I realized at last that when old
Mr. Partridge kept on telling the other customers, "Well, you know this
is a bull market!" he really meant to tell them that the big money was
not in the individual fluctuations but in the main movements—that is,
not in reading the tape but in sizing up the entire market and its
trend.
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And right here let me say one
thing: After spending many years in Wall Street and after making and
losing millions of dollars I want to tell you this: It never was my
thinking that made the big money for me. It always was my sitting. Got
that? My sitting tight! It is no trick at all to be right on the market.
You always find lots of early bulls in bull markets and early bears in
bear markets. I've known many men who were right at exactly the right
time, and began buying or selling stocks when prices were at the very
level which should show the greatest profit. And their experience
invariably matched mine—that is, they made no real money out of it. Men
who can both be right and sit tight are uncommon. I found it one of the
hardest things to learn. But it is only after a stock operator has
firmly grasped this that he can make big money. It is literally true
that millions come easier to a trader after he knows how to trade than
hundreds did in the days of his ignorance.
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The reason is that a man may see
straight and clearly and yet become impatient or doubtful when the
market takes its time about doing as he figured it must do. That is why
so many men in Wall Street, who are not at all in the sucker class, not
even in the third grade, nevertheless lose money. The market does not
beat them. They beat themselves, because though they have brains they
cannot sit tight. Old Turkey was dead right in doing and saying what he
did. He had not only the courage of his convictions but the intelligent
patience to sit tight.
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Disregarding the big swing and
trying to jump in and out was fatal to me. Nobody can catch all the
fluctuations. In a bull market your game is to buy and hold until you
believe that the bull market is near its end. To do this you must study
general conditions and not tips or special factors affecting individual
stocks. Then get out of all your stocks; get out for keeps! Wait until
you see—or if you prefer, until you think you see—the turn of the
market; the beginning of a reversal of general conditions. You have to
use your brains and your vision to do this; otherwise my advice would be
as idiotic as to tell you to buy cheap and sell dear. One of the most
helpful things that anybody can learn is to give up trying to catch the
last eighth—or the first. These two are the most expensive eighths in
the world. They have cost stock traders, in the aggregate, enough
millions of dollars to build a concrete highway across the continent.
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Another thing I noticed in
studying my plays in Fullerton's office after I began to trade less
unintelligently was that my initial operations seldom showed me a loss.
That naturally made me decide to start big. It gave me confidence in my
own judgment before I allowed it to be vitiated by the advice of others
or even by my own impatience at times. Without faith in his own judgment
no man can go very far in this game. That is about all I have
learned—to study general conditions, to take a position and stick to it.
I can wait without a twinge of impatience. I can see a setback without
being shaken, knowing that it is only temporary. I have been short one
hundred thousand shares and I have seen a big rally coming. I have
figured—and figured correctly—that such a rally as I felt was
inevitable, and even wholesome, would make a difference of one million
dollars in my paper profits. And I nevertheless have stood pat and seen
half my paper profit wiped out, without once considering the
advisability of covering my shorts to put them out again on the rally. I
knew that if I did I might lose my position and with it the certainty
of a big killing. It is the big swing that makes the big money for you.
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If I learned all this so slowly
it was because I learned by my mistakes, and some time always elapses
between making a mistake and realizing it, and more time between
realizing it and exactly determining it.
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But at the same time I was
faring pretty comfortably and was very young, so that I made up in other
ways. Most of my winnings were still made in part through my tape
reading because the kind of markets we were having lent themselves
fairly well to my method. I was not losing either as often or as
irritatingly as in the beginning of my New York experiences. It wasn't
anything to be proud of, when you think that I had been broke three
times in less than two years. And as I told you, being broke is a very
efficient educational agency.
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I was not increasing my stake
very fast because I lived up to the handle all the time. I did not
deprive myself of many of the things that a fellow of my age and tastes
would want. I had my own automobile and I could not see any sense in
skimping on living when I was taking it out of the market. The ticker
only stopped Sundays and holidays, which was as it should be. Every time
I found the reason for a loss or the why and how of another mistake, I
added a brand-new Don't! to my schedule of assets. And the nicest way to
capitalize my increasing assets was by not cutting down on my living
expenses. Of course I had some amusing experiences and some that were
not so amusing, but if I told them all in detail I'd never finish. As a
matter of fact, the only incidents that I remember without special
effort are those that taught me something of definite value to me in my
trading; something that added to my store of knowledge of the game—and
of myself!.
Chapter Four - Table of Contents - Chapter Six
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