Chapter Five - Table of Contents - Chapter Seven
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In the spring of 1906 I was in
Atlantic City for a short vacation. I was out of stocks and was thinking
only of having a change of air and a nice rest. By the way, I had gone
back to my first brokers, Harding Brothers, and my account had got to be
pretty active. I could swing three or four thousand shares. That wasn't
much more than I had done in the old Cosmopolitan shop when I was
barely twenty years of age.
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But there was some difference
between my one-point margin in the bucket shop and the margin required
by brokers who actually bought or sold stocks for my account on the New
York Stock Exchange.
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You may remember the story I
told you about that time when I was short thirty-five hundred Sugar in
the Cosmopolitan and I had a hunch something was wrong and I'd better
close the trade? Well, I have often had that curious feeling. As a rule,
I yield to it. But at times I have pooh-poohed the idea and have told
myself that it was simply asinine to follow any of these sudden blind
impulses to reverse my position. I have ascribed my hunch to a state of
nerves resulting from too many cigars or insufficient sleep or a torpid
liver or something of that kind. When I have argued myself into
disregarding my impulse and have stood pat I have always had cause to
regret it. A dozen instances occur to me when I did not sell as per
hunch, and the next day I'd go downtown and the market would be strong,
or perhaps even advance, and I'd tell myself how silly it would have
been to obey the blind impulse to sell. But on the following day there
would be a pretty bad drop. Something had broken loose somewhere and I'd
have made money by not being so wise and logical. The reason plainly
was not physiological but psychological.
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I want to tell you only about
one of them because of what it did for me. It happened when I was having
that little vacation in Atlantic City in the spring of 1906. I had a
friend with me who also was a customer of Harding Brothers. I had no
interest in the market one way or another and was enjoying my rest. I
can always give up trading to play, unless of course it is an
exceptionally active market in which my commitments are rather heavy. It
was a bull market, as I remember it. The outlook was favorable for
general business and the stock market had slowed down but the tone was
firm and all indications pointed to higher prices.
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One morning after we had
breakfasted and had finished reading all the New York morning papers,
and had got tired of watching the sea gulls picking up clams and flying
up with them twenty feet in the air and dropping them on the hard wet
sand to open them for their breakfast, my friend and I started up the
Boardwalk. That was the most exciting thing we did in the daytime.
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It was not noon yet, and we
walked up slowly to kill time and breathe the salt air. Harding Brothers
had a branch office on the Boardwalk and we used to drop in every
morning and see how they'd opened. It was more force of habit than
anything else, for I wasn't doing anything.
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The market, we found, was strong
and active. My friend, who was quite bullish, was carrying a moderate
line purchased several points lower. He began to tell me what an
obviously wise thing it was to hold stocks for much higher prices. I
wasn't paying enough attention to him to take the trouble to agree with
him. I was looking over the quotation board, noting the changes—they
were mostly advances—until I came to Union Pacific. I got a feeling that
I ought to sell it. I can't tell you more. I just felt like selling it.
I asked myself why I should feel like that, and I couldn't find any
reason whatever for going short of UP.
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I stared at the last price on
the board until I couldn't see any figures or any board or anything
else, for that matter. All I knew was that I wanted to sell Union
Pacific and I couldn't find out why I wanted to.
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I must have looked queer, for my
friend, who was standing alongside of me, suddenly nudged me and asked,
"Hey, what's the matter?"
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"I don't know," I answered.
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"Going to sleep?" he said.
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"No," I said. "I am not going to
sleep. What I am going to do is to sell that stock." I had always made
money following my hunches.
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I walked over to a table where
there were some blank order pads. My friend followed me. I wrote out an
order to sell a thousand Union Pacific at the market and handed it to
the manager. He was smiling when I wrote it and when he took it. But when he read the order he stopped smiling and looked at me.
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"Is this right?" he asked me. But I just looked at him and he rushed it over to the operator.
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"What are you doing?" asked my friend.
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"I'm selling it!" I told him.
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"Selling what?" he yelled at me. If he was a bull how could I be a bear? Something was wrong.
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"A thousand UP," I said.
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"Why?" he asked me in great excitement.
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I shook my head, meaning I had
no reason. But he must have thought I'd got a tip, because he took me by
the arm and led me outside into the hall, where we could be out of
sight and hearing of the other customers and rubbering chair-warmers.
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"What did you hear?" he asked me.
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He was quite excited. UP. was
one of his pets and he was bullish on it because of its earnings and its
prospects. But he was willing to take a bear tip on it at second hand.
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"Nothing!" I said.
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"You didn't?" He was skeptical and showed it plainly.
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"I didn't hear a thing."
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"Then why in blazes are you selling?"
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"I don't know," I told him. I spoke gospel truth.
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"Oh, come across, Larry," he said.
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He knew it was my habit to know
why I traded. I had sold a thousand shares of Union Pacific. I must have
a very good reason to sell that much stock in the face of the strong
market.
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"I don't know," I repeated. "I just feel that something is going to happen."
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"What's going to happen?"
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"I don't know. I can't give you
any reason. All I know is that I want to sell that stock. And I'm going
to let 'em have another thousand."
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I walked back into the office
and gave an order to sell a second thousand. If I was right in selling
the first thousand I ought to have out a little more.
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"What could possibly happen?"
persisted my friend, who couldn't make up his mind to follow my lead. If
I'd told him that I had heard UP. was going down he'd have sold it
without asking me from whom I'd heard it or why. "What could possibly
happen?" he asked again.
.
"A million things could happen.
But I can't promise you that any of them will. I can't give you any
reasons and I can't tell fortunes," I told him.
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"Then you're crazy," he said. "Stark crazy, selling that stock without rime or reason. You don't know why you want to sell it?"
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"I don't know why I want to sell
it. I only know I do want to," I said. "I want to, like everything."
The urge was so strong that I sold another thousand.
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That was too much for my friend.
He grabbed me by the arm and said, "Here! Let's get out of this place
before you sell the entire capital stock."
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I had sold as much as I needed
to satisfy my feeling, so I followed him without waiting for a report on
the last two thousand shares. It was a pretty good jag of stock for me
to sell even with the best of reasons. It seemed more than enough to be
short of without any reason whatever, particularly when the entire
market was so strong and there was nothing in sight to make anybody
think of the bear side. But I remembered that on previous occasions when
I had the same urge to sell and didn't do it I always had reasons to
regret it.
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I have told some of these
stories to friends, and some of million. And Jim Fisk just looked at him
and said, "Go ahead! Do! Sell it short and invite me to your funeral.' "
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"Yes," I said; "and if that chap had sold it short, look at the killing he would have made! Sell some UP yourself."
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"Not I! I'm the kind that thrives best on not rowing against wind and tide."
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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.
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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? AH the money
in the world couldn't help much in the next few hours, could it?
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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.
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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.
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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.
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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.
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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.
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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.
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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:
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"Keep him there. Tell him Mr. Harding wants to speak to him."
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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. Ed Harding wanted me on the long-distance
telephone.
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"Hello, Ed," I said.
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But he said, "What the devil's the matter with you? Are you crazy?"
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"Are you?" I said.
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"What are you doing?" he asked.
.
"What do you mean?"
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"Buying all that stock."
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"Why, isn't my margin all right?"
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"It isn't a case of margin, but of being a plain sucker."
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"I don't get you."
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"Why are you buying all that Union Pacific?"
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"It's going up," I said.
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"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 Jet them kid you."
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"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 in 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."
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"The tape says they're buying it," I insisted.
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"Larry, I got heart disease when your orders began to come in. For the love of Mike, don't be a sucker.
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Get out! Right away. It's liable to bust wide open any minute. I've done my duty. Good-by!" And he hung up.
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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.
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Whatever it was that made me decide to follow his advice, I cannot tell you; but follow it, I did.
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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.
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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 manoeuvre 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
ancl 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.
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Of course I realised, the moment
I heard the news of the declaration of that 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.
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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."
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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.
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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.
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Then I got out. I not only made up the forty thousand dollars I had lost but about fifteen thousand besides.
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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 lake 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..
Chapter Five - Table of Contents - Chapter Seven
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