Chapter 03

Chapter III

It takes a man a long time to learn all the lessons of all his

mistakes. They say there are two sides to everything. But there is

only one side to the stock market; and it is not the bull side or

the bear side, but the right side. It took me longer to get that

general principle fixed firmly in my mind than it did most of the more

technical phases of the game of stock speculation.

I have heard of people who amuse themselves conducting imaginary

operations in the stock market to prove with imaginary dollars how

right they are. Sometimes these ghost gamblers make millions. It is

very easy to be a plunger that way. It is like the old story of the man

who was going to fight a duel the next day.

His second asked him, “Are you a good shot?”

“Well,” said the duelist, “I can snap the stem of a wineglass at twenty

paces,” and he looked modest.

“That’s all very well,” said the unimpressed second. “But can you snap

the stem of the wineglass while the wineglass is pointing a loaded

pistol straight at your heart?”

With me I must back my opinions with my money. My losses have taught me

that I must not begin to advance until I am sure I shall not have to

retreat. But if I cannot advance I do not move at all. I do not mean

by this that a man should not limit his losses when he is wrong. He

should. But that should not breed indecision. All my life I have made

mistakes, but in losing money I have gained experience and accumulated

a lot of valuable don’ts. I have been flat broke several times, but my

loss has never been a total loss. Otherwise, I wouldn’t be here now. I

always knew I would have another chance and that I would not make the

same mistake a second time. I believed in myself.

A man must believe in himself and his judgment if he expects to make

a living at this game. That is why I don’t believe in tips. If I buy

stocks on Smith’s tip I must sell those same stocks on Smith’s tip.

I am depending on him. Suppose Smith is away on a holiday when the

selling time comes around? No, sir, nobody can make big money on what

someone else tells him to do. _I know from experience that nobody can

give me a tip or a series of tips that will make more money for me

than my own judgment. It took me five years to learn to play the game

intelligently enough to make big money when I was right._

I didn’t have as many interesting experiences as you might imagine.

I mean, the process of learning how to speculate does not seem very

dramatic at this distance. I went broke several times, and that is

never pleasant, but the way I lost money is the way everybody loses

money who loses money in Wall Street. Speculation is a hard and trying

business, and a speculator must be on the job all the time or he’ll

soon have no job to be on.

My task, as I should have known after my early reverses at Fullerton’s,

was very simple: To look at speculation from another angle. But I

didn’t know that there was much more to the game than I could possibly

learn in the bucket shops. There I thought I was beating the game

when in reality I was only beating the shop. At the same time the

tape-reading ability that trading in bucket-shops developed in me and

the training of my memory have been extremely valuable. Both of these

things came easy to me. I owe my early success as a trader to them and

not to my brains or knowledge, because my mind was untrained and my

ignorance was colossal. The game taught me the game. And it didn’t

spare the rod while teaching.

I remember my very first day in New York. I told you how the bucket

shops, by refusing to take my business, drove me to seek a reputable

commission house. One of the boys in the office where I got my first

job was working for Harding Brothers, members of the New York Stock

Exchange. I arrived in this city in the morning, and before one o’clock

that same day I had opened an account with the firm and was ready to

trade.

I didn’t explain to you how natural it was for me to trade there

exactly as I had done in the bucket shops, where all I did was to bet

on fluctuations and catch small but sure changes in prices. Nobody

offered to point out the essential differences or set me right. If

somebody had told me my method would not work I nevertheless would have

tried it out to make sure for myself, for when I am wrong only one

thing convinces me of it, and that is, to lose money. And I am only

right when I make money. That is speculating.

They were having some pretty lively times those days and the market was

very active. That always cheers up a fellow. I felt at home right away.

There was the old familiar quotation board in front of me, talking a

language that I had learned before I was fifteen years old. There was

a boy doing exactly the same thing I used to do in the first office

I ever worked in. There were the customers--same old bunch--looking

at the board or standing by the ticket calling out the prices and

talking about the market. The machinery was to all appearances the

same machinery that I was used to. The atmosphere was the atmosphere

I had breathed since I had made my first stock-market money--$3.12

in Burlington. The same kind of ticker and the same kind of traders,

therefore the same kind of game. And remember, I was only twenty-two. I

suppose I thought I knew the game from A to Z. Why shouldn’t I?

I watched the board and saw something that looked good to me. It was

behaving right. I bought a hundred at 84. I got out at 85 in less than

a half hour. Then I saw something else I liked, and I did the same

thing; took three-quarters of a point net within a very short time. I

began well, didn’t I?

Now mark this: On that, my first day as a customer of a reputable Stock

Exchange house, and only two hours of it at that, I traded in eleven

hundred shares of stock, jumping in and out. And the net result of the

day’s operations was that I lost exactly eleven hundred dollars. That

is to say, on my first attempt, nearly one-half of my stake went up the

flue. And remember, some of the trades showed me a profit. But I quit

eleven hundred dollars minus for the day.

It didn’t worry me, because I couldn’t see where there was anything

wrong with me. My moves, also, were right enough, and if I had been

trading in the old Cosmopolitan shop I’d have broken better than even.

That the machine wasn’t as it ought to be, my eleven hundred vanished

dollars plainly told me. But as long as the machinist was all right

there was no need to stew. Ignorance at twenty-two isn’t a structural

defect.

After a few days I said to myself, “I can’t trade this way here. The

ticker doesn’t help as it should!” But I let it go at that without

getting down to bed rock. I kept it up, having good days and bad days,

until I was cleaned out. I went to old Fullerton and got him to stake

me to five hundred dollars. And I came back from St. Louis, as I told

you, with money I took out of the bucket shops there--a game I could

always beat.

I played more carefully and did better for a while. As soon as I was in

easy circumstances I began to live pretty well. I made friends and had

a good time. I was not quite twenty-three, remember; all alone in New

York with easy money in my pockets and the belief in my heart that I

was beginning to understand the new machine.

I was making allowances for the actual execution of my orders on the

floor of the Exchange, and moving more cautiously. But I was still

sticking to the tape--that is, I was still ignoring general principles;

and as long as I did that I could not spot the exact trouble with my

game.

We ran into the big boom of 1901 and I made a great deal of

money--that is, for a boy. You remember those times? The prosperity

of the country was unprecedented. We not only ran into an era of

industrial consolidations and combinations of capital that beat

anything we had had up to that time, but the public went stock mad.

In previous flush times, I have heard, Wall Street used to brag of

two-hundred-and-fifty-thousand-share days, when securities of a par

value of twenty-five million dollars changed hands. But in 1901 we had

a three-million-share day. Everybody was making money. The steel crowd

came to town, a horde of millionaires with no more regard for money

than drunken sailors. The only game that satisfied them was the stock

market. We had some of the biggest high rollers the Street ever saw:

John W. Gates, of ‘Bet-you-a-million’ fame, and his friends, like John

A. Drake, Loyal Smith, and the rest; the Reid-Leeds-Moore crowd, who

sold part of their steel holdings and with the proceeds bought in the

open market the actual majority of the stock of the great Rock Island

system; and Schwab and Frick and Phipps and the Pittsburg coterie; to

say nothing of scores of men who were lost in the shuffle but would

have been called great plungers at any other time. A fellow could

buy and sell all the stock there was. Keene made a market for the

U.S. Steel shares. A broker sold one hundred thousand shares in a few

minutes. A wonderful time! And there were some wonderful winnings. And

no taxes to pay on stock sales! And no day of reckoning in sight.

Of course, after a while, I heard a lot of calamity howling and the

old stagers said everybody--except themselves--had gone crazy. But

everybody except themselves was making money. I knew, of course, there

must be a limit to the advances and an end to the crazy buying of

A.O.T.--Any Old Thing--and I got bearish. But every time I sold I lost

money, and if it hadn’t been that I ran darn quick I’d have lost a

heap more. I looked for a break, but I was playing safe--making money

when I bought and chipping it out when I sold short--so that I wasn’t

profiting by the boom as much as you’d think when you consider how

heavily I used to trade, even as a boy.

There was one stock that I wasn’t short of, and that was Northern

Pacific. My tape reading came in handy. I thought most stocks had been

bought to a standstill, but Little Nipper behaved as if it were going

still higher. We know now that both the common and the preferred were

being steadily absorbed by the Kuhn-Loeb-Harriman combination. Well,

I was long a thousand shares of Northern Pacific common, and held it

against the advice of everybody in the office. When it got to about 110

I had thirty points profit, and I grabbed it. It made my balance at my

brokers’ nearly fifty thousand dollars, the greatest amount of money

I had been able to accumulate up to that time. It wasn’t so bad for

a chap who had lost every cent trading in that selfsame office a few

months before.

If you remember, the Harriman crowd notified Morgan and Hill of their

intention to be represented in the Burlington-Great Northern-Northern

Pacific combination, and then the Morgan people at first instructed

Keene to buy fifty thousand shares of N.P. to keep the control in

their possession. I have heard that Keene told Robert Bacon to make

the order one hundred and fifty thousand shares and the bankers did.

At all events, Keene sent one of his brokers, Eddie Norton, into the

N.P. crowd and he bought one hundred thousand shares of the stock.

This was followed by another order, I think, of fifty thousand shares

additional, and the famous corner followed. After the market closed on

May 8, 1901, the whole world knew that a battle of financial giants was

on. No two such combinations of capital had ever opposed each other in

this country. Harriman against Morgan; an irresistible force meeting an

immovable object.

There I was on the morning of May ninth with nearly fifty thousand

dollars in cash and no stocks. As I told you, I had been very bearish

for some days, and here was my chance at last. I knew what would

happen--an awful break and then some wonderful bargains. There would

be a quick recovery and big profits--for those who had picked up the

bargains. It didn’t take Sherlock Holmes to figure this out. We were

going to have an opportunity to catch them coming and going, not only

for big money but for sure money.

Everything happened as I had foreseen. I was dead right and--I lost

every cent I had! I was wiped out by something that was unusual. If

the unusual never happened there would be no difference in people and

then there wouldn’t be any fun in life. The game would become merely

a matter of addition and subtraction. It would make of us a race of

bookkeepers with plodding minds. It’s the guessing that develops a

man’s brain power. Just consider what you have to do to guess right.

The market fairly boiled, as I had expected. The transactions were

enormous and the fluctuations unprecedented in extent. I put in a lot

of selling orders at the market. When I saw the opening prices I had a

fit, the breaks were so awful. My brokers were on the job. They were

as competent and conscientious as any; but by the time they executed

my orders the stocks had broken twenty points more. The tape was way

behind the market and reports were slow in coming in by reason of the

awful rush of business. When I found out that the stocks I had ordered

sold when the tape said the price was, say, 100 and they got mine

off at 80, making a total decline of thirty or forty points from the

previous night’s close, it seemed to me that I was putting out shorts

at a level that made the stocks I sold the very bargains I had planned

to buy. The market was not going to drop right through to China. So I

decided instantly to cover my shorts and go long.

My brokers bought; not at the level that had made me turn, but at the

prices prevailing in the Stock Exchange when their floor man got my

orders. They paid an average of fifteen points more than I had figured

on. A loss of thirty-five points in one day was more than anybody could

stand.

The ticker beat me by lagging so far behind the market. I was

accustomed to regarding the tape as the best little friend I had

because I bet according to what it told me. But this time the tape

double-crossed me. The divergence between the printed and the actual

prices undid me. It was the sublimation of my previous unsuccess, the

selfsame thing that had beaten me before. It seems so obvious now that

tape reading is not enough, irrespective of the brokers’ execution,

that I wonder why I didn’t then see both my trouble and the remedy for

it.

I did worse than not see it; I kept on trading, in and out, regardless

of the execution. You see, I never could trade with a limit. I must

take my chances with the market. That is what I am trying to beat--the

market, not the particular price. When I think I should sell, I sell.

When I think stocks will go up, I buy. My adherence to that general

principle of speculation saved me. To have traded at limited prices

simply would have been my old bucket-shop method inefficiently adapted

for use in a reputable commission broker’s office. I would never have

learned to know what stock speculation is, but would have kept on

betting on what a limited experience told me was a sure thing.

Whenever I did try to limit the prices in order to minimize the

disadvantages of trading at the market when the ticker lagged, I simply

found that the market got away from me. This happened so often that I

stopped trying. I can’t tell you how it came to take me so many years

to learn that instead of placing piking bets on what the next few

quotations were going to be, my game was to anticipate what was going

to happen in a big way.

After my May ninth mishap I plugged along, using a modified but still

defective method. If I hadn’t made money some of the time I might have

acquired market wisdom quicker. But I was making enough to enable me

to live well. I liked friends and a good time. I was living down the

Jersey Coast that summer, like hundreds of prosperous Wall Street men.

My winnings were not quite enough to offset both my losses and my

living expenses.

I didn’t keep on trading the way I did through stubbornness. I simply

wasn’t able to state my own problem to myself, and, of course, it was

utterly hopeless to try to solve it. I harp on this topic so much to

show what I had to go through before I got to where I could really make

money. My old shotgun and BB shot could not do the work of a high-power

repeating rifle against big game.

Early that fall I not only was cleaned out again but I was so sick

of the game I could no longer beat that I decided to leave New York

and try something else some other place. I had been trading since my

fourteenth year. I had made my first thousand dollars when I was a kid

of fifteen, and my first ten thousand before I was twenty-one. I had

made and lost a ten-thousand-dollar stake more than once. In New York

I had made thousands and lost them. I got up to fifty thousand dollars

and two days later that went. I had no other business and knew no other

game. After several years I was back where I began. No--worse, for I

had acquired habits and a style of living that required money; though

that part didn’t bother me as much as being wrong so consistently.