Chapter 05

Chapter V

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.

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.

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.

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.

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. 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.

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.

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.

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.

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.

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.

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.

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.

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 “rightness” entitled me to. Why wasn’t I?

There was as much to learn from partial victory as from defeat.

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._

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.

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. 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!_

_This semisucker is the type that thinks he has cut his wisdom teeth

because he loves to buy on declines._ 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.

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.

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.

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!”

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.

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.

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.

“Yes, Mr. Harwood, I still have it. Of course!” said Turkey gratefully.

It was nice of Elmer to think of the old chap.

“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!”

From his voice and manner you would have conservatively estimated it at

ten thousand shares.

But Mr. Partridge shook his head regretfully and whined, “No! No! I

can’t do that!”

“What?” yelled Elmer.

“I simply can’t!” said Mr. Partridge. He was in great trouble.

“Didn’t I give you the tip to buy it?”

“You did, Mr. Harwood, and I am very grateful to you. Indeed, I am,

sir. But----”

“Hold on! Let me talk! And didn’t that stock go up seven points in ten

days? Didn’t it?”

“It did, and I am much obliged to you, my dear boy. But I couldn’t

think of selling that stock.”

“You couldn’t?” asked Elmer, beginning to look doubtful himself. It is

a habit with most tip givers to be tip takers.

“No, I couldn’t.”

“Why not?” And Elmer drew nearer.

“Why, this is a bull market!” The old fellow said it as though he had

given a long and detailed explanation.

“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.”

“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_?”

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!”

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?”

“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.

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.

I think it was a long step forward in my 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.

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 was always 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.

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 saving what he did. He had not

only the courage of his convictions but the intelligent patience to sit

tight.

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 the 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.

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.

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. 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.

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!