Chapter 10

Chapter X

The recognition of our own mistakes should not benefit us any more

than the study of our successes. But there is a natural tendency in

all men to avoid punishment. When you associate certain mistakes with

a licking, you do not hanker for a second dose, and, of course, all

stock-market mistakes wound you in two tender spots--your pocketbook

and your vanity. But I will tell you something curious: A stock

speculator sometimes makes mistakes and knows that he is making them.

And after he makes them he will ask himself why he made them; and

after thinking over it cold-bloodedly a long time after the pain of

punishment is over he may learn how he came to make them, and when, and

at what particular point of his trade; but not why. And then he simply

calls himself names and lets it go at that.

Of course, if a man is both wise and lucky, he will not make the same

mistake twice. But he will make any one of the ten thousand brothers or

cousins of the original. The Mistake family is so large that there is

always one of them around when you want to see what you can do in the

fool-play line.

To tell you about the first of my million-dollar mistakes I shall have

to go back to this time when I first became a millionaire, right after

the big break of October, 1907. As far as my trading went, having a

million merely meant more reserves. Money does not give a trader more

comfort, because, rich or poor, he can make mistakes and it is never

comfortable to be wrong. And when a millionaire is right his money

is merely one of his several servants. Losing money is the least of

my troubles. _A loss never bothers me after I take it. I forget it

overnight. But being wrong--not taking the loss--that is what does the

damage to the pocketbook and to the soul._ You remember Dickson G.

Watts’ story about the man who was so nervous that a friend asked him

what was the matter.

“I can’t sleep,” answered the nervous one.

“Why not?” asked the friend.

“I am carrying so much cotton that I can’t sleep thinking about it. It

is wearing me out. What can I do?”

“Sell down to the sleeping point,” answered the friend.

As a rule a man adapts himself to conditions so quickly that he loses

the perspective. He does not feel the difference much--that is, he

does not vividly remember how it felt not to be a millionaire. He only

remembers that there were things he could not do that he can do now. It

does not take a reasonably young and normal man very long to lose the

habit of being poor. It requires a little longer to forget that he used

to be rich. I suppose that is because money creates needs or encourages

their multiplication. I mean that after a man makes money in the stock

market he very quickly loses the habit of not spending. But after he

loses his money it takes him a long time to lose the habit of spending.

After I took in my shorts and went long in October, 1907, I decided to

take it easy for a while. I bought a yacht and planned to go off on a

cruise in Southern waters. I am crazy about fishing and I was due to

have the time of my life. I looked forward to it and expected to go any

day. But I did not. The market wouldn’t let me.

_I always have traded in commodities as well as in stocks._ I began as

a youngster in the bucket shops. I studied those markets for years,

though perhaps not so assiduously as the stock market. As a matter

of fact, _I would rather play commodities than stocks_. There is no

question about their greater legitimacy, as it were. It partakes more

of the nature of a commercial venture than trading in stocks does.

A man can approach it as he might any mercantile problem. It may be

possible to use fictitious arguments for or against a certain trend in

a commodity market; but success will be only temporary, _for in the

end the facts are bound to prevail_, so that a trader gets dividends

on study and observation, as he does in a regular business. He can

watch and weigh conditions and he knows as much about it as anyone

else. He need not guard against inside cliques. Dividends are not

unexpectedly passed or increased overnight in the cotton market or in

wheat or corn. _In the long run commodity prices are governed but by

one law--the economic law of demand and supply._ The business of the

trader in commodities is simply to get facts about the demand and the

supply, present and prospective. He does not indulge in guesses about a

dozen things as he does in stocks. It always appealed to me--trading in

commodities.

Of course the same things happen in all speculative markets. The

message of the tape is the same. That will be perfectly plain to

anyone who will take the trouble to think. He will find if he asks

himself questions and considers conditions, that the answers will

supply themselves directly. But people never take the trouble to

ask questions, leave alone seeking answers. The average American is

from Missouri everywhere and at all times except when he goes to

the brokers’ offices and looks at the tape, whether it is stocks or

commodities. The one game of all games that really requires study

before making a play is the one he goes into without his usual highly

intelligent preliminary and precautionary doubts. _He will risk half

his fortune in the stock market with less reflection than he devotes to

the selection of a medium-priced automobile._

This matter of tape reading is not so complicated as it appears. Of

course you need experience. But it is even more important to keep

certain fundamentals in mind. To read the tape is not to have your

fortune told. The tape does not tell you how much you will surely be

worth next Thursday at 1:35 P.M. The object of reading the tape is to

ascertain, first, how and, next, when to trade--that is, whether it is

wiser to buy than to sell. It works exactly the same for stocks as for

cotton or wheat or corn or oats.

You watch the market--that is, the course of prices as recorded by the

tape--with one object: to determine the direction--that is, the price

tendency. Prices, we know, will move either up or down according to the

resistance they encounter. For purposes of easy explanation we will

say that _prices, like everything else, move along the line of least

resistance_. They will do whatever comes easiest, therefore they will

go up if there is less resistance to an advance than to a decline; and

vice versa.

Nobody should be puzzled as to whether a market is a bull market or a

bear market after it fairly starts. The trend is evident to a man who

has an open mind and reasonably clear sight, for it is never wise for a

speculator to fit his facts to his theories. Such a man will, or ought

to, know whether it is a bull or a bear market, and if he knows that he

knows whether to buy or to sell. It is therefore at the very inception

of the movement that a man needs to know whether to buy or to sell.

Let us say, for example, that the market, as it usually does in those

between-swings times, fluctuates within a range of ten points; up to

130 and down to 120. It may look very weak at the bottom; or, on the

way up, after a rise of eight or ten points, it may look as strong as

anything. A man ought not to be led into trading by tokens. _He should

wait until the tape tells him that the time is ripe. As a matter of

fact, millions upon millions of dollars have been lost by men who

bought stocks because they looked cheap or sold them because they

looked dear. The speculator is not an investor. His object is not to

secure a steady return on his money at a good rate of interest, but to

profit by either a rise or a fall in the price of whatever he may be

speculating in. Therefore the thing to determine is the speculative

line of least resistance at the moment of trading; and what he should

wait for is the moment when that line defines itself, because that is

his signal to get busy._

Reading the tape merely enables him to see that at 130 the selling had

been stronger than the buying and a reaction in the price logically

followed. Up to the point where the selling prevailed over the buying,

superficial students of the tape may conclude that the price is not

going to stop short of 150, and they buy. But after the reaction

begins to hold on, or sell out at a small loss, or they go short and

talk bearish. But at 120 there is stronger resistance to the decline.

The buying prevails over the selling, there is a rally and the shorts

cover. The public is so often whipsawed that one marvels at their

persistence in not learning their lesson.

Eventually something happens that increases the power of either the

upward or the downward force and the point of greatest resistance moves

up or down--that is, the buying at 130 will for the first time be

stronger than the selling, or the selling at 120 be stronger than the

buying. The price will break through the old barrier or movement-limit

and go on. As a rule, there is always a crowd of traders who are short

at 120 because it looked so weak, or long at 130 because it looked so

strong, and, when the market goes against them they are forced, after a

while, either to change their minds and turn or to close out. In either

event they help to define even more clearly the price line of least

resistance. Thus the intelligent trader who has patiently waited to

determine this line will enlist the aid of fundamental trade conditions

and also of the force of the trading of that part of the community that

happened to guess wrong and must now rectify mistakes. Such corrections

tend to push prices along the line of least resistance.

And right here I will say that, though I do not give it as a

mathematical certainty or as an axiom of speculation, my experience

has been that accidents--that is, the unexpected or unforeseen--have

always helped me in my market position whenever the latter has been

based upon my determination of the line of least resistance. Do you

remember that Union Pacific episode at Saratoga that I told you about?

Well, I was long because I found out that the line of least resistance

was upward. I should have stayed long instead of letting my broker tell

me that insiders were selling stocks. It didn’t make any difference

what was going on in the directors’ minds. That was something I

couldn’t possibly know. But I could and did know that the tape said:

“Going up!” And then came the unexpected raising of the dividend rate

and the thirty-point rise in the stock. At 164 prices looked mighty

high, but as I told you before, _stocks are never too high to buy

or too low to sell_. _The price_, per se, _has nothing to do with

establishing my line of least resistance._

You will find in actual practice that if you trade as I have indicated

any important piece of news given out between the closing of one market

and the opening of another is usually in harmony with the line of

least resistance. _The trend has been established before the news is

published, and in bull markets bear items are ignored and bull news

exaggerated, and vice versa._ Before the war broke out the market was

in a very weak condition. There came the proclamation of Germany’s

submarine policy. I was short one hundred and fifty thousand shares of

stock, not because I knew the news was coming, but because I was going

along the line of least resistance. What happened came out of a clear

sky, as far as my play was concerned. Of course I took advantage of the

situation and I covered my shorts that day.

It sounds very easy to say that all you have to do is to watch the

tape, establish your resistance points and be ready to trade along the

line of least resistance as soon as you have determined it. _But in

actual practice a man has to guard against many things, and most of all

against himself_--that is, against human nature. That is the reason

why I say that the man who is right always has two forces working in

his favor--_basic conditions and the men who are wrong_. _In a bull

market bear factors are ignored._ That is human nature, and yet human

beings profess astonishment at it. People will tell you that the wheat

crop has gone to pot because there has been bad weather in one or two

sections and some farmers have been ruined. When the entire crop is

gathered and all the farmers in all the wheat-growing sections begin

to take their wheat to the elevators the bulls are surprised at the

smallness of the damage. They discover that they merely have helped the

bears.

When a man makes his play in a commodity market he must not permit

himself set opinions. He must have an open mind and flexibility. _It

is not wise to disregard the message of the tape, no matter what

your opinion of crop conditions or of the probable demand may be._

I recall how I missed a big play just by trying to anticipate the

starting signal. I felt so sure of conditions that I thought it was not

necessary to wait for the line of least resistance to define itself. I

even thought I might help it arrive, because it looked as if it merely

needed a little assistance.

I was very bullish on cotton. It was hanging around twelve cents,

running up and down within a moderate range. It was in one of those

in-between places and I could see it. I knew I really ought to wait.

But I got to thinking that if I gave it a little push it would go

beyond the upper resistance point.

I bought fifty thousand bales. Sure enough, it moved up. And sure

enough, as soon as I stopped buying it stopped going up. Then it began

to settle back to where it was when I began buying it. I got out and

it stopped going down. I thought I was now much nearer the starting

signal, and presently I thought I’d start it myself again. I did.

The same thing happened. I bid it up, only to see it go down when I

stopped. I did this four or five times until I finally quit in disgust.

It cost me about two hundred thousand dollars. I was done with it. It

wasn’t very long after that when it began to go up and never stopped

till it got to a price that would have meant a killing for me--if I

hadn’t been in such a great hurry to start.

This experience has been the experience of so many traders so many

times that I can give this rule: _In a narrow market, when prices

are not getting anywhere to speak of but move within a narrow range,

there is no sense in trying to anticipate what the next big movement

is going to be--up or down._ The thing to do is to watch the market,

read the tape to determine the limits of the get-nowhere prices, and

make up your mind that you will not take an interest until the price

breaks through the limit in either direction. A speculator must concern

himself with making money out of the market and not with insisting that

the tape must agree with him. Never argue with it or ask it for reasons

or explanations. _Stock-market post-mortems don’t pay dividends._

Not so long ago I was with a party of friends. They got to talking

wheat. Some of them were bullish and others bearish. Finally they asked

me what I thought. Well, I had been studying the market for some time.

I knew they did not want any statistics or analyses of conditions. So I

said: “If you want to make some money out of wheat I can tell you how

to do it.”

They all said they did and I told them, “If you are sure you wish to

make money in wheat just you watch it. Wait. The moment it crosses

$1.20 buy it and you will get a nice quick play in it!”

“Why not buy it now, at $1,14?” one of the party asked.

“Because I don’t know yet that it is going up at all.”

“Then why buy it at $1.20? It seems a mighty high price.”

“Do you wish to gamble blindly in the hope of getting a great big

profit or do you wish to speculate intelligently and get a smaller but

much more probable profit?”

They all said they wanted the smaller but surer profit, so I said,

“Then do as I tell you. If it crosses $1.20 buy.”

As I told you, I had watched it a long time. For months it sold between

$1.10 and $1.20, getting nowhere in particular. Well, sir, one day it

closed at above $1.19. I got ready for it. Sure enough the next day it

opened at $1.20½, and I bought. It went to $1.21, to $1.22, to $1.23,

to $1.25, and I went with it.

Now I couldn’t have told you at the time just what was going on. I

didn’t get any explanations about its behaviour during the course of

the limited fluctuations. I couldn’t tell whether the breaking through

the limit would be up through $1.20 or down through $1.10, though I

suspected it would be up because there was not enough wheat in the

world for a big break in prices.

As a matter of fact, it seems Europe had been buying quietly and a lot

of traders had gone short of it at around $1.19. Owing to the European

purchases and other causes, a lot of wheat had been taken out of the

market, so that finally the big movement got started. The price went

beyond the $1.20 mark. That was all the point I had and it was all

I needed. I knew that when it crossed $1.20 it would be because the

upward movement at last had gathered force to push it over the limit

and something had to happen. In other words, by crossing $1.20 the line

of least resistance of wheat prices was established. It was a different

story then.

I remember that one day was a holiday with us and all our markets were

closed. Well, in Winnipeg wheat opened up six cents a bushel. When our

market opened on the following day, it also was up six cents a bushel.

The price just went along the line of least resistance.

What I have told you gives you the essence of my trading system as

based on studying the tape. I merely learn the way prices are most

probably going to move. I check up my own trading by additional tests,

to determine the psychological moment. _I do that by watching the way

the price acts after I begin._

It is surprising how many experienced traders there are who look

incredulous when I tell them that when I buy stocks for a rise I like

to pay top prices and when I sell I must sell low or not at all. It

would not be so difficult to make money if a trader always stuck to his

speculative guns--that is, waited for the line of least resistance to

define itself and began buying only when the tape said up or selling

only when it said down. _He should accumulate his line on the way up._

Let him buy one-fifth of his full line. If that does not show him a

profit he must not increase his holdings because he has obviously begun

wrong; he is wrong temporarily and there is no profit in being wrong

at any time. The same tape that said UP did not necessarily lie merely

because it is now saying NOT YET.

In cotton I was very successful in my trading for a long time. I had my

theory about it and I absolutely lived up to it. Suppose I had decided

that my line would be forty to fifty thousand bales. Well, I would

study the tape as I told you, watching for an opportunity either to

buy or to sell. Suppose the line of least resistance indicated a bull

movement. Well, I would buy ten thousand bales. After I got through

buying that, if the market _went up ten points over my initial purchase

price, I would take on another ten thousand bales_. Same thing. Then,

if I could get twenty points’ profit, or one dollar a bale, I would

buy twenty thousand more. That would give me my line--my basis for my

trading. But if after buying the first ten or twenty thousand bales,

it showed me a loss, out I’d go. I was wrong. It might be I was only

temporarily wrong. But as I have said before _it doesn’t pay to start

wrong in anything_.

What I accomplished by sticking to my system was that I always had a

line of cotton in every real movement. In the course of accumulating

my full line I might chip out fifty or sixty thousand dollars in these

feeling-out plays of mine. This looks like a very expensive testing,

but it wasn’t. After the real movement started, how long would it take

me to make up the fifty thousand dollars I had dropped in order to

make sure that I began to load up at exactly the right time? No time at

all! _It always pays a man to be right at the right time._

As I think I also said before, this describes what I may call my system

for placing my bets. It is simple arithmetic to prove that it is a wise

thing to have the big bet down only when you win, and when you lose to

lose only a small exploratory bet, as it were. If a man trades in the

way I have described, he will always be in the profitable position of

being able to cash in on the big bet.

Professional traders have always had some system or other based

upon their experience and governed either by their attitude toward

speculation or by their desires. I remember I met an old gentleman in

Palm Beach whose name I did not catch or did not at once identify. I

knew he had been in the Street for years, way back in Civil War times,

and somebody told me that he was a very wise old codger who had gone

through so many booms and panics that he was always saying there was

nothing new under the sun and least of all in the stock market.

The old fellow asked me a lot of questions. When I got through telling

him about my usual practice in trading he nodded and said, “Yes! Yes!

You’re right. The way you’re built, the way your mind runs, makes your

system a good system for you. It comes easy for you to practice what

you preach, because the money you bet is the least of your cares. I

recollect Pat Hearne. Ever hear of him? Well, he was a very well-known

sporting man and he had an account with us. Clever chap and nervy. He

made money in stocks, and that made people ask him for advice. He would

never give any. If they asked him point-blank for his opinion about

the wisdom of their commitments he used a favorite race-track maxim of

his: ‘You can’t tell till you bet.’ He traded in our office. He would

buy one hundred shares of some active stock and when, or if, it went up

1 per cent he would buy another hundred. On another point’s advance,

another hundred shares; and so on. He used to say he wasn’t playing the

game to make money for others and therefore he would put in a stop-loss

order one point below the price of his last purchase. When the price

kept going up he simply moved up his stop with it. On a 1 per cent

reaction he was stopped out. He declared he did not see any sense in

losing more than one point, whether it came out of his original margin

or out of his paper profits.

“You know, a professional gambler is not looking for long shots,

but for sure money. Of course long shots are fine when they come

in. In the stock market Pat wasn’t after tips or playing to catch

twenty-points-a-week advances, but sure money in sufficient quantity

to provide him with a good living. Of all the thousands of outsiders

that I have run across in Wall Street, Pat Hearne was the only one who

saw in stock speculation merely a game of chance like faro or roulette,

but, nevertheless, had the sense to stick to a relatively sound betting

method.

“After Hearne’s death one of our customers who had always traded with

Pat and used his system made over one hundred thousand dollars in

Lackawanna. Then he switched over to some other stock and because he

had made a big stake he thought he need not stick to Pat’s way. When a

reaction came, instead of cutting short his losses he let them run--as

though they were profits. Of course every cent went. When he finally

quit he owed us several thousand dollars.

“He hung around for two or three years. He kept the fever long after

the cash had gone; but we did not object as long as he behaved himself.

I remember that he used to admit freely that he had been ten thousand

kinds of an ass not to stick to Pat Hearne’s style of play. Well, one

day he came to me greatly excited and asked me to let him sell some

stock short in our office. He was a nice enough chap who had been a

good customer in his day and I told him I personally would guarantee

his account for one hundred shares.

“He sold short one hundred shares of Lake Shore. That was the time Bill

Travers hammered the market, in 1875. My friend Roberts put out that

Lake Shore at exactly the right time and kept selling it on the way

down as he had been wont to do in the old successful days before he

forsook Pat Hearne’s system and instead listened to hope’s whispers.

“Well, sir, in four days of successful pyramiding, Roberts’ account

showed him a profit of fifteen thousand dollars. Observing that he had

not put in a stop-loss order I spoke to him about it and he told me

that the break hadn’t fairly begun and he wasn’t going to be shaken

out by any one-point reaction. This was in August. Before the middle

of September he borrowed ten dollars from me for a baby carriage--his

fourth. He did not stick to his own proved system. That’s the trouble

with most of them,” and the old fellow shook his head at me.

And he was right. I sometimes think that speculation must be an

unnatural sort of business, because I find that the average speculator

has arrayed against him his own nature. The weaknesses that all men

are prone to are fatal to success in speculation--usually those very

weaknesses that make him likable to his fellows or that he himself

particularly guards against in those other ventures of his where

they are not nearly so dangerous as when he is trading in stocks or

commodities.

_The speculator’s chief enemies are always boring from within. It is

inseparable from human nature to hope and to fear._ In speculation when

the market goes against you you hope that every day will be the last

day--and you lose more than you should had you not listened to hope--to

the same ally that is so potent a success-bringer to empire builders

and pioneers, big and little. And when the market goes your way you

become fearful that the next day will take away your profit, and you

get out--too soon. _Fear keeps you from making as much money as you

ought to._ The successful trader has to fight these two deep-seated

instincts. He has to reverse what you might call his natural impulses.

_Instead of hoping he must fear; instead of fearing he must hope._ He

must fear that his loss may develop into a much bigger loss, and hope

that his profit may become a big profit. _It is absolutely wrong to

gamble in stocks the way the average man does._

I have been in the speculative game ever since I was fourteen. It is

all I have ever done. I think I know what I am talking about. And the

conclusion that I have reached after nearly thirty years of constant

trading, both on a shoestring and with millions of dollars back of

me, is this: A man may beat a stock or a group at a certain time, but

no man living can beat the stock market! A man may make money out of

individual deals in cotton or grain, but no man can beat the cotton

market or the grain market. It’s like the track. A man may beat a horse

race, but he cannot beat horse racing.

If I knew how to make these statements stronger or more emphatic I

certainly would. It does not make any difference what anybody says to

the contrary. I know I am right in saying these are incontrovertible

statements.