Chapter 15

Chapter XV

Among the hazards of speculation the happening of the unexpected--I

might even say of the unexpectable--ranks high. _There are certain

chances that the most prudent man is justified in taking--chances

that he must take if he wishes to be more than a mercantile mollusk._

Normal business hazards are no worse than the risks a man runs when

he goes out of his house into the street or sets out on a railroad

journey. When I lose money by reason of some development which nobody

could foresee I think no more vindictively of it than I do of an

inconveniently timed storm. Life itself from the cradle to the grave is

a gamble and what happens to me because I do not possess the gift of

second sight I can bear undisturbed. But there have been times in my

career as a speculator when I have both been right and played square

and nevertheless I have been cheated out of my earnings by the sordid

unfairness of unsportsmanlike opponents.

Against misdeeds by crooks, cowards and crowds a quick-thinking or

far-sighted businessman can protect himself. I have never gone up

against downright dishonesty except in a bucket shop or two because

even there honesty was the best policy; the big money was in being

square and not in welshing. I have never thought it good business to

play any game in any place where it was necessary to keep an eye on

the dealer because he was likely to cheat if unwatched. But against

the whining welsher the decent man is powerless. Fair play is fair

play. I could tell you a dozen instances where I have been the victim

of my own belief in the sacredness of the pledged word or of the

inviolability of a gentlemen’s agreement. I shall not do so because no

useful purpose can be served thereby.

Fiction writers, clergymen and women are fond of alluding to the floor

of the Stock Exchange as a boodlers’ battlefield and to Wall Street’s

daily business as a fight. It is quite dramatic but utterly misleading.

I do not think that my business is strife and contest. I never

fight either individuals or speculative cliques. I merely differ in

opinion--that is, in my reading of basic conditions. What playwrights

call battles of business are not fights between human beings. They are

merely tests of business vision. _I try to stick to facts and facts

only, and govern my actions accordingly. That is Bernard M. Baruch’s

recipe for success in wealth-winning._ Sometimes I do not see the

facts--all the facts--clearly enough or early enough; or else I do not

reason logically. Whenever any of these things happen I lose. I am

wrong. And it always costs me money to be wrong.

No reasonable man objects to paying for his mistakes. There are no

preferred creditors in mistake-making and no exceptions or exemptions.

But I object to losing money when I am right. I do not mean, either,

those deals that have cost me money because of sudden changes in the

rules of some particular exchange. I have in mind certain hazards of

speculation that from time to time remind a man that no profit should

be counted safe until it is deposited in your bank to your credit.

After the Great War broke out in Europe there began the rise in the

prices of commodities that was to be expected. It was as easy to

foresee that as to foresee war inflation. Of course the general advance

continued as the war prolonged itself. As you may remember, I was busy

“coming back” in 1915. The boom in stocks was there and it was my duty

to utilise it. My safest, easiest and quickest big play was in the

stock market, and I was lucky, as you know.

By July, 1917, I not only had been able to pay off all my debts but was

quite a little to the good besides. This meant that I now had the time,

the money and the inclination to consider trading in commodities as

well as in stocks. For many years I have made it my practice to study

all the markets. The advance in commodity prices over the pre-war level

ranged from 100 to 400 per cent. There was only one exception, and that

was coffee. Of course there was a reason for this. The breaking out

of the war meant the closing up of European markets and huge cargoes

were sent to this country, which was the one big market. That led in

time to an enormous surplus of raw coffee here, and that, in turn, kept

the price low. Why, when I first began to consider its speculative

possibilities coffee was actually selling below pre-war prices. If the

reasons for this anomaly were plain, no less plain was it that the

active and increasingly efficient operation by the German and Austrian

submarines must mean an appalling reduction in the number of ships

available for commercial purposes. This eventually in turn must lead

to dwindling imports of coffee. With reduced receipts and an unchanged

consumption the surplus stocks must be absorbed, and when that happened

the price of coffee must do what the prices of all other commodities

had done, which was, go way up.

It didn’t require a Sherlock Holmes to size up the situation. Why

everybody did not buy coffee I cannot tell you. When I decided to

buy it I did not consider it a speculation. It was much more of an

investment. I knew it would take time to cash in, but I knew also

that it was bound to yield a good profit. That made it a conservative

investment operation--a banker’s act rather than a gambler’s play.

I started my buying operations in the winter of 1917. I took quite

a lot of coffee. The market, however, did nothing to speak of. It

continued inactive and as for the price, it did not go up as I had

expected. The outcome of it all was that I simply carried my line to

no purpose for nine long months. My contracts expired then and I sold

out all my options. I took a whopping big loss on that deal and yet I

was sure my views were sound. I had been clearly wrong in the matter of

time, but I was confident that coffee must advance as all commodities

had done, so that no sooner had I sold out my line than I started in to

buy again. I bought three times as much coffee as I had so unprofitably

carried during those nine disappointing months. Of course I bought

deferred options--for as long a time as I could get.

I was not so wrong now. As soon as I had taken on my trebled line the

market began to go up. People everywhere seemed to realise all of a

sudden what was bound to happen in the coffee market. It began to

look as if my investment was going to return me a mighty good rate of

interest.

The sellers of the contracts I held were roasters, mostly of German

names and affiliations, who had bought the coffee in Brazil confidently

expecting to bring it to this country. But there were no ships to bring

it, and presently they found themselves in the uncomfortable position

of having no end of coffee down there and being heavily short of it to

me up here.

Please bear in mind that I first became bullish on coffee while the

price was practically at a pre-war level, and don’t forget that after I

bought it I carried it the greater part of a year and then took a big

loss on it. The punishment for being wrong is to lose money. The reward

for being right is to make money. Being clearly right and carrying a

big line, I was justified in expecting to make a killing. It would not

take much of an advance to make my profit satisfactory to me, for I was

carrying several hundred thousand bags. I don’t like to talk about my

operations in figures because sometimes they sound rather formidable

and people might think I was boasting. As a matter of fact I trade

in accordance to my means and always leave myself an ample margin

of safety. In this instance I was conservative enough. The reason I

bought options so freely was because I couldn’t see how I could lose.

Conditions were in my favour. I had been made to wait a year, but now I

was going to be paid both for my waiting and for being right. I could

see the profit coming--fast. There wasn’t any cleverness about it. It

was simply that I wasn’t blind.

Coming sure and fast, that profit of millions! But it never reached

me. No; it wasn’t side-tracked by a sudden change in conditions. The

market did not experience an abrupt reversal of form. Coffee did not

pour into the country. What happened? The unexpectable! What had never

happened in anybody’s experience; what I therefore had no reason

to guard against. I added a new one to the long list of hazards of

speculation that I must always keep before me. It was simply that the

fellows who had sold me the coffee, the shorts, knew what was in store

for them, and in their efforts to squirm out of the position into which

they had sold themselves, devised a new way of welshing. They rushed to

Washington for help, and got it.

Perhaps you remember that the Government had evolved various plans

for preventing further profiteering in necessities. You know how

most of them worked. Well, the philanthropic coffee shorts appeared

before the Price Fixing Committee of the War Industries Board--I

think that was the official designation--and made a patriotic appeal

to that body to protect the American breakfaster. They asserted that

a professional speculator, one Lawrence Livingston, had cornered,

or was about to corner, coffee. If his speculative plans were not

brought to naught he would take advantage of the conditions created

by the war and the American people would be forced to pay exorbitant

prices for their daily coffee. It was unthinkable to the patriots who

had sold me cargoes of coffee they couldn’t find ships for, that one

hundred millions of Americans, more or less, should pay tribute to

conscienceless speculators. They represented the coffee trade, not the

coffee gamblers, and they were willing to help the Government curb

profiteering actual or prospective.

Now I have a horror of whiners and I do not mean to intimate that

the Price Fixing Committee was not doing its honest best to curb

profiteering and wastefulness. But that need not stop me from

expressing the opinion that the committee could not have gone very

deeply into the particular problem of the coffee market. They fixed

on a maximum price for raw coffee and also fixed a time limit for

closing out all existing contracts. This decision meant, of course,

that the Coffee Exchange would have to go out of business. There was

only one thing for me to do and I did it, and that was to sell out my

contracts. Those profits of millions that I had deemed as certain to

come my way as any I ever made failed completely to materialise. I was

and am as keen as anybody against the profiteer in the necessaries of

life, but at the time the Price Fixing Committee made their ruling on

coffee, all other commodities were selling at from 250 to 400 per cent

above pre-war prices while raw coffee was actually below the average

prevailing for some years before the war. I can’t see that it made any

real difference who held the coffee. The price was bound to advance;

and the reason for that was not the operations of conscienceless

speculators, but the dwindling surplus for which the diminishing

importations were responsible, and they in turn were affected

exclusively by the appalling destruction of the world’s ships by the

German submarines. The committee did not wait for coffee to start; they

clamped on the brakes.

As a matter of policy and of expediency it was a mistake to force the

Coffee Exchange to close just then. If the committee had let coffee

alone the price undoubtedly would have risen for the reasons I have

already stated, which had nothing to do with any alleged corner.

But the high price--which need not have been exorbitant--would have

been an incentive to attract supplies to this market. I have heard

Mr. Bernard M. Baruch say that the War Industries Board took into

consideration this factor--the insuring of a supply--in fixing prices,

and for that reason some of the complaints about the high limit on

certain commodities were unjust. When the Coffee Exchange resumed

business, later on, coffee sold at twenty-three cents. The American

people paid that price because of the small supply, and the supply

was small because the price had been fixed too low, at the suggestion

of philanthropic shorts, to make it possible to pay the high ocean

freights and thus insure continued importations.

I have always thought that my coffee deal was the most legitimate of

all my trades in commodities. I considered it more of an investment

than a speculation. I was in it over a year. If there was any gambling

it was done by the patriotic roasters with German names and ancestry.

They had coffee in Brazil and they sold it to me in New York. The Price

Fixing Committee fixed the price of the only commodity that had not

advanced. They protected the public against profiteering before it

started, but not against the inevitable higher prices that followed.

Not only that, but even when green coffee hung around nine cents a

pound, roasted coffee went up with everything else. It was only the

roasters who benefited. If the price of green coffee had gone up two or

three cents a pound it would have meant several millions for me. And it

wouldn’t have cost the public as much as the later advance did.

Post-mortems in speculation are a waste of time. They get you nowhere.

But this particular deal has a certain educational value. It was as

pretty as any I ever went into. The rise was so sure, so logical,

that I figured that I simply couldn’t help making several millions of

dollars. But I didn’t.

On two other occasions I have suffered from the action of exchange

committees making rulings that changed trading rules without warning.

But in those cases my own position, while technically right, was not

quite so sound commercially as in my coffee trade. You cannot be dead

sure of anything in a speculative operation. It was the experience I

have just told you that made me add the unexpectable to the unexpected

in my list of hazards.

After the coffee episode I was so successful in other commodities

and on the short side of the stock market, that I began to suffer

from silly gossip. The professionals in Wall Street and the

newspaper writers got the habit of blaming me and my alleged raids

for the inevitable breaks in prices. At times my selling was called

unpatriotic--whether I was really selling or not. The reason for

exaggerating the magnitude and the effect of my operations, I suppose,

was the need to satisfy the public’s insatiable demand for reasons for

each and every price movement.

As I have said a thousand times, no manipulation can put stocks down

and keep them down. There is nothing mysterious about this. The reason

is plain to everybody who will take the trouble to think about it

half a minute. Suppose an operator raided a stock--that is, put the

price down to a level below its real value--what would inevitably

happen? Why, the raider would at once be up against the best kind of

inside buying. The people who know what a stock is worth will always

buy it when it is selling at bargain prices. _If the insiders are not

able to buy, it will be because general conditions are against their

free command of their own resources, and such conditions are not bull

conditions._ When people speak about raids the inference is that the

raids are unjustified; almost criminal. But selling a stock down to

a price much below what it is worth is mighty dangerous business. It

is well to bear in mind that a raided stock that fails to rally is

not getting much inside buying and where there is a raid--that is,

unjustified short selling--there is usually apt to be inside buying;

and when there is that, the price does not stay down. I should say

that in ninety-nine cases out of a hundred, so-called raids are really

legitimate declines, accelerated at times but not primarily caused by

the operations of a professional trader, however big a line he may be

able to swing.

The theory that most of the sudden declines or particular sharp breaks

are the results of some plunger’s operations probably was invented

as an easy way of supplying reasons to those speculators who, being

nothing but blind gamblers, will believe anything that is told them

rather than do a little thinking. The raid excuse for losses that

unfortunate speculators so often receive from brokers and financial

gossipers is really an inverted tip. The difference lies in this: A

bear tip is distinct, positive advice to sell short. But the inverted

tip--that is, the explanation that does not explain--serves merely to

keep you from wisely selling short. _The natural tendency when a stock

breaks badly is to sell it. There is a reason--an unknown reason but a

good reason; therefore, get out._ But it is not wise to get out when

the break is the result of a raid by an operator, because the moment he

stops the price must rebound. Inverted tips!