Chapter 21

Chapter XXI

I am well aware that all these generalities do not sound especially

impressive. Generalities seldom do. Possibly I may succeed better if I

give a concrete example. I’ll tell you how I marked up the price of a

stock 30 points, and in so doing accumulated only seven thousand shares

and developed a market that would absorb almost any amount of stock.

It was Imperial Steel. The stock had been brought out by reputable

people and it had been fairly well tipped as a property of value. About

30 per cent of the capital stock was placed with the general public

through various Wall Street houses, but there had been no significant

activity in the shares after they were listed. From time to time

somebody would ask about it and one or another insider--members of the

original underwriting syndicate--would say that the company’s earnings

were better than expected and the prospects more than encouraging.

This was true enough and very good as far as it went, but not exactly

thrilling. The speculative appeal was absent, and from the investor’s

point of view the price stability and dividend permanency of the

stock were not yet demonstrated. It was a stock that never behaved

sensationally. It was so gentlemanly that no corroborative rise ever

followed the insiders’ eminently truthful reports. On the other hand,

neither did the price decline.

Imperial Steel remained unhonoured and unsung and untipped, content to

be one of those stocks that don’t go down because nobody sells and that

nobody sells because nobody likes to go short of a stock that is not

well distributed; the seller is too much at the mercy of the loaded-up

inside clique. Similarly, there is no inducement to buy such a stock.

To the investor Imperial Steel therefore remained a speculation. To the

speculator it was a dead one--the kind that makes an investor of you

against your will by the simple expedient of falling into a trance the

moment you go long of it. The chap who is compelled to lug a corpse a

year or two always loses more than the original cost of the deceased;

he is sure to find himself tied up with it when some really good things

come his way.

One day the foremost member of the Imperial Steel syndicate, acting for

himself and associates, came to see me. They wished to create a market

for the stock, of which they controlled the undistributed 70 per cent.

They wanted me to dispose of their holdings at better prices than they

thought they would obtain if they tried to sell in the open market.

They wanted to know on what terms I would undertake the job.

I told him that I would let him know in a few days. Then I looked into

the property. I had experts go over the various departments of the

company--industrial, commercial and financial. They made reports to me

which were unbiased. I wasn’t looking for the good or the bad points,

but for the facts, such as they were.

The reports showed that it was a valuable property. The prospects

justified purchases of the stock at the prevailing market price--if

the investor were willing to wait a little. Under the circumstances

an advance in the price would in reality be the commonest and most

legitimate of all market movements--to wit, the process of discounting

the future. There was therefore no reason that I could see why I should

not conscientiously and confidently undertake the bull manipulation of

Imperial Steel.

I let my man know my mind and he called at my office to talk the deal

over in detail. I told him what my terms were. For my services I asked

no cash, but calls on one hundred thousand shares of the Imperial Steel

stock. The price of the calls ran up from 70 to 100. That may seem like

a big fee to some. But they should consider that the insiders were

certain they themselves could not sell one hundred thousand shares, or

even fifty thousand shares, at 70. There was no market for the stock.

All the talk about wonderful earnings and excellent prospects had not

brought in buyers, not to any great extent. In addition, I could not

get my fee in cash without my clients first making some millions of

dollars. What I stood to make was not an exorbitant selling commission.

It was a fair contingent fee.

Knowing that the stock had real value and that general market

conditions were bullish and therefore favourable for an advance in all

good stocks, I figured that I ought to do pretty well. My clients were

encouraged by the opinions I expressed, agreed to my terms at once, and

the deal began with pleasant feelings all around.

I proceeded to protect myself as thoroughly as I could. The syndicate

owned or controlled about 70 per cent of the outstanding stock. I

had them deposit their 70 per cent under a trust agreement. I didn’t

propose to be used as a dumping ground for the big holders. With the

majority holdings thus securely tied up, I still had 30 per cent of

scattered holdings to consider, but that was a risk I had to take.

Experienced speculators do not expect ever to engage in utterly

riskless ventures. As a matter of fact, it was not much more likely

that all the untrusteed stock would be thrown on the market at one

fell swoop than that all the policyholders of a life-insurance company

would die at the same hour, the same day. There are unprinted actuarial

tables of stock-market risks as well as of human mortality.

Having protected myself from some of the avoidable dangers of a

stock-market deal of that sort, I was ready to begin my campaign. Its

objective was to make my calls valuable. To do this I must put up the

price and develop a market in which I could sell one hundred thousand

shares--the stock in which I held options.

The first thing I did was to find out how much stock was likely to come

on the market on an advance. This was easily done through my brokers,

who had no trouble in ascertaining what stock was for sale at or a

little above the market. I don’t know whether the specialists told them

what orders they had on their books or not. The price was nominally 70,

but I could not have sold one thousand shares at that price. I had no

evidence of even a moderate demand at that figure or even a few points

lower. I had to go by what my brokers found out. But it was enough to

show me how much stock there was for sale and how little was wanted.

As soon as I had a line on these points I quietly took all the stock

that was for sale at 70 and higher. When I say “I” you will understand

that I mean my brokers. The sales were for account of some of the

minority holders because my clients naturally had cancelled whatever

selling orders they might have given out before they tied up their

stock.

I didn’t have to buy very much stock. Moreover, I knew that the right

kind of advance would bring in other buying orders--and, of course,

selling orders also.

I didn’t give bull tips on Imperial Steel to anybody. I didn’t have

to. My job was to seek directly to influence sentiment by the best

possible kind of publicity. I do not say that there should never

be bull propaganda. It is as legitimate and indeed as desirable to

advertise the value of a new stock as to advertise the value of woolens

or shoes or automobiles. Accurate and reliable information should be

given by the public. But what I meant was that the tape did all that

was needed for my purpose. As I said before, the reputable newspapers

always try to print explanations for market movements. It is news.

Their readers demand to know not only what happens in the stock market

but why it happens. Therefore without the manipulator lifting a finger

the financial writers will print all the available information and

gossip, and also analyse the reports of earnings, trade condition and

outlook; in short, whatever may throw light on the advance. Whenever a

newspaperman or an acquaintance asks my opinion of a stock and I have

one I do not hesitate to express it. I do not volunteer advice and

I never give tips, but I have nothing to gain in my operations from

secrecy. At the same time I realise that the best of all tipsters, the

most persuasive of all salesmen, is the tape.

When I had absorbed all the stock that was for sale at 70 and a little

higher I relieved the market of that pressure, and naturally that made

clear for trading purposes the line of least resistance in Imperial

Steel. It was manifestly upward. The moment that fact was perceived

by the observant traders on the floor they logically assumed that

the stock was in for an advance the extent of which they could not

know; but they knew enough to begin buying. Their demand for Imperial

Steel, created exclusively by the obviousness of the stock’s rising

tendency--the tape’s infallible bull tip!--I promptly filled. I sold to

the traders the stock that I had bought from the tired-out holders at

the beginning. Of course this selling was judiciously done; I contented

myself with supplying the demand. I was not forcing my stock on the

market and I did not want too rapid an advance. It wouldn’t have been

good business to sell out the half of my one hundred thousand shares at

that stage of the proceedings. My job was to make a market on which I

might sell my entire line.

But even though I sold only as much as the traders were anxious to buy,

the market was temporarily deprived of my own buying power, which I had

hitherto exerted steadily. In due course the traders’ purchases ceased

and the price stopped rising. As soon as that happened there began the

selling by disappointed bulls or by those traders whose reasons for

buying disappeared the instant the rising tendency was checked. But I

was ready for this selling, and on the way down I bought back the stock

I had sold to the traders a couple of points higher. This buying of

stock I knew was bound to be sold in turn checked the downward course;

and when the price stopped going down the selling orders stopped coming

in.

I then began all over again. I took all the stock that was for sale on

the way up--it wasn’t very much--and the price began to rise a second

time; from a higher starting point than 70. _Don’t_ forget that on the

way down there are many holders who wish to heaven they had sold theirs

but won’t do it three or four points from the top. Such speculators

always vow they will surely sell out if there is a rally. They put in

their orders to sell on the way up, and then they change their minds

with the change in the stock’s price-trend. Of course there is always

profit taking from safe-playing quick runners to whom a profit is

always a profit to be taken.

All I had to do after that was to repeat the process; alternately

buying and selling; but always working higher.

Sometimes, after you have taken all the stock that is for sale, it

pays to rush up the price sharply, to have what might be called little

bull flurries in the stock you are manipulating. It is excellent

advertising, because it makes talk and also brings in both the

professional traders and that portion of the speculating public that

likes action. It is, I think, a large portion. I did that in Imperial

Steel, and whatever demand was created by those spurts I supplied.

My selling always kept the upward movement within bounds both as to

extent and as to speed. In buying on the way down and selling on the

way up I was doing more than marking up the price: I was developing the

marketability of Imperial Steel.

After I began my operations in it there never was a time when a

man could not buy or sell the stock freely; I mean by this, buy or

sell a reasonable amount without causing over-violent fluctuations

in the price. The fear of being left high and dry if he bought, or

squeezed to death if he sold, was gone. The gradual spread among the

professionals and the public of a belief in the permanence of the

market for Imperial Steel had much to do with creating confidence in

the movement; and, of course, the activity also put an end to a lot of

other objections. The result was that after buying and selling a good

many thousands of shares I succeeded in making the stocks sell at par.

At one hundred dollars a share everybody wanted to buy Imperial Steel.

Why not? Everybody now knew that it was a good stock; that it had been

and still was a bargain. The proof was the rise. A stock that could go

thirty points from 70 could go up thirty more from par. That is the way

a good many argued.

In the course of marking up the price those thirty points I accumulated

only seven thousand shares. The price on this line averaged me almost

exactly 85. That meant a profit of fifteen points on it; but, of

course, my entire profit, still on paper, was much more. It was a safe

enough profit, for I had a market for all I wanted to sell. The stock

would sell higher on judicious manipulation and I had graduated calls

on one hundred thousand shares beginning at 70 and ending at 100.

Circumstances prevented me from carrying out certain plans of mine for

converting my paper profits into good hard cash. It had been, if I do

say so myself, a beautiful piece of manipulation, strictly legitimate

and deservedly successful. The property of the company was valuable

and the stock was not dear at the higher price. One of the members of

the original syndicate developed a desire to secure the control of the

property--a prominent banking house with ample resources. The control

of a prosperous and growing concern like the Imperial Steel Corporation

is possibly more valuable to a banking firm than to individual

investors. At all events, this firm made me an offer for all my options

on the stock. It meant an enormous profit for me, and I instantly took

it. I am always willing to sell out when I can do so in a lump at a

good profit. I was quite content with what I made out of it.

Before I disposed of my calls on the hundred thousand shares I learned

that these bankers had employed more experts to make a still more

thorough examination of the property. Their reports showed enough to

bring me in the offer I got. I kept several thousand shares of the

stock for investment. I believe in it.

There wasn’t anything about my manipulation of Imperial Steel that

wasn’t normal and sound. As long as the price went up on my buying I

knew I was O.K. The stock never got waterlogged, as a stock sometimes

does. When you find that it fails to respond adequately to your buying

you don’t need any better tip to sell. You know that if there is any

value to a stock and general market conditions are right you can always

nurse it back after a decline, no matter if it’s twenty points. But I

never had to do anything like that in Imperial Steel.

In my manipulation of stocks I never lose sight of basic trading

principles. Perhaps you wonder why I repeat this or why I keep on

harping on the fact that I never argue with the tape or lose my temper

at the market because of its behaviour. You would think--wouldn’t

you?--that shrewd men who have made millions in their own business and

in addition have successfully operated in Wall Street at times would

realise the wisdom of playing the game dispassionately. Well, you would

be surprised at the frequency with which some of our most successful

promoters behave like peevish women because the market does not act the

way they wish it to act. They seem to take it as a personal slight, and

they proceed to lose money by first losing their temper.

There has been much gossip about a disagreement between John Prentiss

and myself. People have been led to expect a dramatic narrative of a

stock-market deal that went wrong or some double-crossing that cost

me--or him--millions; or something of that sort. Well, it wasn’t.

Prentiss and I had been friendly for years. He had given me at various

times information that I was able to utilise profitably, and I had

given him advice which he may or may not have followed. If he did he

saved money.

He was largely instrumental in the organisation and promotion of the

Petroleum Products Company. After a more or less successful market

début general conditions changed for the worse and the new stock did

not fare as well as Prentiss and his associates had hoped. When basic

conditions took a turn for the better Prentiss formed a pool and began

operations in Pete Products.

I cannot tell you anything about his technique. He didn’t tell me how

he worked and I didn’t ask him. But it was plain that notwithstanding

his Wall Street experience and his undoubted cleverness, whatever it

was he did proved of little value and it didn’t take the pool long

to find out that they couldn’t get rid of much stock. He must have

tried everything he knew, because a pool manager does not ask to be

superseded by an outsider unless he feels unequal to the task, and that

is the last thing the average man likes to admit. At all events he came

to me and after some friendly preliminaries he said he wanted me to

take charge of the market for Pete Products and dispose of the pool’s

holdings, which amounted to a little over one hundred thousand shares.

The stock was selling at 102 to 103.

The thing looked dubious to me and I declined his proposition with

thanks. But he insisted that I accept. He put it on personal grounds,

so that in the end I consented. I constitutionally dislike to identify

myself with enterprises in the success of which I cannot feel

confidence, but I also think a man owes something to his friends and

acquaintances. I said I would do my best, but I told him I did not feel

very cocky about it and I enumerated the adverse factors that I would

have to contend with. But all Prentiss said to that was that he wasn’t

asking me to guarantee millions in profits to the pool. He was sure

that if I took hold I’d make out well enough to satisfy any reasonable

being.

Well, there I was, engaged in doing something against my own judgment.

I found, as I feared, a pretty tough state of affairs, due in great

measure to Prentiss’ own mistakes while he was manipulating the stock

for account of the pool. But the chief factor against me was time.

I was convinced that we were rapidly approaching the end of a bull

swing and therefore that the improvement in the market, which had so

encouraged Prentiss, would prove to be merely a short-lived rally. I

feared that the market would turn definitely bearish before I could

accomplish much with Pete Products. However, I had given my promise and

I decided to work as hard as I knew how.

I started to put up the price. I had moderate success. I think I ran it

up to 107 or thereabouts, which was pretty fair, and I was even able to

sell a little stock on balance. It wasn’t much, but I was glad not to

have increased the pool’s holdings. There were a lot of people not in

the pool who were just waiting for a small rise to dump their stock,

and I was a godsend to them. Had general conditions been better I also

would have done better. It was too bad that I wasn’t called in earlier.

All I could do now, I felt, was to get out with as little loss as

possible to the pool.

I sent for Prentiss and told him my views. But he started to object. I

then explained to him why I took the position I did. I said: “Prentiss,

I can feel very plainly the pulse of the market. There is no follow-up

in your stock. It is no trick to see just what the public’s reaction is

to my manipulation. Listen: When Pete Products is made as attractive to

traders as possible and you give it all the support needed at all times

and notwithstanding all that you find that the public leaves it alone

you may be sure that there is something wrong, not with the stock but

with the market. There is absolutely no use in trying to force matters.

You are bound to lose if you do. A pool manager should be willing to

buy his own stock when he has company. But when he is the only buyer in

the market he’d be an ass to buy it. For every five thousand shares I

buy the public ought to be willing or able to buy five thousand more.

But I certainly am not going to do all the buying. If I did, all I

would succeed in doing would be to get soaked with a lot of long stock

that I don’t want. There is only one thing to do, and that is to sell.

And the only way to sell is to sell.”

“You mean, sell for what you can get?” asked Prentiss.

“Right!” I said. I could see he was getting ready to object. “If I am

to sell the pool’s stock at all you can make up your mind that the

price is going to break through par and----”

“Oh, no! Never!” he yelled. You’d have imagined I was asking him to

join a suicide club.

“Prentiss,” I said to him, “it is a cardinal principle of stock

manipulation to put up a stock in order to sell it. But you don’t sell

in bulk on the advance. You can’t. The big selling is done on the way

down from the top. I cannot put up your stock to 125 or 130. I’d like

to, but it can’t be done. So you will have to begin your selling from

this level. In my opinion all stocks are going down, and Petroleum

Products isn’t going to be the one exception. It is better for it to

go down now on the pool’s selling than for it to break next month on

selling by some one else. It will go down anyhow.”

I can’t see that I said anything harrowing, but you could have heard

his howls in China. He simply wouldn’t listen to such a thing. It would

never do. It would play the dickens with the stock’s record, to say

nothing of inconvenient possibilities at the banks where the stock was

held as collateral on loans, and so on.

I told him again that in my judgment nothing in the world could prevent

Pete Products from breaking fifteen or twenty points, because the

entire market was headed that way, and I once more said it was absurd

to expect his stock to be a dazzling exception. But again my talk went

for nothing. He insisted that I support the stock.

Here was a shrewd business man, one of the most successful promoters of

the day, who had made millions in Wall Street deals and knew much more

than the average man about the game of speculation, actually insisting

on supporting a stock in an incipient bear market. It was his stock,

to be sure, but it was nevertheless bad business. So much so that it

went against the grain and I again began to argue with him. But it was

no use. He insisted on putting in supporting orders.

Of course when the general market got weak and the decline began in

earnest Pete Products went with the rest. Instead of selling I actually

bought stock for the insiders’ pool--by Prentiss’ orders.

The only explanation is that Prentiss did not believe the bear market

was right on top of us. I myself was confident that the bull market

was over. I had verified my first surmise by tests not alone in Pete

Products but in other stocks as well. I didn’t wait for the bear market

to announce its safe arrival before I started selling. Of course I

didn’t sell a share of Pete Products, though I was short of other

stocks.

The Pete Products pool, as I expected, was hung up with all they held

to begin with and with all they had to take in their futile effort to

hold up the price. In the end they did liquidate; but at much lower

figures than they would have got if Prentiss had let me sell when and

as I wished. It could not be otherwise. But Prentiss still thinks he

was right--or says he does. I understand he says the reason I gave him

the advice I did was that I was short of other stocks and the general

market was going up. It implies, of course, that the break in Pete

Products that would have resulted from selling out the pool’s holdings

at any price would have helped my bear position in other stocks.

That is all tommyrot. I was not bearish because I was short of stocks.

I was bearish because that was the way I sized up the situation, and

I sold stocks short only after I turned bearish. There never is much

money in doing things wrong end to; not in the stock market. My plan

for selling the pool’s stock was based on what the experience of twenty

years told me alone was feasible and therefore wise. Prentiss ought to

have been enough of a trader to see it as plainly as I did. It was too

late to try to do anything else.

I suppose Prentiss shares the delusion of thousands of outsiders who

think a manipulator can do anything. He can’t. The biggest thing Keene

did was his manipulation of U.S. Steel common and preferred in the

spring of 1901. He succeeded not because he was clever and resourceful

and not because he had a syndicate of the richest men in the country

back of him. He succeeded partly because of those reasons but chiefly

because the general market was right and the public’s state of mind was

right.

It isn’t good business for a man to act against the teachings of

experience and against common sense. But the suckers in Wall Street are

not all outsiders. Prentiss’ grievance against me is what I have just

told you. He feels sore because I did my manipulation not as I wanted

to but as he asked me to.

There isn’t anything mysterious or underhanded or crooked about

manipulation designed to sell a stock in bulk provided such

operations are not accompanied by deliberate misrepresentations.

Sound manipulation must be based on sound trading principles. People

lay great stress on old-time practices, such as wash sales. But I

can assure you that the mere mechanics of deception count for very

little. The difference between stock-market manipulation and the

over-the-counter sale of stocks and bonds is in the character of the

clientele rather than in the character of the appeal. J. P. Morgan

& Co. sell an issue of bonds to the public--that is, to investors.

A manipulator disposes of a block of stock to the public--that is,

to speculators. An investor looks for safety, for permanence of the

interest return on the capital he invests. The speculator looks for a

quick profit.

The manipulator necessarily finds his primary market among

speculators--who are willing to run a greater than normal business risk

so long as they have a reasonable chance to get a big return on their

capital. I myself never have believed in blind gambling. I may plunge

or I may buy one hundred shares. But in either case I must have a

reason for what I do.

I distinctly remember how I got into the game of manipulation--that

is, in the marketing of stocks for others. It gives me pleasure to

recall it because it shows so beautifully the professional Wall Street

attitude toward stock-market operations. It happened after I had “come

back”--that is, after my Bethlehem Steel trade in 1915 started me on

the road to financial recovery.

I traded pretty steadily and had very good luck. I have never sought

newspaper publicity, but neither have I gone out of my way to hide

myself. At the same time, you know that professional Wall Street

exaggerates both the successes and the failures of whichever operator

happens to be active; and, of course, the newspapers hear about him

and print rumors. I have been broke so many times, according to

the gossips, or have made so many millions, according to the same

authorities, that my only reaction to such reports is to wonder how and

where they are born. And how they grow! I have had broker friend after

broker friend bring the same story to me, a little changed each time,

improved, more circumstantial.

All this preface is to tell you how I first came to undertake the

manipulation of a stock for someone else. The stories the newspapers

printed of how I had paid back in full the millions I owed did the

trick. My plungings and my winnings were so magnified by the newspapers

that I was talked about in Wall Street. The day was past when an

operator swinging a line of two hundred thousand shares of stock could

dominate the market. But, as you know, the public always desires to

find successors to the old leaders. It was Mr. Keene’s reputation

as a skillful stock operator, a winner of millions on his own hook,

that made promoters and banking houses apply to him for selling large

blocks of securities. In short, his services as manipulator were in

demand because of the stories the Street had heard about his previous

successes as a trader.

But Keene was gone--passed on to that heaven where he once said he

wouldn’t stay a moment unless he found Sysonby there waiting for

him. Two or three other men who made stock-market history for a few

months had relapsed into the obscurity of prolonged inactivity. I

refer particularly to certain of those plunging Westerners who came to

Wall Street in 1901 and after making many millions out of their Steel

holdings remained in Wall Street. They were in reality superpromoters

rather than operators of the Keene type. But they were extremely able,

extremely rich and extremely successful in the securities of the

companies which they and their friends controlled. They were not really

great manipulators, like Keene or Governor Flower. Still, the Street

found in them plenty to gossip about and they certainly had a following

among the professionals and the sportier commission houses. After they

ceased to trade actively the Street found itself without manipulators;

at least, it couldn’t read about them in the newspapers.

You remember the big bull market that began when the Stock Exchange

resumed business in 1915. As the market broadened and the Allies’

purchases in this country mounted into billions we ran into a boom.

As far as manipulation went, it wasn’t necessary for anybody to lift

a finger to create an unlimited market for a war bride. Scores of men

made millions by capitalizing contracts or even promises of contracts.

They became successful promoters, either with the aid of friendly

bankers or by bringing out their companies on the Curb market. The

public bought anything that was adequately touted.

When the bloom wore off the boom, some of these promoters found

themselves in need of help from experts in stock salesmanship. When the

public is hung up with all kinds of securities, some of them purchased

at higher prices, it is not an easy task to dispose of untried stocks.

_After a boom the public is positive that nothing is going up. It

isn’t that buyers become more discriminating, but that the blind buying

is over. It is the state of mind that has changed. Prices don’t even

have to go down to make people pessimistic. It is enough if the market

gets dull and stays dull for a time._

In every boom companies are formed primarily if not exclusively to take

advantage of the public’s appetite for all kinds of stocks. Also there

are belated promotions. The reason why promoters make that mistake

is that being human they are unwilling to see the end of the boom.

Moreover, it is good business to take chances when the possible profit

is big enough. _The top is never in sight when the vision is vitiated

by hope._ The average man sees a stock that nobody wanted at twelve

dollars or fourteen dollars a share suddenly advance to thirty--which

surely is the top--until it rises to fifty. That is absolutely the

end of the rise. Then it goes to sixty; to seventy; to seventy-five.

It then becomes a certainty that this stock, which a few weeks ago

was selling for less than fifteen, can’t go any higher. But it goes

to eighty; and to eighty-five. Whereupon the average man, who never

thinks of values but of prices, and is not governed in his actions by

conditions but by fears, takes the easiest way--he stops thinking that

there must be a limit to the advances. That is why those outsiders who

are wise enough not to buy at the top make up for it by not taking

profits. The big money in booms is always made first by the public--on

paper. And it remains on paper.