Chapter 24

Chapter XXIV

The public always wants to be told. That is what makes tip-giving and

tip-taking universal practices. It is proper that brokers should give

their customers trading advice through the medium of their market

letters as well as by word of mouth. But brokers should not dwell too

strongly on actual conditions because the course of the market is

always from six to nine months ahead of actual conditions. Today’s

earnings do not justify brokers in advising their customers to buy

stocks unless there is some assurance that six or nine months from

today the business outlook will warrant the belief that the same rate

of earnings will be maintained. If on looking that far ahead you can

see, reasonably clearly, that conditions are developing which will

change the present actual power, the argument about stocks being cheap

today will disappear. The trader must look far ahead, but the broker

is concerned with getting commissions now; hence the inescapable

fallacy of the average market letter. Brokers make their living out

of commissions from the public and yet they will try to induce the

public through their market letters or by word of mouth to buy the same

stocks in which they have received selling orders from insiders or

manipulators.

It often happens that an insider goes to the head of a brokerage

concern and says: “I wish you’d make a market in which to dispose of

50,000 shares of my stock.”

The broker asks for further details. Let us say that the quoted price

of that stock is 50. The insider tells him: “I will give you calls on

5000 shares at 45 and 5000 shares every point up for the entire fifty

thousand shares. I also will give you a put on 50,000 shares at the

market.”

Now, this is pretty easy money for the broker, if he has a large

following and of course this is precisely the kind of broker the

insider seeks. A house with direct wires to branches and connections

in various parts of the country can usually get a large following in

a deal of that kind. Remember that in any event the broker is playing

absolutely safe by reason of the put. If he can get his public to

follow he will be able to dispose of his entire line at a big profit in

addition to his regular commissions.

I have in mind the exploits of an “insider” who is well-known in Wall

Street.

He will call up the head customers’ man of a large brokerage house. At

times he goes even further and calls up one of the junior partners of

the firm. He will say something like this:

“Say, old man, I want to show you that I appreciate what you have done

for me at various times. I am going to give you a chance to make some

real money. We are forming a new company to absorb the assets of one

of our companies and we’ll take over that stock at a big advance over

present quotations. I’m going to send in to you 500 shares of Bantam

Shops at $65. The stock is now quoted at 72.”

The grateful insider tells the thing to a dozen of the headmen in

various big brokerage houses. Now since these recipients of the

insider’s bounty are in Wall Street what are they going to do when they

get that stock that already shows them a profit? Of course, advise

every man and woman they can reach to buy that stock. The kind donor

knew this. They will help to create a market in which the kind insider

can sell his good things at high prices to the poor public.

There are other devices of stock-selling promoters that should be

barred. The Exchanges should not allow trading in listed stocks that

are offered outside to the public on the partial payment plan. To have

the price officially quoted gives a sort of sanction to any stock.

Moreover, the official evidence of a free market, and at times the

difference in prices, is all the inducement needed.

Another common selling device that costs the unthinking public many

millions of dollars and sends nobody to jail because it is perfectly

legal, is that of increasing the capital stock exclusively by reason of

market exigencies. The process does not really amount to much more than

changing the color of the stock certificates.

The juggling whereby 2 or 4 or even 10 shares of new stock are given in

exchange for one of the old, is usually prompted by a desire to make

the old merchandise easily vendible. The old price was $1 per pound

package and hard to move. At 25 cents for a quarter-pound box it might

go better; and perhaps at 27 or 30 cents.

Why does not the public ask why the stock is made easy to buy? It is a

case of the Wall Street philanthropist operating again, but the wise

trader bewares of the Greeks bearing gifts. It is all the warning

needed. The public disregards it and loses millions of dollars annually.

The law punishes whoever originates or circulates rumors calculated to

affect adversely the credit or business of individuals or corporations,

that is, that tend to depress the values of securities by influencing

the public to sell. Originally, the chief intention may have been to

reduce the danger of panic by punishing anyone who doubted aloud the

solvency of banks in times of stress. But of course, it serves also to

protect the public against selling stocks below their real value. In

other words the law of the land punishes the disseminator of bearish

items of that nature.

How is the public protected against the danger of buying stocks above

their real value? Who punishes the distributor of unjustified bullish

news items? Nobody; and yet, the public loses more money buying stocks

on anonymous inside advice when they are too high than it does selling

out stocks below their value as a consequence of bearish advice during

so-called “raids.”

If a law were passed that would punish bull liars as the law now

punishes bear liars, I believe the public would save millions.

Naturally, promoters, manipulators and other beneficiaries of anonymous

optimism will tell you that anyone who trades on rumors and unsigned

statements has only himself to blame for his losses. One might as well

argue that any one who is silly enough to be a drug addict is not

entitled to protection.

The Stock Exchange should help. It is vitally interested in protecting

the public against unfair practices. If a man in position to know

wishes to make the public accept his statements of fact or even his

opinions, let him sign his name. Signing bullish items would not

necessarily make them true. But it would make the “insiders” and

“directors” more careful.

The public ought always to keep in mind the elementals of stock

trading. When a stock is going up no elaborate explanation is needed

as to why it is going up. It takes continuous buying to make a stock

keep on going up. As long as it does so, with only small and natural

reactions from time to time, it is a pretty safe proposition to trail

along with it. But if after a long steady rise a stock turns and

gradually begins to go down, with only occasional small rallies, it is

obvious that the line of least resistance has changed from upward to

downward. Such being the case why should any one ask for explanations?

There are probably very good reasons why it should go down, but these

reasons are known only to a few people who either keep those reasons to

themselves, or else actually tell the public that the stock is cheap.

The nature of the game as it is played is such that the public should

realise that the truth cannot be told by the few who know.

Many of the so-called statements attributed to “insiders” or officials

have no basis in fact. Sometimes the insiders are not even asked to

make a statement, anonymous or signed. These stories are invented by

somebody or other who has a large interest in the market. At a certain

stage of an advance in the market-price of a security the big insiders

are not averse to getting the help of the professional element to trade

in that stock. But while the insider might tell the big plunger the

right time to buy, you can bet he will never tell when is the time

to sell. That puts the big professional in the same position as the

public, only he has to have a market big enough for him to get out on.

Then is when you get the most misleading “information.” Of course,

there are certain insiders who cannot be trusted at any stage of the

game. As a rule the men who are the head of big corporations may act in

the market upon their inside knowledge, but they don’t actually tell

lies. They merely say nothing, for they have discovered that there are

times when silence is golden.

I have said many times and cannot say it too often that the experience

of years as a stock operator has convinced me that no man can

consistently and continuously beat the stock market though he may

make money in individual stocks on certain occasions. No matter how

experienced a trader is the possibility of his making losing plays is

always present because speculation cannot be made 100 per cent safe.

Wall Street professionals know that acting on “inside” tips will break

a man more quickly than famine, pestilence, crop failures, political

readjustments or what might be called normal accidents. There is no

asphalt boulevard to success in Wall Street or anywhere else. Why

additionally block traffic?

Transcriber’s Notes

Punctuation and spelling were made consistent when a predominant

preference was found in the original book; otherwise they were not

changed. Inconsistent hyphenation was not changed.

Simple typographical errors were corrected; unbalanced quotation

marks were remedied when the change was obvious, and otherwise left

unbalanced.

The illustration on the title page is the publisher’s logo.

Page 224: “they were afraid of getting stock if they tried to” was

printed that way; “stock” may be a typographic error for “stuck”.

End of Project Gutenberg's Reminscences of a Stock Operator, by Edwin Lefevre