Part 12
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.
_XI_
And now I’ll get back to October, 1907. I bought a yacht and made all preparations to leave New York for a cruise in Southern waters. I am really daffy about fishing and this was the time when I was going to fish to my heart’s content from my own yacht, going wherever I wished whenever I felt like it. Everything was ready. I had made a killing in stocks, but at the last moment corn held me back.
I must explain that before the money panic which gave me my first million I had been trading in grain at Chicago. I was short ten million bushels of wheat and ten million bushels of corn. I had studied the grain markets for a long time and was as bearish on corn and wheat as I had been on stocks.
Well, they both started down, but while wheat kept on declining the biggest of all the Chicago operators--I’ll call him Stratton--took it into his head to run a corner in corn. After I cleaned up in stocks and was ready to go South on my yacht I found that wheat showed me a handsome profit, but in corn Stratton had run up the price and I had quite a loss.
I knew there was much more corn in the country than the price indicated. The law of demand and supply worked as always. But the demand came chiefly from Stratton and the supply was not coming at all, because there was an acute congestion in the movement of corn. I remember that I used to pray for a cold spell that would freeze the impassable roads and enable the farmers to bring their corn into the market. But no such luck.
There I was, waiting to go on my joyously planned fishing trip and that loss in corn holding me back. I couldn’t go away with the market as it was. Of course Stratton kept pretty close tabs on the short interest. He knew he had me, and I knew it quite as well as he did. But, as I said, I was hoping I might convince the weather that it ought to get busy and help me. Perceiving that neither the weather nor any other kindly wonder-worker was paying any attention to my needs I studied how I might work out of my difficulty by my own efforts.
I closed out my line of wheat at a good profit. But the problem in corn was infinitely more difficult. If I could have covered my ten million bushels at the prevailing prices I instantly and gladly would have done so, large though the loss would have been. But, of course, the moment I started to buy in my corn Stratton would be on the job as squeezer in chief, and I no more relished running up the price on myself by reason of my own purchases than cutting my own throat with my own knife.
Strong though corn was, my desire to go fishing was even stronger, so it was up to me to find a way out at once. I must conduct a strategic retreat. I must buy back the ten million bushels I was short of and in so doing keep down my loss as much as I possibly could.
It so happened that Stratton at that time was also running a deal in oats and had the market pretty well sewed up. I had kept track of all the grain markets in the way of crop news and pit gossip, and I heard that the powerful Armour interests were not friendly, marketwise, to Stratton. Of course I knew that Stratton would not let me have the corn I needed except at his own price, but the moment I heard the rumors about Armour being against Stratton it occurred to me that I might look to the Chicago traders for aid. The only way in which they could possibly help me was for them to sell me the corn that Stratton wouldn’t. The rest was easy.
First, I put in orders to buy five hundred thousand bushels of corn every eighth of a cent down. After these orders were in I gave to each of four houses an order to sell simultaneously fifty thousand bushels of oats at the market. That, I figured, ought to make a quick break in oats. Knowing how the traders’ minds worked, it was a cinch that they would instantly think that Armour was gunning for Stratton. Seeing the attack opened in oats they would logically conclude that the next break would be in corn and they would start to sell it. If that corner in corn was busted, the pickings would be fabulous.
My dope on the psychology of the Chicago traders was absolutely correct. When they saw oats breaking on the scattered selling they promptly jumped on corn and sold it with great enthusiasm. I was able to buy six million bushels of corn in the next ten minutes. The moment I found that their selling of corn ceased I simply bought in the other four million bushels at the market. Of course that made the price go up again, but the net result of my manœuvre was that I covered the entire line of ten million bushels within one-half cent of the price prevailing at the time I started to cover on the traders’ selling. The two hundred thousand bushels of oats that I sold short to start the traders’ selling of corn I covered at a loss of only three thousand dollars. That was pretty cheap bear bait. The profits I had made in wheat offset so much of my deficit in corn that my total loss on all my grain trades that time was only twenty-five thousand dollars. Afterwards corn went up twenty-five cents a bushel. Stratton undoubtedly had me at his mercy. If I had set about buying my ten million bushels of corn without bothering to think of the price there is no telling what I would have had to pay.