Part 21

It was thus plain that the inside clique in Chester were not doing any of the things that inside cliques invariably do in a bull market. For this failure to do the usual thing there might be two reasons. Perhaps the insiders did not put it up because they wished to accumulate more stock before advancing the price. But this was an untenable theory if you analysed the volume and character of the trading in Chester. The other reason was that they did not put it up because they were afraid of getting stock if they tried to.

When the men who ought to want a stock don’t want it, why should I want it? I figured that no matter how prosperous other automobile companies might be, it was a cinch to sell Chester short. _Experiences had taught me to beware of buying a stock that refuses to follow the group-leader._

I easily established the fact that not only there was no inside buying but that there was actually inside selling. There were other symptomatic warnings against buying Chester, though all I required was its inconsistent market behaviour. It was again the tape that tipped me off and that was why I sold Chester short. One day, not very long afterward, the stock broke wide open. Later on we learned--officially, as it were--that insiders had indeed been selling it, knowing full well that the condition of the company was not good. The reason, as usual, was disclosed after the break. But the warning came before the break. _I don’t look out for the breaks; I look out for the warnings._ I didn’t know what was the trouble with Chester; neither did I follow a hunch. I merely knew that something must be wrong.

Only the other day we had what the newspapers called a sensational movement in Guiana Gold. After selling on the Curb at 50 or close to it, it was listed on the Stock Exchange. It started there at around 35, began to go down and finally broke 20.

Now, I’d never have called that break sensational because it was fully to be expected. If you had asked you could have learned the history of the company. No end of people knew it. It was told to me as follows: A syndicate was formed consisting of a half dozen extremely well-known capitalists and a prominent banking house. One of the members was the head of the Belle Isle Exploration Company, which advanced Guiana over $10,000,000 cash and received in return bonds and 250,000 shares out of a total of one million shares of the Guiana Gold Mining Company. The stock went on a dividend basis and it was mighty well advertised. The Belle Isle people thought it well to cash in and they gave a call on their 250,000 shares to the bankers, who arranged to try to market that stock and some of their own holdings as well. They thought of entrusting the market manipulation to a professional whose fee was to be one third of the profits from the sale of the 250,000 shares above 36. I understand that the agreement was drawn up and ready to be signed but at the last moment the bankers decided to undertake the marketing themselves and save the fee. So they organized an inside pool. The bankers had a call on the Belle Isle holdings of 250,000 at 36. They put this in at 41. That is, insiders paid their own banking colleagues a 5-point profit to start with. I don’t know whether they knew it or not.

It is perfectly plain that to the bankers the operation had every semblance of a cinch. We had run into a bull market and the stocks of the group to which Guiana Gold belonged were among the market leaders. The company was making big profits and paying regular dividends. This together with the high character of the sponsors made the public regard Guiana almost as an investment stock. I was told that about 400,000 shares were sold to the public all the way up to 47.

The gold group was very strong. But presently Guiana began to sag. It declined ten points. That was all right if the pool was marketing stock. But pretty soon the Street began to hear that things were not altogether satisfactory and the property was not bearing out the high expectations of the promoters. Then, of course, the reason for the decline became plain. But before the reason was known I had the warning and had taken steps to test the market for Guiana. The stock was acting pretty much as Chester Motors did. I sold Guiana. The price went down. I sold more. The price went still lower. The stock was repeating the performance of Chester and of a dozen other stocks whose clinical history I remembered. The tape plainly told me that there was something wrong--something that kept insiders from buying it--insiders who knew exactly why they should not buy their own stock in a bull market. On the other hand, outsiders, who did not know, were now buying because having sold at 45 and higher the stock looked cheap at 35 and lower. The dividend was still being paid. The stock was a bargain.

Then the news came. It reached me, as important market news often does, before it reached the public. But the confirmation of the reports of striking barren rock instead of rich ore merely gave me the reason for the earlier inside selling. I myself didn’t sell on the news. I had sold long before, on the stock’s behaviour. My concern with it was not philosophical. I am a trader and therefore looked for one sign: Inside buying. There wasn’t any. I didn’t have to know why the insiders did not think enough of their own stock to buy it on the decline. It was enough that their market plans plainly did not include further manipulation for the rise. That made it a cinch to sell the stock short. The public had bought almost a half million shares and the only change in ownership possible was from one set of ignorant outsiders who would sell in the hope of stopping losses to another set of ignorant outsiders who might buy in the hope of making money.

I am not telling you this to moralise on the public’s losses through their buying of Guiana or on my profit through my selling of it, but to emphasise how important the study of group-behaviourism is and how its lessons are disregarded by inadequately equipped traders, big and little. And it is not only in the stock market that the tape warns you. It blows the whistle quite as loudly in commodities.

I had an interesting experience in cotton. I was bearish on stocks and put out a moderate short line. At the same time I sold cotton short; 50,000 bales. My stock deal proved profitable and I neglected my cotton. The first thing I knew I had a loss of $250,000 on my 50,000 bales. As I said, my stock deal was so interesting and I was doing so well in it that I did not wish to take my mind off it. Whenever I thought of cotton I just said to myself: “I’ll wait for a reaction and cover.” The price would react a little but before I could decide to take my loss and cover, the price would rally again, and go higher than ever. So I’d decide again to wait a little and I’d go back to my stock deal and confine my attention to that. Finally I closed out my stocks at a very handsome profit and went away to Hot Springs for a rest and a holiday.

That really was the first time that I had my mind free to deal with the problem of my losing deal in cotton. The trade had gone against me. There were times when it almost looked as if I might win out. I noticed that whenever anybody sold heavily there was a good reaction. But almost instantly the price would rally and make a new high for the move.

Finally, by the time I had been in Hot Springs a few days, I was a million to the bad and no let up in the rising tendency. I thought over all I had done and had not done and I said to myself: “I must be wrong!” With me to feel that I am wrong and to decide to get out are practically one process. So I covered, at a loss of about one million.

The next morning I was playing golf and not thinking of anything else. I had made my play in cotton. I had been wrong. I had paid for being wrong and the receipted bill was in my pocket. I had no more concern with the cotton market than I have at this moment. When I went back to the hotel for luncheon I stopped at the broker’s office and took a look at the quotations. I saw that cotton had gone off 50 points. That wasn’t anything. But I also noticed that it had not rallied as it had been in the habit of doing for weeks, as soon as the pressure of the

## particular selling that had depressed it eased up. This had indicated

that the line of least resistance was upward and it had cost me a million to shut my eyes to it.

Now, however, the reason that had made me cover at a big loss was no longer a good reason since there had not been the usual prompt and vigorous rally. So I sold 10,000 bales and waited. Pretty soon the market went off 50 points. I waited a little while longer. There was no rally. I had got pretty hungry by now, so I went into the dining-room and ordered my luncheon. Before the waiter could serve it, I jumped up, went to the broker’s office, I saw that there had been no rally and so I sold 10,000 bales more. I waited a little and had the pleasure of seeing the price decline 40 points more. That showed me I was trading correctly so I returned to the dining-room ate my luncheon and went back to the broker’s. There was no rally in cotton that day. That very night I left Hot Springs.

It was all very well to play golf but I had been wrong in cotton in selling when I did and in covering when I did. So I simply had to get back on the job and be where I could trade in comfort. The way the market took my first ten thousand bales made me sell the second ten thousand, and the way the market took the second made me certain the turn had come. It was the difference in behaviour.

Well, I reached Washington and went to my brokers’ office there, which was in charge of my old friend Tucker. While I was there the market went down some more. I was more confident of being right now than I had been of being wrong before. So I sold 40,000 bales and the market went off 75 points. It showed that there was no support there. That night the market closed still lower. The old buying power was plainly gone. There was no telling at what level that power would again develop, but I felt confident of the wisdom of my position. The next morning I left Washington for New York by motor. There was no need to hurry.

When we got to Philadelphia I drove to a broker’s office. I saw that there was the very dickens to pay in the cotton market. Prices had broken badly and there was a small-sized panic on. I didn’t wait to get to New York. I called up my brokers on the long distance and I covered my shorts. As soon as I got my reports and found that I had practically made up my previous loss, I motored on to New York without having to stop en route to see any more quotations.

Some friends who were with me in Hot Springs talk to this day of the way I jumped up from the luncheon table to sell that second lot of 10,000 bales. But again that clearly was not a hunch. It was an impulse that came from the conviction that the time to sell cotton had now come, however great my previous mistake had been. I had to take advantage of it. It was my chance. The subconscious mind probably went on working, reaching conclusions for me. The decision to sell in Washington was the result of my observation. My years of experience in trading told me that the line of least resistance had changed from up to down.

I bore the cotton market no grudge for taking a million dollars out of me and I did not hate myself for making a mistake of that calibre any more than I felt proud for covering in Philadelphia and making up my loss. My trading mind concerns itself with trading problems and I think I am justified in asserting that I made up my first loss because I had the experience and the memory.

_XVIII_

History repeats itself all the time in Wall Street. Do you remember a story I told you about covering my shorts at the time Stratton had corn cornered? Well, another time I used practically the same tactics in the stock market. The stock was Tropical Trading. I have made money bulling it and also bearing it. It always was an active stock and a favourite with adventurous traders. The inside coterie has been accused time and again by the newspapers of being more concerned over the fluctuations in the stock than with encouraging permanent investment in it. The other day one of the ablest brokers I know asserted that not even Daniel Drew in Erie or H. O. Havemeyer in Sugar developed so perfect a method for milking the market for a stock as President Mulligan and his friends have done in Tropical Trading. Many times they have encouraged the bears to sell TT short and then have proceeded to squeeze them with business-like thoroughness. There was no more vindictiveness about the process than is felt by a hydraulic press--or no more squeamishness, either.

Of course, there have been people who have spoken about certain “unsavory incidents” in the market career of TT stock. But I dare say these critics were suffering from the squeezing. Why do the room traders, who have suffered so often from the loaded dice of the insiders, continue to go up against the game? Well, for one thing they like action and they certainly get it in Tropical Trading. No prolonged spells of dullness. No reasons asked or given. No time wasted. No patience strained by waiting for the tipped movement to begin. Always enough stock to go around--except when the short interest is big enough to make the scarcity worthwhile. One born every minute!

It so happened some time ago that I was in Florida on my usual winter vacation. I was fishing and enjoying myself without any thought of the markets excepting when we received a batch of newspapers. One morning when the semi-weekly mail came in I looked at the stock quotations and saw that Tropical Trading was selling at 155. The last time I’d seen a quotation in it, I think, was around 140. My opinion was that we were going into a bear market and I was biding my time before going short of stocks. But there was no mad rush. That was why I was fishing and out of hearing of the ticker. I knew that I’d be back home when the real call came. In the meanwhile nothing that I did or failed to do would hurry matters a bit.

The behaviour of Tropical Trading was the outstanding feature of the market, according to the newspapers I got that morning. It served to crystallise my general bearishness because I thought it particularly asinine for the insiders to run up the price of TT in the face of the heaviness of the general list. There are times when the milking process must be suspended. What is abnormal is seldom a desirable factor in a trader’s calculations and it looked to me as if the marking up of that stock were a capital blunder. Nobody can make blunders of that magnitude with impunity; not in the stock market.

After I got through reading the newspapers I went back to my fishing but I kept thinking of what the insiders in Tropical Trading were trying to do. That they were bound to fail was as certain as that a man is bound to smash himself if he jumps from the roof of a twenty-story building without a parachute. I couldn’t think of anything else and finally I gave up trying to fish and sent off a telegram to my brokers to sell 2000 shares of TT at the market. After that I was able to go back to my fishing. I did pretty well.

That afternoon I received the reply to my telegram by special courier. My brokers reported that they had sold the 2000 shares of Tropical Trading at 153. So far so good. I was selling short on a declining market, which was as it should be. But I could not fish any more. I was too far away from a quotation board. I discovered this after I began to think of all the reasons why Tropical Trading should go down with the rest of the market instead of going up on inside manipulation. I therefore left my fishing camp and returned to Palm Beach; or, rather, to the direct wire to New York.

The moment I got to Palm Beach and saw what the misguided insiders were still trying to do, I let them have a second lot of 2000 TT. Back came the report and I sold another 2000 shares. The market behaved excellently. That is, it declined on my selling. Everything being satisfactory I went out and had a chair ride. But I wasn’t happy. The more I thought the unhappier it made me to think that I hadn’t sold more. So back I went to the broker’s office and sold another 2000 shares.

I was happy only when I was selling that stock. Presently I was short 10,000 shares. Then I decided to return to New York. I had business to do now. My fishing I would do some other time.

When I arrived in New York I made it a point to get a line on the company’s business, actual and prospective. What I learned strengthened my conviction that the insiders had been worse than reckless in jacking up the price at a time when such an advance was not justified either by the tone of the general market or by the company’s earnings.

The rise, illogical and ill-timed though it was, had developed some public following and this doubtless encouraged the insiders to pursue their unwise tactics. Therefore I sold more stock. The insiders ceased their folly. So I tested the market again and again, in accordance with my trading methods, until finally I was short 30,000 shares of the stock of the Tropical Trading Company. By then the price was 133.

I had been warned that the TT insiders knew the exact whereabouts of every stock certificate in the Street and the precise dimensions and identity of the short interest as well as other facts of tactical importance. They were able men and shrewd traders. Altogether it was a dangerous combination to go up against. But facts are facts and the strongest of all allies are conditions.

Of course, on the way down from 153 to 133 the short interest had grown and the public that buys on reactions began to argue as usual: That stock had been considered a good purchase at 153 and higher. Now 20 points lower, it was necessarily a much better purchase. Same stock; same dividend rate; same officers; same business. Great bargain!

The public’s purchases reduced the floating supply and the insiders, knowing that a lot of room traders were short, thought the time propitious for a squeezing. The price was duly run up to 150. I daresay there was plenty of covering but I stayed pat. Why shouldn’t I? The insiders might know that a short line of 30,000 shares had not been taken in but why should that frighten me? The reasons that had impelled me to begin selling at 153 and keep at it on the way down to 133, not only still existed but were stronger than ever. The insiders might desire to force me to cover but they adduced no convincing arguments. Fundamental conditions were fighting for me. It was not difficult to be both fearless and patient. A speculator must have faith in himself and in his judgment. The late Dickson G. Watts, ex-President of the New York Cotton Exchange and famous author of “Speculation as a Fine Art,” says that courage in a speculator is merely confidence to act on the decision of his mind. With me, I cannot fear to be wrong because I never think I am wrong until I am proven wrong. In fact, I am uncomfortable unless I am capitalising my experience. The course of the market at a given time does not necessarily prove me wrong. It is the character of the advance--or of the decline--that determines for me the correctness or the fallacy of my market position. I can only rise by knowledge. If I fall it must be by my own blunders.

There was nothing in the character of the rally from 133 to 150 to frighten me into covering and presently the stock, as was to be expected, started down again. It broke 140 before the inside clique began to give it support. Their buying was coincident with a flood of bull rumors about the stock. The company, we heard, was making perfectly fabulous profits, and the earnings justified an increase in the regular dividend rate. Also, the short interest was said to be perfectly huge and the squeeze of the century was about to be inflicted on the bear party in general and in particular on a certain operator who was more than over-extended. I couldn’t begin to tell you all I heard as they ran the price up ten points.

The manipulation did not seem particularly dangerous to me but when the price touched 149 I decided that it was not wise to let the Street accept as true all the bull statements that were floating around. Of course, there was nothing that I or any other rank outsider could say that would carry conviction either to the frightened shorts or to those credulous customers of commission houses that trade on hearsay tips. The most effective retort courteous is that which the tape alone can print. People will believe that when they will not believe an affidavit from any living man, much less one from a chap who is short 30,000 shares. So I used the same tactics that I did at the time of the Stratton corner in corn, when I sold oats to make the traders bearish on corn. Experience and memory again.