Part 27

“You listen to me, Wolff. You knew that the two hundred thousand shares you and Gordon and Kane held were tied up, and that there wouldn’t be an awful lot of floating stock to come on the market if I put up the price, as I’d have to do for two reasons: The first to make a market for the stock; and the second to make a profit out of the call at 40. But you weren’t satisfied to get 40 for the sixty thousand shares you’d been lugging for months or with your share of the syndicate profits, if any; so you decided to take on a lot of stock under 40 to unload on me when I put the price up with the syndicate’s money, as you were sure I meant to do. You’d buy before I did and you’d unload before I did; in all probability I’d be the one to unload on. I suspect you figured on my having to put the price up to 60. It was such a cinch that you probably bought ten thousand shares strictly for unloading purposes, and to make sure somebody held the bag if I didn’t, you tipped off everybody in the United States, Canada and Mexico without thinking of my added difficulties. All your friends knew what I was supposed to do. Between their buying and mine you were going to be all hunky. Well, your intimate friends to whom you gave the tip passed it on to their friends after they had bought their lines, and the third stratum of tip-takers planned to supply the fourth, fifth and possibly sixth strata of suckers, so that when I finally came to do some selling I’d find myself anticipated by a few thousands of wise speculators. It was a friendly thought, that notion of yours, Wolff. You can’t imagine how surprised I was when Consolidated Stove began to go up before I even thought of buying a single share; or how grateful, either, when the underwriting syndicate sold one hundred thousand shares around 40 to the people who were going to sell those same shares to me at 50 or 60. I sure was a sucker not to use the four millions to make money for them, wasn’t I? The cash was supplied to buy stock with, but only if I thought it necessary to do so. Well, I didn’t.”

Joshua had been in Wall Street long enough not to let anger interfere with business. He cooled off as he heard me, and when I was through talking he said in a friendly tone of voice, “Look here, Larry, old chap, what shall we do?”

“Do whatever you please.”

“Aw, be a sport. What would you do if you were in our place?”

“If I were in your place,” I said solemnly, “do you know what I’d do?”

“What?”

“I’d sell out!” I told him.

He looked at me a moment, and without another word turned on his heel and walked out of my office. He’s never been in it since.

Not long after that, Senator Gordon also called. He, too, was quite peevish and blamed me for their troubles. Then Kane joined the anvil chorus. They forgot that their stock had been unsalable in bulk when they formed the syndicate. All they could remember was that I didn’t sell their holdings when I had the syndicate’s millions and the stock was active at 44, and that now it was 30 and dull as dishwater. To their way of thinking I should have sold out at a good fat profit.

Of course they also cooled down in due time. The syndicate wasn’t out a cent and the main problem remained unchanged: to sell their stock. A day or two later they came back and asked me to help them out. Gordon was particularly insistent, and in the end I made them put in their pooled stock at 25½. My fee for my services was to be one-half of whatever I got above that figure. The last sale had been at about 30.

There I was with their stock to liquidate. Given general market conditions and specifically the behaviour of Consolidated Stove, there was only one way to do it, and that was, of course, to sell on the way down and without first trying to put up the price, and I certainly would have got stock by the ream on the way up. But on the way down I could reach those buyers who always argue that a stock is cheap when it sells fifteen or twenty points below the top of the movement,

## particularly when that top is a matter of recent history. A rally is

due, in their opinion. After seeing Consolidated Stove sell up to close to 44 it sure looked like a good thing below 30.

It worked out as always. Bargain hunters bought it in sufficient volume to enable me to liquidate the pool’s holdings. But do you think that Gordon or Wolff or Kane felt any gratitude? Not a bit of it. They are still sore at me, or so their friends tell me. They often tell people how I did them. They cannot forgive me for not putting up the price on myself, as they expected.

As a matter of fact I never would have been able to sell the bank’s hundred thousand shares if Wolff and the rest had not passed around those red-hot bull tips of theirs. If I had worked as I usually do--that is, in a logical natural way--I would have had to take whatever price I could get. I told you we ran into a declining market. The only way to sell on such a market is to sell not necessarily recklessly but really regardless of price. No other way was possible, but I suppose they do not believe this. They are still angry. I am not. Getting angry doesn’t get a man anywhere. More than once it has been borne in on me that a speculator who loses his temper is a goner. In this case there was no aftermath to the grouches. But I’ll tell you something curious. One day Mrs. Livingston went to a dressmaker who had been warmly recommended to her. The woman was competent and obliging and had a very pleasing personality. At the third or fourth visit, when the dressmaker felt less like a stranger, she said to Mrs. Livingston: “I hope Mr. Livingston puts up Consolidated Stove soon. We have some that we bought because we were told he was going to put it up, and we’d always heard that he was very successful in all his deals.”

I tell you it isn’t pleasant to think that innocent people may have lost money following a tip of that sort. Perhaps you understand why I never give any myself. That dressmaker made me feel that in the matter of grievances I had a real one against Wolff.

_XXIII_

Speculation in stocks will never disappear. It isn’t desirable that it should. It cannot be checked by warnings as to its dangers. You cannot prevent people from guessing wrong no matter how able or how experienced they may be. Carefully laid plans will miscarry because the unexpected and even the unexpectable will happen. Disaster may come from a convulsion of nature or from the weather, from your own greed or from some man’s vanity; from fear or from uncontrolled hope. But apart from what one might call his natural foes, a speculator in stocks has to contend with certain practices or abuses that are indefensible normally as well as commercially.

As I look back and consider what were the common practices twenty-five years ago when I first came to Wall Street, I have to admit that there have been many changes for the better. The old-fashioned bucket shops are gone, though bucketeering “brokerage” houses still prosper at the expense of men and women who persist in playing the game of getting rich quick. The Stock Exchange is doing excellent work not only in getting after these out-and-out swindlers but in insisting upon strict adherence to its rules by its own members. Many wholesome regulations and restrictions are now strictly enforced but there is still room for improvement. The ingrained conservatism of Wall Street rather than ethical callousness is to blame for the persistence of certain abuses.

Difficult as profitable stock speculation always has been it is becoming even more difficult every day. It was not so long ago when a real trader could have a good working knowledge of practically every stock on the list. In 1901, when J. P. Morgan brought out the United States Steel Corporation, which was merely a consolidation of lesser consolidations most of which were less than two years old, the Stock Exchange had 275 stocks on its list and about 100 in its “unlisted department”; and this included a lot that a chap didn’t have to know anything about because they were small issues, or inactive by reason of being minority or guaranteed stocks and therefore lacking in speculative attractions. In fact, an overwhelming majority were stocks in which there had not been a sale in years. Today there are about 900 stocks on the regular list and in our recent active markets about 600 separate issues were traded in. Moreover, the old groups or classes of stocks were easier to keep track of. They not only were fewer but the capitalization was smaller and the news a trader had to be on the lookout for did not cover so wide a field. But today, a man is trading in everything; almost every industry in the world is represented. It requires more time and more work to keep posted and to that extent speculation has become much more difficult for those who operate intelligently.

There are many thousands of people who buy and sell stocks speculatively but the number of those who speculate profitably is small. As the public always is “in” the market to some extent, it follows that there are losses by the public all the time. The speculator’s deadly enemies are: Ignorance, greed, fear and hope. All the statute books in the world and all the rules of all the Exchanges on earth cannot eliminate these from the human animal. Accidents which knock carefully conceived plans skyhigh also are beyond regulation by bodies of cold-blooded economists or warm-hearted philanthropists. There remains another source of loss and that is, deliberate misinformation as distinguished from straight tips. And because it is apt to come to a stock trader variously disguised and camouflaged, it is the more insidious and dangerous.

The average outsider, of course, trades either on tips or on rumours, spoken or printed, direct or implied. Against ordinary tips you cannot guard. For instance, a lifelong friend sincerely desires to make you rich by telling you what he has done, that is, to buy or sell some stock. His intent is good. If the tip goes wrong what can you do? Also against the professional or crooked tipster the public is protected to about the same extent that he is against gold-bricks or wood-alcohol. But against the typical Wall Street rumours, the speculating public has neither protection nor redress. Wholesale dealers in securities, manipulators, pools and individuals resort to various devices to aid them in disposing of their surplus holdings at the best possible prices. The circulation of bullish items by the newspapers and the tickers is the most pernicious of all.

Get the slips of the financial news-agencies any day and it will surprise you to see how many statements of an implied semi-official nature they print. The authority is some “leading insider” or “a prominent director” or “a high official” or someone “in authority” who presumably knows what he is talking about. Here are today’s slips. I pick an item at random. Listen to this: “A leading banker says it is too early yet to expect a declining market.”

Did a leading banker really say that and if he said it why did he say it? Why does he not allow his name to be printed? Is he afraid that people will believe him if he does?

Here is another one about a company the stock of which has been active this week. This time the man who makes the statement is a “prominent director.” Now which--if any--of the company’s dozen directors is doing the talking? It is plain that by remaining anonymous nobody can be blamed for any damage that may be done by the statement.

Quite apart from the intelligent study of speculation everywhere the trader in stocks must consider certain facts in connection with the game in Wall Street. In addition to trying to determine how to make money one must also try to keep from losing money. It is almost as important to know what not to do as to know what should be done. It is therefore well to remember that manipulation of some sort enters into practically all advances in individual stocks and that such advances are engineered by insiders with one object in view and one only and that is to sell at the best profit possible. However, the average broker’s customer believes himself to be a business man from Missouri if he insists upon being told why a certain stock goes up. Naturally, the manipulators “explain” the advance in a way calculated to facilitate distribution. I am firmly convinced that the public’s losses would be greatly reduced if no anonymous statements of a bullish nature were allowed to be printed. I mean statements calculated to make the public buy or hold stocks.

The overwhelming majority of the bullish articles printed on the authority of unnamed directors or insiders convey unreliable and misleading impressions to the public. The public loses many millions of dollars every year by accepting such statements as semi-official and therefore trustworthy.

Say for example that a company has gone through a period of depression in its particular line of business. The stock is inactive. The quotation represents the general and presumably accurate belief of its actual value. If the stock were too cheap at that level somebody would know it and buy it and it would advance. If too dear somebody would know enough to sell it and the price would decline. As nothing happens one way or another nobody talks about it or does anything.

The turn comes in the line of business the company is engaged in. Who are the first to know it, the insiders or the public? You can bet it isn’t the public. What happens next? Why, if the improvement continues the earnings will increase and the company will be in position to resume dividends on the stock; or, if dividends were not discontinued, to pay a higher rate. That is, the value of the stock will increase.

Say that the improvement keeps up. Does the management make public that glad fact? Does the president tell the stockholders? Does a philanthropic director come out with a signed statement for the benefit of that part of the public that reads the financial page in the newspapers and the slips of the news agencies? Does some modest insider pursuing his usual policy of anonymity come out with an unsigned statement to the effect that the company’s future is most promising? Not this time. Not a word is said by anyone and no statement whatever is printed by newspapers or tickers.

The value-making information is carefully kept from the public while the now taciturn “prominent insiders” go into the market and buy all the cheap stock they can lay their hands on. As this well-informed but unostentatious buying keeps on, the stock rises. The financial reporters, knowing that the insiders ought to know the reason for the rise, ask questions. The unanimously anonymous insiders unanimously declare that they have no news to give out. They do not know that there is any warrant for the rise. Sometimes they even state that they are not particularly concerned with the vagaries of the stock market or the

## actions of stock speculators.

The rise continues and there comes a happy day when those who know have all the stock they want or can carry. The Street at once begins to hear all kinds of bullish rumours. The tickers tell the traders “on good authority” that the company has definitely turned the corner. The same modest director who did not wish his name used when he said he knew no warrant for the rise in the stock is now quoted--of course not by name--as saying that the stockholders have every reason to feel greatly encouraged over the outlook.

Urged by the deluge of bullish news items the public begins to buy the stock. These purchases help to put the price still higher. In due course the predictions of the uniformly unnamed directors come true and the company resumes dividend payments; or increases the rate, as the case may be. With that the bullish items multiply. They not only are more numerous than ever but much more enthusiastic. A “leading director,” asked point blank for a statement of conditions, informs the world that the improvement is more than keeping up. A “prominent insider,” after much coaxing, is finally induced by a news-agency to confess that the earnings are nothing short of phenomenal. A “well-known banker,” who is affiliated in a business way with the company, is made to say that the expansion in the volume of sales is simply unprecedented in the history of the trade. If not another order came in the company would run night and day for heaven knows how many months. A “member of the finance committee,” in a double-leaded manifesto, expresses his astonishment at the public’s astonishment over the stock’s rise. The only astonishing thing is the stock’s moderation in the climbing line. Anybody who will analyse the forthcoming annual report can easily figure how much more than the market-price the book-value of the stock is. But in no instance is the name of the communicative philanthropist given.

As long as the earnings continue good and the insiders do not discern any sign of a let up in the company’s prosperity they sit on the stock they bought at the low prices. There is nothing to put the price down, so why should they sell? But the moment there is a turn for the worse in the company’s business, what happens? Do they come out with statements or warnings or the faintest of hints? Not much. The trend is now downward. Just as they bought without any flourish of trumpets when the company’s business turned for the better, they now silently sell. On this inside selling the stock naturally declines. Then the public begins to get the familiar “explanations.” A “leading insider” asserts that everything is O.K. and the decline is merely the result of selling by bears who are trying to affect the general market. If on one fine day, after the stock has been declining for some time, there should be a sharp break, the demand for “reasons” or “explanations” becomes clamorous. Unless somebody says something the public will fear the worst. So the news-tickers now print something like this: “When we asked a prominent director of the company to explain the weakness in the stock, he replied that the only conclusion he could arrive at was that the decline today was caused by a bear drive. Underlying conditions are unchanged. The business of the company was never better than at present and the probabilities are that unless something entirely unforeseen happens in the meanwhile, there will be an increase in the rate at the next dividend meeting. The bear party in the market has become aggressive and the weakness in the stock was clearly a raid intended to dislodge weakly held stock.” The news-tickers, wishing to give good measure, as likely as not will go on to state that they are “reliably informed” that most of the stock bought on the day’s decline was taken by inside interests and that the bears will find that they have sold themselves into a trap. There will be a day of reckoning.

In addition to the losses sustained by the public through believing bullish statements and buying stocks, there are the losses that come through being dissuaded from selling out. The next best thing to having people buy the stock the “prominent insider” wishes to sell is to prevent people from selling the same stock when he does not wish to support or accumulate it. What is the public to believe after reading the statement of the “prominent director?” What can the average outsider think? Of course, that the stock should never have gone down; that it was forced down by bear-selling and that as soon as the bears stop the insiders will engineer a punitive advance during which the shorts will be driven to cover at high prices. The public properly believes this because it is exactly what would happen if the decline had in truth been caused by a bear raid.

The stock in question, notwithstanding all the threats or promises of a tremendous squeeze of the over-extended short interest, does not rally. It keeps on going down. It can’t help it. There has been too much stock fed to the market from the inside to be digested.

And this inside stock that has been sold by the “prominent directors” and “leading insiders” becomes a football among the professional traders. It keeps on going down. There seems to be no bottom for it. The insiders knowing that trade conditions will adversely affect the company’s future earnings do not dare to support that stock until the next turn for the better in the company’s business. Then there will be inside buying and inside silence.

I have done my share of trading and have kept fairly well posted on the stock market for many years and I can say that I do not recall an instance when a bear raid caused a stock to decline extensively. What was called bear raiding was nothing but selling based on accurate knowledge of real conditions. But it would not do to say that the stock declined on inside selling or on inside non-buying. Everybody would hasten to sell and when everybody sells and nobody buys there is the dickens to pay.

The public ought to grasp firmly this one point: That the real reason for a protracted decline is never bear raiding. When a stock keeps on going down you can bet there is something wrong with it, either with the market for it or with the company. If the decline were unjustified the stock would soon sell below its real value and that would bring in buying that would check the decline. As a matter of fact, the only time a bear can make big money selling a stock is when that stock is too high. And you can gamble your last cent on the certainty that insiders will not proclaim that fact to the world.