Part 28

Of course, the classic example is the New Haven. Everybody knows today what only a few knew at the time. The stock sold at 255 in 1902 and was the premier railroad investment of New England. A man in that part of the country measured his respectability and standing in the community by his holdings of it. If somebody had said that the company was on the road to insolvency he would not have been sent to jail for saying it. They would have clapped him in an insane asylum with other lunatics. But when a new and aggressive president was placed in charge by Mr. Morgan and the débâcle began, it was not clear from the first that the new policies would land the road where it did. But as property after property began to be saddled in the Consolidated Road at inflated prices, a few clear sighted observers began to doubt the wisdom of the _Mellen_ policies. A trolley system was bought for two million and sold to the New Haven for $10,000,000; whereupon a reckless man or two committed lèse majesté by saying that the management was

## acting recklessly. Hinting that not even the New Haven could stand such

extravagance was like impugning the strength of Gibraltar.

Of course, the first to see breakers ahead were the insiders. They became aware of the real condition of the company and they reduced their holdings of the stock. On their selling as well as on their non-support, the price of New England’s gilt-edged railroad stock began to yield. Questions were asked, and explanations were demanded as usual; and the usual explanations were promptly forthcoming. “Prominent insiders” declared that there was nothing wrong that they knew of and that the decline was due to reckless bear selling. So the “investors” of New England kept their holdings of New York, New Haven & Hartford stock. Why shouldn’t they? Didn’t insiders say there was nothing wrong and cry bear selling? Didn’t dividends continue to be declared and paid?

In the meantime the promised squeeze of the bears did not come but new low records did. The insider selling became more urgent and less disguised. Nevertheless public spirited men in Boston were denounced as stock-jobbers and demagogues for demanding a genuine explanation for the stock’s deplorable decline that meant appalling losses to everybody in New England who had wanted a safe investment and a steady dividend payer.

That historic break from $255 to $12 a share never was and never could have been a bear drive. It was not started and it was not kept up by bear operations. The insiders sold right along and always at higher prices than they could have done if they had told the truth or allowed the truth to be told. It did not matter whether the price was 250 or 200 or 150 or 100 or 50 or 25, it still was too high for that stock, and the insiders knew it and the public did not. The public might profitably consider the disadvantages under which it labours when it tries to make money buying and selling the stock of a company concerning whose affairs only a few men are in position to know the whole truth.

The stocks which have had the worst breaks in the past 20 years did not decline on bear raiding. But the easy acceptance of that form of explanation has been responsible for losses by the public amounting to millions upon millions of dollars. It has kept people from selling who did not like the way his stock was acting and would have liquidated if they had not expected the price to go right back after the bears stopped their raiding. I used to hear Keene blamed in the old days. Before him they used to accuse Charley Woerishoffer or Addison Cammack. Later on I became the stock excuse.

I recall the case of Intervale Oil. There was a pool in it that put the stock up and found some buyers on the advance. The manipulators ran the price to 50. There the pool sold and there was a quick break. The usual demand for explanations followed. Why was Intervale so weak? Enough people asked this question to make the answer important news. One of the financial news tickers called up the brokers who knew the most about Intervale Oil’s advance and ought to be equally well posted as to the decline. What did these brokers, members of the bull pool, say when the news agency asked them for a reason that could be printed and sent broadcast over the country? Why, that Larry Livingston was raiding the market! And that wasn’t enough. They added that they were going to “get” him. But of course, the Intervale pool continued to sell. The stock only stood then about $12 a share and they could sell it down to 10 or lower and their average selling price would still be above cost.

It was wise and proper for insiders to sell on the decline. But for outsiders who had paid 35 or 40, it was a different matter. Reading what the tickers printed there outsiders held on and waited for Larry Livingston to get what was coming to him at the hands of the indignant inside pool.

In a bull market and particularly in booms the public at first makes money which it later loses simply by overstaying the bull market. This talk of “bear raids” helps them to overstay. The public should beware of explanations that explain only what unnamed insiders wish the public to believe.

_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