Chapter 4
Trading on Conviction: The San Francisco Earthquake
In spring 1906, I went to Atlantic City for a vacation, completely out of stocks. While there, I experienced one of those curious market hunches I've learned to respect. Looking at the quotation board at Harding Brothers' branch office, I suddenly felt I should sell Union Pacific, despite having no logical reason. The market was strong and bullish, but I couldn't shake the feeling. I sold 1,000 shares immediately, then 2,000 more, confounding my bullish friend who demanded to know my reasons. I simply couldn't explain it beyond an overwhelming urge to sell.
I abandoned my vacation and returned to New York that night. The next day brought news of the San Francisco earthquake. Despite this catastrophe, the market opened only slightly down and recovered quickly - the Street failing to appreciate the disaster's magnitude. I increased my short position to 5,000 shares, then doubled it to 10,000 as fuller reports came in. When the market finally broke, I cleaned up $250,000 - my biggest winnings to date.
Later that summer in Saratoga Springs, I noticed Union Pacific acting like it was being accumulated. I started buying around 160, feeling comfortable as it strengthened with each purchase. Suddenly, Ed Harding called from New York, urgently warning me that insiders were feeding out stock to suckers like me. Despite my tape reading indicating buying pressure, I trusted Harding's inside information and sold all my shares. Then, believing it equally logical, I went short 4,000 shares around 162.
The next day, Union Pacific directors declared an unprecedented 10% dividend. Wall Street was initially skeptical, but the market exploded upward. I immediately recognized my mistake in ignoring my own convictions for someone else's suspicions. I covered my shorts at 172-174, costing me $40,000 - a cheap lesson. Following the tape's continued bullish signals, I went long 4,000 shares, making back my loss plus $15,000 more. This Saratoga experience completed my education as a trader, giving me confidence in myself and marking my transition from haphazard trading to thinking about basic market conditions rather than individual stocks.
Chapter 5
The Art of Position Building: Testing the Market
My approach to trading is systematic: buy on a rising scale, not a declining one. If I buy 2,000 shares at 110 and it rises to 111, I'm temporarily right and buy 2,000 more. If it continues to 114, I might buy another 2,000, establishing a 6,000-share position at an average of 11134. Then I wait for a reaction to test market strength. If it drops to 11212 and rallies back to 11334, I'll buy 4,000 more. How those shares get filled tells me whether I'm right - if I get them too easily, something's wrong. I never want to buy stocks too cheap or too easily.
I illustrate this principle with a story about Deacon S.V. White, a legendary operator. When given a tip that H.O. Havemeyer was buying Sugar stock, instead of buying immediately, the Deacon sold 10,000 shares, then another 10,000. When both lots were absorbed by a rising market, he knew someone was indeed accumulating, so he covered his shorts and went long 30,000 shares. This tested the market's buying power before committing.
This approach applies to selling too - you can't unload large positions at will. You must watch and test to find when the market can absorb your sales. The timing of your initial transaction is crucial, and you should never make a second trade unless the first shows a profit. It took me years and hundreds of thousands of dollars to learn this lesson.
In cotton trading, I followed this system religiously. With a target position of 40-50 thousand bales, I'd start with 10,000. If it rose 10 points, I'd add another 10,000. At 20 points profit, I'd complete my line with 20,000 more. But if my initial purchase showed a loss, I'd exit immediately. This approach ensured I always participated in real market movements, even if I spent $50-60,000 testing the waters. Once the real movement started, I'd quickly recover those exploratory losses.
Chapter 6
The 1907 Crash: Becoming King for a Day
The Union Pacific incident in Saratoga in 1906 made me more independent than ever of tips and talk. Events proved I could read the tape more accurately than most people around me. I was better equipped than the average customer at Harding Brothers because I was free from speculative prejudices - I don't favor either the bull or bear side, my only prejudice is against being wrong.
I recalled old Partridge's favorite remark-"Well, this is a bull market, you know"-as though that were tip enough for anybody wise enough. It was curious how people who suffered tremendous losses from a fifteen or twenty-point break would welcome a three-point rally, certain the bottom had been reached.
When my friend asked if I'd covered my shorts, I explained that stocks must be "good and dead" before they rise. The rallies grew increasingly feeble as I pushed my luck. Every time I sold Great Northern preferred, it broke several points. I felt out weak spots elsewhere and attacked them - all yielded except Reading, which stood firm like Gibraltar. Everyone warned me it was suicide to short Reading due to a strong bull pool with low-cost shares and friendly bank connections. Despite this, I sold a little Reading anyway, staying true to my principles.
In the past, Reading's strength might have fooled me, but now I was anticipating a general break with no exceptions. I played a lone hand but felt I had allies - underlying conditions. When Reading continued defying the downward trend, I gave two brokers simultaneous orders to sell four thousand shares each. The supposedly "cornered" stock took a headlong dive from 111 to 92, where I covered my entire short line.
After that I had a wonderful time, and in February 1907 I cleaned up as Great Northern preferred had dropped sixty or seventy points. I took profits because I figured the decline had discounted the immediate future.
The crisis peaked on October 24, 1907 - a day I'll never forget. Money was completely unavailable at any price. Brokers couldn't sell stocks because there were no buyers. The Stock Exchange president sought help from James Stillman of National City Bank, who took him to J.P. Morgan. Morgan ordered the banks to provide money using their reserves, ultimately saving the market with about twenty million dollars.
That day marked my winnings exceeding one million dollars and the successful conclusion of my first deliberately planned trading campaign. When I realized how severe the panic was becoming, I stopped selling and began buying at bottom prices, knowing that continuing the bear raid would harm the country's recovery prospects. My wild dream had been realized - I had become king of the market for a day.
Chapter 7
The Million-Dollar Mistake: Falling Under Another's Influence
The recognition of our mistakes should benefit us as much as studying our successes, but human nature avoids punishment. Stock market mistakes wound both your pocketbook and vanity. Sometimes traders make mistakes knowingly, and afterward may understand how and when they made them, but rarely why. A wise and lucky man won't repeat the same mistake, but will likely make one of its ten thousand relatives.
My first million-dollar mistake came right after becoming a millionaire following the 1907 crash. Having money merely meant more reserves - it doesn't make being wrong any more comfortable. Losses never bother me overnight, but being wrong and not taking the loss damages both finances and spirit.
After my cotton triumph, I received a visit from Percy Thomas, the famous cotton speculator known worldwide. I had long admired him as a true speculator with the vision of a dreamer and a fighter's courage - a thinker who understood both theory and practice of cotton trading.
Despite initially declining Thomas's partnership proposal, I began seeing him regularly, drawn to his magnetic personality, impressive knowledge, and remarkable plausibility. Though I wasn't bullish on cotton while he was, his constant barrage of facts and figures gradually undermined my confidence in my own research. I didn't completely accept his view but lost my poise and ceased doing my own thinking - a dangerous state for a trader.
I began to accept Thomas's facts and figures, gradually fearing my bearish position was based on misinformation. Once I covered my short position, I naturally went long, accumulating my usual line of sixty thousand bales - an asinine play where I was merely following another man's game. The market didn't move as Thomas predicted, but instead of taking my loss, I made the catastrophic mistake of trying to hold up the market.
My line increased to about 150,000 bales while I was also carrying a profitable wheat position. Feeling unwell and nervous about my overlarge commitments, I made the utterly foolish decision to sell my profitable wheat and keep my losing cotton. After selling wheat, it rose twenty cents per bushel - I could have made eight million dollars. Meanwhile, I kept buying more cotton to prevent price drops, eventually accumulating 440,000 bales before finally selling out.
I lost nearly everything I had made from my other deals, leaving me with only hundreds of thousands instead of millions. This costly lesson taught me about my susceptibility to magnetic personalities expressed by brilliant minds.
Chapter 8
The Art of Manipulation: Creating Markets
I approach manipulation as a professional service, similar to consulting a physician or engineer. When approached about handling a stock distribution, I first thoroughly research the security and market conditions to determine feasibility. If favorable, I set my terms, typically requesting graduated calls on blocks of stock starting slightly below market price and increasing incrementally.
My first step is creating activity to advertise the bull movement. The ticker tape is the world's greatest publicity agent - I need no press releases or financial reviews. Activity naturally generates demand for explanations. Floor traders, who will trade any active stock regardless of price, become my first buyers. They follow the activity all the way up, spreading the word and distributing tips better than any paid promoters could.
After attracting speculators' attention through activity, buying typically exceeds selling, especially since I've secured much of the available stock through calls. When public demand materializes, I sell on balance, often selling short against my calls when demand is strong. When momentum slows and the stock begins declining, I provide support by covering my shorts without depleting resources.
This stabilizing process discourages both reckless short selling and frightened liquidation. I sell stock during advances but never enough to halt the rise, encouraging conservative speculators while maintaining my ability to support the stock on weak days. By remaining short, I can always provide support without personal risk.
I'll illustrate my manipulation approach with Imperial Steel, where I marked up the price 30 points while accumulating only 7,000 shares and creating a market that could absorb almost any amount of stock.
Imperial Steel was a respectable but dormant stock - about 30% publicly distributed with no significant activity after listing. Despite occasional positive insider reports about earnings and prospects, it lacked speculative appeal. The stock remained in limbo - neither declining (because nobody sold) nor advancing (because nobody bought).
My campaign began by determining how much stock would come to market on an advance. I quietly absorbed all stock for sale at 70 and higher, which wasn't much. Once I relieved this selling pressure, the path of least resistance was clearly upward. Floor traders, seeing this trend, began buying - and I supplied their demand with the stock I had purchased earlier.
I carefully managed the process, not forcing stock on the market or seeking too rapid an advance. When buying slowed and prices stopped rising, disappointed bulls began selling. I bought this stock back at lower prices, which checked the decline. Then I repeated the process - buying on dips, selling on rallies, but always working higher.
Chapter 9
The Speculator's Enemies: Truth About Wall Street
Speculation in stocks will never disappear, nor should it. Despite its dangers, people will always guess wrong regardless of experience or ability. Well-laid plans fail because of the unexpected - from nature, weather, greed, vanity, fear, or hope. Beyond these natural challenges, speculators must contend with indefensible practices and abuses.
The speculator faces four deadly enemies: ignorance, greed, fear, and hope - human traits no laws can eliminate. Beyond these and unpredictable accidents lies another danger: deliberate misinformation disguised as helpful tips.
The manipulation pattern is predictable: When a company's business improves, insiders remain silent while quietly accumulating cheap stock. As their buying drives prices up, reporters ask questions, but insiders deny having news or claim disinterest in "market vagaries."
Once insiders have acquired all the stock they want, bullish rumors suddenly emerge. Tickers report "on good authority" that the company has "turned the corner." The previously silent directors now anonymously encourage stockholders. The public buys, pushing prices higher, and when dividends resume or increase, bullish news multiplies with "leading directors" and "prominent insiders" describing "phenomenal" earnings and "unprecedented" sales.
Insiders hold their low-priced shares while business remains good. But when conditions worsen, they silently sell. As the stock declines on this insider selling, the familiar "explanations" begin: "leading insiders" blame bear raids while assuring the public that "underlying conditions are unchanged" and "business has never been better." News tickers add that "inside interests" are buying the dips and bears have "sold themselves into a trap."
These statements prevent public selling when insiders don't wish to support the stock. But despite promises of a short squeeze, the stock keeps falling, weighed down by insider selling. I've never seen a genuine bear raid cause an extensive decline - what's called bear raiding is actually selling based on accurate knowledge of real conditions.
Stock trading fundamentals are simple: continuous buying makes stocks rise; when they turn downward with only small rallies, the trend has changed. No explanation is needed. Those who know the real reasons for decline typically keep quiet or falsely claim the stock is cheap.
Many supposed "insider statements" are fabricated by parties with market interests. While insiders might tell big players when to buy, they never reveal when to sell. Corporate leaders may trade on inside knowledge but typically remain silent rather than lie outright.
Years of experience have convinced me no one can consistently beat the market. Wall Street professionals know that acting on "inside tips" breaks traders faster than any catastrophe. There's no easy path to success in Wall Street or anywhere else. After nearly thirty years of constant trading, I've concluded that no man living can beat the stock market! You may beat individual stocks or make money on specific grain deals, but you cannot beat the markets themselves. It's like horse racing - you might win a race, but you cannot beat horse racing.
