Part 11

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.

A man can’t spend years at one thing and not acquire a habitual attitude towards it quite unlike that of the average beginner. The difference distinguishes the professional from the amateur. It is the way a man looks at things that makes or loses money for him in the speculative markets. The public has the dilettante’s point of view toward his own effort. The ego obtrudes itself unduly and the thinking therefore is not deep or exhaustive. The professional concerns himself with doing the right thing rather than with making money, knowing that the profit takes care of itself if the other things are attended to. A trader gets to play the game as the professional billiard player does--that is, he looks far ahead instead of considering the particular shot before him. It gets to be an instinct to play for position.

I remember hearing a story about Addison Cammack that illustrates very nicely what I wish to point out. From all I have heard, I am inclined to think that _Cammack_ was one of the ablest stock traders the Street ever saw. He was not a chronic bear as many believe, but he felt the greater appeal of trading on the bear side, of utilizing in his behalf the two great human factors of hope and fear. He is credited with coining the warning: “Don’t sell stocks when the sap is running up the trees!” and the old-timers tell me that his biggest winnings were made on the bull side, so that it is plain he did not play prejudices but conditions. At all events, he was a consummate trader. It seems that once--this was way back at the tag end of a bull market--Cammack was bearish, and J. Arthur Joseph, the financial writer and raconteur, knew it. The market, however, was not only strong but still rising, in response to prodding by the bull leaders and optimistic reports by the newspapers. Knowing what use a trader like Cammack could make of bearish information, Joseph rushed to Cammack’s office one day with glad tidings.

“Mr. Cammack, I have a very good friend who is a transfer clerk in the St. Paul office and he has just told me something which I think you ought to know.”

“What is it?” asked Cammack listlessly.

“You’ve turned, haven’t you? You are bearish now?” asked Joseph, to make sure. If Cammack wasn’t interested he wasn’t going to waste precious ammunition.

“Yes. What’s the wonderful information?”

“I went around to the St. Paul office to-day, as I do in my news-gathering rounds two or three times a week, and my friend there said to me: ‘The Old Man is selling stock.’ He meant William Rockefeller. ‘Is he really, Jimmy?’ I said to him, and he answered, ‘Yes; he is selling fifteen hundred shares every three-eighths of a point up. I’ve been transferring the stock for two or three days now.’ I didn’t lose any time, but came right over to tell you.”

Cammack was not easily excited, and, moreover, was so accustomed to having all manner of people rush madly into his office with all manner of news, gossip, rumors, tips and lies that he had grown distrustful of them all. He merely said now, “Are you sure you heard right, Joseph?”

“Am I sure? Certainly I am sure! Do you think I am deaf?” said Joseph.

“Are you sure of your man?”

“Absolutely!” declared Joseph. “I’ve known him for years. He has never lied to me. He wouldn’t! No object! I know he is absolutely reliable and I’d stake my life on what he tells me. I know him as well as I know anybody in this world--a great deal better than you seem to know me, after all these years.”

“Sure of him, eh?” And Cammack again looked at Joseph. Then he said, “Well, you ought to know.” He called his broker, W. B. Wheeler. Joseph expected to hear him give an order to sell at least fifty thousand shares of St. Paul. William Rockefeller was disposing of his holdings in St. Paul, taking advantage of the strength of the market. Whether it was investment stock or speculative holdings was irrelevant. The one important fact was that the best stock trader of the Standard Oil crowd was getting out of St. Paul. What would the average man have done if he had received the news from a trustworthy source? No need to ask.

But Cammack, the ablest bear operator of his day, who was bearish on the market just then, said to his broker, “Billy, go over to the board and buy fifteen hundred St. Paul every three-eighths up.” The stock was then in the nineties.

“Don’t you mean sell?” interjected Joseph hastily. He was no novice in Wall Street, but he was thinking of the market from the point of view of the newspaper man and, incidentally, of the general public. The price certainly ought to go down on the news of inside selling. And there was no better inside selling than Mr. William Rockefeller’s. The Standard Oil getting out and Cammack buying! It couldn’t be!

“No,” said Cammack; “I mean buy!”

“Don’t you believe me?”

“Yes!”

“Don’t you believe my information?”

“Yes.”

“Aren’t you bearish?”

“Yes.”

“Well, then?”

“That’s why I’m buying. Listen to me now: You keep in touch with that reliable friend of yours and the moment the scaled selling stops, let me know. Instantly! Do you understand?”

“Yes,” said Joseph, and went away, not quite sure he could fathom Cammack’s motives in buying William Rockefeller’s stock. It was the knowledge that Cammack was bearish on the entire market that made his manœuvre so difficult to explain. However, Joseph saw his friend the transfer clerk and told him he wanted to be tipped off when the Old Man got through selling. Regularly twice a day Joseph called on his friend to inquire.

One day the transfer clerk told him, “There isn’t any more stock coming from the Old Man.” Joseph thanked him and ran to Cammack’s office with the information.

Cammack listened attentively, turned to Wheeler and asked, “Billy, how much St. Paul have we got in the office?” Wheeler looked it up and reported that they had accumulated about sixty thousand shares.

Cammack, being bearish, had been putting out short lines in the other Grangers as well as in various other stocks, even before he began to buy St. Paul. He was now heavily short of the market. He promptly ordered Wheeler to sell the sixty thousand shares of St. Paul that they were long of, and more besides. He used his long holdings of St. Paul as a lever to depress the general list and greatly benefit his operations for a decline.

St. Paul didn’t stop on that move until it reached forty-four and Cammack made a killing in it. He played his cards with consummate skill and profited accordingly. The point I would make is his habitual attitude toward trading. He didn’t have to reflect. He saw instantly what was far more important to him than his profit on that one stock. He saw that he had providentially been offered an opportunity to begin his big bear operations not only at the proper time but with a proper initial push. The St. Paul tip made him buy instead of sell because he saw at once that it gave him a vast supply of the best ammunition for his bear campaign.

To get back to myself. After I closed my trade in wheat and corn I went South in my yacht. I cruised about in Florida waters, having a grand old time. The fishing was great. Everything was lovely. I didn’t have a care in the world and I wasn’t looking for any.

One day I went ashore at Palm Beach. I met a lot of Wall Street friends and others. They were all talking about the most picturesque cotton speculator of the day. A report from New York had it that Percy Thomas had lost every cent. It wasn’t a commercial bankruptcy; merely the rumor of the world-famous operator’s second Waterloo in the cotton market.

I had always felt a great admiration for him. The first I ever heard of him was through the newspapers at the time of the failure of the Stock Exchange house of Sheldon & Thomas, when Thomas tried to corner cotton. Sheldon, who did not have the vision or the courage of his partner, got cold feet on the very verge of success. At least, so the Street said at the time. At all events, instead of making a killing they made one of the most sensational failures in years. I forget how many millions. The firm was wound up and Thomas went to work alone. He devoted himself exclusively to cotton and it was not long before he was on his feet again. He paid off his creditors in full with interest--debts he was not legally obliged to discharge--and withal had a million dollars left to himself. His comeback in the cotton market was in its way as remarkable as Deacon S. V. White’s famous stock-market exploit of paying off one million dollars in one year. Thomas’ pluck and brains made me admire him immensely.

Everybody in Palm Beach was talking about the collapse of Thomas’ deal in March cotton. You know how the talk goes--and grows; the amount of misinformation and exaggeration and improvements that you hear. Why, I’ve seen a rumor about myself grow so that the fellow who started it did not recognize it when it came back to him in less than twenty-four hours, swollen with new and picturesque details.

The news of Percy Thomas’ latest misadventure turned my mind from the fishing to the cotton market. I got files of the trade papers and read them to get a line on conditions. When I got back to New York I gave myself up to studying the market. Everybody was bearish and everybody was selling July cotton. You know how people are. I suppose it is the contagion of example that makes a man do something because everybody around him is doing the same thing. Perhaps it is some phase or variety in the herd instinct. In any case it was, in the opinion of hundreds of traders, the wise and proper thing to sell July cotton--and so safe too! You couldn’t call that general selling reckless; the word is too conservative. The traders simply saw one side to the market and a great big profit. They certainly expected a collapse in prices.

I saw all this, of course, and it struck me that the chaps who were short didn’t have a terrible lot of time to cover in. The more I studied the situation the clearer I saw this, until I finally decided to buy July cotton. I went to work and quickly bought one hundred thousand bales. I experienced no trouble in getting it because it came from so many sellers. It seemed to me that I could have offered a reward of one million dollars for the capture, dead or alive, of a single trader who was not selling July cotton and nobody would have claimed it.

I should say this was in the latter part of May. I kept buying more and they kept on selling it to me until I had picked up all the floating contracts and I had one hundred and twenty thousand bales. A couple of days after I had bought the last of it it began to go up. Once it started the market was kind enough to keep on doing very well indeed--that is, it went up from forty to fifty points a day.

One Saturday--this was about ten days after I began operations--the price began to creep up. I did not know whether there was any more July cotton for sale. It was up to me to find out, so I waited until the last ten minutes. At that time, I knew, it was usual for those fellows to be short and if the market closed up for the day they would be safely hooked. So I sent in four different orders to buy five thousand bales each, at the market, at the same time. That ran the price up thirty points and the shorts were doing their best to wriggle away. The market closed at the top. All I did, remember, was to buy that last twenty thousand bales.