Of course I watched the market. With me, to look at the quotation board and to read the signs is one process. My good friend Union Pacific, I noticed, looked like going up. _The price was high, but the stock acted as if it were being accumulated._ I watched it a couple of days without trading in it, and the more I watched it the more convinced I became that it was being bought on balance by somebody who was no piker, somebody who not only had a big bank roll but knew what was what. Very clever accumulation, I thought.
As soon as I was sure of this I naturally began to buy it, at about 160. It kept on acting all hunky, and so I kept on buying it, five hundred shares at a clip. _The more I bought the stronger it got, without any spurt, and I was feeling very comfortable._ I couldn’t see any reason why that stock shouldn’t go up a great deal more; not with what I read on the tape.
All of a sudden the manager came to me and said they’d got a message from New York--they had a direct wire of course--asking if I was in the office, and when they answered yes, another came saying: “Keep him there. Tell him Mr. Harding wants to speak to him.”
I said I’d wait, and bought five hundred shares more of UP. I couldn’t imagine what Harding could have to say to me. I didn’t think it was anything about business. My margin was more than ample for what I was buying. Pretty soon the manager came and told me that Mr. Harding wanted me on the long-distance telephone.
“Hello, Ed,” I said.
But he said, “What the devil’s the matter with you? Are you crazy?”
“Are you?” I said.
“What are you doing?” he asked.
“What do you mean?”
“Buying all that stock.”
“Why, isn’t my margin all right?”
“It isn’t a case of margin, but of being a plain sucker.”
“I don’t get you.”
“Why are you buying all that Union Pacific?”
“It’s going up,” I said.
“Going up, hell! Don’t you know that the insiders are feeding it out to you? You’re just about the easiest mark up there. You’d have more fun losing it on the ponies. Don’t let them kid you.”
“Nobody is kidding me,” I told him. “I haven’t talked to a soul about it.”
But he came back at me: “You can’t expect a miracle to save you every time you plunge into that stock. Get out while you’ve still got a chance,” he said. “It’s a crime to be long of that stock at this level--when these highbinders are shoveling it out by the ton.”
“The tape says they’re buying it,” I insisted.
“Larry, I got heart disease when your orders began to come in. For the love of Mike, don’t be a sucker. Get out! Right away. It’s liable to bust wide open any minute. I’ve done my duty. Good-by!” And he hung up.
Ed Harding was a very clever chap, unusually well-informed and a real friend, disinterested and kind-hearted. And what was even more, I knew he was in position to hear things. All I had to go by, in my purchases of UP., was my years of studying the behaviour of stocks and my perception of certain symptoms which experience had taught me usually accompanied a substantial rise. _I don’t know what happened to me, but I suppose I must have concluded that my tape reading told me the stock was being absorbed simply because very clever manipulation by the insiders made the tape tell a story that wasn’t true._ Possibly I was impressed by the pains Ed Harding took to stop me from making what he was so sure would be a colossal mistake on my part. Neither his brains nor his motives were to be questioned. Whatever it was that made me decide to follow his advice, I cannot tell you; but follow it, I did.
I sold out all my Union Pacific. _Of course if it was unwise to be long of it, it was equally unwise not to be short of it. So after I got rid of my long stock I sold four thousand shares short. I put out most of it around 162._
The next day the directors of the Union Pacific Company declared a 10 per cent dividend on the stock. At first nobody in Wall Street believed it. It was too much like the desperate manœuvre of cornered gamblers. All the newspapers jumped on the directors. But while the Wall Street talent hesitated to act the market boiled over. Union Pacific led, and on huge transactions made a new high-record price. Some of the room traders made fortunes in an hour and I remember later hearing about a rather dull-witted specialist who made a mistake that put three hundred and fifty thousand dollars in his pocket. He sold his seat the following week and became a gentleman farmer the following month.
Of course I realised, the moment I heard the news of the declaration of the unprecedented 10 per cent dividend, that I got what I deserved for disregarding the voice of experience and listening to the voice of a tipster. _My own convictions I had set aside for the suspicions of a friend, simply because he was disinterested and as a rule knew what he was doing._
As soon as I saw Union Pacific making new high records I said to myself, “This is no stock for me to be short of.”
All I had in the world was up as margin in Harding’s office. I was neither cheered nor made stubborn by the knowledge of that fact. What was plain was that I had read the tape accurately and that I had been a ninny to let Ed Harding shake my own resolution. There was no sense in recriminations, because I had no time to lose; and besides, what’s done is done. So I gave an order to take in my shorts. The stock was around 165 when I sent in that order to buy in the four thousand UP. at the market. I had a three-point loss on it at that figure. Well, my brokers paid 172 and 174 for some of it before they were through. I found when I got my reports that Ed Harding’s kindly intentioned interference cost me forty thousand dollars. _A low price for a man to pay for not having the courage of his own convictions! It was a cheap lesson._
I wasn’t worried, because the tape said still higher prices. It was an unusual move and there were no precedents for the action of the directors, but I did this time what I thought I ought to do. As soon as I had given the first order to buy four thousand shares to cover my shorts I decided to profit by what the tape indicated and so I went along. I bought four thousand shares and held that stock until the next morning. Then I got out. I not only made up the forty thousand dollars I had lost but about fifteen thousand besides. If Ed Harding hadn’t tried to save me money I’d have made a killing. But he did me a very great service, for it was the lesson of that episode that, I firmly believe, _completed_ my education as a trader.
It was not that all I needed to learn was not to take tips but follow my own inclination. _It was that I gained confidence in myself and I was able finally to shake off the old method of trading._ That Saratoga experience was my last haphazard, hit-or-miss operation. From then on I began to think of basic conditions instead of individual stocks. I promoted myself to a higher grade in the hard school of speculation. It was a long and difficult step to take.
_VII_
I never hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any particular stock. In a bear market all stocks go down and in a bull market they go up. I don’t mean of course that in a bear market caused by a war, ammunition shares do not go up. I speak in a general sense. But the average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think. It is too much bother to have to count the money that he picks up from the ground.
Well, I wasn’t that lazy, but I found it easier to think of individual stocks than of the general market and therefore of individual fluctuations rather than of general movements. _I had to change and I did._
_People don’t seem to grasp easily the fundamentals of stock trading. I have often said that to buy on a rising market is the most comfortable way of buying stocks. Now, the point is not so much to buy as cheap as possible or go short at top prices, but to buy or sell at the right time. When I am bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on rising scale. I don’t buy long stock on a scale down, I buy on a scale up._
Let us suppose, for example, that I am buying some stock. _I’ll buy two thousand shares at 110. If the stock goes up to 111 after I buy it I am, at least temporarily, right in my operation, because it is a point higher; it shows me a profit. Well, because I am right I go in and buy another two thousand shares._ If the market is still rising I buy a third lot of two thousand shares. Say the price goes up to 114. I think it is enough for the time being. I now have a trading basis to work from. I am long six thousand shares at an average of 111¾, and the stock is selling at 114. I won’t buy any more just then. I wait and see. I figure that at some stage of the rise there is going to be a reaction. I want to see how the market takes care of itself after that reaction. It will probably react to where I got my third lot. Say that after going higher it falls back to 112¼, and then rallies. Well, just as it goes back to 113¾ I shoot an order to buy four thousand--at the market of course. Well, if I get that four thousand at 113¾ I know something is wrong and I’ll give a testing order--that is, I’ll sell one thousand shares to see how the market takes it. But suppose that of the order to buy the four thousand shares that I put in when the price was 113¾ I get two thousand at 114 and five hundred at 114½ and the rest on the way up so that for the last five hundred I pay 115½. Then I know I am right. It is the way I get the four thousand shares that tells me whether I am right in buying that particular stock at that particular time--_for of course I am working on the assumption that I have checked up general conditions pretty well and they are bullish. I never want to buy stocks too cheap or too easily._