It is surprising how many experienced traders there are who look incredulous when I tell them that when I buy stocks for a rise I like to pay top prices and when I sell I must sell low or not at all. It would not be so difficult to make money if a trader always stuck to his speculative guns--that is, waited for the line of least resistance to define itself and began buying only when the tape said up or selling only when it said down. _He should accumulate his line on the way up._ Let him buy one-fifth of his full line. If that does not show him a profit he must not increase his holdings because he has obviously begun wrong; he is wrong temporarily and there is no profit in being wrong at any time. The same tape that said UP did not necessarily lie merely because it is now saying NOT YET.
In cotton I was very successful in my trading for a long time. I had my theory about it and I absolutely lived up to it. Suppose I had decided that my line would be forty to fifty thousand bales. Well, I would study the tape as I told you, watching for an opportunity either to buy or to sell. Suppose the line of least resistance indicated a bull movement. Well, I would buy ten thousand bales. After I got through buying that, if the market _went up ten points over my initial purchase price, I would take on another ten thousand bales_. Same thing. Then, if I could get twenty points’ profit, or one dollar a bale, I would buy twenty thousand more. That would give me my line--my basis for my trading. But if after buying the first ten or twenty thousand bales, it showed me a loss, out I’d go. I was wrong. It might be I was only temporarily wrong. But as I have said before _it doesn’t pay to start wrong in anything_.
What I accomplished by sticking to my system was that I always had a line of cotton in every real movement. In the course of accumulating my full line I might chip out fifty or sixty thousand dollars in these feeling-out plays of mine. This looks like a very expensive testing, but it wasn’t. After the real movement started, how long would it take me to make up the fifty thousand dollars I had dropped in order to make sure that I began to load up at exactly the right time? No time at all! _It always pays a man to be right at the right time._
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.