Excerpts from the book “Reminiscences of a Stock Operator”
One lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.
In fact, I always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own games- that is, to play the market only when I was satisfied that precedents favored my play. There is a time for all things, but I didn’t know it. And that is precisely what beat so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily or sufficient knowledge to make his play an intelligent play.
The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who fell that they must take home some money every day, as though they were working for regular wages.
I never lose my temper over the stock market. I never argue with the tape. Getting sore at the market doesn’t get you anywhere.
I have heard of people who amuse themselves conducting imaginary operations in the stock market to prove with imaginary dollars how right they are. Sometimes these ghost gamblers make millions. It is very easy to be a plunger that way. It is like the old story of the man who was going to fight a duel the next day. His second asked him,” Are you a good shot?” ” Well,” said the duelist,” I can snap the stem of the wineglass at twenty paces,” and he looked modest. “That’s all very well,” said the unimpressed second. “But can you snap the stem of the wineglass while the wine glass is pointing a loaded pistol straight at your heart?”
With me I must back my opinions with my money. My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat. But if I cannot advance I do not move at all. I do not mean by this that a man should not limit his losses when he is wrong. He should. But that should not breed indecision. All my life I have made mistakes, but in losing money I have gained experience and accumulated a lot of valuable don’ts. I have been flat broke several times, but my loss has never been a total loss, otherwise, I wouldn’t be here now. I always knew I would have another chance and that I would not make the same mistake a second time. I believed in myself.
A man must believe in himself and his judgment if he wants to make a living at this game. That is why I don’t believe in tips. If I buy stocks on Smith’s depending on him. Suppose Smith is away on a holiday while the selling time comes around? No, sir, nobody can make big money on what some one else tells him to do.
If somebody had told me my method would not work I nevertheless would have tried it out to make sure for myself, for when I am wrong only one thing convinces me of it, and that is, to lose money. And I am only right when I make money.
Everything happened as I had foreseen. I was dead right and I lost every cent I had. I was wiped out by something that was unusual. If the unusual never happened, there would be no difference in people and there wouldn’t be any fun in life. The game would become merely a matter of addition and subtraction. It’s the guessing that develops a man’s brainpower. Just consider what you have to do to guess right.
When I think I should sell, I sell. When I think stocks will go up, I buy. My adherence to that general principle of speculation saved me.
Instead of placing bets on what the next few quotations were going to be, my game was to anticipate were going to happen in a big way.
When a man is right he wants to get all that is coming to him for being right.
I was 20 when I made my first ten thousand, and I lost that. But I knew how and why because I traded out of season all the time; because when I couldn’t play according to my system, which was based on study and experience, I went in and gambled.
There is nothing like losing all you have in the world for teaching you what not to do in order not to loss money, you begin to learn what to do in order to win. Did you get that? You begin to learn.
Even in my tape reading something enters that is more that mere arithmetic. There is what I call the behavior of a stock, action that enable you to judge whether or not it is going to proceed in accordance with the precedents that your observation has noted. If a stock doesn’t act right don’t touch it; because, being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit.
He said that the only thing that didn’t lie because it simply couldn’t was mathematics.
But not even a world war can keep the stock market from being a bull market when conditions are bullish, or a bear market when conditions are bearish. And all a man needs to know to make money is to appraise conditions.
I never thought that anything was irksome if it helped me to trade more intelligently. Before I can solve a problem I must state it to myself. When I think I have found the solution I must prove I am am right. I know of only one way to prove it; and that is, with my own money.
I had been bullish from the very start of a bull market and I had backed my opinion by buying stocks. An advance followed, as I had clearly foreseen. So far, all very well. But what else did I do? Why, I listened to the elder statesmen and curbed my youthful impetuousness. I made up my mind to be wise and play carefully, conservatively. Everybody knew that the way to do that was to take profits and buy back your stocks on reactions. And that is precisely what I did, or rather what I tried to do; for I often took profits and waited for a reaction that never came. And I saw my stock go kiting up ten points more and I was sitting there with my four-point profit safe in my conservation pocket. They say you never grow poor taking profits. No, you don’t. But neither do you grow rich taking a four- point profit in a bull market. Where I should have made twenty thousand dollars I made two thousand.
I said I’d lose my position. And when you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John P. Rockefeller.
What old Mr. Partridge said did not mean much to me until I began to think about my own numerous failures to make as much money as I thought to when I was so right on the general market. The more I studied the more I realized how wise that old chap was.
”Well you know this is a bull market !” He really meant to tell them that the big money was not in the individual fluctuations but in sizing up the entire market and its trend.
And right here, let me say one thing: After spending many years in wall street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level, which should show the greatest profit. And their experience invariably matched mine… that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.
The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but the intelligent patience to sit tight.
Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end.
It gave me confidence in my own judgment before I allowed it to be vitiated by the advice of others or even by my own impatience at times. Without faith in his own judgment no man can go very far in this game.
All I have learned is to study general conditions, to take a position and stick to it. I can wait without a twinge of impatience. I can see a setback without being shaken, knowing that it is only temporary. I have been short one hundred thousand shares and I have seen a big rally coming. I have figured and figured correctly… that such a rally as I felt was inevitable, and even wholesome, would make a difference of one million dollars in paper profits. And I nevertheless have stood pat and seen half my paper profit wiped out, without once considering the advisability of covering my shorts to put them out again on the rally. I knew that if I did I might lose my position and with it the certainty of a big killing. It is the big swing that makes the big money for you.
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 it comes to selling stocks, it is plan that nobody can sell unless somebody wants those stocks.
If you operate on a large scale you will have to bear that in mind all the time. A man studies conditions, plans his fair line and he accumulates a big profit on paper. Well, that man can’t sell at will. You can’t expect the market to absorb fifty thousand shares of one stock as easily as it does one hundred. He will have to wait until he has a market there to take it. There comes the time when he thinks the requisite buying power is there. When that opportunity comes he must seize it. As a rule he will have been waiting for it. He has to sell when he can, not when he wants to.
Remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don’t make a second unless the first shows you a profit. Wait and watch.
I cannot get out of facts what somebody tells me to get. They are my facts, don’t you see? If I believe something you can be sure it is because I simply must. When I am long of stocks it is because my reading of conditions has made me bullish. But you find many people, reputed to be intelligent, who are bullish because they have stocks. I do not allow my possessions or my prepossessions either to do any thinking for me. That is why I repeat that I never argue with the tape. To be angry at the market because it unexpectedly or even illogically goes against you is like getting mad at your lungs because you have pneumonia.
Old man Partridge’s insistence on the vital importance of being continuously bullish in market doubtless made my mind dwell on the need above all other things of determining the kind of market a man is trading in. I began to realize that the big money must necessarily be in the big swing. Whatever might seem to give a big swing, initial impulse , the fact is that its continuance is not the result of manipulation by pools or artifice by financiers, but depends upon basic conditions. And no matter who opposes it, the swing must inevitably run as far and as fast and as long as the impelling forces determine.
A big swing will mean big money if your line is big.
The thing was to be right; to know it and to act accordingly.
The only thing to do when a man is wrong is to be right by ceasing to be wrong.
What happened shows you that I am right in never trading at limits. Suppose I had limited my selling price to 300? I’d never have got it off. No sir! when you want to get out, get out.
Tape reading was an important part of the game ; so was beginning at the right time ; so was sticking to your position. But my greatest discovery was that a man most study general conditions, to size them so as to be able to anticipate probabilities.
Losing money is the least of my troubles. A loss never bothers me after I take it. I forget it overnight. But being wrong- not taking the loss that is what does the damage to the pocketbook and to the soul.
“You can’t tell 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 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 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 percent reaction, he was stopped out. He declared he did not see any sense in losing more than one point.
Always sell what shows you a loss and keep what shows you a profit.
There isn’t a man in wall street who has not lost money trying to make the market pay for an automobile or a bracelet or a motor boat or a painting.
What does a man do when he sets out to make the stock market pay for a sudden need? why, he merely hopes. He gambles. He therefore, runs much greater risk that he would if he were speculating intelligently, in accordance with opinions or beliefs logically arrived at after a dispassionate study of underlying conditions. To begin with, he is after an immediate profit. He cannot afford to wait.
Another thing to bear in mind is this : Never try to sell at the top. It isn’t wise. Sell after a reaction if there is no rally.
The punishment for being wrong is to lose money. The reward for being night is to make money.
As I have said a thousand times, no manipulation can put stocks down and keep them down.
I never buy at the bottom and I always sell too soon.
Prices were still higher and that I had a satisfying profit but that there was a great big market with a tremendous power of absorption, I could sell any amount of stock in that market ; and, of course, when a man is carrying his full line of stocks; he must be on the watch for an opportunity to change his paper profit into actual cash.
The training of a stock trade is like a medical education. The physician has to spend long years learning anatomy, physiology, materia medica and collateral subjects by the dozen. He learns the theory and then proceeds to devote his life to the practice. He observes and classifies all sorts of pathological phenomena. He learns to diagnose. If his diagnosis is correct, and that develops upon the accuracy of his observation- he ought to do pretty well in his prognosis, always keeping in mind, of course, that human fallibility and the utterly unforeseen will keep him from scoring 100 per cent of bull’s eyes.
And then, as he gains in experience, he learns not only to do the right thing but to do it instantly, so that many people will think he does it instinctively. It really isn’t automatism. It is that he has diagnosed the case according to his observations of such cases during a period of many years; and naturally after he has diagnosed it, he can only treat it in the way that experience has taught him is the proper treatment. You can transit knowing that is, your particular collection of card indexed facts but not your experience. A man may know what to do and lose money if he doesn’t do it quickly enough.
I didn’t follow a hunch. Nobody gave me a tip. It was my habitual or professional mental attitude towards the markets that gave me the profits and that attitude came from my years at this business. I study because my business is to trade. The moment the tape told me that I was on the right track my duty was to increase my line. I did. That is all there is to it.
If I am walking along a railroad track and I see a train coming towards me at sixty miles an hour, do I keep on walking on the ties? Friend , I sidestep. And I do not even pal myself on the back for being so wise and prudent.
Facts are facts and the strongest of all allies are conditions.
Fundamental conditions were fighting for me. It was not difficult to be both fearless and patient. A speculator must have faith in himself and in his judgment.
I stood pat throughout because I knew my position was sound. I wasn’t bucking the trend of the market or going against basic conditions.
Knowing is power and power need not tear lies- not even when the tape prints them.
The principles of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes that they have made in the past.
Quit while the quitting is good and cheap.
I am always willing to sell out when I can do so in a lump at a good profit. I was quite content with what I made out of it.
I never argue with the tape or lose my temper at the market because of its behavior.
You would be surprised at the frequency with which same of our most successful promoters behave like peevish women because the market does not act the way they wish it to act. They seem to take it as a personal slight, and they proceed to lose money by first losing their temper.
I was not bearish because I was short of stocks. I was bearish because that way I sized up the situation, and I sold stocks short only after I turned bearish.
An investor looks for safety, for permanence of the interest return on the capital he invest. The speculator looks for a quick profit to get a big return on their capital. I myself never have believed in blind gambling. I may plunge or I may buy one hundred shares. But in either case I must have a reason for what I do.
The top is never in sight when the vision is vitiated by hope. The average man sees a stock that nobody wanted at twelve dollars or fourteen dollars a share suddenly advance to thirty- which surely is the top until it rises to fifty. That is absolutely the end of the rise. Then it goes to sixty ; to seventy ; to seventy five. It then becomes a certainty that this stock, which a few weeks ago was selling for less than fifteen, can’t go any higher. But it goes to eighty : and to eighty–five, where up the average man, who never thinks of values but of prices, and is not governed in his actions by conditions but by fears, takes the easiest way he stops thinking that there must be a limit to the advances. That is why those outsiders who are wise enough not to buy at the top make up for it by not taking profits. The big money in burns is always made first by the public – on paper. And it remains on paper.
Speculation in stocks will never disappear. The speculator’s deadly enemies are: Ignorance, greed, fear, and hope.
In a bull market and particularly in boom the public at first makes money which it later loses simply by overstaying the bull market.
Today’s earnings do not justify the decisions 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 experience 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% safe.