Reminiscences of a Stock Operator

by Edwin Lefevre

I have found that experience is apt to be a steady dividend payer in this game and that observation gives you the best tips of all. The behaviour of a certain stock is all you need at times. You observe it. Then experience shows you how to profit by variations from the usual, that is, from the probable. For example, we know that all stocks do not move one way together but that all the stocks of a group will move up in a bull market and down in a bear market. This is a common-place of speculation. It is the commonest of all self-given tips and the commission houses are well aware of it and pass it on to any customer who has not thought of it himself; I mean, the advice to trade in those stocks which have lagged behind other stocks of the same group. Thus, if U.S. Steel goes up, it is logically assumed that it is only a matter of time when Crucible or Republic or Bethlehem will follow suit. Trade conditions and prospects should work alike with all stocks of a group and the prosperity should be shared by all. On the theory, corroborated by experience times without number, that every dog has his day in the market, the public will buy A.B. Steel because it has not advanced while C.D. Steel and X.Y. Steel have gone up.

I never buy a stock even in a bull market, if it doesn’t act as it ought to act in that kind of market. I have sometimes bought a stock during an undoubted bull market and found out that other stocks in the same group were not acting bullishly and I have sold out my stock. Why? Experience tells me that it is not wise to buck against what I may call the manifest group-tendency. I cannot expect to play certainties only. I must reckon on probabilities—and anticipate them. An old broker once said to me: “If I am walking along a railroad track and I see a train coming toward me at sixty miles an hour, do I keep on walking on the ties? Friend, I sidestep. And I don’t even pat myself on the back for being so wise and prudent.”

Last year, after the general bull movement was well under way, I noticed that one stock in a certain group was not going with the rest of the group, though the group with that one exception was going with the rest of the market. I was long a very fair amount of Blackwood Motors. Everybody knew that the company was doing a very big business. The price was rising from one to three points a day and the public was coming in more and more. This naturally centered attention on the group and all the various motor stocks began to go up. One of them, however, persistently held back and that was Chester. It lagged behind the others so that it was not long before it made people talk. The low price of Chester and its apathy was contrasted with the strength and activity in Blackwood and other motor stocks and the public logically enough listened to the touts and tipsters and wise-acres and began to buy Chester on the theory that it must presently move up with the rest of the group.

Instead of going on this moderate public buying, Chester actually declined. Now, it would have been no job to put it up in that bull market, considering that Blackwood, a stock of the same group, was one of the sensational leaders of the general advance and we were hearing nothing but the wonderful improvement in the demand for automobiles of all kinds and the record output.

It was thus plain that the inside clique in Chester were not doing any of the things that inside cliques invariably do in a bull market. For this failure to do the usual thing there might be two reasons. Perhaps the insiders did not put it up because they wished to accumulate more stock before advancing the price. But this was an untenable theory if you analysed the volume and character of the trading in Chester. The other reason was that they did not put it up because they were afraid of getting stock if they tried to.

When the men who ought to want a stock don’t want it, why should I want it? I figured that no matter how prosperous other automobile companies might be, it was a cinch to sell Chester short. Experiences had taught me to beware of buying a stock that refuses to follow the group-leader.

I easily established the fact that not only there was no inside buying but that there was actually inside selling. There were other symptomatic warnings against buying Chester, though all I required was its inconsistent market behaviour. It was again the tape that tipped me off and that was why I sold Chester short. One day, not very long afterward, the stock broke wide open. Later on we learned—officially, as it were—that insiders had indeed been selling it, knowing full well that the condition of the company was not good. The reason, as usual, was disclosed after the break. But the warning came before the break. I don’t look out for the breaks; I look out for the warnings. I didn’t know what was the trouble with Chester; neither did I follow a hunch. I merely knew that something must be wrong.

Only the other day we had what the newspapers called a sensational movement in Guiana Gold. After selling on the Curb at 50 or close to it, it was listed on the Stock Exchange. It started there at around 35, began to go down and finally broke 20.

Now, I’d never have called that break sensational because it was fully to be expected. If you had asked you could have learned the history of the company. No end of people knew it. It was told to me as follows: A syndicate was formed consisting of a half dozen extremely well-known capitalists and a prominent banking house. One of the members was the head of the Belle Isle Exploration Company, which advanced Guiana over $10,000,000 cash and received in return bonds and 250,000 shares out of a total of one million shares of the Guiana Gold Mining Company. The stock went on a dividend basis and it was mighty well advertised. The Belle Isle people thought it well to cash in and they gave a call on their 250,000 shares to the bankers, who arranged to try to market that stock and some of their own holdings as well. They thought of entrusting the market manipulation to a professional whose fee was to be one third of the profits from the sale of the 250,000 shares above 36. I understand that the agreement was drawn up and ready to be signed but at the last moment the bankers decided to undertake the marketing themselves and save the fee. So they organized an inside pool. The bankers had a call on the Belle Isle holdings of 250,000 at 36. They put this in at 41. That is, insiders paid their own banking colleagues a 5-point profit to start with. I don’t know whether they knew it or not.

It is perfectly plain that to the bankers the operation had every semblance of a cinch. We had run into a bull market and the stocks of the group to which Guiana Gold belonged were among the market leaders. The company was making big profits and paying regular dividends. This together with the high character of the sponsors made the public regard Guiana almost as an investment stock. I was told that about 400,000 shares were sold to the public all the way up to 47.