Reminiscences of a Stock Operator

by Edwin Lefevre

It seems that Barnes and his associates succeeded in inducing some of their friends who held speculatively some blocks of Gray Stove Company—a large concern—to come into the consolidation on the basis of four shares of Consolidated for each share of Gray. Then the Midland and the Western followed their big sister and came in on the basis of share for share. Theirs had been quoted on the Curb at around 25 to 30, and the Gray, which was better known and paid dividends, hung around 125.

In order to raise the money to buy out those holders who insisted upon selling for cash, and also to provide additional working capital for improvements and promotion expenses, it became necessary to raise a few millions. So Barnes saw the president of his bank, who kindly lent his syndicate three million five hundred thousand dollars. The collateral was one hundred thousand shares of the newly organised corporation. The syndicate assured the president, or so I was told, that the price would not go below 50. It would be a very profitable deal as there was big value there.

The promoters’ first mistake was in the matter of timeliness. The saturation point for new stock issues had been reached by the market, and they should have seen it. But even then they might have made a fair profit after all if they had not tried to duplicate the unreasonable killings which other promoters had made at the very height of the boom.

Now you must not run away with the notion that Jim Barnes and his associates were fools or inexperienced kids. They were shrewd men. All of them were familiar with Wall Street methods and some of them were exceptionally successful stock traders. But they did rather more than merely overestimate the public’s buying capacity. After all, that capacity was something that they could determine only by actual tests. Where they erred more expensively was in expecting the bull market to last longer than it did. I suppose the reason was that these same men had met with such great and particularly with such quick success that they didn’t doubt they’d be all through with the deal before the bull market turned. They were all well known and had a considerable following among the professional traders and the wire houses.

The deal was extremely well advertised. The newspapers certainly were generous with their space. The older concerns were identified with the stove industry of America and their product was known the world over. It was a patriotic amalgamation and there was a heap of literature in the daily papers about the world conquests. The markets of Asia, Africa and South America were as good as cinched.

The directors of the company were all men whose names were familiar to all readers of the financial pages. The publicity work was so well handled and the promises of unnamed insiders as to what the price was going to do were so definite and convincing that a great demand for the new stock was created. The result was that when the books were closed it was found that the stock which was offered to the public at fifty dollars a share had been oversubscribed by 25 per cent.

Think of it! The best the promoters should have expected was to succeed in selling the new stock at that price after weeks of work and after putting up the price to 75 or higher in order to average 50. At that, it meant an advance of about 100 per cent in the old prices of the stocks of the constituent companies. That was the crisis and they did not meet it as it should have been met. It shows you that every business has its own needs. General wisdom is less valuable than specific savvy. The promoters, delighted by the unexpected oversubscription, concluded that the public was ready to pay any price for any quantity of that stock. And they actually were stupid enough to underallot the stock. After the promoters made up their minds to be hoggish they should have tried to be intelligently hoggish.

What they should have done, of course, was to allot the stock in full. That would have made them short to the extent of 25 per cent of the total amount offered for subscription to the public, and that, of course, would have enabled them to support the stock when necessary and at no cost to themselves. Without any effort on their part they would have been in the strong strategic position that I always try to find myself in when I am manipulating a stock. They could have kept the price from sagging, thereby inspiring confidence in the new stock’s stability and in the underwriting syndicate back of it. They should have remembered that their work was not over when they sold the stock offered to the public. That was only a part of what they had to market.

They thought they had been very successful, but it was not long before the consequences of their two capital blunders became apparent. The public did not buy any more of the new stock, because the entire market developed reactionary tendencies. The insiders got cold feet and did not support Consolidated Stove; and if insiders don’t buy their own stock on recessions, who should? The absence of inside support is generally accepted as a pretty good bear tip.

There is no need to go into statistical details. The price of Consolidated Stove fluctuated with the rest of the market, but it never went above the initial market quotations, which were only a fraction above 50. Barnes and his friends in the end had to come in as buyers in order to keep it above 40. Not to have supported that stock at the outset of its market career was regrettable. But not to have sold all the stock the public subscribed for was much worse.