Reminiscences of a Stock Operator

by Edwin Lefevre

Here is another one about a company the stock of which has been active this week. This time the man who makes the statement is a “prominent director.” Now which—if any—of the company’s dozen directors is doing the talking? It is plain that by remaining anonymous nobody can be blamed for any damage that may be done by the statement.

Quite apart from the intelligent study of speculation everywhere the trader in stocks must consider certain facts in connection with the game in Wall Street. In addition to trying to determine how to make money one must also try to keep from losing money. It is almost as important to know what not to do as to know what should be done. It is therefore well to remember that manipulation of some sort enters into practically all advances in individual stocks and that such advances are engineered by insiders with one object in view and one only and that is to sell at the best profit possible. However, the average broker’s customer believes himself to be a business man from Missouri if he insists upon being told why a certain stock goes up. Naturally, the manipulators “explain” the advance in a way calculated to facilitate distribution. I am firmly convinced that the public’s losses would be greatly reduced if no anonymous statements of a bullish nature were allowed to be printed. I mean statements calculated to make the public buy or hold stocks.

The overwhelming majority of the bullish articles printed on the authority of unnamed directors or insiders convey unreliable and misleading impressions to the public. The public loses many millions of dollars every year by accepting such statements as semi-official and therefore trustworthy.

Say for example that a company has gone through a period of depression in its particular line of business. The stock is inactive. The quotation represents the general and presumably accurate belief of its actual value. If the stock were too cheap at that level somebody would know it and buy it and it would advance. If too dear somebody would know enough to sell it and the price would decline. As nothing happens one way or another nobody talks about it or does anything.

The turn comes in the line of business the company is engaged in. Who are the first to know it, the insiders or the public? You can bet it isn’t the public. What happens next? Why, if the improvement continues the earnings will increase and the company will be in position to resume dividends on the stock; or, if dividends were not discontinued, to pay a higher rate. That is, the value of the stock will increase.

Say that the improvement keeps up. Does the management make public that glad fact? Does the president tell the stockholders? Does a philanthropic director come out with a signed statement for the benefit of that part of the public that reads the financial page in the newspapers and the slips of the news agencies? Does some modest insider pursuing his usual policy of anonymity come out with an unsigned statement to the effect that the company’s future is most promising? Not this time. Not a word is said by anyone and no statement whatever is printed by newspapers or tickers.

The value-making information is carefully kept from the public while the now taciturn “prominent insiders” go into the market and buy all the cheap stock they can lay their hands on. As this well-informed but unostentatious buying keeps on, the stock rises. The financial reporters, knowing that the insiders ought to know the reason for the rise, ask questions. The unanimously anonymous insiders unanimously declare that they have no news to give out. They do not know that there is any warrant for the rise. Sometimes they even state that they are not particularly concerned with the vagaries of the stock market or the actions of stock speculators.

The rise continues and there comes a happy day when those who know have all the stock they want or can carry. The Street at once begins to hear all kinds of bullish rumours. The tickers tell the traders “on good authority” that the company has definitely turned the corner. The same modest director who did not wish his name used when he said he knew no warrant for the rise in the stock is now quoted—of course not by name—as saying that the stockholders have every reason to feel greatly encouraged over the outlook.

Urged by the deluge of bullish news items the public begins to buy the stock. These purchases help to put the price still higher. In due course the predictions of the uniformly unnamed directors come true and the company resumes dividend payments; or increases the rate, as the case may be. With that the bullish items multiply. They not only are more numerous than ever but much more enthusiastic. A “leading director,” asked point blank for a statement of conditions, informs the world that the improvement is more than keeping up. A “prominent insider,” after much coaxing, is finally induced by a news-agency to confess that the earnings are nothing short of phenomenal. A “well-known banker,” who is affiliated in a business way with the company, is made to say that the expansion in the volume of sales is simply unprecedented in the history of the trade. If not another order came in the company would run night and day for heaven knows how many months. A “member of the finance committee,” in a double-leaded manifesto, expresses his astonishment at the public’s astonishment over the stock’s rise. The only astonishing thing is the stock’s moderation in the climbing line. Anybody who will analyse the forthcoming annual report can easily figure how much more than the market-price the book-value of the stock is. But in no instance is the name of the communicative philanthropist given.

As long as the earnings continue good and the insiders do not discern any sign of a let up in the company’s prosperity they sit on the stock they bought at the low prices. There is nothing to put the price down, so why should they sell? But the moment there is a turn for the worse in the company’s business, what happens? Do they come out with statements or warnings or the faintest of hints? Not much. The trend is now downward. Just as they bought without any flourish of trumpets when the company’s business turned for the better, they now silently sell. On this inside selling the stock naturally declines. Then the public begins to get the familiar “explanations.” A “leading insider” asserts that everything is O.K. and the decline is merely the result of selling by bears who are trying to affect the general market. If on one fine day, after the stock has been declining for some time, there should be a sharp break, the demand for “reasons” or “explanations” becomes clamorous. Unless somebody says something the public will fear the worst. So the news-tickers now print something like this: “When we asked a prominent director of the company to explain the weakness in the stock, he replied that the only conclusion he could arrive at was that the decline today was caused by a bear drive. Underlying conditions are unchanged. The business of the company was never better than at present and the probabilities are that unless something entirely unforeseen happens in the meanwhile, there will be an increase in the rate at the next dividend meeting. The bear party in the market has become aggressive and the weakness in the stock was clearly a raid intended to dislodge weakly held stock.” The news-tickers, wishing to give good measure, as likely as not will go on to state that they are “reliably informed” that most of the stock bought on the day’s decline was taken by inside interests and that the bears will find that they have sold themselves into a trap. There will be a day of reckoning.