V
The average ticker hound—or, as they used to call him, tape-worm—goes wrong, I suspect, as much from over-specialization as from anything else. It means a highly expensive inelasticity. After all, the game of speculation isn’t all mathematics or set rules, however rigid the main laws may be. Even in my tape reading something enters that is more than mere arithmetic. There is what I call the behavior of a stock, actions 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.
It is a very old thing, this of noting the behavior of a stock and studying its past performances. When I first came to New York there was a broker’s office where a Frenchman used to talk about his chart. At first I thought he was a sort of pet freak kept by the firm because they were good-natured. Then I learned that he was a persuasive and most impressive talker. He said that the only thing that didn’t lie because it simply couldn’t was mathematics. By means of his curves he could forecast market movements. Also he could analyse them, and tell, for instance, why Keene did the right thing in his famous Atchison preferred bull manipulation, and later why he went wrong in his Southern Pacific pool. At various times one or another of the professional traders tried the Frenchman’s system—and then went back to their old unscientific methods of making a living. Their hit-or-miss system was cheaper, they said. I heard that the Frenchman said Keene admitted that the chart was 100 per cent right but claimed that the method was too slow for practical use in an active market.
Then there was one office where a chart of the daily movement of prices was kept. It showed at a glance just what each stock had done for months. By comparing individual curves with the general market curve and keeping in mind certain rules the customers could tell whether the stock on which they got an unscientific tip to buy was fairly entitled to a rise. They used the chart as a sort of complementary tipster. To-day there are scores of commission houses where you find trading charts. They come ready-made from the offices of statistical experts and include not only stocks but commodities.
I should say that a chart helps those who can read it or rather who can assimilate what they read. The average chart reader, however, is apt to become obsessed with the notion that the dips and peaks and primary and secondary movements are all there is to stock speculation. If he pushes his confidence to its logical limit he is bound to go broke. There is an extremely able man, a former partner of a well-known Stock Exchange house, who is really a trained mathematician. He is a graduate of a famous technical school. He devised charts based upon a very careful and minute study of the behaviour of prices in many markets—stocks, bonds, grain, cotton, money, and so on. He went back years and years and traced the correlations and seasonal movements—oh, everything. He used his charts in his stock trading for years. What he really did was to take advantage of some highly intelligent averaging. They tell me he won regularly—until the World War knocked all precedents into a cocked hat. I heard that he and his large following lost millions before they desisted. 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 didn’t mean to get off the track like that, but I can’t help it when I think of my first few years in Wall Street. I know now what I did not know then, and I think of the mistakes of my ignorance because those are the very mistakes that the average stock speculator makes year in and year out.
After I got back to New York to try for the third time to beat the market in a Stock Exchange house I traded quite actively. I didn’t expect to do as well as I did in the bucket shops, but I thought that after a while I would do much better because I would be able to swing a much heavier line. Yet, I can see now that my main trouble was my failure to grasp the vital difference between stock gambling and stock speculation. Still, by reason of my seven years’ experience in reading the tape and a certain natural aptitude for the game, my stake was earning not indeed a fortune but a very high rate of interest. I won and lost as before, but I was winning on balance. The more I made the more I spent. This is the usual experience with most men. No, not necessarily with easy-money pickers, but with every human being who is not a slave of the hoarding instinct. Some men, like old Russell Sage, have the money-making and the money-hoarding instinct equally well developed, and of course they die disgustingly rich.
The game of beating the market exclusively interested me from ten to three every day, and after three, the game of living my life. Don’t misunderstand me. I never allowed pleasure to interfere with business. When I lost it was because I was wrong and not because I was suffering from dissipation or excesses. There never were any shattered nerves or rum-shaken limbs to spoil my game. I couldn’t afford anything that kept me from feeling physically and mentally fit. Even now I am usually in bed by ten. As a young man I never kept late hours, because I could not do business properly on insufficient sleep. I was doing better than breaking even and that is why I didn’t think there was any need to deprive myself of the good things of life. The market was always there to supply them. I was acquiring the confidence that comes to a man from a professionally dispassionate attitude toward his own method of providing bread and butter for himself.
The first change I made in my play was in the matter of time. I couldn’t wait for the sure thing to come along and then take a point or two out of it as I could in the bucket shops. I had to start much earlier if I wanted to catch the move in Fullerton’s office. In other words, I had to study what was going to happen; to anticipate stock movements. That sounds asininely commonplace, but you know what I mean. It was the change in my own attitude toward the game that was of supreme importance to me. It taught me, little by little, the essential difference between betting on fluctuations and anticipating inevitable advances and declines, between gambling and speculating.