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Reminiscences of a Stock Operator (A Marketplace Book Book 173)

Edwin Lefèvre and Roger Lowenstein

Last accessed on Monday April 26, 2021

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Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore. It doesn’t go into explanations. I didn’t ask the tape why when I was fourteen, and I don’t ask it to-day, at forty. The reason for what a certain stock does to-day may not be known for two or three days, or weeks, or months. But what the dickens does that matter?

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There is a time for all things, but I didn’t know it. And that is precisely what beats 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.

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The market had been going up all that week—this was twenty years ago, remember—and it was a cinch the bank statement on Saturday would show a big decrease in the surplus reserve. That would give the conventional excuse to the big room traders to jump on the market and try to shake out some of the weak commission-house accounts. There would be the usual reactions in the last half hour of the trading, particularly in stocks in which the public had been the most active. Those, of course, also would be the very stocks that Teller’s customers would be most heavily long of, and the shop might be glad to see some short selling in them. There is nothing so nice as catching the suckers both ways; and nothing so easy—with one-point margins.

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the automatic closing out of your trade when the margin reached the exhaustion point was the best kind of stop-loss order. You couldn’t get stung for more than you had put up, and there was no danger of rotten execution of orders, and so on.

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Speculation is a hard and trying business, and a speculator must be on the job all the time or he’ll soon have no job to be on.

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knew, of course, there must be a limit to the advances and an end to the crazy buying of A. O. T.—Any Old Thing—and I got bearish. But every time I sold I lost money, and if it hadn’t been that I ran darn quick I’d have lost a heap more.

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when old Mr. Partridge kept on telling the other customers, “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 the main movements—that is, not in reading the tape but in sizing up the entire market and its trend.

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They beat themselves, because though they have brains they cannot sit tight.

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Covid same

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When I am bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don’t buy long stock on a scale down, I buy on a scale up.

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That’s the theory. That is why I never buy stocks cheap. Of course I always try to buy effectively—in such a way as to help my side of the market. When it comes to selling stocks, it is plain that nobody can sell unless somebody wants those stocks.

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But in starting a movement it is unwise to take on your full line unless you are convinced that conditions are exactly right.

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Suppose a man’s line is five hundred shares of stock. I say that he ought not to buy it all at once; not if he is speculating. If he is merely gambling the only advice I have to give him is, don’t! Suppose he buys his first hundred, and that promptly shows him a loss. Why should he go to work and get more stock? He ought to see at once that he is in wrong; at least temporarily.

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Old man Partridge’s insistence on the vital importance of being continuously bullish in a bull market doubtless made my mind dwell on the need above all other things of determining the kind of market a man is trading in.

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I worked back from the quotation to first principles; from price fluctuations to basic conditions.

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Thinking about the reward for my excellent sight kept me from considering the distance to the dollar-heap. I should have walked and not sprinted.

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putting out a very big short line by reason of the market’s habit of having big rallies. If I waited prices might be lower, but the operation would be safer.

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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.

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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 must study general conditions, to size them so as to be able to anticipate probabilities. In short, I had learned that I had to work for my money.

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In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be—up or down. The thing to do is to watch the market, read the tape to determine the limits of the get-nowhere prices, and make up your mind that you will not take an interest until the price breaks through the limit in either direction.

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It would not be so difficult to make money if a trader always stuck to his speculative guns—that is, waited for the line of least resistance to define itself and began buying only when the tape said up or selling only when it said down. He should accumulate his line on the way up. Let him buy one-fifth of his full line. If that does not show him a profit he must not increase his holdings because he has obviously begun wrong; he is wrong temporarily and there is no profit in being wrong at any time.

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he wasn’t playing the game to make money for others and therefore he would put in a 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 per cent reaction he was stopped out. He declared he did not see any sense in losing more than one point, whether it came out of his original margin or out of his paper profits.

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The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.

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To learn that a man can make foolish plays for no reason whatever was a valuable lesson. It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibly expressed by a brilliant mind.

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the hope of making the stock market pay your bill is one of the most prolific sources of loss in Wall Street. You will chip out all you have if you adhere to your determination.

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When something happens on which you did not count when you made your plans it behooves you to utilise the opportunity that a kindly fate offers you.

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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.

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As I said before, in a bear market it is always wise to cover if complete demoralisation suddenly develops.

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But it is not wise to get out when the break is the result of a raid by an operator, because the moment he stops the price must rebound. Inverted tips!

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The belief in miracles that all men cherish is born of immoderate indulgence in hope. There are people who go on hope sprees periodically and we all know the chronic hope drunkard that is held up before us as an exemplary optimist. Tip-takers are all they really are.

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I will tell you my secret if you wish. It is this: I never buy at the bottom and I always sell too soon.”

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Observation, experience, memory and mathematics—these are what the successful trader must depend on. He must not only observe accurately but remember at all times what he has observed. He cannot bet on the unreasonable or on the unexpected, however strong his personal convictions may be about man’s unreasonableness or however certain he may feel that the unexpected happens very frequently. He must bet always on probabilities—that is, try to anticipate them. Years of practice at the game, of constant study, of always remembering, enable the trader to act on the instant when the unexpected happens as well as when the expected comes to pass.

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A man can have great mathematical ability and an unusual power of accurate observation and yet fail in speculation unless he also possesses the experience and the memory. And then, like the physician who keeps up with the advances of science, the wise trader never ceases to study general conditions, to keep track of developments everywhere that are likely to affect or influence the course of the various markets.

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As old Pat Hearne used to remark, “You can’t tell till you bet.” Between being bearish and selling there is no need to waste time.

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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.

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Experiences had taught me to beware of buying a stock that refuses to follow the group-leader.

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My trading mind concerns itself with trading problems and I think I am justified in asserting that I made up my first loss because I had the experience and the memory.

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I had been warned that the TT insiders knew the exact whereabouts of every stock certificate in the Street and the precise dimensions and identity of the short interest as well as other facts of tactical importance. They were able men and shrewd traders. Altogether it was a dangerous combination to go up against. But facts are facts and the strongest of all allies are conditions.

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One day when the entire market was extremely weak Tropical Trading broke 90 and on the demoralisation I covered. Same old reason! I had the opportunity—the big market and the weakness and the excess of sellers over buyers.

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there is profit in studying the human factors—the ease with which human beings believe what it pleases them to believe; and how they allow themselves—indeed, urge themselves—to be influenced by their cupidity or by the dollar-cost of the average man’s carelessness.

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gather from the stories I have read that the professional traders sold the stock because it was too high. And the reason they thought it was too high was that it never before had sold so high; and that made it too high to buy; and if it was too high to buy it was just right to sell. That sounds pretty modern, doesn’t it? They were thinking of the price, and the Commodore was thinking of the value!

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He had in superlative degree the qualities of mind that are associated with successful speculators anywhere. That he did not argue with the tape is plain. He was utterly fearless but never reckless. He could and did turn in a twinkling, if he found he was wrong.

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The chap who is compelled to lug a corpse a year or two always loses more than the original cost of the deceased; he is sure to find himself tied up with it when some really good things come his way.

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Test

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tape did all that was needed for my purpose. As I said before, the reputable newspapers always try to print explanations for market movements.

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Don’t forget that on the way down there are many holders who wish to heaven they had sold theirs but won’t do it three or four points from the top. Such speculators always vow they will surely sell out if there is a rally.

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shrewd men who have made millions in their own business and in addition have successfully operated in Wall Street at times would realise the wisdom of playing the game dispassionately. Well, you would be surprised at the frequency with which some 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.

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In every boom companies are formed primarily if not exclusively to take advantage of the public’s appetite for all kinds of stocks.

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That is why those outsiders who are wise enough not to buy at the top make up for it by not taking profits.

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The fashion for gray-haired presidents of banks was all very well in tranquil times, but youth was the chief qualification in these strenuous times.

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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.

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The public that had been eager to buy it at 50, now didn’t care for it at 37, and probably wouldn’t want it at 27.

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on the way down I could reach those buyers who always argue that a stock is cheap when it sells fifteen or twenty points below the top of the movement, particularly when that top is a matter of recent history. A rally is due, in their opinion.

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You cannot prevent people from guessing wrong no matter how able or how experienced they may be. Carefully laid plans will miscarry because the unexpected and even the unexpectable will happen.

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The speculator’s deadly enemies are: Ignorance, greed, fear and hope. All the statute books in the world and all the rules of all the Exchanges on earth cannot eliminate these from the human animal.

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brokers should not dwell too strongly on actual conditions because the course of the market is always from six to nine months ahead of actual conditions. Today’s earnings do not justify brokers in advising their customers 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.

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Who punishes the distributor of unjustified bullish news items? Nobody;

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If a law were passed that would punish bull liars as the law now punishes bear liars, I believe the public would save millions.

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The public ought always to keep in mind the elementals of stock trading. When a stock is going up no elaborate explanation is needed as to why it is going up. It takes continuous buying to make a stock keep on going up. As long as it does so, with only small and natural reactions from time to time, it is a pretty safe proposition to trail along with it. But if after a long steady rise a stock turns and gradually begins to go down, with only occasional small rallies, it is obvious that the line of least resistance has changed from upward to downward. Such being the case why should any one ask for explanations? There are probably very good reasons why it should go down, but these reasons are known only to a few people who either keep those reasons to themselves, or else actually tell the public that the stock is cheap. The nature of the game as it is played is such that the public should realise that the truth cannot be told by the few who know.

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