Notes on 'Reminscences of a Stock Operator' by Edwin Lefevre
Chapter 14
This chapter details the caution necessary to make a comeback with very little capital, or as is the experience with most traders, how to start out that way.
Chapter 14
This chapter details the caution necessary to make a comeback with very little capital, or as is the experience with most traders, how to start out that way.
- The next four years (1911-14) are a sideways market and for L “there was not a penny to be made”
- “Really I had not been filled with such pride as called for a fall.” Hopefully the modern reader disagrees. L commits and fails to realize he is committing egregious sins of money management.
- L tries making money in other broker’s offices but while he had no trouble getting credit he fails.
- “It served me right, because I was trying to force the market into giving me what it didn't have to give—to wit, opportunities for making money.”
- When he finally stops trading on credit he’s in debt $1M!
- He survives by managing other accounts.
- He begins to feel discouragement “for the first time in my life.”
- “To make money I needed merely to trade successfully. I had so traded before and I must do so once more. More than once in the past I had run up a shoe string into hundreds of thousands. Sooner or later the market would offer me an opportunity.”
- L realizes his problem is worrying over the money he owes. He is also ‘bedevilled’ by a couple of aggressive creditors.
- L decides he must go through bankruptcy but realizes how unpleasant it will be.
- “I hated to do it. I hated to put myself in a position to be misunderstood or misjudged. I myself never cared much for money. I never thought enough of it to consider it worth while lying for. But I knew that everybody didn't feel that way.”
- All his big creditors forgive him. This wasn’t just good sportsmanship- it was an intelligent business decision. His minor creditors continue to hound him though.
- The newspapers, of course, have a field day. L is ashamed to go out, but eventually it all wears off and “I cannot tell you how intense was my feeling of relief to know that I wasn't going to be harried any more by people who didn't understand how a man must give his entire mind to his business—if he wishes to succeed in stock speculation.”
- The exchange was closed for a few months in 1914 (WW1?) and because of the depressed conditions there is no one to go to for a loan.
- Finally L goes back to Willamson (!) who loans him 500 shares of whatever looks good. This actually annoys L who’s “a little sore to think that Williamson & Brown didn't give [him] a decent stake.”
- As with many traders starting out, L has a unique problem. He hasn’t much leeway and cannot afford a single mistake. He must build up his stake on his first play. However he had to make sufficient capital to be able to use good judgment. Without margins he cannot make cold-blooded dispassionate calls that come from the ability to afford minor losses necessary in testing the market before putting down big bets.
- “I think now that I found myself then at the most critical period of my career as a speculator. If I failed this time there was no telling where or when, if ever, I might get another stake for another try. It was very clear that I simply must wait for the exact psychological moment.”
- L avoids Williamson’s office, in case it should cause him to feel pressured to act. “A trader, in addition to studying basic conditions, remembering market precedents and keeping in mind the psychology of the outside public as well as the limitations of his brokers, must also know himself and provide against his own weaknesses. There is no need to feel anger over being human. I have come to feel that it is as necessary to know how to read myself as to know how to read the tape. I have studied and reckoned on my own reactions to given impulses or to the inevitable temptations of an active market, quite in the same mood and spirit as I have considered crop conditions or analysed reports of earnings.”
- L is bullish on Bethlehem steel but resolves to wait for it to ‘cross par’ by which he means cross an even number level like 100, 200, 300. As mentioned in the Anaconda story he believed that when a stock crosses par it’s likely to follow through.
- He is practically tortured by his need to sit tight as he considers how much money he isn’t earning as the stock moves to his entry level. This takes six weeks.
- The price reaches 98 and L can’t resist buying before it hits the level. However he gets what he expected and the stock reaches 114 where he buys 500 more, the next day it quickly shoots up to 145, earning his stake.
- “I earned it. Those six weeks of waiting for the right moment were the most strenuous and wearing six weeks I ever put in. I now had enough capital to trade in fair-sized lots. I never would have got anywhere just on five hundred shares of stock.”
- With no creditors, and no margin issues L starts winning...right before the Lusitania.
- “Every once in a while a man gets a crack like that in the solar plexus, probably that he may be reminded of the sad fact that no human being can be so uniformly right on the market as to be beyond the reach of unprofitable accidents.”
- As a result of the Lusitania incident and “two other reverses” he had only $140,000 at the end of 1915.
- In 1916 he was “very lucky” being “rampantly bullish” in a wild bull market. The war was making the USA prosperous as allies bought much needed supplies and prices rose with inflation.
- HH Rogers of Standard Oil : “there were times when a man could no more help making money than he could help getting wet if he went out in a rainstorm without an umbrella.”
- It was a clearly defined bull market as no manipulation was needed to get it started.
- Despite the prosperity, which was broad-based, not everyone managed to keep their profits, in a case of history repeating itself.
- “Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators to-day differ from yesterday. The game does not change and neither does human nature.”
- As the market rises, L watches for warning signals. “That a bull market has added to my bank account or a bear market has been particularly generous I do not consider sufficient reason for sticking to the bull or the bear side after I receive the get-out warning. A man does not swear eternal allegiance to either the bull or the bear side. His concern lies with being right.”
- “A market does not culminate in one grand blaze of glory. Neither does it end with a sudden reversal of form. A market can and does often cease to be a bull market long before prices generally begin to break. My long expected warning came to me when I noticed that, one after another, those stocks which had been the leaders of the market reacted several points from the top and—for the first time in many months—did not come back. Their race evidently was run, and that clearly necessitated a change in my trading tactics.”
- L switches to both long and short, shorting the stocks that had stopped leading and staying long the leaders. He shorts to the tune of 5,000 shares in each.
If you’re groaning or facepalming at this point of the story, or have done so already I don’t blame you. However looking at a chart of the period it looks like he’s going to emerge the hero.
- The shorts languish and the longs keep rising, but when they stop rising, he exits and goes short on those too. However he knew the time for being a ‘rampant bear’ hadn’t arrived.
- At 60,000 shorts he says it wasn’t a very heavy line but the market wasn’t yet heavily bearish.
- Then the market breaks and when he had a profit of 4 points in every short trade he knew he was right so he doubled his short positions. Once he has his position he doesn’t feel the need to push further. He watches the market for seven weeks.
- News of Wilson suing for peace made stocks break down badly, since the war was a bull item and this is the opportunity L uses to cover his shorts.
- “It was the only play possible. 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. For one thing, on a bad break like that you have a big market, one that you can turn around in, and that is the time to turn your paper profits into real money. Even in a bear market a man cannot always cover one hundred and twenty thousand shares of stock without putting up the price on himself. He must wait for the market that will allow him to buy that much at no damage to his profit as it stands him on paper.”
- Accidents like this usually run along L’s “line of least resistance”
- “Never try to sell at the top. It isn't wise. Sell after a reaction if there is no rally.”
- L clears about $3M dollars in 1916 by being bullish as long as the bull market lasted and then bearish when the bear market started.
- Again he goes fishing for a vacation, this time in Palm Beach. In the Adirondacks he has a direct wire from the broker’s office to his house.
- L reflects on Wilson’s peace efforts and believes he will succeed. He suspects this will cause stocks and wheat to fall, but cotton to rise.
- He starts at 15,000 bales using his usual method.
- The next day the headline is ‘unrestricted warfare’, not peace.
- At Gridley’s (a restaurant?) someone offered to sell any amount of steel at 5 points below that day’s close. He got no takers as everyone knew the market would gap down.
- Some stocks opened 8 points below the previous close and L covers his shorts during the uproar.
- “In a bear market it is always wise to cover if complete demoralisation suddenly develops. That is the only way, if you swing a good-sized line, of turning a big paper profit into real money both quickly and without regrettable reductions. For instance, I was short fifty thousand shares of United States Steel alone. Of course I was short of other stocks, and when I saw I had the market to cover in, I did. Profits amounted to about one and a half million dollars. It was not a chance to disregard.”
- His cotton trade is down $375,000 and while he covered his profitable shorts, he wasn’t sure if he should cover his long trade as he wasn’t sure if he was wrong. L emphasizes that he always takes the loss the moment he’s convinced he’s wrong.
- However then he recalls he was there to have a vacation, not be perplexed by stock operations, and after his enormous profits in wheat and stocks, he takes the loss. Wise, it seems to me.
- L notes that his ‘line of least resistance theory’ bears out again, because if the note had been peace instead of war, he would have been right in all three of his lines, but even with diametrically opposing news he was still right in ⅔.
- L returns to New York in 1917 and pays off all his debts which amount to over $1M. A great pleasure. He could have paid them off earlier but didn’t as he needed the capital. Of course many of them never expected to be repaid. He makes the one creditor who made his life most miserable, the smallest loan of the bunch, wait last to be repaid.
- “After I paid off my debts in full I put a pretty fair amount into annuities. I made up my mind I wasn't going to be strapped and uncomfortable and minus a stake ever again. Of course, after I married I put some money in trust for my wife. And after the boy came I put some in trust for him.”
Events in his late life make this statement questionable.
- I knew that a man will spend anything he can lay his hands on. This one anyway!
- But I have fixed it up so that no matter what I want or what my wife wants, that trust holds.”
L may have learned his lesson from his first marriage which ended shortly after he tried to pawn the jewelry she’d received from him, to recover from trading losses.
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