Chapter XI: Part 11

The first step in a bull movement in a stock is to advertise the fact that there is a bull movement on. Sounds silly, doesn’t it? Well, think a moment. It isn’t as silly as it sounded, is it? The most effective way to advertise what, in effect, are your honourable intentions is to make the stock active and strong. After all is said and done, _the greatest publicity agent in the wide world is the ticker, and by far the best advertising medium is the tape_. I do not need to put out any literature for my clients. I do not have to inform the daily press as to the value of the stock or to work the financial reviews for notices about the company’s prospects. Neither do I have to get a following. I accomplish all these highly desirable things by merely making the stock active. _When there is activity there is a synchronous demand for explanations_; and that means, of course, that the necessary reasons--for publication--supply themselves without the slightest aid from me.

Activity is all that the floor traders ask. They will buy or sell any stock at any level if only there is a free market for it. They will deal in thousands of shares wherever they see activity, and their aggregate capacity is considerable. It necessarily happens that they constitute the manipulator’s first crop of buyers. They will follow you all the way up and they thus are a great help at all the stages of the operation. I understand that James R. Keene used habitually to employ the most active of the room traders, both to conceal the source of the manipulation and also because he knew that they were by far the best business-spreaders and tip-distributors. He often gave calls to them--verbal calls--above the market, so that they might do some helpful work before they could cash in. He made them earn their profit. To get a professional following I myself have never had to do more than to make a stock active. Traders don’t ask for more. It is well, of course, to remember that these professionals on the floor of the Exchange buy stocks with the intention of selling them at a profit. They do not insist on its being a big profit; but it must be a quick profit.

I make the stock active in order to draw the attention of speculators to it, for the reasons I have given. I buy it and I sell it and the traders follow suit. The selling pressure is not apt to be strong where a man has as much speculatively held stock sewed up--in calls--as I insist on having. The buying, therefore, prevails over the selling, and the public follows the lead not so much of the manipulator as of the room traders. It comes in as a buyer. This highly desirable demand I fill--that is, I sell stock on balance. If the demand is what it ought to be it will absorb more than the amount of stock I was compelled to accumulate in the earlier stages of the manipulation; and when this happens I sell the stock short--that is, technically. In other words, I sell more stock than I actually hold. It is perfectly safe for me to do so since I am really selling against my calls. Of course, when the demand from the public slackens, the stock ceases to advance. Then I wait.

Say, then, that the stock has ceased to advance. There comes a weak day. The entire market may develop a reactionary tendency or some sharp-eyed trader may perceive that there are no buying orders to speak of in my stock, and he sells it, and his fellows follow. Whatever the reason may be, my stock starts to go down. Well, I begin to buy it. I give it the support that a stock ought to have if it is in good odour with its own sponsors. And more: I am able to support it without accumulating it--that is, without increasing the amount I shall have to sell later on. Observe that I do this without decreasing my financial resources. Of course what I am really doing is covering stock I sold short at higher prices when the demand from the public or from the traders or from both enabled me to do it. It is always well to make it plain to the traders--and to the public, also--that there is a demand for the stock on the way down. That tends to check both reckless short selling by the professionals and liquidation by frightened holders--which is the selling you usually see when a stock gets weaker and weaker, which in turn is what a stock does when it is not supported. These covering purchases of mine constitute what I call the stabilising process.

As the market broadens I of course sell stock on the way up, but never enough to check the rise. This is in strict accordance with my stabilising plans. It is obvious that the more stock I sell on a reasonable and orderly advance the more I encourage the conservative speculators, who are more numerous than the reckless room traders; and in addition the more support I shall be able to give to the stock on the inevitable weak days. By always being short I always am in a position to support the stock without danger to myself. As a rule I begin my selling at a price that will show me a profit. But I often sell without having a profit, simply to create or to increase what I may call my riskless buying power. My business is not alone to put up the price or to sell a big block of stock for a client but to make money for myself. That is why I do not ask my clients to finance my operations. My fee is contingent upon my success.

Of course what I have described is not my invariable practice. I neither have nor adhere to an inflexible system. I modify my terms and conditions according to circumstances.

A stock which it is desired to distribute should be manipulated to the highest possible point and then sold. I repeat this both because it is fundamental and because the public apparently believes that the selling is all done at the top. Sometimes a stock gets waterlogged, as it were; it doesn’t go up. That is the time to sell. The price naturally will go down on your selling rather further than you wish, but you can generally nurse it back. As long as a stock that I am manipulating goes up on my buying I know I am hunky, and if need be I buy it with confidence and use my own money without fear--precisely as I would any other stock that acts the same way. It is the line of least resistance. You remember my trading theories about that line, don’t you? Well, when the price line of least resistance is established I follow it, not because I am manipulating that particular stock at that particular moment but because I am a stock operator at all times.

When my buying does not put the stock up I stop buying and then proceed to sell it down; and that also is exactly what I would do with that same stock if I did not happen to be manipulating it. The principal marketing of the stock, as you know, is done on the way down. _It is perfectly astonishing how much stock a man can get rid of on a decline._

I repeat that at no time during the manipulation do I forget to be a stock trader. My problems as a manipulator, after all, are the same that confront me as an operator. All manipulation comes to an end when the manipulator cannot make a stock do what he wants it to do. _When the stock you are manipulating doesn’t act as it should, quit. Don’t argue with the tape. Do not seek to lure the profit back. Quit while the quitting is good--and cheap._

_XXI_

I am well aware that all these generalities do not sound especially impressive. Generalities seldom do. Possibly I may succeed better if I give a concrete example. I’ll tell you how I marked up the price of a stock 30 points, and in so doing accumulated only seven thousand shares and developed a market that would absorb almost any amount of stock.

It was Imperial Steel. The stock had been brought out by reputable people and it had been fairly well tipped as a property of value. About 30 per cent of the capital stock was placed with the general public through various Wall Street houses, but there had been no significant activity in the shares after they were listed. From time to time somebody would ask about it and one or another insider--members of the original underwriting syndicate--would say that the company’s earnings were better than expected and the prospects more than encouraging. This was true enough and very good as far as it went, but not exactly thrilling. The speculative appeal was absent, and from the investor’s point of view the price stability and dividend permanency of the stock were not yet demonstrated. It was a stock that never behaved sensationally. It was so gentlemanly that no corroborative rise ever followed the insiders’ eminently truthful reports. On the other hand, neither did the price decline.

Imperial Steel remained unhonoured and unsung and untipped, content to be one of those stocks that don’t go down because nobody sells and that nobody sells because nobody likes to go short of a stock that is not well distributed; the seller is too much at the mercy of the loaded-up inside clique. Similarly, there is no inducement to buy such a stock. To the investor Imperial Steel therefore remained a speculation. To the speculator it was a dead one--the kind that makes an investor of you against your will by the simple expedient of falling into a trance the moment you go long of it. 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.

One day the foremost member of the Imperial Steel syndicate, acting for himself and associates, came to see me. They wished to create a market for the stock, of which they controlled the undistributed 70 per cent. They wanted me to dispose of their holdings at better prices than they thought they would obtain if they tried to sell in the open market. They wanted to know on what terms I would undertake the job.

I told him that I would let him know in a few days. Then I looked into the property. I had experts go over the various departments of the company--industrial, commercial and financial. They made reports to me which were unbiased. I wasn’t looking for the good or the bad points, but for the facts, such as they were.

The reports showed that it was a valuable property. The prospects justified purchases of the stock at the prevailing market price--if the investor were willing to wait a little. Under the circumstances an advance in the price would in reality be the commonest and most legitimate of all market movements--to wit, the process of discounting the future. There was therefore no reason that I could see why I should not conscientiously and confidently undertake the bull manipulation of Imperial Steel.

I let my man know my mind and he called at my office to talk the deal over in detail. I told him what my terms were. For my services I asked no cash, but calls on one hundred thousand shares of the Imperial Steel stock. The price of the calls ran up from 70 to 100. That may seem like a big fee to some. But they should consider that the insiders were certain they themselves could not sell one hundred thousand shares, or even fifty thousand shares, at 70. There was no market for the stock. All the talk about wonderful earnings and excellent prospects had not brought in buyers, not to any great extent. In addition, I could not get my fee in cash without my clients first making some millions of dollars. What I stood to make was not an exorbitant selling commission. It was a fair contingent fee.

Knowing that the stock had real value and that general market conditions were bullish and therefore favourable for an advance in all good stocks, I figured that I ought to do pretty well. My clients were encouraged by the opinions I expressed, agreed to my terms at once, and the deal began with pleasant feelings all around.

I proceeded to protect myself as thoroughly as I could. The syndicate owned or controlled about 70 per cent of the outstanding stock. I had them deposit their 70 per cent under a trust agreement. I didn’t propose to be used as a dumping ground for the big holders. With the majority holdings thus securely tied up, I still had 30 per cent of scattered holdings to consider, but that was a risk I had to take. Experienced speculators do not expect ever to engage in utterly riskless ventures. As a matter of fact, it was not much more likely that all the untrusteed stock would be thrown on the market at one fell swoop than that all the policyholders of a life-insurance company would die at the same hour, the same day. There are unprinted actuarial tables of stock-market risks as well as of human mortality.

Having protected myself from some of the avoidable dangers of a stock-market deal of that sort, I was ready to begin my campaign. Its objective was to make my calls valuable. To do this I must put up the price and develop a market in which I could sell one hundred thousand shares--the stock in which I held options.

The first thing I did was to find out how much stock was likely to come on the market on an advance. This was easily done through my brokers, who had no trouble in ascertaining what stock was for sale at or a little above the market. I don’t know whether the specialists told them what orders they had on their books or not. The price was nominally 70, but I could not have sold one thousand shares at that price. I had no evidence of even a moderate demand at that figure or even a few points lower. I had to go by what my brokers found out. But it was enough to show me how much stock there was for sale and how little was wanted.

As soon as I had a line on these points I quietly took all the stock that was for sale at 70 and higher. When I say “I” you will understand that I mean my brokers. The sales were for account of some of the minority holders because my clients naturally had cancelled whatever selling orders they might have given out before they tied up their stock.

I didn’t have to buy very much stock. Moreover, I knew that the right kind of advance would bring in other buying orders--and, of course, selling orders also.

I didn’t give bull tips on Imperial Steel to anybody. I didn’t have to. My job was to seek directly to influence sentiment by the best possible kind of publicity. I do not say that there should never be bull propaganda. It is as legitimate and indeed as desirable to advertise the value of a new stock as to advertise the value of woolens or shoes or automobiles. Accurate and reliable information should be given by the public. But what I meant was that the tape did all that was needed for my purpose. As I said before, the reputable newspapers always try to print explanations for market movements. It is news. Their readers demand to know not only what happens in the stock market but why it happens. Therefore without the manipulator lifting a finger the financial writers will print all the available information and gossip, and also analyse the reports of earnings, trade condition and outlook; in short, whatever may throw light on the advance. Whenever a newspaperman or an acquaintance asks my opinion of a stock and I have one I do not hesitate to express it. I do not volunteer advice and I never give tips, but I have nothing to gain in my operations from secrecy. At the same time I realise that the best of all tipsters, the most persuasive of all salesmen, is the tape.

When I had absorbed all the stock that was for sale at 70 and a little higher I relieved the market of that pressure, and naturally that made clear for trading purposes the line of least resistance in Imperial Steel. It was manifestly upward. The moment that fact was perceived by the observant traders on the floor they logically assumed that the stock was in for an advance the extent of which they could not know; but they knew enough to begin buying. Their demand for Imperial Steel, created exclusively by the obviousness of the stock’s rising tendency--the tape’s infallible bull tip!--I promptly filled. I sold to the traders the stock that I had bought from the tired-out holders at the beginning. Of course this selling was judiciously done; I contented myself with supplying the demand. I was not forcing my stock on the market and I did not want too rapid an advance. It wouldn’t have been good business to sell out the half of my one hundred thousand shares at that stage of the proceedings. My job was to make a market on which I might sell my entire line.

But even though I sold only as much as the traders were anxious to buy, the market was temporarily deprived of my own buying power, which I had hitherto exerted steadily. In due course the traders’ purchases ceased and the price stopped rising. As soon as that happened there began the selling by disappointed bulls or by those traders whose reasons for buying disappeared the instant the rising tendency was checked. But I was ready for this selling, and on the way down I bought back the stock I had sold to the traders a couple of points higher. This buying of stock I knew was bound to be sold in turn checked the downward course; and when the price stopped going down the selling orders stopped coming in.

I then began all over again. I took all the stock that was for sale on the way up--it wasn’t very much--and the price began to rise a second time; from a higher starting point than 70. _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. They put in their orders to sell on the way up, and then they change their minds with the change in the stock’s price-trend. Of course there is always profit taking from safe-playing quick runners to whom a profit is always a profit to be taken.

All I had to do after that was to repeat the process; alternately buying and selling; but always working higher.

Sometimes, after you have taken all the stock that is for sale, it pays to rush up the price sharply, to have what might be called little bull flurries in the stock you are manipulating. It is excellent advertising, because it makes talk and also brings in both the professional traders and that portion of the speculating public that likes action. It is, I think, a large portion. I did that in Imperial Steel, and whatever demand was created by those spurts I supplied. My selling always kept the upward movement within bounds both as to extent and as to speed. In buying on the way down and selling on the way up I was doing more than marking up the price: I was developing the marketability of Imperial Steel.

After I began my operations in it there never was a time when a man could not buy or sell the stock freely; I mean by this, buy or sell a reasonable amount without causing over-violent fluctuations in the price. The fear of being left high and dry if he bought, or squeezed to death if he sold, was gone. The gradual spread among the professionals and the public of a belief in the permanence of the market for Imperial Steel had much to do with creating confidence in the movement; and, of course, the activity also put an end to a lot of other objections. The result was that after buying and selling a good many thousands of shares I succeeded in making the stocks sell at par. At one hundred dollars a share everybody wanted to buy Imperial Steel. Why not? Everybody now knew that it was a good stock; that it had been and still was a bargain. The proof was the rise. A stock that could go thirty points from 70 could go up thirty more from par. That is the way a good many argued.

In the course of marking up the price those thirty points I accumulated only seven thousand shares. The price on this line averaged me almost exactly 85. That meant a profit of fifteen points on it; but, of course, my entire profit, still on paper, was much more. It was a safe enough profit, for I had a market for all I wanted to sell. The stock would sell higher on judicious manipulation and I had graduated calls on one hundred thousand shares beginning at 70 and ending at 100.

Circumstances prevented me from carrying out certain plans of mine for converting my paper profits into good hard cash. It had been, if I do say so myself, a beautiful piece of manipulation, strictly legitimate and deservedly successful. The property of the company was valuable and the stock was not dear at the higher price. One of the members of the original syndicate developed a desire to secure the control of the property--a prominent banking house with ample resources. The control of a prosperous and growing concern like the Imperial Steel Corporation is possibly more valuable to a banking firm than to individual investors. At all events, this firm made me an offer for all my options on the stock. It meant an enormous profit for me, and I instantly took it. I am always willing to sell out when I can do so in a lump at a good profit. I was quite content with what I made out of it.

Before I disposed of my calls on the hundred thousand shares I learned that these bankers had employed more experts to make a still more thorough examination of the property. Their reports showed enough to bring me in the offer I got. I kept several thousand shares of the stock for investment. I believe in it.

There wasn’t anything about my manipulation of Imperial Steel that wasn’t normal and sound. As long as the price went up on my buying I knew I was O.K. The stock never got waterlogged, as a stock sometimes does. When you find that it fails to respond adequately to your buying you don’t need any better tip to sell. You know that if there is any value to a stock and general market conditions are right you can always nurse it back after a decline, no matter if it’s twenty points. But I never had to do anything like that in Imperial Steel.

In my manipulation of stocks I never lose sight of basic trading principles. Perhaps you wonder why I repeat this or why I keep on harping on the fact that I never argue with the tape or lose my temper at the market because of its behaviour. You would think--wouldn’t you?--that 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.

There has been much gossip about a disagreement between John Prentiss and myself. People have been led to expect a dramatic narrative of a stock-market deal that went wrong or some double-crossing that cost me--or him--millions; or something of that sort. Well, it wasn’t.

Prentiss and I had been friendly for years. He had given me at various times information that I was able to utilise profitably, and I had given him advice which he may or may not have followed. If he did he saved money.

He was largely instrumental in the organisation and promotion of the Petroleum Products Company. After a more or less successful market début general conditions changed for the worse and the new stock did not fare as well as Prentiss and his associates had hoped. When basic conditions took a turn for the better Prentiss formed a pool and began operations in Pete Products.

I cannot tell you anything about his technique. He didn’t tell me how he worked and I didn’t ask him. But it was plain that notwithstanding his Wall Street experience and his undoubted cleverness, whatever it was he did proved of little value and it didn’t take the pool long to find out that they couldn’t get rid of much stock. He must have tried everything he knew, because a pool manager does not ask to be superseded by an outsider unless he feels unequal to the task, and that is the last thing the average man likes to admit. At all events he came to me and after some friendly preliminaries he said he wanted me to take charge of the market for Pete Products and dispose of the pool’s holdings, which amounted to a little over one hundred thousand shares. The stock was selling at 102 to 103.

The thing looked dubious to me and I declined his proposition with thanks. But he insisted that I accept. He put it on personal grounds, so that in the end I consented. I constitutionally dislike to identify myself with enterprises in the success of which I cannot feel confidence, but I also think a man owes something to his friends and acquaintances. I said I would do my best, but I told him I did not feel very cocky about it and I enumerated the adverse factors that I would have to contend with. But all Prentiss said to that was that he wasn’t asking me to guarantee millions in profits to the pool. He was sure that if I took hold I’d make out well enough to satisfy any reasonable being.

Well, there I was, engaged in doing something against my own judgment. I found, as I feared, a pretty tough state of affairs, due in great measure to Prentiss’ own mistakes while he was manipulating the stock for account of the pool. But the chief factor against me was time. I was convinced that we were rapidly approaching the end of a bull swing and therefore that the improvement in the market, which had so encouraged Prentiss, would prove to be merely a short-lived rally. I feared that the market would turn definitely bearish before I could accomplish much with Pete Products. However, I had given my promise and I decided to work as hard as I knew how.

I started to put up the price. I had moderate success. I think I ran it up to 107 or thereabouts, which was pretty fair, and I was even able to sell a little stock on balance. It wasn’t much, but I was glad not to have increased the pool’s holdings. There were a lot of people not in the pool who were just waiting for a small rise to dump their stock, and I was a godsend to them. Had general conditions been better I also would have done better. It was too bad that I wasn’t called in earlier. All I could do now, I felt, was to get out with as little loss as possible to the pool.

I sent for Prentiss and told him my views. But he started to object. I then explained to him why I took the position I did. I said: “Prentiss, I can feel very plainly the pulse of the market. There is no follow-up in your stock. It is no trick to see just what the public’s reaction is to my manipulation. Listen: When Pete Products is made as attractive to traders as possible and you give it all the support needed at all times and notwithstanding all that you find that the public leaves it alone you may be sure that there is something wrong, not with the stock but with the market. There is absolutely no use in trying to force matters. You are bound to lose if you do. A pool manager should be willing to buy his own stock when he has company. But when he is the only buyer in the market he’d be an ass to buy it. For every five thousand shares I buy the public ought to be willing or able to buy five thousand more. But I certainly am not going to do all the buying. If I did, all I would succeed in doing would be to get soaked with a lot of long stock that I don’t want. There is only one thing to do, and that is to sell. And the only way to sell is to sell.”

“You mean, sell for what you can get?” asked Prentiss.

“Right!” I said. I could see he was getting ready to object. “If I am to sell the pool’s stock at all you can make up your mind that the price is going to break through par and----”

“Oh, no! Never!” he yelled. You’d have imagined I was asking him to join a suicide club.

“Prentiss,” I said to him, “it is a cardinal principle of stock manipulation to put up a stock in order to sell it. But you don’t sell in bulk on the advance. You can’t. The big selling is done on the way down from the top. I cannot put up your stock to 125 or 130. I’d like to, but it can’t be done. So you will have to begin your selling from this level. In my opinion all stocks are going down, and Petroleum Products isn’t going to be the one exception. It is better for it to go down now on the pool’s selling than for it to break next month on selling by some one else. It will go down anyhow.”

I can’t see that I said anything harrowing, but you could have heard his howls in China. He simply wouldn’t listen to such a thing. It would never do. It would play the dickens with the stock’s record, to say nothing of inconvenient possibilities at the banks where the stock was held as collateral on loans, and so on.

I told him again that in my judgment nothing in the world could prevent Pete Products from breaking fifteen or twenty points, because the entire market was headed that way, and I once more said it was absurd to expect his stock to be a dazzling exception. But again my talk went for nothing. He insisted that I support the stock.

Here was a shrewd business man, one of the most successful promoters of the day, who had made millions in Wall Street deals and knew much more than the average man about the game of speculation, actually insisting on supporting a stock in an incipient bear market. It was his stock, to be sure, but it was nevertheless bad business. So much so that it went against the grain and I again began to argue with him. But it was no use. He insisted on putting in supporting orders.

Of course when the general market got weak and the decline began in earnest Pete Products went with the rest. Instead of selling I actually bought stock for the insiders’ pool--by Prentiss’ orders.

The only explanation is that Prentiss did not believe the bear market was right on top of us. I myself was confident that the bull market was over. I had verified my first surmise by tests not alone in Pete Products but in other stocks as well. I didn’t wait for the bear market to announce its safe arrival before I started selling. Of course I didn’t sell a share of Pete Products, though I was short of other stocks.

The Pete Products pool, as I expected, was hung up with all they held to begin with and with all they had to take in their futile effort to hold up the price. In the end they did liquidate; but at much lower figures than they would have got if Prentiss had let me sell when and as I wished. It could not be otherwise. But Prentiss still thinks he was right--or says he does. I understand he says the reason I gave him the advice I did was that I was short of other stocks and the general market was going up. It implies, of course, that the break in Pete Products that would have resulted from selling out the pool’s holdings at any price would have helped my bear position in other stocks.

That is all tommyrot. I was not bearish because I was short of stocks. I was bearish because that was the way I sized up the situation, and I sold stocks short only after I turned bearish. There never is much money in doing things wrong end to; not in the stock market. My plan for selling the pool’s stock was based on what the experience of twenty years told me alone was feasible and therefore wise. Prentiss ought to have been enough of a trader to see it as plainly as I did. It was too late to try to do anything else.

I suppose Prentiss shares the delusion of thousands of outsiders who think a manipulator can do anything. He can’t. The biggest thing Keene did was his manipulation of U.S. Steel common and preferred in the spring of 1901. He succeeded not because he was clever and resourceful and not because he had a syndicate of the richest men in the country back of him. He succeeded partly because of those reasons but chiefly because the general market was right and the public’s state of mind was right.

It isn’t good business for a man to act against the teachings of experience and against common sense. But the suckers in Wall Street are not all outsiders. Prentiss’ grievance against me is what I have just told you. He feels sore because I did my manipulation not as I wanted to but as he asked me to.

There isn’t anything mysterious or underhanded or crooked about manipulation designed to sell a stock in bulk provided such operations are not accompanied by deliberate misrepresentations. Sound manipulation must be based on sound trading principles. People lay great stress on old-time practices, such as wash sales. But I can assure you that the mere mechanics of deception count for very little. The difference between stock-market manipulation and the over-the-counter sale of stocks and bonds is in the character of the clientele rather than in the character of the appeal. J. P. Morgan & Co. sell an issue of bonds to the public--that is, to investors. A manipulator disposes of a block of stock to the public--that is, to speculators. An investor looks for safety, for permanence of the interest return on the capital he invests. The speculator looks for a quick profit.

The manipulator necessarily finds his primary market among speculators--who are willing to run a greater than normal business risk so long as they have a reasonable chance to get a big return on their capital. I myself never have believed in blind gambling. I may plunge or I may buy one hundred shares. But in either case I must have a reason for what I do.

I distinctly remember how I got into the game of manipulation--that is, in the marketing of stocks for others. It gives me pleasure to recall it because it shows so beautifully the professional Wall Street attitude toward stock-market operations. It happened after I had “come back”--that is, after my Bethlehem Steel trade in 1915 started me on the road to financial recovery.

I traded pretty steadily and had very good luck. I have never sought newspaper publicity, but neither have I gone out of my way to hide myself. At the same time, you know that professional Wall Street exaggerates both the successes and the failures of whichever operator happens to be active; and, of course, the newspapers hear about him and print rumors. I have been broke so many times, according to the gossips, or have made so many millions, according to the same authorities, that my only reaction to such reports is to wonder how and where they are born. And how they grow! I have had broker friend after broker friend bring the same story to me, a little changed each time, improved, more circumstantial.

All this preface is to tell you how I first came to undertake the manipulation of a stock for someone else. The stories the newspapers printed of how I had paid back in full the millions I owed did the trick. My plungings and my winnings were so magnified by the newspapers that I was talked about in Wall Street. The day was past when an operator swinging a line of two hundred thousand shares of stock could dominate the market. But, as you know, the public always desires to find successors to the old leaders. It was Mr. Keene’s reputation as a skillful stock operator, a winner of millions on his own hook, that made promoters and banking houses apply to him for selling large blocks of securities. In short, his services as manipulator were in demand because of the stories the Street had heard about his previous successes as a trader.

But Keene was gone--passed on to that heaven where he once said he wouldn’t stay a moment unless he found Sysonby there waiting for him. Two or three other men who made stock-market history for a few months had relapsed into the obscurity of prolonged inactivity. I refer particularly to certain of those plunging Westerners who came to Wall Street in 1901 and after making many millions out of their Steel holdings remained in Wall Street. They were in reality superpromoters rather than operators of the Keene type. But they were extremely able, extremely rich and extremely successful in the securities of the companies which they and their friends controlled. They were not really great manipulators, like Keene or Governor Flower. Still, the Street found in them plenty to gossip about and they certainly had a following among the professionals and the sportier commission houses. After they ceased to trade actively the Street found itself without manipulators; at least, it couldn’t read about them in the newspapers.

You remember the big bull market that began when the Stock Exchange resumed business in 1915. As the market broadened and the Allies’ purchases in this country mounted into billions we ran into a boom. As far as manipulation went, it wasn’t necessary for anybody to lift a finger to create an unlimited market for a war bride. Scores of men made millions by capitalizing contracts or even promises of contracts. They became successful promoters, either with the aid of friendly bankers or by bringing out their companies on the Curb market. The public bought anything that was adequately touted.

When the bloom wore off the boom, some of these promoters found themselves in need of help from experts in stock salesmanship. When the public is hung up with all kinds of securities, some of them purchased at higher prices, it is not an easy task to dispose of untried stocks. _After a boom the public is positive that nothing is going up. It isn’t that buyers become more discriminating, but that the blind buying is over. It is the state of mind that has changed. Prices don’t even have to go down to make people pessimistic. It is enough if the market gets dull and stays dull for a time._

In every boom companies are formed primarily if not exclusively to take advantage of the public’s appetite for all kinds of stocks. Also there are belated promotions. The reason why promoters make that mistake is that being human they are unwilling to see the end of the boom. Moreover, it is good business to take chances when the possible profit is big enough. _The top is never in sight when the vision is vitiated by hope._ The average man sees a stock that nobody wanted at twelve dollars or fourteen dollars a share suddenly advance to thirty--which surely is the top--until it rises to fifty. That is absolutely the end of the rise. Then it goes to sixty; to seventy; to seventy-five. It then becomes a certainty that this stock, which a few weeks ago was selling for less than fifteen, can’t go any higher. But it goes to eighty; and to eighty-five. Whereupon the average man, who never thinks of values but of prices, and is not governed in his actions by conditions but by fears, takes the easiest way--he stops thinking that there must be a limit to the advances. That is why those outsiders who are wise enough not to buy at the top make up for it by not taking profits. The big money in booms is always made first by the public--on paper. And it remains on paper.

_XXII_

One day Jim Barnes, who not only was one of my principal brokers but an intimate friend as well, called on me. He said he wanted me to do him a great favour. He never before had talked that way, and so I asked him to tell me what the favour was, hoping it was something I could do, for I certainly wished to oblige him. He then told me that his firm was interested in a certain stock; in fact, they had been the principal promoters of the company and had placed the greater part of the stock. Circumstances had arisen that made it imperative for them to market a rather large block. Jim wanted me to undertake to do the marketing for him. The stock was Consolidated Stove.

I did not wish to have anything to do with it for various reasons. But Barnes, to whom I was under some obligations, insisted on the personal-favour phase of the matter, which alone could overcome my objections. He was a good fellow, a friend, and his firm, I gathered, was pretty heavily involved, so in the end I consented to do what I could.

It has always seemed to me that the most picturesque point of difference between the war boom and other booms was the part that was played by a type new in stock-market affairs--the boy banker.

The boom was stupendous and its origins and causes were plainly to be grasped by all. But at the same time the greatest banks and trust companies in the country certainly did all they could to help make millionaires overnight of all sorts and conditions of promoters and munition makers. It got so that all a man had to do was to say that he had a friend who was a friend of a member of one of the Allied commissions and he would be offered all the capital needed to carry out the contracts he had not yet secured. I used to hear incredible stories of clerks becoming presidents of companies doing a business of millions of dollars on money borrowed from trusting trust companies, and of contracts that left a trail of profits as they passed from man to man. A flood of gold was pouring into this country from Europe and the banks had to find ways of impounding it.

The way business was done might have been regarded with misgivings by the old, but there didn’t seem to be so many of them about. 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. The banks certainly did make enormous profits.

Jim Barnes and his associates, enjoying the friendship and confidence of the youthful president of the Marshall National Bank, decided to consolidate three well-known stove companies and sell the stock of the new company to the public that for months had been buying any old thing in the way of engraved stock certificates.

One trouble was that the stove business was so prosperous that all three companies were actually earning dividends on their common stock for the first time in their history. Their principal stockholders did not wish to part with the control. There was a good market for their stocks on the Curb; and they had sold as much as they cared to part with and they were content with things as they were. Their individual capitalisation was too small to justify big market movements, and that is where Jim Barnes’ firm came in. It pointed out that the consolidated company must be big enough to list on the Stock Exchange, where the new shares could be made more valuable than the old ones. It is an old device in Wall Street--to change the colour of the certificates in order to make them more valuable. Say a stock ceases to be easily vendible at war. Well, sometimes by quadrupling the stock you may make the new shares sell at 30 or 35. This is equivalent to 120 or 140 for the old stock--a figure it never could have reached.

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.

At all events, the stock was duly listed on the New York Stock Exchange and the price of it duly kept sagging until it nominally stood at 37. And it stood there because Jim Barnes and his associates had to keep it there because their bank had loaned them thirty-five dollars a share on one hundred thousand shares. If the bank ever tried to liquidate that loan there was no telling what the price would break to. 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.

As time went on the banks’ excesses in the matter of extensions of credits made people think. The day of the boy banker was over. The banking business appeared to be on the ragged edge of suddenly relapsing into conservatism. Intimate friends were now asked to pay off loans, for all the world as though they had never played golf with the president.