How I Trade and Invest in Stocks and Bonds

My First Lessons in Investing and Trading

I

My First Lessons in Investing and Trading

AT the suggestion of my first employer in Wall Street, I began the study of railroad and other corporation statistics about the time my trousers were being lengthened from knee to ankle and I was receiving the munificent sum of $20 per month. This was in 1888.

With numerous interruptions my studies continued until 1897, when I began to put them into practice by purchasing one share of St. Louis & San Francisco common, at $4 per share. At that time some of the other leading stocks were selling at the following prices: Union Pacific 4, Southern Pacific 14, Norfolk & Western 9, Atchison 9, Northern Pacific 11. Reading 17. To put it mildly, prices were very low. Many roads were just emerging from, or were still in, receivership, and Irish dividends were the rule.

As I saved a little money I began to buy more one share lots and finally I became such a pest in this respect that the Stock Exchange firm which I “favored” with my orders said they didn't care for the business, whereupon I decided to buy more shares, of fewer varieties.

This is the way most people begin their operations—by purchasing outright, believing that they are safe. It is true they are safe in the possession of their certificates once they have them in their safe deposit boxes, but in no other respect. They are not safe against fluctuations or shrinkages in value or earning power. Nevertheless, if their securities are well selected, and bought at the right time, the chances are strongly in favor of their making money.

It was my practice about that time to sit up nights, read the financial papers, and study probably future values of securities, and when I didn't have money enough to buy, I would make my selections just the same and write my imaginary purchases in a book with reasons alongside why they should ultimately be worth more money. Two of these I still retain in my memory, viz., Chicago, Burlington & Quincy at 57, and Edison Electric Illuminating of New York, at 101.

I mention these incidents because they illustrate a very good way for anyone to begin to learn the business of trading and investing in securities. Just as in any other line it is practice that makes perfect, and most of the fatalities in Wall Street can be traced to lack of practice. You don't have to risk real money when you are learning, and I always advocate two or three years—not two or three months, mind you—of this kind of study and paper practice when one is seriously considering participation in this greatest of all games.

But study and practice are the two things farthest removed from the minds of the majority. Everyone knows that people who engage in speculation for the first time do not want to bother with such details. The average man who comes to Wall Street comes to speculate, although he may pay in full for his purchases. All he asks is to be told "something good." That is not speculation, it is gambling; for speculation, to quote Thomas F. Woodlock, "involves the use of intelligent foresight." Most people use neither foresight nor intelligence.

It might seem to the reader a long while to wait, but in my case I did not begin to invest until eight years after I started to study, and I did not commence trading for six years after that, so it may be admitted that I went to school and got a foundation knowledge which has been of inestimable value.

In connection with my one share purchases I found that although I had correctly figured financial conditions and earning power of the companies whose securities I held, their prices would often fluctuate widely as a result of general market conditions. In other words, a stock might go down, although everything in the way of intrinsic value and future possibilities pointed upward; so I made up my mind that there were other factors to be considered and found that these were principally three, viz., manipulation, technical conditions and trend of the market.

In order to study the market closely I identified myself with a leading New York Stock Exchange house which did a big business for some prominent operators, and there I learned how necessary it is to observe the proposition, not from the standpoint of the outsider who is endeavoring to anticipate the fluctuations from what he sees on the surface, but from the standpoint of the insider who is a factor in influencing prices.

Investigation proved that many of those who were thus able to affect prices often made the same mistakes as small traders, only their errors ran into big money, which, however, was not out of the proportion to their profits. Years before, in my clerical capacity in the brokerage business, I had noticed tendencies among small traders which I now found magnified many diameters in the case of large operators.

In the study of technical conditions, which was my next step, I found that the most important factor was the trend of the market and that the overbought or oversold condition of the market had the most to do with the immediate direction of the next swing.

No doubt the principles which will be found in my book, "Studies in Tape Reading," were rattling around in my head for a long time before I wrote them out, and as I did this they clarified and crystallized. When I realized this, I began to put them into practice by trading in ten share lots, although I had operated in a much larger way some years before. It seemed to me that, with the right principles and a sufficient amount of practice, I could gradually build up my trading on a strong foundation that would not lead to flash-in-the-pan results but to a steady increase in speculative ability and consequent profits.

Being in the brokerage business, my immediate object was to make more money for my clients, because I realized that this was the only way in which they would become permanent and successful clients. My ultimate object, however, was to get out of the brokerage business and devote my time to the security markets, and it is a satisfaction to say that I arrived at that point some years ago.

Unlike many who operate in order that they may make money with which to enlarge their market operations, I am more interested in realizing profits so that I may have more money to invest. Just as its staff writers, through the columns of The Magazine of Wall Street, advocate that the business man take his surplus and invest it in sound securities, so I make a business of trading and invest the profits which result. In a word, I trade so that I may invest.

But let us go back a little and note some of the points which came to me while I was studying the subject in an objective way:

The market operations which were carried on in the office of my first employers were not significant because it was a small firm and did not have many customers. The head of the firm traded a little and made some money, because he seemed to understand what he was doing. Most of the customers, on the other hand, neither understood nor made money. Once in a while some one would come in and plunge around, pay a lot of commissions, and then go away disgusted with the business. Traders of this sort should have been disgusted with themselves. The majority seemed to look upon it as a sport or an adventure in which they hoped to prove that their judgment and ability were better than those of all who they knew had failed.

Nearly everyone seemed to be just guessing.

One man certainly carried off the palm at the business of buying at the top and selling at the bottom. Another told me how he had taken one little Reading 3rd Income Bond, worth about $300, and by pyramiding on the rise in Reading during former years had run up an equity of something over $250,000. But at this particular time he was down to a shoestring again.

We had one old fellow who bought nothing but the very highest grade railroad bonds, and only when they were very low. Collecting these and clipping coupons was a mania with him and in order to indulge his mania he economized to the point of using a piece of plain manila twine to hold his eye glasses. He and other out-and-out investors were the most satisfactory clients because they kept coming around year after year, while those who speculated disappeared one after the other. As for the latter, I noticed a very marked tendency to accept a small profit and stand for a big loss.

About that time I heard of a prominent Brooklyn man who after several attempts at speculation said to himself, "I know the secret of this game—these traders are all taking small profits and big losses. I will open a bucket shop and when they do this they will force me to take small losses and big profits." He did. And in a short while he bought a couple of hotels and was rated as a millionaire. No doubt he mistrusted his own ability to trade as the others were doing and followed strictly this profitable principle (the bucket shop proprietor may have two different kinds of principles although they are spelled the same way), but he knew if he got into the business he would be obliged by the very ignorance of his clients, to make more money than he lost.