Chapter 2. Entering Wall Street

I called Lou Keller. I told him who I was and what I wanted. Next day he sent me some papers to sign, and advised me that as soon as I returned them with a deposit I would have an account with his brokerage firm. When I re­ceived his notice something happened to me. Suddenly I began to feel that I was becoming part of the financial scene. I cannot describe Wall Street because I have never been there physically, but even its name had an almost mystical attraction for me.

Here everything was going to be serious and different. I now considered my Canadian induction period as pure crazy gam­bling that I would never repeat.

As I studied the long gray columns of stock market quota­tions in the New York papers, I felt I was about to enter a new and successful period in my life. This was not like the wildcat. Canadian market with its quick tip-offs on gold strikes and uranium fields. This was responsible business, the street of bank presidents and great industrial combines, and I prepared to enter it with proper reverence.

I intended to make a much more cautious and mature ap­proach to the stock market. I added up my assets to see what I had to work with. I had started in the Canadian market with $11,000—my original brilund investment of $3,000 and profit of $8,000. This had been reduced by $5,200 in the fourteen months of my Canadian operations. All I had left of the brilund money was $5,800.

This did not seem like enough money with which to approach Wall Street, so I decided to add to it. From the savings of my show business activities I raised my stake to $10,000. It was a good round figure, and I deposited this sum with the broker.

Then one day I decided to start trading. I rang Lou Keller and nonchalantly, trying to be the old financial hand, simply asked him what was good.

I realize now this inquiry was more suitable for a butcher, but Mr. Keller was equal to it. He suggested several "safe stocks." He also gave me the fundamental reasons why these stocks were "safe." While I did not understand, I listened intently to such explanations as dividend increase, stock-splits, improved earn­ings. Now this to me was the highest professional advice. This man earned his living on Wall Street, so obviously he knew. Be­sides, he only "suggested." He emphasized that the decision was "up to me." This made me feel important and in command.

When one or two of the stocks he gave me rose a few points almost immediately, I had no doubt of the excellence of the information I was receiving and my natural ability as a stock market operator to act on it. What I did not know was that I was practically smack in the middle of the biggest bull market the world had ever seen and it was quite difficult, unless you were extremely unlucky, not to show a little paper profit from time to time.

Here are three typical consecutive deals I concluded in the early part of 1954—deals which convinced me I was a natural in Wall Street. In this table as in all the following tables in this book, I have included commissions and taxes.


Bought at 20 ($4,050.00)
Sold at 22⅞ ($4,513.42)
Profit $ 463.42


Bought at 24¼ ($4,904.26)
Sold at 26⅞ ($5,309.89)
Profit $ 405.63


Bought at 53½ ($5,390.35)
Sold at 59 ($5,854.68)
Profit $ 464.33
Total Profit $1,333.38

You will note that each of these transactions netted me just over $400. It was not a large sum, but three profits in a row amounting to $1,333.38 in just a few weeks made me feel that these were smooth, simple operations and I was in control.

The feeling that I was operating with a profit in Wall Street, allied to a natural awe of the place, made me feel foolishly happy. I felt I was losing my Canadian amateur status and becoming a member of an inner circle. I did not realize my method had not improved—that I was simply using more pompous words to cover it. For instance, I no longer considered the broker's advice as tips, but as "information". As far as I was concerned, I had given up listening to tips and instead was receiving authentic news based on valid economic evidence.

The boat sailed happily along. Here are some of my trans­actions during April and May 1954:

  Bought Sold

Profits, profits, profits. My confidence was at its height. This was clearly not Canada. Here everything I touched turned to gold. By the end of May, my $10,000 had grown to $14,600.

Occasional setbacks did not bother me. I regarded them as slight, inevitable delays in the upward climb towards prosperity. Besides, whenever a trade was successful I praised myself; when I lost, I blamed it on the broker.

I continued to trade constantly. I telephoned my broker sometimes twenty times a day. If I did not conduct at least one transaction a day I did not feel I was fulfilling my role in the market. If I saw a new stock I wanted to have it. I reached out for fresh stocks like a child for new toys.

These transactions in which I was involved in Wall Street around July 1954 will show the energy I expended for very small returns:


Bought 100 at 16 ($1,709.38)
  100 at 17½ ($1,772.50)
Sold at 17 ($3,523.06)
Profit $41.18


Bought at  21½ ($2,175.75)
Sold at 22½ ($2,213.70)
Profit $37.95


Bought at 24¾ ($2,502.38)
Sold at 24¾ ($2,442.97)
Loss $59.41


Bought at 14¾ ($1,494.75)
Sold at 15 ($1,476.92)
Loss  $17.83
Total Profit $79.13
Total Loss $77.24

My net profit on these transactions was $1.89. The only person who was happy was my broker. According to the New York Stock Exchange rules, his commission on these ten transactions amounted to $236.65. Incidentally, my $1.89 profit did not include the price of my telephone calls.

In spite of this, only one thing really bothered me. Half the words my broker used concerning the stock market I did not understand. I did not like to show my ignorance, so I decided to read up on the subject. In addition to the financial columns in the New York daily papers, I began to read books about the stock market so I could talk on his level.

Slowly I became acquainted with a series of new words and was always trying to use them. I was fascinated by words like earnings, dividends, capitalization. I learned that "per-share earnings" means "the company's net profit divided by the number of shares outstanding" and that "listed securities" are "those stocks that are quoted on the New York and American Stock Exchanges."

I labored over definitions of stocks, bonds, assets, profits, yields.

There was plenty to read, because there are hundreds of books published about the stock market. More has been written about the stock market, for instance, than about many cultural sub­jects.

At this time I studied books like:

R. C. Effinger ABC of Investing
Dice & Eiteman The Stock Market
B. E. Schultz The Securities Market: And How It Works
Leo Barnes Your Investments
H. M. Gartley Profit In The Stock Market
Curtis Dahl Consistent Profits In The Stock Market
E. J. Mann You Can Make Money In The Stock Market

Armed with my new vocabulary, and what seemed to me my growing knowledge, I became more ambitious. I felt the time had come to find another brilund. After all, somewhere there must be a big, sound Wall Street stock that could do as well for me as what I now considered a "little penny stock."

I started to subscribe to stock market services such as Moody's, Fitch, and Standard & Poor's. They gave me what seemed to me magnificent information—except that I did not understand any of it.

Some of the passages read like this:

"Promised expansion in consumer expenditures for durable goods, non-durables and services, plus a fairly pronounced improvement in productive efficiency, provide the base for rather good earnings and dividend improvement for companies whose earnings will reflect the favorable nature of these conditions. We expect continued irregularity to continue temporarily under the guise of which this new status of the market's preference will be implemented."

They were dignified, impressive, they told me everything I wanted   to   know—except   which   stock   was   going   up   like BRILUND.

As I read them, however, curiosity overcame me. I wanted to see what other stock-market services were saying. I saw in the papers that, as in Canada, for one dollar I could have a four-week trial subscription to certain services. Soon I found myself a trial-subscriber of almost every service that advertised.

I collected clippings from everywhere—daily papers, financial columns, book jackets. Whenever I saw a new financial service advertised, I immediately put my dollar in the mail.

As the releases arrived, I found to my great surprise that they often contradicted each other. Frequently, a stock that on service recommended for buying, another recommended for selling. I also found that the recommendations were almost always non-committal. They used terms like "Buy on reactions," or "Should be bought on dips." But none of them told me what I should consider a reaction or a dip.

I overlooked all this and read on avidly, hoping to uncover the secret of the stock-that-can-only-rise.

One day an advisory service which prided itself on giving information only five or six times a year, published a very glossy release, nearly a whole book, examining emerson radio. It com­pared this company favorably with the mighty r.c.a. It went deeply into emerson's capitalization, sales volume, profits before tax, profits after tax, per share earnings, comparative price-earnings ratios.

I did not understand all of this, but I was very impressed by these erudite words and the analytical comparisons. They proved that emerson stock, which was selling around 12, should be worth 30 to 35, comparable to the price of r.c.a. at that time.

Naturally, I bought emerson. I paid 12½, which seemed a nice low bargain price for a stock, which the glossy booklet assured me, was worth 35. What happened? This sure-fire stock began to drift downwards. Puzzled, baffled, I sold it.

Now, I am certain that the serious Wall Street analyst who prepared this glossy booklet had nothing but the highest intentions, but I must record in the interest of truth that by the end of 1956, this stock was down to 5¾.

About that time I heard a saying which has been passed from mouth to mouth for generations in Wall Street, but to me was new: "You cannot go broke taking a profit." I was much impressed by this and I was burning to put it into operation. This is how I did it.

One of the market leaders early in February 1955 was kaiser aluminum. On my broker's recommendation I bought 100 shares at 63⅜, paying $6,378.84 for the stock. It went up steadily, and at 75 I sold it. I received $7,453.29, which gave me a profit of $1,074.45 in less than one month.
Hoping for another quick profit, I switched into 100 boeing at 83. I paid $8,343.30 for these shares. The stock almost im­mediately began to drop. Four days later I sold at 79⅞ for $7,940.05. My loss on the boeing transaction was $403.25.

Trying to make up for the loss, I then bought magma copper in the first week of April. It was selling at 89¾. I paid $9,018.98 for 100 shares. No sooner did I buy, than it started to drop. Two weeks later I sold it at 80^4 for $8,002.18. This gave me a loss of $1,016.80.

By this time kaiser aluminum, which I had jumped out of in the first week of March, had moved up to 82. An advisory service was recommending it, so I switched back to it, buying 100 shares at that price. I paid $8,243.20.

Five minutes later it started to slide. Not wanting to risk a further loss, I sold at 81¾ and received $8,127.59. This meant that for five minutes of trading I lost $115.61, including com­missions.

On the first kaiser deal I had made a profit of $1,074.45. The losses sustained by jumping in and out of the other stocks were $1.53 5.66. So the whole circular transaction, which began with kaiser and ended with kaiser, gave me a net loss of $461.21.

If I had stuck with kaiser from my original purchase at 63⅜ until my ultimate sale at 81¾, I would have had a profit of $1,748.75 instead of the loss of $461.21.

Here is another case. From November 1954 to March 1955 I was constantly jumping in and out of a stock called rayonier, which in an eight-month period went from approximately 50 to 100. These were my transactions in rayonier, 100 shares at a time:

November-December 1954

Bought at 53 ($5,340.30)
Sold at 58¼ ($5,779.99)
Profit  $ 439.69

February-March 1955

Bought at 63⅞ ($6,428.89)
Sold at 71⅝ ($7,116.13)
Profit $ 687.24

March 1955

Bought at 72 ($7,242.20)
Sold at 74 ($7,353.39)
Profit $111.19
Total Profit $1,238.12

The profit I made on this series of trades amounted to $1,238.12. Then the old loss pattern repeated itself. In April 1955 I switched into manati sugar. I bought 1,000 shares at 8%, paying $8,508.80. Immediately afterwards it started a downward slide and I sold out at the varying prices of 7¾, 7⅝ and 7½. I received a total of $7,465.70, giving me a loss of $1,043.10. This left me with a net profit of $195.02 on the combined rayonier-manati operation.

However, if I had held my original November purchase of rayonier without constantly trying to take a profit, and sold it in April at 80, I would have had a profit of $2,612.48 instead of $195.02.

What did all this mean? I did not appreciate it at the time, but it was a classic refutation of: "You cannot go broke taking a profit." Of course you can.

Another stock market saying that began to fascinate me was "Buy Cheap, Sell Dear." This sounded even better. But where could I buy something cheap? As I searched for a bargain, I discovered the over-the-counter market, the market of unlisted securities. I knew from my books that in order to get its stock listed and traded on the stock exchanges a company has to observe very stringent financial regulations. I had read that this did not apply to over-the-counter stocks.

This market, therefore, seemed to me the perfect place to find a bargain. I naively believed that because these stocks were not listed, few people knew about them and I could buy them cheap. I hurriedly subscribed to a monthly booklet called Over-the-Counter Securities Review and started hunting.

I searched eagerly among the thousands and thousands of names for the bargains that seemed to be offered. I bought stocks like PACIFIC AIRMOTIVE, COLLINS RADIO, GULF SULPHUR, DOMAN HELICOPTER, KENNAMETAL, TEKOIL CORPORATION and some of the more obscure ones. What I did not know was that when I came to offer them for sale, some of these stocks stuck to my fingers like tar. I found it very difficult getting rid of them— and rarely at anything like the price I paid for them. Why? Because there was no rigid price discipline as there is for the listed securities; there were no specialists—professionals to assure a continuous and orderly market; there were no reports where one could see at what price a transaction took place. There were only the "Bid" and "Ask" prices. These, I discovered, were often very far apart. When I wanted to sell at 42, which was the quoted "Ask" price, I only found a buyer at 38, the quoted "Bid" price. I sometimes ended up at 40 but that was by no means certain.

When I stumbled into the over-the-counter market, all this was unknown to me. Fortunately, I quickly came to realize that this is a specialized field and is only lucrative for experts who really know something about the affairs of a particular company. I decided to give it up, and returned my attention to listed securities.

All this time, I never once questioned the truth of any Wall Street rumors. I had no way of knowing that they are just as ill-founded and dangerous as rumors in the Canadian or other markets.

What I believed to be solid information, piped straight from Wall Street, had the most sensational lure for me. Here are two typical cases that show the sort of information I gobbled up and acted upon.

One day a strong rumor floated into the market that bald-win-lima-hamilton, a firm of railroad equipment manufacturers, had received an order to construct an atomic train. Wall Street acted on this at once. The stock shot up from 12 to over 20.

By the time I heard this startling information, the stock had risen to what later turned out to be its peak. I bought 200 shares at 24½. The purchase price was $4,954.50. I held the stock for two weeks and watched with utter unbelief as it slipped slowly back to 19¼. By then even I realized that something was wrong, and I sold it for a loss of $1,160.38. However, I had done the very best thing in my bewilderment. I could have fared much worse with that stock, since it later went down to a low of12¼.

Another time my broker called me and said, "sterling precision will go to 40 before the end of the year." The stock was quoted at 8. He gave me the reason: "The company is buying up many more small prosperous companies and will grow into a giant in no time." He added that this was first-hand information.

To me that was sufficient. Why not? A Wall Street broker, who I thought could not possibly be wrong, had favored me with this authentic news. I could not give my buying order quickly enough. I decided, in view of the source of my informa­tion, to plunge big on this one, I bought 1,000 sterling precision at 77/8paying $8,023.10. I sat back happily to watch it rocket toward 40. Far from rocketing to 40, it began to waver. Slowly it slid downwards. When it looked as though it would fall below 7, something had obviously gone wrong, so I sold the stock at 71/8for $6,967.45. This piece of news showed me a loss of $1,055.65 in a few days. The stock subsequently touched a low of 41/8.

But these losses were more than offset by the great pride I felt in being part of Wall Street, and I constantly searched for new approaches. One day, reading The Wall Street Journal, I saw a column reporting stock transactions by officers and directors of listed companies. When I looked into this further I found out that, to prevent manipulations, the Securities and Exchange Commission required that officers and directors report whenever they bought or sold stocks of their own company. Now, that was something! Here was a way for me to know what the real "insiders" were doing. All I had to do was to follow them. If they were buying, I would buy. If they were selling, I would sell.

I tried this approach, but it did not work. By the time I found out about the insiders' transactions, it was always too late. Besides, I often found that insiders were human too. Like other investors, they often bought too late or sold too soon. I made another discovery. They might know all about their company but they did not know about the attitude of the market in which their stock was sold.

Through these and other experiences, however, certain con­clusions began to emerge. As a baby repeatedly hearing the same words starts to learn them, so did I slowly start, through my trading experiences, to discern the outlines of some rules that I could apply?

They were:

  1. I should not follow advisory services. They are not infallible, either in Canada or on Wall Street.
  2. I should be cautious with brokers' advice. They can be wrong.
  3. I should ignore Wall Street sayings, no matter how ancient and revered.
  4. I should not trade "over the counter"—only in listed stocks where there is always a buyer when I want to sell.
  5. I should not listen to rumors, no matter how well founded they may appear.
  6. The fundamental approach worked better for me than gambling. I should study it.

I wrote out these rules for myself and decided to act accord­ingly. I went over my brokerage statements and it was then that I discovered a transaction that gave me a seventh rule and led to the events that immediately followed. I discovered that I owned a stock and did not know it.
The stock was Virginian railway and I had bought 100 shares in August 1954 at 29¾ for $3,004.88. I had bought it and forgotten it, simply because I was too busy on the telephone jumping in and out of dozens of stocks—sometimes making as little as 75 cents; other times frantically calling up about a slid­ing stock, trying to sell it before it dropped any lower.

Virginian railway had never given me a moment's anxiety, so I left it alone. It was like a good child that sat playing quietly in the corner while I worried and fretted about the behavior of a dozen bad children. Now that I saw its name—after having held it for eleven months—I hardly recognized it. It had been so quiet, it had gone completely out of my mind. I rushed to my stock tables. It was standing at 43½. This forgotten, calm, dividend-paying stock had been slowly rising. I sold it and received $4,308.56. Without any effort on my part, or even any anxiety, it had made me $1,303.68. It also made me dimly aware of what was to become my rule number

  1. I should rather hold on to one rising stock for a longer period than juggle with a dozen stocks for a short period at a time.

But which stock will rise? How to find it by myself?

I decided to have a look at Virginian railway. What had caused its steady rise while other stocks were jumping about? I asked my broker for information. He told me that the company paid a good dividend and had a fine earnings record. Its financial position was excellent. Now I knew the reason for the steady rise. It was a fundamental reason. This convinced me of the Tightness of my fundamental approach.

I made up my mind to refine this approach. I read, studied, analyzed. I set out to find the ideal stock.

I thought that if I really studied the company reports I could find out all about a stock and decide whether it was a good investment. I began to learn all about balance sheets and income accounts. Words like "assets," "liabilities," "capitalization," and "write-offs" became commonplace in my vocabulary.

For months I puzzled over these problems. Night after night, for hours after my daily dealings, I pored over the statements of hundreds of companies. I compared their assets, their liabili­ties, their profit margins, their price-earnings ratios.

I thumbed through lists like:

  • Stocks with top quality rating
  • Stocks the experts like
  • Stocks selling below book value
  • Stocks with strong cash position
  • Stocks that have never cut their dividend

Time and again, however, I was confronted with the same problem. When things looked perfect on paper, when balance sheets seemed right, the prospects bright, the stock market never acted accordingly.

For instance, when I carefully compared the financial position of some dozen textile companies and after much study decided that the balance sheets clearly indicated that American viscose and stevens were the best choices, it was very puzzling to me why another stock called textron advanced in price while my two selections did not. I found this pattern repeatedly in other industry groups.

Baffled and a little disconcerted, I wondered whether it would not be wiser to adopt the judgment of a higher authority about the merits of a company. I asked my broker whether there was such an authority. He recommended a widely used, serious, very reliable monthly service, which gives the vital data on several thousand stocks—the nature of their business, their price ranges for at least twenty years, their dividend payments, their finan­cial structure and their per-share annual earnings. It also rates each stock according to relative degrees of safety and value. It fascinated me to see how this was done.

High Grade stocks whose dividend payments are considered relatively sure are rated:


Investment Merit stocks that usually pay dividends:

BBB—Best of group

Lesser Grade stocks, paying dividends but future not sure:

CCC—Best of group
CC—Fair dividend prospects
C—Slight dividend prospects Lowest Grade stocks:

DDD—No dividend prospects
DD—Slight apparent value
D—No apparent value

I studied all these ratings very carefully. It seemed so very simple. There was no longer any need for me to analyze balance sheets and income accounts. It was all spelled out for me here, I had only to compare: A is better than B, C is better than D.

I was absorbed and happy with this new approach. To me it had the charm of cold science. No longer was I the plaything of frantic, worrying rumor. I was becoming the cool, detached financier.

I was sure I was laying the foundation of my fortune. I now felt competent and confident. I listened to no one, I asked no one for advice. I decided everything I had done before was as slaphappy as my Canadian gambling period. I felt all I now needed to achieve success was to set up my own comparison tables. This I did, spending many grave and serious hours at the task.

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