Chapter 5. Cables Round the World
Almost at the same time that I started to operate with my new principles in mind, I signed up to make a two-year tour of the world with my dancing act. Immediately, I was faced with many problems. How, for instance, could I continue to trade while I was at the other side of the world? And instantly and very vividly there came before my mind the occasion when my broker missed me on the telephone. If this could happen in New York, how was I to overcome such a difficulty when I was thousands of miles away? I discussed the matter with him and we decided that we could remain in touch with each other through cables.
We also decided upon one tool—this was Barton's, a weekly financial publication, which we arranged to have airmailed to me as soon as it was published. This would show me any stocks, which might be moving up. At the same time a daily telegram would quote the stocks I owned. Even in such remote places as Kashmir and Nepal, where I performed during the tour, the daily telegram duly arrived. It contained the Wall Street closing prices of my stocks.
To save time and money, I had instituted a special code with my broker in New York. My cables consisted only of a string of letters denoting the stocks, each followed by a series of apparently meaningless numbers. They looked something like this:
"B 32½ L 57 U 89½ A 120¼ F 132¼"
It only took me a few days to discover that these quotations were insufficient for me to properly follow the movements of my stocks. I was unable to construct my boxes without knowing the upper and lower limits of their moves. I called New York and asked my broker to add to each closing price the full details of the stock's daily price fluctuations. This consisted of the highest and lowest price of the stock for that day. Now my telegrams started to look like this:
"B 32½ (34½-32⅜) L 57 (58⅝-57) U 89½ (91½-89) A 120¼ (121/2-120¼) F 132¼ (134⅞-132¼)."
I did not ask for volume quotes, as I feared that too many figures might overcrowd my cables. My selections were high-volume stocks anyway and I thought that if the volume contracted, I would notice it in Barron's a few days later.
As my broker and I both knew which stocks we were quoting, we only used the first letter of the name of each stock I owned. But because these were not the normal stock-market abbreviations which are known all over the world, these constant mysterious letter-figure cables upset and bothered post-office employees almost everywhere. Before they handed my first cables to me, I had to give them a detailed explanation of what they contained.
They obviously thought I must be a secret agent. I was constantly confronted with this suspicion, especially in the Far East. It was perhaps worst in Japan. The telegraph officials there were more suspicious than anywhere else, as the Japanese bureaucrats do not appear to have completely shed their pre-war spy mania. Whenever I went to a new town such as Kyoto, Nagoya or Osaka, the cable officials would look at me with the gravest doubts.
I had always to go into long explanations. As I did not speak Japanese, this was often a complicated operation. Oddly enough, however, they seemed quite happy as soon as I signed a paper telling them exactly what my cables contained. It might not have been the truth, but that did not seem to have occurred to them. On the other hand, without this paper bearing my signature, they would refuse to send my cables.
It took me a long time to change their minds. I spent six months in Japan before I finally became a well-known figure in the cable offices of most of the major cities. They even began cheerfully to accept my cables without a special signature. The word had gone around among the Japanese that I was a mad, but apparently harmless, European who kept sending and receiving telegrams containing financial gibberish.
During my tour of the world my journeys ranged from Hong Kong to Istanbul, Rangoon, Manila, Singapore, Stockholm, Formosa, Calcutta, Japan and many other places. Naturally I often ran into other difficulties trying to receive or send my cables.
One major problem was that while I was traveling I had to be careful that cables did not miss me. So when I was on the move they were duplicated or even triplicated. It was quite common for the same cable to leave Wall Street addressed Pan-Am Flight 2 Hong Kong Airport, repeated Tokyo Airport, repeated Nikkatsu Hotel Tokyo. This arrangement enabled me, if I missed it in flight, to pick it up immediately after landing.
My difficulties in operating in Wall Street from Vientiane in Laos, for instance, were tremendous. The first of them was that there was no telephone system there at all. The only local telephone was between the American military mission and the American Embassy, which, of course, was of no use to me.
If I wanted to send or collect any messages I had to take a rickshaw to the post office, which was open just eight hours a day and always closed bang on the minute.
Since there was a difference of twelve hours between local and New York time, the post office was shut from opening to closing time on Wall Street. I was under constant tension, worrying whether important news from the stock market was being held up.
One day when I went to the post office, I found a telegram awaiting me, which had been forwarded from Saigon to Hong Kong and then sent on from Hong Kong to Vientiane. I opened it apprehensively, thinking that the delay certainly must spell disaster. But luckily it contained no information I felt compelled to act upon.
But Laos was only one of the places where I ran into difficulties. In Kathmandu, the capital of Nepal in the Himalayas, there was no telegraph service at all. The only telegraph office was in the Indian Embassy and all communications by cable from the outside world came through there.
The Embassy officials obviously considered it beneath their dignity to bother about private cables addressed to ordinary people. When a telegram arrived for me they would not deliver it, and I had to constantly telephone the Embassy to see if there were any messages. Sometimes I had to call ten times before they told me to come and collect my cables. Moreover, they were handwritten and often illegible.
The basic mechanics of my operations were these: Barron's, published in Boston on Mondays, usually reached me if I was in Australia or India, or any part of the world not too remote, by Thursday. This, of course, meant that I was four days behind the Wall Street movements. However, when I saw in Barron's a stock that behaved according to my theories, I sent a telegram to my broker asking him to bring me up to date on the stock's movements from Monday to Thursday, for example:
"CABLE THIS WEEK'S RANGE AND CLOSE CHRYSLER."
If the stock, for instance, was, in my opinion, behaving well in the 60/65 box, I would wait to see if the four-day quotations from New York still showed this. If the quotations cabled to me showed it was still in this box, I decided to watch it. I would then ask my broker to quote it daily so I could see if it was pressing toward a higher box. If I was satisfied with what I saw, I cabled to New York my on stop buy order, which my broker was instructed to consider good-till-cancelled unless otherwise specified. This was always coupled with an automatic stop-loss order in case the stock dropped after I bought it. A typical cable looked like this:
"BUY 200 CHRYSLER 67 ON STOP 65 STOPLOSS."
If, on the other hand, my broker's cable showed it had moved out of the 60/65 box. Since I had noticed it in Barron's, I forgot about it. It was too late for me to act. I had to wait for another opportunity.
Naturally, I was forced to narrow down my operations to a few stocks. The reason was purely financial. If I spent more than $12 to $15 a day on cables requesting stock quotations, the operation would become uneconomic unless I made enormous profits.
In the beginning, I was terribly afraid. Not that being in New York had helped me in the past, but to be able to communicate with Wall Street by telephone had given me a false feeling of security. This I missed for a while. It was only later, as I gradually gained experience in trading through cables, that I came to see the advantages of it. No phone calls, no confusion, no contradictory rumors—these factors combined gave me a much more detached view.
As I only handled five to eight stocks at a time, I automatically separated them from the confusing, jungle-like movement of the hundreds of stocks, which surrounded them. I was influenced by nothing but the price of my stocks.
I could not hear what people said, but I could see what they did. It was like a poker game in which I could not hear the betting, but I could see all the cards.
I did not know it at the time, but later, as I became more experienced in the market, I realized how invaluable this was to me. Of course, the poker players would try to mislead me with words, and they would not show me their cards. But if I did not listen to their words, and constantly watched their cards, I could guess what they were doing.
At first I tried to practice on paper without investing any money. But I soon discovered that working on paper was quite different from actual investing. It was like playing cards without any dollars in the pot. It had as much savor and excitement as bridge at an old ladies' home.
Everything seemed very easy on paper with no money at stake. But as soon as I had $ 10,000 invested in a stock the picture became quite different. With no money involved I could easily control my feelings, but as soon as I put dollars into a stock my emotions came floating quickly up to the surface.
As my cables continued to arrive day after day, I slowly became accustomed to this new type of operation and started to feel more and more confident. Only one particular fact bothered me. Sometimes some of my stocks made inexplicable moves, which had no relation to their previous behavior.
This baffled me, and it was while I was looking for an explanation that I made a momentous discovery. I realized I was on my own. I was certain I could learn nothing more from books. No one could guide me. I was completely alone with my daily telegrams and my weekly issues of Barton's. They were my only contact with Wall Street, many thousands of miles away. If I wanted an explanation, I could only turn to them.
So I plunged avidly into Barron's. I turned its pages until they turned to shreds before I finally discovered this: the inexplicable moves in my stocks usually coincided with some violent move in the general market. As I only received the quotes of my own stocks, I was completely disregarding the possible influence of the general market on them. This was no better than trying to direct a battle by only looking at one section of the battlefield.
This was a very important discovery for me and I immediately acted on it. I asked my broker to add to the end of my cables the closing price of the Dow-Jones Industrial Average. This I thought would give me a clear enough picture of how the general market behaved.
My telegrams now read like this:
"B 32½ (34½-32⅜) L 57 (58⅝-57) U 89½ (91½-89) A 120¼ (121½-120¼) F 132¼ (134⅞-132¼) 482.31"
When I received the first cables with this added information, I was like a child with a new toy. I thought I had discovered a completely new formula. As I tried to relate the Dow-Jones Industrial Average to the movements of my own stocks, I reasoned that if the Average was going up, so would my stocks.
Soon after, I found out that this was not true. To try to fit the market into a rigid pattern was a mistake. It seemed quite impossible to do it. Each stock behaved differently. There was no such thing as a mechanical pattern. I was wrong many times before I banished the Average to its proper place. It was some time before I discovered that the Dow-Jones Company publishes an average. It simply mirrors the day-to-day behavior of 3 0 selected stocks. Other stocks are influenced by it but do not mechanically follow its pattern. I also began to appreciate that the Dow-Jones Company is not a fortune-telling organization. It does not attempt to tell you when individual stocks will rise or fall.
Gradually, I began to understand that I could not apply mechanical standards to the relationship between the Average and individual stocks. Judging this relationship was much more like an art. In some ways it was like painting. An artist puts colors on a canvas obeying certain principles, but it would be impossible for him to explain how he does it. In the same way I found that the relationship between the Average and my individual stocks were confined within certain principles, but they could not be measured exactly. From then on, I made up my mind to keep watching the Dow-Jones Industrial Average, but only in order to determine whether I was in a strong or a weak market. This I did because I realized that a general market cycle influences almost every stock. The main cycles like a bear or a bull market usually creep into the majority of them.
Now that I was armed with a finishing touch to my theory, I felt much stronger. I felt as though I was beginning to touch some of the light switches, which would illuminate the room.
I discovered I could form an opinion on the stocks from the telegrams in front of me. They became like X-rays to me. To the uninitiated, an X-ray picture is meaningless. But to a physician, it often contains all the information he wants to know. He relates its findings to the nature and duration of the illness, the age of the patient, etc., and only then does he draw his conclusions.
Looking at my telegrams, I did something similar. I compared the prices of my stocks first with each other, then with the Dow-Jones Average, and after I weighed their trading range, I evaluated whether I should buy, sell or hold.
I did this automatically without deeper analysis. I could not fully explain this to myself until I realized that I was now reading and no longer spelling out the alphabet. I was doing what an educated adult does—I could absorb the printed page at a glance and draw rapid conclusions from it, instead of painfully putting the letters together like a child.
Simultaneously, I tried to train my emotions. I worked it this way: Whenever I bought a stock, I wrote down my reason for doing so. I did the same when I sold it. Whenever a trade ended with a loss, I wrote down the reason I thought caused it. Then I tried not to repeat the same mistake. This is how one of my tables looked:
Cause of Error
|ISLAND CREEK COAL
||Brought too late
||Stop-loss too close
|EASTERN GAS & FUEL
||Overlooked weak general market
||Brought on decline
These cause-of-error tables helped me immeasurably. As I drew them up one after the other I was learning something from each trading. I started to see that stocks have characters just like people. This is not so illogical, because they faithfully reflect the character of the people who buy and sell them.
Like human beings, stocks behave differently. Some of them are calm, slow, conservative. Others are jumpy, nervous, tense. Some of them I found easy to predict. They were consistent in their moves, logical in their behavior. They were like dependable friends.
And some of them I could not handle. Each time I bought them they did me an injury. There was something almost human in their behavior. They did not seem to want me. They reminded me of a man to whom you try to be friendly but who thinks you have insulted him and so he slaps you. I began to take the view that if these stocks slapped me twice I would refuse to touch them any more. I would just shake off the blow and go away to buy something I could handle better. This does not mean, of course, that other people with a different temperament from mine were not able to get on well with them - just as some people get along with one set of people better than they do with others.
The experience I gained through my cause-of-error tables became one of the most important of all my qualifications. I now realized I could never have learned it from books. I began to see that it is like driving a car. The driver can be taught how to use the accelerator, the steering wheel and the brakes, but he still has to develop his own feeling for driving. No one can tell him how to judge whether he is too close to the car in front of him or when he should slow down. This he can only learn through experience.
As I flew around the world and operated in Wall Street by cables, I slowly came to see that though I was becoming a diagnostician I could not be a prophet. When I examined a stock and found it strong, all I could say was: It is healthy now, today, at this hour. I could not guarantee it would not catch a cold tomorrow. My educated guesses, no matter how cautious they were, many times turned out to be wrong. But this did not upset me any more. After all, I thought, who was I to say what a stock should or should not do?
Even my mistakes did not make me unhappy. If I was right, so much the better. If I was wrong—I was sold out. This happened automatically as something apart from me. I was no longer proud if the stock went up, nor did I feel wounded if it fell. I knew now that the word "value" cannot be used in relation to stocks. The value of a stock is its quoted price. This in turn is entirely dependent on supply and demand. I finally learned that there is no such thing as a $50 stock. If a $50 stock went to $49—it was now a $49 stock. Being thousands of miles away from Wall Street, I succeeded in disassociating myself emotionally from every stock I held.
I also decided not to be influenced by the tax problem. Many people hold on to stocks for six months to obtain long-term capital gain. This I considered dangerous. I might lose money by holding on to a falling stock just for tax reasons.
I decided I would trade in the market by doing the right thing first—follow what a stock's behavior commands and care about taxes later.
As if stocks were made to confirm my new attitude, I handled them successfully for quite a while. I bought with bold confidence when I thought I was right and coldly, without hurt ego, I took my limited losses when I thought I was proven wrong.
One of my most successful operations was in cooper-bes-semer. I bought three times into this stock, each time 200 shares. Two operations ended with a loss, but the third made me a sizeable profit. Here are the details of these purchases:
January – April 1957
A few other stocks, like dresser industries and Reynolds metals, behaved equally well and gave me satisfactory profits.
But then, in the summer of 1957, when I was in Singapore, a most staggering series of events developed.
I brought BALTIMORE & OHIO RAILROAD at 56¼. I thought it was in the 56/61 box and it would advance. But it started reaching down, and I sold it at 55.
Then I tried DOBECKMUN. I judged it was in a 44/49 box, so I brought it at 45. It began to sag and I sold it at 41.
I brought DAYSTROM at 44 because I thought it was rising into the 45/50 box. I sold out at 42¼.
I brought FOSTER WHEELER at 61¾. I thought it was in the 60/80 box. When it turned slowly against me, I sold out just below 60 frame at 59½.
AEROQUIP was the last one. I had brought it at prices ranging from 23¼ to 27⅝. I watched it climb towards 30 and waited for the 31/35 box to evolve. It did not happen that way. I was stopped out of AEROQUIP at 27½.
Finally, on August 26, 1957, I found myself without a single stock. My automatic stop-loss had sold me out of everything. In two months every one of my stocks had slowly turned around, and one by one had sagged through the bottom of their boxes. And one by one, even if it was only a question of half a point, they were sold.
I did not like it, but there was nothing I could do. According to my theory, I just had to sit back and wait patiently until one or more of the stocks I had been stopped out of, or any other stocks I was watching, went towards a new higher box.
Eager and anxious, I watched from the sidelines with not a dollar invested, while prices continued to drop.
But no opportunity seemed to appear. What I did not know was that we were at the end of one phase of the great bull market. It was several months before this became evident and it was declared a bear market. Half the Wall Street analysts still discuss it. They say it was merely an intermediate reaction —a temporary halt in the rising market. They all agree, however, that prices collapsed.
Of course all these opinions are expressed by hindsight— when it is too late. The advice to get out of the market was not available when one needed it.
I recall the case of Hitler when he decided to invade Stalingrad. To him it was just another Russian town to be conquered and occupied. Nobody knew while the battle of Stalingrad was being fought that it was the turning point in the war. For a very long time, few people realized it.
Even when the German armies were halfway back, it was still talked about as strategic withdrawal. It was, in fact, the end of Hitler. The Nazi war bull market ended the day Hitler attacked Stalingrad.
In the same way, I realized that it was impossible for me to assess great historical turning points in the market when they began to happen. What fascinated me, as Wall Street prices continued to fall, was the gradual realization that my system of ducking out quickly with my stop-losses made such an assessment unnecessary.
I made the joyful discovery that my method had worked much better than I had dreamed. It had automatically released me well before the bad times came. The market had changed - but I was already out of it.
The most important aspect to me was that I had absolutely no hint whatsoever that the market would slide. How could I have had any information? I was too far away all the time. I had listened to no predictions, studied no fundamentals, and heard no rumors. I had simply gotten out on the basis of the behavior of my stocks.
Later when I studied the stocks I had sold automatically, I found that they subsequently slid down very low indeed in the recession period.
Look at the following table:
I sold at
|BALTIMORE & OHIO
When I looked at this table, I thought this: If my stop-losses had not taken me out of the market I could have lost about 50% of my investment. I would have been like a man in a cage, locked in with my holdings and missing my opportunity to make a fortune. The only way I could have escaped would have been by smashing out, taking a 50% loss, possibly ruining myself, and gravely impairing my confidence for future deals.
I could, of course, have bought these stocks and "put them away.'* This is a classic solution among people who call themselves conservative investors. But by now I regarded them as pure gamblers. How can they be non-gamblers when they stay with a stock even if it continues to drop? A non-gambler must get out when his stocks fall. They stay in with the gambler's eternal hope of the turn of a lucky card.
I thought of the people who paid 250 for new york central in 1929. If they were still holding it today it was worth about 27. Yet they would be indignant if you called them gamblers!
It was in this mood of non-gambling that I received my monthly statement in the first week of September 1957, and I began to check up on my accounts. I found I had made up the money I had lost on jones & laughlin and my original capital of $37,000 was almost intact. Many of my operations had been moderately successful, but commissions and taxes had taken a great deal.
When I went into the accounts more closely I found I had the unenviable distinction of coming out of the greatest bull market in history with a lot of experience, a great amount of knowledge, much more confidence—and a net loss of $889.
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