Chapter 8. My First Half-Million

The overwhelming success of my handling of e. l. bruce should have made me more eager and less cautious. Yet, somehow it made me more cautious. I had made over $325,000 in nine months' investment, and I was determined not to lose it by a wrong move. So many operators have made big money in nine months and lost it in nine weeks. I decided this would not happen to me. The first step I took was to withdraw half of my profits from the market. With my remaining capital I eyed the market warily, watching for possible new well-behaved stocks. As so often after a coup, I had very little success for a month or two immediately afterwards.

I cautiously bought 500 shares of molybdenum. I bought it at 27, paying $13,606.25. Almost immediately, I was stopped out at 26½, so that I got back $13,123.78.

I had a go at haveg industries. I bought 500 shares at 31⅜, paying $15,860.95. It turned around and looked as if it was going to slip under 30, so I sold out at 30½ for $15,056.94.

Then, as I saw nothing interesting, I ventured back to loril-lard. This stock, which had once stood out in the bear market like a tree in a desert, had now become a rather weary, slow-moving elderly gentleman. But I suppose I had a sentimental attachment towards it because it had done so well for me the first time. For a long time I could not leave it alone. It became my American "pet." This was an utterly wrong attitude but I could not seem to help it.

Three times I bought into it, because I thought it was climb­ing towards a higher box. Three times I sold out because the new box did not materialize.

This is how the lorillard operation looked:

1,000 shares

Bought at 70½ ($70,960.50)
Sold at 67⅞ ($67,369.74)
Loss $3,590.76

500 shares

Bought at 69⅛ ($34,792.05)
Sold at 67¾ ($33,622.42)
Loss $1,169.63

1,000 shares

Bought at 67¾ ($68,207.80)
Sold at 67 ($66,495.66)
Loss $1,712.14

That did it. The third loss finally broke my sentimental at­tachment and I did not buy in again. I realized that as lorillard now moved at a very leisurely pace, it was obviously no longer a stock for me.

After I withdrew from lorillard, I sat back and assessed my overall position.

It looked like this:

  Profit Losses
LORILLARD $21,052.95 $6,472.53
DINERS’ CLUB 10,328.05  
E. L. BRUCE 295,305.45  
MOLYBDENUM   482.47
HAVEG INDUSTRIES   804.01
Total $326,686.45 $7,759.01

My overall profit was $318,927.44.

During the time I was getting in and out of lorillard, I was continuously looking for stocks that would fit my theory. One very important factor that urged me to deeper search was that the general market started to get stronger. As I felt this strength becoming pronounced, I wanted to take full advantage of it by getting into a promising stock as early as possible.

Among the stocks that caught my eye was a little, unknown company called universal products. It was quoted around 35, running up and down between 35⅞ and 33½I found out it was an electronics company and therefore I felt it qualified as far as my techno-fundamentalist theory was concerned.

In July 1958, when I was still in Calcutta, I asked New York for daily quotes. The story they told me was very promising. However, my recent lorillard losses reminded me that I could be wrong several times in a row and I wanted to act very cautiously. I thought I could get a better feel of the stock's movement if I actually owned some of it, so I decided to make a pilot buy. I sent out the following cable:

"BUY 300 UNIVERSAL PRODUCTS 35¼ OR BETTER"

Next day, when I received the advice that 300 shares of universal products had been bought for me at 35¼, I wired:

"ENTER STOPLOSS 32½"
Now there was nothing to do but sit back, watch and wait for the next move.

At this period, I was flying back and forth across India rather frequently. But cable quotes on universal products followed me everywhere. In the third week of August 1958, I was in Srinagar in Kashmir, when I noticed that the stock was be­ginning to firm up. I cabled:

"BUY 1200 UNIVERSAL PRODUCTS 36½ ON STOP 33 STOPLOSS"

When I returned to the Imperial Hotel in New Delhi I re­ceived the notice:

“BROUGHT 1200 U 36½ ON STOP U 36¾ (37⅞ - 35⅜) ETC”

This meant I had bought my stock at 36½ and it closed at 36¾. While it did not decisively pull away from my buying price, it closed above it. Now the question was: Will my stock continue to advance or will it return to its former box?

I was quite excited. Although I had already fixed the limit of my possible eventual loss, now it was a question of whether my judgment was right or wrong. I could hardly wait for next day's cable. When it finally arrived, it showed that universal products had closed at 38 1/8. Its range for the day was 38¾-37½. This meant I was right—at least for the time being.

In the next few days the stock continued to advance, and when I was in Karachi I bought another 1,500 shares at 40. Shortly thereafter, universal products changed its name to universal controls and split 2-for-l. It continued to act well but after my last purchase I decided that I had as much universal controls as I cared to carry.

This was my exact position: (The prices in this table, and all following tables, are average.)

Pilot buy of 300 at 35¼ ($10,644.93)
1,200 at 36J4 ($44,083.56)
1,500 at 40 ($60,585.00)
Total 3,000 shares $115,313.49

This gave me 6,000 shares of the newly split stock. Now I sat back and held on while the stock started to skyrocket.

At the beginning of December, when I saw that universal controls was behaving correctly, I recommended the stock to my secretary. I told him to buy it at 31¾. I said: "If it goes below 30 take a loss and sell it, otherwise hold it for a big rise. If you have to take a loss I will cover it."

It so happened that his father was an old-fashioned, pure fundamentalist and when he heard what I had suggested, he told his son not to be such a fool. His argument was: What was the point of buying a stock if it might go down? He reckoned you should only buy stock that was sure to rise—as if anyone could be sure. He also said he wanted to examine the books of the company to see if it was in good condition.

My secretary took his father's advice. He did not invest any money, but waited while the old man was carefully examining the books. While he was engrossed in this task the stock went up to 50.

Simultaneously with universal controls, I was watching another stock whose action was fascinating to me. It was THIOKOL CHEMICAL.

It first attracted my attention in February 1958, when I was in Tokyo. It had just split 2-for-l and was the object of heavy trading before it quieted down into a    39/47    box. It stayed calmly in this area for several months.

As I regularly checked it in Barron's, this area of tranquility looked like a pond on a summer's day. But somehow I had the feeling it was a calm that precedes the storm.

In March I cabled New York:

"QUOTE THIOKOL"

The quotes duly arrived but, except for a few weeks of short-lived flurry in April, nothing noteworthy happened. After a few weeks I sent the following cable from Hong Kong:

“STOP THIOKOL QUOTES START QUOTING AGAIN IF RISES OVER 45”

I reasoned that if it reached again toward the upper frame of its box that would be the moment to watch it again. It was in the first week of August that thiokol quotes started to reap­pear in my telegrams. Above 45 it looked as though it was flexing its muscles for an upward jump. I decided for a pilot buy, and cabled:

"BUY 200 THIOKOL 47¼"

The order was executed at this price for a cost of $9,535.26.

After that it took three weeks for thiokol to find its true dynamics. At the end of August I felt the moment had come. I cabled New York:

“BUY 1300 THIOKOL 49½ ON STOP”

The purchase was executed at 49⅞ on September 2, 1958. The cost was $65,408.72.

With my 1,500 shares I saw the stock rapidly rising over 50 and trading in the range of 52-56.

A week later I receives notice from Thiokol had decided to issue stock-rights. These were given as bonuses to the holders of the stock at the rate of one right per share. In turn, with 12 of these rights you could buy one share of thiokol at the special price of $42. As the stock was quoted over 50, this was cheap indeed—if you wanted to exercise your stock-rights. If not, you could sell them on the American Stock Exchange where they were listed and traded for a limited period.

However, there was another important feature about these rights that made them very interesting. According to stock ex­change rules, if the rights were being used to purchase the com­pany's stock you could take advantage of what they called a "special subscription account." When you deposited your rights in this account, the broker was permitted to lend you up to 75% of the current market value of the stock. In addition, there was no commission charge on the purchase.

I jumped on this eagerly. Here was a unique opportunity for me to buy a great deal of stock on credit. I decided to plunge into this with all my free cash. I made a quick rough accounting of my position. Here is how I stood:

Original Investment $36,000
Total Profits (after deducting loses) $319,000
   
Total Capital $355,000
Cash Withdrawn 160,000
   
Free for Investment $195,000
   
Purchases now Held  
3,000 UNIVERSAL PRODUCTS $115,300
1,500 THIOKOL 75,000
Total $190,300
   
70% cash under margin rules  $133,000
   
Free for further investment $62,000

But now a curious situation developed. As I tried to make my arrangement with New York, I discovered that—in spite of the regulation permitting a 75% loan—there was wide disagree­ment among brokers concerning the amount that I could borrow from them in a special subscription account. While one broker was only willing to lend 75% of the purchase price of the stock, another was willing to advance a full 75% of the market value of the stock, thiokol being quoted around 55, the latter proposi­tion was an extraordinarily attractive credit situation. I pro­ceeded to take advantage of it.

I bought 36,000 rights at an average price of l 5/16 for which I paid $49,410. They entitled me to buy 3,000 thiokol at $42 per share. These cost me $126,000, but under the rights-subscrip­tion I only had to add another $6,000 cash. The rest of the money was loaned to me by one of my brokers. This arrangement looked so favorable that I made up my mind to take further advantage of these unique credit conditions.

I figured out that by selling my original lot of 1,500 thiokol shares I could buy twice as much back under the special sub­scription rules.

I sold my stock at an average price of 53^2. This gave me a new buying power of $57,000. With this I bought a second block of 36,000 rights. Just as in the previous operation, I converted them into a second block of 3,000 shares of thiokol stock.

The operation looked like this:

  1. Sold 1,500 shares thiokol stock
  2. Bought 36,000 thiokol rights, and with these
  3. Bought 3,000 shares thiokol stock

My total cost for 6,000 shares was $350,820.

In the second week of December, thiokol shifted from the American to the New York Stock Exchange. It immediately moved up 8 points and the following week it was touching the 100 mark. As it continued its upward move, my broker must have become nervous, because I received a telegram, which said:

"YOUR THIOKOL PROFITS NOW $250,000"

This came to me while I was staying at the Georges V Hotel in Paris. I suddenly realized I had been so busy watching the quotes that I had almost forgotten about the paper profits piling up. Added to my profits in bruce, I now had a profit of over half-a-million dollars! This was much more money in fact than I ever thought I would own. It would make me a rich man for life.

The realization that I had all this money came to me with startling suddenness. Every fiber in my being seemed to be saying, "Sell, Sell." It was the biggest temptation in the world.

What should I do? Would the stock rise still higher—or should I take my profit and get out? Perhaps it wouldn't rise any higher—there might be a fallback. It was a terrible dilemma, the old one of "when to sell" much magnified because of the large amount of money at stake. If I did the right thing here, it would change my whole life. If I did the wrong thing, I would regret it forever.

I felt very alone. No one on earth could give me any advice on what to do in this situation. I decided to go out and have a few drinks by myself and consider the situation. Before I went out, I sat down at my dressing table and wrote on a little card, "Re­member bruce!" I thought this would remind me of what I had learned in the past.
As I wandered around Paris, I kept fingering this little card in my pocket. Every time I felt like sending a cable to my brokers telling them to sell thiokol, I pulled out this card, looked at it and hesitated.

Finally, I decided not to sell. It was the best example of my new market technique and it was anything but easy to do. By the time I arrived back at my hotel I was exhausted. I must have looked more like a man about to commit suicide than one who had just made himself a small fortune.

But I was proved right, thiokol continued to rise and by making that decision in Paris, I was able to hold on and make much more money out of the stock.

A few weeks later, in January 1959, I returned to New York. When I landed at Idlewild Airport, I was holding 6,000 thiokol and 6,000 universal controls. They were both doing very well indeed, thiokol was standing on the 100 mark and universal controls had risen to 45.

In New York, my first appointment was to see my brokers and discuss my "Wall Street dealings with them. They told me that, according to their books, my investments had made me well over half a million dollars.

I felt elated, confident and successful. I booked myself a room at the Plaza Hotel and decided that during my stay I would continue my stock-market dealings from close quarters.

How little did I know I was preparing to make a complete fool of myself? Within the next few weeks I was to bring myself within whistling distance of ruin.


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