Chapter 9. My Second Crisis

The half-million-dollar news gave me enormous confidence. I had a very clear conception of how I had done it and I was also convinced I could repeat the feat again. I had no doubt that I had mastered my art. Working with my cables, I had developed a sort of sixth sense. I could "feel" my stocks. This was no different from the feeling that a musical expert develops. His ear will detect a flat note, which is inaudible to the ordinary listener.

I could almost tell what stocks would do. If after an eight-point advance a stock dropped back four points, I did not become alarmed. I expected it to do just that. If a stock started to firm up, I could often predict the day its advance would start. It was a mysterious, unexplainable instinct, but there was no question in my mind that I possessed it. This filled me with a tremendous sense of power.

It is therefore not the slightest bit surprising that I slowly started to imagine I was a Napoleon of finance. I felt I was about to march along a glittering road. I was not aware of any perils. I did not know that along the way a dangerous giant lay in wait. After all, I reasoned to myself rather smugly, how many people could do what I had done?

I decided to really get down to business. If I could make half a million, what was to stop me from making two, three or even five million? Although the margin requirement had recently been raised to 90 per cent, I was convinced that by using the $160,000 I had set aside from my bruce profits, I could lay the basis of a new fortune. I intended to start serious day-to-day dealings on the spot—dealings that would make my previous buying and selling seem like very small potatoes.

The truth was that as my pocket had strengthened, my head had weakened. I became over-confident, and that is the most dangerous state of mind anyone can develop in the stock market. It was not long before I received the bitter lesson the market always hands out to those who think they can carelessly master it.

After a few days in New York, I decided to establish closer contact with the market. Possessing what I thought was a fool­proof system; I believed that if I moved nearer to the market, nothing could stop me from making a fortune each day. As the scene of my future triumphs, I chose the uptown office of one of my brokers.

I was fascinated by my first visit to the office. The boardroom was large, with chairs placed in front of an ever-moving little machine, the stock-ticker. The atmosphere was exciting, filled with electricity. The people in the room, like hangers-on in Monte Carlo, were nervous, exalted. There was an air of action, bustle, and noise. Tickers ticking, typewriters pounding, telegraph machines clacking, clerks busily rushing around. From every direction I heard sentences like: "goodyear doesn't look good to me." "I am getting out of anaconda." "The market is ripe for a reaction."

The first day I was quite unperturbed by this taut, electric atmosphere. With my success behind me I felt I was above the anxieties, hopes and fears of these tense people. But this did not last long. As I began trading day to day from the boardroom, I gradually abandoned my detachment and started to join them. I opened my ears to the confusing combination of facts, opinions and gossip. I read the market letters. I also started to answer questions like, "What do you think of the market?" or "What do you know that's cheap?" All this had a deadly effect on me.

In a few days of trading, I threw overboard everything I had learned over the past six years. I did everything I had trained myself not to do. I talked to brokers. I listened to rumors. I was never off the ticker.

It was as if the "get-rich-quick" demon had gotten hold of me. I completely lost the clear perspective I had so carefully built up through my cables. Step by step I led myself along a path where I began to lose my skill.

The first thing that deserted me was my sixth sense. I did not "feel" anything. All I could see was a jungle of stocks run­ning up and down without rhyme or reason. Then my inde­pendence went. I gradually abandoned my system and adopted the attitude of the others. The first thing I knew, I was follow­ing the crowd. My reason forsook me and emotion took over completely.

It is easier to understand how difficult it was for me to cling to my system if I explain it this way: Yell "fire" in a crowded theatre and what happens? People rush for the exit, killing, in­juring each other.  A drowning man will struggle, grasp his would-be rescuer and perhaps pull him under too. They are unreasonable, wrong attitudes, yet instinct will dictate them.

As I followed the crowd I also started to act like this. Instead of being a lone wolf, I became a confused, excited lamb milling around with others, waiting to be clipped. It was impossible for me to say "no" when everybody around me was saying "yes". I got scared when they got scared. I became hopeful when they were hopeful.

Nothing like this, not even in my first novice years, had ever happened to me. I lost all my skill and control. Everything I touched went wrong.

I behaved like a complete amateur. The careful system I had built up collapsed around me. Every transaction ended in disas­ter. I put in dozens of contradictory orders. I bought stocks at 55. They went back to 51. I hung on. Stop-loss? That was the first thing I threw away. Patience? Judgment? I had none. Boxes? I forgot about them.

As the days went by the vicious circle of my operations started to look like this:

I BOUGHT AT THE TOP As
     Soon as I bought
          The stock started to drop I
               Became frightened
                      AND SOLD AT THE BOTTOM
                         As soon as I sold
                              The stock started to rise I became greedy
                                    AND BOUGHT AT THE TOP

I developed a tremendous frustration. Instead of blaming my own stupidity, I invented different reasons for my failures. I started to believe in "They." "They" were selling me dear. "They" were buying stock from me cheap. I could not, of course, tell anyone who "They" were—but that did not stop me from believing in them.

Fighting "Them"—these grey ghosts at the back of the mind —made me reckless. I became stubborn. Even though stocks went on beating me, each time they hit me I just wiped off the blood and came back for more. I kept telling myself that I was more than half-a-million dollars ahead of the market and there­fore this could not possibly be happening to me. How wrong I was!

It was a period of complete disaster. I lost $100,000 in a few weeks. A detailed list of my trading at this time reads like a lunatic's chronicle. I can still hardly believe it. Now I know that it was caused by egotism leading to vanity leading to over-confidence, which in turn led to disaster. It was not the market that beat me. It was my own unreasoning instincts and uncon­trolled emotions.

I bought stocks and sold them a few hours later. I knew that if I bought and sold the same day, I was permitted to operate with as little as 2 5 % margin in my account. Instead of profiting from this, I succeeded in losing several thousand dollars each time. This is how I assured myself of disaster:


2,500 HAVEG INDUSTRIES

Bought at 70 ($176,150.00)
Sold at 63½ ($157,891.34)
Loss $ 18,258.66

1,000 ROME CABLE

Bought at 37 ($ 37,375.00)
Sold at 31 ($ 30,724.48)
Loss $ 6,650.52

1,000 GENERAL TIME

Bought at 47¾ ($48,178.80)
Sold at 44¾ ($ 44,434.32)
Loss $ 3,744.48

500 ADDRESSOGRAPH-MULTIGRAPH

Bought at 124½ ($ 62,507.25)
Sold at 116½ ($ 58,053.90)
Loss $ 4,453.35

1,000 REICHHOLD CHEMICALS

Bought at 63½ ($ 63,953.50)
Sold at 16½ ($ 61,158.37)
Loss $ 2,795.13

2,000 BRUNSWICK-BALKE-COLLENDER

Bought at 55½ ($111,891.00)
Sold at 53½ ($106,443.46)
Loss $ 5,447.54

2,000 RAYTHEON

Bought at 60½ ($121,901.00)
Sold at 57¾ ($114,823.69)
Loss $ 7,077.31

2,000 NATIONAL RESEARCH

Bought at 24½ ($ 49,625.00)
Sold at 22 ($ 43,501.52)
Loss $ 6,123.48

4,000 AMERICAN METALS-CLIMAX

Bought at 32⅞ ($132,917.60)
Sold at 31⅝ ($125,430.47)
Loss $ 7,487.13

3,000 AMERICAN MOTORS

Bought at 41¼ ($124,938.90)
Sold at 40 ($119,094.60)
Loss $ 5,844.30

2,000 MOLYBDENUM

Bought at 49½ ($ 99,875.00)
Sold at 47½ ($ 94,352.50)
Loss $ 5,522.50

2,000 SHARON STEEL

Bought at 48¼ ($ 97,362.60)
Sold at 43¼ ($ 85,877.27)
Loss $ 11,485.33

1,000 WARNER LAMBERT

Bought at 98½ ($ 98,988.50)
Sold at 95½ ($ 95,127.09)
Loss $ 3,861.41

1,000 LUKENS STEEL

Bought at 88 ($ 88,478.00)
Sold at 81 ($ 80,640.48)
Loss $ 7,837.52
   
Total Loss $ 96,588.66

Do you wonder, after this melancholy table, why I shuddered whenever I looked at stocks?

The plain fact was that I was reading too much, trying to do too much. That is why I rapidly reached the stage where I could read the figures on the stock market quotations but they no longer told me anything. Not long afterwards came an even worse phase. Haunted by never-ending losses, terrified by the confusion, racked by rumors, I got so I could not even see the figures. My coordination broke down. I used to pore all day over columns of figures, which my eyes scanned, but I could not assimilate. My mind had become blurred. This last phase really frightened me. I felt like a drunk who loses touch with reality and cannot understand why.

At the end of a few disastrous weeks, I sat down soberly to examine the reasons why this should have happened to me. Why should I have the touch in Hong Kong, Calcutta, Saigon and Stockholm, and lose it when I was within half a mile of Wall Street? What was the difference?

There was no easy solution to the problem and for a long time I was baffled. Then one day, as I sat in the Plaza Hotel afraid to make a telephone call, I suddenly realized something. When I was abroad, I visited no boardrooms, talked to no one, received no telephone calls, watched no ticker.

The solution was whispering to me but at first I could not credit it. It was so surprising, so simple and yet so extraordinary that I could hardly believe it. It was: My ears were my enemy. It dawned on me like a revelation that when I was traveling abroad I had been able to assess the market, or rather the few stocks in which I was interested, calmly, neutrally, without in­terruption or rumor, completely without emotion and ego.

I had operated simply on the basis of my daily telegram, which gave me my perspective. It showed me the way my stocks were behaving. There were no other influences, because I did not see or hear anything else.

In New York it was nothing like that. There were interruptions, rumors, panics, contradictory information, all floating into my ear. As a result of this my emotions became involved with the stocks—and the cold, clinical approach had gone.

I decided there was only one answer. I must try to find myself. I must go away at once, a long way from New York, before I lost all my money.

There was only one thing, which saved me from complete ruin during this period. And that was that universal controls and thiokol were behaving well and I left them alone. I now realize I only did this because I was too busy to bother about them? I was trading in other stocks, which were losing me money.

I reviewed the situation and got rid of every stock except for these two. Then I took a plane for Paris. Before I left, however, I made a very important decision. I gave instructions to my brokers that they must never telephone me or give me any in­formation of any sort on any pretext whatsoever. The only communication I wanted from them and from Wall Street was my usual daily telegram.

I wandered around Paris in a daze, my head still spinning with blurred, meaningless columns of stock market quotations. My daily telegrams arrived—and they did not make much sense to me. I had completely lost my touch. I felt like a man who has had a terrible accident and feels he will never be well again. I was thoroughly demoralized.

Then just when I thought my condition was permanent something happened. I had been in Paris about two weeks when one day I picked up my daily telegram in the Hotel Georges V. As I scanned it dispiritedly somehow the figures seemed less dim. At first I could not believe it. I felt myself gazing at them as though I had never seen them before. I was afraid I was only imagining things.

I impatiently waited for the next day's cable. When I re­ceived it, there was no doubt: the figures were clearer and more familiar. As though a veil was being lifted, once again images started to form before my eyes, giving me some view of the stock's future.

In the days that followed my telegrams became clearer and clearer; I started reading the quotes like my old self. Once more I could see that some of the stocks were stronger, others weaker. Simultaneously my "feeling" started to return. Gradually, like an invalid, I began to regain my confidence. I recovered enough courage to try to approach the market again. But I had learned my lesson. I decided to make it a permanent rule that I must never visit a brokerage office again. Also my brokers must be prohibited from picking up the telephone and calling me. I must only have stock quotations by cable—and nothing else.

Even if I returned to the New York hotel, the scene of my disastrous dealings, which is within a short taxi ride of Wall Street, my instructions would be unyielding. I must place Wall Street thousands of miles away from me. Every day my brokers must send me a telegram just as if I were in Hong Kong, Karachi or Stockholm.

Also, my brokers must never quote any stock to me, except the ones I asked for. They must not tell me about any new stock because that would immediately come into the rumor class. I would pick new stocks myself, as I had always done, by reading my weekly financial paper. When I saw one that interested me and seemed to be preparing for a rise, I would ask for quotations. I would only ask for one new quotation at a time. Then, as I did before, I would study it carefully before deciding if it was worth going into.

Like a man who has survived a plane crash and knows he must fly again immediately or lose his nerve, I knew only one way of making this method foolproof. I booked myself on a plane back to New York.


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