Chapter 10. Two Million Dollars

When I came back to New York in the third week of February 1959, I had completely recovered from the shock of my mad period, and I began to invest in the market again.

I could still feel the bruises of my own foolishness but I was like a man who feels stronger and better after a bad experience. I had learned my last lesson. I knew now that I had to keep rigidly to the system I had carved out for myself. I had learned that if I deviated from it even once, I would be in trouble. My whole financial structure was immediately in danger—it could crash like a house of cards.

My first move in New York was to erect an iron fence around myself to ensure that I did not repeat any of my previous errors.

I first decided to spread out my deals among six brokers. This way my operations would not be followed. To guard my­self against any possible interference from them, I put up my barrier. It is a way of protection I am still using today.

This is how I worked it out. I asked my brokers to send out their telegrams after Wall Street closing time, so they would reach me at 6 p.m. This is about the time I get up—the result of performing in nightclubs for many years. Meanwhile, during the day, the telephone operator is instructed not to let any calls through.

In this way everything happens in Wall Street while I am in bed. I am sleeping while they are working, and they cannot reach me nor worry me. My delegate, the stop-loss order, rep­resents me in case something unforeseen happens.

At 7 p.m. I start to work studying my daily telegram and deciding what my future dealings will be. Before I do this, I buy a copy of an afternoon paper that contains Wall Street closing prices. I tear out the pages giving the day's quotations and throw the rest of the financial section away. I do not wish to read any financial stories or commentaries, however well informed. They might lead me astray.

Then, with my telegram and my page out of the newspaper, I settle down to work while Wall Street sleeps.

During the weeks I spent repairing my injured confidence, the two stocks I did not sell continued to rise, universal controls almost uninterruptedly advanced until it stood around 60. This was more than a 40% rise since my last New York visit. thiokol behaved equally well and now was pushing over 110.

This was very promising indeed. I decided I had no reason whatever to touch them. Armed by my bitter experience and well entrenched behind my new strong fence, I began to move into the market with cautious confidence.

These were some of my successful operations:

l,000 GENERAL TIRE & RUBBER

Bought at 56 ($56,446.00)
Sold at 69½ ($69,151.01)
Profit $12,705.01

1,000 CENCO INSTRUMENTS

Bought at 19½ ($19,775.00)
Sold at 23½ ($23,247.63)
Profit $ 3,472.63

500 AMERICAN PHOTOCOPY

Bought at 71½ ($35,980.75)
Sold at 79½ ($39,570.92)
Profit $ 3,590.17

1,000 UNION OIL OF CALIF

Bought at 46 ($46,420.00)
Sold at 50 ($49,669.00)
Profit $ 3,249.00

500 POLAROID

Bought at 121 ($60,755.50)
Sold at 127 ($63,299.08)
Profit $ 2,543.58

500 BRUNSWICK-BALKE-COLLENDER

Bought at 71¼ ($35,855.65)
Sold at 77 ($38,322.08)
Profit $ 2,466.43

500 BELL & HO WELL

Bought at 93 ($46,741.50)
Sold at 99¼ ($49,436.81)
Profit $ 2,695.3

This being the stock market, not all my deals were successful. A number of stocks I bought did not behave as I had predicted.

These are some of my transactions ending with a loss:

1,000 CENCO INSTRUMENTS

Bought at 23 ($23,300.00)
Sold at 22 ($21,755.76)
Loss $ 1,544.24

500 REICHHOLD CHEMICALS

Bought at 65 ($32,727.50)
Sold at 63% ($31,703.17)
Loss $ 1,024.33

1,000 FANSTEEL

Bought at 63½ ($63,953.50)
Sold at 62 ($61,6S7.96)
Loss $ 2,295.54

500 PHILADELPHIA & READING

Bought at 131 ($65,760.50)
Sold at 129¾ ($64,672.79)
Loss $ 1,087.71

These two tables confirm my method completely. You will notice that in each case I was successful in taking larger profits than losses in proportion to the amounts invested. Remember that all these operations were entirely done by telegram from New York to New York. I had never seen or spoken to my brokers even once. Many times during the day's trading when some of my holdings began to flutter and fail like dying birds, they must have itched to pick up a telephone and alert me. They must have felt I was the biggest fool in the world to forbid them to do it. But my rule was rigid. I heard the news—good or bad —every day at 6 p.m. when my telegrams arrived. Then I began to act.

During the few weeks I spent trading like this in New York, signs of trouble started to show up in universal controls. It began to lose its steady upward marching progress. Its ac­tivity and price advance became wild—too wild.

This spelled trouble and trouble surely came. After an ad­vance from 66in the first week of March, the stock rose within three weeks to 102. It was at this point that it switched its momentum and began to go in the other direction. I did not like the look of this drop at all. It fell as if in an air pocket and there seemed no sign of a rise. I had little doubt that the holiday was over. If I were not careful I might get caught in a nose-dive, so I brought up my stop-loss within two points of the day's closing price. I was sold out of universal controls next morn­ing at varying prices between 86% and 89%. This was more than 12 points from the high. I was well content with this. There was no reason why I should be unhappy. I had had a good long ride and my total selling price was $524,669.97. This gave me a profit of $409,356.48.

I now had a very large capital to invest. I took a careful look at the market, looking as usual for an actively traded, high-priced stock. Another problem arose at this point which made a suitable stock more difficult to find. With this amount of money to spend I must be careful not to allow my own buying unduly to influence the market.

After some search I alighted on a stock, which fulfilled all these difficult requirements. It was texas instruments.

I bought my first 2,000 shares at an average price of 94⅜ in the second week of April and another 1,500 at 97⅞. As the stock continued to act well, I added to my holdings 2,000 shares.

The average price of this last purchase was 101 %. This, as you realize, involved big money, more than half a million dollars in fact. The details of my Texas instruments purchases looked like this:

2,000 shares at 94¾ ($189,718.80)
1,500 shares at 97⅞ ($147,544.35)
2,000 shares at 101⅞ ($204,733.80)
Total 5,500 shares $541,996.95

Now that the capital I had taken out of universal controls was reinvested, I devoted my attention once again to thiokol.

thiokol and I were now partners of long standing and had, like all old-time partners, a special relationship. I had always allowed thiokol a greater leeway than other stocks—partly because I really "felt" this stock, and also because I had the great advantage afforded by the special subscription account.

It would have been foolish to give up such a unique credit arrangement, so I always kept my trailing stop-loss far behind its rise. This I would do with no other stock, but in the case of thiokol it saved me twice from being sold out. The second time was when it had a very bad reaction in the first week of April. This reaction came on the heels of the announcement of a 3-for-l split. It was so severe that I thought we would have to part, but I decided to let my stop-loss decide.

This was not touched off, and the sinking spell was quickly followed by a vigorous rise. However, I was not the only one who liked thiokol. The newly split stock was met by a hectic public response which shot it up to 72 in the first week of May.

The response was too good. It led to this amazing situation:

Its activity for the week was an incredible volume of 549,400 shares.
Its advance for the week was 13¼ points.

The trading volume represented an aggregate value of $40,000,000.

The price difference for the week was $7,000,000.

It looked as if every trader on the New York Stock Exchange had done nothing else all week but rush in and out of thiokol.

Of course, it could not last. The governors of the New York Stock Exchange decided to suspend all stop orders. The effect of this was that the majority of traders left the stock alone. They would not buy and sell a stock where they could not protect themselves. It also meant that I was automatically out of the stock myself. They had taken my most powerful tool away, and I could not work without it.

I sold my thiokol holdings, at an average price of 68. This gave me, under the 3-for-l split, over $200 for each of my original 6,000 shares. I had paid a total of $350,820. For my 18,000 split shares I received $1,212,851.52. My profit was $862,031.52.

The prospect of putting a million dollars back into the market posed an enormous problem. I would have to be doubly careful. This was too much money to switch into another stock easily. It was such a big sum that my buy was bound to influence the market.

I also had to face the fact that my stop-loss would be no longer practical, because no trader or specialist would absorb such a large quantity of stock in a matter of seconds.

There was only one thing to do: I decided to divide my funds into two parts. Once I had made up my mind to do this, selection was comparatively easy. I had only to decide among four stocks:

ZENITH   RADIO, LITTON   INDUSTRIES, FAIRCHILD   CAMERA   and BECKMAN INSTRUMENTS.

I had watched all of these for a long time. They were all suit­able as far as my techno-fundamentalist theories were concerned. Now all that remained was to see which two of them I should choose. There was only one way to do this—to let their strength in the market be the judge.

Using the technique I had employed so successfully with universal controls and thiokol, I made a pilot buy into all four of them on May 13, 1959:

500 shares zenith radio at 104 ($52,247)
500 shares beckman instruments at 66 ($3 3,228)
500 shares fairchild camera at 128 ($64,259)
500 shares litton industries at 112 ($ 56,251)

On each of these stocks I put a stop-loss order of 10 per cent below buying price.

I was fully aware that these stop-losses were vague and too mechanical. It was a deliberate, if clumsy, method. I purposely used this system because I knew sooner or later it would eliminate those of the four that were weakest.

On May 18th I was stopped out of beckman instruments at 60, and on May 19th I decided to sell litton industries, which was acting worse than the others, at 106¼. Now I adjusted my stop-losses on the remaining stocks.

It was the fourth week of May when I proceeded to switch more than $1,000,000 into the two stronger stocks. These were my total purchases:

ZENITH RADIO

500 shares at 104 ($52,247.00)
1,500 shares at 99¾ ($ 150,359.70)
1,000 shares at 104 ($104,494.00)
1,000 shares at 105¼ ($105,745.30)
1,500 shares at 107½ ($161,996.25)
Total 5,500 shares $574,842.25

FAIRCHILD CAMERA

500 shares at 128 ($64,259.00)
1,000 shares at 123¼ ($123,763.30)
1,000 shares at 125 ($125,515.00)
1,000 shares at 126¼ ($ 126,766.30)
1,000 shares at 127 ($127,517.00)
Total 4,500 shares $567,820.60

Discounting my short-term tradings, my funds were switched from stock to stock in the following way:

March-April 1959

Sold UNIVERSAL CONTROLS $ 524,670
Bought TEXAS INSTRUMENTS $ 541,997

May 1959

Sold THIOKOL CHEMICAL $1,212,850
Bought ZENITHRADIO $ 574,842
Bought FAIRCHILD CAMERA $ 567,821

 

Total received $1,737,520
Margin debt 274,600
  $1,462,920
Available cash from previous operations 274,600
Available for reinvestment $1,532,920
Total reinvested  (at 90% margin) $1,684,660

At that time I had six brokers. I closed my account with three of them. Then I sat back and watched the stocks I held. There was nothing else for me to do while texas instruments, zenith radio and fairchild camera went to work for me.

During June the telegrams continued to flash between Wall Street and the Plaza Hotel. They were meaningless to the West­ern Union operators but they were full of meaning for me. For instance, on June 9th I received the following telegram:

"Z 122½   (124-116¾) T 119¼  (121½-117¼) F 125   (126-121)"

The following day's telegram read:

"Z 132⅜  (132½-125) T 123¾  (123⅞-120⅜) F 130  (130-126½)"

They were boring, meaningless hieroglyphics to the operator but they meant a lot to me. They told me that the value of my holdings had appreciated $100,000 in that one single day!

It began to be a strange life. I sat in the Plaza every evening, reading my telegram and filing it. There was nothing further I could do. I felt elated and restless, but powerless. I was like a scientist who, after years of work and research, has successfully launched a rocket to the moon, and now as he tracks it climbing higher and higher he has a tremendous sense of achievement and also a strange letdown feeling of inactivity.

Like him, I was now on the sidelines just keeping vigil while my stocks continued to climb steadily like well-made missiles.

Then one day early in July I received an offer to appear in the "Sporting Club" in Monte Carlo. I accepted it gladly. Sitting still was beginning to hold a slight boredom after all my nerve-wracking problems and panics of the past.

Before making arrangements to leave New York I asked my brokers to meet me. I went through my accounts with each of them. I found that if I were to sell out before flying to Europe I could realize my stocks for over $2,250,000.

What was my feeling at this news? Elation? Excitement that I was now more than twice a millionaire? Not exactly. I was happy, but not excited. I had been much more excited when I made my first $10,000 out of diners' club. This time I felt rather like a runner who has trained strenuously and has suffered many defeats, and now trots to victory.

I was also faced with the same dilemma I had known before: Should I sell? Should I get out altogether?

The answer this time was easy. It was the old tried and trusted answer: I did not have any reason to sell a rising stock. I would just continue to jog along with the trend, trailing my stop-loss behind me. As the trend increased, I would buy more. If the trend reversed? I would, as ever, flee like a disturbed burglar.

I put new stop-losses on all my stocks so that if they dropped while I was on my way to Europe I would be sold out and my two million would remain intact.

I felt content and assured as I rode up Fifth Avenue in a taxi after leaving my brokers.

I walked into the lobby of the Plaza Hotel, automatically bought an evening paper, tore out the Wall Street closing prices, threw the rest of the newspaper away, picked up my 6 P.M. telegram and went up in the elevator.

In my room I opened the telegram, spread out the sheet of newspaper, and sat back with a happy sigh. Not only because I had made two million dollars but because I was doing what I liked best.

I was working while Wall Street slept.

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