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I listened eagerly to what they had to say and religiously followed their tips. Whatever I was told to buy, I bought. It took me a long time to discover that this is one method that never works.
It was a period of wild, foolish gambling with no effort to find the reasons for my operations. I followed “hunches.” I went by god-sent names, rumors of uranium-finds, oil strikes, anything anyone told me. When there were constant losses an occasional small gain gave me hope, like the carrot before the donkey’s nose.
did not know it but I was already coming up against one of the great pitfalls of the small operator—the almost insoluble problem of when to enter the market. These sudden drops immediately after he has invested his money are one of the most mystifying phenomena facing the amateur. It took me years to realize that when these financial tipsters advise the small operator to buy a stock, those professionals who have bought the stock much earlier on inside information are selling.
By the end of 1953, when I returned to New York, my $11,000 was down to $5,800. Once again I had to reconsider my position. The businessmen’s tips did not produce the Eldorado they promised. The advisory services did not provide the information which enables you to make money in the stock market.
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.
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.
7. 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.
What, I asked myself, was the value of examining company reports, studying the industry outlook, the ratings, the price-earnings ratios? The stock that saved me from disaster was one about which I knew nothing. I picked it for one reason only—it seemed to be rising.
It meant that if I studied price action and volume, discarding all other factors, I could get positive results.
Before a dancer leaps into the air he goes into a crouch to set himself for the spring. I found it was the same with stocks. They usually did not suddenly shoot up from 50 to 70. In other words, I considered that a stock in upward trend that reacted to 45 after reaching 50 was like a dancer crouching, ready for the spring-up.
Later when I had more experience I also learned that this 45 position in a stock after a 50 high point has another important benefit. It shakes out the weak and frightened stockholders who mistake this reaction for a drop, and enables the stock to advance more rapidly.
1. There is no sure thing in the market—I was bound to be wrong half of the time. 2. I must accept this fact and readjust myself accordingly—my pride and ego would have to be subdued. 3. I must become an impartial diagnostician, who does not identify himself with any theory or stock. 4. I cannot merely take chances. First, I have to reduce my risks as far as humanly possible.
The first step I took in that direction was to adopt what I called my quick-loss weapon. I already knew that I would be wrong half of the time. Why not accept my mistakes realistically and sell immediately at a small loss?
I had learned from experience that my most difficult problem was to discipline myself not to sell a rising stock too quickly.
Because the producer would be a fool to close the show when he sees the theater full every night. It is only when he starts to notice empty seats that he considers closing the show.
I knew that I had to adopt a cold, unemotional attitude toward stocks; that I must not fall in love with them when they rose and I must not get angry when they fell; that there are no such animals as good or bad stocks. There are only rising and falling stocks—and I should hold the rising ones and sell those that fall.
the inexplicable moves in my stocks usually coincided with some violent move in the general market.
The experience I gained through my cause-of-error tables became one of the most important of all my qualifications.
If my stop-losses had not taken me out of the market I could have lost about 50% of my investment.
I reasoned that if a stock has fallen from 100 to 40, it will almost certainly not climb up to the same high again for a long, long time. It was like an athlete with a badly injured leg who would need a long period of recuperation before he could run and jump again as before.
I would marry my technical approach to the fundamental one. I would select stocks on their technical action in the market, but I would only buy them when I could give improving earning power as my fundamental reason for doing so. This was how I arrived at my techno-fundamentalist theory, which I am still using today.
Bear markets were always followed by bull markets. The educated art was to watch for the first signs, be sure they were real, and buy in before everyone else noticed and the prices began to rise too high.
I did suspect one thing, however—and that was that the leaders in the previous market would probably not lead again.
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.
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.
