Wednesday, May 13, 2009

Selling for Information and Avoiding the Averaging Down as a Trader

Interesting section from Reminscences of a Stock Operator pg 61:

"One day a man who knew Deacon White rushed into the office
all excited and said, "Deacon, you told me if I ever got any
good information to come to you at once with it and if used it
you'd carry me for a few hundred shares." He paused for breath
and for confirmation.
The deacon looked at him in that meditative way he had and
said, "I don't know whether I ever told you exactly that or not,
but I am willing to pay for information that I can use."
"Well, I've got it for you."
"Now, that's nice," said the deacon, so mildly that the man
with the info swelled up and said, "Yes, sir, deacon." Then he
came closer so nobody else would hear and said, "H. O. Havemeyer
is buying Sugar."
"Is he?" asked the deacon quite calmly.
It peeved the informant, who said impressively: "Yes, sir.
Buying all he can get, deacon."
"My friend, are you sure?" asked old S. V.
"Deacon, I know it for a positive fact. The old inside gang
are buying all they can lay their hands on. It's got something
to do with the tariff and there's going to be a killing in the
common. It will cross the preferred. And that means a sure
thirty points for a starter."
"D' you really think so?" And the old man looked at him
over the top of the old-fashioned silver-rimmed spectacles that
he had put on to look at the tape.
"Do I think so? No, I don't think so; I know so. Absolutely!
Why, deacon, when H. O. Havemeyer and his friends buy
Sugar as they're doing now they're never satisfied with anything
less than forty points net. I shouldn't be surprised to see the
market get away from them any minute and shoot up before they've
got their full lines. There ain't as much of it kicking around
the brokers' offices as there was a month ago."
"He's buying Sugar, eh?" repeated the deacon absently.
"Buying it? Why, he's scooping it in as fast as he can
without putting up the price on himself."
"So?" said the deacon. That was all.
But it was enough to nettle the tipster, and he said, "Yes,
sir-reel And I call that very good information. Why, it's
absolutely straight."
"Is it?"
"Yes; and it ought to be worth a whole lot. Are you going
to use it?"
"Oh, yes. I'm going to use it."
"When?" asked the information bringer suspiciously.
"Right away." And the deacon called:.”Frank!" It was the
first name of his shrewdest broker, who was then in the
adjoining room.
"Yes, sir," said Frank.
"I wish you'd go over to the Board and sell ten thousand
Sugar."
"Sell?" yelled the tipster. There was such suffering in his
voice that Frank, who had started out at a run, halted in his
tracks.
"Why, yes," said the deacon mildly.
"But I told you H. O. Havemeyer was buying it!"

...

"My friend," the deacon explained kindly, "I did not doubt
that you were telling me the truth as you saw it. But even if I
had heard H. O. Havemeyer tell you himself, I still would have
acted as I did. For there was only one way to find out if
anybody was buying the stock in the way you said H. O. Havemeyer
and his friends were buying it, and that was to do what I did.
The first ten thousand shares went fairly easily. It was not
quite conclusive. But the second ten thousand was absorbed by a
market that did not stop rising. The way the twenty thousand
shares were taken by somebody proved to me that somebody was in
truth willing to take all the stock that was offered. It doesn't
particularly matter at this point who that particular somebody
may be. So I have covered my shorts and am long ten thousand
shares, and I think that your information was good as far as it
went."

"Much depends upon beginning at exactly the right
time. It took me years to realize the importance of this. It
also cost me some hundreds of thousands of dollars.
I don't mean to be understood as advising persistent pyramiding.
A man can pyramid and make big money that he couldn't
make if he didn't pyramid; of course. But what I meant to say
was this: Suppose a man's line is five hundred shares of stock.
I say that he ought not to buy it all at once; not if he is
speculating. If he is merely gambling the only advice I have to
give him is, don't!
Suppose he buys his first hundred, and that promptly shows
him a loss. Why should he go to work and get more stock? He
ought to see at once that he is in wrong; at least temporarily."