Chapter 15

Among the hazards of speculation the happening of the unexpected—I might even say of the unexpectable—ranks high. There are certain chances that the most prudent man is justified in taking—chances that he must take if he wishes to be more than a mercantile mollusk. Normal business hazards are no worse than the risks a man runs when he goes out of his house into the street or sets out on a railroad journey. When I lose money by reason of some development which nobody could foresee I think no more vindictively of it than I do of an inconveniently timed storm. Life itself from the cradle to the grave is a gamble and what happens to me because I do not possess the gift of second sight I can bear undisturbed. But there have been times in my career as a speculator when I have both been right and played square and nevertheless I have been cheated out of my earnings by the sordid unfairness of unsportsmanlike opponents.

Among the hazards of speculation, the unexpected ranks high. I might even say the unexpectable. There are certain chances that the most prudent man is justified in taking. He must take them if he wishes to be more than a mercantile mollusk. Normal business hazards are no worse than the risks a man runs when he steps out of his house into the street or sets out on a railroad journey. When I lose money because of some development nobody could foresee, I feel no more spite toward it than toward a badly timed storm. Life itself, from the cradle to the grave, is a gamble. Whatever happens to me because I don’t have the gift of second sight, I can bear undisturbed. But there have been times in my career as a speculator when I was both right and played fair. And still I was cheated out of my earnings by the sordid unfairness of unsportsmanlike opponents.

Against misdeeds by crooks, cowards and crowds a quick-thinking or far-sighted businessman can protect himself. I have never gone up against downright dishonesty except in a bucket shop or two because even there honesty was the best policy; the big money was in being square and not in welshing. I have never thought it good business to play any game in any place where it was necessary to keep an eye on the dealer because he was likely to cheat if unwatched. But against the whining welsher the decent man is powerless. Fair play is fair play. I could tell you a dozen instances where I have been the victim of my own belief in the sacredness of the pledged word or of the inviolability of a gentlemen’s agreement. I shall not do so because no useful purpose can be served thereby.

A quick-thinking or far-sighted businessman can protect himself against wrongdoing by crooks, cowards, and crowds. I have never encountered outright dishonesty except in a bucket shop or two. Even there, honesty was the best policy. The big money came from dealing fairly, not from refusing to pay up. I have never thought it good business to play a game where I had to watch the dealer. If left unwatched, he might cheat. But a decent man is powerless against someone who whines and refuses to pay up. Fair play is fair play. I could tell you a dozen times when my belief in the sanctity of a promise made me a victim. The same is true of my belief that a gentleman’s agreement must be honored. I won’t tell you those stories, because no useful purpose would be served.

Fiction writers, clergymen and women are fond of alluding to the floor of the Stock Exchange as a boodlers’ battlefield and to Wall Street’s daily business as a fight. It is quite dramatic but utterly misleading. I do not think that my business is strife and contest. I never fight either individuals or speculative cliques. I merely differ in opinion—that is, in my reading of basic conditions. What playwrights call battles of business are not fights between human beings. They are merely tests of business vision. I try to stick to facts and facts only, and govern my actions accordingly. That is Bernard M. Baruch’s recipe for success in wealth-winning. Sometimes I do not see the facts—all the facts—clearly enough or early enough; or else I do not reason logically. Whenever any of these things happen I lose. I am wrong. And it always costs me money to be wrong.

Fiction writers, clergymen, and women like to call the Stock Exchange floor a battlefield for swindlers. They also describe Wall Street’s daily business as a fight. That sounds dramatic, but it is completely misleading. I do not think of my business as a struggle or contest. I never fight individuals or speculative cliques. I simply differ with them in my opinions, particularly in how I read basic conditions. What playwrights call business battles are not fights between people. They are simply tests of business judgment. I try to stick to facts and facts alone, and act accordingly. That is Bernard M. Baruch’s recipe for success in making money. Sometimes I do not see all the facts clearly enough or early enough. Or I fail to reason logically. Whenever any of these things happen, I lose. I am wrong, and being wrong always costs me money.

No reasonable man objects to paying for his mistakes. There are no preferred creditors in mistake-making and no exceptions or exemptions. But I object to losing money when I am right. I do not mean, either, those deals that have cost me money because of sudden changes in the rules of some particular exchange. I have in mind certain hazards of speculation that from time to time remind a man that no profit should be counted safe until it is deposited in your bank to your credit.

No reasonable person objects to paying for mistakes. When it comes to making mistakes, no one gets special treatment. There are no exceptions or exemptions. But I object to losing money when I am right. I don’t mean trades that cost me money because an exchange suddenly changed its rules. I mean certain risks of speculation that remind you from time to time that no profit is safe until it’s deposited in your bank account.

After the Great War broke out in Europe there began the rise in the prices of commodities that was to be expected. It was as easy to foresee that as to foresee war inflation. Of course the general advance continued as the war prolonged itself. As you may remember, I was busy “coming back” in 1915. The boom in stocks was there and it was my duty to utilise it. My safest, easiest and quickest big play was in the stock market, and I was lucky, as you know.

After the Great War broke out in Europe, commodity prices began to rise, as expected. That was as easy to foresee as wartime inflation. Of course, prices kept rising as the war went on. As you may remember, I was busy “coming back” in 1915. Stocks were booming, and it was my duty to take advantage of the boom. The stock market offered my safest, easiest, and quickest chance to make a big profit. And as you know, I was lucky.

By July, 1917, I not only had been able to pay off all my debts but was quite a little to the good besides. This meant that I now had the time, the money and the inclination to consider trading in commodities as well as in stocks. For many years I have made it my practice to study all the markets. The advance in commodity prices over the pre-war level ranged from 100 to 400 per cent. There was only one exception, and that was coffee. Of course there was a reason for this. The breaking out of the war meant the closing up of European markets and huge cargoes were sent to this country, which was the one big market. That led in time to an enormous surplus of raw coffee here, and that, in turn, kept the price low. Why, when I first began to consider its speculative possibilities coffee was actually selling below pre-war prices. If the reasons for this anomaly were plain, no less plain was it that the active and increasingly efficient operation by the German and Austrian submarines must mean an appalling reduction in the number of ships available for commercial purposes. This eventually in turn must lead to dwindling imports of coffee. With reduced receipts and an unchanged consumption the surplus stocks must be absorbed, and when that happened the price of coffee must do what the prices of all other commodities had done, which was, go way up.

By July 1917, I had paid off all my debts and had quite a bit left over. I now had the time, money, and inclination to consider trading in commodities as well as stocks. For many years, I have made a practice of studying all the markets. Commodity prices had risen between 100 and 400 percent above their prewar levels. Coffee was the only exception. Of course, there was a reason for this. The outbreak of war had closed European markets. Huge cargoes of coffee were sent to this country, the one big market still open. In time, that created an enormous surplus of raw coffee here, which kept the price low. When I first considered the possibilities of speculating in coffee, it was actually selling below prewar prices. The reasons for this unusual situation were clear. But it was equally clear that German and Austrian submarines were operating actively and with increasing efficiency. That had to mean an appalling reduction in the number of ships available for commercial use. Eventually, the loss of ships would lead to fewer coffee imports. With less coffee coming in and consumption unchanged, the surplus stocks would have to be used up. When that happened, coffee prices would have to do what all other commodity prices had done. They would go way up.

It didn’t require a Sherlock Holmes to size up the situation. Why everybody did not buy coffee I cannot tell you. When I decided to buy it I did not consider it a speculation. It was much more of an investment. I knew it would take time to cash in, but I knew also that it was bound to yield a good profit. That made it a conservative investment operation—a banker’s act rather than a gambler’s play.

You didn’t have to be Sherlock Holmes to see what was happening. I can’t tell you why everyone didn’t buy coffee. When I decided to buy it, I didn’t consider it speculation. It was much more of an investment. I knew it would take time to make money, but I also knew it was bound to yield a good profit. That made buying coffee a conservative investment, something a banker would do rather than a gambler’s bet.

I started my buying operations in the winter of 1917. I took quite a lot of coffee. The market, however, did nothing to speak of. It continued inactive and as for the price, it did not go up as I had expected. The outcome of it all was that I simply carried my line to no purpose for nine long months. My contracts expired then and I sold out all my options. I took a whopping big loss on that deal and yet I was sure my views were sound. I had been clearly wrong in the matter of time, but I was confident that coffee must advance as all commodities had done, so that no sooner had I sold out my line than I started in to buy again. I bought three times as much coffee as I had so unprofitably carried during those nine disappointing months. Of course I bought deferred options—for as long a time as I could get.

I started buying coffee in the winter of 1917. I bought quite a lot, but the market did almost nothing. Trading remained slow, and the price did not rise as I had expected. As a result, I held my position for nine long months without getting anywhere. When my contracts expired, I sold all my options. I took a huge loss on the deal, yet I was sure my views were sound. I had clearly been wrong about the timing. But I was confident that coffee would rise, just as all commodities had done. So as soon as I sold my position, I started buying again. I bought three times as much coffee as I had held so unprofitably for those nine disappointing months. Of course, I bought options with the latest expiration dates I could get.

I was not so wrong now. As soon as I had taken on my trebled line the market began to go up. People everywhere seemed to realise all of a sudden what was bound to happen in the coffee market. It began to look as if my investment was going to return me a mighty good rate of interest.

I wasn't so wrong this time. As soon as I tripled my position, the market began to rise. People everywhere seemed to realize all at once what was bound to happen in the coffee market. It began to look as if my investment would earn me a very good return.

The sellers of the contracts I held were roasters, mostly of German names and affiliations, who had bought the coffee in Brazil confidently expecting to bring it to this country. But there were no ships to bring it, and presently they found themselves in the uncomfortable position of having no end of coffee down there and being heavily short of it to me up here.

The sellers of the contracts I held were coffee roasters, mostly with German names and connections. They had bought the coffee in Brazil, confident they could bring it to this country. But there were no ships to bring it. Soon they found themselves in an uncomfortable position. They had a huge amount of coffee in Brazil and owed me a great deal of it here.

Please bear in mind that I first became bullish on coffee while the price was practically at a pre-war level, and don’t forget that after I bought it I carried it the greater part of a year and then took a big loss on it. The punishment for being wrong is to lose money. The reward for being right is to make money. Being clearly right and carrying a big line, I was justified in expecting to make a killing. It would not take much of an advance to make my profit satisfactory to me, for I was carrying several hundred thousand bags. I don’t like to talk about my operations in figures because sometimes they sound rather formidable and people might think I was boasting. As a matter of fact I trade in accordance to my means and always leave myself an ample margin of safety. In this instance I was conservative enough. The reason I bought options so freely was because I couldn’t see how I could lose. Conditions were in my favour. I had been made to wait a year, but now I was going to be paid both for my waiting and for being right. I could see the profit coming—fast. There wasn’t any cleverness about it. It was simply that I wasn’t blind.

Please remember that I first became optimistic about coffee when its price was almost at the prewar level. After buying it, I held it for most of a year and then took a big loss. The punishment for being wrong is losing money. The reward for being right is making money. I was clearly right and held a large position, so I was justified in expecting to make a killing. The price did not have to rise much for me to make a satisfactory profit. I was holding several hundred thousand bags. I don’t like to talk about my trades in figures. The numbers sometimes sound rather large, and people might think I’m boasting. In fact, I trade according to my means and always leave myself a generous margin of safety. In this case, I was conservative enough. I bought options so freely because I couldn’t see how I could lose. Conditions were in my favor. I had been made to wait a year, but now I was going to be paid for waiting and for being right. I could see the profit coming fast. There was nothing clever about it. I simply wasn’t blind.

Coming sure and fast, that profit of millions! But it never reached me. No; it wasn’t side-tracked by a sudden change in conditions. The market did not experience an abrupt reversal of form. Coffee did not pour into the country. What happened? The unexpectable! What had never happened in anybody’s experience; what I therefore had no reason to guard against. I added a new one to the long list of hazards of speculation that I must always keep before me. It was simply that the fellows who had sold me the coffee, the shorts, knew what was in store for them, and in their efforts to squirm out of the position into which they had sold themselves, devised a new way of welshing. They rushed to Washington for help, and got it.

That profit of millions was coming, sure and fast! But it never reached me. No, a sudden change in conditions did not get in the way. The market did not suddenly reverse course. Coffee did not pour into the country. What happened? The unexpected! Something no one had ever experienced before, so I had no reason to guard against it. I added another risk to the long list of hazards of speculation I must always keep in mind. The men who had sold me the coffee, the shorts, knew what was in store for them. To wriggle out of the position their sales had put them in, they devised a new way to avoid paying up. They rushed to Washington for help, and got it.

Perhaps you remember that the Government had evolved various plans for preventing further profiteering in necessities. You know how most of them worked. Well, the philanthropic coffee shorts appeared before the Price Fixing Committee of the War Industries Board—I think that was the official designation—and made a patriotic appeal to that body to protect the American breakfaster. They asserted that a professional speculator, one Lawrence Livingston, had cornered, or was about to corner, coffee. If his speculative plans were not brought to naught he would take advantage of the conditions created by the war and the American people would be forced to pay exorbitant prices for their daily coffee. It was unthinkable to the patriots who had sold me cargoes of coffee they couldn’t find ships for, that one hundred millions of Americans, more or less, should pay tribute to conscienceless speculators. They represented the coffee trade, not the coffee gamblers, and they were willing to help the Government curb profiteering actual or prospective.

Perhaps you remember that the Government had developed various plans to prevent further profiteering on necessities. You know how most of the plans worked. Well, the philanthropic coffee shorts appeared before the Price Fixing Committee of the War Industries Board. I think that was its official name. They made a patriotic appeal to the committee to protect the American breakfast eater. They claimed that a professional speculator, one Lawrence Livingston, had cornered the coffee market or was about to do so. If his speculative plans were not stopped, he would take advantage of conditions created by the war. Then the American people would be forced to pay outrageous prices for their daily coffee. The patriots had sold me cargoes of coffee they could not find ships for. To them, it was unthinkable that some one hundred million Americans should pay tribute to ruthless speculators. They represented the coffee trade, not the coffee gamblers. And they were willing to help the Government curb profiteering, whether actual or potential.

Now I have a horror of whiners and I do not mean to intimate that the Price Fixing Committee was not doing its honest best to curb profiteering and wastefulness. But that need not stop me from expressing the opinion that the committee could not have gone very deeply into the particular problem of the coffee market. They fixed on a maximum price for raw coffee and also fixed a time limit for closing out all existing contracts. This decision meant, of course, that the Coffee Exchange would have to go out of business. There was only one thing for me to do and I did it, and that was to sell out my contracts. Those profits of millions that I had deemed as certain to come my way as any I ever made failed completely to materialise. I was and am as keen as anybody against the profiteer in the necessaries of life, but at the time the Price Fixing Committee made their ruling on coffee, all other commodities were selling at from 250 to 400 per cent above pre-war prices while raw coffee was actually below the average prevailing for some years before the war. I can’t see that it made any real difference who held the coffee. The price was bound to advance; and the reason for that was not the operations of conscienceless speculators, but the dwindling surplus for which the diminishing importations were responsible, and they in turn were affected exclusively by the appalling destruction of the world’s ships by the German submarines. The committee did not wait for coffee to start; they clamped on the brakes.

I hate whiners, and I don't mean to suggest that the Price Fixing Committee wasn't doing its honest best to curb profiteering and waste. But I still think the committee couldn't have looked very deeply into the particular problem of the coffee market. It set a maximum price for raw coffee and a deadline for closing out all existing contracts. This decision meant, of course, that the Coffee Exchange would have to go out of business. I had only one thing to do, and I did it: I sold my contracts. I had considered those millions in profits as certain as any I had ever made, but they never materialized. I was and still am as strongly opposed as anyone to profiteering in life's necessities. But when the Price Fixing Committee ruled on coffee, all other commodities were selling for 250 to 400 percent above prewar prices. Raw coffee, meanwhile, was actually below its average price for some years before the war. I can't see that it made any real difference who held the coffee. The price was bound to rise, and not because of the actions of unscrupulous speculators. The surplus was dwindling because imports were falling. Imports, in turn, were falling solely because German submarines were destroying the world's ships at an appalling rate. The committee didn't wait for coffee prices to start rising. It slammed on the brakes.

As a matter of policy and of expediency it was a mistake to force the Coffee Exchange to close just then. If the committee had let coffee alone the price undoubtedly would have risen for the reasons I have already stated, which had nothing to do with any alleged corner. But the high price—which need not have been exorbitant—would have been an incentive to attract supplies to this market. I have heard Mr. Bernard M. Baruch say that the War Industries Board took into consideration this factor—the insuring of a supply—in fixing prices, and for that reason some of the complaints about the high limit on certain commodities were unjust. When the Coffee Exchange resumed business, later on, coffee sold at twenty-three cents. The American people paid that price because of the small supply, and the supply was small because the price had been fixed too low, at the suggestion of philanthropic shorts, to make it possible to pay the high ocean freights and thus insure continued importations.

Closing the Coffee Exchange at that moment was a mistake, both as a matter of policy and practicality. If the committee had left coffee alone, the price would undoubtedly have risen for the reasons I have already given. Those reasons had nothing to do with any alleged corner. But a high price, which need not have been excessive, would have encouraged suppliers to bring coffee to this market. I have heard Mr. Bernard M. Baruch say that the War Industries Board considered this need to ensure supplies when fixing prices. For that reason, some complaints about the high price limits on certain commodities were unjust. When the Coffee Exchange reopened later, coffee sold for twenty-three cents. The American people paid that price because supplies were low. And supplies were low because the price had been fixed too low, at the suggestion of philanthropic shorts. The price was too low to cover the high cost of ocean freight and thus ensure continued imports.

I have always thought that my coffee deal was the most legitimate of all my trades in commodities. I considered it more of an investment than a speculation. I was in it over a year. If there was any gambling it was done by the patriotic roasters with German names and ancestry. They had coffee in Brazil and they sold it to me in New York. The Price Fixing Committee fixed the price of the only commodity that had not advanced. They protected the public against profiteering before it started, but not against the inevitable higher prices that followed. Not only that, but even when green coffee hung around nine cents a pound, roasted coffee went up with everything else. It was only the roasters who benefited. If the price of green coffee had gone up two or three cents a pound it would have meant several millions for me. And it wouldn’t have cost the public as much as the later advance did.

I have always thought my coffee deal was the most legitimate of all my commodity trades. I considered it more of an investment than a speculation. I stayed in it for over a year. If anyone was gambling, it was the patriotic roasters with German names and ancestry. They had coffee in Brazil and sold it to me in New York. The Price Fixing Committee fixed the price of the only commodity that had not gone up. The committee protected the public against profiteering before it started, but not against the inevitable higher prices that followed. Even when green coffee stayed around nine cents a pound, roasted coffee went up along with everything else. Only the roasters benefited. If green coffee had gone up two or three cents a pound, I would have made several million dollars. And it would have cost the public less than the later price increase did.

Post-mortems in speculation are a waste of time. They get you nowhere. But this particular deal has a certain educational value. It was as pretty as any I ever went into. The rise was so sure, so logical, that I figured that I simply couldn’t help making several millions of dollars. But I didn’t.

Looking back at speculative trades is a waste of time. It gets you nowhere. But this particular deal offers a useful lesson. It was as good as any deal I ever made. The price rise seemed so certain and logical that I thought I couldn’t help making several million dollars. But I didn’t.

On two other occasions I have suffered from the action of exchange committees making rulings that changed trading rules without warning. But in those cases my own position, while technically right, was not quite so sound commercially as in my coffee trade. You cannot be dead sure of anything in a speculative operation. It was the experience I have just told you that made me add the unexpectable to the unexpected in my list of hazards.

On two other occasions, I lost money because exchange committees changed trading rules without warning. But in those cases, although my position was technically correct, it was not quite as commercially sound as my coffee trade. You can never be completely sure of anything in a speculative trade. The experience I just described made me add the unexpectable to the unexpected on my list of risks.

After the coffee episode I was so successful in other commodities and on the short side of the stock market, that I began to suffer from silly gossip. The professionals in Wall Street and the newspaper writers got the habit of blaming me and my alleged raids for the inevitable breaks in prices. At times my selling was called unpatriotic—whether I was really selling or not. The reason for exaggerating the magnitude and the effect of my operations, I suppose, was the need to satisfy the public’s insatiable demand for reasons for each and every price movement.

After the coffee episode, I was very successful in other commodities and by selling stocks short. As a result, I began to suffer from silly gossip. Wall Street professionals and newspaper writers got into the habit of blaming me and my supposed raids for inevitable price drops. Sometimes they called my selling unpatriotic, whether I was actually selling or not. I suppose they exaggerated the size and effect of my trading to satisfy the public’s endless demand for reasons behind every price movement.

As I have said a thousand times, no manipulation can put stocks down and keep them down. There is nothing mysterious about this. The reason is plain to everybody who will take the trouble to think about it half a minute. Suppose an operator raided a stock—that is, put the price down to a level below its real value—what would inevitably happen? Why, the raider would at once be up against the best kind of inside buying. The people who know what a stock is worth will always buy it when it is selling at bargain prices. If the insiders are not able to buy, it will be because general conditions are against their free command of their own resources, and such conditions are not bull conditions. When people speak about raids the inference is that the raids are unjustified; almost criminal. But selling a stock down to a price much below what it is worth is mighty dangerous business. It is well to bear in mind that a raided stock that fails to rally is not getting much inside buying and where there is a raid—that is, unjustified short selling—there is usually apt to be inside buying; and when there is that, the price does not stay down. I should say that in ninety-nine cases out of a hundred, so-called raids are really legitimate declines, accelerated at times but not primarily caused by the operations of a professional trader, however big a line he may be able to swing.

As I’ve said a thousand times, no manipulation can drive stocks down and keep them down. There’s nothing mysterious about that. The reason is clear to anyone who takes half a minute to think about it. Suppose a trader raided a stock, driving its price below its real value. What would inevitably happen? The raider would immediately run up against the strongest kind of insider buying. People who know what a stock is worth will always buy it at bargain prices. If insiders can’t buy, it will be because general conditions prevent them from freely using their own resources. And those are not conditions for a bull market. When people talk about raids, they imply that the raids are unjustified, almost criminal. But selling a stock down to far below its value is mighty dangerous business. Keep in mind that a raided stock that fails to rebound is not attracting much insider buying. And where there is a raid, meaning unjustified short selling, there is usually likely to be insider buying. When insiders buy, the price doesn’t stay down. I’d say that in ninety-nine cases out of a hundred, so-called raids are really legitimate declines. A professional trader’s operations may sometimes speed up those declines, but they aren’t the main cause, however large a position the trader can manage.

The theory that most of the sudden declines or particular sharp breaks are the results of some plunger’s operations probably was invented as an easy way of supplying reasons to those speculators who, being nothing but blind gamblers, will believe anything that is told them rather than do a little thinking. The raid excuse for losses that unfortunate speculators so often receive from brokers and financial gossipers is really an inverted tip. The difference lies in this: A bear tip is distinct, positive advice to sell short. But the inverted tip—that is, the explanation that does not explain—serves merely to keep you from wisely selling short. The natural tendency when a stock breaks badly is to sell it. There is a reason—an unknown reason but a good reason; therefore, get out. But it is not wise to get out when the break is the result of a raid by an operator, because the moment he stops the price must rebound. Inverted tips!

The theory that a plunger’s trades cause most sudden declines or especially sharp drops was probably invented as an easy explanation. It gives an explanation to speculators who are nothing but blind gamblers. They will believe anything they are told rather than do a little thinking. Brokers and financial gossipers often blame a raid for unlucky speculators’ losses. That excuse is really an inverted tip. The difference is this: A bear tip is clear, direct advice to sell short. But an inverted tip, an explanation that explains nothing, only keeps you from wisely selling short. When a stock drops sharply, the natural reaction is to sell it. There is a reason, an unknown but good reason. So get out. But it is not wise to get out when an operator’s raid has caused the drop. As soon as the operator stops, the price must rebound. Inverted tips!