After the end of the First World War, business across the globe was in a state of disharmony. Even though the share price of the global conglomerate retraced with the rest of the market, people still had faith in the company, because it was still paying its dividends as usual. However, to the surprise of many, as the general market was showing a notable rally one day, the shares of the global conglomerate did the opposite and dropped a number of points in an uncharacteristically volatile manner. The investors worried that something bad was going to happen.
In order to find an explanation, an editor of a financial newspaper was sent to contact the president of the global conglomerate. After he was put through to the president, the editor mentioned a rumour that the company was going to pass the dividend at the next board meeting, just like many other companies did at that time, because of the poor economy. He asked the president if it had anything to do with the recent decline in the share price.
The president claimed that it was news to him, and said, “I’ll tell you that there has been no talk whatever about it, and no desire or intention of either reducing or passing the next dividend. I hope we may never have to do that.”
The editor thanked the president and hung up. Soon the newspaper published a statement from the president who denied that the global conglomerate would cut or pass the next dividend. The editor believed in the president because the latter was known to be an honest and well-respected gentleman. He didn’t think that the president would say that just to keep the shareholders from selling out.
However, the statement did not induce a rally. On the contrary, the share price of the global conglomerate went further down the next day. The editor was stunned. If the company was doing genuinely well, where did that big selling come from? The share price would have gone up instead. He pondered a while and came to a conclusion: perhaps the president was really lying to him.
As the editor predicted, a few days later, the board of directors of the global conglomerate announced that, in view of poor financial and industrial conditions around the world, the company had decided to conserve its cash by passing its quarterly dividend this time.
The editor felt betrayed and called it a lesson learned. He told this story to a journalist friend who also happened to be acquainted with the president of the global conglomerate. The journalist was curious about the case, so he met up with the president and asked him, “Why in blazes did you have to deny that you were going to pass the dividend?”
“It was the truth!” The president swore. “When I made that statement there had been absolutely no talk about the dividend. I give you my word that, two minutes before the vote was taken, there was not one director who was sure of what the board’s action might be.”
The journalist claimed that he believed his friend, but he insisted that there must be some insider who sold the shares, or else there would not be such a large decline. However, the president still maintained that neither he himself nor any of the directors was guilty this time. He explained:
“After I issued my statement our business got much worse. Some of the markets for our products simply dropped out of sight; there were a couple of revolutions and a lot of banking and commercial failures all over South America; altogether one hellish state of affairs. We are going to need a lot of money, for there’s a long hard pull ahead of us, and we naturally decided to keep as much cash on hand as we possibly could. There was considerable opposition to passing the dividend, but the conservatives won.”
It turned out that the president was telling the truth. Sometime later, the journalist found out who the real culprit was. It was not the president. It was not any of the directors. Actually, it wasn’t anyone related to the company at all. The person who aggressively sold the conglomerate’s shares was none other than the great speculator Jesse Livermore, who was described by Time Magazine as “the most fabulous living U.S. stock trader”.
In an interview that took place shortly afterwards, Livermore admitted to the journalist that he was responsible for the plunge, and made a lot of money from it. Naturally, the journalist was surprised and he asked Livermore how he was able to predict that the company would pass the dividend. Was he connected to anybody inside the company? Did he talk to anyone in the board before the meeting?
It was none of the above. Livermore told the journalist that he knew it because he studied the global economic situations, and it led him to believe that the company could not afford to pay any dividend this time.
Livermore had been following the economic situations in other continents like South America and Asia, and he found that the outlook was far from optimistic. He then searched for companies that would be hit hard by this deterioration in foreign trades. He found that the shares of the aforementioned global conglomerate were still holding up, seemingly unable to observe the aggravated conditions of the world’s economy. After he studied a few years of the company’s financial statements, he was convinced that the share price of the company would soon plunge, and sold short thirty thousand shares in total.
“I made a killing on that stock. I didn’t need any inside tip,” said Livermore. “I read the president’s statement. I didn’t hope that they might never have to pass the dividend. I knew they must; if not this time, three months later. If they had paid the regular dividend I would have sold short twenty thousand shares more, because their action would have been proof that they didn’t know their business or that their stock-market commitments obliged them to do the wrong thing; and with the help of the vanishing export business I would have made them let go their holdings before I got through with them. I knew the directors were the richest bankers in the country, but I also knew that no man or set of men could fight conditions.”
So here is the first lesson that a speculator must learn. No one, however mighty and wealthy, can fight against the underlying conditions of the market. As Livermore himself said, “My greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities... They were helping me with all their might. Perhaps they were a trifle slow at times in bringing up the reserves, but they were dependable, provided I did not get too impatient. I was not pitting my tape-reading knack or my hunches against chance.
The inexorable logic of events was making money for me.” Speculation in the stock market is not a random act of buying and selling, but a rational process of making money from the underlying economic trend.
Reference:
Lefèvre, E. (1923). Reminiscences of a Stock Operator. New York: George H. Doran Company.
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