14. WHY ARE THE LITTLE PEOPLE ALWAYS WRONG?

If all the numbers, accounting variations, computer systems, and infinite possibilities are beginning to bewilder you, there is one indicator that professionals still use that is simple. That is to find out what the average investor, or the little investor, is doing. Then you do just the opposite. The sophisticates never feel comfortable unless they can be reassured that relatively uninformed investors are going the other way with some conviction. It all has to do with Accumulation and Distribution. When the sophisticates are Accumulating, they have to be Accumulating from someone, and when they are Distributing, somebody has to be there to buy.

There is nothing really new about this. A Successful Operator, the one who wrote How to Win in Wall Street in 1881, asked the question rhetorically thus:

Who is it that supports every one of the ruddy-faced and round-bellied brokers, furnishes their brownstone houses in velvet and ebony, their tables with wine and silver, their wives and daughters—aye, and mistresses too—in silks and diamonds and laces? It is the lamb, the meek-eyed confiding and innocent little lamb.

Some things have changed since 1881. The ruddy-faced and round-bellied brokers are trying to get that round belly down with exercise and Metrecal, which they didn’t bother with in 1881, but otherwise—well, otherwise, a lot of things haven’t really changed at all. (Nobody uses the word “mistress” much any more, and the girls who might qualify under that category of Successful Operator are more interested in a couple hundred shares of a very hot new issue, and a stake in the Caribbean pad, than in silks and laces. Progress is progress.) But the sophisticates still have those yellow wolf-eyes peeled for the lambs.

Two friends of mine, for example, run a very zippy fund. Whenever they get a bit nervous about the market, they go up to the order room of Merrill Lynch, Pierce, Fenner & Smith, where all the teletypes print all the orders from the myriad branches of Merrill Lynch all over the world. Merrill Lynch, as you know, is the A & P of the investment world, known as “We the People” for serving small investors.

“We walked around the room,” said one of my friends, after a particular visit, “and orders were pouring in from all over the country, and all the orders we saw said sell, sell, sell. So we knew the market was still all right.” In other words, the Little People were selling, so the market was still all right, because the Little People are always wrong, at least that is the way the mythology goes.

The Little People are not actually short of stature, they are small accounts who buy stocks in less than hundred-share lots because that’s all the money they have. You can keep track of them by the Odd-Lot statistics in the papers, and there are also various savants who ponder these statistics and tell you whether you can truly continue doing the opposite of what the Little People are doing, or whether there is some sort of False Move involved. False Move is the cop-out phrase savants use, like that legal paragraph on the bottom of brokerage house reports that says in legalese, Nothing Contained Herein May Be True, and We May Be Selling This Stuff We’re Recommending, but Our Lawyer Has Read This Report and We’re Covered.

Shortly after my friends’ trip to the order room a genuine Odd-Lotter of my acquaintance dropped by, and we had a heartrending lunch in which I was able to take my own soundings to see, on the Do the Opposite theory, what is likely to happen next.

It is a little hard for me to adjust to talking to a genuine Odd-Lotter, just as a matter of scale, because I hear so much gossip from professional money managers and their numbers are so much bigger. They say things like, “The Justice Department cost me twenty-two million dollars in my American Broadcasting when they stopped the ITT merger,” and they are, of course, telling the truth, but it isn’t their money, it’s their job. Or I sit with someone contentedly watching the tape, and a block of Sperry Rand goes by, and they say, “Oh, look, Gerry is selling his Sperry for the third time this year.” Wise inside things like that; in other words, Gerry, whom they had breakfast with on Tuesday, has been buying and selling Sperry Rand and has managed to make $50 million go in a circle, at some profit.

Anyway, I geared up for this lunch because I had just read a market letter about the Little People. This particular letter writer thinks the actions of small investors are an exercise in mass masochism, that they keep losing because it feels so good when it hurts. Says he: “… the odd-lotters continue their selling-on-balance, replete with a puerile confidence that the ‘bad’ economic news they read in the papers will shortly be ‘understood’ by the market. Not until the market begins Top Formation will these individuals realize that they are beginning to ‘understand’ what the market has seen all along.” The Odd-Lotters, it is said, sold all the way up in the 1962–66 market rise, and then they bought all the way down as it fell, and now they have been selling again as it goes up. Somebody has to be on the other side.

“First of all, I may be a small investor, but I am not your average small investor,” said Odd-Lot Robert, my lunch companion. “I’m a speculator and I admit it. Second, my information is much better than the average small investor’s. I get a lot of inside information.”

Inside information has been the undoing of many a wise man, so I asked him where he got it.

“I have a terrific broker,” he said. “He really knows ahead of time when things are going to happen. He tells me when stocks are going to split.”

“Splits are usually discounted and the two pieces of paper are worth the same as the old one,” I said, feeling avuncular.

“There was a split in February and I made three points on it,” said Robert. “Then, I get even more information from this guy in my office. His sister works for a guy at City Hall, and those people in the government really know when things are going to happen.”

I began to get a certain glimmer of Robert’s world: They, with a capital T, are always about to do something. To me, They are sitting around at Oscar’s at five o’clock and you can talk to Them any time, for one round of drinks; the trick is to know when They are telling you the truth and when They are faking you out.

“Both my broker and this guy’s sister have done very, very well,” said Robert. “Very, very well indeed.”

“I’m glad to hear it,” I said. “What are you doing in the market now?”

“I’m selling,” Robert said. “That is, I’ve already finished my selling.”

“You feel the economy is heading for trouble,” I suggested.

“That’s what it says in the paper,” Robert said. “So I’m taking profits. I have some particularly good issues I’m going to get back into as soon as they go down.”

“Do you really have the courage to buy when the market is going down?” I asked Robert.

“Absolutely, I’m very courageous. I told you, I have steel nerves, I’m a speculator.”

I have to admire Robert, because if you know any of the real gunslinging speculators, especially the ones managing pressure performance funds, you know they have no fingernails and are always chewing Gelusil and complaining about how they don’t sleep. But then, they don’t have steel nerves.

“You have to consider what’s open to someone like me,” Robert said. “I used to have war bonds. Then I woke up to the fact that you lose money on war bonds. You buy the bond, you get the interest, and by the time you cash it in, haircuts have doubled, and suits have doubled, and doctor bills have doubled and you’ve got the war bond and the interest, you’re way behind. A lot of people don’t see through that, but I do.”

“The depreciation of currency is a major world problem,” I said, avuncular again. “Every major world power is running the printing presses.”

“Right,” Robert said. “The same goes for life insurance. The bucks you get out aren’t the ones you put in.”

“Very shrewd,” I said. “Good thinking.”

“So you have to buy something that will keep pace,” Robert said. “I have eleven Kennedy half-dollars that have already gone up a lot, but of course that’s just a handful. And I have a number of rolls of 1937 Denver nickels, and they have practically doubled.”

“I didn’t know you were a coin collector,” I said.

“I dabble in a lot of things,” Robert said.

“How did you do in the market break last year?” I asked.

“I did beautifully, beautifully,” Robert said. “I had a little bad luck at the end, though. Back last spring, I figured color TV was going to be very big. I still believe it. Everyone’s going to have a color TV set. So I bought some Motorola.”

“What price?”

“I bought the first Motorola at two hundred and four dollars,” Robert said. “Then it got hit in the break, and I bought some more. That reduced my average cost sharply. My second batch of Motorola only cost me one hundred and fifty-six.”

“But Motorola’s down around par, around one hundred dollars,” I said. “You have a loss.”

“A tax loss, I took it last year,” Robert said. “I sold it at ninety-eight dollars, so you see it hasn’t gone up since I’ve sold it.”

“That’s true,” I said.

“I sold it to switch into Polaroid, I knew that little Swinger camera was going to be a hit, and a friend of mine who is a buyer for a very, very big chain said they just couldn’t keep them in stock.”

“That was brilliant,” I said. “If you switched into Polaroid when Motorola was selling at that price, you’ve made eighty percent on your money and made up your loss.”

“I would have,” Robert said, “only I didn’t actually buy the Polaroid. You see, just at that time my wife and I went away for the weekend and on the Merritt Parkway on the way back the car developed this clunking sound, and the garage man said it needed a complete reconditioning, so we traded it in and bought a new car.”

“So you were out of the market.”

“Except for my short sales.”

“You sold short in the big break?”

“I was short Douglas Aircraft at thirty-eight dollars. I read this story in a business magazine how they were losing six hundred thousand on every airplane they produced and were practically bankrupt, and I figured the market in general was going down because we were heading into a recession.”

“You made a few points there—Douglas got down to around thirty dollars.”

“It did, but I was out of town that day and couldn’t call my broker, and when I got back there were all those rumors about McDonnell taking it over. So I covered it in the low forties. I’m very quick to take a loss when things are going against me, unless I plan to hold the stock as a long-term investment.”

“What does your wife think of your market activity?” I asked.

“She’s trying to make me get out,” Robert said. “But what do women know, anyway? I was out for a while last fall, and you know what? I missed it, every day I wasn’t in it. I enjoy talking to an intelligent broker, exchanging views. The truth is, I can’t stand to stay out of the action. I love the market.”

“Tell me something,” I said. “I know it’s hard to keep track, because you’ve taken money out for a new car, and so on, but have you ever added up what your record is?”

“Sure,” Robert said. “I started with nine thousand dollars, that I got when my uncle died. And I took some out, for the car and so on, and I’ve learned a lot, and I know what I’ve been doing wrong, and I’m very confident about the future.”

“And what is the nine thousand now?”

“I still have twenty-one hundred left,” Robert said.

I have to confess that Robert can almost make me a believer in a theory that has been quite erratic, and I hope to keep in touch. Actually, Robert is part of a bigger picture; all individuals have been consistent sellers for years now, no matter what the size of their accounts, round lots as well as odd lots, because the pension funds have been the big buyers and there does have to be a seller for each buyer. The volume has been enormous, but part of that has been because some of the institutions forgot how big they had grown and were trying to get out of stocks and into cash and then back into stocks like elephants in a ballet. I leave to you Robert’s endeavors in the market. Right now I am trying to corral some rolls of 1937D nickels, because I have a hot tip from someone with real inside information that they are really about to move.