"Bernard Baruch: My Own Story"

 

I’ve told my children not to be blinded to the greatness of America (the opportunity to benefit oneself through one’s own striving) and by the pettiness of some the people in it… Prof. Newcomb plugged away at the law of supply and demand taught us to believe in it: when prices go up two processes will set in- an increased production and a decreased consumption. The effect will be a gradual fall in prices. If prices get too low two processes will set in- decreased production b/c man will not continue to produce at a loss and second, increased consumption. These two forces will tend to establish a normal balance… Colleges teach quiz experts who have not been trained how to THINK… Value of an education lay in acquired discipline and the general philosophy of life you gained from becoming acquainted with the great minds of the past… No one is any better than you, but you are no better than anyone else until you prove it… A fight is never over until one man is out, as long as you ain’t that man you have a chance… The prices of stocks, commodities and bonds are affected by literally anything and everything that happens in our world, from new inventions and the changing value of the dollar to vagaries of the weather and the threat of war or the prospect of peace. What registers in the stock market’s fluctuations are not the events but the human reactions to these events. Above all else in other words, the stock market is people. And it is this intensely human quality that makes the stock market so dramatic, an arena in which men and women pit their conflicting judgments, their hopes and fears, strengths and weaknesses, greeds and ideals…One could say that my whole career in Wall Street proved on long process of education in human nature… Every chance I got I would also pull open Poor’s manual, cramming into my head all sorts of information about different corporations. Railroads: could rattle off what commodities and products gave them their main source of revenue… After each major undertaking- and particularly when things had gone sour- I would shake loose from Wall Street and  go off to some quiet place  where I could review what I had done and where I had gone wrong. Periodic self-examination of this sort is something all of us need… Two principal mistakes that nearly all amateurs in the stock market make: inexact knowledge of the securities in which one is dealing and to try to run up a fortune on a shoestring… During a depression people come to feel that better times never will come. They cannot see through their despair to the sunny future that lies beyond the fog. At such times a basic confidence in the country’s future pays off, if one purchase securities and holds them until prosperity returns… The investing public was wary, as it always is when things are cheap… Speculator comes from the Latin speculari, which means to spy out and observe. I have defined the speculator as a man who observes the future and acts before it occurs. To be able to do this successfully- and it is an ability of priceless value and all human affairs including the making of peace and war, three things are necessary: 1) Get the facts of the situation or problem 2) One must form a judgment as to what those facts portend and 3) one must act in time-before it is too late… One quickly learns how important it is too act swiftly. When Admiral Schley had destroyed the Spanish fleet Santiago it told the speedy end to the Spanish-American war; sizable profits could be made by placing orders for American stocks on the London exchange when it opened…  But I was soon to learn that is one thing to make money and another thing to keep it. In fact, making money is often easier than keeping it… People sometimes drop remarks calculated to bring the little minnows into the net to be served up for the big fish. I had been a little minnow… I have found it better to rely on one’s own cold detached judgment of the economic facts… My course violated every sound rule of speculation. I acted on unverified information after superficial investigation and like thousands of others before and since, got just what my conduct deserved… I still felt convinced that Amalgamated organizers were trying to defy the law of supply and demand, and the priced would have to drop and so I continued to sell short (despite being warned by Keene associates). But I have followed this policy of silence my whole career… Both my failure in whiskey (tip) and my success in copper emphasized on thing, the importance of getting the facts of a situation free from tips, inside dope, or wishful thinking… In every govt. assignment that was given me I would begin with a relentless search of the facts of the situations… I still believe that no President or Congress can make two and two equal anything but four…  Transformation of America from a frontier pushing people, concerned mainly with subduing a continent, to the prime stabilizing force for the whole of western civilization… (Keene) As long as he thought he was right he was patient, very patient. But when he believed himself wrong, he could turn in an instant. “I get awful tired sometimes, but I come again.” Gates was all nerve- and no nerves. Beneath his roughness lay a cool, bold, penetrating intelligence. I took to vaccinate myself against (Gates) virulent optimism- and I am sure a man of his intuition must have been aware of this- it made no difference in our relations…  When men tossed around huge sums in bets, at cards, and at the races, it meant that they had all lost all sense of value and of economics. No market in the hands of such people, I told Hawley, could be a stable or genuine one… Stock prices had been pushed far too high- beyond and economic justification at the time… Over-optimism is capable of doing more damage than pessimism b/c caution tends to be thrown aside… A speculator should travel his road alone… I distrust supposedly versatile people, for I have learned that few men can do more than one thing well… Instinct for preservation of self-esteem (when dealing with mistakes) is one of the deep-seated traits of human nature… Under-developed nations must recognize that if they increase the risks that a foreign investor must run, they increase the cost that they must pay for any investment; both underdeveloped and developed nations should be striving for agreement on the terms that would make private investment mutually profitable… I told MacNeill (who perfected process of handling low-grade ores) six percent would suffice when going rate was 150% and sent back the note and made it 20%… Value in an investment is like character in an individual. It stands up better under adversity… A panic may bring a temporary collapse in the market price of an investment, but the stock is bound to recover if the company meets a GENUINE ECONOMIC NEED… If not for processes developed we would have had to import most of the copper we used in WWII; would have diverted ships for this from other war uses… New technological developments can give new uses to areas which might have been worthless a few years earlier (and vice versa)… Gamble was a pure choice of words, I should have said invest. “I never gamble,” replied Mr. Morgan… I have bought when things seemed low enough and sold when they seemed high enough. In that way I have managed to avoid being swept along to those wild extremes of market fluctuations which prove so disastrous (doesn’t believe can buy at the bottom or sell at the top- different then JL who seems to buy/sell after bottom/top)… On crowd madness: A bull market, for example, will be sweeping along and then something will happen- trivial or important- and the first man will sell and then others will sell and the continuity of thought toward higher prices is broken… Another strange thing is that education and high rank is no immunization against the virus… August of ’29 cabled three men regarding exchange of multiple companies for 2, one of whom held one of the highest posts in American finance and said the general business situation was ‘like a weathervane pointing into a gale of prosperity’; Baruch came back to New York and sold everything he could… In the dark years that followed (he) reread Mackay (Extraordinary Popular Delusions and the Madness of Crowds) and found tales curiously encouraging. For if his book showed how baseless are man’s moods of wild hope, it also showed that man’s moods of black despair are equally unfounded. ALWAYS in the past, NO MATTER HOW BLACK THE OUTLOOK, things got better. ‘Two and two still make four and you can’t keep mankind down for long’…  What drives the prices of stocks up or down is not impersonal economic forces or changing events but the human reactions to these happenings. The main obstacle lies in disentangling ourselves from our own emotions… As a student of human nature, I always felt a good speculator should be able to tell what a man will do with his money before he does it. “See Baruch”, saw $1m check and then convert owner took stock instead of cash… Should have sold coffee as soon as realized crop would exceed expectations. It would have meant pocketing a loss. One of the worst mistakes is hold on blindly and refuse to admit that his judgment has been wrong. The procedure one should follow is to sell the bad stock and keep the good stock. With rare exceptions, stocks are high because they are good and stocks are low b/c they are of doubtful value… I vowed never gain to take an important risk in anything I did not know about… Often we become carried away so much by the desirability of an end that we overlook the impracticality of its accomplishment… The more one knows about a subject the more likely one is to believe that he can outwit the workings of supply and demand… Rules 1) Don’t speculate unless can make it a full time job 2) Beware of ‘tips’ 3) Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth 4) Don’t try to buy at the bottom and sell at the top- this can’t be done 5) Learn how to take losses quickly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible 6) Don’t buy too many different securities. Better have only a few investments which can be watched. 7) Make a periodic REAPPRAISAL of all your investments to see whether changing developments have altered prospects 8) Study tax position to know when you can sell at the greatest advantage 9) Always keep a good part of your capital in a cash reserve. Never invest all your funds 10) Don’t try to be a jack of all investments i.e. if don’t know beware… Getting the facts of a situation before acting is of crucial importance and getting these facts is a continuous job which requires eternal vigilance… One cannot make an investment and take for granted that its worth will remain unchanged. New sources of supply coming from hitherto untapped areas of the world may transform the competitive position of a company as will changes in people’s habits or technological innovations. Often something will shrink in value b/c of one discovery, as coal did in relation to oil and electricity, only to be given new economic life by another development such as the new chemical uses being made of coal… Fact that value of an investment can never be counted upon why periodic reappraisal and why it is unwise to spread funds over too many securities. One can know all there is to now about a few issues one cannot possibly know all one needs to know about a great many issues… I have often that perhaps the strongest force that starts an economy upward after it has hit bottom is the simple fact that all of us must somehow find a way to live. Even when we are sunk in the blackest despair, we have to work and eat and clothe ourselves, and this activity starts the economic wheels turning away… Value is in 1) Net cash and real assets 2) whether people want or must have company’s products or services 3) Character and brains of management; give less weight to big financial names at the head of a company than to the quality of its engineering staff. These basic facts must be checked and rechecked constantly. Sometimes I have made mistakes and yet, by abandoning my position in time, was still able to emerge with a net profit.  Recheck facts on so extension. Studies pages of hired surveyors’ figures; discovered error and sold to mostly insiders. This feat was accomplished by superior research… Some people after selling bedevil themselves with ‘if only I had done this’. To do this is both silly and demoralizing. No speculator can be right all the time… Even being right three or four times out of ten should yield a person a fortune if he has the sense to cut losses quickly on the ventures when wrong… I have found it wise, in fact to periodically turn into cash most of my holdings and virtually retire from the market. No general keeps his troops fighting all the time… A skilled operator in any field acquires an almost instinctive ‘feel’ which enables him to sense many things even without being able to explain them. In a few instances as in coffee where I went into speculation where I have lacked this feel I have not done too well… If anything, too much information may be available today. The problem has become less one of digging out information than to separate the irrelevant detail from the essential facts and to determine what those facts mean. More than ever what is needed is sound judgment… In recent years a number of structural changes in security investment (higher taxes) have taken place and are worth careful investigation. The capital gains tax has made many investors reluctant to part with their holdings. The full implication of every form of tax exemption should also be re-examined… If our general economic policies and our national defense are sound, the stock market will adjust to them and we well not to worry about a possible collapse of the market. If we do not preserve our national security and national credit, then nothing will have lasting value…  In this hectic age of distraction, all of us need to pause every now and then in what we are doing to examine where the rush of the world and our own activities is taking us. Even an hour or two spent in such detached contemplation on a park bench will prove rewarding. If I had lost money, I wanted to make sure that I would not repeat the same mistake. If it had been a successful operation, getting away from the clattering tickers helped clear my mind and refresh me physically for any future operation… The passage ahead looms as a perilous one. But when I think how far we already have traveled, I feel confident the difficulties ahead will be overcome… Planning a successful financial operation was much like planning a military operation. Before going into action, one had to know the strengths and weaknesses of opposing forces… Accommodation to mutual needs remains the best basis for all agreements… We have persisted in thinking that the rules of peacetime economics and peacetime society should fit our needs. Yet there has been hardly a single year since 1914 which could be considered as really free from the influences of war and its aftermath… Test of ability to govern ourselves 1) what things will we give up to make other things secure 2) test of reasoning powers, whether have with to think our problems through an effective solution 3) self-discipline: ability to stand by our values and see our polices through. Many of us listen to these truths (to think and be disciplined) and nod our heads at their verity but do nothing to put them into practices… But if the frenzy of soaring hope can never be realized, we can also avoid the panic of plunging despair- if we learn to think our problems through, decide what it is that we value most, and organize ourselves, both as individuals and as a nation- to see that first things come first…