The Three Million Dollar Profit


In the preceding chapter, I related how by not exercising patience I missed being in on a play that would have netted a handsome profit. Now I shall describe an instance where I bided my time and the result of waiting for the psychological moment.

In the summer of 1924, Wheat had reached a price that I term a Pivotal Point, so I stepped in with an initial buy order for five million bushels. At that time the Wheat market was an extremely large one, so that the execution of an order of this size had no appreciable effect on the price. Let me here indicate that a similar order given in a single stock would have been the equivalent of 50,000 shares.

Immediately after the execution of this order the market became dull for a few days, but it never declined below the Pivotal Point. The market then started up again and went a few cents higher than on the previous move, from which point it had a Natural Reaction and remained dull for a few days after which it resumed its advance.

As soon as it pierced the next Pivotal Point, I gave an order to buy another five million bushels. This was executed at an average price of 1.5 cents above the Pivotal Point, which clearly indicated to

me that the market was working itself into a strong position. Why? Because it was much more difficult to accumulate the second five million bushels than the first.

The ensuing day, instead of the market reacting as it had after the first order, it advanced 3 cents, which is exactly what it should have done if my analysis of the market was correct. From then on there developed what might be termed a real Bull Market. By that I mean an extensive movement had begun which I calculated would extend over a period of several months. I did not, however, fully realize the full possibilities which lay ahead. Then, when I had a 25 cents per bushel profit, I cashed in—and sat back and saw the market advance 20 cents more within a few days.

Right then I realized I had made a great mistake. Why had I been afraid of losing something I never really had? I was altogether too anxious to convert a paper profit into actual cash, when I should have been patient and had the courage to play the deal out to the end. I knew that in due time, when the upward trend had reached its Pivotal Point, I would be given a danger signal in ample time.

I therefore decided to re-enter the market and went back at an average of 25 cents higher than that at which I had sold my first commitment. At first I had only the courage to make one commitment, which represented 50% of what I had originally sold out. However, from there on I stayed with it until the danger signal gave warning. On January 28, 1925. May Wheat sold at the high price of $2.05 7/8 per bushel. On February 11 it had reacted to $1.77.

During all this phenomenal advance in Wheat, there was another commodity, Rye, which had had an even more spectacular advance than Wheat. However, the Rye market is a very small one compared to Wheat, so that the execution of a comparatively small order to buy would create a decidedly rapid advance.

During the above-described operations, I frequently had I large personal commitment in the market, and there were others who had equally as large commitments. One other operator was reputed to have accumulated a line of several million bushels of futures, in addition to many millions of bushels of cash wheat, and in order to help his position in Wheat to have also accumulated large amounts of cash Rye. He was also reputed to have used the Rye market at times when Wheat began to waver by placing orders to buy Rye.

As stated, the Rye market being small and narrow in comparison, the execution of any sizable buying order immediately caused a rapid advance, and its reflection on Wheat prices was necessarily very marked. Whenever this method was used the public would rush in to buy Wheat, with the result that that commodity sold into new high territory.

This procedure went on successfully until the major movement reached its end. During the time Wheat was having its reaction Rye reacted in a corresponding way, declining from its high price made on January 28, 1925, of $1.82 1/4 cents, to a Price of $154, being a reaction of 281/4 cents against a reaction of 28 3/8 cents in Wheat,. On March 2, May Wheat had recovered to within 3 cents of its previous high, selling at $2.02, but Rye did not recover its decline in the same vigorous way as Wheat had, only being able to make a price of $l.70 1/8 which was 12 1/8 points below its previous high Price.

Watching the market closely, as I was at that time, I was struck forcibly by the fact that something was wrong, since, during all the big Bull Market. Rye had inevitably preceded the advance in Wheat. Now, instead of becoming a leader of the Grain Pit in its advance, it was lagging. Wheat had already recovered most of its entire abnormal reaction, whereas Rye failed to do so by about 12 cents per bushel. This action was something entirely new.

So I set to work analyzing, with a view to ascertaining the reason why Rye was not participating in the recovery proportionately to Wheat. The reason soon became evident. The public had a great interest in the Wheat market but none in Rye. If that was a one-man market, why, all of a sudden, was he neglecting it? I concluded that he either had no more interest in Rye and was out, or was so heavily involved in both markets that he was no longer in a position to make further commitments.

I decided then and there that it made no difference whether he was in or out of Rye—that eventually the result would be the same marketwise, so I put my theory to test.

The last quotation on Rye was $1.697 bid, and having determined to find out the real position in Rye, I gave an order to sell 200,000 bushels “at the market.” When I placed that order Wheat was quoted at $2.02. Before the order was executed Rye had sold off 3 cents per bushel, and two minutes after the order was filled it was back at $1.687.

I discovered by the execution of that order that there were not many orders under the market. However, I was not yet certain what might develop after, so I gave an order to sell another 200,000 bushels, with the same result—down it went 3 cents before the order was executed, but after the execution it only rallied 1 cent against the 2 cents previously.

I still entertained some doubt as to the correctness of my analysis of the position of the market, so I gave a third order to sell 200,000 bushels, with the same result—the market again went down, but this time there was no rally. It kept on going down on its own momentum.

That was the tip-off for which I was watching and waiting. If someone held a big position in the Wheat market and did not for some reason or other protect the Rye market (and what his reason was did not concern me), I felt confident that he would not or could not support the Wheat market. So I immediately gave an order to sell 5,000,000 bushels of May Wheat “at the market.” It was sold from $2.01 to $1.99. That night it closed around $1.97 and Rye at $1.65. I was glad the last part of my order was completed below $2.00 because the $2.00 price was a Pivotal Point, and the market having broken through that Pivotal Point, I felt sure of my position. Naturally I never had any worries about that trade.

A few days later I bought my Rye in, which I had sold only as a testing operation to ascertain the position of the Wheat market, and chalked up a profit of $250,000.00 on the transaction.

In the meantime, I kept on selling Wheat until I had accumulated a short line of fifteen million bushels. March 16, May Wheat closed at $1.645 and the next morning Liverpool was 3 cents lower than due, which on a parity basis should cause our market to open around $1.61.

Then I did something that experience taught me I should not do, namely, give an order at a specified price before the market opened. But temptation submerged my better judgment and I gave an order to buy five million bushels at $1.61, which was 3-4 cents below the previous night’s close. The opening showed a price range of $1.61 to $1.54. Thereupon I said to myself: “It serves you right for breaking a rule you know you should not have broken.” But again it was a case of human instinct overcoming innate judgment. I would have bet anything that my order would be executed at the stipulated Price of $1.61, which was the high of the opening price range.

Accordingly, when I saw the price of $1.54. I gave another order to buy five million bushels. Immediately thereafter I received a report: “bought five million bushels May Wheat at $1.53.”

Again I entered my order for another five million bushels. In less than one minute the report came; “Bought five million bushels at $1.53,” which I naturally assumed was the price at which my third order had been filled. I then asked for a report on my first order. The following was handed to me:

The first five million bushels reported to you filled your first order.”

The second five million bushels reported filled your second order.”

Here is the report on your third order: * 3.5 million bushels at 153.00 * 1 million bushels at 153.12 * 500,000 bushels at 153.25.”

The low price that day as $151 and next day Wheat was back to $1.64. That was the first time in my experience that I ever received an execution of a limited order of that nature. I had given an order to buy five million bushels at $1.61—the market opened at my bid price of $1.61 to 7 cents lower, $ 1.54, which represented a difference of $350,000.00.

A short time later I had occasion to be in Chicago, and asked the man who was in charge of placing my orders how it happened that I received such excellent execution of my first limited order. He informed me that he happened to know there was an order in the market to sell thirty-five million bushels “at the market.” That being the case, he realized that no matter how low the market might open there would be plenty of Wheat for sale at the lower opening price after the opening, so he merely waited until the opening range and then put in my order at the market.

He stated that had it not been for my orders reaching the Pit as they did, the market would have had a tremendous break from the opening level.

The final net result of these transactions showed a profit of over $3,000,000.00.

This illustrates the value of having a short interest in speculative markets because the short interests become willing buyers, and those willing buyers act as a much-needed stabilizer in times of panic.

Today operations of this kind are not possible, as the Commodities Exchange Administration limits the size of any one individual’s position in the grain market to two million bushels, and while there has been no limit placed on the size of anyone’s commitment in the stock market, it is equally impossible for any one operator to establish a sizable short position under the existing rules in respect to selling short.

I therefore believe the day of the old speculator has gone. His place will be taken in the future by the semi-investor, who, while not able to make such large sums in the market quickly, will be able to make more money over a given period and be able to keep it. I hold the firm belief that the future successful semi-investor will only operate at the psychological time and will eventually realize a much larger percentage out of every minor or major movement than the purely speculative-minded operator ever did.

Part of “How to Trade in Stocks” by Jesse Livermore.


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