In front of one of my charts

Wall Street: Page Three

As to the management of the Fund. I’m keenly aware that today’s markets are vastly different from the markets of those days. Today there are options, puts and calls, indexes, and other things. Today 300 million shares a day are ordinary. In those days, the average volume was three to four million shares. But I think certain fundamentals still exist.

The management fee of $2,500 (half a percent of $500,000) was so small when we started the Fund that we couldn’t afford a research staff. A young man, Alex Rudnicki, and I ran the Fund. Alex was a nice boy, extremely shy—even more shy than I. We were so shy that neither of us had the courage to call an officer of a company and ask how the company was doing. Maybe this was an asset. According to the Arthur Wiesenberger report, during the twelve years Alex and I made the decisions the Dreyfus Fund outperformed all other mutual funds, by a large margin. Alex was never found without a Standard & Poor’s or Moody’s booklet in his pocket. Alex was strong on the fundamentals. He had been a student at the Graham Dodd School of Investing. Graham Dodd believed that if a stock had $12 in cash, it was all right to pay $8 for it. I’m exaggerating a little, but the principles were that you had to be very sound. My method, of course, was different. I didn’t object to soundness, but I was interested in market timing.

I had used weekly bar charts, posted daily, from my beginning in Wall Street. I found these the best for me. Daily charts gave too many opinions, monthly charts didn’t give enough. So weekly charts, posted daily, and looked at daily, were what we used. We had six hundred of them made up, on a large scale. I didn’t try to squeeze opinions out of the charts. Perhaps five percent of the time a chart position formed which, based on my experience, indicated the stock a probable buy or sale (in those days funds were not permitted to sell short). Then we acted. Even then we made enough mistakes to satisfy ourselves. When the stock didn’t act as we expected, we took our loss. We didn’t want to become what was called “involuntary investors.”

In our commercials we said, “We’re trying to make your money grow and management takes what it considers sensible risks in that direction.” But how did we think of that money? Well, I struck on an idea which we used. We thought of it as our mother’s money. The emphasis was on our. If it was someone else’s mother’s money we would be inhibited by what her accountant or her lawyer would think. This was our mother’s money. At the same time it was a mother’s money, so we were not going to take wild risks. We always had in mind that the dollar bill was just a piece of paper. It would seem that if you wanted to be careful, you’d just keep the paper. But there were signs of inflation, and keeping the paper wouldn’t necessarily keep the purchasing power. You just couldn’t buy bonds and be safe, you couldn’t buy stocks and be safe. You had to keep thinking.

One of our general rules was to follow the major trend. Markets in those days—not as much now—had major trends. The markets tended to go up as a unit, or down as a unit. If you’ve got an escalator that’s going up, you’re better off betting on an individual on that escalator than on an individual on an escalator that’s going down. The whole market was like an escalator. In other words, if a company did poorly, a bull market escalator would usually keep it from going down. The opposite was so in a bear market. Of course there were exceptions. Although it was our mother’s money, we had our minimum limits. We didn’t often buy “cats and dogs” (that was an expression in those days)—they call them secondary stocks now. Occasionally we did, but I was careful about it. That’s where Alex and his Moody’s handbook helped.

A fundamental fact of the market was explained, I think by Jeb Stuart or Stonewall Jackson (not General Schwarzkopf), who said, “Get there fustus with the mostus.” That meant that you can win a battle, even if you’ve got a smaller number of people, if you get there first. In the days that I’m talking about, margin accounts swung the whole market. They were a small part of the total investment holdings, but margin traders worked in concert—the investors worked individually. When an investor sold his house, he might invest the proceeds in the stock market. If he wanted to buy a house, or spend money, he would sell stock to do it. But that wasn’t in concert with other investors. And the investment accounts managed by the banks and investment funds were not too flexible. In those days there was a little bit of “buy a good stock, put it away, and forget about it.”

But the margin accounts were very flexible. They were in constant touch with their brokers. When a piece of news occurred, they responded. Obviously, they had varying opinions. The only time they worked in concert, unfortunately, was when they were overextended. When too many of them were fully margined and the market went down, the brokers had to call the weakest accounts for more money. Many of these accounts didn’t have more money and the only way of getting it was by selling stock. This would cause the market to break and then the next group of accounts would come under pressure. This continued until those who were on the most conservative margins had to sell. There had been a domino effect (I hate the expression). When the margin accounts had been cleaned out there was usually a good deal of pessimism, and the market was usually a buy.

We must keep in mind that being bullish doesn’t put the market up. Having purchasing power is what puts the market up. Being bearish doesn’t put the market down. Having selling power, being long of stock, can put it down. So, comparatively speaking, a small segment of the investment public, the margin trader, had a lot to do with market swings. The short interest was an important gauge. It was like a Gallup poll of market sentiment with the margin traders. Most people didn’t sell short, but you knew that when the short interest was high, a large percentage of the other margin accounts would be in cash. When the short interest was low, you knew the margin traders were mostly long of stock. That was the most reliable way of knowing what the margin players were doing.

In the management of the Fund, we had certain principles. One of these was to not pound the table when we had an idea. The reason for that was simple. Once you pound the table, you take away some of your flexibility (it’s harder to admit you were wrong). And admitting that we were wrong was something that we put high on the list, because taking losses early is a valuable thing when you’re speculating in the market. So we never pounded the table. As I said earlier we tried to follow the major trends. We thought of the money as our mother’s money. We tried to be flexible. But the only rule we had, that was an absolute rule, was to keep thinking.

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