A summary of my Wall Street career

The Subject of Probabilities

As I look back, I realize that it was a good instinct for probabilities that pulled me through that early period of my pursuit of Dilantin. Without this instinct I could never have survived the negative inferences drawn from the fact that the medicine had been around for over twenty years. I used to think that everyone had a pretty good sense of probabilities. But I don’t now, and I’ve heard some strange comments about probabilities in the medical field.

Probabilities are an important underlying theme of this site and, partly to qualify myself on the subject, I will depart from the narrative and discuss them. In some fields a sense of probabilities is much more important than in others. An insurance actuary would feel naked without a sense of probabilities. A painter, on the other hand, might swap his sense of probabilities for a two percent improvement in color sense. In medicine a sense of probabilities is more important than generally realized. Sometimes weighing the probabilities—the use of a potentially dangerous procedure against the dangerous condition a patient is in—is the whole medical question. In the FDA the weighing of risk vs. gain looms large in the question of whether a drug should be approved for listing.

I’ve always had a good sense of probabilities—born with it I believe—and I used to think of it as a form of intelligence. But as I began to assess some of my other “forms of intelligence” and found them lacking, I decided I’d better think of them all as aptitudes. The word aptitude itself suggests wide variances. It seems that aptitudes come with the baby. We’re not all born with a good sense of direction, and a good sense of probabilities is not standard equipment either. On the way to the subject of probabilities, let’s discuss aptitudes. If the reader doesn’t have a good sense of probability this should make him feel better.

Some of the genetic blanks I drew when aptitudes were being handed out were in mechanics, in remembering names, and in sense of direction.

Things mechanical are a mystery to me. In World War II, I took an exam to qualify for Officers Training School in the U.S. Coast Guard. My aptitude for mechanics helped me get a grade of twenty-nine out of a possible 100. After looking at this score the Coast Guard decided it had enough officers, and awarded me the post of apprentice seaman. I can’t remember people’s names no matter how hard I try. I seem to have a scrambling device in my head. If two strangers come into the office, my secretary discreetly writes their names on the side of a paper coffee cup and I have to refer to it constantly.

My most conspicuous aptitude—in absentia—is my sense of direction. For that reason, and because there is evidence of genetic origin, I will discuss it more fully. My sense of direction is fine—but it’s in backwards. This is not easy to explain to a person with a good sense of direction. I believe such a person has a tug he’s not conscious of that pulls him in the right direction. I have such a tug, but it pulls me in the wrong direction. For example, when I leave a washroom in a strange airport, without hesitation I turn the wrong way. Apparently my aptitude for going the wrong way is not only lateral but vertical. For fifteen years my office was on the twenty-ninth floor of 2 Broadway and our boardroom was on the thirtieth. When I was in a hurry to get to the thirtieth floor I would invariably walk down to the twenty-eighth.

I don’t have to climb the family tree very high to see where I got my sense of direction. It was bequeathed me by my father. His sense of direction was in backwards too—and was even stronger than mine. He got lost all the time but it never occurred to him to blame his sense of direction, he just thought it was bad luck. It’s a good thing Dad didn’t have to make his living as a wagon scout in the old days. He’d have set out for California with his train of covered wagons and, if things had gone well, in a few months he’d have discovered Plymouth Rock. It’s not surprising that the family hero is the homing pigeon. You can put this rascal in a dark bag, take him 500 miles from home, and without consulting a road map or following the railroad tracks he will fly directly to his coop. Scientists may say he takes radar soundings or something. But what of it? Could Shakespeare do it, could Beethoven? The pigeon has quite an aptitude.

Without realizing it, we gravitate in the direction of our aptitudes. We bounce from one field to another, being repelled or attracted, and if we’re lucky we come to rest where our aptitudes are at a premium. When I got out of college, I bounced around for a few years and wound up as assistant to a customer’s broker in the stock exchange. The stock market appealed to my sense of probabilities and to another aptitude, gambling (speculation as it’s called in the market). An aptitude for gambling by itself is a dubious asset; it’s fortunate for me that this aptitude came in a package with my sense of probability. This steered me into games of skill and away from casino games, such as dice and roulette, where the odds against you are slight but inexorable. My first gambling game was marbles for keeps. I remember bankrupting a kid from down the block when I was six. When I gave up marbles, I took up other games—contract bridge, gin rummy, and handicapping the races. In these games a good sense of probabilities is an asset.

There are two kinds of probabilities. There is the mathematical kind that can be arrived at precisely. As a simple example, the chance of calling the toss of a coin correctly (provided it’s not weighted) is exactly one in two. The chance of calling it correctly twice in a row is one-half of one-half of a chance, or one in four, and so forth. If you wish to determine the exact probability that a coin tossed a hundred times will come up heads thirty-one times, there’s a formula for it. I don’t know it.

Another kind of probability cannot be arrived at by mathematical formula. It’s an estimate—exact figures can’t be placed on it. Let’s call it free-form probability. We use it all the time, some of us more consciously than others. For example, when I make a phone call I start to assess the probability that the person I’m calling is at home. With adjustments for the individual, I might figure it’s three-to-one against his or her being home after the third ring, eight-to-one after the fourth ring, etc. After the fifth ring I usually hang up. (When I used to call my former wife, if the phone was answered before the fourth ring, I knew I’d got the wrong number.)

One who makes a living by the application of free-form probabilities is the racetrack handicapper. After studying the many variables, he comes up with the probable odds for each horse in a particular race—the morning line. Over a period of time the handicapper’s “line” should be close to the odds made by the betting public, or as my friend Dingy Weiss says, “He can tell his story walking.”

Free-form probability also deals with odds of a larger magnitude. Some examples. The odds against five horses, in a ten-horse race, finishing in a dead heat. The odds against finding a lion in your backyard in Manhattan. The odds against the next person you meet having a wooden leg and offering you a banana. Or, for a pertinent example, the odds against thousands of physicians, working independently, finding a drug useful for over fifty symptoms and disorders, and that drug being useful for only a single disorder. When the odds are this large, it’s easy to be approximately right. Whether you estimate one chance in a million or one chance in a billion, the estimates are almost the same—the difference between these figures is less than one in a million. (If the reader’s sense of probability is like my sense of direction, his feelers will tell him this is wrong.)

A feel for probabilities is essential in two of the card games I’ve played, bridge and gin rummy. Although I haven’t played gin in fifteen years, the Encyclopedia of Bridge is still kind enough to say, “Dreyfus...is reputed to be the best American player of gin rummy.” This compliment, no longer deserved, is based on a system of play I discovered many years ago that relies heavily on probabilities. Gin rummy deals mostly with exact probabilities. Another game I’ve played, the stock market, deals largely with inexact probabilities.

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“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.—Mark Twain, Pudd’nhead Wilson

With this cautionary note the reader will be given instructions on how to buy a stock. Take the five-year earnings record of a company, its current earnings and your estimate for the near future, its book value, its net quick assets, the prospect for new products, the competitive position of the company in its own industry, the merits of the industry relative to other industries, your opinion of management, your opinion of the stock market as a whole, and the chart position of the individual stock. Put all this where you think your brains are, circulate it through your sense of probabilities, and arrive at your conclusion. Be prepared to take a quick loss; your conclusion may be wrong even though you approached it the right way.

My introduction to Wall Street was in 1941. I got a job as an assistant to a customer’s broker in the garment district branch of Cohen, Simondson & Company, at a salary of $25 a week. One of my duties in this job was the posting of hundreds of weekly charts. This early experience with charts influenced my Wall Street career. Skipping the intervening travail—fascinating as it would be to nobody—I found myself, in the early fifties, responsible for the management of a small mutual fund, The Dreyfus Fund. The fund was so small that the management fees were only $2,500 a year. Perforce, the fund could not afford a large research staff. Actually our staff consisted of a fine young man, Alex Rudnicki, and myself. Alex was a fundamentalist, a student of the Graham Dodd school. I was a student of charts and market technique. We were at the opposite extremes of investment approach, but we worked together as friends.

Alex had a wonderful memory for the earnings of companies and other statistical information; my contribution was six hundred large-scale, weekly line charts. From my experience, monthly charts were too “slow” to be of much use, and daily charts were too volatile to be reliable. I split the difference with weekly charts, posted daily. I developed my own theories about the charts, and read no books on the subject. It seemed best to make my own mistakes—at least then I’d know whom to blame.

In those early days, our statistical information was no more up-to-date than the latest quarterly reports. Alex and I were too chicken to call a company and ask a vice-president how things were going. Of necessity we put more emphasis on the technical side of the market than did most funds.

When you study the technical side of the stock market you deal with two components. One component is major market trends—bull or bear market. The other is the timing of the purchase or sale of individual securities. In those days, more than now, the market tended to move as a whole—being right about the major trend was more than half the game. We focused a good deal of our attention on this. With three- and four-million-share days, the trading of the speculator was a key factor in market moves. Speculators tended to move in concert. Excessive optimism, with the parlayed purchasing power of their margin accounts, caused the market to get out of hand on the upside; forced selling in these same margin accounts caused the market to get out of hand on the downside.

The more money a speculator had, the healthier the technical side of the market—he had purchasing power. The more stock the speculator had, the weaker the technical side—he had selling power. Human nature being what it is, when a speculator owned stock he talked bullish. When he had cash, or was short of stock, he talked bearish. In estimating whether we were in a major uptrend or downtrend, the speculator’s chatter was taken into consideration, along with changes in the short interest and the condition of the margin accounts. And of course our charts were helpful.

Objectivity—difficult to come by—is important in any field. It didn’t take us long to learn that stubbornness, ego, and wishful thinking could mess up the best of market techniques; so we tried to keep our emotions separate from our decision-making. When we bought a security we didn’t pound the table to emphasize how sure we were that we were right. Instead, we tried to prepare ourselves for the possibility that we might be wrong so that when the unexpected happened, which it frequently did, we were psychologically in a position to take a loss. Our sense of probabilities was always in play. We wouldn’t buy a high-risk stock, one that could go down fifty to sixty percent, unless we felt we had a chance of at least doubling our money. If we bought a conservative stock, one not likely to go down more than twenty percent, a thirty percent profit was worth shooting for. Since our methods differed from those of most other funds, it was likely that our performance would vary considerably from the average. Fortunately for our stockholders this variance was in the right direction—it could have been the other way. At the time of my retirement, our ten-year performance was the best of any mutual fund—nearly 100 percentage points better than the second-best fund. (326 percent to 232 percent, Arthur Wiesenberger, Inc.)

That was a long time ago. Recently, my good friend Bill Rogers, of two-Cabinet-post renown, said, “Jack, I guess you’re doing well in the market as usual.” I said, “No, Bill, to tell you the truth I’ve been in a long stupid streak.” It’s nice to see a friend have a good laugh.

Back to medical probabilities. Including my own case, I had seen seven consecutive persons benefit from Dilantin. If each case had been the flip of a coin, fifty-fifty, the odds against seven in a row would have been 127-to-1. But the response to Dilantin had been so prompt and the symptoms that responded so similar, that each case deserved a weight far exceeding 50-50.

Of course my objectivity could be questioned. But that didn’t bother me; it’s only other people’s objectivity that bothers me. Even at that early date I placed a high probability figure on the chance that Dilantin was more than an anticonvulsant.

During the first year of my experience with Dilantin I had gathered some helpful information on the subject of electricity in the body. This is discussed in section on electricity.

Next Section: Body Electricity

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