legendary investor Jack Dreyfus

“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.)

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