Bernard Baruch lived a dual financial life early in his career. He remained cautious and ever-watchful over his client’s money but that conservative nature ended where his own portfolio began.
Baruch tended to overtrade. He also ran a margin account and never left money in reserve. In other words, he liked to bet it all. But since he had little capital, he always put up the smallest margin possible.
In those days, margin accounts allowed anywhere from 10% to 20% margin. So Baruch could buy a stock using his own money to cover as little as 10% of a stock’s price and borrow the other 90%. Which is exactly what he did. Except, having no money in reserve meant a tiny change in price would quickly wipe him out. And so it went.
Anytime Baruch came across a stock or bond he felt sure of, he bet everything he had. Almost like clockwork, the market fluctuated in the wrong direction, and he was broke again. It didn’t help that most of his ideas came from gossip and tips. This process repeated numerous times before he finally realized he needed a little bit in reserve in case the market moved against him.
His big turning point, however, came in the spring of 1897. It was the first time Baruch changed his investment approach. He set his eyes on American Sugar Refining. He could afford to buy shares but before doing so he actually studied the company. Continue Reading…