Bernard Baruch was known as the Lone Wolf of Wall Street, but he wore many hats. He was a speculator, an investor, a deal maker, a philanthropist, and an advisor to Presidents.
Baruch was born in Camden, South Carolina in 1870. The family moved to New York when he was 10. He got his first job on Wall Street in 1889 as a runner for $3 a week. It was there he first learned the art of arbitrage, reorganizations, and speculation.
He became a partner at A.A. Housman & Company at age 25, playing speculator and dealmaker for the firm. In one instance, he put arbitrage skills to work after learning of the potential end to the Spanish-American War. It was July 3rd. The New York exchange was closed on the 4th. So he bought stocks on the London exchange, expecting to sell them for a big profit when the exchange opened on the 5th. When the New York exchange opened on the 5th, his stock prices soared.
In another instance, he played dealmaker in a tobacco merger. He convinced Liggett & Myers to merge with Union Tobacco. At the last minute, a third company, Continental Tobacco, joined to create the monopoly known as The American Tobacco Company. Baruch earned a cool $150,000 for his effort.
By 33, he was a millionaire, bought a seat on the exchange, and set out on his own.
His wealth grew as during his solo career, first from speculation. But as he gained experience, he turned more towards investing. Often, he provided the seed capital to new companies that produced the materials to supply the accelerating growth of the country.
As the 1920s came to an end, Baruch famous avoided the crash. He began selling a few positions as early as 1928. He wanted cash handy, just in case.
But an invite, in August 1929, to buy two new trusts — The Shenandoah and Blue Ridge Corporation — was the warning sign that the market had gone too far. He had sold everything before September ended. The market crashed a month later.
Experience goes a long way in the markets. Baruch had four decades in the market when it crashed in 1929. He saw firsthand, on several occasions, how greed and panic could take hold of markets. He was prepared for the 1920s bull market to roll over.
Baruch also made a slew of mistakes. Yet, early in his career, he set in motion the habit of studying his losses to learn from each one. Put simply, he built up a wealth of knowledge from his experiences that helped guide his decisions.
It was Baruch’s independent spirit that gained the respect of others in and outside of Wall Street. His experiences made him an important resource too. And he shared it on many occasions throughout his life.
On the Psychology of a Bubble
The 1920’s brought us the New Economics, which could best be described as a system in which everything on the charts of business activity was supposed to go up, and nothing was supposed to come down. Experience and common sense showed that this could not be. Yet, in the overheated atmosphere of the great boom, the New Economics was taken seriously. It was as though the whole nation had been seized by money madness…
But there was not much of an audience for those of us who felt uneasy about the state of our economy. To most people, it seemed as though prosperity would never stop, that everyone would simply go on making and spending more and more money. Never before had there been such gambling as there was in those last turbulent years of the ’20s; but few people realized they were gambling — they thought they had a sure thing…
There were some who believed that prices would never descend and others who thought that, if they did, it would still be possible to get out in time. But of those who realized that the boom had to end, none knew when the expected break would come.
We must remember that delusions swing between extremes, like pendulums. Delusions of grandeur and unending wealth give place to delusions of unending gloom. One is as unreal as the other.
One could say that my whole career in Wall Street proved one long process of education in human nature.
On the Stock Market
The stock market could be termed the total thermometer for our civilization. The prices of stocks — and commodities and bonds as well — are affected by literally anything and everything that happens in our world, from new inventions and the changing value of the dollar to vagaries of the weather and the threat of war or the prospect of peace. But what actually registers in the stock market’s fluctuations are not the events themselves, but the human reactions to these events. In short, how millions of individual men and women feel these happenings may affect the future…
And it is this intensely human quality which makes the stock market so dramatic an arena, in which men and women pit their conflicting judgments, their hopes and fears, strengths and weaknesses, greeds and ideals.
The stock market registers the judgments of multitudes of buyers and sellers about the many factors which affect business — what business is like today; what it will be like in the future.
On Predicting the Market
No one, not even the most experienced trader, economist or businessman can predict with certainty the course of the stock market. Whether stocks rise or fall is determined by innumerable forces and elements, by economic conditions, the actions of governments, the state of international affairs, the emotions of people — even the vagaries of the weather.
On Stock Tips and “Inside” Information
People sometimes drop remarks calculated to bring the little minnows into the net to be served up for the big fish… The longer I operated in Wall Street the more distrustful I became of tips and “inside” information of every kind… It is not simply that “inside” information often is manufactured to mislead the gullible. Even when insiders know what their companies are doing, they are likely to make serious blunders just because they are in the know.
There is something about “inside” information which seems to paralyze a man’s reasoning powers. For one thing, people place a great store on knowing something no one else knows, even if it isn’t true. This feeling of possessing “inside dope” makes a man feel so much smarter than other people that he will disregard even the most evident facts. I have seen insiders hold on to their stocks when it was obvious to nearly everyone else that they should be sold.
It would seem that for many people the lure of the stock market is curiously similar to the medieval hunt for some magic alchemy for making gold. If only one knows the philosopher’s stone — gets the right tip — poverty can be turned into riches, or financial insecurity into ease. I doubt that anything I write will change this. To many persons Wall Street will always remain a place to bet and gamble.
On Doing the Research
Over the long run, I have found it better to rely on one’s own cold, detached judgment of the economic facts. Otto Kahn, of the famous banking house of Kuhn, Loeb & Company, liked to relate how he met me one day when there was considerable market activity in Union Pacific. He started to tell me something, when I stopped him by saying, “Please don’t tell me anything that is happening to Union Pacific. I don’t want my judgment affected by anything you might say…”
In the search for facts I learned that one had to be as unimpassioned as a surgeon. And if one had the facts right one could stand with confidence against the will or whims of those who were supposed to know best.
I developed a habit I was never to forsake — of analyzing my losses to determine where I had made my mistakes. This was a practice I was to develop ever more systematically as my operations grew in size. After each major undertaking — and particularly when things had turned sour — I would shake loose from Wall Street and go off to some quiet place where I could review what I had done and determine wherein I had gone wrong. At such times I never sought to excuse myself, but was concerned solely with guarding against a repetition of the same error.
In those early Wall Street days, it wasn’t too difficult to figure out what I was doing that was wrong. There are two principal mistakes that nearly all amateurs in the stock market make. The first is to have an inexact knowledge of the securities in which one is dealing, to know too little about a company’s management, its earnings, and prospects for future growth. The second mistake is to trade beyond one’s financial resources, to try to run up a fortune on a shoestring.
Bernard Baruch’s Own Story: The 1929 Crash
Investigation of Economic Problems
The Stock Market is People
Stock Market Study
Bernard Baruch’s Investing Rules
Notes: Baruch My Own Story
- Marks Memo: I Beg to Differ (pdf) – H. Marks
- Status Anxiety – Klement on Investing
- 5 Signs of Speculation – J. Rekenthaler
- What is the One Lesson You Would Teach the Average Investor? (podcast) – Excess Returns
- We’re Probably in a Recession, and That’s Fine – Noahpinion
- The Index Inclusion Effect Isn’t Cause for Concern – Morningstar
- Do Corporate Profits Increase When Inflation Increases? – Liberty Street
- Kahneman: How Making Decisions Isn’t As Objective As You Think (podcast) – Science Friday
- Ecosystems and Extreme Weather Events – JSTOR Daily
- Hidden Chaos Found to Lurk in Ecosystems – Quanta