Amateur Hour

BACK WHEN I WAS A downy-cheek in the brokerage business, an experienced customer taught me a lesson I haven't forgotten.

An important piece of news came clattering across the broad tape with the accompanying bells and the immediate pick up in the pace of the market. I can't remember now what the news was or whether the effect was good or bad, but I do remember that the more experienced brokers in my office got busy calling their biggest customers, relating the news and suggesting buys or sales based on it.

I had only one fairly big customer at the time, but since I didn't want to give the impression I wasn't an experienced broker, I called him and told him the news.

"That's interesting, son," he said. "What do you think we ought to do?"

I stammered a little and timidly suggested we move on 500 shares of stock.

"No, son," my customer said. "Don't ever ask me to do anything during amateur hour. I'll talk to you tomorrow."

By the time he hung up, the market was really moving. The tape was late. Volume was unbelievably heavy. Many stocks had stopped trading due to the overwhelming influx of orders, all seemingly on one side of the market. That day the market moved drastically on very heavy volume. Some stocks gapped three or more points from where they stopped trading.

I didn't do any business during all that wildness, and I felt very low at the end of the day as I watched the older brokers posting their books and heard them talking about the thousands of shares they'd traded. But after a few years and many mistakes forged in the fires of an overheated market, I realized how sage that customer's advice really was. No sane investor should make decisions regarding securities investments in a runaway market spurred by some unexpected news event.

And we've had a lot of those recently, what with the ups and downs of the Viet Nam peace negotiations and Phases I through III. There have been any number of days in which the Dow-Jones moved rapidly 15 points in one direction or the other. Curiously, the news breaks seem to come during flat or dull markets, and that makes the subsequent reaction more pronounced.

How does the market go about losing its head in these situations? It usually starts something like this.

Some broker is walking past the broad tape machine toward the coffee room when a bell starts ringing, calling attention to some momentous announcement just coming across the tape. He stops to read the news.

"Hey," he announces in a voice loud enough to cover the entire board room, "President Nixon just announced Phase XIV!"

Twenty-five brokers reach for the phone at the same time and the ado begins.

"What's he say?"

"Who's it going to help?"

"I knew I should have brought that Xerox yesterday."

"Someone get me a copy of the text."

"Is anyone going out for lunch?"

All across the country brokers are calling their customers and imploring them to buy or sell, according to the news. Within minutes the demand for or offering of shares reaches such a crescendo that prices are forced drastically one way or the other.

Since traders on the floor of the New York Stock Exchange are generally two or three steps in front of the investing public despite the marvels of modem communications, the public orders hit a market that has just been cleaned up by the pros.

As the public orders start reaching the floor of the exchange, the specialists, those bastions of rectitude, become besieged with overwhelming orders to buy or sell the securities they make markets in. Stalwart, they defend their positions, stand their ground. No investor is going to be allowed to make hasty investment decisions if the specialist has his way. So he gets permission to stop trading while he surveys the situation, counting and matching buy and sell orders off his book with those being received to see where the stock should reopen.

The specialist is human. He may not have the responsibilities your psychiatrist or minister or doctor has in his relations with you, the investor, but he is human. He's hard-pressed. He's moving a herd of goldfish upstream, and it's hard to keep them together. New orders keep coming in all the time, unsettling his search for a delicate balance.

Consider his position. He's got to move a stock to a point that satisfies all the current demand or supply. This means he has to sell or go short to fill the demand; or he may have to buy substantial amounts of the supply offered.

That's very noble of him, of course, and that's exactly what the New York Stock Exchange wants him to do. But his position is enviable. He's generally short or has sold stock into the last of the demand. When demand wanes, stocks go down. If you've just sold or have a short position, that's good. If you've bought the last of the supply, chances are that the price of the stock will go back up again for awhile. That's good, too, if you just bought the stock.

The specialist is like a player in a stud poker game with a hidden three of a kind, and all he can see on the table are lower pairs after the last card has been dealt.

Check it for yourself. Look at stocks in a frantic market to see what they do after opening three or more points away from the last trade. In most cases they immediately reverse directions. If a stock stops trading at 40 and reopens at 45, it will probably close at 43. The specialist had to sell at 45 to get the stock open. It has to go down for him to buy back and recoup. The direction reversal is equally automatic if a stock opens down sharply.

Remember, specialists are like doctors. You'll never meet a

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