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Thursday, 19 June 2014

Bernard Baruch - A Stock Speculator

Baruch was recognized as one of Wall Street’s financial leaders and his teachings are as valuable today as decades ago. These are well documented in his book Baruch: My Own Story (1957) in which, among others, he said: “I have heard many men talk intelligently, even brilliantly, about something – only to see them proven powerless when it comes to acting on what they believe.”

Baruch started out as most traders do – i.e. losing lots of money because he lacked the knowledge, experience and discipline. “You have to lose money in order to better yourself.”

Real success in the market takes time and money. Unfortunately “most people view the market as the place where the miracle of great and quick riches can be performed with little effort”.

Overtrading and holding too many positions in his early years caused Baruch to go broke many times before he developed the discipline to succeed.

A successful speculator is “a man who observes the future and acts before it occurs”. Acting swiftly in the market is important.

After losing money as a result of the recommendation of others, Baruch focused on the facts. “One must search through a maze of complex and contradictory details to get to the significant facts … Then he must be able to operate coldly, clearly, and skilfully on the basis of those facts.” The challenge for the successful speculator is “how to disentangle the cold hard facts from the rather warm feelings of the people dealing with the facts.” Moreover, “if you get all the facts, your judgment can be right; if you don’t get all the facts, it can’t be right”.

Be honest with yourself and expect to be wrong as many times as you are right. “If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.” Cutting losses quickly was THE most important trading rule.

Don’t underestimate the power of thinking. “During my eighty-seven years I have witnessed a whole succession of technological revolutions. But none of them has done away with the need for character in the individual or the ability to think.”

If your stocks are keeping you awake a night worrying about them, you should sell them to a “sleeping point”.

The way to truly succeed in the market is to devote oneself full-time to the task. “Because of the extreme challenge, one must commit full attention to it.” Market speculation is “no different than trying to be a successful doctor or lawyer … you simply must devote yourself full-time to the study of your craft”.

Through experience, Baruch learned the golden rule – never take stock tips from others. Self-reliance and “doing one’s own thinking” are a must.

Baruch found it best to keep silent about his positions and trades and he believed it was “best to trade alone”. When he retired from A.A. Housman & Company and went on his own, Baruch did so because he thought it was best to trade independently and remain focused in order to achieve the greatest profits. “Most of the successful people I’ve known are the ones who do more listening than talking.”

Baruch would often trade both sides of the market – long and short. “Having flexibility should not be underestimated.”

About risk, he said: There is no investment which does not involve some risk and is not something of a gamble.” Moreover, “what we can try to do perhaps is to come to a better understanding of how to reduce the element of risk in whatever we undertake”.

Baruch did not believe in diversification, but that it was “better to have a few stocks and to watch them carefully”.

Having a “good supply of cash on hand at all times in reserve is important” to take advantage of market declines and major crashes.

He believed that traders should focus on one thing at a time. He thought no one could be an expert at too many things. He liked to focus on “one thing at a time, perfect it, and do it well”.

Baruch believed the two main mistakes that contributed to his early losses were the same mistakes most investors make, namely 1) “They know too little about the company’s management, earnings, prospects, and possibility for future growth” and 2) “They tend to trade beyond their financial capital capacity”.

Baruch was a fundamentalist versus technical focused investor. In essence he required strong real assets of the company (cash and properties), that the company produced or performed something that is needed and valued, and that it had good management.

“Successful speculation requires staying on top of changes in industries and companies that either create new industries or improve on existing industries. The majority of your profits will come from these two … The shrewdest traders throughout history all adapted the skill of reactionary change, as the market constantly presents new and different opportunities.”

What drives stock prices is human reactions. Ironically, the key to successful speculation is to remove our decisions from our emotions. “Without control over your emotions, there is very little chance for profitable success in the stock market.”

Baruch often described the market as a thermometer and the economic environment as the fever. “The market does not cause economic cycles but merely reflects them and the judgments of what traders believe business and the future will be like.”

He believed no one could sell at the top and buy at the bottom (both for stocks and the market itself). “Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.” That said, Baruch said that through all of his time and research, he would develop a “feel” for when it was time to reduce positions. “I made my money by selling too soon.” While he didn’t have sell rules per se, he developed more of a sense that one gets when one trades for many years and follows the market with intense study.

“It is much harder to sell stocks correctly than to buy them correctly.” Because of the emotional aspect of trading, if a “stock went up, the average investor would hold because he wants more gains – he’s exhibiting greed. If the stock declines, he also holds on and hopes the stock will come back so he can at least sell and break even – he’s hoping against hope”. Baruch worked hard to avoid these emotions by recognizing mistakes early and taking immediate action to own up to his mistakes quickly.

Baruch believed that you had to take responsibility for your decisions. “Do not blame anybody for your mistakes and failures.” In addition, he blamed most of his losses on the failure of judgment and taking time to think. “Whatever failures I have known, whatever errors I have committed, whatever follies I have witnessed in private and public life have been the consequence of action without thought.”

It is important to “follow what the market is currently doing as opposed to following what one might personally think the market should do.” As he said, “Every man has a right to his opinion, but no man has a right to be wrong in his facts.”

Knowing your biases and weaknesses is important. “Only as you do know yourself can your brain serve you as a sharp and efficient tool. Know your own failings, passions and prejudices so you can separate them from what you see.”

Baruch was highly regarded and well-respected, but he frequently practised humility and understood the challenges of the market. He is often credited with the saying “The main purpose of the stock market is to make fools of as many men as possible”.
Taking time away from the market is necessary. He took many vacations and used the downtime to “reflect on past transactions”. For Baruch, this time away was important so he could have the peace of mind and concentration to reflect and improve his abilities. He devoted lots of hours and effort to examining past trades to find out why he lost money.

Source: Charles Kirk, The Kirk Report, 05 June 2008


  1. Thanks for sharing. All the bold quotes are great points worth pondering

  2. CW and Richard,

    Most veteran "investors/traders", after being 10 years or more in the market, may identify with what Bernard Baruch has said (in bold).

    There are only so many ways to skin a cat. At the end of the day, it's mostly old wine in new bottles.

    Terminology may be different, gurus may use different words to mean the same thing, its all same old same old.

    There are no "secrets". (If you know a secret to make money; would you tell anyone and everyone? )

    There are only market truths.

  3. He call himself a speculator. Read deeper and I think his definition is rather different from what most have I. Mind.

    1. sillyinvestor,

      Bernard Baruch made his first fortune speculating in the sugar market before age 30.

      I added the "A Stock Speculator" in the post title instead of following what most books or articles use: Investing Legend of Wall Street.

      Not going to let "wannebe investors" claim Bernard as one of their own ;)


      It's never about what we call ourselves; it's what we DO that matters.

  4. Like the title of Manager.

    Same title but pay difference can be huge.


    1. CW,

      That's why I call myself an Equities Man Whore.

      When I am the lowest of the low, there's no way to go but up!

      Let those who sneer at speculation, gambling, and trading have their day in the sun. As if calling oneself an "investor" makes one holier than thou...

      The hubris!

    2. Read somewhere Whore's earning is computed as part of nation's GDP. Not low hor.

    3. CW,

      It's EU.

      Spain has already incorporated drugs, prostitution, and smuggling into their GDP manipulations. (Do criminals issue receipts?)

      If a country's debts are too high relative to GDP (debt/equity ratio), we shore up the equity side of the equation to bring down the ratio lor!

      We are living in "interesting" times.

      Now that Spain has been knocked out of the World Cup, even a few weeks of distraction from austerity is now dashed...


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