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Industrial Stocks Produce a Millionaire (1897–1909): Bernard Barch

Industrial Stocks Produce a Millionaire
(1897–1909)

 

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Bernard Baruch Considered the Action of the Market
when Making His Plans

Financier and Politician. Known by the nickname “The Lonely Lion of Wall Street”. He concluded his studies at City College of New York, later becoming a broker at an important New York company, where he acquired much experience in the business world.  With the newly adopted Dow Industrial Average for measuring the overall
performance of the market in place, stock operators could better gauge the
actions of the market. One of those early stock operators was Bernard
Baruch. Baruch had spent the early part of his trading career
making most of the same mistakes many investors make in the market. He
wasn’t doing his own research, he lacked experience and knowledge, and he
kept listening to others’ so-called opinions. He suffered many losses during
his first six or so years being active in the market. But his refusal to give up
and his constant study of his mistakes and how the market actually worked
would eventually pay off for him.


The market was basically flat from January through May of 1897; the
economy was still adjusting and improving as it was coming out of a recession
period from the prior few years. In June 1897 the market began to rise
sharply and did so for the next four straight months. As mentioned, business
conditions became positive as the economy was coming off a depression type
period from early 1896. It was very common during those times to have
sharp recession- or depression-like periods due to “panics” and then have
strong reversals to the upside very soon afterward. By early 1897 banking,
commerce, railroads and heavy industry were resuming activities at a rapid
pace. The outlook for the country was improving steadily, and many business
leaders were gaining confidence. It was a speculative period, and the
markets were not regulated with many of the rules that exist today. Many
who participated in the markets were wealthy and had access to information
that the general public mostly lacked, but interest in the market was greatly
improving. America was viewed as the next economic strength as it began to
compete with Europe at a fast pace. The strength in railroads, agriculture
and industrial sectors led to an exuberant and positive attitude. Two benchmark
figures at the time, which were steel and gold, kept increasing in price.

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Bankers kept things in order in those days, and the most influential banker
of the era was J. P. Morgan. Merger activity was very strong, as companies
would combine operations to create “trusts.” There were over 3,000 mergers
from 1895–1904. In 1899 alone, there were 1,208 mergers. Some of the more
notable corporations that were formed at that time due to industrial combinations
consisted of Allis-Chambers, Amalgamated Copper, American Beet
Sugar, American Car & Foundry, United Fruit and Republic Iron & Steel.


The increase in merger activity created opportunities for many stock market
participants. Times were good as America headed for the 20th century.

From Baruch’s limited experience and as his observation of market activity
began to improve, he noticed that many times during his era the market would
experience many downtrending cycles only to bounce right back with strong
upward reversals. He also noticed that the best profitable opportunities presented
themselves when these reversals to the upside would begin. He thought
that if he could time his purchases of new leaders that possessed very strong
fundamentals when the market began to turn he could reap positive returns.

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His constant observation and study of the market alerted him to the
change in trend that was beginning to occur in the spring of 1897, and he
purchased 100 shares of American Sugar Refining, which was a leading stock
at the time and one of the representative stocks of the recently created Dow
Industrial Average. He rode this stock up for a strong six months, as the market
was strong at that time. He also used a pyramiding strategy to buy more
of the stock as American Sugar kept increasing in price. His leveraging of a
strong stock, as it kept moving up in price, only compounded his returns.
Baruch ended up making a profit of $60,000 on that stock. The profit was
substantial enough for him to purchase a seat on the Exchange. This was also
the turning point for Baruch as it related to his stock trading. His ever-observant
eye to the market, his study of the strong fundamentals of the
stock he purchased, and his understanding of the strong economic and perceived
perception of strength and profitable times ahead for businesses all
combined to create what he thought was a solid speculative opportunity.

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Baruch was one of the most successful stock market traders ever, and
this transaction reiterated that his favorite time to purchase stocks was when
the general market was beginning a strong upward trend after coming off a
low market period. His observation skills and experience from watching and
participating in the markets since 1891 gave him the confidence to take
advantage of the strong opportunities when the market presented them. As
mentioned earlier, he made most of the errors many market participants
make in the market over the prior six years when he was starting out and
learning exactly how the market operated. But he learned from his mistakes,
decided he would never give up, and kept fast to his study. He was an avid
reader, and he studied the fundamentals of companies extensively before he
made any trade. He also learned how to wait for the market to confirm its
new trend, and then he would trade with that trend. This he learned from
the prior cycles in the market that had been occurring from 1891 to the then
present time of 1897. His patience paid off in 1897, and with his pyramiding
strategy to buy more shares as his winner kept rising in price, he kept a close
eye on this big winner, making sure he would not give back his hard-earned
profits. He also learned how to sell a good stock as it kept rising in price.

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Remember, he always would learn from his prior mistakes in order to better
his timing for purchases and sales of his holdings. The market flattened out and actually began to decline in the fall of 1897. Baruch made sure not to give back his hard-earned profits, and the actions of the market and his stock were huge warning signs to him that it was time to act. He therefore cashed in before the stock would break hard.
His objective was to make a profitable return and not to declare himself a
long-term or short-term trader. He just followed the actions of the stock and
the market and made the right timing and profit decisions.

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Baruch’s Newly Established Rules Lead to More Profits,
The market declined from September 1897 through early April 1898. It bottomed
in April 1898 and did not touch this level again until October 1903,
51⁄2 years later, due to the Rich Man’s Panic (as it was called) of 1903. From
April 1898 to April 1899 the market was in a strong upward trend with the
only correction occurring in August and September of 1898. Coming off
this brief correction the market rose from September 1898 to April 1899
from near 50 to near 75, or nearly 50%. One important item to understand
is how the market seemed to anticipate the upcoming recession that would
begin in June 1899, as the market topped and then began to decline. This
helps confirm the forecasting ability that the market will continue to show
as we go through the decades. It will continuously seem to decline and/or
flatten out numerous times before an actual recession begins. And it will
usually begin to turn upwards inside the recession before the recession ends
and forecast better times ahead for American businesses.

Baruch discovered through his study that the market actually reflected
the economic conditions of the day, rather than caused them.He noted that the
market would act like a thermometer and the economy was more like a fever.
It’s important to understand this distinction. All the economic activity and
factors that affect that activity (including interest rates, inflation, productivity,
and profitability) taking place and being caused by supply and demand would
be reflected in the stock market due to investors’ expectations of current and
future profitability. As the market constantly discounts the future to the
present, it becomes a reliable resource as a forecasting tool. This could be seen
all the way back to the late 1890s and early 1900s, and we will see this parallel
as we move through each decade to come.

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In early spring of 1899 while the market was still strong, Baruch purchased
shares of B.R.T. (Brooklyn Rapid Transit Company) as a new executive
manager had taken control months before and improvements were beginning
to show in the company’s results. B.R.T. was a leading stock at that time; its
revenues were rising fast; and the stock price was reflecting the strong upward
market environment, the leadership of the stock, and its strong fundamentals.
By April the price of B.R.T. hit $137 and then began to pull back. Soon thereafter
the new executive in charge died unexpectedly, a panic hit the stock, and
it declined to near $100. But J. P.Morgan and others moved in to support the
stock, and the price moved back up to hit $115. Although Baruch held on
through this uncertain time, he did notice that as the months went on the
market began to flatten and the price of B.R.T. began to stall as well. He
decided to sell and retain his profit, due to his observation of the topping price
and volume action within the stock. When he sold, he retained a profit of
approximately $60,000. By the end of 1899 B.R.T. had declined to the $60s, as
the market broke hard, and B.R.T. would never again reach the peak it had
established earlier in the year. Here again we see Baruch latching on to one of
the leaders of his day, as the market was moving upward. He also always would
buy only fundamentally strong stocks that had good prospects for their products
and future profits. He also liked to sell his winners on the way up, or in
this case, when they began to top or stall in order to realize his profits. Again,
his time frame for holding the stock didn’t matter — it was the action within
the market and his holding that alerted him of what action to take.

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