Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Lessons from "The Witch from Wall Street"

What can a woman born in New England in 1834 teach us about investing in today's market?  Plenty.

Hetty Green was one of the savviest investors of all time. Her steely resolve, unwavering discipline and glacial patience are every bit as important to market success today as they were a hundred years ago.

And yet Hetty -- once the richest woman in the world -- remains mostly a footnote to financial history, a curious bit of eccentric Wall Street lore. That's too bad. There's much to be learned from her.

Hetty's father, "Black Hawk" Robinson, was a notoriously hard-driving New Bedford whaling magnate, and he imbued his daughter with his business acumen and insight into the darker side of human nature. His was a not a rose-tinted, sentimental perspective. Black Hawk taught his daughter never to owe anyone anything, not even a kindness. Hetty wasn't merely tough, she was ruthless. "The Witch of Wall Street" once foreclosed on a church. When she died in 1916, she was worth $100 million, a fortune to rival the richest men of her day.

Hetty played rough in a rough game. The unregulated markets -- where Hetty was absolutely the only woman -- were a dangerous environment for the most seasoned and scurrilous traders. Even the most cunning operators flamed out from time to time. Not Hetty. She routinely beat the robber barons at their own game.

Addison Cammack, for example, was a successful cotton trader who had moved from Kentucky to expand his fortune on Wall Street. Using his connections, he learned that the Louisville & Nashville Railroad was about to cut its dividend. Armed with this insider information, he shorted the stock.

Short sellers borrow stock, then sell it. When the price goes down, they buy back the shares at the reduced price and keep the difference. They're still buying low and selling high, only in reverse order. The risk, however, is that the stock will go up, not down, and then the short seller will be forced to buy back the shares for more than he initially received for them.

Insider trading -- illegal today -- helped mitigate the downside risk. And Cammack's tip was spot on: The railroad did indeed cut its dividend, and the stock plummeted. All that remained was for Cammack to buy back the shares and count his money.

But there were no shares to be had -- at any price. Hetty Green, who had even better insider information than Cammack, somehow figured out what he was up to. So she cornered the market by buying every share she could find. Cammack was in a fix. It was a textbook short squeeze.

Hetty let it leak that she had the 40,000 shares Cammack needed, but she made him sweat for a few days before granting him an audience. When he arrived, she was merciless. It was not a negotiation so much as an execution. She demanded $10 a share above her cost -- regardless of the market price, which had subsequently fallen fully 30 points. Hetty decimated Cammack and pocketed a $400,000 profit.

True story.

Here's the point that we should take to heart in today's or indeed in any market: You can sell on good information, or you can buy on better information.

As markets lose value, investors lose patience. They forget the fundamental reasoning behind their stock purchases as fear displaces reason. Investors see the value of their portfolios eroding, and they move to limit their losses by selling. The price could drop to zero, after all, and sometimes it feels as if that's imminent, so let's sell before it gets there. It's an understandable emotional response.

These investors, to be sure, are selling on good -- that is, accurate -- information.

In the short term, it makes sense. In the long term, selling in down markets only compounds the problem.

#-ad_banner_2-#That's because there is better -- more prescient -- information out there. Savvy operators like Hetty Green are all too happy to buy when everyone else is unloading at ridiculously cheap prices. They know the time will come when they get to dictate the price, just as Hetty did to Addison Cammack.

The trick is to ignore what the price is and focus on what the price will be. It's purely a question of perspective. Hetty didn't care what the price of Louisville & Nashville Railroad was or what it did. It didn't matter in the slightest. I doubt she monitored the ticker in her borrowed office in the Chemical Bank. (She was far too miserly to pay for an office.)

After all, Hetty knew what her stock was going to be worth later.  Hetty Green, like every successful investor before her and like every successful investor to follow in her footsteps, never sold the present. She always bought the future.

That's the mental ammunition you need. Remember why you invested in the first place. Hetty herself summed it up thus: "There is no secret in fortune making. All you have to do is buy cheap and sell dear, act with thrift and shrewdness and be persistent." Sell your stocks when they're up, not when they're down.