Daniel Williamson gives Larry Livingston twenty-five thousand dollars to trade with. Three weeks later, Livingston has earned a hundred and twelve thousand dollars in profit. He offers to repay the advance. Williamson refuses.
Livingston is the fictionalized narrator of Reminiscences of a Stock Operator. He can afford to repay the favor, but gratitude leaves him reluctant to withdraw his profits or disregard Williamson's wishes. Independence means keeping both his reasons for a trade and the authority to change it, while understanding what the person offering help stands to gain.
A profitable account, somebody else's decisions
Williamson has offered him the money after heavy losses and debt, requiring him to trade through his firm. He openly explains a business reason. Wealthy clients have stock to sell. Livingston's reputation as an aggressive short seller will make observers unsure whose shares the firm is selling. His presence helps conceal the clients' liquidation.
Then Williamson reverses one of Livingston's trades before telling him. Livingston has sold a railroad short, expecting to buy back the shares more cheaply. Williamson buys them back and purchases shares for his account instead. His brother-in-law heads the railroad, lending apparent authority to the intervention. Livingston still expects a decline, but thanks him. His profits disappear, and he owes the firm money.
Williamson promises to repair the damage if Livingston stops trading independently. He agrees. About six months later, credit slips show the debt gone and a small balance remaining. Another purchase puts him in debt again, followed by profits from other accounts whose trades he learns about afterward. The helpful relationship has taken practical control of his trading.
Only after leaving does Livingston infer another motive. Williamson had known earlier that his brother-in-law was terminally ill. Livingston believes the estate needed to sell large holdings in a falling market, and that keeping him from becoming a powerful independent seller protected those sales. Even paying his losses could have been cheaper than letting him trade freely. Meanwhile, his chance to rebuild in that favorable market has passed.
Letting someone else supply the reasons
An earlier cotton disaster begins with Percy Thomas, an expert Livingston admires. He declines Thomas's proposed partnership, but their friendly conversations continue. Thomas has detailed private figures that Livingston cannot disprove. First he doubts his own bearish judgment. Eventually he accepts Thomas's information as superior, buys back his shorts and becomes a buyer. He has adopted someone else's premises without independently establishing the case for his new position.
When cotton behaves badly, he holds on and buys more, partly to keep its price from falling. He even sells profitable wheat while keeping the losing cotton. By the time he closes, more than nine-tenths of his stake is gone. Livingston presents his own susceptibility to persuasion as the failure; he does not establish that Thomas intended to deceive him. Admiration has survived evidence that would normally have made him leave.
What the other side earns
Some intermediaries have a direct interest in customers losing. The bucket shops where Livingston began take wagers on quoted prices without buying shares for customers. Customer losses become house earnings, so a consistent winner is unwelcome. Shops exclude him. He investigates whether firms pay winners and later has to fight to collect. A profitable ticket is worth little if the firm refuses payment.
An instruction can fail too. After a private Borneo Tin tip, Mrs. Livingston tells her broker she wants to risk only five hundred dollars and owe nothing beyond it. When the trade goes against her, he delays selling because he wants to consult her. Then he asks for more money to carry the shares. Her intended limit has failed because he did not carry out her instruction. The final brokerage loss is not given.
In Livingston's account of regular brokerage, advice can pay immediately through commissions. A broker recommends shares that insiders have asked the firm to sell. The commission arrives before the customer knows whether the purchase will turn out well. He also describes insiders offering influential employees stock below the quoted price. Those employees have a reason to promote it, creating buyers for the insiders' larger holdings. The recommendation helps somebody else get out.
Advice that keeps the buyer waiting
A supposedly private tip can travel through many recipients, each buying before passing it along. A famous trader's name encourages belief. The chain can bring a crowd of buyers to people trying to sell. Livingston also describes reports attributed to an unnamed prominent director, giving a claim apparent authority while hiding responsibility. Some statements are invented without consulting an insider. A sincere mistake and a selling story can sound equally confident.
Reassurance remains useful after the purchase. In Livingston's stories, falling prices get explained as insiders quietly accumulating shares. Bad results can then strengthen attachment to the tip. Claims that hostile short sellers are attacking encourage holders to wait for their defeat, while insiders keep selling. Such stories prevent sales as well as attract purchases. A company's prestige and continued dividends do not settle whether its business is deteriorating.
The person who supplies a reason to buy may never tell the buyer when to leave. Even an insider needs buyers for an exit. Livingston's independence depends on continuing to examine his reasons and remaining free to act when they fail, however welcome the original help felt.
Three things to keep
Gratitude can surrender control long after the financial need has passed.
A recommendation's value depends on its reasons, incentives and actual execution.
The person supplying a reason to buy may withhold the reason to leave.