How To Make Money On Wall Street

Watch out for the old men hobbling on their canes down Wall Street, says Henry Clews.

When you see these men, you need to find your broker right away and buy all the stocks you can.

Henry Clews was one of the most important investment managers of the 1800s. They called him the sage of Wall Street. I’m reading his book this week. The second chapter of the book is called ‘How to make money on Wall Street.’ It is here that I found this unusual buy indicator.

Here’s Clews’ theory:

On Wall Street, only the best traders survive. Or as Clew’s says, “Few [traders] gain sufficient experience in Wall Street to command success until they reach that period in life in which they have one foot in the grave.”

The thing is, in the late 1800s, there were no telephones. If you wanted to trade stocks, you had to physically leave your house and wander up to your broker’s office on Wall Street.

So as the legendary traders grew old and frail, they appeared much less frequently on the Street. They’d sooner stay at home by the fire with a good book and a tumbler of scotch, I guess, than duke it out in the pits with all those younger traders.

That doesn’t mean the old timers lost interest in making profits. On the contrary. Instead of walking to the market every day, they’d simply wait for the best opportunities. This approach reminds me of the famous Jim Rogers quote:

So how did the veterans do it? They simply waited for panic to grip the market, then they’d hobble down to Wall Street and “buy good stocks to the extent of their bank balances, which have been permitted to accumulate for just such an emergency.”

Thus, when veterans hobbled down Wall Street, Clews knew he had an exceptional buying opportunity.

We can use Clews’ theory to formulate an investing strategy:

Let’s define a panic as a 10% or greater decline in the Dow Jones Industrial Average over a five-day period.

According to data supplied by Victor Niederhoffer, there have been 26 panics on Wall Street since 1901. If you’d bought stocks after each panic and held for the following two hundred days, returns averaged 14%, almost double the long-term average stock market return.

We found something else when studying these statistics. If you’d followed this strategy since 1932, you’d have lost money only once – a loss of 6% in 1940 – and average returns over the next two hundred days reached almost 30%.

Conclusion: Wait for Wall Street to panic and then buy as many good-quality stocks as you can.

The problem is, panics don’t happen very often anymore. They’ve only occurred five times in the last sixty years. The last time the Dow fell 10% in five days was after the terrorist attacks in September 2001, almost six years ago.

At that time, I personally bet big on a stock market rally. It was one of the best trades I ever made.

Henry Clews would be proud.

Good investing,

Tom