From legendary short seller to god of American capital

Chapter 418 A sudden flash of inspiration after arduous thought: devising two simultaneous tactics

After receiving Larry's "activity funds," Mr. K happily deposited the money in the bank. That evening, he treated his two bodyguards to a nice meal, then went to the downtown area for a good time. He also met with Abel Rothstein, not only handing him a $10,000 deposit but also asking him for directions to a suitable location to turn it into a convenience store.

Afterwards, he found a hotel that offered special services and had a wonderful night's sleep.

The next day, Thursday morning at 7 o'clock, he got up wearily and rushed to the New York branch of Reading Company with two assistants.

After seeing the rabbit and greeting it, Mr. K was surprised to discover that his boss hadn't slept all night.

Larry Livingston was busy in his office the whole time. His three bodyguards even took turns resting, but he didn't sleep for a single minute. He even ate dinner in Baruch's office.

Upon hearing this news, Mr. K was slightly surprised. He walked a few steps to the door of the general manager's office, straightened his clothes, rubbed his face, and then knocked on the door.

"Come in!" came Baruch's voice from inside the door.

Mr. K opened the door, only to find that in just one night, the place had undergone tremendous changes.

The portrait behind the office desk had been temporarily removed, and now the walls were covered with a series of unintelligible charts, featuring dazzling red and blue pencil-drawn bar graphs. Mr. K had seen these charts before with Larry and Matthew and knew they were candlestick charts.

"Good morning, Mr. K!" Baruch greeted Mr. K in a friendly manner, but his dark circles under his eyes were impossible to hide.

Clearly, he also spent the whole night with Larry.

Larry Livingston, on the other hand, was staring blankly at the huge charts hanging on the wall, with an ashtray full of half-smoked cigars and several half-empty cups of cold coffee on the table.

"Boss, didn't you sleep all night?" Mr. K asked in a fawning manner.

"Oh, I slept for two hours—Old K, you're here," Larry said without turning around, gesturing for him to stand shoulder to shoulder and look at the charts. "Come and look at this chart; it shows the stock price performance of National Rope Company over the past year—"

Mr. K had seen candlestick charts before, and Larry gave him a brief explanation. He immediately understood the meaning of the candlestick chart representing the National Rope Company's stock price over the past year:

April 1892: The average stock price at that time was $102.

July 1892: The stock price reached $117, which was also the highest stock price in a year.

October 1892: The stock price fell back to $108.

January 1893: The stock price fluctuated around $102.

February 1893: The stock price fell to around $98.

March 1893: The stock price hit a low of $95.

From April 1893 to the present: the stock price has fluctuated between 94 and 97.

"Did you figure it out?" Larry asked, arms crossed.

Mr. K glanced at the candlestick chart several times, then tentatively said, "The stock price—is falling!"

"Nonsense!" Larry laughed in exasperation. "Take another look!"

Mr. K looked at it for a long time, then shook his head blankly.

Larry picked up a pencil and drew a line on the graph that started from 117 in July of last year, slanted downwards, passed through 108 in October, passed through 102 in January of this year, and extended all the way to the current 95.

"This is a downward channel," Larry said, pointing to the bottom of the chart. "But that's not the point. The point is the trading volume."

Mr. K followed Larry's finger downwards and saw a black bar below each candlestick indicating trading volume, with coordinates next to it, making the daily trading volume immediately clear.

At this moment, Baruch quietly stood behind Mr. K. Although he had repeatedly marveled at the ingenuity of these charts the previous night, standing before them now, he nodded in admiration once more—this kind of chart, called a candlestick chart, truly transformed price from a numerical dimension into a graphical dimension, unprecedented in history. All fluctuations and volume-price relationships were meticulously displayed on it.

More importantly, he gave everyone who read the charts an intuitive understanding. They could not only feel the trend of the stock, but also its pulse.

At this point, Larry began explaining to Mr. K, "Last July, when the stock price was 117, what was the average daily trading volume? 3,800 shares. In October, when the stock price was 108, the average daily trading volume rose to 5,500 shares. This January, the stock price was 102, and the average daily trading volume was 10,500 shares. Last month, the stock price was 95, and the average daily trading volume was 17,300 shares."

"Oh, oh—" Mr. K nodded, pretending that he understood.

Larry pointed to the chart. "Prices are falling, but volume is rising. What does that mean?"

Mr. K's face turned bright red, thinking to himself, "I don't understand stocks, why are you asking me?"

Baruch, standing behind him, said in a deep voice, "Someone's selling!"

“Yes,” Larry nodded, “but not the kind of dumping. It’s selling a little bit every day, preventing the price from falling too quickly and without letting the market notice. It’s like boiling a frog in lukewarm water.”

"Yes!" Mr. K quickly replied.

"Do you know who's selling it?" Larry asked again.

Mr. K continued to shake his head blankly.

"It's an insider selling!" Larry frowned as he looked at the charts. "The people who know best how much this company is worth."

They started selling last fall, selling a little each month and cashing out a bit each month. The stock price plummeted from 117 to 95, and they've been selling for a whole year, and they still haven't finished.

Baruch stood behind the two men, nodding repeatedly.

Larry suddenly turned around, looked at Mr. K, and his eyes were frighteningly bright.

What does this mean?

Mr. K thought to himself, "This is weird! Why is my boss acting like an elementary school teacher today, constantly asking me questions?"

However, he thought for a moment before answering, "It means—they have too much stock and can't sell it all at once?"

"You're half right." Larry walked back to the table, casually grabbed a cigar butt from the ashtray, lit it, and took a puff. "The other half is that they're very careful and don't want to alarm the market. If they suddenly crash the stock price, they won't be able to escape. So they have to sell slowly, slowly, while also finding people to support the price."

"Market support?" Mr. K asked.

"Why do you think the stock price is still at 95?" Larry sneered, pointing with his cigar to the latter half of the chart. "Insiders sell themselves, but the company's die-hard bulls, their connections in banks, and those paid analysts will help prop it up. They spread rumors that the company's fundamentals are fine, that they'll pay dividends next quarter, that big orders are coming in—basically, they're trying to stop retail investors from selling and make them the ones buying."

He paused, then added, "But after that 'big windfall' next Monday, we can't hold on any longer."

As he spoke, Larry sat back in his leather chair, staring at the charts and falling into deep thought once more. A moment of silence fell over the room.

Mr. K glanced at Baruch behind him for help and muttered to him in a low voice, "What's wrong with my boss today? Why is he keeping asking me these questions? How the hell am I supposed to know why?"

Baruch smiled and explained with a light laugh, "Mr. Livingston is thinking—he's not just asking you a question, he's clarifying his own thoughts. He calls it the Feynman Technique—"

After a moment, Baruch exclaimed sincerely, "Mr. Livingston is truly a genius! I've never heard of anyone so talented and so hardworking before—I was fortunate enough to witness it last night. I personally benefited greatly!"

Sycophant!

Mr. K cursed inwardly.

But looking at Baruch's expression, it seemed he wasn't faking it.

Meanwhile, Larry paid no attention to what the two of them were saying, but was instead preoccupied with the answer he had been pondering.

—They are shipping out their stock, but it's not a panic sell-off.

—They began slowly selling at a high of $117. Each sale slightly pushed the stock price down, then...

The price stabilizes at a low level, creating the illusion of a "healthy pullback" to attract bargain hunters. Then, selling continues.

But by this spring, things had changed. The stock price fell below $100, making it difficult to clear the gap and unload shares, as there were fewer and fewer potential buyers.

—From March to April, the stock price formed a consolidation pattern around $95. This consolidation pattern was the last line of defense for the major shareholders.

Thinking of this, Larry suddenly stood up and pointed to the lower edge of the candlestick chart fluctuation.

"They have to hold this position," Larry raised his voice, "because once it falls below $90, the chart will completely break down, triggering a much larger sell-off, and more importantly—"

Larry thought for a few seconds, then continued, "More importantly, many insiders have relatively high cost basis, and if the stock price crashes, their wealth will evaporate. Furthermore, the company may be using stock as collateral for loans—a sharp drop in the stock price could trigger margin calls, creating a death spiral."

Baruch and Mr. K turned to look at Larry, but he didn't seem to care.

Supporting the market requires money, a lot of money!

Larry quickly calculated in his mind that to keep the stock price above $95, the major shareholders needed to be ready to absorb selling pressure at any time. Assuming that 1% of the outstanding shares wanted to be sold each day, they would need to have $8 to $10 in cash on hand to buy them.

It would cost at least 40 to 50 a week!

Where does this money come from for a company on the verge of bankruptcy?

"Either the company is using cash flow that should be for operations to prop up the stock price—which is tantamount to drinking poison to quench thirst and hastening its demise. Or—" Larry raised his voice, "it's the insiders using their own money to stall, but that leads to the most fatal problem—a misalignment of interests!!"

Larry had completely entered a state of flow, and was desperately thinking to himself—

The most ingenious method, of course, is to borrow money from banks to maintain the stock price, and then, after the collapse and the insiders have all fled, the banks take over the bankrupt company.

However, if it's an insider manipulating the stock price—

That's a classic prisoner's dilemma!

A group of insiders conspired to manipulate the market and prop it up, but they didn't trust each other. Everyone wanted to run away first, but they were also afraid that if they ran away, the whole system would collapse and everyone would die together.

"So," Larry stood up and began pacing around the office, "if I were part of this company, what would I be most afraid of right now?"

They fear a powerful, unaffected selling pressure from the outside; they fear betrayal from within, leading to a sudden massive sell-off; they fear an undeniable negative development from the company, leaving no reason for supporting the price—

Larry abruptly stopped, his gaze falling on yesterday's trading records. Yesterday afternoon, he had sold 11,000 shares, equivalent to more than 1% of the outstanding shares, which must have alerted the major shareholders.

Suddenly, Larry had a flash of inspiration! He knew the simplest way to deal with their current situation!

"I need to lure them into revealing their weaknesses—that's not actually that difficult, the key is—cooperation!"

"Baruch!" Larry suddenly raised his voice.

Baruch stiffened. "I'm here, sir!"

"Listen carefully, for the next day, we're changing our strategy. We're going to stop selling and let the stock price rebound!"

"A rebound? Why, Mr. Livingston, we're shorting!" Baruch exclaimed in surprise.

Larry didn't care and continued, "Yes, but we need to get the stock price to around $98—by buying it up slowly and in small increments with our own money, creating the illusion that the bears are losing strength and the bulls are regaining the upper hand."

At the same time, I want you to borrow all the National Rope Company stock you can get your hands on through the most clandestine channels today and tomorrow. We'll place a sell order for 2 shares at $95 per share on Saturday morning!

"2 shares?!" Baruch gasped. "We'll drive the stock price below $90!"

"No!" Larry waved his hand to correct him, "We won't actually trade 2 shares, we're just placing that sell order."

What we need to watch is when that huge sell order appears on the price chart, and at the same time, rumors of insider financial scandals are circulating in the market —

He paused, then said, word by word, "Will that market-stabilizing alliance unite and raise a huge sum of money to buy up these 2 shares, or will they scramble to sell before those 2 shares are traded?"

Baruch thought for a few seconds. "But there are two problems. First, if prices collapse, we won't have enough leverage. Second, when will that financial scandal you mentioned occur?"

Larry nodded, his face serious. "First, you don't need to worry, because what's important to us is breaking the market stabilizers' scheme. As long as they stop stabilizing the market and don't squeeze the shorts, then we can calmly build positions below $90."

When it comes to truly shorting the market, it's not about devouring the fish head—it's about making them panic and see threats everywhere—that's when we should really teach them a lesson.

"If we can crash the stock price, whether we start at $95 or $85—it makes no difference in terms of profit."

"And what about the news you mentioned?" Baruch pressed.

"Mr. K!" Larry turned around and called out to Mr. K.

"----I am here!"

"Take $30 right now and the legal team I've been in contact with, and head straight to the Wall Street Journal to invest it as we agreed. Make sure the investment process is completed before noon; I need to give them the details this afternoon."

"Some exciting news!" Larry said with a laugh.