The Erie Corner (November 1868)
Daniel Drew and Jay Gould teamed up and worked out a scheme to short the Erie Railroad and other stocks. They started shorting heavily in a bear raid, another term for a bull squeeze. They then tried to force the interest rates up and caused a general stock market decline by withdrawing lots of money from New York banks. Jay was a lot more aggressive and ruthless than Daniel, who was skeptical that they could really have a significant impact on interest rates and, even so, if that would affect the stock market significantly in the short term.
Daniel Drew began to waver in withdrawing money from the banks. Jay Gould grew angry at Daniel Drew for going soft and switched his strategy from a bear raid to a bull run; he simply switched from short selling to buying up stock. Drew had no idea that he had been betrayed and kept on selling short the Erie Railroad stock, completely unaware that it was actually his “trusted partner” who was buying it all up.
The share price for Erie Railroad stock dropped from $50 to $40 in October and went down further to $35 on November 13, but by then Gould had secretly bought up the entire float of stock. On November 16, the price suddenly jumped to $55 and caught Drew short 70,000 shares. The lesson behind this corner is that sometimes a manipulation will tank in price — this is known as a shake- out — before running up dramatically in price.
BIO: Doc Brown is a national expert on the stock market. His courses “How to Make a Million Dollar Portfolio from Scratch” at the Oxford Club is a national bestseller. Dr. Brown’s research appears in some of the most prestigious academic journals in the field of finance. See Journal of Financial Research and Financial Management. Scott is an associate professor of finance in the Graduate School of Business at the University of Puerto Rico.
TRAP: Shakeouts are forceful breaks in an uptrend. They are gut wrenching and take knowl- edge and experience to spot. If you don’t learn stock investing well you will buy and sell stock at the wrong prices!
SURVIVAL RULE: Learn how to identify and patiently sit through shakeouts!
NOTE: Sharp, R., 1989, The Lore and Legends of Wall Street, Homewood, IL.: Dow Jones-Irwin.
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