The Stutz Motor Company of America, Inc. Corner (1920)
A well-known short squeeze market manipulator in the early 20th century was Allan Ryan. He bought a controlling interest in the Stutz Motor Company and acquired a position on the board of directors. Mr. Stutz, the founder, hated Ryan for his dishonest business practices and sold out of the company — a bitter departure for an automobile legend whose his cars are still prized by collectors today. Ryan began marketing Stutz cars with overly-optimistic promises beyond what the company could actually deliver.
Ryan continued to buy the float, and the company’s stock price rose from $100 to $134 per share. Ryan was informed that short sellers, who included some prominent members of the New York Stock Exchange, had taken action because the price had risen too high. To counter the bears, Ryan borrowed a substantial amount of money to buy additional shares of the company stock. At first, despite Ryan’s large purchase, the stock price went down — since the short-selling pressure was high — but the price finally responded upward in March, reaching $391.
The NYSE Shut Stutz Down
Toward the end of March, short sellers were selling stock that had to be borrowed from Ryan because he had accumulated nearly all of the floating shares. On March 31, the Governing committee of the NYSE announced it had decided to suspend all dealings in Stutz Motor stock for an indefinite period due to irregular price movements.
On April 20, the Protective Committee of the NYSE announced that it was ready to accept impartial mediation on a negotiated-settlement price that led to a settlement for the short sellers at the price of $550. Shortly after this fiasco, the NYSE quietly amended its constitution by allowing the governing committee to postpone the time for deliveries on short contracts with the purpose of preventing corners.
Ryan’s bad management eventually ran Stutz Motor Company into bankruptcy. What I want you to take from this is that you should never buy a stock just because you like the product. Stutz automobiles were incredibly well built and are prized by collectors today. If you buy a stock just because you like the product, you will then hesitate too long to sell when you should or worse buy when the common stock price is too high.
– Doc Brown
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.
FACT: It costs on average $200,000 to raise a child from birth to 18 years age —that’s without college… ouch!
SURVIVAL RULE: Never buy a stock just because you like the product!
NOTE: Brooks, J., 1969, Once in a Golconda: A True Drama of Wall Street 1920-1938, New York: Harper and Row.
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