A 170-Year-Old Strategy to Boost Your Returns
Doc's note: Jacob Little was one of the first great speculators in the railroad industry. And he took a risky bet to gain control of a market darling.
As Mike DiBiase – co-editor of Stansberry's Credit Opportunities – explains in today's issue, you can use a similar strategy to actually reduce your risk...
The "Happy Family" thought they had Jacob Little cornered... but the "Great Bear of Wall Street" had a trick up his sleeve...
Little went to Wall Street in 1817 as a young man with a Quaker upbringing and nothing in his pockets. Through decades of 18-hour workdays and the knack for making winning trades, he became one of the richest men on Wall Street.
You see, Little loved to speculate in stocks. He even invested in distressed debt. But he earned his nickname "Great Bear of Wall Street" because he primarily made his fortune "bearing" stocks. That was the term used back then for short selling, or making money when stock prices fall.
Little loved action and making big bets. He lost his fortune and then made it back a couple different times.
And he aimed to make another fortune on railroads...
Little was one of the first great speculators in the industry. He bought up railroad stocks as they started their initial build-out and into the 1850s.
That's when Little figured the railroad trade had become overdone. So he began shorting market darling Erie Railroad Company, the railroad that connected New Jersey and New York.
At the time, shorting was done by selling six-to-12-month option contracts at a fixed price with the promise to deliver stock later. If the price fell, Little would pocket the difference. If the price rose, he would have to pay the difference. (Short-selling mechanics are different today – though the results are similar.)
Little took a massive short position and started flooding the market with contracts to deliver Erie stock at a later date. Eventually, he amassed a short position of around two-thirds of Erie's stock.
That made the big broker-dealer owners of Erie nervous. So they teamed together and formed the "Happy Family" coalition. Their plan was to corner Erie's stock, move prices drastically higher... and saddle Little with an enormous loss.
That kind of conspiracy is market manipulation. It's illegal today. But back then, it was normal practice.
With millions of dollars at their disposal, the Happy Family entered the market as rampant bulls. They bought every Erie share they could get their hands on, squeezing prices higher.
Happy Family member Nelson Robinson went onto the New York Stock Exchange and started calling out cash offers to buy Erie.
Day by day, he took the price higher. But it got to the point where no one took his offers. There wasn't one share left in the market. The Happy Family had cornered Erie's stock.
In response, Little increased his short bet.
The Happy Family was stunned. Little was about to be wiped out with a loss of at least $1 million. (That's $125 million today based on the equivalent gold value.)
Finally, the day came for Little to pay up. His shorted shares were due. Back then, that was done by a formal transfer in person.
First, Little showed up to Erie's office. Tall and slim with a commanding appearance, his confidence was both perplexing and disconcerting.
Little then presented Erie management with a large bundle of convertible-bond certificates that he had purchased through London banks. He demanded Erie convert his bonds into stock.
Erie had no choice but to comply...
Instead of buying the shares on the open market and taking a massive hit on the difference, management had to grant him shares at the preset conversion price.
Little then fulfilled his obligations... and turned his loss into more than a $100,000 windfall. (That's at least $12.5 million today based on the equivalent gold value.)
It was the first move of its kind. In one masterstroke, Little broke the Happy Family corner on Erie stock with convertible bonds... one of the many feats that cemented him as a Wall Street legend.
Little's story illustrates the power of convertible bonds. The option of converting your bonds into stock makes convertible bonds a shrewd way for bond investors to earn big profits. And that wasn't just true in Little's time. It works that way today, too.
Sometimes long shots happen. Buying a convertible bond at a fair price can provide a handsome payout – with limited downside.
Good investing,
Mike DiBiase
Editor's note: Mike says that ordinary investors are about to get a chance at investment bargains of a lifetime. This is all due to the incoming "Wall Street Fire Sale" that's going to flood the market with billions – possibly trillions – of dollars' worth of heavily discounted corporate bonds.