This week, we are looking at ten tips from the legendary Jesse Livermore, from the book Reminiscences of a Stock Operator. If you haven’t read this book – I’d strongly recommend it. It’s entertaining, easily readable, and packed full of gems.
The story of Jesse Livermore is both a fascinating and an intensely sad one, for he would eventually kill himself. Some have suggested depression, some have suggested that he was broke. We may never know the real reason.
Livermore started trading young, tracking the ticker numbers in his journal, and he realised that there was nothing random about them at all. Certain patterns existed. The bucket shops eventually all banned him, because he kept winning! In 1899, he decided to up his game and moved to New York. However, he lost everything because the tickers lagged behind the real numbers.
Livermore made huge amounts of money several times, only to lose it again and again. He made a fortune during the Crash in 1929, but struggled to hold onto it. In 1940, he shot himself in the cloakroom of The Sherry-Netherland in the Upper East Side.
“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.”
Many readers love to speculate, and this can be highly profitable. In the AIM market, we’re playing against other humans, many of whom don’t do their research, gamble, and are unable to control their emotions. For the astute speculator, profits can be made long and short.
In the first part of our review of Livermore’s approach – which can be found here – we looked at his thoughts on losses, the predictability of markets, and pricing, among other areas. Here, we look at five more key tips:
1. “Remember this: when you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes.”
Boredom trading was a problem for me; I felt the need for action on a daily basis. Traders should trade when the market conditions are advantageous to them, otherwise if we stare at the tape all day we’ll end up feeding it. A cheetah is the fastest animal on the planet, but they run sparingly. They wait for the right moment, and strike when they are sure of victory. Be like the cheetah.
2. “All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis.”
As has been said, patterns repeat. They repeat because people cannot control their own emotions. If you are emotional about a stock – you’re in too large or losing too much. Sell down to the sleeping point. There is nothing wrong with trimming winners – a winner today may not be a winner tomorrow, and profits are not profits until they are banked.
Nobody ever made a loss taking a profit, but nobody ever caught large moves by taking scraps.
The last picture of Jesse Livermore ever taken, on Wednesday 27th of November, 1940. Livermore was 63 when he committed suicide the next day.
3. “It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”
Being right is one thing. But being able to sit tight is another. If you can be both right and patient, then you will do very well.
4. “He should accumulate his line on the way up. Let him buy one-fifth of his full line. If that does not show him a profit he must not increase his holdings because he has obviously begun wrong; he is wrong temporarily and there is no profit in being wrong at any time.”
People love to average down, but nobody likes to average up. I love aberaging up, because I am financing larger risks with paper profits. I am adding to the right side of the trade, rather than fighting the trend – and if you want to follow a trend you need to stick with it. Sometimes the best stock to buy is one you already own, even if it is up in price.
5. “If you do not know who you are, the stock market is an expensive place to find out.”
I believe that the trading arena is the greatest sport on the planet. Many come, in hopes of quick riches and easy work, and most fall by the wayside when they realise what is required of them.
You are required to work hard. If there was such a thing as easy money, nobody would be trying to force it into your pocket.
You are required to be objective. If one can’t exercise discipline alongside remaining rational, then your emotions will control you and you can wave your stake goodbye. This is what tripped Jesse Livermore up three times – despite having made huge amounts of wealth from nothing. The trick is not getting rich, but staying rich.
One final quote from Livermore:
“The human side of every person is the greatest enemy of the average investor or speculator.”
Don’t underestimate your own emotions and biases.
A part of Livermore’s eight-page suicide note:
“My dear Nina: Can’t help it. Things have been bad with me. I am tired of fighting. Can’t carry on any longer. This is the only way out. I am unworthy of your love. I am a failure. I am truly sorry, but this is the only way out for me. Love Laurie.”
Despite all of his successes, Livermore believed he was a failure. Livermore’s net worth put at his biographer was minus $350,000. However, many years later, his son reported to the same biographer that he saw around $3 million in cash in bags lying around the house. Who the money belonged to, it is not known.
Livermore’s death is a stark reminder that money isn’t everything, and that we should not neglect our personal lives and our family relationships in our pursuit of trading.
Author Michael Taylor’s website
www.shiftingshares.com contains numerous tutorials on how to trade and invest as well as his free book – ‘How to Make Six Figures in Stocks’.