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The author of Reminiscences of a Stock Operator discussed his experiences as an early trader and then later on, when he had determined how to really profit from his decisions. He described it as follows:
I made up my mind to be wise and play carefully, conservatively. Everybody knew that the way to do that was to take profits and buy back your stocks on reactions. And that is precisely what I did, or rather what I tried to do; for I often took profits and waited for a reaction that never came. And I saw my stock go kiting up ten points more and I am sitting there with my four-point profit safe in my conservative pocket. They say you never grow poor taking profits. No, you don't. But neither do you grow rich taking a four-point profit in a bull market. I think I took a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, "Well, you know this is a bull market." he really meant to tell them that the big money was not in the individual fluctuations but in the main movements--that is, not in reading the tape but in sizing up the entire market and its trend.
And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: 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. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn.
That is about all I learned--to study general conditions, to take a position and stick to it. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps!
When I am long of stocks it is because my reading of conditions has made me bullish. But you find many people, reputed to be intelligent, who are bullish because they have stocks. I do not allow my possessions--or my prepossessions either--to do any thinking for me. That is why I repeat that I never argue with the tape. To be angry at the market because it unexpectedly or even illogically goes against you is like getting mad at your lungs because you have pneumonia.
Mr. Livermore believed that tape reading was not as complicated as it seemed to many traders. He used the tape to determine if the tendency of prices, the trend, indicated that it was time to buy (go long) or sell (go short). He wanted to know the direction of the market. He described it as follows:
Prices, we know, will move either up or down according to the resistance they encounter. For purposes of easy explanation we will say that prices, like everything else, move along the line of least resistance. They will do whatever comes easiest, therefore they will go up if there is less resistance to an advance than to a decline; and vice versa.
In addition, Livermore advised traders to be patient and wait until the market direction was very clear and then to join in the movement, being careful not to get caught at the top of a market ready to crash. Getting into the market too early before the trend has become obvious and staying in the market after the trend has started to reverse are the classic ways to lose your money.
He put it best when he wrote, "One of the most helpful things that anybody can learn is to give up trying to catch the last eighth--or the first. These two are the most expensive eighths in the world." He references eighths (12.5 cents) because in 1923 stock prices were posted in fractions, not in decimals like today. His message was, essentially, don't anticipate a market's trend and jump in too early and don't overstay the trend's movement. Give up trying to capture the first or the last little bit of profit, going in or coming out of your trading position. Jesse Livermore also recommended an individual trade on his or her own, avoiding advice and tips as much as possible. It is said that one of his favorite books was Charles Mackay's 1841 classic, Extraordinary Popular Delusions and the Madness of Crowds, which we studied in an earlier blog.
Although Livermore claimed authorship of Reminiscences, I believe that the book was actually written by Edwin Lefevre in collaboration with him. To me, there is a vast difference in writing styles between Reminiscences and the book, How To Trade In Stocks, written by Jesse Livermore in 1940, the year of his death. A recent paperback edition of How To Trade In Stocks, with updates and commentary by Richard Smitten, was published by McGraw-Hill in 2006. The book includes a collection of Livermore's trading records and shows how he calculated his trades. I must confess I did not completely understand it.
This concludes our look at one of the most famous Wall Street traders of all time.
Excerpts from Reminiscences of a Stock Operator, Edwin Lefevre, 1923, republished by John Wiley & Sons, Inc. in the Wiley Investment Classics series
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