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Legendary speculator Jesse
Livermore is surely one of the most fascinating characters in all of
financial-market history.
About a century ago Jesse
Livermore blossomed into one of the most celebrated speculators of all
time. He was trading heavily in the early decades of the 1900s, a
wondrous era to speculate in stocks. His renowned exploits are still
viewed with great awe and reverence by today’s elite speculators and
his towering speculation wisdom will stand tall for ages to come.
If you are interested in
more background information on Jesse Livermore and my reasons behind writing
this series of essays on the man’s awesome speculation wisdom, you may
wish to skim the introduction of the first essay in this series.
Livermore’s
exploits were recorded in the greatest book on speculation of all time.
Originally published in 1923, it is called “Reminiscences of a Stock
Operator” and was written by a gifted financial journalist named Edwin Lefevre. Lefevre penned
the account as if from the first-person perspective of a fictional trader
named Larry Livingston. As Lefevre had spent
weeks extensively interviewing Jesse Livermore, market historians are
virtually unanimous in viewing Lefevre’s
classic book as a thinly-disguised biography of Livermore’s trading life.
Today “Reminiscences
of a Stock Operator” is fondly read with awe by speculators of all
levels and abilities all around the globe. I have personally read the
book many times and I try to re-read it at least once a year now. The
speculation wisdom contained within these magical pages is just awesome and
truly priceless for all speculators to digest.
If you are interested in
speculation and you haven’t read the book you owe it to yourself to buy
it today at Amazon or Barnes & Noble. I can
almost guarantee it will forever change you as a speculator and help you soar
to new heights of understanding of the game and achieving real-world success.
Jesse Livermore’s
words and experiences are so endearing and powerful because he presents
himself as just another mere mortal like you and I, with hopes, fears, and
frailties. He is brutally honest in critiquing his own evolution as a
speculator and thoroughly explaining his own mistakes and the great wisdom
they ultimately led to.
In this series of essays
Jesse Livermore’s wisdom is presented chronologically from the
book. All the bold-faced passages below are his words directly out of
Lefevre’s book, while the following normal text is my own feeble
thoughts and commentary attempting to pull Livermore’s wisdom a century into the
future to today. Before every quote below, the chapter in
“Reminiscences” from which it is pulled is noted so you can
quickly find it and dig deeper by reading the valuable surrounding background
context if you wish.
I hope and pray that you find
Jesse Livermore’s awesome wisdom as exciting and valuable as I have!
(Chapter II) … “The
desire for constant action irrespective of underlying conditions is
responsible for many losses in Wall Street even among the professionals, who
feel that they must take home some money every day, as though they were
working for regular wages.”
This classic Jesse
Livermore quote picks up just where we left off in the first essay, on the
perpetually popular game of day trading. Livermore was not fond of day trading and
he touches on the great dangers of it many times in his discourses. He
advocated a much more patient strategic speculation approach. This
broader perspective and slower pace of trading helped him to ultimately
harvest far higher profits and avoid the immense stress and pitfalls of
ultra-short-term speculation.
Livermore believed that a
speculator should diligently study the markets and then patiently stalk any
potential trades. He felt that speculators had a much greater
probability of succeeding if they intelligently defined a potential entry
point in advance through careful research and then patiently waited for it to
actually come to pass in the real-world markets. This led to staking intelligent
positions and eliminated the possibility of the dangerous unthinking
“impulse trading” so common in day trading.
Once his carefully-planned
positions were deployed, Livermore
advocated the strategic side of short-term speculation, holding carefully
targeted positions through an entire bullish or bearish swing of the
markets. Sometimes these swings lasted weeks, usually they lasted
months, and occasionally they lasted more than a year. Over and over
Jesse Livermore emphasizes that these strategic-oriented position trades had
both the highest probability of success and the highest potential profits as
rewards for being right.
Today’s speculators
can learn a great lesson from the Livermore
quote above. The really big wins in trading don’t come out of
daily scalping, but out of diligently riding entire major bullish and bearish
market swings. Jesse Livermore wisely points out that those who
“desire for constant action” and trade
regardless of underlying big-swing market conditions face “many
losses”.
Speculation is like a grand
real-world game of chess, a thinking-man’s strategy game sprawling out
into the unknown future across weeks and months. If you want to have a
shot at growing into an elite speculator, you are best off ignoring the small
gains and losses of day trading and holding out for the really big wins
possible by riding entire bull or bear swings. Speculators are not
“working for regular wages” and don’t need small daily
wins, all we really need are the enormous Big Trade wins that usually appear
several times a year or so.
(Chapter II) … “A
stock operator has to fight a lot of expensive enemies within himself.”
It is not the financial
markets, nor government intervention in the markets, nor even the other
competing traders that are the greatest enemy of any speculator,
it is the greed and fear dwelling deep within his own human heart. To
become an elite speculator, one must carefully learn over decades of
real-world trading how to turn off one’s own dangerous emotions of greed
and fear like a switch. The goal is to be totally emotionally neutral,
never growing too scared nor stumbling into the deadly trap of greed.
A greedy speculator is
doomed before he even starts because he will buy in at the wrong time and
will inevitably fail to sell high when everyone else is confirming his greed
and bidding up prices. A fearful speculator will fare no better, as he
will be too scared to buy in at the right time when everyone else is also
frightened and he will sell out too soon as his fear multiplies, missing most
of the market move.
Jesse Livermore learned
through long, hard experience that his own internal greed and fear were his
greatest enemies as a speculator. Once he learned how to tame his own
dangerous emotions when he traded, both his success and fortunes soared.
(Chapter II) … “I
don’t know whether I make myself plain, but I never lose my temper over
the stock market. I never argue with the tape. Getting sore at
the market doesn’t get you anywhere.”
Part of the journey every
speculator must travel in taming his own emotions is
to refuse to get angry at the markets or at speculation itself. Losses
will happen and they are simply part of the game, nothing to grow upset
about. If a speculator allows himself to grow angry
over a loss, he is just shooting himself in the foot. Anger clouds the
mind and leads to poor decision making.
Rather than getting angry
at your own trading losses, I think it is useful to consider them as
“speculation tuition” and diligently strive to learn whatever you
can from them. If you can avoid anger and accept your trading losses as
valuable lessons, odds are your wisdom and success as a speculator will
continue to grow. Losses are the ultimate speculation teachers as they
are painful and memorable and lead to crucial wisdom on how to avoid making
this same particular mistake again in the future.
Anger (and worry) is a
complete waste of time and as Jesse Livermore wisely pointed out,
“Getting sore at the market doesn’t get you anywhere.”
After a losing trade you have to swallow your pride, accept your loss, learn
your lesson, and move on to more successful trades in the future.
(Chapter II) … “We
ran into a crazy bull market when stocks didn’t react enough to wipe
out even the one-point margins, and, of course, all the customers were bulls
and winning and pyramiding.”
Everyone wins in a bull
market. This ancient financial truism is incredibly important and must
not be forgotten by speculators. It doesn’t matter so much what
individual positions you take, but whether or not the underlying market
conditions are highly favorable for your particular open trades. This
also relates back to Jesse Livermore’s idea of playing the major market
bull and bear swings, of riding the predominant market trends at any given
time.
A corollary to this piece
of wisdom is that trading in a bull market is generally easier than in a bear
market. Since a powerful bull will lift virtually everything in its
path, precise picking of trades is not as important as merely having your
capital deployed in line with the current market trend. If a glorious
bull is galloping, as in the gold market today, simply pick
some trades with long exposure. Odds are you will reap handsome rewards
even if you haven’t picked the best possible trades for the bull run.
Conversely if a wicked bear
is prowling, as in general stocks today, pick some
trades with short exposure. The reason everyone doesn’t win in a
bear market is that the vast majority of market participants are unable to
overcome their own irrational internal bias against shorting. Speculators
must learn to simply not care which way the markets are heading, up or down,
but merely to know in advance what probabilities suggest and deploy long or
short with the primary trend accordingly.
(Chapter III) … “It
takes a man a long time to learn all the lessons of all his mistakes. They
say there are two sides to everything. But there is only one side to
the stock market; and it is not the bull side or the bear side, but the right
side. It took me longer to get that general principle fixed firmly in
my mind than it did most of the more technical phases of the game of stock
speculation.”
Behold one of Jesse
Livermore’s greatest classic quotes! Being a bull or a bear alone
is meaningless out of the crucial context of the current market
conditions. All that really matters for the great game of speculation is
being on the “right side”, knowing when the markets are in a bull
or a bear trend and deploying your speculative capital accordingly.
Once again Livermore ties speculation back into the
speculator’s own internal emotions. He points out that it makes no
sense to be bullish or bearish as a rule, but to carefully watch the market
conditions in order to be on “the right side” at any given
moment. Most speculators are burdened with an innate emotional bias to
be bullish that is dangerous and must be eradicated if they wish to succeed
in speculation.
A speculator must not
foolishly try to bend the markets to his will, but instead prudently bend his
will to the markets! If a bull trend is evident, be long. If a
bear trend dominates, be short. An elite speculator doesn’t care
at all which way the markets are moving, he just wants to be
“right” and recognize the trend early enough to prudently deploy
his own capital and be blessed to harvest profitable trades.
Forget the endless bull and
bear arguments and don’t let any other speculators try to pigeonhole
you into one of the two warring camps. Instead of being a perma-bull or
perma-bear, instead strive to listen to the rhythm of the markets and simply
be “right” about what is coming to pass next and trade
accordingly.
(Chapter III) … “With
me I must back my opinions with my money. My losses have taught me that
I must not begin to advance until I am sure I shall not have to
retreat. But if I cannot advance I do not move at all. I do not
mean by this that a man should not limit his losses when he is wrong. He
should. But that should not breed indecision. All my life I have
made mistakes, but in losing money I have gained experience and accumulated a
lot of valuable don’ts. I have been flat broke several times, but
my loss has never been a total loss. Otherwise, I wouldn’t be
here now. I always knew I would have another chance and that I would
not make the same mistake a second time. I believed in myself. A
man must believe in himself and his judgment if he expects to make a living
at this game.”
This awesome Jesse
Livermore paragraph is striking as it really distills the whole essence of
successful speculation. First Livermore
cuts to the core of speculation, backing “my opinions with my
money.” Everyone has opinions about which way the markets are
heading, but the speculator has a much higher stake in being right because
his own precious capital is on the line based on his opinions of future
market direction. Talk is cheap if not backed by real capital!
The best time to trade
based on these opinions is when a speculator is virtually convinced that a
trade has a very high probability of success, what we call the “Big
Trades” in our acclaimed Zeal Intelligence
newsletter. A speculator must patiently wait until conditions are
nearly perfect to trade large, and then he must aggressively deploy his
capital and ride out the trade until the end. If conditions for trading
are ideal when a position is opened, odds are a retreat out of the position
won’t be necessary. Livermore
says that one should not even trade, “do not move at all”, if
conditions are not ideal.
After Livermore acknowledges that waiting for
those rare optimal trading situations is essential, he wades into the hidden
value of making mistakes. Losses are just part of the game as discussed
above, and they should not lead to anger but instead to immensely valuable
lessons that help a speculator grow wiser and more successful in the
future. Jesse Livermore pointed out that the benefits of a learned
lesson later in his speculation career vastly outweighed the capital losses
he suffered to learn his lesson originally.
Finally, while in his prime
Livermore
never allowed his losses or tough times to sap his spirit. He learned
from his mistakes and even if he had lost all his capital knew that he would
be back to trade again. A speculator must first be comfortable with himself and learn to trust his own judgment when assessing
market conditions and stalking and deploying trades. Confidence and
conviction are essential attributes for all speculators to carefully
cultivate.
(Chapter III) … “It
took me five years to learn to play the game intelligently enough to make big
money when I was right.”
Unfortunately many new
speculators grow discouraged after their first losses. The evolution of
a speculator is not an easy process and takes a great deal of time and
effort. Jesse Livermore claimed it took him five years before he
arrived at the point where he could play the game well and harvest large
profits. In my own speculation history I have experienced the same
thing, that at least several years of “training” via actual
real-world trading is necessary to build up one’s core speculation
skills sufficiently to start winning big.
New speculators today need
to realize that it will take them 3 to 5
years to start getting competent at speculation. If you are a new
speculator with less experience than that and you are discouraged after some
recent losses, have no fear and keep learning and playing the game. Every
speculator must pay his dues before he starts winning consistently and it
truly does take years to educate yourself as a
speculator.
(Chapter III) … “Speculation
is a hard and trying business, and a speculator must be on the job all the
time or he’ll soon have no job to be on.”
It always strikes me as
funny that non-speculators see trading as an easy way to make a living.
They couldn’t be farther from the truth! Speculation is immensely
challenging and the markets will find and exploit every conceivable chink in
your emotional armor. All your personal weaknesses will conspire to
mercilessly work against you in concert to thwart your evolution as a
speculator.
If you want to embark upon
the journey of growing into an elite speculator, have no illusions that your
path ahead will be easy. It will be a huge challenge for you just as it
was a huge challenge for Jesse Livermore and is a huge challenge for me on my
own speculation journey.
Livermore also points out
that casual speculators are not often
successful. If you want to speculate, do your homework and do it right,
even if it is not your primary job. Speculating as a hobby is fine, but
even hobby speculators must learn the same lessons and approach the game with
the same diligence, seriousness, and zeal as full-time professional
speculators. The markets take no prisoners.
(Chapter III) … “The
game taught me the game. And it didn’t spare the rod while
teaching.”
Not surprisingly the best
way to learn the art of speculation is not to read a book about it, but to
actually speculate yourself. Regardless of how little capital a new
speculator starts out with, he must actually bet some of it in the real-world
markets to learn and grow as a trader. Just as one has to play football
in order to become a good football player, one has to actually speculate in
the real markets with real capital in order to become a good
speculator. There is no other way.
And Jesse Livermore wisely
points out that real-world trading is the school of hard knocks, that
“it didn’t spare the rod while teaching” him. Nevertheless,
a speculator should embrace his losses and the tough lessons they taught him
so he can continue to grow in knowledge and wisdom and become a superior
speculator in the future.
Well, unfortunately this is
all of Jesse Livermore’s wisdom that fits into this second essay of my
series on “Reminiscences”. I hope you found Livermore’s great
wisdom enlightening!
Go buy and read “Reminiscences of a Stock Operator”
today! I can almost guarantee it will forever change your life as a
speculator! Jesse Livermore’s quotes are even more impressive in
proper context and are delightful to read and digest. This essay format
can’t even start to do them justice.
Until next time, Godspeed
and happy speculating!
Adam Hamilton,
CPA
February 28, 2003
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