Wisdom of Jesse Livermore 6
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.
Mr. 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.
Mr. 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 yet you owe it to yourself to buy it today
at Amazon or Barnes & Noble. I can almost guarantee that 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 quotation 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 V) … "The customers, who were all eager to be shoved and forced into doing things so as
to lay the blame for failure on others..."
In a wonderfully entertaining narrative about a battle-hardened and wealthy old speculator named Mr. Partridge,
Jesse Livermore exposes one of the most dangerous character flaws a speculator can have, a lack of absolute personal
accountability and responsibility. Unless a speculator takes full personal responsibility for all of the trades
that he chooses to make, win, lose, or draw, he will never achieve great success.
Just as today, the majority of speculators back in Mr. Livermore's time wanted to congenitally blame others
for their own trades that turned sour. Rather than accepting the full weight of their own decisions, they desperately wanted
their brokers or advisors to push them into trades so these speculators could avoid accepting the responsibility themselves
for failed trades. Elsewhere Livermore talks about speculators perpetually blaming external manipulation for their own bad
bets, another way of refusing to accept full responsibility for the fruits of their own actions.
Just like a child who never learns to be responsible, a speculator who cannot fully accept any possible
outcome on any trade that he freely chose to make is doomed to immature mediocrity. If you or I use our own God-given
brains and decide to execute on a particular trade, we cannot blame anyone else but ourselves if the trade doesn't work out.
It doesn't matter where the information came from that led to the trade, it is ultimately the responsibility of the individual
speculator who decided to execute on this information regardless of the outcome.
So before you freely choose to launch a trade, while you are gathering information and running reconnaissance,
realize that you most hold yourself absolutely accountable for your own decision. If you win, great, congratulations and many
kudos on another successful trade! If you lose however, the loss is your fault alone and your responsibility alone since you
freely chose to make the trade.
Every speculator must always be ready to win or lose on each and every trade, and to fully accept
responsibility for their own decisions always. Losses are simply part of this grand game and just have to be accepted, since
no one but God can see the future before it happens. When you freely choose to pull the trigger on your own trade,
the outcome is always 100% your own responsibility and no one else's. If you cannot accept this truth, then you shouldn't
be speculating.
(Chapter V) … "I think it was 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."
In all of "Reminiscences" this crucial idea that the Really Big Money is always earned by prudently riding
the large trends over time and not in day trading every minute fluctuation is one of the central themes of the book. Livermore
hammers this again and again, attacking it from countless angles and spicing up all of his amazing lessons with his own enthralling
personal experiences.
This old and successful speculator that Livermore mentions, Mr. Partridge, would always politely tell the
younger speculators who asked him trading questions that it was a bull market. The young speculators were always eager to
trade, but Partridge was old and battle-scarred enough to know that no mere mortal could even hope to catch every individual
fluctuation so the wisest strategy was just to ride the major trends. His simple reply, which would annoy the youngsters since
they couldn't yet perceive the deep wisdom in it, was to subtly advise them to just ride the primary trend and not worry about
rapid-fire trading.
If a particular market happens to be in a primary bull trend, then just be long and don't worry about trying
to interpret and trade upon the essentially random day-to-day market noise. If a particular market is in a primary bear trend,
then either sit out in cash or stay short and wait for the trend to fully mature and run its course. Don't try to frantically
outguess the primary trend everyday, just accept it and trade with it and you will win in the end.
And this leads into what is perhaps the most famous quotation out of the entire book, Jesse Livermore's legendary
"be right and sit tight" wisdom! While a long quotation, I just have to offer this entire paragraph in its original shining
unedited brilliance…
(Chapter V) … "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. 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 and 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. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that
he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds
did in the days of his ignorance."
Be Right and Sit Tight! Marvel at Jesse Livermore at his finest! Like so many great truths in life this is
so simple to understand, but so incredibly difficult to actually act out and walk the walk. So much of speculation really
boils down to patience, that extraordinarily difficult trait to acquire. Do your research, determine the primary trend, deploy
your positions, and then just hurry up and wait.
The patient and prudent contrarian speculator usually wins in the end, but the whole modern financial-market
arena is configured to award impatience. From 24/7 financial television to 3-second guaranteed executions on Internet
trades to after-hours trading, our modern market environment is cunningly designed to nurture a culture of continuous
frantic trading. The brokerages and financial industry love this go-go focus because they make money on each and every
trade, and higher trading volume leads to much higher Wall Street profits.
Most individual speculators also love this light-speed market culture, primarily because we speculators tend
to be adrenaline junkies. It doesn't matter whether you are buying or selling, it doesn't matter whether your trade is big
or small, but whenever your finger hovers a quarter inch above your mouse button and you are ready to pull the trigger and
execute a trade the adrenaline rush and euphoria are simply awesome. Let's face it, trading is fun and addictive! The
very act of trading is a rush!
Yet, a truly great speculator must transcend and rise above this frenetic market culture. Rather than getting
all caught up in the incessant hype, a speculator must carefully cultivate patience. He must figure out the primary
market trends, deploy positions somewhere near the beginning, and then steadfastly ignore all the market noise and
huge temptations to overtrade until the primary market trends appear to be ending. This is very easy to understand, but exceedingly
difficult to actually accomplish in the real world.
The key to being able to actually act out Be Right and Sit Tight in your own real-world trading is to relentlessly
nurture your own patience. According to the Bible (Romans 5:3), patience is learned through tribulation, which is suffering.
I think a great part of the education of a speculator is tribulation, the agony of defeat in losing precious capital
in bad trades, as well as the psychological anchor of being caught wrong by the markets. Learning to speculate is certainly
not an easy or trivial undertaking!
But as these painful lessons accumulate, as a speculator suffers, gradually they learn. Jesse Livermore characterized this process as, "And when you know what not to do in order not to lose money, you begin to learn what to do in order to
win." The entire education of a speculator ultimately leads to the elusive and prized emotion of patience, which is so difficult
to cultivate yet so priceless to possess. Only the abnormally patient command the crucial internal discipline and peace necessary
to Sit Tight.
Jesse Livermore continued, right after the quotation above…
(Chapter V) … "The reason is that a man may see straight and clearly and yet become impatient or
doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who
are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They
beat themselves, because though they have brains they cannot sit tight."
Every speculator has been in the situation Jesse Livermore describes, probably many times. You diligently
do your research, you are convinced that the markets are almost certain to head in a particular direction, but then they stubbornly
don't conform to your plan. At first this is no big deal, but after a couple months of the markets not behaving all kinds
of nagging doubts relentlessly assault the speculator.
Even if the speculator is dead right about the long-term, if he can't sit tight over the short-term stress
he is already sunk. While there is a fine line between having courage in your own convictions on the markets and just
being belligerently wrong indefinitely, having the patience to sit tight when you are right is so incredibly important. If
you are right on the primary trend and know it but the short-term fluctuations are moving against you, dig deep
and summon the courage and patience to sit tight and wait for the major trend to reassert its dominance once again.
It takes a great deal of speculation experience, a lot of learning through a lot of challenging market conditions,
to cultivate this patience and inner peace necessary to sit tight when the markets are making you look like a fool over the
short-term. Nevertheless, the ultimate returns to be earned by developing this serene patience necessary to sit tight through
difficult short-term adversity are breathtaking. Only the truly patient have a shot at the really big money which Livermore
describes!
As I believe that this entire extended passage of "Reminiscences" is so profound and mind-bogglingly important,
once again Jesse Livermore continues in the very next paragraph…
(Chapter V) … "Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can
catch all the fluctuations. 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."
As Jesse Livermore points out from his own hard-won experience, regardless of which market you are trading
the game is to discern the primary trend and ride it from reasonably close to the beginning to reasonably close to the end.
Trying to actively trade every small fluctuation and always outguess the markets is suicidal for capital and highly counterproductive.
While large fluctuations running many months can sometimes be successfully traded, the probability of success
for intra-trend trading shrinks dramatically with trade duration. For example, if you initiate a trade running with a sub-trend
that you expect to last for six months inside of a larger primary trend, you probably have a decent chance of success. But
if you launch a trade on a trend that you expect to run for only six days, your probability of success is vastly lower.
The shorter the trade duration, the more it is tormented by maddening market randomness and the less value logical and sound
analysis has.
Being right on the primary trend and sitting tight until the end is a macro exercise. Livermore points
out that the game is not won by getting bogged down in individual-stock analysis, but by studying general-market conditions
as a whole. While it is certainly interesting to study individual stocks as many have wonderful stories to tell, these stocks
will almost always move up or down with the fortunes of the markets as a whole. So it makes great sense to devote more
time to studying the general markets than to individual stocks.
The prudent and patient contrarian speculator will study the big market picture and trade with the
major trends that are running many months or years. And once his positions are deployed, he will zealously sit tight until
he thinks that he sees the beginnings of reversals in the major trend that he is trading. This Livermore-esque speculator
does not allow himself to be tempted by short-term fluctuations and remains intensely focused on the large primary trends.
(Chapter V) … "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. They have cost stock traders, in the
aggregate, enough millions of dollars to build a concrete highway across the continent.
This passage, right after the paragraphs above in "Reminiscences", warns speculators about the deadly perils
of greed in opening and closing trades. While Jesse Livermore was talking about longer-term trading here, riding entire primary
bull or bear trends to completion, there are also valuable short-term lessons for speculators to learn.
On the longer-term macro trades, Livermore's original context for this quote, he wisely advises speculators
to not grow greedy. You don't have to buy in at the very bottom of a long-term trend, just somewhere reasonably near it. Similarly
you don't have to try and sell out at the very top, just somewhere reasonably close to it. It is impossible to precisely catch
the exact long-term bottoms and tops of any major trend and the ultimate cost of gaming these in capital and grief is enormous.
The price of trying to capture the last eighths in macro trades is far too high for the benefits won in those
elusive rare times when a speculator is lucky enough to be nearly exactly right. Getting greedy over the exact entry
and exit prices causes all kinds of problems, delaying prudent execution and interfering with your carefully cultivated speculator's
instinct of when to get in and out. When you feel that the time is right, just act and make the trades without fretting about
holding out for a small additional discount or profit.
This also really applies to the short-term. If today, for example, looks like a good day to deploy a position
to ride a major trend, then just buy the position now and get it over with. Don't worry about holding out for a price a few
pennies lower than what the market is offering now. Buy when you feel that it is time to buy and sell when you feel that it
is time to sell, but don't waste your time and capital hunting down those elusive last eighths. Hunting for them will ultimately
cause you far more trouble than they are worth!
Well, unfortunately this is all of Jesse Livermore's wisdom that fits into this sixth essay of my series on "Reminiscences". I hope you found Mr. Livermore's great wisdom enlightening!
Go buy and read "Reminiscences of a Stock Operator" today! I can almost guarantee that it will forever change your life as a speculator! Jesse Livermore's quotes
are even more impressive in their 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
Wisdom of Jesse Livermore
Adam Hamilton January 31,
2003 3047 Words
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.
Mr. Livermore’s
illustrious career began as a young lad when he landed a job as a quotation-board boy in a stock-brokerage office. As
he transferred stock-price numbers from the ticker tape and posted them on the big board for the brokerage’s customers
to see, he became captivated by the endless stream of figures.
After a while
he began to make observations, noting that when the price of a stock behaved a certain way a substantial drop or rally was
probably dead ahead. He began to meticulously keep a “dope book” of his observations and his real-time predictions
based on them, and noticed that more often than not the markets proved him right.
Soon Livermore
was blessed with the opportunity to actually trade for himself rather than just watch others trade. He amassed his first
$1000 by the time he was only 15 years old, much to his mother’s amazement.
Now $1000 today
isn’t much, chump change thanks to 90 years of relentless inflation by the nefarious Federal Reserve, but $1000 way back in the pre-Fed days is the equivalent of about $20,000 in today’s inflation-eroded US dollars.
Winning the equivalent of $20k in the stock markets at the tender age of 15 would be a monumental achievement today too!
Before he turned
21, an age today when most kids have horrendous finances and mountains of college debt, Livermore’s speculative capital
had ballooned to $10k, about $200k in purchasing power in today’s dollars!
Speculation
is a hard and unforgiving business and Jesse Livermore wasn’t King Midas, everything he touched did not turn into gold.
He did suffer through trying losing streaks like all speculators, even going completely broke several times and deep into
debt at least once. Yet, he eventually succeeded in mastering the game to a magnificent degree and ultimately achieved
a fantastic level of success in the financial markets.
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.
Any speculator
on Earth today, regardless of if they are interested in QQQ options, futures, gold stocks, or any other financial-market arena, can harvest vast wisdom from the endlessly fascinating life of Mr. Livermore.
Other than reading the Bible to understand how unfathomably dangerous the emotion of greed is (1 Timothy 6:10 ... For
the love of money is the root of all evil...), there is no book on speculating I can recommend more highly than
“Reminiscences”.
As my own lifelong
personal evolution as a speculator continues and I attempt to continually learn to deepen my own wisdom and understanding,
I would like to write some essays highlighting Jesse Livermore’s awesome wisdom. Periodically we will publish
a new essay delving deeper into the book. I am not sure how many essays it will ultimately take to hit the majority
of the wisdom high points in “Reminiscences”, but the journey will be fun and enlightening.
My personal
goal for embarking upon this “Wisdom of Jesse Livermore” series is two-pronged. First, I want to deeply
internalize Livermore’s fantastic wisdom myself so I can continue to grow as a speculator and also recommend superior
real-world trades for the wonderful subscribers to our acclaimed Zeal Intelligence monthly newsletter.
Second, I have
a heart and passion for trying to help others grow into better investors and speculators so it will be a great blessing to
help share Livermore’s wisdom with a generation that desperately needs it. As we sojourn in a brutal post-bubble
bust era, it is more important now than ever that investors and speculators today learn from legends like Livermore so they can
avoid making the same painful mistakes with their own precious capital.
To make it
easier for everyone to follow along, I will present Jesse Livermore’s wisdom 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” it is pulled from 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 I)
… “Another lesson I learned early is that there is nothing new in Wall Street. There
can’t be because speculation is as old as the hills. Whatever happens in the stock market to-day has happened
before and will happen again. I’ve never forgotten that.”
Oh, what a
priceless opening lesson! It reminds me of ancient Israeli King Solomon’s unequaled wisdom stating that “there
is no new thing under the sun.” In the last few years literally trillions of dollars have vaporized, shattering
countless families’ precious hopes and dreams, because investors foolishly believed the silly new-era hype surrounding
the doomed NASDAQ tech-stock bubble.
Booms, bubbles,
bursts, and busts have been around for centuries and will continue into the future. Every major stock-market bubble
is heralded as a “New Era” at the time before it bursts. Everything investors and speculators are witnessing
in today’s markets has come to pass before. Even though technology relentlessly marches forward, there is one
ultimate driving force behind the endless financial-market machinations that never changes.
This force
is the human heart. Every speculator is both blessed and burdened with one. As long as humans trade, the titanic
warring emotions of greed and fear will lead to endless waves of overvalued then undervalued markets, booms then busts, rallies
then downlegs. A greedy or fearful trader today behaves no differently than a greedy or fearful trader 100 years ago
or 100 years from now in the future. There is nothing new in Wall Street.
(Chapter I)
… “That’s all the fun there is – being right by using your head. If I
was right when I tested my convictions with ten shares I would be ten times more right if I traded in a hundred shares.
That is all that having more margin meant to me – I was right more emphatically. More courage? No!
No difference! If all I have is ten dollars and I risk it, I am much braver than when I risk a million, if I have another
million salted away.”
Amen on being
right! This is truly the greatest reward of speculating! The huge profits are merely a pleasant byproduct.
The real pleasure for speculators involves being right and being rewarded for being right!
Being in the
private speculation, financial newsletter, and consulting businesses, I am really blessed to talk with all kinds of speculators
around the world on a daily basis. One common opinion I note in many of the speculators newer to the game, and a myth
I myself believed when I was younger, is that the size of one’s capital matters for success in speculation. In
truth, size is irrelevant in the vast, vast majority of speculation!
If you are
a new trader and all you have is $1000 to risk, don’t worry about it at all. If you are right and your trades
are blessed with success, your stake, or “line” as Jesse Livermore called it, will grow. You have to cut
your teeth and learn the art of speculation by beginning small, and only then can you eventually grow to become an elite speculator
some day.
If you are
faithful over a few things, successfully trading whatever meager capital you can scrape up initially, you will eventually
be blessed with the opportunity to be a ruler over many things. If you sow the seeds of learning how to speculate starting
small, you will eventually reap the magnificent harvests of speculating big with awesome amounts of capital.
Success in
speculation is not related to one’s bankroll and a very small speculator takes the same risks and plays the game the
same way as a large speculator. If you want to be a speculator, please don’t let your lack of capital intimidate
you. Livermore himself went broke and started again from nothing several times, yet he still became so successful that
he will be forever remembered as one of the greatest speculators in all of history. Everyone starts small.
(Chapter I)
… “I knew something was wrong somewhere, but I couldn’t spot it exactly. But
if something was coming and I didn’t know where from, I couldn’t be on my guard against it. That being the
case I’d better be out of the market.”
Another common
and deadly speculation myth is that speculators must always be in the markets playing the game. As Jesse Livermore wisely
pointed out, this is foolishness. Once again the ancient King Solomon’s vast wisdom echoes through the ages, “To
every thing there is a season, and a time to every purpose under the heaven.” There are times to trade and times
not to trade.
Mr. Livermore
noted that he had an uncomfortable feeling about the market in this quote but didn’t quite know why. Something
in his subconscious was nagging at him but he couldn’t quite verbalize the thought. He wisely closed his position
and evacuated. As a speculator it is always far better to be safe on the outside wishing one was in than being trapped
on the inside hemorrhaging capital at frightening speeds and wishing one was out!
Speculation
opportunities are legion and will always exist. Like missing a flight at an airport, it is never a big deal if you miss
a particular speculation opportunity because there is always another one flying out somewhere behind it. In my own experience
I have generally found that excellent speculation opportunities arise every few months or so.
If something
just doesn’t feel right and you are uncomfortable with the markets for some reason, get out and don’t trade until
your comfort returns. Worst case you will have to wait a few months or so for the next prime opportunity. Best
case, however, you will avoid overtrading and finding yourself being flayed alive by a big loss during anomalous market conditions.
(Chapter II)
… “My plan of trading was sound enough and won oftener than it lost. If I had stuck
to it I’d have been right perhaps as often as seven out of ten times. In fact, I always made money when I was
sure I was right before I began. What beat me was not having brains enough to stick to my own game – that is,
to play the market only when I was satisfied that precedents favored my play. There is a time for all things, but I
didn’t know it.”
This hugely
important lesson ties in with the one above. Periodically the scales of probability tilt so favorably that a speculator
commands high odds of emerging from a specific trade with outstanding profits. As Jesse Livermore learned, a prudent
speculator will patiently bide his or her time to stalk a trade. They won’t actually commit a dime of capital
until they are sure that market precedents favor the speculation they are about to embark upon. In Zeal Intelligence
we christen these super-opportunities “The Big Trades”.
After Livermore
found a speculation that had a high probability of success based on past market behavior, he learned the hard way that he
should stick with his position. If he knew he “was right” going into a trade, he said he always won.
I have also experienced this in my own personal speculation evolution. I have found that the times I really felt that
a trade was “right” before I began were vastly more successful than the times I foolishly succumbed to temptation
and traded on a flimsy whim. Planning is crucial and impulse trading is lethal!
Speculators
must research the markets, patiently await an awesome opportunity, bravely deploy their capital ahead of the expected market
move as contrarians, and diligently ride it out towards the original end they anticipated. If they fail to meticulously
follow these 4 steps, research, stalking, deploying, and sitting tight, odds are their speculations will not be very successful
on balance. Livermore knew his stuff!
(Chapter II)
… “There is the plain fool, who does the wrong thing at all times everywhere, but there
is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or
selling stocks daily – or sufficient knowledge to make his play an intelligent play. I proved it.”
Wow!
This wisdom is sure controversial today! Jesse Livermore, one of the greatest speculators of all time, flat-out says
that day trading is foolish. He points out that there are never “adequate reasons” to buy or sell stocks
constantly, and that someone who tries to play the game of trading all the time is a “Wall Street fool”.
Interestingly, Wall Street loves these suckers as their constant trading racks up enormous brokerage fees whether the speculators
win or lose in the end.
In my own evolution
as a speculator, I tried the day-trading game in early 2000 as the tech bubble was topping. I was primarily trading
biotech and genomics stocks, entering and exiting single trades within hours or sometimes even minutes. Thankfully I
emerged unscathed as I was blessed with modest profits after a couple months of this, but I will never forget the fantastic
lessons I learned.
First, trading
is stressful. The markets are a hard teacher. Every single time you have an open trade with your precious capital
exposed to the markets, you burn some crucial psychological capital. Having open positions is always an emotional burden,
sometimes it is light and sometimes it feels like a mighty lead anchor chained around your neck crushing you into powder.
In day trading the ultimate stress and psychological capital cost is immensely higher because the volume of trades is so much
higher. Today I prefer tactical speculations with multi-month time horizons, as far fewer trades are necessary so they
are vastly less of an overall psychological burden.
Second, as
Livermore wisely points out, there is no way to have “sufficient knowledge” to consistently intelligently day
trade. Especially in the young Information Age today, speculators trying to absorb the torrents of financial information
available are essentially trying to drink from a raging fire hose. If a speculator is buying or selling every couple
hours every day, he or she cannot possibly have studied each trade enough to fully understand its risks and implications.
Third, the
ultra-short-term intraday markets are inherently unpredictable and capricious. Any speculator can make an educated guess
about whether the markets will be higher or lower a few months from now, but since information flow and general sentiment
can shift so incredibly rapidly no one has a clue whether the markets will be up or down tomorrow. The shorter the expected
time horizon for a trade, the more it resembles pure Vegas-style gambling and the less it is like intelligent speculation.
Fourth, a day
trader is a slave to the computer. They must constantly be hunched among computers painstakingly watching minute-to-minute
market movements and attempting to divine what on Earth will happen a half hour later. Day traders are always exposed
and can seldom take mental or physical breaks. In sharp contrast, a tactical multi-month speculator can relax and enjoy
life, virtually ignoring the markets for weeks at a time, once their capital is deployed and in position.
Finally, the
typical profits in day trading are usually trivial. After commissions, a day-trading scalper is lucky to earn a few
percent on each trade on average. Why face the monumental stress of day trading to earn a measly few percent on your
capital while risking much larger losses? Conversely, a multi-month tactical speculation played out right can earn profits
in the hundreds of percent, such as our current open QQQ options plays outlined in Zeal Intelligence now have the potential to achieve.
Well, unfortunately
this is all of Jesse Livermore’s wisdom that fits into this first essay in my new 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!
