Selected Materials from Book - Reminiscences of a Stock Operator by Edwin Lefevre

Reminiscences of a Stock Operator by Edwin Lefevre July 22, 2008

This is one of the classic and best books ever written in trading. It’s about a stock operator named Jesse Livermore, in the book known as Lawrence Livingston. This is not really a biography, but a series of interviews conducted by the author and inside contains some of the hard lessons learned and sage advices that are still often-quoted.

One of the main ideas the author try to convey is no one can consistently beat the market.

Great traders, like Jesse Livermore, Jacob Little whose bearishness made his name a house-hold name, and Anthony W. Morse the bull who broke Jacob Little, all at times were millionaires but in the end became victims of the market and suffered great misfortunate. Jesse Livermore committed suicide in 1940 in New York hotel room.

The two big bold advices” Conditions and Timing

Livermore quoted Baron Rothchild, as secret to making money, “I never buy at the bottom and I always sell too soon.”

“The stock market is difficult for most investors because it works in precisely the opposite way of how a normal, intelligent person tends to think and react. People want to buy something that looks cheap, is down in price, and appears to be a bargain. This rarely works because the stock is usually down for a good reason.”

“The public does not take kindly to short selling. For one thing, it is easier to be optimistic, to believe what it pleases a man to believe.”

“It’s the successful business man, the shrewd merchant, who is the biggest sucker of the lot.” Comment on shrewd men who make money on their own field by hard works and knowledge, then turn to market by risk money in an area where outside his or her expertise, expect to earn quick profit for no work. “It isn’t the game that beats him; he beats himself.”

“The sucker play is always the same: To make easy money. That is why speculation never changes.”

“… no man or set of men could fight conditions.”

Jesse Livermore based operations on Time and Behavior.

“A talker as a rule does not crave action; but a doer often loves to talk.”

To win out a super successful man is to understand him, best by listen accurately rather than sympathetically. “You prove your understanding by occasionally not waiting for him to finish a remark, but finishing it yourself.”

“A man who does not wish to be quoted must be persuaded that he will not be misquoted; and the best way to achieve that is to convince him that you know him better than he can possibly know himself, because it is your business to know men – as it is his to be an unusual personality.”

“… whenever he tried to get something for nothing out of the stock market, or followed tips or ventured in other markets on another’s advice, he invariably fared as doth the sucker.”

Speculator’s Weakness: Trading in and out of season: Livingston “had learned to wait for the right time. Too soon is as bad as too late.” Hope: “The average sucker does little more than hope…” Lack of Knowledge of the Game: “Lack of knowledge of market movements, of general trade conditions, of specific conditions affecting specific stocks, of values, of money conditions, contributes to make the public lose.” Inexperience Temperamental Unfitness

“The reason for what a certain stock does today may not be know for two or three days, or weeks, or months.”

“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 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.”

“Throughout the history of the stock exchanges, time lags have been responsible for many market losses.”

“Oh, 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.”

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.”

“There is nothing like losing all you have in the world for teaching you what not to do. 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.”

“If a stock doesn’t act right doesn’t touch it; because being unable to tell precisely what is wrong, you cannot tell which way it is going.”

It taught me, little by little, the essential difference between betting on fluctuations and anticipating inevitable advances and declines, between gambling and speculating.”

“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.”

“The tyro knows nothing, and everybody, including himself, knows it. But the next, or second, grade thinks he knows a great deal and makes other feel that way too. He is the experienced sucker, who has studied – not the market itself but a few remarks about the market made by a still higher grade of suckers. The second-grade sucker knows how not to lose his money in some of the ways that get the raw beginner. It is this semisucker rather than the 100 percent article who is the real all-the-year-round support of the commission houses. He lasts about three and half years on average, as compared with a single season of from three to thirty weeks, which is the usual Wall Street life of a first offender. It is naturally the semi-sucker who is always quoting the famous trading aphorisms and the various rules of the game. He knows all the don’ts that exist – excepting the principle one, which is: Don’t be a sucker!”

Mr. Partridge always tell customs who seeks his wisdom that “Well, you know this is a bull market.” What he 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.”

“It never was my thinking that made the big money for me. It always was my sitting.” “Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn.”

“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 eights in the world.”

That is about all I have learned – to study general conditions, to take a position and stick to it.”

“It is the big swing that makes the big money for you.”

From then on I began to think of basic conditions instead of individual stocks. I promote myself to a higher grade in the hard school of speculation. It was a long and difficult step to take.”

“But the average man doesn’t wish to be told that it is a bull or a bear market. What he wants is to be told specifically what particular stock to buy or sell. He wants to get something for nothing. He does not wish to work, He doesn’t even wish to have to think. It is too much bother to have to count the money that he picks up from the ground.”

“The is not so much to buy as cheap as possible or go short at top prices, but to buy or sell at right time.”

When using tip, at least test it, or test the market.

“But in starting a movement it is unwise to take on your full line unless you are convinced that conditions are exactly right. Remember that stocks are never too high for you to begin buying or too to begin selling.”

Livermore suggest: the method of betting your money is pyramiding when you’re right, and out when you wrong.

“It was an old trading theory of mine that when a stock crosses 100 or 200 or 300 for the first time the price does not stop there but goes a good deal higher, so that if you buy it as soon as it crosses the line it is almost certain to show you profit.”

“When you want to get out, get out.”

“My greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities. In short, I had learned that I had to work for my money.”

Livermore reveals that trading stock is more complicated than trading in commodity futures. Commodity prices are governed by supply and demand, stock price have multiple of other factors.

“The object of reading the tape is to ascertain, first, how and, next, when to trade – that is, whether it is wiser to buy than to sell.”

“The speculator is not an investor. His object is not to secure a steady return on his money at a good rate of interest, but to profit by either a rise or a fall in the price of whatever he may be speculating in. Therefore the thing to determine is the speculative line of least of resistance at the moment of trading; and what he should wait for is the moment when that line defines itself, because that is his signal to get busy.”

“The trend has been established before the news is published, and in bull markets bear items are ignored and bull news exaggerated, and vice versa.”

“It is not wise to disregard the message of the tape, no matter what your opinion of crop conditions or of the probable demand may be.”

Livermore gave this rule:” In a narrow market, when prices are not getting anywhere to speak of, but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be – up or down. The thing to do is to watch the market, read the tape to determine the limits of the get-nowhere prices, and make up your mind that you will not take an interest until price breaks through the limit in either direction.”

“It doesn’t pay to start wrong in anything.”

“A man cannot be convinced against his own convictions, but he can be talked into a state of uncertainty and indecision, which is even worse, for that means that he cannot trade with confidence.”

“Always sell what shows you a loss and keep what shows you a profit. That was so obviously the wise thing to do and was so well known to me that even now I marvel at my doing the reverse.”

“To learn that a man can make foolish plays for no reason whatever was valuable lesson. It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibly expressed by a brilliant mind.”

“If you know much about the average customer of the average commission house you will agree with me that the hope of making the stock market pay your bills is one of the most prolific sources of loss in Wall Street. You will chip out all you have if you adhere to your determination.”

Practice to listen in silence with impassive face to any proposition: “Simply by looking and listening Stillman often made the man offer terms much more advantageous to the bank than he had meant to offer when he began to speak.”

“A trader, in addition to studying basic conditions, remembering market precedents and keeping in mind the psychology of the sucker public as well as the limitation of his brokers, must also know himself and provide against his own weakness.”

“When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and either does human nature.”

“As I said before, a man does not have to marry one side of the market till death do them part.”

“As I said before, in a bear market it is always wise to cover if complete demoralization suddenly develops.”

“Observation, experience, memory and mathematics – these are what the successful trader must depend on.”

“I never buy a stock, even in a bull market, if it doesn’t act as it ought act in that kind of market.”

Insider and sector: “When the men who ought to want a stock don’t want it, why should I want it? … Experience has taught me to beware of buying a stock that refuses to follow group leader.”

“Most losses in the stock market can be traced to the average speculator’s persistent disregard of the lessons of the past, of the experience of himself and of others; in short, of the fundamentals of stock speculation.”

“You cannot prevent people from guessing wrong, no matter how able or how experienced they may be, because every man has many enemies within himself as well as on the outside.”