I always find it useful to study the books of traders in years gone by and learn from their experience and mistakes. It is a very cheap tuition fee to pay. One of most successful traders of all times was Jesse Livermore who started out trading in bucket shops (now called CFD trading) at the age of 15. He traded through the 1907 panic, made a fortune on the short side in 1929, lost a fortune a few times but always bounced back. The best known book on Livermore is the biography by journalist Edwin Lefebvre. This belongs in the book shelf of every trader. Less known but still useful reading is Livermore’s book ‘How to trade in stocks’ written one year before his death.
Edwin Lefebvre: Reminiscences of a Stock Operator, George H. Doran Company, 1923, reprinted Traders press 1985
Jesse Livermore: How to trade in stocks; added material by Richard Smitten, McGraw-Hill 2001, first published in 1940
I periodically re-read my favourite quotes which I want to share with you today. Print them out and read them frequently until the lessons become second nature in your trading.
On having to trade all the time
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 regular money every day, as though they were working for regular wages.
On learning from your mistakes
All my life I made mistakes, but by 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.
I have always found it profitable to study my mistakes.
On forming your own opinion and ignoring tips
I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgment. It took me five years to learn to play intelligently enough to make big money when I was right.
It has always seemed to me the height of damfoolishness to trade on tips…..It is not so much greed made blind by eagerness as it is hope bandaged by the unwillingness to do any thinking.
On pyramiding up
When I am bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on rising scale. I don’t buy long stock on a scale down; I buy on a scale up.
Remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don’t make a second unless the fist shows you a profit.
Don’t argue with the tape
When I am long of stocks it is because my reading of conditions had 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 prepossession’s 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.
……and the public that buys on reactions began to argue as usual: That stock had been considered a good purchase at 153 and higher. Now 20 points lower, it was necessarily a much better purchase
On taking losses
A loss never bothers me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul.
The natural tendency when a stock breaks badly is to sell it. There is a reason – an unknown reason but a good reason; therefore, get out.
Nothing ever changes in the markets
Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. 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 neither does human nature.
No need to understand why
When a stock is going up no elaborate explanation is needed as to why it is going up. As long as it does so, with only small and natural reactions from time to time, it is a pretty safe proposition to trail along with it. But if after a long steady rise a stock turns and gradually begins to go down, with only occasional small rallies, it is obvious that the line of least resistance has changed from upward to downward. Such being the case why should anyone ask for explanations?
And here’s my favourite one (probably because that’s the lesson I had to learn most). Once I went for the bigger moves the money came in. Forget day trading and short term swing trading!
It never was my thinking that made the big money for me. It was always 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 …… 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 to trade than hundreds did in the days of his ignorance.