Reminiscences of a Stock Operator by Edwin Lefèvre
It has been a while but we are back with another incredible piece of literature: "Reminiscences of a Stock Operator" by Edwin Lefèvre. The book covers the journey of stock and commodities trader Jesse Livermore, in the late 19th century. A lot has changed in the markets since then, yet surprisingly many things have remained the same. Concepts such as speculation, manipulation, human nature, insider trading, and more, are rather similar, even after more than a century.
One of the key differences, is that the book covers the insights and lessons of a trader, or speculator. There are large differences between the mindsets of speculators and investors: speculators buy the trend, investors are in for the long haul. These are different games, and every participant should clarify for themselves which game they are playing.
🖊️ Edwin Lefèvre was an American journalist, writer, and diplomat, who is most noted for his writings on Wall Street business. "Reminiscences of a Stock Operator" began as a series of twelve articles published during 1922 and 1923 in The Saturday Evening Post. It is written as first-person fiction, telling the story of a professional stock trader on Wall Street. While published as fiction, generally, it is accepted to be the biography of stock market whiz, Jesse Livermore. At one time, Livermore was one of the richest people in the world; however, at the time of his suicide, he had liabilities greater than his assets. The book, being reprinted almost every decade, can be seen as one of the classics on financial markets and clearly shows how large the ups and downs can be in the life of a Wall Street speculator.
My 🔑 takeaways:
During the 19th and early 20th century, speculating in the markets was based on reading the tape. Which is a record of all stock transactions throughout the trading day and typically includes trade size, price and time of trade. The basic principle has remained the same, yet in today's world, data moves significantly faster, and trades are executed at lightning speeds. So if technology advanced so much, why would the story of Livermore be printed over and over, in every decade? Because markets are largely driven on human nature and psychology, which has changed very little.
The concept of speculation never left, traders persist to outsmart the "market" by forming some sort of prediction. One of Livermore's key insights, is to study the market as a whole, rather than fixating solely on individual price movements. Which is to identify whether bull or bear market conditions are present. Sometimes underlying fundamentals dictate market direction before specific price movements occur. One must always look at the general conditions, or as mentioned in the book: "One must be bullish in a bull market and bearish in a bear market." Easier said than done. In bull markets, bearish news is often ignored and bullish news is exaggerated, and vice versa. Deciding to short a stock based solely on bearish news may backfire in a bull market, even though this may seem counterintuitive. Thus what may seem like a good trade based on the individual stock price, often results in a bad trade when trading against general conditions. Thus, a thorough analysis on both aspects is a key before entering a trade.
Another key takeaway is on timing trades in these bull or bear markets. Or as is stated in the book: "People don't seem to grasp easily the fundamentals of stock trading. I have often said that to buy on a rising market is the most comfortable way of buying stocks. Now, the point is not so much to buy as cheap as possible or go short at top prices, but to buy or sell at the right time. 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." This is valuable lesson, as often traders try to time the market at the exact dip or peak, instead of averaging out and seeing how the market reacts upon the first trades. Firstly, one must analyze the general conditions, secondly, one must act upon these conditions by constantly validating their trade and acting upon changes.
As a concrete example from the book, Livermore would often add his big positions only after a smaller position showed a profit: "Well, I would buy ten thousand bales. After I got through buying that, if the market went up ten points over my initial purchase price, I would take on another ten thousand bales. Same thing. Then, if I could get twenty points' profit, or one dollar a bale, I would buy twenty thousand more. That would give me my line—my basis for my trading. But if after buying the first ten or twenty thousand bales, it showed me a loss, out I'd go. I was wrong. It might be I was only temporarily wrong. But as I have said before it doesn't pay to start wrong in anything."
Livermore also goes through a multitude of valuable lessons, extremely valuable, as his mistakes cost him millions, going almost bankrupt multiple times. One of the key lessons is to study mistakes: "The recognition of our own mistakes should not benefit us any more than the study of our successes. But there is a natural tendency in all men to avoid punishment." Or "A man can excuse his mistakes only by capitalizing them to his subsequent profit.", thus expensive mistakes become even more expensive when one does not manage to learn from them. It may be difficult and hurt ego to analyze such mistakes, yet it is a must for those who want to become a successful speculator.
Another valuable lesson is to let winners run and cut losers out: "I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. … 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 myself for doing the reverse." Often, attempting to make up for losses on a losing trade by adding more capital, while also prematurely cashing in on a winning trade, tends to yield poorer outcomes compared to adopting the opposite approach.
Livermore also strongly opposes to trading based on tips, which is still relevant to this day. Many traders buy and sell based on reading this one analyst report, hearing this one friend talk about the stock, or being persuaded through news reporters. Independent thinking is one of the most important traits in speculating.
💭 "The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor."
💭💭 "A man can have great mathematical ability and an unusual power of accurate observation and yet fail in speculation unless he also possesses the experience and the memory. And then, like the physician who keeps up with the advances of science, the wise trader never ceases to study general conditions, to keep track of developments everywhere that are likely to affect or influence the course of the various markets."
Final Word
Thus even after many decades of technological advancements, human nature has changed very little. "The speculator's deadly enemies are: Ignorance, greed, fear and hope. All the statute books in the world and all the rules of all the Exchanges on earth cannot eliminate these from the human animal." Despite the integration of new trading algorithms, one might think it has become less important, yet from recent market events, it can still be seen that human nature is a huge driver in markets today. Hence even after more than a hundred years, Livermore's insights are still as relevant as ever.