Timeless Advice from Jesse Livermore

“Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee. A man has to have experience and he has to pay for it.” – Jesse Livermore

Reminiscences of a Stock Operator by Edwin Lefevre is an investment classic that often finds its way onto the short list of best investment books ever written.

It’s not a get rich quick or how to kind of book. It simply chronicles the investing exploits of one of the most famous Wall Street traders of all-time, Jesse Livermore. It’s amazing how well this book holds up today considering it takes place during the late 1800s and early 1900s.

The book was actually first published in 1923.

Livermore made his first trade at the ripe age of 15. He started small but ended up making and losing millions throughout career as a professional trader.

My biggest takeaway from this book isn’t just that Livermore was an insanely smart trader (he was); it’s that his biggest advantage over the other side of his trades was that he understood human nature.

And even 100 years or so later, human nature still rules the markets and can lead to manias and panics. The structure and technology of the markets is different, but really it remains the same because emotions still rule the decisions of investors.

Here is some of the timeless advice from the book along with my thoughts:

Speculation is a hard and trying business, and a speculator must be on the job all the time or soon he’ll have no job. Being a full time trader is extremely difficult to pull off. Being a part time trader is impossible to pull off.

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 today has happened before and will happen again. The players may change but not their motives.

Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore. The financial media loves to look for reasons that the market moves up or down on certain days. Most of the time there’s no explanation.

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.  Doing nothing is a perfectly legitimate strategy the majority of the time with your investments. Livermore was a trader and even he knew that inaction worked most of the time.

It takes a man a long time to learn all the lessons of all his mistakes. I make mistakes all the time, but I’m trying to learn from them. Complex financial markets lead to mistakes no matter how smart or experienced you are. You can be wrong just don’t stay wrong for too long.

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. Did you get that? You begin to learn! Learning what not to do can be more important than learning what you do need to do to have success.

But not even a world war can keep the stock market from being a bull market when conditions are bullish, or a bear market when conditions are bearish. All a man needs to know to make money is to appraise conditions. Markets trade in cycles and sometimes they don’t care about external events.  Valuation, trends, cycles and sentiment determine the direction of the market.

After spending many years on Wall Street and after making and losing millions of dollars I want to tell you this: It was never my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight! Patience is a key virtue for investment success.

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. Investors get themselves in trouble by becoming greedy after large gains and fearful after large losses. Don’t fall into this trap by making big moves at the extremes.

But the average man doesn’t wish to be told that it is a bull or bear market. What he desires is to be told specifically which 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. Investors love looking for hot stock tips and market timing signals. They don’t exist on a consistent basis. Tactics are context dependent and they don’t last for long.

As a rule a man adapts himself to conditions so quickly that he loses the perspective. He does not feel the difference much – that is, he does not vividly remember how it felt not to be a millionaire. This line of thinking keeps people from saving more as they make more money. Keeping a consistent lifestyle is the key to saving.

Man will risk half his fortune in the stock market with less reflection than he deviates to the selection of a medium-priced automobile. It’s funny, because it’s true.

A man may beat a stock or a group at a certain time, but no man living can beat the stock market! Price is the ultimate judge and jury of the market. Don’t try to be outsmart than the market, especially over the short term.

The professional concerns himself with doing the right thing rather than with making money, knowing that the profit takes care of itself if the other things are attended to. Another example of the power of process over outcomes. This is one of the hardest things to do as an investor because you can clearly see your wins and losses, but doing it the right way is the best way to increase your probability for success.

Source:
Reminiscences of a Stock Operator

Further Reading:
John Templeton’s 16 Rules for Investment Success

 

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  1. Martin commented on Nov 26

    I read the book several times and loved everything he ever said. My blog name is actually named after Jesse calling some of his opponents in the stock market “suckers”.

    I loved his story when in 1930 when everybody was losing he made 3 millions dollars that day. He knew exactly what will be happening and positioned his trades accordingly. Brilliant.

    It can be however deceiving. If you misunderstand Livermore you can slip into gambling instead of trading and then you become that sucker he speaks of.

  2. Martin commented on Nov 26

    Yes it is his picture. I’ll check those articles.