Reminiscences of a Stock Operator is a roman à clef written by Edwin Lefèvre. The whole book describes the life of the legendary stock speculator Jesse Livermore (Larry Livermore in this novel). I will summarise the book and share some of my reactions in a couple of blogs.
I was most interested in verifying whether I had observed accurately; in other words, whether I was right.
I think this is a very unique motivation for a kid who was only about 14 and started trading — most adults don’t even have such vision — people usually only trade for making money, but Jesse did that for self-verification. Money to him was definitely important because it was the ticket for him to enter into this game.
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.
When he was 21, he was valued at about $25,000 and he went to New York, trying to be closer to the source of this game. However, it was not long before he went bankrupt in New York because he did not have a comprehensive understanding of stock speculation — it was more than playing for fluctuations of a few points as what he did in the bucket shops previously.
At that moment, all he knew was heavily relying on the ticker tape and then executed trades based on the numbers on it. This strategy caused him big trouble because there was always a lag between the numbers on the ticker tape and the actual price when his order arrived at the exchange house. Unfortunately, he did not realize this at the beginning (or we could say he did not come up with good solutions for this issue), and then he went bankrupt. This first-time bankruptcy pushed him to go back to trade in bucket shops in St. Louis, earning some money to stage a comeback.
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.
He came back to New York quickly after he profited in St. Louis. In the big boom of 1901, just like most people in the stock market at that time, he made some money, and quickly he was worth $50,000 because of his benefit from the war between the Harriman crowd VS. Morgan and Hill.
However, pleasant hours fly past quickly, he went bankrupt again in that fall and left New York. It’s not deniable that he had a good sense about the market — he foresaw that the market would retreat while after the big bump, and he traded by following this logic. However, the problem was still there — the laggings between the price on ticker tape and the ultimate execution price. When he saw the price on ticker tape was $100, and then he made the order to short the stock based on this number, however, he would get an $80 as the execution price returned, losing 20%, and unfortunately, this $80 was the price that he planned to buy it back when he made the $100 short order. On the contrary, when he made an order to buy the stock at $80, he might end up getting a $90 as an execution price, losing about another 15%. It was the fact that he knew how the market would go, but he still lost money.
Later, he tried to save his trades by making orders with limited prices, which was proved to be just like putting the old wine in a new bottle, he couldn’t solve the issues derived from those laggings. After that, he left New York and went back to his home, knowing that he was not able to solve the problem at that moment.
The Great Revival
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.
Jesse spent about one year at home, keeping trading and accumulating his wealth, then he started his journey to New York — as the third time. This time the journey would be bound to be different from the previous two experiences because he had come up with more completed theories and assured that what he needed to do was practicing them in a more regulated and furious battlefield. I think one of the key factors that separate nobody and legendary is the reaction to setbacks — being in awe of those setbacks and absorbing from failures could be the best catalyst for being successful.
The only thing that didn’t lie because it simply couldn’t was mathematics.
As a talented and smart guy, Jesse was able to find out why he failed previously. Meanwhile, he was a guy who was good at studying, especially studying from people who were more experienced. One of the first men he learned from was a Frenchman who was good at chart analysis (technical analysis). Initially, he did not care about this guy at all because Jesse thought this guy was just another puppet of big brokers. However, his curiosity about knowing potential new trading theories persuaded him to study more about the curves that Frenchman mentioned. Then he quickly realized that this mathematics-based method was able to tell the truth of the market movement (at that period) and he could use it to better analyze and forecast the future price movement.
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.
However, even with the help of technical analysis and studying the market/stock more proactively and thoroughly, sometimes he was still upset that he could not maximize his profits all the time. Later on, he started noticed a guy whose nickname was Turkey (what a great name for a stock operator ;p). During the bull market, people always traded quickly by relying on different tips — both traceable and untraceable. In short, people traded blunderingly and just want to make quick and easy money. However, the trading game for this Turkey guy was different — he barely did any short-term sell after he bought a stock, and sometimes people may suggest him to sell but he had never taken the advice. After analyzing Turkey’s behavior, Jesse learned that in a bull market your game was to buy and hold until the big trend was drawing to a close. Whereas this does not mean people should be as greedy as possible, and he also recognized that don’t try to grab every first and last penny.
Looking back to the early life of Jesse Livermore, I find it was not plain sailing as what I expected before. I think one of the reasons that I am deeply attracted by his stories is not just because of all the ups and downs of his life, but also because of his enthusiasm and persistence to what he was really loved.
I think maybe I should end the part I here because I don’t want to make this post too long and hard to read.