From March to December 2010, I am re-reading and reviewing one timeless investment classic that I keep and refer to on the bookshelf within arm’s reach of my desk.
And now, MEA CULPA! The rush to leave 1896 left my short-term memory impaired. Since I had planned on surprising each month, I didn’t publish my titles in advance and, as a result, inadvertently eschewed chronological order and skipped right over 1923’s Reminiscences of a Stock Operator by Edwin LeFevre and 1934’s Security Analysis, by Benjamin Graham & David Dodd. I think the rise from 1923 to 1929 was very similar to 1993 - 1999. And I imagine 2010 will be an awful lot like 1934 was, just at the bottoming area of a new beginning-to-move-up market. So maybe it was fate to insert these next two now...
You can help keep me on the straight and narrow. The only author to repeat on this Timeless Classics list will make his second appearance in September. That will bring us all the way forward to the year in which the Chicago, Burlington & Quincy, Denver & Rio Grande Western and Western Pacific railroads inaugurated the California Zephyr passenger train between Chicago and Oakland, California, as the first long distance train to feature Vista Dome cars as regular equipment. The repeat author should give it away but, no cheating by looking online now, any guesses as to the author, year and timeless classic for September?
- Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackey (1841)
- The Crowd: A Study of the Popular Mind, by Gustave Le Bon (1896)
- The Battle for Investment Survival, by Gerald M. Loeb (1935)
- Where Are the Customers' Yachts?, by Fred Schwed, Jr.
And now on to July’s essential classic, Reminiscences of a Stock Operator, Edwin LeFevre, 1923.
"It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! ...Men who can both be right and sit tight are uncommon." -- Edwin LeFevre
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."-- Warren Buffett, who obviously read his Edwin LeFevre
Reminiscences of a Stock Operator is a barely-disguised biography of Jesse Livermore, a Wall Street legend who made and lost a number of fortunes. Mr. Lefevre has taken a very close look at what worked and what didn’t for Mr. Livermore and come away with some remarkably insightful observations about investing, speculating, trading and the nature of the market and its players.
Remember when reading this book, it is written as a novel, not a biography or an autobiography. I say this because it is so thinly-veiled that scores of quotes are today attributed to Jesse Livermore, when in fact they were penned by journalist Edwin Lefevre and spoken by his protagonist “Larry Livingston.” That’s not to say that Jesse Livermore may not have said the same thing or something nearly like it, but it was “Livingston” to whom it can be traced. I use the character and the flesh-and-blood character interchangeably; throughout the book, you may well feel as if this was Livermore’s "as told to" authorized biography, and it may well have been.
Among my favorite thoughts in the book that has guided my investing for 40 years is, “I learned early that there is nothing new in Wall street. ...Whatever happens in the stock market today has happened before and will happen again.” That does seem particularly timely of late.
The first part of the book provides some background for the young trader, describing “Livingston's” early career as a young boy working in a "bucket shop," so called because it was there that speculators placed stock “bets” with operators who were often swindlers; they never actually executed buy or sell orders but, instead, threw them into a bucket. They knew that the vast majority of bets would be wiped out by minor fluctuations, allowing them to pocket the funds based on their “margin rules” and such. Sort of like bank trading desks today, only with nicer personalities.
Young Livingston learned his craft here from years of daily observation, and he then swindled the swindlers by using their own tricks against them. He became a dedicated tape reader who developed an acumen for anticipating price fluctuations. He amassed his first fortune from these trading activities, so successfully that the bucket shop operators banned him from “playing” anymore, so he moved on to the Big Casino of Wall Street trading firms.
If you are a buy-and-hold investor, Reminiscences of a Stock Operator may not convince you to become a stock trader but it will still help you become a better long-term investor. How? Because the speculative ploys described in the book will allow you to see who is arrayed against you today and help you understand that there is absolutely no difference between what the Goldman Sachs (NYSE:GD) traders do and what the speculators of 1923 did, except maybe the price of their suits.
Livingston / Livermore’s approach was the very antithesis of buy-and-hold; his was the intellectual groundspring from which all the relative momentum traders of today have come. Just determine the path of least resistance in the market and never fight the tape. He did no fundamental analysis or attempt to determine a likely top or bottom. Instead, he waited for a trend to be confirmed and then jumped in with large bets. If there was no defined trend he waited patiently on the sidelines.
I am someone whose natural temperament, along with the time I am willing to spend watching every tick of the market, pushes me to calm, reflective fundamental analysis and a long-term point of view, so you might be surprised to find that one of my best “fundamentalist” disciplines comes from Reminiscences of a Stock Operator. Any fundamentalist’s natural propensity is to buy low and sell, if at all, much higher. That sometimes makes us believe that, just because we bought something at 15 and added a little at 17, that at 25 it must be too dear. I learned from this book to stop selling my own analysis short.
The biggest coups I have made in my career have come from identifying an undervalued situation and a probable catalyst early (very un-Livermore like) but then adding to it regularly – averaging up – as long as my analysis still held (very, very Jesse Livermore.) It’s a pleasure to watch as others catch on to something I discerned a month or a year earlier, but more pleasurable yet to continue to profit by it.
From this book I learned to add to my best ideas as long as their trend is still moving exactly as I imagined it would, which I recommend to you whether you are a trader or investor. And do cut your losses. It’s OK to be wrong; it’s not OK to be broke. If the rest of the investing world disagrees strenuously with you choice, don’t average down; keep most of your portfolio intact and be able to come back with a different idea.
In this, Livingston and Livermore and I are well in sync. You have to be patient, he wrote: if things are going your way, stay the course and don’t succumb to the occasional quick profit. He also noted that, for him, value plays no part in the decision, since prices move with the greed or fear of the crowd. That’s why he believed, and proved in his own accounts, that a stock is never too high to buy or too low to sell .
Although the book purports to accurately describe the highs and lows of Livingston / Livermore’s roller-coaster life, the real take-aways come from the trading decrees that are now trading maxims around the world. For instance, the concept of a public that regularly vacillates between greed and fear is on page 130 of my edition. The maxim "Never average down" on page 154. Among others that came directly from this book are “The trend is your friend,” “No stock is too high to buy or too low to sell,” “Let your winners run and cut your losses quickly,” and "if you don't like the odds, don't place a bet."
Among some others I think you may find of value, even in, especially in, our own troubled times are:
“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 favoured my play… No man can have adequate reasons for buying or selling stocks daily – or sufficient knowledge to make his play an intelligent play”
“… the automatic closing out of your trade when the margin reached the exhaustion point was the best kind of stop-loss order.” [JLS: Or, Never meet a margin call!]
“I knew of course, there must be a limit to the advances and an end to the crazy buying of A.O.T.-Any Old Thing-and I got bearish.”
“ My relations with my brokers were friendly enough. Their accounts and records did not always agree with mine, and the differences uniformly happened to be against me. Curious coincidence--not! But I fought for my own and usually won in the end. They always had the hope of getting from me what I had taken from them. They regarded my winnings as temporary loans, I think.”
“ They say you never go broke taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market.”
“… 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.”
“Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market the game is to buy and hold until you believe the bull market is near its end.”
“When I am long of stocks it is because my reading of conditions has 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 prepossessions either – to do any thinking for me. That is why I repeat that I never argue with the tape.”
“… I came to learn that even when one is properly bearish at the very beginning of a bear market it is not well to begin selling in bulk until there is no danger of the engine back-firing.”
“Sell down to the sleeping point.”
“He will risk half his fortune in the stock market with less reflection that he devotes to the selection of a medium-priced automobile.”
“He should accumulate his line on the way up. Let him buy one-fifth of his full line. If that does not show him a profit he must not increase his holdings because he has obviously begun wrong; he is wrong temporarily and there is no profit in being wrong at any time.”
“When a stock is going up no elaborate explanation is needed as to why it is going up. It takes continuous buying to make a stock keep 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 with it.”
And the one I hew to every single day, “I trade on my own information and follow my own methods.”
Author's Disclosure: No securities recommended. This review embraces strategy, not stock picks. If you want those, see my, and others', articles on SA.
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