 Wisdom of Jesse Livermore 7
"don't
put the speculation cart before the horse that drives it!"
Adam Hamilton
Archives
January 2, 2004
Legendary speculator Jesse
Livermore is surely one of the most fascinating characters in
all of financial-market history.
About a century ago Jesse Livermore
blossomed into one of the most celebrated speculators of all
time. He was trading heavily in the early decades of the 1900s,
a wondrous era to speculate in stocks. His renowned exploits
are still viewed with great awe and reverence by today's elite
speculators and his towering speculation wisdom will stand tall
for ages to come.
If you are interested in more
background information on Jesse Livermore and my reasons behind
writing this series of essays on the man's awesome speculation
wisdom, you may wish to skim the introduction of the first
essay in this
series.
Mr. Livermore's exploits were
recorded in the greatest book on speculation of all time. Originally
published in 1923, it is called "Reminiscences of a Stock
Operator" and was written by a gifted financial journalist
named Edwin Lefevre. Mr. Lefevre penned the account as if from
the first-person perspective of a fictional trader named Larry
Livingston. As Lefevre had spent weeks extensively interviewing
Jesse Livermore, market historians are virtually unanimous in
viewing Lefevre's classic book as a thinly-disguised biography
of Livermore's trading life.
Today "Reminiscences
of a Stock Operator" is fondly read with awe by speculators
of all levels and abilities all around the globe. I have personally
read the book many times and I try to re-read it at least once
a year now. The speculation wisdom contained within these magical
pages is just awesome and truly priceless for all speculators
to digest.
If you are interested in speculation
and you haven't read this book yet you owe it to yourself to
buy it today at Amazon or Barnes & Noble. I can almost guarantee
that it will forever change you as a speculator and help you
soar to new heights of understanding of the game and achieving
real-world success.
Jesse Livermore's words and
experiences are so endearing and powerful because he presents
himself as just another mere mortal like you and I, with hopes,
fears, and frailties. He is brutally honest in critiquing his
own evolution as a speculator and thoroughly explaining his own
mistakes and the great wisdom they ultimately led to.
In this series of essays Jesse
Livermore's wisdom is presented chronologically from the book.
All the bold-faced passages below are his words directly out
of Lefevre's book, while the following normal text is my own
feeble thoughts and commentary attempting to pull Livermore's
wisdom a century into the future to today. Before every quotation
below, the chapter in "Reminiscences" from which it
is pulled is noted so you can quickly find it and dig deeper
by reading the valuable surrounding background context if you
wish.
I hope and pray that you find
Jesse Livermore's awesome wisdom as exciting and valuable as
I have!
(Chapter V)
..."Without faith in his own judgment no man can go very
far in this game. That is about all I have learned - to study
general conditions, to take a position and stick to it. I can
wait without a twinge of impatience."
Jesse Livermore, just like
modern students of the art of speculation, studied the financial
markets relentlessly. Good sound judgment is one of the most
valuable attributes that a speculator can possess, and good judgment
is always the product of real-world experience and time. Studying
and trading the markets over time leads to this experience, and
the actual speculation wins and losses with your own capital
on the line ultimately begets judgment.
While judgment takes years
to learn, and can continue to increase indefinitely until we
die and cease studying and playing the markets, a speculator
still must maintain faith in his own judgment in order to fully
utilize this priceless wisdom. Once you make a judgment on a
particular market, it can take a great deal of faith to hold
the line and maintain your positions, to sit tight even though
the markets haven't proven you right yet.
These judgments, keeping the
faith in them, and the resulting ironclad patience necessary
to wait for a trade to mature even in sometimes adverse market
conditions really define contrarianism. Jesse Livermore was speaking
as an elite master speculator here, able to make judgments based
on his experiences, be confident in his judgments and the actual
resulting trades, and finally to hold fast unflustered until
the large swing that he was looking for finally came home to
roost and blessed him with magnificent profits.
(Chapter V)
..."As a matter of fact, the only incidents that I remember
without special effort are those that taught me something of
definite value to me in my trading; something that added to my
store of knowledge of the game - and of myself!"
The matchless Jesse Livermore
closed the magnificent Chapter V of "Reminiscences"
highlighting some of his most important lessons for us speculators
of the future. Play the big swings only, because that is where
the truly legendary profits are earned!
Mistakes and losses are just
part of the game, but use them wisely and make darned sure that
you seize the opportunity to learn from every loss that you suffer.
After all, these very painful losses provide the priceless experience
that will lead to stellar speculation instincts and judgment
in the future!
And while reminiscing about
betting big and losing it all three times in only two years,
Livermore points out that "being broke is a very efficient
educational agency." Losing it all in the early years is
just par for this challenging course and happens to almost all
speculators, so if you are new to the game and bet big and lose
big, have no fear! Start saving and rebuilding your capital war
chest right away, diligently learn from your mistakes, and get
ready to jump right back into the game when the opportunity arises.
Jesse Livermore ultimately
concludes this awesome chapter with the amazing words above,
kind of a closely held secret amongst speculators. Speculation
not only teaches us a great deal about the markets, but also
about ourselves! Indeed, learning about our own internal workings
and psychology is one of the greatest side benefits of speculation,
a rare opportunity that only exists in challenging and stressful
paths in life.
The markets and capital are
emotional beasts, and they will relentlessly expose every single
chink in your and my spiritual, mental, emotional, and psychological
armor. As the markets obstinately probe our own individual weaknesses
through our own trades though, we become aware of our own unique
failings and are gradually able to overcome them.
While all speculators face
common adversities, there are little challenges unique to me
and also other ones unique to you. The markets ultimately expose
all of these individual weaknesses and failings eventually and
force us to deal with them and our own fragile emotions.
After many years or decades
of speculating, a speculator already knows most of his or her
unique weaknesses and has learned to ignore them, compensate
for them, or totally overcome them. If you choose the hard path
of a speculator, then before your journey ends you will know
vastly more about yourself than when you started. This is truly
a great and worthy reward by any standard.
(Chapter VI)
..."You may remember the story I told you about that time
when I was short thirty-five-hundred Sugar in the Cosmopolitan
and I had a hunch something was wrong and I'd better close the
trade? Well, I have often had that curious feeling. As a rule,
I yield to it. But at times I have pooh-poohed the idea and have
told myself that it was simply asinine to follow any of these
sudden blind impulses to reverse my position. I have ascribed
my hunch to a state of nerves resulting from too many cigars
or insufficient sleep or a torpid liver or something of that
kind. When I have argued myself into disregarding my impulse
and have stood pat I have always had cause to regret it."
Jesse Livermore is talking
about that almost magical quality of intuition here. You have
seen all the statistics about our marvelous brains! They are
fearfully and wonderfully created, each more powerful than supercomputers
with more internal connections than exist in the entire telecommunications
networks of our whole planet! Our brains constantly assimilate
and process vast amounts of raw data and it doesn't all come
back to the surface immediately.
But sometimes, we get a nagging
feeling and a glimmer or hint of some crucial piece of information
that will most probably affect one of our open trades. Livermore
said that we should run with these curious feelings or hunches.
I suspect that this precious
speculators' intuition arises when our brains are processing
information to such a parallel and non-related degree that we
just can't fully grasp the full reasoning behind a nagging conclusion.
So, our brains flash us a tantalizing inkling that something
is up and we ought to heed it, sometimes by closing our relevant
position if necessary.
Now heeding hunches and being
right and sitting tight are certainly not mutually exclusive,
as might appear at first glance! There is indeed a fine line
between acting on a solid hunch and being flighty, but I suspect
this razor's edge is dipped in emotion. A hunch is intellectual
and emotionally neutral, while any idea even remotely tainted
with greed or fear is probably merely emotional and shouldn't
stop a speculator from sitting tight through challenging market
conditions.
For example, if you get a nagging
feeling that something isn't right on one of your trades, but
you can't place it, you need to farther analyze this hunch. If
your hunch is completely devoid of emotion, you probably ought
to heed it and get out of potential harm's way. Losing capital
is much worse than missing an opportunity, since opportunities
are like trains in the markets, they are always coming and going
and always will. Missing one is no big deal since you can always
catch the next!
But if your feeling is tinged
with greed or fear, it is probably not a righteous subconscious
hunch. For example, if you are scared about losing money, fearful
of not making enough, or greedily expecting to retire and buy
a private island from your projected million-to-one win on your
next trade, then you probably ought to disregard it. Our own
internal emotions springing from our mortal hearts can be our
own worst enemies as speculators.
So if you find yourself greedy
or frightened, sit tight and fight the death grip of emotions
on your heart! But, if an uneasy feeling arises about a position
you are holding that is totally emotionally neutral, then it
is prudent to close your position and sit back until your subconscious
brain can finally relay the data and logic underneath the hunch
in such a fashion that your conscious mind can understand the
subtle peril at hand.
This priceless intuition, interestingly
enough, goes hand-in-hand with judgment and can only be obtained
as well through the very same real-world study, speculation,
and experience. The more time that you spend in the markets,
the sharper that your intuition will become and the greater of
an ally it will be for you.
A little later in his fascinating
narrative Jesse Livermore wisely points out, "it isn't a
hunch but the subconscious mind, which is the creative mind,
at work. That is the mind which makes artists do things without
their knowing how they came to do them. Perhaps with me it was
the cumulative effect of a lot of little things individually
insignificant but collectively powerful."
(Chapter VI)
..."I can always give up trading to play, unless of course
it is an exceptionally active market in which my commitments
are rather heavy."
Since speculation is so intellectually
challenging and emotionally draining, Jesse Livermore points
out that leisure time is absolutely crucial. All speculators
need a break from the game, and leisure time is totally necessary
for us to relax and unwind. It doesn't really matter what type
of leisure that you fancy, just as long as that activity allows
you to totally disconnect from the markets and your trades and
mentally and emotionally decompress.
Personally, I truly savor reading
great nonfiction and fiction books, both historical and contemporary.
I enjoy the adrenaline rush of seeing great action movies during
this winter season, and the fast-paced thrill of mercilessly
pounding the rough single-track trails on my trusty carbon-fiber
mountain-bike steed in the summers. Life is chock full of so
many great wonders to enjoy!
I have speculator friends that
escape via golf, in hiking through the mountains, in flying airplanes,
in sailing, in traveling and exploring, in all kinds of neat
things. I even know three separate fellows who run their own
private hobby gold mines for fun, chiseling rock by hand when
they aren't trading! It doesn't matter what kind of leisure you
prefer, just that you force yourself to take fun downtime, "play"
time as Livermore called it, away from the perpetual stress of
the markets.
As an added bonus, leisure
time grants our subconscious minds excellent quality time to
chew on current market conditions without us consciously badgering
and nagging and can lead to great insights and intuition. How
many times have you been taking a steaming hot shower after a
morning workout, or coming home from a fun outing, when all of
a sudden, out of the blue, bam, a fantastic speculation idea
emerges from the rested subconscious that you are just going
to have to pursue when you return to the markets!
(Chapter VI)
..."The bull forces were at work, and the public never is
independently responsive to news. You see that all the time.
If there is a solid bull foundation, for instance, whether or
not what the papers call bull manipulation is going on at the
same time, certain news items fail to have the effect they would
have if the Street was bearish. It is all in the state of sentiment
at the time."
Boy, if this was true in Jesse
Livermore's day, imagine how much more so it is today in the
frenetic Information Age! News alone is not all that important,
it is only when news is filtered through the currently prevailing
sentiment that it will have a material impact on the markets.
If sentiment is bullish then bad news is ignored, and if sentiment
is bearish then good news is disregarded. Sentiment is king for
short-term trading!
In this quotation's fascinating
original context, Livermore is talking about the day that the
news of the awful great San Francisco earthquake of 1906 arrived
on Wall Street in New York. Our hero was short 5,000 shares of
the Union Pacific railroad on a hunch before the earthquake hit,
a perfect trade, but Livermore noted that the stock markets were
only down a couple percent as the shocking news hit.
Livermore's massive short position
was fundamentally correct, as the railroad damage had probably
been catastrophic and hence rotten news for Union Pacific, but
since Wall Street was not in the mood for bad news at the moment
the markets initially ignored the horrible tidings. Prices even
recovered before the trading day ended. Jesse Livermore said,
"The blow had fallen, but my stock hadn't." One of
Livermore's friends told him that the tape didn't lie, to which
Jesse brilliantly replied that neither does it "always tell
the truth on the instant."
UP had suffered tremendous
damage that would eat up future earnings and dividends but the
Street was stuck in a bullish sentiment phase and wasn't ready
to digest the ill news yet. Naturally Livermore knew that he
was right so he sat tight, and after a couple of days the real
damage reports started trickling in and the railroad selloff
started. Livermore ended up pocketing $250k on this single trade,
the equivalent of at least $5m in today's inflated dollars, in
his biggest win to that point in his life!
Just like the Great 1906 San
Francisco Quake, all news is first filtered through the prevailing
market sentiment of the moment, and people specifically and the
Street in general are often shortsighted and slow to change in
the face of new news that threatens a specific fashionable worldview.
Often times market prices lag real-world events by as long as
it takes for sentiment to shift to reflect the new realities.
Sometimes this only takes days, but other times the shifts drag
out for weeks or longer.
So if you have a position,
and you are aware of some major undisputable fundamental change
underlying it, have no fear if the markets don't react instantly
to the news. If the breaking news flies in the face of the prevailing
bullishness or bearishness at the moment, it can take some time
for the markets to digest the new fundamentals and the prices
to move accordingly. Livermore's incredible railroad short through
the 1906 San Francisco earthquake magnificently illustrates this
important lesson.
(Chapter VI)
..."From then on I began to think of basic conditions instead
of individual stocks. I promoted myself to a higher grade in
the hard school of speculation. It was a long and difficult step
to take."
The legendary Jesse Livermore
closed out this sixth chapter in his wonderful treatise on the
art of speculation by concluding that it is the general market
conditions that speculators must diligently strive to understand
first, not individual stocks. Individual stocks are certainly
still important, but only when considered within the overriding
prevailing strategic background context of existing market conditions
and sentiment at the time.
For example, when the NASDAQ
sells off hard, pretty much all of the technology stocks today
fall with it regardless of their individual fundamentals. During
our awesome gold-stock
rally of 2003, almost all gold stocks had great years, the
rising golden tide lifted almost all of the boats regardless
of the individual merits of specific gold-mining companies. You
can know everything that there is to know about individual companies
but still make the wrong bets at the wrong times if you cannot
correctly perceive and handicap the markets' currently prevailing
"basic conditions."
If you want to play tech stocks,
before you dump the considerable time into culling out your plays
of choice, make sure that you know whether or not the general
markets ought to be heading higher or lower in the months ahead
based on historical probabilities. Even if you buy the best technology
company on earth right before a major NASDAQ decline odds are
that you are going to lose a lot of money on that trade!
As I was hard at work on the
just-published shiny new January issue of our acclaimed Zeal
Intelligence newsletter for our dear subscribers
this week, which details fundamental analysis on six of the most
promising elite unhedged blue-chip gold and silver stocks for
the next major precious-metals upleg in 2004, I pondered this
great Livermore truth a great deal.
No matter how much time and
painstaking effort that we spend ferreting out the best blue-chip
gold and silver speculations around, whether we will win or lose
on these plays totally depends on the prevailing market conditions
and sentiment at the time.
If we buy near the cusp of
a short-term bull-market interim high right before a major correction,
then we will lose money over the short-term no matter how good
our companies are. But if we can discern the technical signs
and summon the patience to wait to buy near the next interim
lows after a major correction, our potential profits could be
immense!
Individual-stock analysis is
certainly important, but only within the crucial overarching
strategic context of general market conditions, the very drivers
of the coveted big swings that Jesse Livermore so diligently
stalked. Don't make the dangerous mistake of putting the speculation
cart before the horse that drives it!
Well, unfortunately this is
all of Jesse Livermore's wisdom that fits into this seventh essay
of my
series on "Reminiscences." I hope you found Mr.
Livermore's great wisdom enlightening!
Go buy and read "Reminiscences
of a Stock Operator" today! I can almost guarantee that
it will forever change your life as a speculator! Jesse Livermore's
quotes are even more impressive in their proper context and are
delightful to read and digest. This essay format can't even start
to do them justice.
Until next time, Godspeed and
happy speculating!
Adam Hamilton, CPA
email:
zelotes@zealllc.com
Archives
January 2, 2004
The Series:
Wisdom
of Jesse Livermore 7 1.2.2004
Wisdom
of Jesse Livermore 6 10.31.2003
Wisdom
of Jesse Livermore 5 8.29.2003
Wisdom
of Jesse Livermore 4 7.3.2003
Wisdom
of Jesse Livermore 3 5.2.2003
Wisdom
of Jesse Livermore 2 2.28.2003
Wisdom
of Jesse Livermore 1 1.31.2003
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