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Some things in investing are timeless.
That is the case with bubbles. They appear every so often, going back to the Tulip Mania of Holland in the 1600s and before. And they always burst eventually.
In fundamental investing, the work of Ben Graham in the 1940s and 1950s has been a major influence on Warren Buffett and many value investors.
In trading, there is Jesse Livermore, the inspiration for the timeless 1923 book, “Reminiscences of a Stock Operator.”
Jack Schwager, the author of “Market Wizards,” interviewed 30 of the greatest traders of all time . . . he asked them what book they found the most valuable and would recommend to aspiring traders.
Their overwhelming response was “Reminiscences.”
Jesse Livermore and Modern-Day Investing
There are many pearls of wisdom in Livermore’s book from nearly 100 years ago that apply to modern-day active investing and momentum trend trading. Here are some of my favorite Jesse Livermore nuggets:
“I absolutely believe that price movement patterns are being repeated. They are recurring patterns that appear over and over, with slight variations. This is because markets are driven by humans – and human nature never changes.”
(Markets are guided by human behavior and have patterns that repeat and can be observed.)
“A prudent speculator never argues with the tape.” Another version is, “I don’t know whether I make myself plain, but I never lose my temper over the stock market. I never argue with the tape. Getting sore at the market doesn’t get you anywhere.”
(The chart tells the tale — don’t argue with the market.)
“Don’t take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don’t be an impatient trader.”
(Wait for confirmation of a trend before entering a trade. Don’t get whipped out by noise.)
When You Lose Money . . .
“Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul.”
(Cutting losses short is a vital money management tool and psychological boost for successful trading. Don’t let a small loser turn into a big loser.)
“Professional traders have always had some system or other based upon their experience and governed either by their attitude towards speculation or by their desires.”
(Having a tested, systematic approach that gives you an edge is always better than gambling with news events and playing hunches. Don’t get hooked on “hopium.”)
“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. Of all the speculative blunders, there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.”
(Let your winners run and cut your losers short. Don’t double down on a loser; study what went wrong and move on to the next trade.)
“Experience has proved to me that real money made in speculating has been in commitments in a stock or commodity showing a profit right from the start.”
(The best trades tend to go your direction fairly quickly.)
“In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be. The thing to do is to watch the market, read the tape to determine the limits of the get nowhere prices, and make up your mind that you will not take an interest until the prices breaks through the limit in either direction.”
(In a trading range environment, wait for a breakout or breakdown of the range before placing a directional momentum trade.)
“If you can’t sleep at night because of your stock market position, then you have gone too far. If this is the case, then sell your position down to the sleeping level.”
(Don’t risk more than you can afford to lose. Limit speculative aggressive trading to a portion of your portfolio.)
“It is foolhardy to make a second trade, if your first trade shows you a loss. Never average losses. Let this thought be written indelibly upon your mind.”
(Don’t double down and dollar-cost average a losing trade. Move on. It clears up mental capital and keeps powder dry for the next opportunity.)
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Some things never change. The lessons of Jesse Livermore apply today more than ever for active investors and traders.
Happy Trading,
Moby Waller
Lexington, Kentucky