Reminiscences of a Stock Operatorwas originally written in 1922 as a first-person fictional account, but is now generally accepted as the biography of stock market whiz Jesse Livermore. The book is recommended to traders and value investors alike, for the lessons it teaches the reader in human behaviour as it pertains to securities trading and investing.
Chapter 11-12
Using examples from his own trading experiences, Livermore discusses some stock market lessons he has learnt. The first lesson has to do with the herd mentality that is often possessed by large groups of investors. At times, that a certain security will rise or fall is considered so certain by investors, that they will go long or short in droves. Often, no one in the group will take pause to question their actions; instead, they will simply believe themselves to be right because everyone else is doing the same thing. Livermore has made much money trading opposite these herders.
Another lesson Livermore has learned is that although he may be right about the future direction of a price, he may be wrong on whether he can convert his paper profit to an actual profit. This is because if one accumulates too many shares relative to the liquidity of the shares, the speculator may still have to take a loss even when he turns out correct on the price. Speculators should only take positions that they can get out of when they need to, or else they must be prepared to get out not on their own terms, but rather when an opportunity presents itself.
Finally, Livermore recommends that the reader not listen to experts that claim to know something you don't. Livermore has lost a pretty penny thinking that he was trading on information that was superior to his own analysis. All he found was that he lost money when banking on the analysis of others. No matter how convincing analysts are, Livermore recommends that the reader do his own homework and draw his own conclusions from that homework.
Chapter 13-14
Throughout his trading career, Livermore has been used by others. In one instance in particular, Livermore was used by the president of a brokerage house to help out other clients. Since Livermore was known as a heavy short-seller (whether true or not, this was the public perception), he was offered favourable terms by this brokerage house, in order that when stock sales were executed by some of the long clients of this brokerage house, it could be explained away as Livermore's short sales (and result in a better execution price for the long clients).
At the time, however, Livermore did not see that he was being used, and instead found this president to be of immense generosity. This taught him an expensive lesson in human nature. The perceived kindness of this president caused Livermore to listen and accept this man's suggestions more than he should have. It is to this human trait, allowing someone who is kind more influence than someone otherwise unkind, that Livermore attributes to yet another wipe-out of his portfolio.
As a result of this particular bust, Livermore was over $1 million in debt to various brokers and friends. He found that psychologically he could not make money in the market with these debts hanging over him, and so he went to his debtors to ask for loan forgiveness, but with the full intention to pay back in the future. The newspapers bashed him for needing loan forgiveness, and this saddened him greatly.
With the loans forgiven, Livermore once again rose to prominence by running with a bull market and then successfully shorting a bear market. He paid off his forgiven debts, and having learnt a lesson in human nature, he set up irrevocable trusts to provide for his wife and child so that even if he were to beg his wife for money, legally even she could not alter the trust to grant him funds.
Chapter 15-16
When Livermore is wrong in his speculation, he has no problem with losing money as a result. When conditions change following a market bet he has made, he also has no problem losing money as a result. But Livermore does take exception to parties that weasel out of agreements.
In one particular case, it cost Livermore millions of dollars. During World War I, coffee importers held too much supply, and thus sold the commodity to Livermore. Once transportation for the commodity began to return, Livermore stood to make a killing as the price would begin to rise. The importers, however, went to Washington and convinced regulators to force the immediate settlement of contracts so that they could profit over Livermore, a supposed speculator and profiteer that added no value to the economy. Livermore counters that it was he who stabilized the price when it was falling (to the benefit of the economy), and therefore it should be his reward if/when the situation turns.
Livermore also tackles the uselessness of stock tips that are abound in the market. He claims to have received more than 100 tips per day! He never gave tips, for he recognized that in speculation, there is no sure thing. But the number of people willing to listen to and give away tips baffles him. Livermore recounts several stories where tips have led to disasters, and believes no speculator or investor should trade off them. One company president even gave a tip to Livermore's wife, and she traded on the info (only to lose her investment completely) unbeknownst to Livermore.
Chapter 17-18
Livermore speaks to the many tales that have been told about his trading prowess. Everyone from the media to his close friends have all exaggerated his ability. They speak of how he receives hunches in the middle of dinner that cause him to act just then, resulting in a sale (or purchase) right at the market top (or bottom).
These "hunches", Livermore argues, are nothing more than his mind (including, at times, his subconscious mind) mulling over the various facts that govern whether a security is to break higher or lower.
One of the pieces of information in which Livermore places great importance in forming his trading opinions is the level of insider buying/selling. But the information on insider buying/selling only comes out much later, and therefore Livermore tries to determine it right then and there by reading a stock's ticker (i.e. looking at past prices). In combination with a stock's fundamentals and the state of the macroeconomy and industry, Livermore tries to determine (with test trades described in an earlier chapter) whether insiders are participating. If insiders are not bolstering an undervalued stock with their own buying, for example, he often sees this as a signal that something is wrong with the company.
At other times, however, the economy and general market conditions will cause him to trade opposite insiders. Many times, insiders have promoted their stock by releasing positive news or spreading rumours that are bullish. In such cases, Livermore will again test the market to determine if insiders are actually buying. If there is no resistance (e.g. the price moves down as a result of his sale transaction), he will trade against the stock despite the actions of other market participants who are reacting to the news.
Chapter 19-20
Often, a speculator will acquire a large block of stock that he wishes to sell. Unfortunately, unloading a ton of shares on the market will often reduce the selling price, and can sometimes even cause a panic. As such, selling large chunks of shares to the market is an art form that Livermore argues only specialists should perform.
Livermore has been asked by large holders of stock to use his skill in selling their stock at a reasonable price. In return, Livermore asks for graduated call options on the stock, so that the higher he gets the price (resulting in a higher profit for the large holder), the more he gets paid.
Unlike many stock manipulators of his day, Livermore sees no need to spread false rumours to get a stock price moving. Cognizant of the fact that humans tend to supply their own reasons for occurrences that are taking place, Livermore simply increases the volume of the stock in question by both buying and selling. He finds that the increase in volume attracts buyers, offering him the ability to sell into the newfound demand.
Livermore also discusses the exploits of some of the famous stock manipulators of years past. Some would try to corner markets, though that was no guarantee of success. Others would create ponzi schemes that the public would buy into without thought. As Livermore used to read about past stock market manipulations, he used to believe that people of yesteryear were simply not as bright as people today. With enough experience, however, he saw that people of his day are just as likely to fall for false promises of easy money as people of years past.
Saj Karsan
http://www.barelkarsan.com
Chapter 11-12
Using examples from his own trading experiences, Livermore discusses some stock market lessons he has learnt. The first lesson has to do with the herd mentality that is often possessed by large groups of investors. At times, that a certain security will rise or fall is considered so certain by investors, that they will go long or short in droves. Often, no one in the group will take pause to question their actions; instead, they will simply believe themselves to be right because everyone else is doing the same thing. Livermore has made much money trading opposite these herders.
Another lesson Livermore has learned is that although he may be right about the future direction of a price, he may be wrong on whether he can convert his paper profit to an actual profit. This is because if one accumulates too many shares relative to the liquidity of the shares, the speculator may still have to take a loss even when he turns out correct on the price. Speculators should only take positions that they can get out of when they need to, or else they must be prepared to get out not on their own terms, but rather when an opportunity presents itself.
Finally, Livermore recommends that the reader not listen to experts that claim to know something you don't. Livermore has lost a pretty penny thinking that he was trading on information that was superior to his own analysis. All he found was that he lost money when banking on the analysis of others. No matter how convincing analysts are, Livermore recommends that the reader do his own homework and draw his own conclusions from that homework.
Chapter 13-14
Throughout his trading career, Livermore has been used by others. In one instance in particular, Livermore was used by the president of a brokerage house to help out other clients. Since Livermore was known as a heavy short-seller (whether true or not, this was the public perception), he was offered favourable terms by this brokerage house, in order that when stock sales were executed by some of the long clients of this brokerage house, it could be explained away as Livermore's short sales (and result in a better execution price for the long clients).
At the time, however, Livermore did not see that he was being used, and instead found this president to be of immense generosity. This taught him an expensive lesson in human nature. The perceived kindness of this president caused Livermore to listen and accept this man's suggestions more than he should have. It is to this human trait, allowing someone who is kind more influence than someone otherwise unkind, that Livermore attributes to yet another wipe-out of his portfolio.
As a result of this particular bust, Livermore was over $1 million in debt to various brokers and friends. He found that psychologically he could not make money in the market with these debts hanging over him, and so he went to his debtors to ask for loan forgiveness, but with the full intention to pay back in the future. The newspapers bashed him for needing loan forgiveness, and this saddened him greatly.
With the loans forgiven, Livermore once again rose to prominence by running with a bull market and then successfully shorting a bear market. He paid off his forgiven debts, and having learnt a lesson in human nature, he set up irrevocable trusts to provide for his wife and child so that even if he were to beg his wife for money, legally even she could not alter the trust to grant him funds.
Chapter 15-16
When Livermore is wrong in his speculation, he has no problem with losing money as a result. When conditions change following a market bet he has made, he also has no problem losing money as a result. But Livermore does take exception to parties that weasel out of agreements.
In one particular case, it cost Livermore millions of dollars. During World War I, coffee importers held too much supply, and thus sold the commodity to Livermore. Once transportation for the commodity began to return, Livermore stood to make a killing as the price would begin to rise. The importers, however, went to Washington and convinced regulators to force the immediate settlement of contracts so that they could profit over Livermore, a supposed speculator and profiteer that added no value to the economy. Livermore counters that it was he who stabilized the price when it was falling (to the benefit of the economy), and therefore it should be his reward if/when the situation turns.
Livermore also tackles the uselessness of stock tips that are abound in the market. He claims to have received more than 100 tips per day! He never gave tips, for he recognized that in speculation, there is no sure thing. But the number of people willing to listen to and give away tips baffles him. Livermore recounts several stories where tips have led to disasters, and believes no speculator or investor should trade off them. One company president even gave a tip to Livermore's wife, and she traded on the info (only to lose her investment completely) unbeknownst to Livermore.
Chapter 17-18
Livermore speaks to the many tales that have been told about his trading prowess. Everyone from the media to his close friends have all exaggerated his ability. They speak of how he receives hunches in the middle of dinner that cause him to act just then, resulting in a sale (or purchase) right at the market top (or bottom).
These "hunches", Livermore argues, are nothing more than his mind (including, at times, his subconscious mind) mulling over the various facts that govern whether a security is to break higher or lower.
One of the pieces of information in which Livermore places great importance in forming his trading opinions is the level of insider buying/selling. But the information on insider buying/selling only comes out much later, and therefore Livermore tries to determine it right then and there by reading a stock's ticker (i.e. looking at past prices). In combination with a stock's fundamentals and the state of the macroeconomy and industry, Livermore tries to determine (with test trades described in an earlier chapter) whether insiders are participating. If insiders are not bolstering an undervalued stock with their own buying, for example, he often sees this as a signal that something is wrong with the company.
At other times, however, the economy and general market conditions will cause him to trade opposite insiders. Many times, insiders have promoted their stock by releasing positive news or spreading rumours that are bullish. In such cases, Livermore will again test the market to determine if insiders are actually buying. If there is no resistance (e.g. the price moves down as a result of his sale transaction), he will trade against the stock despite the actions of other market participants who are reacting to the news.
Chapter 19-20
Often, a speculator will acquire a large block of stock that he wishes to sell. Unfortunately, unloading a ton of shares on the market will often reduce the selling price, and can sometimes even cause a panic. As such, selling large chunks of shares to the market is an art form that Livermore argues only specialists should perform.
Livermore has been asked by large holders of stock to use his skill in selling their stock at a reasonable price. In return, Livermore asks for graduated call options on the stock, so that the higher he gets the price (resulting in a higher profit for the large holder), the more he gets paid.
Unlike many stock manipulators of his day, Livermore sees no need to spread false rumours to get a stock price moving. Cognizant of the fact that humans tend to supply their own reasons for occurrences that are taking place, Livermore simply increases the volume of the stock in question by both buying and selling. He finds that the increase in volume attracts buyers, offering him the ability to sell into the newfound demand.
Livermore also discusses the exploits of some of the famous stock manipulators of years past. Some would try to corner markets, though that was no guarantee of success. Others would create ponzi schemes that the public would buy into without thought. As Livermore used to read about past stock market manipulations, he used to believe that people of yesteryear were simply not as bright as people today. With enough experience, however, he saw that people of his day are just as likely to fall for false promises of easy money as people of years past.
Saj Karsan
http://www.barelkarsan.com
