Last week, we discussed some of the most insightful observations made by Jesse Livermore, an early-to-mid-20th century stock operator and trader. Livermore is best known today, as he was in his own day, for shorting the market before the crash of 1929, a move that earned him a fortune and won him the moniker of the “Great Bear of Wall Street.”
Livermore was well-known for his wit and observations on the behavior of the market and of the mob psychology that often underpins its movements. A single article can hardly contain the full scope of his insight, and so we have decided to dip further into the well of Livermore’s wisdom today.
Our last entry was something of a “greatest hits” compilation, with no specific theme. This research note, on the other hand, focuses on one aspect of investing: using information to make superior trading and investment decisions.
Beware brokers bearing gifts
Livermore had this to say about brokers’ tips:
“There is only one sure tip from a broker: the margin call. When it reaches you: close your account.”
In other words, when your broker comes to you with a hot tip, it is never a sure thing. And oftentimes it is the opposite of good advice. In Livermore’s time, the rules were far laxer than they are today, and brokers could get involved in all sorts of gray areas. As for the one sure tip, the margin call, that is still an issue today. The only thing you can be absolutely sure of when your broker calls is when you are in deep trouble. As for closing your account upon receipt of a margin call, it is not a bad idea, especially if it was precipitated by advice provided by the broker. If your broker messes up like that, obviously close your account and try somewhere else.
While investors often have far less active interaction with stock brokers than they did in Livermore’s day, thanks to the advent of online trading platforms that make human-to-human interaction less necessary, many individuals still rely on broker-dealers of various stripes for investment advice. Many individuals believe that their wealth managers are obligated to act in their best interests, but that of course is not the case. The fiduciary rule that would require broker-dealer advice to be of a higher standard – namely, it would have to pass a fiduciary test and not simply a suitability test – has been postponed by the Trump administration and may never see the light of day.
Remember that, when speaking to your wealth adviser or broker, their loyalty is to themselves and not to you. You must always be your own advocate.
Be wary of insiders
In the pre-1929 stock market, insider trading was a fairly standard occurrence. Indeed, it was considered part of doing business on Wall Street. But Livermore was wary of inside information:
“Beware of inside information: ALL inside information.”
The rules governing insider trading and inside tips were tightened severely during the Roosevelt administration, and were progressively strengthened over the next several decades. Today, insider trading is 100% illegal and no one should ever engage in it. Getting inside information, even inadvertently, can expose you to serious legal liability.
So why was Livermore concerned with it? One would think that, in his own time, inside information would be welcome indeed. Yet he was very wary of such tips. The reason for this is that insiders may have a separate agenda from your own.
Spreading misinformation remains a tactic occasionally employed by public companies, though usually this must occur in a gray area in order to avoid sanction or regulatory and legal repercussions. So if it seems like there are rumbling from inside a company, or internal reports or correspondence gets leaked, it is often done with an agenda. Always look at such information, if it comes into the public space, with extreme caution and skepticism. Never let yourself be manipulated by those selling an agenda. The price of credulity is often dear.
Commit to your own decisions
We have written at various times about how absolutely essential it is to know who you are before you get involved in the stock market. As George Goodman said, “If you don’t know who you are, it is an expensive place to find out.” Similarly, Livermore was a great proponent of individual agency:
“Listen to what others have to say: but in the end follow your own rules.”
But once you understand yourself, your needs, your drives and your weaknesses, then comes the next hard step: trusting yourself.
The market is awash with information and data. Indeed, there is more publicly available information than at any point in history. There is too much raw material to digest, and then there is the vast ecosystem of analysts, commentators and advisors who generate further information by expressing opinions and filtering the vast trove of data and information through their own prisms. Individuals may feel overwhelmed by such information shock, which may lead to the decision to surrender control to someone else.
But successful investors are those who trust themselves. No one can be an expert at everything, so knowing where to find timely and accurate analysis is important. But keeping final decision-making power in your own hands is absolutely vital. You must build your rules and follow them. Breaking them will lead to heartbreak in the end.
Disclosure: I/We own no stocks discussed in this article.
