Saturday, August 21, 2010

Reminiscences of a Stock Operator: Chapters 15 & 16

Reminiscences of a Stock Operator was 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.

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.

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