Saturday, August 28, 2010

Reminiscences of a Stock Operator: Chapters 19 & 20

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.

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.

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