Reminiscences of a Stock Operator: Chapters 23 & 24

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.

While thousands of people speculate on stocks daily, Livermore argues that few of them do so profitably. In his opinion, the speculator's deadly enemies are ignorance, greed, fear and hope.

Making it difficult to make money is the amount of noise reported by the media. Livermore makes fun of a few headlines and articles where market pundits state their case, but for which there is no basis.

But the public loves to receive (and act on) tips. As such, there will always be people there to provide them, for their own gains of course. Brokers are one example of a class of citizen which prospers when the public buys. As such, whether times are good or bad, brokers just want commissions, and so they will offer advice that gets the public to purchase stock.

Livermore ends the book by stating his belief, with all of his years of experience now, that no trader can consistently and continuously beat the market.

Reminiscences of a Stock Operator: Chapters 21 & 22

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.

Livermore discusses some of the successes and failures he has had in selling stocks for clients with large blocks. Due to his reputation in the newspapers as a skilled trader, he has received many such requests.

In these chapters, Livermore goes into detail about which companies he sold under the requests of which stock owners. In some cases, he had luck on his side, as a prevailing bull market enabled him to employ the technique (of running up the price, and thus encouraging volume to grow) described in the previous chapter. But at other times, he simply advised his requester to sell, as he feared things would only get worse if he purchased more.

In one particular instance, Livermore was double-crossed by a consortium he was in league with to drive up the price of a security. The large holders (who wanted to sell) were actually adding to their positions, as they figured Livermore would be driving the stock up in an attempt to attract speculators. Livermore, however, noticed the market action and did nothing of the sort. This left the large holders with even more stock to sell, and thus eventually caused the price to get driven even lower. Livermore notes that hogs are bound to lose.

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.

Reminiscences of a Stock Operator: Chapters 17 & 18

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.

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.

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.

Reminiscences of a Stock Operator: Chapters 13 & 14

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.

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.

Reminiscences of a Stock Operator: Chapters 11 & 12

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.

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.

Reminiscences of a Stock Operator: Chapters 9 & 10

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.

Livermore describes his successful speculative trades that led to his being "king for a day" and making his first million in the market. Livermore had been bearish on the market for some time, due to many economic factors that he studied that showed liquidity to be at a premium. The rest of the market was bullish, however. Rather than do what he normally would have done, which is plow into the market because he believed himself to be right, he waited for the right opportunity, using the techniques described in the previous chapter.

When the bear market finally it came, it was so devastating to the market that extraordinary support from key banking officials was needed to keep the market from flat-lining completely. Livermore's legend grew as his net worth expanded, with traders around the country discussing his prowess. As the bear market continued and Livermore's gains continued to grow, Livermore was eventually asked by a key official to stop his selling out of patriotic duty, for the economy as a whole was likely to suffer if Livermore kept punishing the market. By that time, Livermore had already resumed covering his shares; but had he not, Livermore believes he singlehandedly could have destroyed the market (by continuing to short).

At this point, Livermore believed that he finally learned to trade properly. He had advanced from bucket shop trading to trading on the real market, whereby study of macroeconomic issues went hand-in-hand with "reading the tape" (studying past prices).

Livermore also discusses "resistance levels" and how he uses them in his trades. Often, a security will trade within a range, because as it rises, selling pressure increases, and as it falls, buying increases. But when a security breaks through a resistance point, it often continues to move in the same direction, according to Livermore. As such, he will take an initial position as the price moves through a resistance level and build on it as it continues in the same direction.

But Livermore finishes the chapter with an ominous note:

"The conclusion that I have reached after nearly thirty years of constant trading, both on a shoestring and with millions of dollars back of me, is this: A man may beat a stock or a group at a certain time, but no man living can beat the stock market! A man may make money out of individual deals in cotton or grain, but no man can beat the cotton market or the grain market. It's like the track. A man may beat a horse race, but he cannot beat horse racing. If I knew how to make these statements stronger or more emphatic I certainly would."

Reminiscences of a Stock Operator: Chapters 7 & 8

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.

Livermore now shares some of his speculating techniques, many of which he has learned from other speculators. Livermore clearly believes speculation to not be the same as gambling. He believes his method of trading contains little to no elements of gambling, and therefore is safe. One of his abilities relative to other traders is that he is able to separate his opinions from his portfolio. Livermore claims a great many investors are simply bulls because they own stocks, but what they own should not affect their outlook.

Livermore buys when the market (or a security) is going up, and sells short when the market (or a security) is going down. If he believes a stock is going up, he will buy it, but not all at once. He first tests the water by placing an initial order. If the order is easily absorbed by the market or the price falls (or rises if he is short) despite the order, he will consider himself wrong for now and will get out. If the price rises on his buy, however, he believes there are more buyers than sellers out there and he will re-enter the market with a subsequent order. When one is unsure about the market's (or a security's) direction, Livermore advises placing test orders to determine how well the market absorbs an order. If the market is not absorbing well, there could be a big move and Livermore would enter with larger orders.

Before Livermore learned to employ the above technique, however, he was wiped out once more. In 1907 he saw a bear market coming, but was too early in selling short three straight times. A bull market was on, and when it looked like it was ready to fizzle out, Livermore jumped in with large sell orders that he eventually had to buy back at higher prices. The last of these cleaned him out completely. Because he generated lots of commissions for his broker, they fronted him some more money, and Livermore was finally correct about his predicted bear market. He made back a ton of money in a huge market sell-off.

Reminiscences of a Stock Operator: Chapters 5 & 6

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.

No matter what one's methods of speculating in the market, Livermore advises that one be flexible. The market's action may change. As such, it is no good to have a method that continues to lose money just to remain consistent. As bear and bull markets come and go, the speculator must adapt, as did Livermore when he attempted for the third time to avoid losing all his money upon his return to New York.

As Livermore changed his methods as he tried to transfer his success from the bucket shops to the exchanges, he found that he now had to be more anticipatory as opposed to reactionary. Previously, he would simply study the ticker's past price changes to make his decisions. With the execution delays inherent in real trading, however, Livermore now had to anticipate the market's movements. He would do this by reading trade reports, railroad earnings, and financial and commercial statistics.

Livermore says that most of the market's speculators lose money. Some learn from their mistakes, but most others graduate to a level where they learn the conventional wisdoms that continually lose them money. It's those that can get past those so-called wisdoms that can truly profit, according to Livermore.

One example of this has to do with profit-taking. Conventional wisdom argues that no one has ever lost money taking profits (selling after a small gain). But Livermore argues he has made more money by sitting (on a position) than by thinking alone. It's easy enough to be right about the direction of a stock, according to Livermore, but the kind of person that can both be right and sit tight is uncommon and is the kind of person that can make real money in the market.

Reminiscences of a Stock Operator: Chapters 3 & 4

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.

Livermore was desperate to learn where he was going wrong in his legitimate trading, but having lost all his money he had no choice but to return home. But the bucket shops were closed to him, and were fewer in number as the authorities cracked down on them. He made some money trading through a friend in the bucket shops, but soon the bucket shops became wise to his friend as well.

By chance one day he ran into a friend of a friend who had an interest in a "legitimate" broker that could get faster execution than the New York firms Livermore had lost his money with. Livermore couldn't understand how this could be done, but realizing execution speed was the key to his success so far, he investigated. Livermore found a class of firms that were one level above bucket shops in that they did some legitimate trading, but they were mostly bucket shops and so they would give him immediate execution based on the latest available price. These firms would make money by simultaneously telegramming some clients to buy a certain stock and some clients to sell that same stock. The firm would buy a little bit of the stock for real so that the operation seemed legit, but in the end they would profit off of their clients' losses.

For Livermore, these companies offered a bucket shop environment (which is one in which he could succeed) and were willing to do business with him (since they were larger operations) and so he set to work. He opened an office and set up direct wires to five of these firms, and another wire to get the latest stock prices.

He made some money this way, but was under the distinct impression that some of these firms were trading against him, costing him earnings. As such, he often cheated to increase his earnings. He would place buy orders on a fairly illiquid stock (knowing that these firms aren't actually buying the stock for him), and place a real sell order through a legitimate firm, in effect driving down the price. As such, he would get a great price for his bucket trades. Later in the day he would close out his position by placing a sell order with the five firms, and a buy order with the legit firm, thus getting a great selling price for his bucket trades.

In so doing, Livermore saved up enough, despite a lavish lifestyle, to return to New York City to try his hand there for a third time.

Reminiscences of a Stock Operator: Chapters 1 & 2

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.

At the age of 14, Livermore got a job in a brokerage office updating the quotation board. The latest quotes would be shouted at him, and for hours on end (as long as the market was open) he would change the numbers on the board.

Since arithmetic came easy to him and he could remember numbers easily, Livermore eventually started to notice patterns in the quotes he would receive. He would start to make notes in a little book predicting market movements (based on the movements of their past prices) and then later check to see if he turned out to be right. He figured he was doing quite well, so he started to put his own money to work in bucket shops throughout his area.

Livermore made so much money off of the bucket shops that one by one they refused to deal with him anymore. He wouldn't win on every trade, but figures he made money about 6/10 times, and that it would have been 7/10 times, but for the fact that he would sometimes deviate from his method for psychological reasons. Not long after, he became famous around the country as "Boy Trader", and bucket shops were wise to him. As a result, he was forced into trading at legitimate brokers if he wanted to trade, and so he showed up in NYC in 1898 at the age of 21 with $2,500 ($70,000 in today's dollars) he had accumulated so far through bucket shop winnings.

Unfortunately, over a period of six months he lost it all and then some in stock speculation through legitimate brokers, due to some key differences between real trading and bucket shop operations. In real trading, you never knew the market price you were getting by the time your trade got to the floor. You might want to short something at $108 for example, but by the time your trade transacted the price might be $102, and you've lost your gains. Since the bucket shops were closed to him now, Livermore had to figure out how to make money with the new playing rules he had now encountered.