Legendary speculator Jesse Livermore is surely one of the most fascinating characters in all of financial-market history.
About a century ago Jesse Livermore blossomed into one of the most celebrated speculators of all time. He was trading heavily in the early decades of the 1900s, a wondrous era to speculate in stocks. His renowned exploits are still viewed with great awe and reverence by today's elite speculators and his towering speculation wisdom will stand tall for ages to come.
If you are interested in more background information on Jesse Livermore and my reasons behind writing this series of essays on the man's awesome speculation wisdom, you may wish to skim the introduction of the first essay in this series.
Mr. Livermore's exploits were recorded in the greatest book on speculation of all time. Originally published in 1923, it is called "Reminiscences of a Stock Operator" and was written by a gifted financial journalist named Edwin Lefevre. Mr. Lefevre penned the account as if from the first-person perspective of a fictional trader named Larry Livingston. As Lefevre had spent weeks extensively interviewing Jesse Livermore, market historians are virtually unanimous in viewing Lefevre's classic book as a thinly-disguised biography of Livermore's trading life.
Today "Reminiscences of a Stock Operator" is fondly read with awe by speculators of all levels and abilities all around the globe. I have personally read the book many times and I try to re-read it at least once a year now. The speculation wisdom contained within these magical pages is just awesome and truly priceless for all speculators to digest.
If you are interested in speculation and you haven't read the book yet you owe it to yourself to buy it today at Amazon or Barnes & Noble. I can almost guarantee that it will forever change you as a speculator and help you soar to new heights of understanding of the game and achieving real-world success.
Jesse Livermore's words and experiences are so endearing and powerful because he presents himself as just another mere mortal like you and I, with hopes, fears, and frailties. He is brutally honest in critiquing his own evolution as a speculator and thoroughly explaining his own mistakes and the great wisdom they ultimately led to.
In this series of essays Jesse Livermore's wisdom is presented chronologically from the book. All the bold-faced passages below are his words directly out of Lefevre's book, while the following normal text is my own feeble thoughts and commentary attempting to pull Livermore's wisdom a century into the future to today. Before every quotation below, the chapter in "Reminiscences" from which it is pulled is noted so you can quickly find it and dig deeper by reading the valuable surrounding background context if you wish.
I hope and pray that you find Jesse Livermore's awesome wisdom as exciting and valuable as I have!
(Chapter V) ... "The customers, who were all eager to be shoved and forced into doing things so as to lay the blame for failure on others..."
In a wonderfully entertaining narrative about a battle-hardened and wealthy old speculator named Mr. Partridge, Jesse Livermore exposes one of the most dangerous character flaws a speculator can have, a lack of absolute personal accountability and responsibility. Unless a speculator takes full personal responsibility for all of the trades that he chooses to make, win, lose, or draw, he will never achieve great success.
Just as today, the majority of speculators back in Mr. Livermore's time wanted to congenitally blame others for their own trades that turned sour. Rather than accepting the full weight of their own decisions, they desperately wanted their brokers or advisors to push them into trades so these speculators could avoid accepting the responsibility themselves for failed trades. Elsewhere Livermore talks about speculators perpetually blaming external manipulation for their own bad bets, another way of refusing to accept full responsibility for the fruits of their own actions.
Just like a child who never learns to be responsible, a speculator who cannot fully accept any possible outcome on any trade that he freely chose to make is doomed to immature mediocrity. If you or I use our own God-given brains and decide to execute on a particular trade, we cannot blame anyone else but ourselves if the trade doesn't work out. It doesn't matter where the information came from that led to the trade, it is ultimately the responsibility of the individual speculator who decided to execute on this information regardless of the outcome.
So before you freely choose to launch a trade, while you are gathering information and running reconnaissance, realize that you most hold yourself absolutely accountable for your own decision. If you win, great, congratulations and many kudos on another successful trade! If you lose however, the loss is your fault alone and your responsibility alone since you freely chose to make the trade.
Every speculator must always be ready to win or lose on each and every trade, and to fully accept responsibility for their own decisions always. Losses are simply part of this grand game and just have to be accepted, since no one but God can see the future before it happens. When you freely choose to pull the trigger on your own trade, the outcome is always 100% your own responsibility and no one else's. If you cannot accept this truth, then you shouldn't be speculating.
(Chapter V) ... "I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, "Well, you know this is a bull market!" he really meant to tell them that the big money was not in the individual fluctuations but in the main movements - that is, not in reading the tape but in sizing up the entire market and its trend."
In all of "Reminiscences" this crucial idea that the Really Big Money is always earned by prudently riding the large trends over time and not in day trading every minute fluctuation is one of the central themes of the book. Livermore hammers this again and again, attacking it from countless angles and spicing up all of his amazing lessons with his own enthralling personal experiences.
This old and successful speculator that Livermore mentions, Mr. Partridge, would always politely tell the younger speculators who asked him trading questions that it was a bull market. The young speculators were always eager to trade, but Partridge was old and battle-scarred enough to know that no mere mortal could even hope to catch every individual fluctuation so the wisest strategy was just to ride the major trends. His simple reply, which would annoy the youngsters since they couldn't yet perceive the deep wisdom in it, was to subtly advise them to just ride the primary trend and not worry about rapid-fire trading.
If a particular market happens to be in a primary bull trend, then just be long and don't worry about trying to interpret and trade upon the essentially random day-to-day market noise. If a particular market is in a primary bear trend, then either sit out in cash or stay short and wait for the trend to fully mature and run its course. Don't try to frantically outguess the primary trend everyday, just accept it and trade with it and you will win in the end.
And this leads into what is perhaps the most famous quotation out of the entire book, Jesse Livermore's legendary "be right and sit tight" wisdom! While a long quotation, I just have to offer this entire paragraph in its original shining unedited brilliance...
(Chapter V) ... "And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying and selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine - that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance."
Be Right and Sit Tight! Marvel at Jesse Livermore at his finest! Like so many great truths in life this is so simple to understand, but so incredibly difficult to actually act out and walk the walk. So much of speculation really boils down to patience, that extraordinarily difficult trait to acquire. Do your research, determine the primary trend, deploy your positions, and then just hurry up and wait.
The patient and prudent contrarian speculator usually wins in the end, but the whole modern financial-market arena is configured to award impatience. From 24/7 financial television to 3-second guaranteed executions on Internet trades to after-hours trading, our modern market environment is cunningly designed to nurture a culture of continuous frantic trading. The brokerages and financial industry love this go-go focus because they make money on each and every trade, and higher trading volume leads to much higher Wall Street profits.
Most individual speculators also love this light-speed market culture, primarily because we speculators tend to be adrenaline junkies. It doesn't matter whether you are buying or selling, it doesn't matter whether your trade is big or small, but whenever your finger hovers a quarter inch above your mouse button and you are ready to pull the trigger and execute a trade the adrenaline rush and euphoria are simply awesome. Let's face it, trading is fun and addictive! The very act of trading is a rush!
Yet, a truly great speculator must transcend and rise above this frenetic market culture. Rather than getting all caught up in the incessant hype, a speculator must carefully cultivate patience. He must figure out the primary market trends, deploy positions somewhere near the beginning, and then steadfastly ignore all the market noise and huge temptations to overtrade until the primary market trends appear to be ending. This is very easy to understand, but exceedingly difficult to actually accomplish in the real world.
The key to being able to actually act out Be Right and Sit Tight in your own real-world trading is to relentlessly nurture your own patience. According to the Bible (Romans 5:3), patience is learned through tribulation, which is suffering. I think a great part of the education of a speculator is tribulation, the agony of defeat in losing precious capital in bad trades, as well as the psychological anchor of being caught wrong by the markets. Learning to speculate is certainly not an easy or trivial undertaking!
But as these painful lessons accumulate, as a speculator suffers, gradually they learn. Jesse Livermore characterized this process as, "And when you know what not to do in order not to lose money, you begin to learn what to do in order to win." The entire education of a speculator ultimately leads to the elusive and prized emotion of patience, which is so difficult to cultivate yet so priceless to possess. Only the abnormally patient command the crucial internal discipline and peace necessary to Sit Tight.
Jesse Livermore continued, right after the quotation above...
(Chapter V) ... "The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight."
Every speculator has been in the situation Jesse Livermore describes, probably many times. You diligently do your research, you are convinced that the markets are almost certain to head in a particular direction, but then they stubbornly don't conform to your plan. At first this is no big deal, but after a couple months of the markets not behaving all kinds of nagging doubts relentlessly assault the speculator.
Even if the speculator is dead right about the long-term, if he can't sit tight over the short-term stress he is already sunk. While there is a fine line between having courage in your own convictions on the markets and just being belligerently wrong indefinitely, having the patience to sit tight when you are right is so incredibly important. If you are right on the primary trend and know it but the short-term fluctuations are moving against you, dig deep and summon the courage and patience to sit tight and wait for the major trend to reassert its dominance once again.
It takes a great deal of speculation experience, a lot of learning through a lot of challenging market conditions, to cultivate this patience and inner peace necessary to sit tight when the markets are making you look like a fool over the short-term. Nevertheless, the ultimate returns to be earned by developing this serene patience necessary to sit tight through difficult short-term adversity are breathtaking. Only the truly patient have a shot at the really big money which Livermore describes!
As I believe that this entire extended passage of "Reminiscences" is so profound and mind-bogglingly important, once again Jesse Livermore continues in the very next paragraph...
(Chapter V) ... "Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks."
As Jesse Livermore points out from his own hard-won experience, regardless of which market you are trading the game is to discern the primary trend and ride it from reasonably close to the beginning to reasonably close to the end. Trying to actively trade every small fluctuation and always outguess the markets is suicidal for capital and highly counterproductive.
While large fluctuations running many months can sometimes be successfully traded, the probability of success for intra-trend trading shrinks dramatically with trade duration. For example, if you initiate a trade running with a sub-trend that you expect to last for six months inside of a larger primary trend, you probably have a decent chance of success. But if you launch a trade on a trend that you expect to run for only six days, your probability of success is vastly lower. The shorter the trade duration, the more it is tormented by maddening market randomness and the less value logical and sound analysis has.
Being right on the primary trend and sitting tight until the end is a macro exercise. Livermore points out that the game is not won by getting bogged down in individual-stock analysis, but by studying general-market conditions as a whole. While it is certainly interesting to study individual stocks as many have wonderful stories to tell, these stocks will almost always move up or down with the fortunes of the markets as a whole. So it makes great sense to devote more time to studying the general markets than to individual stocks.
The prudent and patient contrarian speculator will study the big market picture and trade with the major trends that are running many months or years. And once his positions are deployed, he will zealously sit tight until he thinks that he sees the beginnings of reversals in the major trend that he is trading. This Livermore-esque speculator does not allow himself to be tempted by short-term fluctuations and remains intensely focused on the large primary trends.
(Chapter V) ... "One of the most helpful things that anybody can learn is to give up trying to catch the last eighth - or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.
This passage, right after the paragraphs above in "Reminiscences", warns speculators about the deadly perils of greed in opening and closing trades. While Jesse Livermore was talking about longer-term trading here, riding entire primary bull or bear trends to completion, there are also valuable short-term lessons for speculators to learn.
On the longer-term macro trades, Livermore's original context for this quote, he wisely advises speculators to not grow greedy. You don't have to buy in at the very bottom of a long-term trend, just somewhere reasonably near it. Similarly you don't have to try and sell out at the very top, just somewhere reasonably close to it. It is impossible to precisely catch the exact long-term bottoms and tops of any major trend and the ultimate cost of gaming these in capital and grief is enormous.
The price of trying to capture the last eighths in macro trades is far too high for the benefits won in those elusive rare times when a speculator is lucky enough to be nearly exactly right. Getting greedy over the exact entry and exit prices causes all kinds of problems, delaying prudent execution and interfering with your carefully cultivated speculator's instinct of when to get in and out. When you feel that the time is right, just act and make the trades without fretting about holding out for a small additional discount or profit.
This also really applies to the short-term. If today, for example, looks like a good day to deploy a position to ride a major trend, then just buy the position now and get it over with. Don't worry about holding out for a price a few pennies lower than what the market is offering now. Buy when you feel that it is time to buy and sell when you feel that it is time to sell, but don't waste your time and capital hunting down those elusive last eighths. Hunting for them will ultimately cause you far more trouble than they are worth!
Well, unfortunately this is all of Jesse Livermore's wisdom that fits into this sixth essay of my series on "Reminiscences". I hope you found Mr. Livermore's great wisdom enlightening!
Go buy and read "Reminiscences of a Stock Operator" today! I can almost guarantee that it will forever change your life as a speculator! Jesse Livermore's quotes are even more impressive in their proper context and are delightful to read and digest. This essay format can't even start to do them justice.
Until next time, Godspeed and happy speculating!
