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Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing…

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Wisdom of Jesse Livermore 2

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.

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. 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 you owe it to yourself to buy it today at Amazon or Barnes & Noble. I can almost guarantee 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 quote 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 II) … "The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages."

This classic Jesse Livermore quote picks up just where we left off in the first essay, on the perpetually popular game of day trading. Livermore was not fond of day trading and he touches on the great dangers of it many times in his discourses. He advocated a much more patient strategic speculation approach. This broader perspective and slower pace of trading helped him to ultimately harvest far higher profits and avoid the immense stress and pitfalls of ultra-short-term speculation.

Livermore believed that a speculator should diligently study the markets and then patiently stalk any potential trades. He felt that speculators had a much greater probability of succeeding if they intelligently defined a potential entry point in advance through careful research and then patiently waited for it to actually come to pass in the real-world markets. This led to staking intelligent positions and eliminated the possibility of the dangerous unthinking "impulse trading" so common in day trading.

Once his carefully-planned positions were deployed, Livermore advocated the strategic side of short-term speculation, holding carefully targeted positions through an entire bullish or bearish swing of the markets. Sometimes these swings lasted weeks, usually they lasted months, and occasionally they lasted more than a year. Over and over Jesse Livermore emphasizes that these strategic-oriented position trades had both the highest probability of success and the highest potential profits as rewards for being right.

Today's speculators can learn a great lesson from the Livermore quote above. The really big wins in trading don't come out of daily scalping, but out of diligently riding entire major bullish and bearish market swings. Jesse Livermore wisely points out that those who "desire for constant action" and trade regardless of underlying big-swing market conditions face "many losses".

Speculation is like a grand real-world game of chess, a thinking-man's strategy game sprawling out into the unknown future across weeks and months. If you want to have a shot at growing into an elite speculator, you are best off ignoring the small gains and losses of day trading and holding out for the really big wins possible by riding entire bull or bear swings. Speculators are not "working for regular wages" and don't need small daily wins, all we really need are the enormous Big Trade wins that usually appear several times a year or so.

(Chapter II) … "A stock operator has to fight a lot of expensive enemies within himself."

It is not the financial markets, nor government intervention in the markets, nor even the other competing traders that are the greatest enemy of any speculator, it is the greed and fear dwelling deep within his own human heart. To become an elite speculator, one must carefully learn over decades of real-world trading how to turn off one's own dangerous emotions of greed and fear like a switch. The goal is to be totally emotionally neutral, never growing too scared nor stumbling into the deadly trap of greed.

A greedy speculator is doomed before he even starts because he will buy in at the wrong time and will inevitably fail to sell high when everyone else is confirming his greed and bidding up prices. A fearful speculator will fare no better, as he will be too scared to buy in at the right time when everyone else is also frightened and he will sell out too soon as his fear multiplies, missing most of the market move.

Jesse Livermore learned through long, hard experience that his own internal greed and fear were his greatest enemies as a speculator. Once he learned how to tame his own dangerous emotions when he traded, both his success and fortunes soared.

(Chapter II) … "I don't know whether I make myself plain, but I never lose my temper over the stock market. I never argue with the tape. Getting sore at the market doesn't get you anywhere."

Part of the journey every speculator must travel in taming his own emotions is to refuse to get angry at the markets or at speculation itself. Losses will happen and they are simply part of the game, nothing to grow upset about. If a speculator allows himself to grow angry over a loss, he is just shooting himself in the foot. Anger clouds the mind and leads to poor decision making.

Rather than getting angry at your own trading losses, I think it is useful to consider them as "speculation tuition" and diligently strive to learn whatever you can from them. If you can avoid anger and accept your trading losses as valuable lessons, odds are your wisdom and success as a speculator will continue to grow. Losses are the ultimate speculation teachers as they are painful and memorable and lead to crucial wisdom on how to avoid making this same particular mistake again in the future.

Anger (and worry) is a complete waste of time and as Jesse Livermore wisely pointed out, "Getting sore at the market doesn't get you anywhere." After a losing trade you have to swallow your pride, accept your loss, learn your lesson, and move on to more successful trades in the future.

(Chapter II) … "We ran into a crazy bull market when stocks didn't react enough to wipe out even the one-point margins, and, of course, all the customers were bulls and winning and pyramiding."

Everyone wins in a bull market. This ancient financial truism is incredibly important and must not be forgotten by speculators. It doesn't matter so much what individual positions you take, but whether or not the underlying market conditions are highly favorable for your particular open trades. This also relates back to Jesse Livermore's idea of playing the major market bull and bear swings, of riding the predominant market trends at any given time.

A corollary to this piece of wisdom is that trading in a bull market is generally easier than in a bear market. Since a powerful bull will lift virtually everything in its path, precise picking of trades is not as important as merely having your capital deployed in line with the current market trend. If a glorious bull is galloping, as in the gold market today, simply pick some trades with long exposure. Odds are you will reap handsome rewards even if you haven't picked the best possible trades for the bull run.

Conversely if a wicked bear is prowling, as in general stocks today, pick some trades with short exposure. The reason everyone doesn't win in a bear market is that the vast majority of market participants are unable to overcome their own irrational internal bias against shorting. Speculators must learn to simply not care which way the markets are heading, up or down, but merely to know in advance what probabilities suggest and deploy long or short with the primary trend accordingly.

(Chapter III) … "It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation."

Behold one of Jesse Livermore's greatest classic quotes! Being a bull or a bear alone is meaningless out of the crucial context of the current market conditions. All that really matters for the great game of speculation is being on the "right side", knowing when the markets are in a bull or a bear trend and deploying your speculative capital accordingly.

Once again Livermore ties speculation back into the speculator's own internal emotions. He points out that it makes no sense to be bullish or bearish as a rule, but to carefully watch the market conditions in order to be on "the right side" at any given moment. Most speculators are burdened with an innate emotional bias to be bullish that is dangerous and must be eradicated if they wish to succeed in speculation.

A speculator must not foolishly try to bend the markets to his will, but instead prudently bend his will to the markets! If a bull trend is evident, be long. If a bear trend dominates, be short. An elite speculator doesn't care at all which way the markets are moving, he just wants to be "right" and recognize the trend early enough to prudently deploy his own capital and be blessed to harvest profitable trades.

Forget the endless bull and bear arguments and don't let any other speculators try to pigeonhole you into one of the two warring camps. Instead of being a perma-bull or perma-bear, instead strive to listen to the rhythm of the markets and simply be "right" about what is coming to pass next and trade accordingly.

(Chapter III) … "With me I must back my opinions with my money. My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat. But if I cannot advance I do not move at all. I do not mean by this that a man should not limit his losses when he is wrong. He should. But that should not breed indecision. All my life I have made mistakes, but in losing money I have gained experience and accumulated a lot of valuable don'ts. I have been flat broke several times, but my loss has never been a total loss. Otherwise, I wouldn't be here now. I always knew I would have another chance and that I would not make the same mistake a second time. I believed in myself. A man must believe in himself and his judgment if he expects to make a living at this game."

This awesome Jesse Livermore paragraph is striking as it really distills the whole essence of successful speculation. First Livermore cuts to the core of speculation, backing "my opinions with my money." Everyone has opinions about which way the markets are heading, but the speculator has a much higher stake in being right because his own precious capital is on the line based on his opinions of future market direction. Talk is cheap if not backed by real capital!

The best time to trade based on these opinions is when a speculator is virtually convinced that a trade has a very high probability of success, what we call the "Big Trades" in our acclaimed Zeal Intelligence newsletter. A speculator must patiently wait until conditions are nearly perfect to trade large, and then he must aggressively deploy his capital and ride out the trade until the end. If conditions for trading are ideal when a position is opened, odds are a retreat out of the position won't be necessary. Livermore says that one should not even trade, "do not move at all", if conditions are not ideal.

After Livermore acknowledges that waiting for those rare optimal trading situations is essential, he wades into the hidden value of making mistakes. Losses are just part of the game as discussed above, and they should not lead to anger but instead to immensely valuable lessons that help a speculator grow wiser and more successful in the future. Jesse Livermore pointed out that the benefits of a learned lesson later in his speculation career vastly outweighed the capital losses he suffered to learn his lesson originally.

Finally, while in his prime Livermore never allowed his losses or tough times to sap his spirit. He learned from his mistakes and even if he had lost all his capital knew that he would be back to trade again. A speculator must first be comfortable with himself and learn to trust his own judgment when assessing market conditions and stalking and deploying trades. Confidence and conviction are essential attributes for all speculators to carefully cultivate.

(Chapter III) … "It took me five years to learn to play the game intelligently enough to make big money when I was right."

Unfortunately many new speculators grow discouraged after their first losses. The evolution of a speculator is not an easy process and takes a great deal of time and effort. Jesse Livermore claimed it took him five years before he arrived at the point where he could play the game well and harvest large profits. In my own speculation history I have experienced the same thing, that at least several years of "training" via actual real-world trading is necessary to build up one's core speculation skills sufficiently to start winning big.

New speculators today need to realize that it will take them 3 to 5 years to start getting competent at speculation. If you are a new speculator with less experience than that and you are discouraged after some recent losses, have no fear and keep learning and playing the game. Every speculator must pay his dues before he starts winning consistently and it truly does take years to educate yourself as a speculator.

(Chapter III) … "Speculation is a hard and trying business, and a speculator must be on the job all the time or he'll soon have no job to be on."

It always strikes me as funny that non-speculators see trading as an easy way to make a living. They couldn't be farther from the truth! Speculation is immensely challenging and the markets will find and exploit every conceivable chink in your emotional armor. All your personal weaknesses will conspire to mercilessly work against you in concert to thwart your evolution as a speculator.

If you want to embark upon the journey of growing into an elite speculator, have no illusions that your path ahead will be easy. It will be a huge challenge for you just as it was a huge challenge for Jesse Livermore and is a huge challenge for me on my own speculation journey.

Livermore also points out that casual speculators are not often successful. If you want to speculate, do your homework and do it right, even if it is not your primary job. Speculating as a hobby is fine, but even hobby speculators must learn the same lessons and approach the game with the same diligence, seriousness, and zeal as full-time professional speculators. The markets take no prisoners.

(Chapter III) … "The game taught me the game. And it didn't spare the rod while teaching."

Not surprisingly the best way to learn the art of speculation is not to read a book about it, but to actually speculate yourself. Regardless of how little capital a new speculator starts out with, he must actually bet some of it in the real-world markets to learn and grow as a trader. Just as one has to play football in order to become a good football player, one has to actually speculate in the real markets with real capital in order to become a good speculator. There is no other way.

And Jesse Livermore wisely points out that real-world trading is the school of hard knocks, that "it didn't spare the rod while teaching" him. Nevertheless, a speculator should embrace his losses and the tough lessons they taught him so he can continue to grow in knowledge and wisdom and become a superior speculator in the future.

Well, unfortunately this is all of Jesse Livermore's wisdom that fits into this second essay of my series on "Reminiscences". I hope you found Livermore's great wisdom enlightening!

Go buy and read "Reminiscences of a Stock Operator" today! I can almost guarantee it will forever change your life as a speculator! Jesse Livermore's quotes are even more impressive in 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!

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