When famous investors are asked to name books that all stockmarket enthusiasts ought to read, they invariably highlight Edwin Lefevre’s Reminiscences of a Stock Operator (John Wiley & Sons). A fictionalised account of the trading career of Jesse Livermore, one of the world’s most famous traders of the early 20th century, it was first published in 1923. Its compelling portrayal of a trader’s successes and failures, and astute observations on the art of speculation (many of which are now part of Wall Street lore), has established it as a classic.
It’s an engaging read, chock-full of pearls of market wisdom and amusing anecdotes, with the candid and analytical style evoking sympathy for the narrator. Livermore, given the pseudonym Larry Livingstone in the book, started out at the age of 14 as a quotation-board boy at a brokerage in his native Massachusetts. As he posted the numbers on a board, his keen head for figures allowed him to discern recurring patterns in stock prices. He soon learnt how stocks “behaved” before they fell or rose decisively.
Livermore was soon playing the market in bucket shops (fringe brokerages) and had made his first $1,000 by the age of 15. Soon after, the “Boy Trader” headed for the New York Stock Exchange. He stuck to his basic technique, which would now be called momentum trading. He would identify a trend from the ticker tape – “the line of least resistance” – and follow it, testing the water by staking small amounts until he was sure he had called the bear or bull movement correctly. “Stocks are never too high to buy or too low to sell”, provided the trend is clear, was one saying. Flat, directionless markets such as the spell between 1911 and 1914, when not even “a skunk could make a scent”, forced him to sit on the sidelines.
His system made him a million from shorting stocks in the 1907 bear market and forays into commodities. But when he let himself be swayed by tips or the “urgings of a magnetic personality”, he got into trouble. Listening to legendary cotton trader Percy Thomas, for instance, virtually bankrupted him. That episode coined another widespread investment aphorism: never try to average a losing game; sell what shows a loss and keep what shows a profit.
Having been convinced by Thomas that cotton should rise, he bought more to boost falling prices and sold out of a winning wheat position. “A man must believe in himself and his judgement”. But it’s natural to be swayed by hope and fear. “Whatever happens in the stock¬market today has happened before and will happen again…the game does not change and neither does human nature.”
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