Reminiscences of a stock operator is an excellent fictional narrative of Jesse Livermore, one of the greatest stock operators of all time.
It virtually takes us through the life of Livermore as a trader that will leave us awestruck.
How did Livermore Get Started?
Livermore was fascinated with mental arithmetic and got himself a job as a quotation board boy. His fascination for numbers got him interested in changes he would see in stock prices.
They went up and down, which was all that he would experience. Why these numbers changed was not an issue but the fact they changed captivated him. He would start making a note of these changes drew his interest in the behavior of prices.
Livermore was always looking for the repetitive and parallelisms of behavior learning to read the tape. He made the first trade by chance when asked by an office boy to play with him. It worked and he kept repeating this on his own in bucket shops.
That was when the journey of a boy fascinated with mental arithmetic got started, from making $1000 to becoming the most talked about trader of all time. His first trade earned him $3.12 on an investment of a few dollars.
Play the Game You Know
Livermore was known to beat the bucket shops at their game, and he would be stopped out quickly. They would trick him with margins, and he had to switch from one bucket shop to another until he almost lost them all.
Livermore moved to New York, where he wanted to trade closer to the exchange, not in bucket shops where you are eventually squeezed out of your money even when right.
He lost the twenty-five hundred dollars he had brought with him. It was not that he was doing it wrong, but it was not trading in New York like he would in the bucket shops. Time was his enemy here.
Valuable Lessons in Trading
Livermore learned a lesson from his mistakes. There were no two sides in the markets, the bull side or the bear side. There was only one side which was the right side.
He felt he had learned valuable lessons of the don’ts in trading in his losing trades. That’s the kind of perception one should have if one wants to play the game for long.
You can never make more money from your judgments than those from tips from someone else.
The game teaches you the game. It doesn’t spare the rod while teaching.
You make money only when you are right. The only way to know you were wrong is if you lost it.
When you push your confidence to its logical limits, you are bound to go broke.
To read the tape is not to have your fortune told. The object of reading the tape is to ascertain, first, how and, next, when to trade, that is, whether it is wiser to buy than to sell. It works the same way for stocks as for cotton or wheat or corn, or oats.
Nuggets of Wisdom Spanning Over 30 Years
The book is all about how Livermore traded in the bucket shops, then only to realize that it was not the same when you trade in bigger brokerage houses. He rightly realized that you could not win the game without knowing how to play the game.
'Reminiscences of a stock operator' bring forth years of real-life experiences of Livermore on how anyone can go about trading successfully. Even though the book was written 100 years ago, they are still relevant today. He made millions and lost them as well. These are all lessons traders can learn without burning their pockets.
He felt his greatest discovery was that a man must study general conditions to size them to be able to anticipate probabilities. In short, you have to work for the money and cannot place bets blindly. Nobody is immune from the danger of sucker plays.
The book is full of wits and wisdom. Capturing some of them that will tickle your mind to deliberate on the ones that will be fruitful. The virtue that made Livermore was that he played a lone hand by choice.
The recognition of our own mistakes should not benefit us any more than the study of our successes.
It is human nature to avoid punishment.
The mistake family is so large that there is always one of them around when you want to see what you can do in the fool-play line.
After a man makes money in the stock market, he very quickly loses the habit of not spending. But after he loses his money it takes him a long time to lose the habit of spending.
Livermore considered the money he lost in the stock market as a learning, and he gained valuable experiences. Sadly, he paid a heavy tuition fee with his huge losses.
The Psychology That Makes Traders Out
The moment traders play the game not based on their study and to fulfill a fixed expectation from the market, they pay the price. The need supersedes the process, and the subconscious mind does not allow common sense to prevail.
He says, “What does a man do when he sets out to make the stock market pay for a sudden need? Why he merely hopes. He gambles. He, therefore, runs much greater risks than he would if he were speculating intelligently, by opinions or beliefs logically arrived at after a dispassionate study of underlying conditions.”
He rightly compared a trader's journey to that of a Physician. One that not many people have the patience or want to give that kind of time to their life.
Success for a trader can come only from the enormous study of the subject and devoting his life to its practice. Observation, experience, memory, and mathematics are what the successful trader must depend on.
Fear and hope remain the same; therefore, the study of the psychology of speculators is as valuable as it ever was. Weapons change, but the strategy remains strategy.
Conclusion
'Reminiscences of a stock operator' is a timeless tale of Jesse Livermore that speaks volumes of the lessons shared that still make sense. It is not about making big money that helps keep your longevity in the markets, it’s learning to keep them that does.
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Guest Post - Written by Mr. Lal Bajaj, Bangalore
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