The Complete Trader

Jesse Livermore Discovers the Missing Piece in the Trading Jigsaw

From the age of 15, Jesse Livermore had become an expert at reading the ticker tape that brought price and volume data from the trading floor of the New York Stock Exchange.

Livermore had learned, with a high probability of being right, to predict whether a stock was due to rise or fall.

He had also learned that the time delay involved in trading on the stock exchange through a broker, rather than trading in a bucket shop, meant he had to choose his trades carefully. He should accept only those trades that offered the highest probability of large movements in price. The time-delay meant he could no longer step into trades where he thought he could very quickly grab a one-point profit.

Finally, he had learned through bitter experience to trust his own reading of the tape in preference to listening to experts. He had also learned that the insider tips he was regularly privy to were often worthless and that they should be ignored.

Something was still missing from his trading though and Livermore tried to find it.

First of all, rather than solely relying on the tape, Livermore began to look further a field, reading trade reports, earnings figures and financial statements. This gave him a better feel for the companies that should be rising and those that should be falling.

Then, studying his own trading records, he found that although he was often 100 percent right in predicting small movements in prices, he was making much less profit than he should in the bull market that prevailed. Livermore realized that by jumping into and out of stocks on the basis of his daily reading of the tape he was missing out on profits.

A Crucial Conversation - "It's a Bull Market"

Listening to the (repeated daily) advice of an old stager in the offices of Fullerton, it suddenly dawned on him why he was making less profit than he should. Whatever questions the old fellow - known to everyone as Turkey although his real name was Partridge - was asked about the market, he would reply, "well, it's a bull market".

At first Livermore thought this was a mere platitude. Hearing "It's a Bull Market" daily, he began thinking about it more. Then, listening to a conversation between Turkey and Elmer Harwood - a young trader - he realized that it was more than a platitude - it was the missing piece in his own education.

Elmer: "Mr. Partridge, I have just sold my Climax Motors. My people say the market is entitled to a reaction and that I'll be able to buy it back cheaper. So you'd better do likewise. That is, if you've still got yours."

Turkey: "Yes, Mr. Harwood, I still have it. Of course!"

Elmer: "Well, now is the time to take your profit and get in again on the next dip," said Elmer, "I have just sold every share I owned!"

Turkey: "No! No! I can't do that!"

Elmer: "Didn't I give you the tip to buy it?"

Turkey: "You did, Mr. Harwood, and I am very grateful to you.

Elmer: And didn't that stock go up seven points in ten days? Didn't it?"

Turkey: "It did, and I am much obliged to you, my dear boy. But I couldn't think of selling that stock."

Elmer: "Why not?"

Turkey: "Why, this is a bull market!"
(The old fellow said it as though he had given a detailed explanation.)

Elmer: "I know this is a bull market as well as you do. But you'd better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself."

Turkey: "My dear boy, if I sold that stock now I'd lose my position; and then where would I be? And when you are as old as I am and you've been through as many booms and panics as I have, you’ll know that to lose your position are something nobody can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be able to repurchase your line at a substantial concession, sir. But I myself can only trade in accordance with the experience of many years. I paid a high price for it and I don't feel like throwing away a second tuition fee. But I am as much obliged to you as if I had the money in the bank. It's a bull market, you know."

Jesse Livermore realized that Turkey's consistent message was that the big money was to be made not in trying to trade small moves on the tape but to catch the major trend.

"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. Then get out of all your stocks; get out for keeps! You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear. 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."

With this step in place, Jesse Livermore's trading philosophy was complete.

 

Beating the Market

No Man Living Can Beat the Stock Market

Anyone who has regularly traded the stock market with his or her own money will tell you that, at times, it can be a highly stressful occupation. Livermore said of his profession, "... a man must give his entire mind to his business if he wishes to succeed in stock speculation." Jesse Livermore lived with this stress for a large part of his life, beginning at the age of just 15.

Stress can do funny things to the mind. Livermore was prone to bouts of depression and it was during one of these that he took his own life.

Throughout his career, Livermore made and lost fortunes trading the markets. It appears, from his interviews with Edwin Lefebvre in 1922 that the causes of his losses were:

a. He was trading in the period before he had fully formulated his trading rules.

Or

b. He ignored his trading rules.

In 1929 Jesse Livermore's fortunes were at their zenith. He had made a profit of $100 million dollars shorting the markets during the great crash. Yet, by 1934, he was bankrupt. In just five short years one of the greatest stock-traders the world has known lost his entire $100 million fortune. We cannot blame this on inadequate trading rules - they were fully formulated by then. We must conclude that he ignored at least one of his sacrosanct rules - never to hold on to a losing position. If Livermore did hold losing positions until his $100 million fortune was wiped out - in spite of the lessons of 41 years of trading - we must presume his mental processes had malfunctioned, due either to stress, depression, or a combination of the two.

Twelve years earlier, Livermore had told Lefebvre how he had put money in trust for his family. Lefebvre had asked if this was because Livermore feared that the stock market might take his money away from him. Livermore replied prophetically, "I know this - that a man will spend anything he can lay his hands on; and that he can lose every cent."

Livermore himself had noted that what ultimately defeated most traders was their inability to stick to their own proven trading rules. Usually hope or fear brought them down. Hope caused traders to increase their losses by holding on to losing positions for too long, hoping the trade would become profitable. Fear caused traders to decrease their profits by selling winning positions too soon, fearful the market would turn and their winning positions would turn into losers.

"I sometimes think that speculation must be an unnatural sort of business, because I find that the average speculator has arrayed against him his own nature. The weaknesses that all men are prone to are fatal to success in speculation...

"The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day - and you lose more than you should had you not listened to hope - to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little.

"And when the market goes your way you become fearful that the next day will take away your profit, and you get out-too soon.

"Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does."

Jesse Livermore concluded that no trader could trade the market constantly and beat it. Everyone who played the market daily would eventually lose. Winning was only possible by trading at times when the market allowed one to win - during clear bull and bear markets when most stocks were moving in a single direction.

"I have been in the speculative game ever since I was fourteen. It is all I have ever done. I think I know what I am talking about. And 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.

"If I knew how to make these statements stronger or more emphatic I certainly would. It does not make any difference what anybody says to the contrary. I know I am right in saying these are incontrovertible statements."