This is a must read book for traders and investors. Most people would know that Jesse Livermore was a trader. But in fact, he was more than that. He was a stock manipulator too. One who would accumulate alot of stocks and unload them to others for a big profit. I would split the book into two parts. The first part would talk about how he began trading and his learning journey to become a big boy in the markets. The second part would talk about how he play the market as a big boy (I will be dedicating most of these parts to other posts, I will cover one or two in this post). I have arranged the summary in point form which I believed would be useful to you (not in order of merit).
#1 Do not wait for a reason for price movement
“The reason for what a certain stock does to-day may not be known for two or three days, or weeks, or months… Your business with the tape is now – not to-morrow. The reason can wait. But you must act instantly or be left.”
“The reason for exaggerating the magnitude and the effect of my operations, I suppose, was the need to satisfy the public’s insatiable demand for reasons for each and every price movement.”
#2 Do not trade when conditions are not favorable
“to play the market only when I was satisfied that precedents favored my play. There is a time for all things, but I didn’t know who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily – or sufficient knowledge to make his play an intelligent play.”
#3 Do not blame the market
“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.”
#4 Learn from losses
“That is how I came back to Wall Street for a third attempt. I had been studying, of course, trying to locate the exact trouble with my system that had been responsible for my defeats in A. R. Fullerton & Co.’s office. I was twenty when I made my first ten thousand, and I lost that. But I knew how and why – because I traded out of season all the time; because when I couldn’t play according to my system, which was based on study and experience, I went in and gambled. I hoped to win, instead of knowing that I ought to win on form. When I was twenty-two I ran up my stake to fifty thousand dollars; I lost it on May ninth. But I didn’t know why I had lost after my return from St. Louis or after the May ninth panic. I had theories – that is, remedies for some of the faults that I thought I found in my play. But I needed actual practice.”
“There is nothing like losing all you have in the world for teaching you what not to do. 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.”
#5 Find the path of least resistance
“You watch the market – that is, the course of prices as recorded by the tape – with one object: to determine the direction – that is, the price tendency. Prices, we know, will move either up or down according to the resistance they encounter. For purposes of easy explanation we will say that prices, like everything else, move along the line of least resistance. They will do whatever comes easiest, therefore they will go up if there is less resistance to an advance than to a decline; and vice versa.”
“Nobody should be puzzled as to whether a market is a bull or a bear market after it fairly starts. The trend is evident to a man who has an open mind and reasonably clear sight, for it is never wise for a speculator to fit his facts to his theories… It is therefore at the very inception of the movement that a man needs to know whether to buy or to sell.”
#6 Lose small and win big
“In the course of accumulating my full line I might chip out fifty or sixty thousand dollars in these feeling-out plays of mine. This looks like a very expensive testing, but it wasn’t. After a real movement started how long would it take for me to make up the fifty thousand dollars I had dropped in order to make sure that I began to load up at exactly the right time? No time at all! It always pays a man to be right at the right time.”
“It is simple arithmetic to prove that it is a wise thing to have the big bet down only when you win, and when you lose to lose only a small exploratory bet.”
#7 Be patient and sit tight through the bull run
“I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which would show the greatest profit. And their experience invariably matched mine – that is, they made no real money out of it.”
“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 third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.”
“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 the end. To do this you must study the general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! Wait until you see – or if you prefer, until you think you see – the turn of the market; the beginning of a reversal of general conditions. 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.”
#8 Do not try to pick market top and bottom
“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.”
#9 Average up not down
People don’t seem to grasp easily the fundamentals of stock trading. I have often said that to buy on a rising market is the most comfortable way of buying stocks. Now, the point is not so much to buy as cheap as possible or go short at top prices, but to buy or sell at the right time. When I am bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don’t buy long stock on a scale down, I buy on a scale up.”
#10 Do not have a position too large for your psychology
“I can’t sleep,” answered the nervous one.
“Why not?” asked the friend.
“I am carrying so much cotton that I can’t sleep thinking about it. It is wearing me out. What can I do?”
“Sell down to the sleeping point,” answered the friend.
#11 Reverse your instincts
“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.”
#12 You cannot beat the market
“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 our of individual deals in cotton or grain, but no man can beat the cotton market or the grain market. It’s like the track. A man may beat a horse race, but he cannot beat horse racing.”
#13 Do not focus on how much money you are going to make”
“The professional concerns himself with doing the right thing rather than with making money, knowing that the profit takes care of itself if the other things are attended to.”
#14 Do not listen to others
“When he (Thomas) began his talks with me about the cotton situation I not only was bearish but I was short of the market. Gradually, as I began to accept his facts and figures I began to fear I had been basing my previous position on misinformation… And once I had covered because Thomas made me think I was wrong, I simply had to go long… The market was not going my way. I am never afraid or impatient when I am sure of my position… Having taken the first wrong step I took the second and the third, and of course it muddled me all up. I allowed myself to be persuaded not only into not taking my loss but into holding up the market… But I was not myself. I was another man – a Thomasized person.”
“To learn that a man can make foolish plays for no reason whatever was a valuable lesson. It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibility expressed by a brilliant mind. It has always seemed to me, however, that I might have learned my lesson quite as well if the cost had been only one million. But fate does not always let you fix the tuition fee. She delivers the educational wallop and presents her own bill, knowing you have to pay it, no matter what the amount may be.”
#15 Do not trade the market to clear your debts
“I lost what little my cotton deal had left me. It did even more harm, for I kept on trading and losing. I persisted in thinking that the stock market must perforce make money for me in the end. But the only end in sight was the end of my resources. I went into debt, not only to my principal brokers but to other houses that accepted business from me without my putting up an adequate margin. I not only got in debt but I stayed in debt from then on.”
#16 Know yourself
“A trader, in addition to studying basic conditions, remembering market precedents and keeping in mind the psychology of the outside public as well as the limitations of his brokers, must also know himself and provide against his own weaknesses.”
#17 Booms and busts will always happen because human nature does not change
“When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators to-day differ from yesterday. The game does not change and neither does human nature.”
“Fear and hope remain the same; therefore the study of the psychology of speculators is as valuable as it ever was. Weapons change, but strategy remains strategy, on the New York Stock Exchange as on the battlefield. I think the clearest summing up of the whole thing was expressed by Thomas F. Woodlock when he declared: “The principles of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes that they have made in the past.””
“I used to think that people were more gullible in the l860’s and ’70’s than in the 1900’s. But I was sure to read in the newspapers that very day or the next something about the latest Ponzi or the bust-up of some bucketing broker and about the millions of sucker money gone to join the silent majority of vanished savings.”
“The speculator’s deadly enemies are: Ignorance, greed, fear and hope. All the statute books in the world and all the rules of all the Exchanges on earth cannot eliminate these from the human animal.”
#18 Sell after a reaction
‘Never try to sell at the top. It isn’t wise. Sell after a reaction if there is no rally.”
#19 Do not follow or give tips
“Tips! How people want tips! They crave not only to get them but to give them. There is greed involved, and vanity. It is very amusing, at times, to watch really intelligent people fish for them. And the tip-giver need not hesitate about the quality, for the tipseeker is not really after good tips, but after any tip. If it makes good, fine! If it doesn’t, better luck with the next.”
#20 Learn how to diagnose the market
“The training of a stock trader is like a medical education. The physician has to spend long years learning anatomy, physiology, materia medica and collateral subjects by the dozen. He learns the theory and then proceeds to devote his life to the practice. He observes and classifies all sorts of pathological phenomena. He learns to diagnose. If his diagnosis is correct and that depends upon the accuracy of his observation he ought to do pretty well in his prognosis, always keeping in mind, of course, that human fallibility and the utterly unforeseen will keep him from scoring 100 per cent of bull’s-eyes. And then, as he gains in experience, he learns not only to do the right thing but to do it instantly, so that many people will think he does it instinctively. It really isn’t automatism. It is that he has diagnosed the case according to his observations of such cases during a period of many years; and, naturally, after he has diagnosed it, he can only treat it in the way that experience has taught him is the proper treatment.”
MANIPULATION
#1 Find an appropriate time to unload a large position
“If you operate on a large scale you will have to bear that in mind all the time. A man studies conditions, plans his operations carefully and proceeds to act. He swings a pretty fair line and he accumulates a big profit – on paper. Well, that man can’t sell at will. You can’t expect the market to absorb fifty thousand shares of one stock as easily as it does one hundred. He will have to wait until he has a market there to take it… He has to sell when he can, not when he wants to… That is where your tape reading comes in – to enable you to decide as to the proper time for beginning.”
#2 Make a stock active during the bull run
“The most effective way to advertise what, in effect, are your honourable intentions is to make the stock active and strong. After all is said and done, the greatest publicity agent in the wide world is the ticker, and by far the best advertising medium is the tape. I do not need to put out any literature for my clients. I do not have to inform the daily press as to the value of the stock or to work the financial reviews for notices about the company’s prospects. Neither do I have to get a following. I accomplish all these highly desirable things by merely making the stock active. When there is activity there is a synchronous demand for explanations; and that means, of course, that the necessary reasons for publication supply themselves without the slightest aid from me.”
“As I said before, the reputable newspapers always try to print explanations for market movements. It is news. Their readers demand to know not only what happens in the stock market but why it happens. Therefore without the manipulator lifting a finger the financial writers will
print all the available information and gossip, and also analyse the reports of earnings, trade condition and outlook.”
Wisdom on trading