The following is a guest post by John Douglas, who enjoys intelligent discussions around writing and focuses on portfolio enhancement through options.

Part 3 in a 4 part series where through a strange time warp-or perhaps just a dream- the narrator is transported back to the early part of the twentieth century. He is charged with re-discovering the lessons of two of the country’s greatest legends, and revealing these lessons to a new set of traders and odds-makers.  Part 1 Part 2

Chapter 4:  A different drummer/Alone in a crowd

There was some intangible factor about Livermore and Thompson that I had to ask about. They never really had partners-at least, not in a long-term business setting. They were often surrounded by crowds, but interacted only when it suited their purpose. I knew that Jesse could provide some wisdom about “going it alone.” When he was only fifteen years old, one could already see the self-reliance taking shape.  In the words of Jesse Livermore, as a young trader:

“I didn’t have a following. I kept my business to myself. It was a one-man business, anyhow. It was my head, wasn’t it? Prices were going either the way I doped them out, or they were going the other way, and nobody could stop them out of kindness to me. I couldn’t see where I needed to tell my business to anybody else. I’ve got friends of course, but my business has always been the same-a one-man affair. That is why I have always played a lone hand.”

How good was Livermore at such a young age?

“That was the time they got to calling me the Boy Plunger. I had to be changing brokers all the time, going from one bucket shop to another. It got so that I had to give a fictitious name. I’d begin light, only fifteen or twenty shares. At times, when they got suspicious, I’d lose on purpose at first and then sting them proper.”

Chapter 5:  Experience is a dead school/The high cost of tuition

Once, when we were floating around on Jesse’s yacht- just off the coast of Palm Beach, Florida- I asked Jesse about the dues he paid to become one of the wealthiest traders in the country.

“It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibly expressed by a brilliant mind. 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.”

He stood up and looked out over the Atlantic. I thought he was ready to change the subject, but he whirled around and looked me dead straight in the eye.

“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. Did you get that?  You begin to learn! A man can excuse his mistakes only by capitalizing them to his subsequent profit.”

As soon as I heard that, I knew it made perfect sense. I thought about a coin where one side said “win’ and the other said “don’t lose.” While I had his attention, I decided to ask one more question.

“I’ve noticed that you seem to take things in stride. I can’t tell if you’re winning or losing. What’s the secret?”

“Perhaps you wonder why I repeat this or why I keep on harping on the fact that I never argue with the tape or lose my temper at the market because of its behavior. You would think-wouldn’t you?-that shrewd men who have  made millions in their own businesses and in addition have successfully operated in Wall Street at times would realize the wisdom of playing the game dispassionately. Well, you would be surprised at the frequency with which some of our most successful promoters behave like peevish women because the market does not act the way they wish it would act. They seem to take it as a personal slight, and they proceed to lose money by first losing their temper.”

I started to tell Jesse about the psychological studies which revealed that people fear losses more than they enjoy gains, but he obviously didn’t need me to tell him that. He figured it out long before the guys in the white coats started doing contrived lab tests.

“The loss of money didn’t bother me. Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee.”

Chapter 6:  The more things change

You know, and I know that human nature is like the leopard that can’t change his spots. Even armed with all the latest findings into the inner workings of our psyche, it seems to provide scant help-certainly when we need it the most. I don’t know about you, but it seems like a lot of people are crying foul when it comes to the market-like it’s a rigged game. I asked Jesse about that issue:

“Get the slips of the financial news agencies any day and it will surprise you to see how many statements of an implied semi-official nature they print. The authority is some “leading insider’ or a “prominent director” or “a high official” or “someone in authority” who presumably knows what he is talking about…Quite apart from the intelligent study of speculation everywhere the trader must consider certain facts in connection with the game in Wall Street. In addition to trying to determine how to make money one must also try to keep from losing money. It is almost as important to know what not to do as to know what should be done. It is therefore well to remember that manipulation of some sort enters into practically all advances in individual stocks and that such advances are engineered by insiders with one object in view and one only and that is to sell at the best profit possible.”

So, is it not true that the more things change, the more they remain the same? What about all the talk about the retail investor leaving the market for good-because it’s not a level playing field? Do they not detest their own gullibility? Again, from Livermore:

“The public always wants to be told. This is what makes tip-giving and tip-taking universal practices…The trader must look far ahead, but the broker is concerned with getting commissions now; hence the inescapable fallacy of the average market letter. Brokers make their living out of commissions from the public and yet they will try to induce the public through their market letters or by word of mouth to buy the same stocks in which they have received selling orders from insiders or manipulators. Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. 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.”

Chapter 7: Words of eternal wisdom

There was a question gnawing at the edge of my mind. I suspect that you would ask the same question-if you were here. I had to know why so many traders seemed to be frightened out of their positions, generally hours before a turn-around.

“I sometimes think that speculation must be an unnatural sort of business, because I find the average speculator has arrayed against him his own nature. The weaknesses that all men are prone to are fatal to success in speculation-usually those very weaknesses that makes him likeable to his fellows or that he himself particularly guards against in those other ventures of him where they are not nearly so dangerous as when he is trading in stocks or commodities… The speculator’s chief enemies are always boring from within. It is inseparable 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.”


To be continued…


3 Responses to “Traits of Livermore That Fueled His Success”

  1. David Haley Says:

    Thank you for this series:

    I have a copy of “Reminiscences of a Stock Operator” that I have read twoce over the last 5 years. I need to read it again as there is indeed nothing new under the sun and how fooled we are actually drinking downstream from the herd while thinking we are thoughtful and rational and thereby of the opinion that we are imbibing from the pure cool springs up the mountain.

    Again, keep it up.

  2. jeff pierce Says:

    I try and read it over Christmas vacation as that last week of trading in Dec. is very light. Sort of a tradition for me.

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