Livermore had been actively trading for 32 years by 1923. He was 46 years old. He had an unquenchable thirst for knowledge about his chosen profession, and he was a constant student of the technical side of the market. He was also a great student of the psychology of the market. At one point he took psychology courses at night school to better understand human nature. Livermore concluded that there may be millions of minds at work in the market, but there was basically only a few psychological patterns that had to be studied and understood—since human nature has common traits.
Later in his life he was asked an important question by his sons, Paul and Jesse Jr., “Dad, why are you good in the market and other people lose all their money?”
“Well boys, I have also lost money, but each time I lost, I tried to learn why I had lost. The stock market must be studied, not in a casual way, but in a deep knowledgeable way. It’s my conclusion that most people pay more care and attention to the purchase of an appliance for their house, or in buying a car, than they do to the purchase of stocks. The stock market, with its allure of easy money, and fast action induces people into foolishness and the careless handling of their hard earned money, like no other entity.
“You see, the purchase of a stock is simple, easily done by placing your purchase order with a broker, and later a phone call to sell, completes the trade. If you profit from this transaction it appears to be easy money with seemingly no work. You didn’t have to get to work by nine and labor for eight hours a day. It was simply a paper transaction, requiring what appears to be no labor. It gives the clear appearance of an easy way to get rich. Simply buy the stock at 10 dollars and sell it later for more than 10 dollars. The more you trade, the more you made, that’s how it appears. Simply put, it’s ignorance.
“And you must constantly deal with your emotions—there’s fear to deal with, which you will find out when you grow up. Fear lies buried just beneath the surface of all normal human life. Fear, like violence, can appear in a single heartbeat, a fast breath, a blink of the eye, the grab of a hand, the noise of a gun. When it appears, natural survival tactics come alive, normal reasoning is distorted. Reasonable people act unreasonably when they are afraid. And people become afraid when they start to lose money, their judgment becomes impaired. This is our human nature in this stage of our evolution. It cannot be denied. It must be understood, particularly in trading the market.
“And the unsuccessful investor is best friends with hope—and hope skips along life’s path hand-in-hand with greed and fear when it comes to the stock market. Once a stock trade is entered, hope springs to life. It is man’s nature to be hopeful, to be positive, to hope for the best.
Hope is an important survival technique for the human race. But hope, like it’s stock market cousins: ignorance, greed and fear, all distort reason. See boys, the stock market only deals in facts, in reality, in reason, and the stock market is never wrong—traders are wrong. Like the spinning of a roulette wheel, the little black ball tells the final outcome, not greed, fear, or hope. The result is objective and final, with no appeal, like pure nature.”
Both boys wondered if the stock market was for them. Was it too dangerous? Should they just leave it to their father.
Livermore went on: “I believe that the public wants to be led, to be instructed, to be told what to do. They want reassurance. They will always move en masse, a mob, a herd, a group, because people want the safety of human company. They are afraid to stand-alone because the belief is that it is safer to be included within the herd, not to be the lone calf standing on the desolate, dangerous wolf-patrolled prairie of contrary opinion—and the truth is that it usually “is” safer to go with the trend.
“This is where it gets slightly complicated. I always wanted to trade along the LINE OF LEAST RESISTANCE—THE TREND, so I was generally moving along with the crowd, the herd, most of the time. It was when the ‘change in trend’ started to appear the change in overall market direction that was the most difficult moment to catch and act upon. I always was hunting for the clues to the change. But, I was always ready to separate myself from the popular thinking, the group thinking and go in the opposite direction, because I believed in cycles—like life they go up and down.
“The change in trend is the most difficult time in a speculator’s trading life. These major changes in trends were hell. But, I did not want to toboggan downhill with the crowd, unless I had sold stocks short.
“With this in mind, I developed two rules that I followed.
“First: do not be invested in the market all the time—there are many times when I have been completely in cash, especially when I was unsure of the direction of the market and waiting for a confirmation of the next move. In my later life, whenever I deduced that a change was coming, and I wasn’t sure exactly when, or how severe the change might be, I cashed in all my positions and waited.
“Second: it is the change in the major trend that hurts most speculators. They simply get caught invested in the wrong direction, on the wrong side of the market. To determine if I was right in my appraisal that a change in market trend was coming I used SMALL POSITION PROBES, placing small orders, either buy or sell orders depending on the direction of the trend change, to test the correctness of my judgment, by sending out exploratory orders and investing real money I usually got the signal that the trend was changing because each stock purchase was at a cheaper price than the prior purchase—the prices were dropping.
Jesse Livermore was a highly disciplined man. During the week, he went to bed every night at 10 P.M. and arose each morning at six. He preferred to have no one around him for the first hour. The kitchen staff was trained to leave his coffee and juice on the table in the solarium if he was in his mansion at Great Neck, Long Island. The newspapers were also laid out for him, including the European and Chicago newspapers. He read voraciously all his life. He wanted this hour or two to plan his day. Livermore had observed that few men really planned their day. Yes, they were organized, they had appointments scheduled, lunch engagements, and public affairs planned and written down. They knew in detail what awaited them, meetings, and people coming by the office, phone calls they would make and receive. They knew what had been planned for them—but what items of major importance had they planned actually to get done for themselves.
Livermore, on special occasions, spoke to his sons of his business, in his massive library in the house on Long Island: “Boys, you will find that hardly any businessman really plans his day to handle the most important items. In most cases his day is laid out for him-organized for him by his secretary and his staff. He is merely an attending party. At the completion of the day he is often left with the most important matters still unattended, unexamined, uncompleted. Important strategy matters in running a complex business are perhaps not being attended: personnel problems, mergers and acquisitions, raising capital, and great marketing concepts—like buying on the installment plan was to banking—or perhaps the competition is not being clearly examined or assessed.
“Not so for me. In the stock market, my moves must be based as much on clear facts as they can be. To play the market properly requires silence, and seclusion to examine the situation, and to appraise, and deliberate on new information that comes to hand during the trading day. One must always have a clear strategy to play the market.
“I have found that it is easy to pick up the phone and pull the trigger by buying or selling. The problem is knowing when and what to do and to follow religiously your own rules.
“Boys, I decided long ago that if there are going to be mistakes made in my trading—I want them to be ’my mistakes.’ I don’t need someone else to lose my money for me by giving me tips, or influencing my trades. In the business I am in there is no room for post-mortems, you either make money or you lose money…or your money just sits there waiting for the right situation while earning small interest.
“That’s why I go to bed at ten and rise at six. The careful, disciplined man must be aware of everything, ignorant of nothing. You can not afford to be careless about anything. Sometimes overlooking a single item, big or small, can ruin everything, kill all your plans. Like a General in wartime, his men’s lives depend on his thoroughness in planning and executing that plan. In the stock market there is no room for error and carelessness.
“People think that I am simply a speculator, a trader, who finds situations and plunges into them. Nothing could be further from the truth. I often pick up small seemingly useless clues in the newspapers and after checking them out, investigating what is behind them, I will act upon them.
“You ask about my day? In the solitude of the morning hours, after being rejuvenated from sleep, with nothing to distract me, I carefully read the papers. I have often used small specific news items like weather events, like droughts, insect problems, labor strikes, and assess how they would effect the corn, wheat or cotton yields that often lead me to generalities, and a possible trade.
“I got my news on the financial side by examining the actual prices and actions in the commodities market such as: coal, copper, steel, textiles, sugar, corn wheat, automobile sales, and employment figures. I got a feel and a correct judgment on general business conditions in the United States. It was no one single fact, it was a plethora of facts that finally led me down a narrow path to a trade.
“I did more than just scan the headlines of the newspaper, I read the paper carefully looking for small items of news that might provide me with important clues especially about an industry group or a specific stock that had changed from weak to strong or vice-versa.
“The headlines are for the suckers. A good speculator has to get behind the news and see what was really going on. Beware, often misleading articles are planted by people or brokers with hidden agendas, who want to sell their stock on the good news or they want to keep people invested while they go ahead and distribute their own stock.
“Once I traveled in my railway car to Pittsburgh where I observed that the steel mills were not at 30 percent capacity, they were at less than 20 percent and falling. In other words, they were a perfect short sale.
“Unfortunately many people who invest in the market only read the headlines and they too easily believe what they read. This is unfortunate since there are many pitfalls, schemes, and dangers, slick money traps always appear wherever great sums of money are involved, such as the stock market. It is my observation that often what you read in the newspaper is nothing more than another form of a stock tip—so the reader has to beware of the source, motives and effect of what he is reading on the stock market, otherwise chances are he or she will become a sucker too.
“Boys, it is my observation that there is no better time than the early morning to gain an enormous advantage toward being a successful stock trader. There is silence in the house, no person or thing is disturbing your concentration, and the mind is renewed after a good night’s sleep.
“You will learn as you grow older that most people simply get up at a certain time in the morning, get ready and go directly to the office. Often, these same people feel the desire to go out at night during the week to the cinema, a play, a long dinner with several drinks. In other words, they feel the need for social interaction or recreation during the weekdays. This may work well in other fields of endeavor, but it is a dangerous practice on a regular basis if a person wants to be successful in seriously trading the stock market. A good stock trader is not unlike a well-trained professional athlete who must keep the physical side of their life in perfect form if they want to continue to be at the top of their mental form. The body must be in tune with the mind, for there is no more intense or exciting field of battle than the stock market. A person is making a mistake if they think success in the stock market comes easily, instantly, or steadily without great effort. The successful trader must always be in top physical form.
“During the week I have always been willing to sacrifice the diversions offered to people from ten o’clock at night until two in the morning. I do not feel I have missed anything by being asleep during this period and up at five or six in the morning. I have found for me that there is true joy in the solitude and pure work I did during this time, all my life. For, I always believed I was in search of bigger game, than just pleasure and social interaction. I wanted to be supreme in my endeavors in the stock market—this is what gave me real pleasure and satisfaction. Playing the game and winning the game.
“Finally, it has been my observation that the public believe the stock market is an easy way to make money. They have some extra money to invest and they believe the stock market should offer them an easy way to increase the value of the money that they have invested.
“This is not the case. I have observed that people who have no knowledge of the stock market, but insist on playing the stock market, generally lose their money in a hurry.
“So I believe that if you want to succeed in the stock market make sure you get plenty of sleep, and give yourself plenty of time for the uninterrupted study of all the elements involved with the stock market and remember that the essential to success in the stock market is knowledge and patience. So few people succeed in the market because they have no patience and are generally ignorant of the market and finally they want to get rich quickly.
“Anyone who figures that his success is dependent upon chance may as well stay out of the market. His attitude is wrong from the very start. The great trouble with the average person who buys securities is that they think the market is a gambling proposition.
“One should realize at the outset that to work in the stock market requires the same study and preparation as law or medicine. Certain rules of the stock market are to be studied as closely as if he were a law student preparing for the bar. Many people attribute my success to luck. That is not true; the fact is that since I was fifteen, I have studied this subject closely. I have given my life to it, concentrating upon it and putting into it my very best.”
“My main objective was to protect myself from unwelcomed bad influences—in particular I was trying to avoid anyone who might be inclined to offer me assistance in trading the stock market by giving me some information—in the form of a tip. Tips were the one thing that had done me the most harm in trading the stock market.
“I never wanted to be part of a group of stock market traders especially those traders who gathered in the brokerage office. My main reason was that I needed continuity of thought. I needed to be able to have more than 15 minutes of uninterrupted thought. Tips, gossip, and the interpretation of the daily news events concerning the stock market by the people gathered in an office held no interest for me.
“In the larger brokerage offices where a large number of people gathered was chaos to my brain. As far as I was concerned, it was hurtful to my trading, to be with these people, with their own biases and their own hidden agendas which did not necessarily match up with my own. I believed in working in silence and keeping my own council. As a friend of mind once told me, I do not take tips. I prefer to make my own mistakes not the mistakes of other people!’ As far as I am concerned my friend was right.
“I also travel from my home to my offices undisturbed. I either travel to the office by car in silence and isolation or by my boat in the better weather, also in silence, with no other passengers—this gives me a chance to read the newspaper and plan my day. I do this to avoid meeting people who’ll eventually inquire about the stock market, the subject comes up almost automatically. I am then forced to listen to tips, gossip, and prognostications that will inevitably creep into my conscious and sub-conscious mind and therefore affect my judgment. If I travel by myself I can continue with my thinking without any interference in implementing my plan for the day. I agree with my friend Bernard Baruch who tells his brokers: ‘If you know anything about the stock I am trading…please do not tell me.’
“I believe that one of the most important qualifications for a successful trader is “POISE” which to me is defined as stability, a well balanced person with dignity of manner—as it relates to the stock market. A poised person is a person who can handle their hopes and their fears in a calm manner. The other qualification is “PATIENCE” to wait for the opportune time, when as many factors as possible are positioned in the traders favor. Poise and patience are the close friends of successful traders.
The final qualification is “SILENCE.” Keep your own silent counsel—keep your victories and your failures to yourself—learn from them both. Poise, Patience, and Silence are attributes that must be cultivated. These virtues do not come automatically to the stock market trader.
“I was often the first one to the office followed by Harry Dache my office manager and security manager. The board men, usually six in total, filed into the office by nine o’clock to take their positions on the chalk board to file the trades as they occurred. For volume numbers I consulted the actual ticker tape. I positioned the main ticker in the center of the board on a tall podium so all I had to do was raise or lower my eyes to see the action of stocks I owned or was interested in. I also employed telephone lines that went directly to the “hot” posts I was trading at the time, say steel, motors, mail order or radio. I used the largest and fastest ticker tape and positioned it at near eye level so it was easily accessible. In fact, I generally used “tall ticker tapes” so that I had to stand while I read the tape. Standing in an erect position insured me of proper blood circulation, and better breathing. I found this helped to keep me calm during stressful trading periods. I am up and on my feet nearly all the time that the market is open. This gave me a little exercise and kept my senses at a higher pitch. The bent-over or lounging position was never a position I wanted to assume. I consider the market a great challenge that demands total concentration and is not for the lazy, even my telephoning I did from a standing position.
“I also allowed “No Talking” once the bell rang. I wanted silence in the office while the market was open. My phone number was known to very few people and I would often change it to keep people from reaching me. I received as little mail as possible and I answered as little mail as possible during the working day. I only am interested in the stock market; it is my sole job and I consider all else as an unwelcome distraction from my job.
“One of the things I liked best about my job, after I had fallen into many pitfalls and managed to climb out, was the solitude—I loved the individuality, being the lone wolf—the solitude—everything that happened occurred as a result of my judgment.
“I had no interest in sharing my market experiences with anyone—the good or the bad. I couldn’t. After all, how could they care, it had nothing to do with their lives. And I had come to know by then that if you do well, if you are successful, most people are envious and they covet your success and if you do poorly they revel in your misfortune and tell their friends that you have finally been humbled by the stock market—and that “You had it coming” for your reckless behavior. So silence is the best option since there is nothing to gain through informing people of your activities. The self-satisfaction for me is “BEING CORRECT” understanding and beating the tape
“On October 5, 1923, in order to practice my new techniques and theories, I moved my offices from 111 Broadway, uptown to 780 Fifth Avenue, the Heckscher Building. I designed the offices very carefully. I wanted to be away from the Wall Street atmosphere, out of earshot of any tips. I also wanted to gain more secrecy in my operations and more security, so that no one would know my trades. Sometimes I used over fifty brokers to keep my trades secret.
“Inside the building, there was a private express elevator that traveled only to my floor in the Penthouse. My offices occupied the entire penthouse floor. I purposely had no sign on the office door where the elevator stopped. Once inside, there was a small anteroom, a kind of waiting room where Harry Edgar Dache’ had his desk.
“Harry was described by the New York press as ‘Pug-ugly with a personality to match.’ He stood a solid six feet six inches and weighed close to three hundred pounds with the battle-scarred face of a pugilist. Harry’s looks belied his high intelligence. I interviewed him for only half an hour and hired him right on the spot. Harry had been in the Merchant Marine and traveled the globe many times. He spoke six languages, including Latin. He was a voracious reader, knowledgeable in many areas and a terrific administrator. He ran the office with secrecy and perfection. He was completely loyal to me and very protective of me and my family. The boys loved Harry. Jesse Jr. and Paul were enthralled with his magical stories of traveling the seven seas. He was their unofficial tutor, chauffeur, companion and bodyguard, especially when we went to Palm Beach.
“There were no windows in the ante-room, only a few chairs and Harry’s desk. Behind Harry was the solid floor to ceiling door to my offices. There were no signs or identification on any doors. To let someone in to see me, Harry would first always confirm the appointment with me by intercom, no matter who it was. He would then rise from his desk and use his key to open the door for the visitor. It was a theatrical ritual that Harry performed to show the visitor the difficulty in gaining entrance into my ‘Trading Room,’ and it worked.
“Behind the door was a massive open room with a green chalk board that ran the entire length of the room. There was a catwalk in front of the chalkboard where four to six men would work in silence. They each would have a section of the “board” and they were responsible for specific stocks, active stocks or commodities that I was trading or observing closely.
“These men were paid very well and sworn to secrecy and Harry Dache’ assured they remained loyal to me. Each man had on headphones that connected to the floor of the exchange. Men on the floor would call up the “instant” quotes to my board men, who would immediately write down the individual stock transaction—the bid, asked, and sold price. They did not work off the ticker tape. It was too slow. This gave me an edge on the ticker tape, which was usually delayed at least fifteen minutes and up to hours. I wanted the most current information I could get. I had learned as a young man how important “fresh” quotes were.
“If I was active in several stocks or commodities I would often increase my staff from four to six men on the “stock board.” These men would work all day on the catwalk, in silence, only taking a short break for lunch, when they would usually be replaced by Harry, so no quotes were lost.
“These board men would always track two or more stocks in the same group. If I was trading General Motors, I would track, Ford or Chrysler as well, to observe the group action.
“In the middle of the office was a massive conference table of shiny mahogany with eight comfortable leather office armchairs. On the rare occasions when I had guests to my office I would always sit facing the chalkboard so I could watch the quotes as I listened to my guests. I often interrupted the meeting to enter my office and place trades in private.
“My private office was very large with heavy paneling of oak and mahogany. I had seen the paneling in a library in an old English manor and had purchased it. The library was disassembled and shipped to New York.
“My desk was large, made out of highly polished mahogany. On my desk was an “IN” basket and an “OUT” basket, a pad and pencil, nothing else. The adjacent wall to the mahogany desk that faced the “stock board” was a solid sheet of clear plate-glass, so I could see the market action as it happened from my desk.
“There were three black telephones on my desk. One was a direct wire to London, the second went to Paris and the third went directly to the floor of the Chicago grain pits. I wanted first hand, fresh information, and I was willing to pay for it. I knew that wars were won on information, intelligence, and the general with the best information, the best intelligence, was the general most likely to win. And I wanted no “rumors of war” I wanted only specific accurate information.
“Paul, my son, would often come to this office as he grew up, especially on his summer breaks. I would sometimes allow him to work the board. The board men were trained to work with a code. If a stock suddenly had a deep price fluctuations they would use a “secret code” to note this on the board. These codes were known only to the board men and myself. On occasion, there would be guests in the office who would ask me: J.L. what the hell are those weird columns on the chalkboard, some kind of hieroglyphics?”
“They make perfect sense to me.” I would respond.
“You wanna explain them to me?”
“No.” I would smile. “If I did, then you would be as smart as I am.
“Just tell me what to buy and sell—and when—keep it simple forme.”
“You know I never recommend a stock, but I would be glad to tell you whether I believe the market is going up or down.”
“It always goes up or down, J.L.”
“You’re right of course, but the trick is ‘when’ is it going to go up or down.”
“And ‘what’s’ going to go up or down, J.L. Don’t forget it’s ‘what’ particular stocks are going to go up or down; that’s what we all want to know—what stock will rise and when.”
“If a man knows the general trend of the market he should be able to do well.”
“Whatever you say, J.L., whatever you say.”
“One day I was sitting in my office talking to my son Paul. ‘Turn around Paul, and look at the stock board.’ Paul turned and studied the men as they moved on the catwalk like well-choreographed dancers.
“I continued: You see, son, those markings on that board are as clear to me as a musical score is to a great conductor. I see these symbols as alive, a rhythm, a heartbeat, a pulse, that makes beautiful music—it all makes perfect sense to me.
“For me the board is alive, like music, we are able to communicate. It’s something that has come to me only after years of hard work and practice, not unlike a great conductor, of a great orchestra. What I feel when I look at that board, can’t be shared, anymore than a conductor could articulate what he feels when he plays Mozart just the way it should be played. The board and those men are a playing a symphony to me, a symphony of money—that sings to me—that makes love to me—that envelops me in it’s song.”
Paul studied his father that afternoon. He believed every word. It was a rare moment for Paul, to get so intimate with his father who was a private man, stingy with his emotions, frugal with his love.
“I believe my job is to continually observe the tape and to interpret the tape as a person would look at a movie with no two frames exactly the same. These individual messages must be extracted from the tape and run through your brain in a rapid fashion. I carefully observe the market swings from five to twenty points that take from five to twenty working days. I also observe intensely the 3 and 6 point advances and declines…for all these factors play their part in forming the overall action on the stock market.
“I believe that the stock market always follows the line of least resistance until it meets with an at-first almost imperceptible force that slowly, but inexorably, stops its upward or downward movement. It is at these key junctures—the pivotal points—that the real money is made.
“I refer to them as pivotal points…these points are often difficult for the untrained “trader” to observe while they are happening. They become obvious at a later date when they have totally formed and the market has clearly changed direction. It is the job of the skillful stock trader to recognize and act in conjunction with these pivotal points and take his positions at the perfect psychological point, often these will involve industry groups falling out of favor and new groups rising and coming into favor.
“The savvy stock market trader controls his emotions and always acts in the future, not the present, and certainly never from the past. Therefore, like a crystal ball, the person who knows how to read the tape at these moments always seems to be able to identify these rising Industry Groups who will become the new strong sector-stocks for the new rally.
“People have always thought I was a “Bear Raider” who acted impulsively. Nothing could be further from the truth I have always been highly interested in the small and intermediate swings, as well as the longer trends. In fact, I’m interested in all movements of any kind that appear to me on the tape. I always considered it a personal challenge to try and figure out what the tape was saying. I knew what the great detective Sherlock Holmes knew, the clues are lying there in front of you, through calm deductive reasoning you must figure out the answer to the puzzle, discern what is lying there before you—many try but few succeed—”poise” “patience” and “silence” are the emotional keywords for the top trader.
“Just as the panics have always encouraged me to go long when things look the bleakest—conversely, when everything looks perfect and blissful it occurs to me that it may be time to go short. I try and see this before everyone else sees it, that is why I keep my own council in silence and avoid talking to anyone who may alter my thinking.
“Sometimes I have accumulated my line of stocks at what I believe to be the turning point in a great decline or at the crest of a mighty upward wave and I have carried this line for many months, even up to a year before I was proved correct. Because I understood that it requires time for general business to recover and for the earning power of these stocks to be reinstated so one must be patient and prudent in assembling their line of stocks for either a new rally or in going short in a downward trading market.
“I started trading at age 15 in the stock market; it has been the focus of my life. I was very fortunate in calling the crash of 1907 almost to the actual hour and very flattered when J.P. Morgan sent a special envoy to ask me to discontinue my short selling, which I did.
“On my best day during that decline of 1907 I made three million dollars in a single day. I was also fortunate in the depression of 1921 when I decided to go long with the market at its very lowest stages.
“And finally in the great depression of 1929 I went to the short side too early with the “motors” as they rolled over and I began my shorting—I lost over a quarter of a million dollars before I finally found the correct Reversal Pivotal Points for the rest of the leaders as they rolled over and tumbled headlong into the great depression. I went short in earnest at that moment and increased all my positions. I made the largest amount of money I had ever made during the market crash of 1929. I was even blamed personally by the press and the public for the crash, which was pure nonsense, nobody, no single person could cause a market to do something that it did not want to do.
“But please remember that I had been trading almost 40 years and I had a finely developed intuition as a result of the enormous experience I had attained. But I must say now in retrospect that in all these cases the clues were evident and spoke to meet as clearly as can be imagined. Volume was very important to me. I was a careful student in watching the way the selling was absorbed and the resistance, which it met from day-to-day. The volume of trades was always of key interest to me. I got this volume number from the ticker tape. There are people who believed I paid no attention to volume, some believed this because they came to my office and did not see the notations for volume. I kept the volume numbers often in my head or I just checked it at the end of the day’s trading and had Harry, my office manager, post this final volume number in the master book on a stock I was particularly interested in.
“To me the people who invest in the market are akin to a large school of bait fish who have no specific leader, and they are capable of very quick, random-action whenever they fear they are in danger. In other words, there are millions of minds involved in the stock market, these minds form decisions based on the two main emotions in the stock market hope and fear—hope is often generated by greed—fear is often generated by ignorance.
“What this has always meant to me is that the key factor that drives the stock market is not intelligent analysis or reason…no, it is human emotions. Once a person understands this he will be a long way closer to becoming a successful stock market trader. With this in mind, a stock trader always has to look behind what he is seeing, with a careful analysis, remember everyone is basically receiving the same information, some win and some lose, based on how they interpret the information they receive.
“I have found that the ability to find the main turning points, the Reversal Pivotal Points, in the long trends is the most crucial and important thing a stock trader must do. I also believe that if all I could do during the panics and the booms was accurately find the perfect psychological moment to EXIT and ENTER the market I could amass a fortune of great proportion, for a successful trader must find and trade in the direction of the momentum—the direction of the line of least resistance. I have never had a problem in playing either side of the market because it was only logical to me to go long and to also go short. The market goes up a third of the time, down a third, and sideways a third of the time.
“If I am exiting a long position because I believe the stock has topped out, it is easy for me to get on the short side of that stock. I have no feeling for a stock as some people do. For instance, if I have made money with General Motors on the long side I have no feelings for General Motors—the stock has simply done what I had felt it would do. If I can now make a profit as General Motors declines—by going short—I will do so with no feeling toward the stock, which is after all an inanimate thing with no feelings for me. There are no good stocks nor are there any bad stocks; there are only stocks that make money for the speculator.
“I have heard many of my contemporaries say: ‘That stock was good to me.’ Or ‘That stock cost me money, so I am staying away from it!’ The stock had nothing to do with it. Everything that happens is a result of the Trader’s judgment and ‘no excuses’ are acceptable. To put it simply it was the ‘Trader’ or ‘Speculator’ that made the conscious decision to enter a trade and always makes the conscious decision to exit a trade. The judgment was either correct or it wasn’t.
“What all Traders must beware of is in effect a kind of arrogance, for when a stock moves against us we must decide that we were ‘wrong’ and we must exit that trade instantly. Most traders forget that it is a proven fact that we will always be wrong on some trades; it is getting out of those trades quickly that is the key to success.
“Another trap the inexperienced trader must deal with is trying to find the exact bottom and top of a major trading cycle. Remember, there are times when a trader must be out of the market and waiting on the sidelines. It is my experience that it is virtually impossible to call the exact top and the bottom of a market, but it is much better to err on the side of caution. Getting out and waiting for the market to establish itself is very difficult while you are invested, because by being invested you will have an automatic bias toward the direction of your position. If you are long you will subconsciously favor the longside, if you are short you will subconsciously favor the downside. Hope lives in us all, remember it is human nature to be hopeful. That is why I often sold out all my positions and re-evaluated the market from a cash position. It cost me the commissions, but for me I viewed this as a small insurance premium cost toward my overall goal. I also was well aware that all stocks do not top out at the same time, but stocks in industry groups often top out at the same time, as new groups move in to take their place. It is the overall trend of the leading groups that I watch.
“I have observed that the principle power of a bull market is purely money, the availability of money, and the real attitudes and emotions of men and women and whether these people are inclined to buy or sell stocks—I have always tracked the money flow as well as I could.
“I have further observed that is not what the millions of people think about the market, or say about the market…no, no, no, it is what they “DO” about the market by their actual buying and selling and all this is immediately revealed in the tape, the problem is in the interpretation of this news, this displayed evidence as the tape flows past the reader.
“This was my business, my life’s vocation and the thing I most enjoyed. The work of solving the puzzle was what always fascinated me. It was never the money it was solving the puzzle, the money was the reward for solving the puzzle. Going broke, which happened to me several times in my life was the penalty for not solving the puzzle. The chief deception is that trading the market looks easy when it is one of the most difficult things to do—anticipate the trend. And the reason it is so difficult is because of human nature, controlling and conquering our human nature is the most difficult task. As I told my sons on many occasions: I lost money when I broke my own rules but when I followed the rules, I made money.”
“I have always been suspicious of everything I read in the newspaper and I never accept what I read at face value I try to look for hidden agendas and self-serving reasons that could have generated the articles, no matter what paper published the information. I understand that the market is composed of the reflections of the attitudes in the minds of millions and millions of people. But I try to read between the lines and formulate my own judgment; that is why I like to be alone to use my own judgment in situations such as reading the newspapers.
“Often people use the media to promote their stock and to influence public opinion to persuade the public and the pools into buying or selling, this is particularly true of large stock owners, pools and insiders. I interpret these newspaper articles in two ways:
“First, I try to interpret their immediate and direct influence on the opinions and actions of stock traders with regard to a particular stock.
“Second, I watch the actual stock quotes to detect how the news has influenced the buying and selling of specific stocks as a whole in that market industry group. Often my interpretation of a news event is wrong. But I always know that if the news-development is of sufficient importance it will eventually affect the tape.
“In other words, I watch the tape like a hawk to see how it is reacting to actual news. I do not listen to people, “the pundits,” “the reporters” who are trying to interpret the news item and predict what will happen.
It is my experience that it is far better to look objectively at the tape, for the tape will provide the actual facts as to how the public is reacting to the news, these actual facts revealed by the tape are a far better indicator than any “reporter” or “pundit” can provide. It is up to the skillful market trader to watch the tape and react only to what the tape is saying. Learn how to read the tape—the truth is in the tape—listen to it.
Note: This conversation and story is excerpted from The Amazing Life of Jesse Livermore—World’s Greatest Stock Broker written by Richard Smitten. The conversation between Jesse Livermore, Walter Chrysler (Chrysler Motors), Ed Kelley (head of United Fruit Co.) and T. Coleman Dupont (Dupont Family) and Colonel Ed Bradley in Bradley’s Casino in Palm Beach-the longest running illegal gambling club in the United States.
“I’ve been hearing rumors on the Street about you and a wheat trade. Tell us about it, J.L., entertain us at lunch.”
“Well I just felt the demand for wheat in America was under estimated, and the price was going to rise. I waited for what I call my Pivotal Point and stepped in and bought 5 million bushels of wheat, about 7 million dollars worth.
“I watched the market closely after the purchase. It lagged. It was a dull market, but it never declined below where I bought it. Then one morning the market started upwards and after a few days the rise consolidated, forming another of my Pivotal Points. It laid around in there for a little while and then one day it popped out on the upside with heavy volume.
“A good signal, so I put in an order for another 5 million bushels. This order was filled at higher and higher prices. This was good news to me because it clearly indicated that the market line of least resistance was upwards.
“I liked the fact that it was much more difficult to acquire the second lot of 5 million bushels. I then had filled out my pre-determined target position of 10 million bushels, so I stepped back, and kept my eye on the market. It formed into a strong bull market and rose steadily for several months.
“When wheat rose 25 cents above my average price I cashed in. This was a bad mistake.” Livermore paused as the lobster salads were served, and the second bottle of champagne was opened.
Walter Chrysler said, “J. L., how the hell could it be a bad mistake to make a profit of two and a half million dollars?”
“Because Walter, I sat back and watched wheat rise another 20 cents in price in three days.”
“I still don’t get it.” Chrysler said.
“Why was I afraid? There was no good reason to sell the wheat. I simply wanted to take my profit.”
“It still looks like a pretty good trade to me. I’m afraid you lost me, J.L.” Ed Kelley added.
“All right, let me explain. You remember that old joke about the guy who goes to the race track and bets on the daily double and wins, then takes all his winnings and bets it on the third race and wins. He does the same on all the other races, and wins. Then on the eighth and final race he takes his hundred thousand dollars in winnings and bets it all to win on a horse, and the horse loses.”
“Yeah.” Chrysler nodded.
“Well, he’s walking out of the track and he meets a pal of his, who says. ‘How’d you do today?’
“‘Not bad,’ he answers, smiling, ‘I lost two bucks.’”
They laughed. “That’s a good story J.L., but how the hell does it apply to the wheat story?” Chrysler asked.
“Simple, why was I afraid of losing the track’s money, my profits, in effect. I was simply acting out of fear. I was in too big a hurry to convert a paper profit into a cash profit. I had no other reason for selling out that wheat, except that I was afraid to lose the profit I had made.”
“What’s wrong with being afraid?” Dupont asked.
“So, what did you do, J.L.?” Kelley asked.
“Well, after I booked my profit in the wheat I realized I had made a great mistake. I had not had the courage to play the deal out to the end—’till I got a signal to sell, a real definitive sell signal.”
“So…”
“I re-entered the market and went back at an average price 25 cents higher than where I had sold out my original position. It rose another 30 cents, and then it gave a danger signal, a real strong danger signal. I sold out near the high of $2.06 a bushel. About a week later it sold off to $1.77 a bushel.”
“Well, you have more guts than me, J.L., and it sounds a little like greed to me.”
“That’s because you sell fruit, Ed. The way you know how to diagnose the market on fruit is the way I am supposed to know how to diagnose the stock and commodities markets, and the wheat futures market had shown no signs of weakness when I first sold it.
“The next time I sold the wheat it was different, I could see definite symptoms of weakness. It gave the clues, the hints, the tell tale signs of topping out. The tape always gives plenty of warning time for the savvy speculator to heed.”
“Well, J.L., I like your story but sometimes I think maybe you got a set of those lucky horseshoes up your ass, just like Ed Bradley here.” Chrysler added.
“Well Walter, a little luck never hurt anyone.” Livermore paused and looked around at the group. “I’d say we all had our share of luck at one time or another.”
They all laughed.
Livermore agreed with his friend, the gambler, Colonel Ed Bradley—after TIMING and MONEY MANAGEMENT comes EMOTIONS…it is one thing to know what to do. It is quite another thing to have the will to actually do it. This is true of the stock market. This is true of life. Who knew better than Jesse Livermore. He explained to his sons:
“I believe that having the discipline to follow your rules is essential. Without specific, clear, and tested rules speculators do not have any real chance of success. Why, because speculators without a plan are like a general without a strategy, and therefore without an actionable battle plan. Speculators without a single clear plan can only act and react, act and react, to the ‘slings and arrows of stock market mis fortune,’ until finally they are defeated.
“It is my conclusion that playing the market is partly an art form, it is not just pure reason. If it were pure reason, then somebody would have figured it out long ago. That’s why I believe every speculator must analyze his own emotions to find out just what stress level he can endure. Every speculator is different, every human psyche is unique, every personality exclusive to an individual. Learn your own emotional limits before attempting to speculate, that is my advice to any one who has ever asked me what makes a successful speculator. If you can’t sleep at night because of your stock market position than you have gone too far, if this is the case then sell your position down to the sleeping level.
“On the other hand, I believe anyone who is intelligent, conscientious and willing to put in the necessary time, can be successful on Wall Street. As long as they realize the market is a business like any other business—they have a good chance to prosper.
“I believe that behind all major movements in the stock market there are irresistible forces at work. This is all the successful speculator needs to know. Just be aware of the actual stock movements and act upon that knowledge. It is too difficult to match up world events or current events, or economic events with the movements of the stock market. This is true because the stock market always moves ahead of world events. The stock market is not operating in the present or reflecting the present; it is operating on what is yet to be the future. The market often moves contrary to apparent common sense and world events, as if it had a mind of its own, designed to fool most people, most of the time. Eventually the truth of why it moved as it did will emerge.
“It is therefore foolish to try and anticipate the movement of the market based on current economic news and current events, such as: The Purchasing Managers Report, the Balance of Payments, Consumer Price Index and the Unemployment figures, even the rumor of war, because these are already factored into the market. It is not that I ignored these facts or was ignorant of them, I wasn’t. I was well aware of world events, political events, and economic events. But these facts were not facts I could ever use to “PREDICT” the market. After the market moved it would be ‘rationalized’ in endless post mortems by the financial pundits and later when the dust had settled, the real economic, political and world events would eventually be brought into focus by historians as to the actual reasons why the market acted as it had. But, by that time it was too late to make any money.
“Trying to figure out the ‘why’ of a market move can often cause great emotional strife. The simple fact is, the market always precedes economic news, it does not react to economic news. The market lives and operates in future time. Example: A good earnings statement is issued by a company and the stock proceeds to fall in price-why? Because the market had already factored in those earnings.
“One of the problems with looking too deeply into economic news is that it may plant ‘suggestions’ in your mind, and suggestions can be subliminal and dangerous to your emotional stock market health where you have to deal in reality. These suggestions are very often logical but that does not mean they are true and will effect the market.
“I have never understood why people think making money in the market is easy. We all have our own businesses. I would never ask my good friend Ed Kelley, the head of the United Fruit Company, to tell me the secrets of the fruit business, or Walter Chrysler about the automotive business. It would just never dawn on me. So, I could never understand when people asked me: How can I make some fast money in the stock market?
“I always smiled and said to myself—How could I possibly know how YOU could make money in the market? I always evaded the question. It was like asking me, how can I make some quick money in brain surgery? Or how can I make a few fast bucks defending some person in a murder case? I believe, from experience, that even attempting to answer these questions effects a person’s emotions, because you have to take a firm position and defend your thoughts, which may change tomorrow, depending on the conditions of the market.
“But I fully understood that I was not the only one who knew that the stock market is the world’s biggest gold mine, sitting at the foot of the island of Manhattan. A gold mine that opens its doors everyday and invites any and all people in to plumb its depths and leave with wheelbarrows full of gold bars, if they can, and I have done it. The gold mine is there all right, and I believe everyday someone plumbs its depths, and when the bell rings at the end of the day they have gone from pauper to prince, or from prince to supreme potentate…or stony broke. And it’s always there, waiting.
“I believe that uncontrolled basic emotions are the true and deadly enemy of the speculator, hope, fear and greed are always present, sitting on the edge of our psyches, waiting on the sidelines, waiting to jump into the action, plow into the game.
“This is one of the reasons I never use the words ‘Bullish’ or ‘Bearish.’ These words are not in my vocabulary, because I believe these words can create an emotional mind-set of a specific market direction in a speculator’s mind. The words Bull and Bear cause a trader to get a fixed mind-set. And there is a good chance the speculator will blindly follow that trend or direction for an extended period of time, even if the facts change.
“I have found that well-defined trends do not last for extended periods of time. When people ask me for a tip I say the market is currently in an ‘Upward Trend’ or a ‘Downward Trend’ or a ‘Sideways Trend’—or I tell them that the ‘line of least resistance’ is currently up or down,’ as the case may be…and that is all I say.
“This leaves me with the flexibility to change my mind, according to market behavior. I try never to ‘PREDICT’ or ‘ANTICIPATE’ the market. I only try to “REACT” to what the market is telling me by its behavior.
“I firmly believe that there are always clues as to what is going to come next. The clues are buried in the behavior of the market—what the market actually does—the here and now—not what is predicted that it will do. In a way, you have to be like a detective and solve the puzzle using the facts that you are given. But, like a good detective, always look for proof of your facts and re-confirm them if possible always get corroboration. This requires an unemotional analysis.
“And I am one of the few speculators who has never cared in which direction a stock is going. I simply go with the ‘line of least resistance.’ For me it is simply ‘a market play,’ the direction of the stock is not important. In fact, one of the reasons I was noted as ‘The Great Bear of Wall Street’ was that so few other speculators had the courage of their convictions to play the downside, the negative side of the market.
“When stocks decline swiftly, and abruptly, they are being driven by fear. When they rise they are being driven by hope. If people are hoping a stock will rise they are slower to sell. If they fear the stock will decline they are usually fast to dump that stock. That is why declines produce faster, more abrupt market action. So, if you play the short side you must react to faster, more drastic market patterns and conditions.
“There is no good direction to trade, short or long, there is only the ‘money making’ way to trade. I have observed that to sell short goes against human nature, which is basically optimistic and positive. I believe less than 4% of speculators ever trade the short side of the stock market. There is also no question that it is “extremely dangerously” to sell short because the potential loss is unlimited. It takes strong control of your emotions to trade on the short side.
“But the stock market moves up roughly a third of the time, sideways a third of the time, and downward a third of the time. If you only played the bull-side of the market you were out of the action, and a chance to make money two thirds of the time. And for good or bad I was not a man who wanted to wait, and hope, and wonder. I wanted to trade the market, and I wanted to win more times than I lost.
“I am fully aware that of the millions of people who speculate in the stock market few people spend full time involved in the art of speculation. Yet, as far as I am concerned it is a full-time job, perhaps even more than a job, perhaps it is a vocation—where many are called and few are singled out for success.
“By far, the hardest emotional battle a speculator must deal with is tips. It was the main reason I moved uptown to Fifth Avenue, to get out of the reach of everyone who was trying to help me by giving me ‘sure things’ and ‘inside information.’ Beware of all ‘inside information’ and ‘tips.’
“Tips come from all sources. Once, long ago, one of these tips was passed on to me from the Chairman of a major American corporation who spoke to me at a dinner party at my house in Great Neck.
“How are things going?” I asked him.
“Great, we’ve turned the company around, not that it was really in trouble, but it looks like clear sailing from here. In fact, our quarterly earnings are coming out in a week and they are going to be terrific.”
“I liked him and believed him. So, the next morning I bought a thousand shares to test it out. The earnings came in just as the chief executive said they would. The stock rose nicely, the earnings continued to rise for the next three quarters, and the stock rose steadily. I was lulled into a feeling of security, as the stock continued to rise. Then it stopped and started plummeting in the opposite direction, like a waterfall.
“I called the Chairman and said: This fall in your stock price has me worried. What’s going on?”
He answered. “I know the price has fallen J.L., but we consider it nothing more than a natural correction—after all we have had a pretty damn steady rise in the price of the stock for almost a year now.”
“How’s business?” I asked.
“Well, our sales are slightly off and that news may have leaked out, I’m afraid. Looks like the “bears” got hold of that information and are hammering the stock. It’s mostly short selling, a bear raid, we think. We’ll drive them out on the next rally, squeeze them a little, eh J.L.?”
“Are you guys selling any of your holdings?” I asked.
“Absolutely not! Where would I put my money with more safety than my own company?”
“Well, sure enough, I later found out that the ‘insiders’ were busy selling into the stock’s strength, the minute they got wind of the business going into a slump.
“I never got mad. It was my stupidity and greed. I knew that all key executives were basically cheerleaders and they must remain positive, must be bearers of only good news. They could never tell shareholders or competitors that things were not as “rosy” as they appeared. In fact, it always made me smile to listen to their mendacity. The mis-statements, the lies, were just a matter of ‘self-preservation,’ an essential part of the job of a chief executive officer—at every level of power, including politics.
“But it was my self-preservation I was interested in, not the top executives and shareholders of the companies I invested in. Therefore after a while, and some substantial lost money, I never asked an insider about how their business was doing.
“Why waste my time listening to half-truths, shadowy statements, inaccurate projections, and just plain bold-faced lies when I could simply just look at the behavior of the stock. The story was clear in the action of the stock. The truth was in the tape for anyone and everyone to see.
“I have suggested to people who were interested in the stock market that they carry around a small notebook, keep notes on interesting general market information and perhaps develop their own stock market trading strategy. I always suggested, that the first thing they write down in their little notebooks was:
“There is only one way to achieve success in speculation—through hard work, persistently hard work. If there is any easy money lying around no one is going to try and give it to me—this I know. My satisfaction always came from beating the market, solving the puzzle. The money was the reward, but it was not the main reason I loved the market. The stock market is the greatest, most complex puzzle ever invented, and it pays the biggest jackpot.
“And always remember: You can win a horse race, but you can’t beat the races. You can win on a stock, but you cannot beat Wall Street all the time—nobody can.
“People always talked about my instincts, especially after the Union Pacific story and the San Francisco earthquake. But I never thought my instincts were that special. The instincts of a seasoned speculator are really no different than the instincts of a farmer, like my father. In fact, I consider farmers the biggest gamblers in the world. Planting their crops every year, gambling on the price of wheat, corn, or cotton, or soybeans, choosing the right crop to plant, gambling on the weather and insects—the unpredictable demand for the crop—what was more speculative. These same principles apply to all business. So, after twenty, thirty, forty years, of growing wheat or corn or raising cattle or making automobiles or bicycles, the person naturally gets his sixth sense, his intuition, his experienced-based-hunches for his business. I consider myself no different.
“The only area I may have differed from most speculators, was when I felt I was truly right, dead right, for-damn-sure right—then I would go all the way, shoot the works. The way I did during the 1929 market crash when I had a line of one million shares of stock out on the short side, and every rise and fall of a single point meant a million dollars to me. Even then, my biggest play, it was never the money that drove me. It was the game, solving the puzzle, beating a game that confused and confounded the greatest minds in the history of mankind. For me, the passion, the challenge, the exhilaration, was in beating the game, a game that was a living dynamic riddle, a conundrum, to all the men and women who speculated on Wall Street.
“Perhaps it was like combat is to a soldier. It’s a mental high that’s visceral, where all your senses are pushed to the limit and the stakes are very high.
“I told my boys—stay in the business your good at, and I was good at speculating. Over the years I took “many millions” of dollars out of Wall Street and invested them in Florida land, aircraft companies, oil wells, and new “miracle” products based on new inventions—they were all abject failures, disasters. I lost every cent I ever invested in them.
“Just remember, without discipline, a clear strategy, and a concise plan the speculator will fall into all the emotional pitfalls of the market and jump from one stock to another, hold a losing position too long, cut-out of a winner too soon, and for no reason other than fear of losing the profit. Greed, fear, impatience, ignorance and hope, will all fight for mental dominance over the speculator. Then, after a few failures and catastrophes the speculator may become demoralized, depressed, despondent, and abandon the market and the chance to make a fortune from what the market has to offer.
“Develop your own strategy, discipline and approach to the market. I offer my suggestions as one who has traveled the road before you. Perhaps I can act as a guide for you and save you from falling into some of the pitfalls that befell me.