I recently finished reading Edwin Lefèvre’s classic Reminiscences of a Stock Operator, marking my second time through the book. I first picked it up nine years ago on the recommendation of a former coworker who was a flow trader. A burgeoning credit analyst at a bulge bracket investment bank at the time, I was interested in learning more about the trading aspect of job and had asked for a primer on the subject. While initially confused to have received the historical novel as the answer to my inquiry, my sophomoric skepticism was completely reversed by its end. Though many of the book’s lessons were largely lost upon my younger self, it struck the older, wiser, and only slightly more profitable “me” like a thunderbolt. In this post I thought I’d do some reminiscing on Lefèvre’s “Reminiscences”, and add to the ever expanding tome on the subject.
For the uninitiated, Reminiscences is a historical novel that chronicles the trading career of Larry “The Plunger” Livingston. It is meant to be the fictionalized account of famed trader Jesse Livermore, who was said to have provided insights for Lefèvre’s project. The book is set at the turn of the 20th century and follow’s Livingston’s professional career. It is equally insightful from a historical perspective as it is from a money management one.
At the opening of Reminiscences we are introduced to Livingston as a young teenager employed as a quotation-board boy in a New England stockbrokerage office. While literally writing and erasing stock prices on the firm’s chalkboard for clients, he developed a skill for “tape reading” and ventures off to strike it big in the buck shops. His success leads to an eventual “black listing” from the gambling houses, leaving him no choice but to move to New York City to trade stocks in a brokerage house if he is to continue on as a trader. Throughout Livingston’s journey, from humble beginnings to becoming one of the most successful traders of his day, Lefèvre imparts his valuable teachings.
As far novels go, Reminiscences is mediocre at best (and I’m being kind). For a story containing so much natural drama, none of it comes through in the novel. However, the value of Reminiscences lies beyond its literary merits. It is brimming with trading wisdom which is effectively illustrated through the medium of fiction (which is perhaps its “secret sauce”). The reader is shown through Livingston’s progression of successive failures and successes the value of taking a risk management approach towards trading, independent thinking, intellectual honesty, and the ability for dispassionate judgement and adaptability. These apply across trading techniques and epochs alike. As Lefèvre notes, “there is nothing new on Wall Street.”
There were a number of key concepts and reminders that shone through for me this time through Reminiscences. Not surprising, they are intertwined and fit together in an integrated fashion. While the specific “tape reading” techniques may or may not presently apply, the larger overarching principles are as relevant today as they were nearly a hundred years ago when first penned. What follows are a few of my favorites.
We’re all speculators, and there’s a value to recognizing that:
“… there is nothing new on Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market to-day has happened before and will happen again.”
“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.”
“Observation, experience, memory and mathematics these are what the successful trader must depend on. He must not only observe accurately but remember at all times what he has observed. He cannot bet on the unreasonable or on the unexpected, however strong his personal convictions may be about man’s unreasonableness or however certain he may feel that the unexpected happens very frequently. He must bet always on probabilities that is, try to anticipate them.”
Let’s face it, no matter if one goes by “trader” or “investor”, we’re all just speculating on future prices. The material difference between these two polarizing monikers is time horizons. Making peace with this fact allows one to properly study the subject and hopefully improve. Successful speculation requires an expansive toolkit ranging from the quantitative to qualitative, from fundamental to behavioral, and the historical records are full of useful examples from which one can draw.
“Price is primary”
“They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side.”
“… I never argue with the tape. To be angry at the market because it unexpectedly or even illogically goes against you is like getting mad at your lungs because you have pneumonia.”
“… the only thing to do when a man is wrong is to be right by ceasing to be wrong.”
As investors, our only concern is to make money, not being “right.” While there should be a connection between the two, the introduction of time into the equation can muddle this relationship. Being “right” on price is the only thing that matters in investing.
“If somebody had told me my method would not work I nevertheless would have tried it out to make sure for myself, for when I am wrong only one thing convinces me of it, and that is, to lose money. And I am only right when I make money. That is speculating. “
“A man must believe in himself and his judgment if he expects to make a living at this game. That is why I don’t believe in tips. If I buy stocks on Smith’s tip I must sell those same stocks on Smith’s tip. I am depending on him. Suppose Smith is away on a holiday when the selling time comes around? No, sir, nobody can make big money on what someone else tells him to do. I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgment. It took me five years to learn to play the game intelligently enough to make big money when I was right.”
Dr. Ben Hunt characterizes investing as playing the player. In other words, you literally can’t make money by following what others do. You’ll also never build a skillset in speculating if you leave the thinking to others. Do your own work and study and refine your method; mistakes are opportunities to improve. It’s your best shot at being successful.
Investing requires not only risk management, but reward management
“When a man is right he wants to get all that is coming to him for being right. “
“They say you never grow poor taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market.”
We’ve heard it before: successful trading is in essence an exercise in risk management. Many are familiar with the popular expression about cutting one’s losers and letting his/her winners run. I was struck by Lefevre’s more positive focus on the making money part of the equation. He’s right, long-term success comes down to being a pig when you have a variant perception.
“I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, ‘Well, you know this is a bull market!’ he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend.”
“The trend has been established before the news is published, and in bull markets bear items are ignored and bull news exaggerated, and vice versa.”
“But not even a world war can keep the stock market from being a bull market when conditions are bullish, or a bear market when conditions are bearish. And all a man needs to know to make money is to appraise conditions.”
Lefèvre illustrates this concept in a number of passages and different ways, though the above struck me the hardest. Using a macro and micro thesis in concert with each other will yield the greatest returns. General trends have a way of magnifying individual ones.
“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. 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 should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”
“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 Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but the intelligent patience to sit tight.”
I already covered this one in a previous post, but it can’t be stressed enough. Investing is not a regular job. Profits do not accrue linearly over time. Be selective with your trading activity and only do so when the time seems right.
One can find many of these quotes and others from Reminiscences attributed to Jesse Livermore, however, the accuracy of that practice is unknown. To be sure, Lefèvre must have relied upon Livermore for the trading principles, being a journalist; however, the effective communication of them may surely be the author’s achievement alone. Regardless of where the credit lies, reminiscing on Reminiscences has undoubtedly been a valuable endeavour for me and I look forward to incorporating the genius of Livermore and Lefèvre into my own practice.
A version of this article first appeared on the Integrating Investor.
Seth Levine is a professional, institutional investor focused on selecting high yield bond positions for a financial services company. He is also the creator of The Integrating Investor where he blogs about macroeconomic and investment strategy related themes. Seth holds a Bachelor of Science degree in Mechanical Engineering from Cornell University and is a CFA charterholder. You can learn more about Seth at www.integratinginvestor.com and follow him on Twitter at @SethLevine2. Please note that any opinions and views he expresses are solely his own and do not reflect those of his current or former employers.