Reminiscences of a Stock Operator by Edwin Lefèvre is a classic investing book. The book was written in 1923 and surrounds a trader named Larry Livingston who is based on Jesse Livermore. Jesse was one of the great traders back before the Great Depression. He gained and lost immense fortunes multiple times. At one point he was one of the richest men in the world. After World War 1 he managed to corner to the cotton market and it took a one and one meeting with Woodrow Wilson to prevent him from driving the price of cotton up. The reason why the book is considered a classic is that it is full of timeless investing/trading heuristics. Here are my favorite quotes and insights.
Another lesson I learned early is that there is nothing new in 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.
In the first few pages of the book you get hit with the “there’s nothing new under the sun (except for nuclear weapons)” line. Wall Street, is full of people and people tend to act predictably within a given system. So when someone says “this time is different” your first instinct should be to fade that sucker.
No man can always have adequate reasons for buying or selling stocks daily or sufficient knowledge to make his play an intelligent play.
Trading requires admitting your own ignorance. That is hard for most people to do especially when our culture encourages unrelenting confidence over humility. Handicapping potential outcomes probabilistically not only acknowledges our ignorance but facilitates prudent risk management. If you can ballpark the odds of a particular trade or strategy you can then size the position to have a favorable return given the probability.
When making trades you should always assume the person on the other side knows more than you. This is defensive in nature and is probably closer to the truth. What information edge could I possibly have over a manager who has been working at the company in question for the 20 years? Or the investor who has spent 100 hours researching a particular stock or commodity?
It never was my thinking that made the big money for me. It always was my sitting.
Overtrading is something that every new trader has to deal with. I’ve found that when I first started trading I was trading to much for a couple reasons. First, I lacked confidence in my judgement and because of that I would take profits too soon on winning trades and would not be quick to cut my losers. Everyone knows the heuristic “let your winner’s ride and cut your losers” but everyone also knows “no one ever went broke taking profits.” I was over-applying the second rule at the expense of the first one. Secondly, when the market is in a general trend it is foolish to try and fight it. Trying to be the hero and catching the top or the bottom makes for a good story and you are better off following the path of least resistance.
It is naturally the semisucker who is always quoting the famous trading aphorisms and the various rules of the game.
The chapter on suckers is my favorite part of the book. Edwin Lefèvre describes the various types of suckers that gravitate towards financial markets like moths to a flame. Suckers deserve everything that happens to them. Suckers have a set of behaviors that they exhibit. Here’s a few:
- Seeking tips and copying other traders behavior
- Trying to catch a top or a bottom
- Constantly seeking action
A man must believe in himself and his judgment if he expects to make a living at this game.
Expanding off of not being a sucker, as long as you are dependent on others for tips or research you will never be successful. I have recently crossed a threshold of having confidence in my own calls. Stutter stepping and self doubt will hold you back in anything you try to do. There are a million different ways to make money in the financial markets. A strategy that works for one person may not work for someone else. Buying the dip on the index for 30 years doesn’t do it for me but is optimal for someone saving for retirement and does not follow the markets. Establishing a disciplined process that aligns to my personality quirks has allowed me to have more confidence in my calls and follow-through with conviction.
The strength of Reminiscences of a Stock Operator is its ability to put you in the trader mindset. This documentary about the great Paul Tudor Jones has the same effect and is quite enjoyable if you can get past the 80’s fashion.
He Was A Data Boi 