Reminiscences of a Stock Operator is one of those books that many stock traders put in their “must read” category. Until I saw it recommended by so many traders that I respect and admire, I didn’t see how the (slightly) fictionalized account of a major speculator from 100 years ago would be of value to me, personally. But I went ahead and borrowed a copy from the library, and enjoyed it a great deal. And I tentatively agree with putting it on a “must read” list for anybody serious about active trading on the stock market.
Reminiscences of a Stock Operator is the fictionalized account of the early career of Jessie Livermore - one of the most famous traders of Wall Street. Under the pseudonym Larry Livingston, he describes through author Edwin LeFevre his career in the stock market from the turn of the century to the early 1920s.
He started doing his own trading via “bucket shops” - effectively gambling houses which used bets based on the ticker prices. Livingston / Livermore had a knack for being able to read and predict the tape. He eventually became so successful that the bucket shops began blacklisting him. So he took the show on the road to New York, to trade in actual stock with no limits.
He failed almost immediately, and kept going back to the bucket shops (often through third-parties or in other locations to get around blacklisting limitations) to rebuild his stake. He discovered that gambling on stock price in the bucket shops was different in critical ways from trading stocks in the brokerages in Wall Street. For one thing, the price on the tape lagged the actual price on the floor pretty severely - meaning his predictions for the short-term fluctuations were already out-of-date and unable to be executed upon. Secondly - with a larger stake (and a smaller market than we have today), his stock trades often impacted the price directly. Getting fills was not as easy as calling the price on the ticker.
The story continues through a number of ups and downs in both the market and in his own career. Many of the actions taken by the various people at the “top” are illegal today, and the technology and operations of the market today are very different from how it was in Livermore’s day. Amusingly, Livermore talks about this at some length - about his study of the methods of the famous operators in his past. As he explains it, studying their actual methods was useless - they were often no longer legal or possible. But, he notes, the basics of human psychology, the general operations of the market - ANY MARKET - and the underlying principals behind the schemes cooked up by his predecessors remained valid decades later.
And so it is with Livermore’s story almost a century later. I found myself wincing repeatedly as he describes some of his failures - particularly his early ones, before he became one of the “kings” of Wall Street and won his first million. They were very familiar. I have made the exact same mistakes, albeit with different technology. And I’ll probably make the same mistakes again. The people and psychology of the markets are exactly the same. Or, as Livermore explains, “The game does not change, and neither does human nature.”
Much of Livermore’s advice in these chapters - originally a newspaper series - to would-be stock speculators remains completely valid today. Some samplings:
“It is not our duty as speculators to be on the bull side or the bear side but upon the winning side.”
“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.”
“…if a man is both wise and lucky, he will not make the same mistake twice. But he will make any one of ten thousand brothers or cousins of the original. The Mistake family is so large that there is always one of them around when you want to see what you can do in the fool-play line.”
“Remember that prices are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don’t make a second unless the first shows you a profit.” — I’m personally pretty bad at that. I sometimes increase my stake as the stock moves against me - which has earned me a tidy profit sometimes, but sometimes clobbers me.
“It never was my thinking that made the big money for me. It was always my sitting tight.”
“A loss never bothers me after I take it. I forget it overnight. But being wrong - not taking the loss - that is what does the damage to the pocketbook and the soul.”
“I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.”
“I never argue with the tape.”
“It sounds very easy to say that all you have to do is to watch the tape, establish your resistance points and be ready to trade along the line of least resistance as soon as you have determined it. But in actual practice a man has to guard against many things, and most of all against himself – that is, against human nature.”
Livermore’s observations on the difference between gambling in the bucket shops and making real trades could also be applicable to paper-trading vs. the real thing … although I don’t think the difference is nearly as profound. There’s probably a bigger difference in emotional impact here, but it’s worth noting.
Another thing he rails against is the seeking of “hot tips” among not only casual investors & speculators, but even the very professionals who should know better. Or letting someone else do your thinking for you. He understood quite well how manufactured many of those hit tips and rumors were - and how they were usually contrary to actual market conditions, as they had been manufactured specifically to help the insiders get into or out of positions. He illustrates this point with several stories that demonstrate that even if a tip is valid, a trader absolutely MUST do his own homework to both verify it and work out his own plan to take advantage of it.
I certainly don’t aspire to be like Jessie Livermore. I don’t aspire to his lifestyle or ruthlessness. And, after all, the guy failed to follow his own advice, ended up broke and committing suicide years later. And I don’t need to worry about things like the telegraph going down between Florida and New York on account of bad weather. But these are stories and discussions from a stock trader at the top of his game, and I found it full of valuable insight. And it gives me a greater perspective on the stock and commodity markets as a whole - particularly a more solid historical perspective. In other words, it improved my foundation.
So yeah - bottom line - I’d also call it a “must read” for anybody who is serious about trading in the stock market.