(Meditations on a Stock Operator, On Reminiscences Chapter 2)
|Aug 31, 2015||Public post|
Meditations on a Stock Operator, Ch.2: “All that I had”
“I came to New York at the age of 21, bringing with me all I had, twenty-five hundred dollars. I told you I had ten thousand dollars when I was twenty…But I didn’t always win… What beat me was not having brains enough to stick to my own game-that is, to play the market only when I was satisfied that precedents favored my play.”
Livermore admits to the classic struggle of many traders, of being able to adhere to the discipline of a system which was acknowledged to be effective and gave a sufficient edge to accumulate profits and grow accounts.
Many of you know about this lament. You all know the "but for yourself" experiences where you got in your own way and gained less than you could have on paper and in retrospect, and/or lost more than you should have.
“There is a time for all things…there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily - or sufficient knowledge to make his play an intelligent play.
The biggest thing is not market timing but being in tune with the rhythm of your approach to the markets. Some are fast operators, with day trading time frames. Others are positively glacial and have accumulated glacier-sized exposure with a multi-year approach. If both systems work for the trader and adhered too, then there is both harmony and consistency. When there is a mismatch, "intelligent plays" are impossible.
There are so many approaches to successful and profitable speculation but for carbon-based traders (I do not know about HFTs), none are successful 24/7/365. The hackneyed phrase about broken clocks means that while they do tell the time twice a day correctly, the rest of the time, you are better off using a sundial or asking someone else for the time. The same goes for speculation. There are moments where the trader’s system provides an edge with a positive expected value and that timing is aligned with the trader’s mental, physical and financial state of being. The trader’s emotional capital must also be adequate.
When the “stars are aligned”, traders avoid becoming Wall Street fools and can make an “intelligent plays".
“Of course I let the craving for excitement get the better of my judgment…The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel they must take home some money every day, as though they were working for regular wages.”
Trading is not for excitement. It is work and a business. It is not an ordinary business, and does not necessarily offer a regular wage. There are challenges which even Livermore admitted to being vulnerable to. World weary, after 7 years in the markets, at barely 21 years of age, he knew that he was a recovering addict suffering from a need for constant action in the markets.
But experience is useless if it’s not heeded and used. Because this was a de facto memoir LIvermore jumps ahead in his narrative to confide that he would use his experience 15 years later on, when he was 36 or so, to wait for the right moment in a trade, when the temptation to jump in was strong.
“A Stock Operator has to fight a lot of expensive enemies within himself.”
Having narrowly escaped his fate at a bucket shop in the 1st chapter, he decides to set up a proper trading account. It seems like a common sense notion but not everyone thought as he did and continued to be the prey of not even having the safety of reliable broker. So much of success comes from the foundation of that success. You cannot build a tower on sand.
Having set up shop in a New York brokerage, Livermore’s education continued. He found out that his bucket shop system was useless and he began to lose money despite his ability to “read the tape”, his way of gathering trading ideas. Having ideas and entries was NOT enough.
“In short, I did not know the game of stock speculation. I knew a part of it… I was only twenty-two, remember; not that I was so stuck on myself that I didn’t want to know just where I was at fault, but at that age nobody knows much of anything.”
This is a common problem for both the young and/or the inexperienced. You have one part of the “puzzle” in a situation and have mistaken it to be the end all/be all for mastery. And you don’t know that you DON’T KNOW.
Eventually Livermore loses it all, within 6 months.
At this moment, the story relates more to Livermore’s plan to come up with a way to rebuild his “grubstake”, by gaming the bucket ships and outplaying them.
During this time, a disappointment from being barred from further trade in a bucket shop turns out to be a blessing and lesson in disguise:
“If it hadn’t been for their refusing to take my business I never would have stopped trading in them. And then I never would have learned that there was much more to the game of stock speculation than to play for fluctuations of a few points.”
This parting observation is connected with the Traders' saying: “let your winners run”. Livermore was scalping but he would evolve into a different kind of trader.