Events, Not Tips. Conditions, Not Tickers

Meditations On A Stock Operator

Jesse Livermore was the same as any other investment professional. In the beginning he was vulnerable to opinions of others but over time learned to think for himself. He became confident enough to trust in his judgement and to keep his own counsel.

The Union Pacific incident in Saratoga in the summer of 1906 made me more independent than ever of tips and talk-that is, of the opinions and surmises and suspicions of other people, however friendly or however able they might be personally.”

“Events, not vanity, proved for me that I could read the tape more accurately than most of the people about me. I also was better equipped than the average customer of Harding Brothers in that I was utterly free from speculative prejudices. The bear side doesn’t appeal to me any more than the bull side, or vice versa. My one steadfast prejudice is against being wrong.”

Independence of thought must also be flexible and governed by the search for truth. It does no good to be figuratively “bull-headed” (pun intended) a/k/a stubborn. It is important to both think for oneself AND be able to change one’s mind, as called for by facts.

“Even as a lad I always got my own meanings out of such facts as I observed. It is the only way in which the meaning reaches me. I cannot get out of facts what somebody tells me to get. They are my facts, don’t you see?”

Reliance upon the facts, not “speculative prejudices”, was essential for studying “conditions”.

“If I believe some thing you can be sure it is because I simply must. When I am long of stocks it is because my reading of conditions has made me bullish.

“But you find many people, reputed to be intelligent, who are bullish because they have stocks. I do not allow my possessions-or my prepossessions either-to do any thinking for me.”

Being long a stock did not determine Livermore’s next trade. He could easily close out the trade, or go short, if his “reading of conditions” meant it was time to change.

“That is why I repeat that 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.”

If the markets changed direction or an anticipated trade did not work as anticipated, a trader must not resent reality but assess conditions and act.

Being businesslike and dispassionate was another asset of Livermore, in addition to his independence of thought. He was not perturbed by the tape, as it was objective phenomena to him at this point, and not anthropomorphized — he didn’t take price changes that might be adverse to a trade personally.

Market changes and price movements were the same as scientific/medical phenomena for Livermore. He evolved beyond specific trading ideas, removing himself further from the influence of “tips”. This included the abandonment of fixed opinions, including his own, which might have been held just a moment before some change in price direction or economic and market conditions. He was evolving a perspective based upon fluid observations of “basic conditions” — of the totality of economic and capital market realities.

I had been gradually approaching the full realization of how much more than tape reading there was to stock speculation. Old man Partridge’s insistence on the vital importance of being continuously bullish in a bull market doubtless made tny mind dwell on the need above all other things of determining the kind of market a man is trading in. I began to realize that the big money must necessarily be in the big swing. Whatever might seem to give a big swing its initial impulse, the fact is that its continuance is not the result of manipulation by pools or artifice by financiers, but depends upon basic conditions. And no matter who opposes it, the swing must inevitably run as far and as fast and as long as the impelling forces determine.”

Livermore expounds further of the impact of his success in the prior chapter, during his working vacation in Saratoga. Here, he begins to sound like modern day macro trader, overcoming some of the unique challenges of trading specific individual ideas, which also included the challenges of short-squeezes:

After Saratoga I began to see more clearly-perhaps I should say more maturely-that since the entire list moves in accordance with the main current there was not so much need as I had imagined to study individual plays or the behavior of this or the other stock. Also, by thinking of the swing a man was not limited in his trading. He could buy or sell the entire list. In certain stocks a short line is dangerous after a man sells more than a certain percentage of the capital stock, the amount depending upon how, where and by whom the stock is held. But he could sell a million shares of the general list-if he had the price-without the danger of being squeezed. A great deal of money used to be made periodically by insiders in the old days out of the shorts and their carefully fostered fears of corners and squeezes.”

With a top-down appraisal of conditions, there was also a quantitative, statistical, and almost actuarial approach to trades. Nothing was certain but traders can make an appraisal of the likelihood, the probability, of scenarios:

“Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn’t it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities. It took me a long time to learn to trade on those lines. But in justice to myself I must remind you that up to then I had never had a big enough stake to speculate that way. A big swing will mean big money if your line is big, and to be able to swing a big line you need a big balance at your broker’s.”

Here is the heart of the framework of a big picture trader that Livermore was evolving into:

The moment I ceased to be satisfied with merely studying the tape I ceased to concern myself exclusively with the daily fluctuations in specific stocks, and when that happened I simply had to study the game from a different angle. I worked back from the quotation to first principles; from price fluctuations to basic conditions.”

And despite his newfound framework and personal growth he was still an eager rookie in some ways:

“For years I had been the victim of an unfortunate combination of inexperience, youth and insufficient capital. But now I felt the elation of a discoverer. My new attitude toward the game explained my repeated failures to make big money in New York. But now with adequate resources, experience and confidence, I was in such a hurry to try the new key that I did not notice that there was another lock on the door- a time lock! It was a perfectly natural oversight. I had to pay the usual tuition-a good whack per each step forward.”

He traded and lost but he would try again and then be stopped out. (This sounds familiar to many traders.):

I have always found it profitable to study my mistakes. Thus I eventually discovered that it was all very well not to lose your bear position in a bear market, but that at all times the tape should be read to determine the propitiousness of the time for operating. If you begin right you will not see your profitable position seriously menaced; and then you will find no trouble in sitting tight.”

It’s easier to work with a position, if there’s a profit earlier on. And future profits come with learning from past mistakes. There are no guarantees but it does make risk-taking easier and less of a struggle. Success breeds success.

Originally published at on September 12, 2015.