Meditations of A Stock Operator

Livermore Revisited

Every so often many investors refresh their memories and revive their animal spirits with inspiration and instruction, including books which have been read over and over — to the point of almost committing them to long term memory.

My “go to” book to help me recharge and reinforce is “Reminiscences of a Stock Operator” (Edwin LeFevre, 1922) and it’s well known to those with more than a passing interest in the market. Not long after completing a period of focused training under the tutelage of a trading mentor, I began a review of this “traders’ bible” and wrote down the bones of what has morphed into a candidate for a future book project.

Here is some of the text from my notes, which I labelled as “Meditations on a Stock Operator”:

Jesse Livermore (via Wikipedia)

“Those quotations did not represent prices to me…so many dollars per share. They were numbers. Of course they meant something. They were always changing…Why did they change? I didn’t know, I didn’t care. i simply saw that they changed.”

A young man named Jesse Livermore began a journey, over a century ago, many of us have begun recently. Some of you are just starting out, dazzled by stars suspended in the firmament of your ambition and dreams or you had a taste, in some classroom or from a book about what you could become and want more. Some of you have been doing this for years and you continue on, guided by a star which still burns the brightest in your personal constellation. And some of you have completed your journey and look back either with amusement or bitterness — and will either nod knowingly or struggle with wistful longing. But we all know at least person in the history of “our business” who would have understood us, and he’s been gone for decades.

Most traders know or have read at least this “traders’ bible”, Reminiscences of a Stock Operator. It’s a thinly veiled first person autobiographical account of one of the most well known figures in Wall Street’s history, Jesse Livermore, born 1877. In ‘Reminscences’, Livermore is re-named Larry Livingston but we know Livingston’s words are from Livermore himself, a/k/a “JL” or the “Boy Wonder”. Edwin LeFevre, the author, was a financial journalist and was Livermore’s amanuensis — a creative para-biographer reporting from the scene from within Livermore’s private offices. Fans of the book, including me, all know it’s about us too (at least those of us arrogant, brave, foolish, naive, brilliant, or independent enough to become speculators and investors).

Livermore’s first experiences was so much like our own: mastering the arcana of price. As just a teenager, working and living on his own, he noticed numbers being posted on chalk boards, and read off of or printed on stock tickers, and recorded the stream of these numbers, watching for and looking for some kind of pattern, meaning and message in them. He did not focus on the why. He watched and recorded, over and over what he saw actually happening.

“The tape is your telescope”

The tape, the stream of quotations of the market, was compared to a scientific, quantitative instrument. Price is reduced to quantitative observation, like starlight through a telescope. The rest is interpretation of such observations.

But then Livermore pulls back from the digits and offers:

“…Speculation is as old as the hills. Whatever happens…today has happened before and will happen again”

And here is the big picture. That speculation is a manifestation of human activity. It is less about prediction and stated as a recognition of one of the aspects of the human condition, pattern making.

“I didn’t ask the tape WHY when I was fourteen, and I don’t ask it today, at forty.” Here is a wisdom and a humility of an observer of quantifiable observations — uncanny at fourteen and uncommon even at forty.

As a 14 year old office worker, who would only be called “boy wonder” years later, Livermore would stay late and jot down notes and numbers in a book for at least 6 months. No money on the line, just a constant stream of observation, recording and guesswork about price direction and noting when he was “right”. He was captivated by the data, without an aim. It was scientific observation of natural phenomena, like a sociologist in the field trying to make sense of local customs and practices. He was an observer of price action, markets and traders.

Soon enough, however, Livermore had skin in the game, when a coworker came to him with a “tip”, a trading idea to trade on with real money.

As with many of us,we started with an idea, a tip, as if it were all that counted in the world and was the only information that mattered in the market.

Offered a chance to double his money, the boy (not yet “boy wonder”) checked his notebook to see if his “dope”, his notebook, would confirm his tipster friend’s sales pitch. After going all in, he made a profit and like many of us, was hooked. He discovered, he could make money from this!

Livermore started in what we still refer to as “bucket shop” and within a year had accumulated a princely sum of $1,000, which even today is a respectable sum for any speculator of any age to make. In fact every profit feels princely once it’s in your pocket.

The Boy Wonder begins to live the dream many budding traders and market students have and quits his job so that he can trade full time, much to the consternation of his parents. We all know about this, when loved ones freak out and fear for us. But he is all too aware about risk. A remarkable statement about risk comes from this young man: “If all I have is ten dollars and I risk it, I am much braver than when I risk a million, if I have another million salted away.”

Critics of some of today’s brokerage firms and “experts” promising instant riches can relate to how the bucket shops of late 19th/early 20th century would have “ways of parting customers from their money, even when they guessed right.”

In this opening chapter, Livermore hints at his independence of mind and discretion. “I didn’t have a following. I kept my business to myself… Prices either were going the way I doped them out, without any help from friends or partners, or they were going the other way, and nobody could stop them out of kindness to me.”

This reflected an objectivity about the business and job of speculation, that prices did what they did.

By the time he was 20, Livermore made 10,000 dollars, doing a “ten bagger” after five years of trading, roughly equivalent to about 275,000+ dollars in today’s terms.

One last note to this chapter:

Livermore traded a large line, short “Sugar”, a/k/a U.S. Sugar, one of the industrial combines of its day, short 3500 shares at 105 1/4 but soon enough got out with a quick profit.

“You know I don’t do things blindly. I don’t like to. I never did. Even as a kid I had to know why I should do certain things But this time I had no definitive reason to give to myself, and yet I was so uncomfortable that I couldn’t stand it.”

No, we are not being advised by Livermore to trade impulsively. He was guided by experience, not magic. And the “hunch” he had was a crystallized, distilled signal from his mind acting on his body. I am reminded of anecdotes about George Soros about his backaches as well as Ed Seykota’s Trading Tribe exercises involving greater self awareness and embrace of one’s physical state. Livermore was in tune enough with his “feeling”, that he saved himself from getting wiped out. This was a process of unselfconscious, effortless action.

He knew his stock, his risk levels and his operating environment, a famous, large bucket shop, that as opulent and big as it might have been decorated, was still a bucket shop with its own interests at heart. He didn’t kid himself and treated his environment objectively as sure as it were more numbers in his “dope” book.

Sounds great, how do we get there and achieve such levels of mastery? Let’s close this entry with the following questions:

Can you make notes and journal?

Can you study continuously?

Can you develop an approach consistent with your study?

Can you learn to think for yourself. You don’t have to keep your own counsel, but can you make up your own mind?

Can you know when to act?

Can you be in tune with both price and your environment and do what it takes to “listen” to what feedback you get? Are you honest enough to do so?

Many traders act impulsively, and don’t even bother to articulate the whys and wherefores. Starting at age 14, Livermore then spent over 5 years after a long period of previous study and observation, accumulating a “line” from a few dollars in his pocket after leaving the family farm, to making a stake and then multiplying it. And this was only the start of his education.

I wish us all luck as each of us continues a hopefully endless and exciting journey of education and growth.