The following are a selection of quotes and my thoughts on the investment classic, Reminiscences of a Stock Operator. The book, written by Edwin Lefèvre and published in 1923, is thinly disguised biography of Jesse Livermore, a legendary speculator. Although written nearly a century years ago, this book remains a must read for serious students of the market. Over the years, I’ve been asked many times how one could break into the hedge fund industry, and I always point them to this book due to the timeless insights it offers into the art of speculation. I recommend readers read between the lines rather than take everything literally or as gospel. For example, the greatest unstated lesson of the book is the importance of risk control so to build a sustainable trading practice. Though the book ended on a high note, it was plain as day that, without robust risk management, Jesse Livermore would end up broke once again. In fact he did: Livermore went broke in the 1930’s and committed suicide in 1940 at the age of 63 — truly a tragedy that could be avoided. Nevertheless, this book offers invaluable insights to all serious market participants.
“They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side.”
The successful investor and speculator must concern solely with the aim of making money — in other words, be on the right side of the trade — rather than defending a view, protecting the ego, chasing a thrill, or any other aim other than making money.
“My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat.”
This parallel’s Warren Buffett’s two rules to investing: Rule # 1: Don’t lose money. Rule #2: Don’t forget Rule #1. (Read: The Snowball, the most comprehensive biography of Warren Buffett.) If this sounds simple and devoid of meaning, gain some experience in the financial markets, and come back to meditate on this quote. To restate the quote: take care to understand your risks, before you think of your profits.
“A man must believe in himself and his judgement if he expects to make a living at this game. This is why I don’t believe in tips. If I buy stocks on Smith’s tip I must sell those same stocks on Smith’s tip. I am depending on him. Suppose Smith is away on a holiday when the selling time comes around? No, sir, nobody can make big money on what someone else tells him to do. I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgement.”
If you buy or sell based solely on other people’s recommendation, you aren’t investing or speculating, you are being a sheep. This does not mean to ignore other people’s opinions, but to always carefully consider the validity of these opinions, and to come to a conclusion based on your own independent analysis.
“Speculation is a hard and trying business, and a speculator must be on the job all the time or he’ll soon have no job to be on.”
Gaining a little knowledge on the art of speculation, without the will to carry it through to mastery, is like paying for three years of college and not graduating. If you are not willing to put in serious work, you are better off investing in an index fund. This book by Vanguard founder, John Bogle, will teach you how to get started on index investing. I invest all of my retirement accounts in the lowest cost index funds I could find — all of them are Vanguard funds.
“I didn’t keep on trading the way I did through stubbornness. I simply wasn’t able to state my own problem to myself, and, of course, it was utterly hopeless to try to solve it.”
If you are not doing well but can’t state the problem, that is your problem.
“I couldn’t afford anything that kept me from feeling physically and mentally fit. Even now I am usually in bed by ten. As a young man I never kept late hours, because I could not do business properly on insufficient sleep.”
“It was the change in my own attitude toward the game that was of supreme importance to me. It taught me, little by little, the essential difference between betting on fluctuations and anticipating inevitable advances and declines, between gambling and speculating.”
“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.”
“It is naturally the semi-sucker who is always quoting the famous trading aphorisms and the various rules of the game. He knows all the don’ts that exist—excepting the principal one, which is: Don’t be a sucker!”
“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! … The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he doped out it must do.”
“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.”
“The moment I ceased to be satisfied with merely reading the tape I ceased to concern myself exclusively with the 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.”
“When you associate certain mistakes with a licking, you do not hanker for a second dose, and, of course, all stock-market mistakes wound you in two tender spots—your pocketbook and your vanity. But I will tell you something curious: A stock speculator sometimes makes mistakes and knows that he is making them.”
“A man, if he is both wise and lucky, will not make the same mistake twice. But he will make any one of the ten thousand brothers or cousins of the original mistake.”
“The trend is evident to a man who has an open mind and reasonably clear sight, for it is never wise for a speculator to fit his facts to his theories. Such a man will, or ought to, know whether it is a bull or a bear market, and if he knows that, he knows whether to buy or to sell.”
“A man cannot be convinced against his own convictions, but he can be talked into a state of uncertainty and indecision, which is even worse, for that means that he cannot trade with confidence.”
“There I was, once more broke, which was bad, and dead wrong in my trading, which was a sight worse. I was sick, nervous, upset and unable to reason calmly. That is, I was in the frame of mind in which no speculator should be when he is trading.”