Jesse Livermore was famous ’cause he was the king of the trader back in his time and made millions; but at the same time, he also gave it all back. Without doubt, his famous book, “Reminiscences of a Stock Operator” by Edwin Lefevre, contains treasure of trading wisdom which are timeless. Nevertheless, the most important lesson I took to heart is from Chapter XII where he described how he gave back nine-tenths of his stake (in milions). Here is an excerpt from the book:
“It seems incredible that knowing the game as well as I did and with an experience of twelve or fourteen years of speculating in stocks and commodities 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. It was an utterly foolish play, but all I can say in extenuation is that it wasn’t really my deal, but Thomas’. Of all speculative blunders there are few greater than trying to average a losing game. My cotton deal proved it to the hilt a little later. Always sell what shows you a loss and keep what shows you a profit. That was so obviously the wise thing to do and was so well known to me that even now I marvel at myself for doing the reverse.” (from Chapter XII)
In his defense, Jesse said he was the victim of a magnetic personality with a brilliant mind. Somehow, he allowed his belief in someone else’s fundamental aspect of the cotton trade to supersede his intimate knowledge of the price action which was telling him that his timing was very wrong! Yet he kept on averaging down!
The lesson I learned from this chapter is that you must always open to the idea of being wrong at any point in time during your trade. There is no if or but. The answer is very clearly displayed to you in the price action of the market. If you don’t have a profit after you are in within a reasonable time, you are wrong! Simple at that.
So, what is wrong with being wrong? NOTHING! If you are wrong, just admit it, close your position and move on. It is only wrong if you refuse to admit that you are wrong. Guess what, you can always go back in if market condition change and your stock begins to show sign of movement in the direction of your thesis. It is just that at the time you took the trade earlier, the timing was wrong. Like I said before, sometimes you can be lucky to defy your being wrong and get away with it; but in the long run, you will pay the ultimate price- a decimate to your portfolio.
Now you know why I sometimes acted kind of “jumpy” in my trades. In and out, in and out, and in and out. But overall, I make money. Perhaps not a 10 baggers or a big-hit wonder; but enough for me to enjoy my time at the market.
You see, there is nothing wrong with being wrong.
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