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.
Good Hunting!
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the best lessons r learned the hard way. but u refuse the truth u suffer indefinitely.
Very true. It took me a couple of “hits” in my pocketbook in the early days for this lesson to sink in.
As the old sayings go: “Those who cannot remember the past are condemned to repeat it”
Good post and Reminiscenses of a Stock Operator is a treasure trove of wisdom. It is so tempting to sell one’s winners. I am forcing myself to hold $WMT despite the fact that it has run far and fast (for $WMT) , and it would feel so good to take a profit in this market. But the reality is, the stock has broken out of a 10+ year range, and deserves a little longer leash.
Here is another excerpt from Jess Livermore’s book “How to Trade in Stocks.” that may help:
“Don’t let the stock go stale on you. After attaining a goodly profit, you must have patience, but don’t let patience create a frame of mind that ignores the danger signals.
The stock starts up again, and it has a rise of six or seven points in one day, followed the next day by perhaps eight to ten points- with great activity- but during the last hours of the day all of a sudden it has an abnormal break of seven or eight points. The next morning it extends it reaction another point or so, and then once more starts to advance, closing very strong. But the following day, for some reason, it does not carry through.
That is an immediate danger signal. All during the progress of the move it had nothing but natural and normal reactions. Then all of a sudden an abnormal reaction occurs- and by ‘abnormal’ I mean a reaction in one day of six or more points from an extreme price made in that same day- something it has not had before, and when something happens abnormally stock-marketwise, it is flashing you a danger signal which must not be ignored.
You have had patience to stay with the stock all during its natural progress. Now have the courage and good sense to honor the danger signal and step aside.
I do not say that these danger signals are always correct because, as stated before, no rules applying to stock fluctuations are 100% right. But if you pay attention to them consistently, in the long run you will profit immensely.”
That comment is incredible. I’m going to go back and re-read that book. Thanks Zen!
Dr Alexander Elder wrote a decent book called ‘Trade for a Living’. In it, he describes how he started attending AA meetings in an attempt to help him cope with losses and being wrong.
This is critical step in speculation.
Do whatever it takes to force yourself to enjoy losing and enjoy being wrong about the market (or at the very least, accept it). Accepting and knowing you are wrong, and will continue to be wrong in the market is imperative. A small, stopped out loss on a trade is something that is to be celebrated. This sort of loss is actually a tremendous win. It is evidence that you are not a wild-eyed, spend-thrift gambler, but a well-balanced and disciplined speculator. You understand that losses are an inevitable aspect of speculation and that they must be dealt with effectively.
On the other side, learn humility and to temper your enthusiasm when you are right in the market and winning in a trade. Understanding and accepting that any particular trade could have just as easily gone the other way. This will help keep you even keeled. Speculators that are over-confident and cocky are more prone to over-ride stops, double-up and take on more risk than is prudent.
Great comment. Yes, learn to love your losses. I love my SMALL losses. Often times, I love them even more when price action continued to go against my thesis after I got out and considered my good fortune to have gotten out early. It is only from actually experiencing the value of taking small losses that good habit begin to develop.
Yes, occasionally, I’ve to buy back at higher price to get back in when price continues based on my thesis. As you read my trading journal update/comment for the last 2-3 weeks, it didn’t stop me from making money, albeit a little bit less but who is counting penny when you are making dollar?
Livermore is awesome.
Every time I have been hurt in the market it was because I did not have or removed a trailing stop loss.
Take your losses and live to fight another day. 10% loss is a lesson, 30% is stupidity.
I am sitting on some stupid losses right now.
10% loss is too generous for my taste. I like to estimate my loss to be 1/3 of my expected win. So, if you are setting yourself up for a 10% loss, are you expecting a 30% return on the investment? At least, this is how I’ll estimate the amount of loss I am willing to take for each trade I’m going to take.
Sometimes I won’t even wait for my stop loss to hit. I’ll simply punched out when I see price action is having a hard time going the way I like to see it goes.