I've recently read a very curious book about the stock market. Based on my previous posts you would have thought that it's either a Buffett's or a Benjamin Graham's book about value investing. Wrong. The name of the book is "Reminiscences of a Stock Operator" and it was written by Edwin Lefevre eighty-five years ago. Naturally, one would wonder how is reading about a stock speculator that lived in the beginning of the last century applicable to the value investing strategy. Well, it may not be, but I found it very interesting nevertheless and would recommend it to anyone interested in the stock market regardless of the investing strategy.
As I started learning about investments, I considered myself a long-term value investor. The first books that I've read were about Warren Buffett and Philip Fisher, who are two of the most well-known and influential value investors. Then I stumbled upon this book as I was perusing through Amazon.com's investment-related books. This book tells a story of a stock speculator who started out from scratch and became one of the best-known traders of his time. I found his principles and insights quite valuable. I will share some of the highlights of this book through a series of posts.
One of the reasons why I found this book so valuable is that it helps to understand and define my own investment strategy. As many investors and traders often state - more important that any particular strategy is finding the one that suits you best and the one that you will have absolute confidence in. This books helps me, for example, understand that Buffett's strategy doesn't suit me 100% while the constant trading probably will not suit me either. At this point, I see myself somewhere in between the Buffett/Graham and Jesse Livermore (trader whose story is told in the aforementioned book) camps of thought. I liked how Livermore stated in the middle of the book that a whole lot more money was made sitting tight and doing nothing than trading in and out. In my opinion, that already makes him more than a regular run of the mill trader,
Please see below are general stock market/trading related excerpts from the book. Future excerpts will be more topic-specific.
"Another lesson I learned early is that there is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market to-day has happened before and will happen again.
Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore. It doesn't go into explanations. I didn't ask the tape why when I was fourteen, and I don't ask it to-day, at forty. The reason for what a certain stock does to-day may not be known for two or three days, or weeks, or months. But what the dickens does that matter? Your business with the tape is now not tomorrow. The reason can wait. But you must act instantly or be left.
It takes a man a long time to learn all the lessons of all his mistakes. 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. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation. I have heard of people who amuse themselves conducting imaginary operations in the stock market to prove with imaginary dollars how right they are. Sometimes these ghost gamblers make millions. It is very easy to be a plunger that way.
With me I must back my opinions with my money. My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat. But if I cannot advance I do not move at all. I do not mean by this that a man should not limit his losses when he is wrong. He should. But that should not breed indecision. All my life I have made mistakes, but in losing money I have gained experience and accumulated a lot of valuable don'ts. I have been flat broke several times, but my loss has never been a total loss. Otherwise, I wouldn't be here now. I always knew I would have another chance and that I would not make the same mistake a second time. I believed in myself.
A man must believe in himself and his judgment if he expects to make a living at this game. That 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 judgment. It took me five years to learn to play the game intelligently enough to make big money when I was right.
I didn't have as many interesting experiences as you might imagine. I mean, the process of learning how to speculate does not seem very dramatic at this distance. I went broke several times, and that is never pleasant, but the way I lost money is the way everybody loses money who loses money in Wall Street. 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.
If somebody had told me my method would not work I nevertheless would have tried it out to make sure for myself, for when I am wrong only one thing convinces me of it, and that is, to lose money. And I am only right when I make money. That is speculating.
I have always played a lone hand. I began that way in the bucket shops and have kept it up. It is the way my mind works. I have to do my own seeing and my own thinking. But I can tell you after the market began to go my way I felt for the first time in my life that I had allies the strongest and truest in the world: underlying conditions. They were helping me with all their might. Perhaps they were a trifle slow at times in bringing up the reserves, but they were dependable, provided I did not get too impatient. I was not pitting my tape-reading knack or my hunches against chance. The inexorable logic of events was making money for me.
The thing was to be right; to know it and to act accordingly.
When it comes to selling stocks, it is plain that nobody can sell unless somebody wants those stocks. If you operate on a large scale you will have to bear that in mind all the time. A man studies conditions, plans his operations carefully and proceeds to act. He swings a pretty fair line and he accumulates a big profit on paper. Well, that man can't sell at will. You can't expect the market to absorb fifty thousand shares of one stock as easily as it does one hundred. He will have to wait until he has a market there to take it. There comes the time when he thinks the requisite buying power is there. When that opportunity comes he must seize it. As a rule he will have been waiting for it. He has to sell when he can, not when he wants to. To learn the time, he has to watch and test. It is no trick to tell when the market can take what you give it. But in starting a movement it is unwise to take on your full line unless you are convinced that conditions are exactly right.
Remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don't make a second unless the first shows you a profit. Wait and watch. That is where your tape reading conies in to enable you to decide as to the proper time for beginning. Much depends upon beginning at exactly the right time. It took me years to realize the importance of this. It also cost me some hundreds of thousands of dollars."
