About Stock Tips - "Reminiscences of a Stock Operator"

This is a great piece that goes into details of why stock tips are bad and why people who use and give such tips usually trap themselves in a loop of bad investment decisions.

"Tips! How people want tips! They crave not only to get them but to give them. There is greed involved, and vanity. It is very amusing, at times, to watch really intelligent people fish for them. And the tip-giver need not hesitate about the quality, for the tipseeker is not really after good tips, but after any tip. If it makes good, fine! If it doesn't, better luck with the next. I am thinking of the average customer of the average commission house. There is a type of promoter or manipulator that believes in tips first, last and all the time. A good flow of tips is considered by him as a sort of sublimated publicity work, the best merchandising dope in the world, for, since tip-seekers and tiptakers are invariably tip-passers, tip-broadcasting becomes a sort of endless-chain advertising. The tipster-promoter labours under the delusion that no human being breathes who can resist a tip if properly delivered. He studies the art of handing them out artistically.

It has always seemed to me the height of damfoolishness to trade on tips. I suppose I am not built the way a tip-taker is. I sometimes think that tip-takers are like drunkards. There are some who can't resist the craving and always look forward to those jags which they consider indispensable to their happiness. It is so easy to open your ears and let the tip in. To be told precisely what to do to be happy in such a manner that you can easily obey is the next nicest thing to being happy which is a mighty long first step toward the fulfillment of your heart's desire. It is not so much greed made blind by eagerness as it is hope bandaged by the unwillingness to do any thinking.

And it is not only among the outside public that you find inveterate tip-takers. The professional trader on the floor of the New York Stock Exchange is quite as bad. I am definitely aware that no end of them cherish mistaken notions of me because I never give anybody tips. If I told the average man, "Sell yourself five thousand Steel!" he would do it on the spot. But if I tell him I am quite bearish on the entire market and give him my reasons in detail, he finds trouble in listening and after I'm done talking he will glare at me for wasting his time expressing my views on general conditions instead of giving him a direct and specific tip, like a real philanthropist of the type that is so abundant in Wall Street the sort who loves to put millions into the pockets of friends, acquaintances and utter strangers alike.

The belief in miracles that all men cherish is born of immoderate indulgence in hope. There are people who go on hope sprees periodically and we all know the chronic hope drunkard that is held up before us as an exemplary optimist. Tip-takers are all they really are.

Now what's the use of talking about sucker tiptakers? Men do not take tips because they are bally asses but because they like those hope cocktails I spoke of. Old Baron Rothschild's recipe for wealth winning applies with greater force than ever to speculation. Somebody asked him if making money in the Bourse was not a very difficult matter, and he replied that, on the contrary, he thought it was very easy.

"That is because you are so rich," objected the interviewer.

"Not at all. I have found an easy way and I stick to it. I simply cannot help making money. I will tell you my secret if you wish. It is this: I never buy at the bottom and I always sell too soon.""

Virtual Funds: Financial Fund's Ranking/Performance in Q3 '08 and Overall

If you thought that the 3rd quarter was tough for Energy, well, extrapolate that quarter onto a full year and you will understand how the Financials have done. They've been beaten down time and time again this year. Every time they'd try to rally back up, they'd get knocked back down. To a large extent this had been a non-discriminatory beatdown, although high-quality institutions, however discounted they may be now, have still faired much better than the likes of Citigroup and my personal favorite, AIG. Here I will detail the performance of the virtual mutual fund I've set up for the Financial sector on the Marketocracy web site.

Orange line in the chart below shows how my Financial Fund has performed relative to the m100 (a collective Marketocracy fund that uses picks from the top 100 members), S&P 500, Dow Jones Index, and Nasdaq.

Below is this fund's ranking:

As you can see above, overall performance has been pretty dismal. Of course, 1-month performances for the months of June and September are rather curious freaks of nature. I would venture to say that 2nd quarter's 1.4th percentile ranking set me up for the September's 98th percentile and 3rd quarter's 88.3rd percentile rankings. Very interesting. What's my prediction for the 4th quarter? Just like everything else, financials will rise up towards the end of the year, but whether they'll recover from the new lows they'll make in the 4th quarter is anyone's guess.

Here is a list of all the stocks currently in the fund and how they've performed up to this point:

I've pretty much stuck to the original picks, so turnover is only 20.4% for this fund. I will probably do some house cleaning in the 4th quarter to set up this fund for the 2009 investing year. Below are brief profiles of the stocks currently in the fund. I intend to post more details and expectations for this fund's holdings as well as for my other funds.

Berkshire Hathaway (BRK.B) - This diversified holding company owns and operates more than 70 businesses and also invests widely in undervalued equities and bonds. Berkshire owns large stakes in Coke, Procter & Gamble, and American Express. Berkshire is the world's only AAA rated reinsurer; its insurance businesses include Geico, General Re, and National Indemnity. Berkshire also owns stakes in several private businesses, including Medical Protective, Forest River, and Justin Brands. (Source: Morningstar)

U.S. Bancorp (USB) -Had assets of about $242 billion as of June 2007--ranking it as the seventh-largest U.S. bank by total assets. The firm has four main business lines: consumer banking, wholesale banking, wealth management, and payment services. Approximately 50% of revenue is fee-based, similar to other financial institutions of US Bancorp's size. The bank has more than 2,400 offices concentrated in the Midwestern and Western states. (Source: Morningstar)

Northern Trust (NTRS) - A large custodian bank, providing services to big institutional clients such as endowments and fund managers, as well as to high-net-worth individuals. The company is also a large asset manager, with around $750 billion in assets under management. Fees from custodial and management services generate nearly three fourths of revenue, with the rest provided by net interest from lending operations. (Source: Morningstar)

Goldman Sachs (GS) - A global investment banking firm whose activities are organized into investment banking, trading and principal investments, and asset-management and securities services segments. The firm recently reorganized itself as a bank holding company regulated by the Federal Reserve. (Source: Morningstar)

American Express (AXP) - Best known for its flagship green charge card, is segmented into three main businesses: U.S. card services, international card and global commercial services, and global network and merchant services. Its former financial advisor segment, American Express Financial Advisors, was spun off to shareholders in 2005 and is now known as Ameriprise. (Source: Morningstar)

Wesco Financial (WSC) - This diversified holding company is 80% owned by Berkshire Hathaway, which controls it. Wesco serves as a conduit for select Berkshire investments, including Coca-Cola and P&G. Wesco also owns businesses that provide insurance, rent furniture, and custom-manufacture steel. Wesco offers supercatastrophe reinsurance. Kansas Bankers Surety provides bank insurance. Precision Steel services niche steel markets. CORT leases furniture and offers relocation services. (Source: Morningstar)

Associated Bank-Corp (ASBC) - Based in Green Bay, Wis., Associated Banc-Corp. has $22 billion in assets and more than $13 billion of deposits. The company has 300 branches in Wisconsin, Minnesota, and Illinois. Associated's portfolio is 66% commercial, 20% retail (home equity, installment), and 14% residential mortgage. (Source: Morningstar)

Cathay General Bancorp (CATY) - A California-based regional bank primarily serving the Chinese American community. With more than 45 branches and three international representative offices, the bank provides traditional loan and deposit products, as well as international trade-related services to individuals and small to midsize businesses. The bank has more than $7 billion in assets. (Source: Morningstar)

CME Group (CME) - The largest futures and options exchange in the world. It was formed from the merger of the Chicago Mercantile Exchange and the Chicago Board of Trade in 2007. It serves the speculation, asset allocation, and hedging needs of individuals and institutions with its products based on interest rates, equities, foreign exchange, commodities, and alternative investments. (Source: Morningstar)

Regions Financial (RF) - The bank, which has $144 billion in assets, operates retail and commercial banking businesses and owns investment brokerage house Morgan Keegan, which made up 18% of the firm's 2007 revenue. With about 2,000 offices, Regions operates in 16 states and is among the largest banks in the United States by assets. (Source: Morningstar)

Morgan Stanley (MS) - Morgan Stanley is a global investment bank with history through its legacy firms that can be traced back to 1924. The company has institutional securities, wealth management, and asset management segments and more than 45,000 employees. The company derives approximately half of its total revenues outside of the Americas. (Source: Morningstar)

CB Richard Ellis Group (CBG) - In terms of sales, CB Richard Ellis is the largest commercial real estate services firm, offering capital markets services, property and facility management, tenant representation, transaction services, valuations and appraisals, investment management, and property development services, among others. The firm operates a global network of 29,000 employees in 300 offices worldwide. It claimed 85 of the Fortune 100 as clients in 2007. (Source: Morningstar)

Wachovia (WB) - The fourth-largest bank by assets in the United States. The bank operates in 21 states and has a dominant market position in the fast-growing Southeast and the wealthy Mid-Atlantic states. Recent acquisitions have given Wachovia a presence in California, as well. Wachovia also runs an investment bank and wealth-management business. Wachovia Securities--a joint venture with Prudential--is the second-largest retail brokerage in the U.S. (Currently in the process of being merged into Wells Fargo, it's acquirer.) (Source: Morningstar)

Hazards of Speculation: Unexpected Events - "Reminiscences of a Stock Operator"

Although in general I disagree with proponents of diversification because such experts' advice usually involves overdiversification, this quote makes a good point of what can happen if you put all your eggs into one basket. As with anything else in life, prudent investing is about moderation and balance. Diversify, but don't overdiversify; have a concentrated portfolio, but don't put your eggs into one basket.

"Among the hazards of speculation the happening of the unexpected I might even say of the unexpectable ranks high. There are certain chances that the most prudent man is justified in taking chances that he must take if he wishes to be more than a mercantile mollusk. Normal business hazards are no worse than the risks a man runs when he goes out of his house into the street or sets out on a railroad journey. When I lose money by reason of some development which nobody could foresee I think no more vindictively of it than I do of an inconveniently timed storm. Life itself from the cradle to the grave is a gamble and what happens to me because I do not possess the gift of second sight I can bear undisturbed."

Virtual Funds: Energy Fund's Ranking/Performance in Q3 '08 and Overall

This has been a tough year and a very tough 3rd quarter for all sectors. Energy was affected as much if not worse than most of the other sectors. Here I will detail the performance of the virtual mutual fund I've set up for the Energy sector on the Marketocracy web site.

Orange line in the chart below shows how my Energy Fund has performed relative to the m100 (a collective Marketocracy fund that uses picks from the top 100 members), S&P 500, Dow Jones Index, and Nasdaq.

Below is this fund's ranking:

As you can see this fund has done very will in the 1st and 2nd quarters of 2008, but as the commodities (and energy in particular) crashed by the middle of the summer, fund's performance has turned dismal in the 3rd quarter. I don't expect any kind of a significant upward movement in this sector until December in the earliest, but most likely towards the spring. The colder the winter will be and the better 4th quarter economic indicators will be, the more likely energy sector will start rising back up.

Here is a list of all the stocks currently in the fund and how they've performed up to this point:

I have not changed the picks since the fund's inception, so the turnover is negligible. I expect to add to my positions in several of these stocks since I still have $186K of Cash in this fund. Below are brief profiles of these stocks. I intend to post more details and expectations for this fund's holdings as well as for my other funds.

NuStar Energy (NS) - Based in San Antonio, Texas, NuStar Energy LP is a master limited partnership that was spun off from refiner Valero Energy. NuStar holds most of Valero Energy's pipelines, terminals, and storage facilities. The 2005 acquisition of the Kaneb companies more than doubled NuStar's asset base to 9,300-plus miles of crude-oil and refined-product pipelines, 86 terminal facilities, and four crude-oil storage facilities. (Source: Morningstar)

Buckeye Partners (BPL) - Owns and operates refined petroleum pipelines and storage terminals in the United States. Most of the company's assets are found in the Northeast and Midwest, though it also operates terminals and some smaller pipelines in the Southeast and West. Buckeye's pipelines transport a variety of refined petroleum products connecting refineries, storage facilities, other companies' pipelines, and airports. (Source: Morningstar)

Boardwalk Pipeline Partners (BWP) - Was formed in August 2005 by its parent, Loews Corporation, to acquire and develop natural-gas pipelines and storage facilities. The partnership owns two interstate natural-gas pipeline systems, which consist of 13,470 miles of pipe spanning from Texas to Ohio, and 11 underground natural-gas storage facilities. Aggressive expansion plans will increase total pipeline and storage capacity dramatically during the next several years. (Source: Morningstar)

Energy Transfer Partners (ETP) - A master limited partnership primarily engaged in natural-gas transportation and storage. The partnership operates more than 12,000 miles of natural-gas gathering and intrastate transportation pipelines in Texas and Louisiana and the 2,500-mile Transwestern interstate pipeline. Also, Energy Transfer Partners is the third-largest retail marketer of propane in the U.S., serving more than a million customers in 41 states. (Source: Morningstar)

Unit Corporation (UNT) - Unit is engaged in the contract drilling of oil and natural-gas wells. The company also develops, acquires, and produces oil and natural-gas properties and markets natural gas. Unit operates primarily in the Texas Gulf coast and Rocky Mountain regions, as well as in the Anadarko and Arkoma Basins, which cover portions of Oklahoma, Texas, Kansas, and Arkansas. The company owns and operates approximately 75 drilling rigs in these regions. Unit is based in Tulsa, Oklahoma. (Source: Morningstar)

Ensco International (ESV) - Owns one of the newest jack-up fleets in the contract drilling industry, which drills for oil and natural gas globally. The firm has been acquiring jack-ups since the early 1990s and has recently expanded its 46-jack-up fleet with its first semisubmersible. It has several additional semisubmersibles under construction. (Source: Morningstar)

Buckeye GP Holdings (BGH) - Manages a network of refined oil products pipelines and terminals through its subsidiary, Buckeye Partners. Most of the company's assets are found in the Northeast and Midwest, though it also operates terminals and some smaller pipelines in the Southeast and West. Buckeye's pipelines transport a variety of refined petroleum products connecting refineries, storage facilities, other companies' pipelines, and airports. (Source: Morningstar)

Energy Transfer Equity (ETE) - Owns the general partner interests, incentive distribution rights, and about 46% of the outstanding limited partner interests of Energy Transfer Partners. ETP is a master limited partnership primarily engaged in natural-gas transportation and storage and also is the third-largest retail marketer of propane in the U.S., serving more than a million customers in 41 states. (Source: Morningstar)

Chesapeake Energy (CHK) - An independent oil and natural-gas producer. CEO Aubrey McClendon cofounded Chesapeake in 1989 and took it public in 1993. The firm's proved reserves of 11 trillion cubic feet of natural-gas equivalent are located primarily in the Mid-Continent and Appalachian basin. Chesapeake also owns natural-gas gathering and processing assets and several drilling rigs. (Source: Morningstar)

Southern Union (SUG) - Southern Union operates an array of regulated and unregulated assets divided into the transportation and storage, gathering and processing, and distribution segments. The transportation and storage assets, comprising one of the nation's largest LNG terminals and a pipeline network stretching from Texas up through the Midwest and across to south Florida, generate the lion's share of cash flows. (Source: Morningstar)

Cal Dive International (DVR) - Cal Dive International, a marine contractor company, provides underwater services to offshore natural gas and oil firms. These services include manned diving, pipe lay and pipe burial services. It also constructs, inspects, maintains, repairs and decommissions offshore pipeline infrastructure in the Gulf of Mexico, Middle East, Southeast Asia, and Australia. Helix Energy Solutions Group is its parent company. (Source: Morningstar)

Market Will Not Pay For Your Car - "Reminiscences of a Stock Operator"

The point here is that you should not get into the stock market if you're simply looking for easy money. Either make long-term investments into solid companies or make it a full-time job to speculate in the market. One can't go into the market expecting great returns without the appropriate amount of knowledge, research, and time for investments to grow.

"There isn't a man in Wall Street who has not lost money trying to make the market pay for an automobile or a bracelet or a motor boat or a painting. I could build a huge hospital with the birthday presents that the tight-fisted stock market has refused to pay for. In fact, of all hoodoos in Wall Street I think the resolve to induce the stock market to act as a fairy godmother is the busiest and most persistent.

Like all well-authenticated hoodoos this has its reason for being. What does a man do when he sets out to make the stock market pay for a sudden need? Why, he merely hopes. He gambles. He therefore runs much greater risks than he would if he were speculating intelligently, in accordance with opinions or beliefs logically arrived at after a dispassionate study of underlying conditions. To begin with, he is after an immediate profit. He cannot afford to wait. The market must be nice to him at once if at all. He flatters himself that he is not asking more than to place an even-money bet. Because he is prepared to run quick say, stop his loss at two points when all he hopes to make is two points he hugs the fallacy that he is merely taking a fifty-fifty chance. Why, I've known men to lose thousands of dollars on such trades, particularly on purchases made at the height of a bull market just before a moderate reaction. It certainly is no way to trade."

Speculator's Worst Enemy Is Himself - "Reminiscences of a Stock Operator"

This piece is actually as important for investors as it is for speculators. Fear, hope, and greed live within all of us, but it is those who control (or ignore) these feelings the best who succeed in the investment world.

"The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you you hope that every day will be the last day and you lose more than you should had you not listened to hope to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.

I have been in the speculative game ever since I was fourteen. It is all I have ever done. I think I know what I am talking about. And the conclusion that I have reached after nearly thirty years of constant trading, both on a shoestring and with millions of dollars back of me, is this: A man may beat a stock or a group at a certain time, but no man living can beat the stock market! A man may make money out of individual deals in cotton or grain, but no man can beat the cotton market or the grain market. It's like the track. A man may beat a horse race, but he cannot beat horse racing."

Trading In Narrow Markets - "Reminiscences of a Stock Operator"

This short excerpt speaks for itself. Once again, market is always right, so don't even try to argue with it.

"In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be up or down. The thing to do is to watch the market, read the tape to determine the limits of the get-nowhere prices, and make up your mind that you will not take an interest until the price breaks through the limit in either direction. A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him. Never argue with it or ask it for reasons or explanations. Stock-market postmortems don't pay dividends."

About Market Trending - "Reminiscences of a Stock Operator"

In this part, market trending is touched upon. I think it's important for investors/traders to combine both, fundamental and technical factors in their decision-making process.

"This matter of tape reading is not so complicated as it appears. Of course you need experience. But it is even more important to keep certain fundamentals in mind. To read the tape is not to have your fortune told. The tape does not tell you how much you will surely be worth next Thursday at 1:35 p.m. The object of reading the tape is to ascertain, first, how and, next, when to trade that is, whether it is wiser to buy than to sell. It works exactly the same for stocks as for cotton or wheat or corn or oats.

You watch the market that is, the course of prices as recorded by the tape with one object: to determine the direction that is, the price tendency. Prices, we know, will move either up or down according to the resistance they encounter. For purposes of easy explanation we will say that prices, like everything else, move along the line of least resistance. They will do whatever comes easiest, therefore they will go up if there is less resistance to an advance than to a decline; and vice versa.

Nobody should be puzzled as to whether a market is a bull or a bear market after it fairly starts. 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. It is therefore at the very inception of the movement that a man needs to know whether to buy or to sell.

Millions upon millions of dollars have been lost by men who bought stocks because they looked cheap or sold them because they looked dear. The speculator is not an investor. His object is not to secure a steady return on his money at a good rate of interest, but to profit by either a rise or a fall in the price of whatever he may be speculating in. Therefore the thing to determine is the speculative line of least resistance at the moment of trading; and what he should wait for is the moment when that line defines itself, because that is his signal to get busy.

And right here I will say that, though I do not give it as a mathematical certainty or as an axiom of speculation, my experience has been that accidents that is, the unexpected or unforeseen have always helped me in my market position whenever the latter has been based upon my determination of the line of least resistance.

You will find in actual practice that if you trade as I have indicated any important piece of news given out between the closing of one market and the opening of another is usually in harmony with the line of least resistance. The trend has been established before the news is published, and in bull markets bear items are ignored and bull news exaggerated, and vice versa.

It sounds very easy to say that all you have to do is to watch the tape, establish your resistance points and be ready to trade along the line of least resistance as soon as you have determined it. But in actual practice a man has to guard against many things, and most of all against himself that is, against human nature. That is the reason why I say that the man who is right always has two forces working in his favor basic conditions and the men who are wrong. In a bull market bear factors are ignored. That is human nature, and yet human beings profess astonishment at it. People will tell you that the wheat crop has gone to pot because there has been bad weather in one or two sections and some farmers have been ruined. When the entire crop is gathered and all the farmers in all the wheat-growing sections begin to take their wheat to the elevators the bulls are surprised at the smallness of the damage. They discover that they merely have helped the bears."

Trading in Commodities - "Reminiscences of a Stock Operator"

Even though commodities are often regarded as very risky and volatile investments, they can also be better understood by understanding the underlying market's supply and demand. In some ways, they are more simple than equities. Although nowadays it seems that there are no fundamental laws that govern any markets, including commodity markets.

"I always have traded in commodities as well as in stocks. I began as a youngster in the bucket shops. I studied those markets for years, though perhaps not so assiduously as the stock market. As a matter of fact, I would rather play commodities than stocks. There is no question about their greater legitimacy, as it were. It partakes more of the nature of a commercial venture than trading in stocks does. A man can approach it as he might any mercantile problem. It may be possible to use fictitious arguments for or against a certain trend in a commodity market; but success will be only temporary, for in the end the facts are bound to prevail, so that a trader gets dividends on study and observation, as he does in a regular business. He can watch and weigh conditions and he knows as much about it as anyone else. He need not guard against inside cliques. Dividends are not unexpectedly passed or increased overnight in the cotton market or in wheat or corn.

In the long run commodity prices are governed but by one law the economic law of demand and supply. The business of the trader in commodities is simply to get facts about the demand and the supply, present and prospective. He does not indulge in guesses about a dozen things as he does in stocks. It always appealed to me trading in commodities."

Learning From Mistakes - "Reminiscences of a Stock Operator"

Mistakes and explanations of how traders/investors should learn from them are mentioned quite a few times in the book, but here he goes a little bit more in-depth on the subject. Learning from mistakes is an important skill in all facets of life, but it is rather critical in the investment world. If you don't learn from your previous investment stakes, you will make those mistakes again and lose money again. Such pattern cannot be a part of a prudent trading/investing strategy.

"The recognition of our own mistakes should not benefit us any more than the study of our successes. But there is a natural tendency in all men to avoid punishment. 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. And after he makes them he will ask himself why he made them; and after thinking over it cold-bloodedly a long time after the pain of punishment is over he may learn how he came to make them, and when, and at what particular point of his trade ; but not why. And then he simply calls himself names and lets it go at that.

Of course, if a man is both wise and lucky, he will not make the same mistake twice. But he will make any one of the ten thousand brothers or cousins of the original. The Mistake family is so large that there is always one of them around when you want to see what you can do in the fool-play line."

Importance of Market Timing - "Reminiscences of a Stock Operator"

This piece builds upon the previous post that made a point of knowing whether you're in the bull or the bear market. Here, the protagonist explains that that is not enough. Once you know what market you are in, you will most likely need to tread water for a while to wait until everyone else knows that. If you jump onto the bull wagon while everyone else is still bearish, you could see significant losses before the market becomes bullish as you predicted. As important as it is to understand the market fundamentals, investors/traders also need to have a good handle on the market sentiment which can determine the size of your gains or losses just as much as the underlying market conditions.

"I studied the situation in 1906 and I thought that the money outlook was particularly serious. Much actual wealth the world over had been destroyed. Everybody must sooner or later feel the pinch, and therefore nobody would be in position to help anybody. Such being the case there was but one thing to do sell stocks!

And now when I decided to sell I plunged. Since we undoubtedly were entering upon a genuine bear market I was sure I should make the biggest killing of my career.

The market went off. Then it came back. It shaded off and then it began to advance steadily. My paper profits vanished and my paper losses grew. One day it looked as if not a bear would be left to tell the tale of the strictly genuine bear market. I couldn't stand the gaff. I covered. It was just as well. If I hadn't I wouldn't have had enough left to buy a postal card. I lost most of my fur, but it was better to live to fight another day.

I had made a mistake. But where? I was bearish in a bear market. That was wise. I had sold stocks short. That was proper. I had sold them too soon. That was costly. My position was right but my play was wrong. However, every day brought the market nearer to the inevitable smash. So I waited and when the rally began to falter and pause I let them have as much stock as my sadly diminished margins permitted. I was right this time for exactly one whole day, for on the next there was another rally. Another big bite out of yours truly! So I read the tape and covered and waited. In due course I sold again and again they went down promisingly and then they rudely
rallied.

It was the first time I had worked with a definite forwardlooking plan embracing the entire market instead of one or two stocks. I figured that I must win if I held out. You see, I had observed certain facts but had not learned to coordinate them. My incomplete observation not only did not help but actually hindered.

I have always found it profitable to study my mistakes. Thus I eventually discovered that it was all very well not to lose your bear position in a bear market, but that at all times the tape should be read to determine the propitiousness of the time for operating. If you begin right you will not see your profitable position seriously menaced; and then you will find no trouble in sitting tight.

I tell you it was remarkable. What happened was this: I looked ahead and saw a big pile of dollars. Out of it stuck a sign. It had "Help yourself," on it, in huge letters. Beside it stood a cart with "Lawrence Livingston Trucking Corporation" painted on its side. I had a brand-new shovel in my hand. There was not another soul in sight, so I had no competition in the gold-shoveling, which is one beauty of seeing the dollar-heap ahead of others. The people who might have seen it if they had stopped to look were just then looking at baseball games instead, or motoring or buying houses to be paid for with the very dollars that I saw. That was the first time that I had seen big money ahead, and I naturally started toward it on the run. Before I could reach the dollar-pile my wind went back on me and I fell to the ground. The pile of dollars was still there, but I had lost the shovel, and the wagon was gone. So much for sprinting too soon! I was too eager to prove to myself that I had seen real dollars and not a mirage. I saw, and knew that I saw.

Thinking about the reward for my excellent sight kept me from considering the distance to the dollar-heap. I should have walked and not sprinted.

That is what happened. I didn't wait to determine whether or not the time was right for plunging on the bear side. On the one occasion when I should have invoked the aid of my tape-reading I didn't do it. That is how I came to learn that even when one is properly bearish at the very beginning of a bear market it is well not to begin selling in bulk until there is no danger of the engine back-firing."

About Attachment to the Bull or the Bear Market - "Reminiscences of a Stock Operator"

A very important lesson stems from this excerpt - don't be a bull, don't be a bear, just be an astute investor or trader. It's not important whether the market is bullish or bearish, but it is critical for you to know which one it is so you can invest/trade accordingly.

"I was not, and I never have felt that I was, wedded indissolubly to one or the other side of the market. That a bull market has added to my bank account or a bear market has been particularly generous I do not consider sufficient reason for sticking to the bull or the bear side after I receive the get-out warning. A man does not swear eternal allegiance to either the bull or the bear side. His concern lies with being right.

And there is another thing to remember, and that is that a market does not culminate in one grand blaze of glory. Neither does it end with a sudden reversal of form. A market can and does often cease to be a bull market long before prices generally begin to break.

The bear side doesn't appeal to me any more than the bull side, or vice versa. My one steadfast prejudice is against being wrong.

Even as a lad I always got my own meanings out of such facts as I observed. It is the only way in which the meaning reaches me. I cannot get out of facts what somebody tells me to get. They are my facts, don't you see? If I believe some thing you can be sure it is because I simply must. 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. That is why I repeat that I never argue with the tape. To be angry at the market because it unexpectedly or even illogically goes against you is like getting mad at your lungs because you have pneumonia.

I had been gradually approaching the full realization of how much more than tape
reading there was to stock speculation. Old man Partridge's insistence on the vital importance of being continuously bullish in a bull market doubtless made my mind dwell on the need above all other things of determining the kind of market a man is trading in. I began to realize that the big money must necessarily be in the big swing.

Whatever might seem to give a big swing its initial impulse, the fact is that its continuance is not the result of manipulation by pools or artifice by financiers, but depends upon basic conditions. And no matter who opposes it, the swing must inevitably run as far and as fast and as long as the impelling forces determine.

The moment I ceased to be satisfied with merely studying the tape I ceased to concern myself exclusively with the daily 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.

Of course I had been reading the daily dope regularly for a long time. All traders do. But much of it was gossip, some of it deliberately false, and the rest merely the personal opinion of the writers. The reputable weekly reviews when they touched upon underlying conditions were not entirely satisfactory to me. The point of view of the financial editors was not mine as a rule. It was not a vital matter for them to marshal their facts and draw their conclusions from them, but it was for me. Also there was a vast difference in our appraisal of the element of time. The analysis of the week that had passed was less important to me than the forecast of the weeks that were to come."

Instinct of a Trader - "Reminiscences of a Stock Operator"

This piece is more useful for the actual traders than investors since investors should not be impulse buyers or sellers while traders must rely on all the skills and experience-based instincts that they have acquired.

"You may remember the story I told you about that time when I was short thirty-five hundred Sugar in the Cosmopolitan and I had a hunch something was wrong and I'd better close the trade? Well, I have often had that curious feeling. As a rule, I yield to it. But at times I have pooh-poohed the idea and have told myself that it was simply asinine to follow any of these sudden blind impulses to reverse my position. I have ascribed my hunch to a state of nerves resulting from too many cigars or insufficient sleep or a torpid liver or something of that kind. When I have argued myself into disregarding my impulse and have stood pat I have always had cause to regret it. A dozen instances occur to me when I did not sell as per hunch, and the next day I'd go downtown and the market would be strong, or perhaps even advance, and I'd tell myself how silly it would have been to obey the blind impulse to sell. But on the following day there would be a pretty bad drop. Something had broken loose somewhere and I'd have made money by not being so wise and logical. The reason plainly was not physiological but psychological."

Market Trends vs. Stock Picks; Sit Tight and Make Money - "Reminiscences of a Stock Operator"

This part of the book could not be more applicable right now. During this time of market turmoil, it is important to keep a perspective on things and not give in to the market sentiment. On one hand, right now could be an absolute best time to start buying stocks since they are so very very cheap. On the other hand, you don't know whether they will lose another 10 or 20 percent. As he explains below, you will have a much greater chance of success if you start buying when the market is starting to get bullish again. One problem with that right now is that markets are likely to stay choppy for another year or two. There will be rallies and pullbacks, so it is quite difficult to predict short-term movements of the stock market. If you want to take a chance, buy some very high quality companies with plenty of cash on hand. Keep in mind that you are always at risk of buying the stock right before it starts going down again. Low prices don't guarantee a rally nor do they protect you from further pullbacks.

"I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, "Well, you know this is a bull market!" he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend.

It was not that all I needed to learn was not to lake tips but follow my own inclination. It was that I gained confidence in myself and I was able finally to shake off the old method of trading. That Saratoga experience was my last haphazard, hit-or-miss operation. From then on I began to think of basic conditions instead of individual stocks. I promoted myself to a higher grade in the hard school of speculation. It was a long and difficult step to take.

And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn.
But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.

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 figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but the intelligent patience to sit tight.

Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! Wait until you see or if you prefer, until you think you see the turn of the market; the beginning of a reversal of general conditions. You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear. One of the most helpful things that anybody can learn is to give up trying to catch the last eighth or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.

Another thing I noticed in studying my plays in Fullerton's office after I began to trade less unintelligently was that my initial operations seldom showed me a loss. That naturally made me decide to start big. It gave me confidence in my own judgment before I allowed it to be vitiated by the advice of others or even by my own impatience at times. Without faith in his own judgment no man can go very far in this game. That is about all I have learned to study general conditions, to take a position and stick to it. I can wait without a twinge of impatience. I can see a setback without being shaken, knowing that it is only temporary. I have been short one hundred thousand shares and I have seen a big rally coming. I have figured and figured correctly that such a rally as I felt was inevitable, and even wholesome, would make a difference of one million dollars in my paper profits. And I nevertheless have stood pat and seen half my paper profit wiped out, without once considering the advisability of covering my shorts to put them out again on the rally. I knew that if I did I might lose my position and with it the certainty of a big killing. It is the big swing that makes the big money for you.

I never hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any particular stock. In a bear market all stocks go down and in a bull market they go up. I don't mean of course that in a bear market caused by a war, ammunition shares do not go up. I speak in a general sense. But the average man doesn't wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn't even wish to have to think. It is too much bother to have to count the money that he picks up from the ground.

Well, I wasn't that lazy, but I found it easier to think of individual stocks than of the general market and therefore of individual fluctuations rather than of general
movements. I had to change and I did.

People don't seem to grasp easily the fundamentals of stock trading. I have often said that to buy on a rising market is the most comfortable way of buying stocks. Now, the point is not so much to buy as cheap as possible or go short at top prices, but to buy or sell at the right time. When I am bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don't buy long stock on a scale down, I buy on a scale up."

Different Kinds of Suckers In the Market - "Reminiscences of a Stock Operator"

This is a rather interesting part where he describes different players in the market most of who are "suckers." Although, I think this really applies more to traders than long-term investors. Enjoy.

"I made up my mind to be wise and play carefully, conservatively. Everybody knew that the way to do that was to take profits and buy back your stocks on reactions. And that is precisely what I did, or rather what I tried to do; for I often took profits and waited for a reaction that never came. And I saw my stock go kiting up ten points more and I sitting there with my four-point profit safe in my conservative pocket. 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.

About the time I discovered what a small percentage of what I should have made I was getting I discovered something else, and that is that suckers differ among themselves according to the degree of experience. The tyro knows nothing, and everybody, including himself, knows it. But the next, or second, grade thinks he knows a great deal and makes others feel that way too. He is the experienced sucker, who has studied not the market itself but a few remarks about the market made by a still higher grade of suckers. The second-grade sucker knows how to keep from losing his money in some of the ways that get the raw beginner. It is this semisucker rather than the 100 per cent article who is the real all-the-year-round support of the commission houses. He lasts about three and a half years on an average, as compared with a single season of from three to thirty weeks, which is the usual Wall Street life of a first offender. It is naturally the semisucker who is always quoting the famous trading aphorisms and the various rules of the game. He knows all the don'ts that ever fell from the oracular lips of the old stagers excepting the principal one, which is: Don't be a sucker!

This semisucker is the type that thinks he has cut his wisdom teeth because he loves to buy on declines. He waits for them. He measures his bargains by the number of points it has sold off from the top. In big bull markets the plain unadulterated sucker, utterly ignorant of rules and precedents, buys blindly because he hopes blindly. He makes most of the money until one of the healthy reactions takes it away from him at one fell swoop. But the Careful Mike sucker does what I did when I thought I was playing the game intelligently according to the intelligence of others."

Speculation, Not Gambling; Seeing the Big Picture - "Reminiscences of a Stock Operator"

Even stock market speculators know that patience is a virtue and you will make more money doing nothing than doing the non-stop trading. I learned this lesson myself, albeit on a much, much smaller scale (e.g., on a very small scale!).

"The first change I made in my play was in the matter of time. I couldn't wait for the sure thing to come along and then take a point or two out of it as I could in the bucket shops. I had to start much earlier if I wanted to catch the move in Fullerton's office. In other words, I had to study what was going to happen; to anticipate stock movements. That sounds asininely commonplace, but you know what I mean. 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.

I had to go further back than an hour in my studies of the market which was something I never would have learned to do in the biggest bucket shop in the world. I interested myself in trade reports and railroad earnings and financial and commercial statistics. Of course I loved to trade heavily and they called me the Boy Plunger; but I also liked to study the moves. I never thought that anything was irksome if it helped me to trade more intelligently. Before I can solve a problem I must state it to myself. When I think I have found the solution I must prove I am right. I know of only one way to prove it; and that is, with my own money."

Technical Charting - "Reminiscences of a Stock Operator"

Continuing the series of quotes from Edwin Lefevre's "Reminiscences of a Stock Operator," we are now on to the protogonist's opinion of the technical charting.

Technical analysis and charting doesn't sound like something value investors should concern themselves with since company fundamentals is what they base investing decisions on. I think there is a need for technical indicators in every investor's toolbox. Technicians usually concern themselves with short-term market movements, but these short-term trends are just as important to long-term investors since your entry and exit points in the stock position will have a significant impact on your overall returns.

"After all, the game of speculation isn't all mathematics or set rules, however rigid the main laws may be. Even in my tape reading something enters that is more than mere arithmetic. There is what I call the behavior of a stock, actions that enable you to judge whether or not it is going to proceed in accordance with the precedents that your observation has noted. If a stock doesn't act right don't touch it; because, being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit.

It is a very old thing, this of noting the behavior of a stock and studying its past performances. When I first came to New York there was a broker's office where a Frenchman used to talk about his chart. At first I thought he was a sort of pet freak kept by the firm because they were good-natured. Then I learned that he was a persuasive and most impressive talker. He said that the only thing that didn't lie because it simply couldn't was mathematics. By means of his curves he could forecast market movements. Also he could analyze them, and tell, for instance, why Keene did the right thing in his famous Atchison preferred bull manipulation, and later why he went wrong in his Southern Pacific pool. At various times one or another of the professional traders tried the Frenchman's system and then went back to their old unscientific methods of making a living. Their hit-or-miss system was cheaper, they said. I heard that the Frenchman said Keene admitted that the chart was 100 per cent right but claimed that the method was too slow for practical use in an active market.

I should say that a chart helps those who can read it or rather who can assimilate what they read. The average chart reader, however, is apt to become obsessed with the notion that the dips and peaks and primary and secondary movements are all there is to stock speculation. If he pushes his confidence to its logical limit he is bound to go broke. There is an extremely able man, a former partner of a well-known Stock Exchange house, who is really a trained mathematician. He is a graduate of a famous technical school. He devised charts based upon a very careful and minute study of the behavior of prices in many markets stocks, bonds, grain, cotton, money, and so on. He went back years and years and traced the correlations and seasonal movements oh, everything. He used his charts in his stock trading for years. What he really did was to take advantage of some highly intelligent averaging. They tell me he won regularly until the World War knocked all precedents into a cocked hat. I heard that he and his large following lost millions before they desisted. But not even a world war can keep the stock market from being a bull market when conditions are bullish, or a bear market when conditions are bearish. And all a man needs to know to make money is to appraise conditions."