Book Review: How to trade in stocks – Jesse Livermore
How to trade in stocks (1940) was the last achievement of Jesse Livermore (1877-1940). The story of Livermore, is perhaps best captured in the classic, 1923 book: Reminiscences of a stock operator, by journalist Edwin Lefèvre.
Born in New York, the colorful stock market speculator was famous for making millions on the stock market, especially from shorting the market in the great crash of 1929. In How to trade in stocks, Livermore lays out his ideas on speculation, after 40 years dedicated studies of the world’s stock markets.
Livermore was a stock market speculator. He saw speculation as any other business there were. Where success did not come easy, and required hard work.
According to Livermore speculation can be seen as:
the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.
For Livermore speculation was nothing more than anticipating future movement in prices. The applicability of this idea rests upon his theory that nothing new ever happens in speculation. Even if some variations occurred, he believed that similar price patterns, repeated themself over and over.
As soon as you familiarize yourself with the actions of the past, you will be able to anticipate and act correctly and profitably upon forthcoming movements
Livermore divided stock movements into two separate kinds, either stocks behaving “normally”, or they behaved “abnormally”. Never be afraid of normal movements, he maintained. But when abnormal stock movements occur, it is time to get out! When placing a bet on a single stock, the Livermore market method would urge you to close it, should the stock not behave as you expected. On the other hand, should the stock move in tandem with your bet, one should increase the bet size.
A vital point in Livermore’s strategy was to identify certain pivotal point in prices. When a stock reached this point, he would make a move. For example, when a stock for the first time moved to 100, he would buy it, since this often represented a psychological barrier, pushing prices further.
Throughout the book, Livermore provides lots of recommendations and advises:
“Never sell a stock, because it seems high priced”
“Never buy a stock because it has a big decline from its previous high”
“Never average losses”
However, the key element in the Livermore method is bookkeeping. By constantly recording specific stock prices in a certain fashion, Livermore had created a method that allowed him to view large amounts of information, in a structured fashion, allowing him to spot different trends and price patterns.
Finally, from the book Reminiscences of a stock operator, perhaps the most important lesson Livermore left us, was that:
there is nothing like losing all you have in the world for teaching you what not to do. And when you learn what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!.
And Livermore had first hand experience from learning by his own mistake, as he lost his complete fortune, twice.
Sadly Jesse Livermore committed suicide the same year the first edition of this book was published.
If you are interested in how he manage his bookkeeping, I recommend that you pick up the book and chapter IX: Explanatory rules, where he in detail explain the structure. The complete 1940 book can be found in PDF, here.
