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.

In my review of Thomas J. Dorsey’s book: Point & Figure Charting, I wrote that technical analysis (especially Point & Figure charting) could be seen as a form of entrepreneurship in the financial sector. When betting on the stock market, technical analysis is an important tool investors use when he is trying to get the odds in his favor.

This is especially relevant in the short term, where prices tend to move according to sentiment and peoples expectations. In the medium to long term, sentiments and expectations play a much smaller part in determining the overall trend. Here, fundamentals become more important as prices tend to conform to the underlying supply and demand dynamics.

In this analysis, Austrian economics can be very beneficial. For people not familiar with Austrian economics, What every Investor should know about Austrian economics and the hard-money movement (1988 ) by Mark Skousen, is a must read. This is a beautiful little book (and perfect for weekend reading), with a very interesting theme: Austrian Economics applied to finance.

However, for people already familiar with Austrian economics, I doubt that What every Investor should know about Austrian economics and the hard-money movement will add much new insight, as it is an introduction. But, because of the scarce supply of Austrian investment books on the market, I still think this little book deserves a place in every serious investor’s personal library.

Skousen does a great job in pointing out some important features of Austrian economics that you don’t easily find in the average text book. In the part called, Followers of the Austrian School of Economics, he mentions the obvious, but often ignored fact, that one of the keys to economic growth and prosperity is a high rate of personal savings and capital formation.

The Keynesian framework provides a relevant example. Here, focus lies completely on consumption, and not on savings. This misconception has serious effects on the economy, as government consumption is believed to produce prosperity.

On Wednesday this week, we could see another example resulting from ignoring this key insight, the GDP report. GDP are supposed to measure the health of the economy for a country. Although GDP is an important number, it almost completely consists of consumption related spending. This takes focus away from what is really the driver of economic prosperity and capital formation, namely savings.

Another Austrian insight mention in the book is that government inflationary policy is responsible for the boom-bust business cycle. What Skousen is refereeing to here is the Austrian business cycle theory (ABCT), first developed by Ludwig von Mises.

In the part called How to profit from the business cycle, Skousen gives a brief overview of how he sees the business cycle. He divides the cycle into four stages: (1) The inflationary boom, (2) The credit crises, (3) Recession, and (4) Economic recovery. Depending on which stage the business cycle is experiencing, different types of assets are more suitable than other in an investors portfolio.

However, Skousen points out, as also many other Austrians do, that no one rings the bell when we go from one stage to the next. This fact has even made some people question the value of Austrian economics in practical investing.

However, It should be clear, even if Austrian economics cannot answer that question, by understanding the causal relation ship between credit expansion, inflation and the business cycle, people familiar with Austrian economics have a direct advantage over the average nonaustrian economist, in making appropriate long term investment decisions.

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