[Trade Feed] StableMaster: Excerpts from "Reminiscences of a Stock Operator"

@StableMaster is a young investment trader, but in fact, he has very rich investment experience. What events have influenced him to become the investor ?

"Reminiscences of a Stock Operator" is a timeless classic that transcends the decades to offer invaluable insights into the world of finance and trading. Author Edwin Lefèvre masterfully weaves the narrative of a legendary stock trader, drawing on the real-life experiences of Jesse Livermore. This book is not just a biography; it's a deep dive into the psychology of trading, the ebb and flow of market sentiment, and the eternal struggle between greed and prudence. Whether you're a seasoned investor or just starting your journey into the markets, "Reminiscences of a Stock Operator" is a must-read. It's a book that teaches you the importance of discipline, the value of learning from one's losses, and the art of reading market trends. With its vivid portrayal of the highs and lows of trading life, it's a story that resonates with anyone who has ever taken a risk in pursuit of financial success.

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A hundred years ago, the author engaged in speculative trading with short-selling securities companies and made his first fortune.

Some readers might not know the trading model of short-selling companies: the company acts as a market maker, allowing users to buy stocks at market prices without actual stock transactions, merely keeping accounts. When selling, the company settles the profit with you, essentially betting against the short-selling company.

Because short-selling companies do not engage in actual stock transactions but settle based on market prices, Livermore exploited this loophole, making a significant profit until he was blacklisted by several short-selling companies.

Of course, such opportunities exist in every era, though they are difficult to find and take various forms.

I have read two versions of this book, and I like them both. Some of the words in the book remain valuable even after several centuries. Today, I have excerpted some quotes for your appreciation. This aligns with the saying: "There is nothing new under the sun."

By the way, the different translations of this book are quite interesting.

I have read two versions. In one, the author is referred to as "Money Grabber," while in the other, he is called "The Boy Speculator." Clearly, I prefer the former translation, "Money Grabber."

The following quotes are all excerpts from the book.

“If a person hopes to make a living by trading stocks, he must trust himself and his judgment. This is why I don’t listen to insider information.”

Especially today, big data holds a lot of your personal privacy and thinking patterns as well as search habits. Often, the information you see is filtered by algorithms and manipulated by certain people behind the scenes. It is not necessarily correct, which is what is known as the "information cocoon."

“Why did it take me so many years to understand that my task was to predict the big movements, not the immediate changes?”

In modern terms, the goal is to earn alpha returns and reduce the high-frequency trading of buying low and selling high.

"To this day, I still go to bed before 10 o’clock. When I was young, I never stayed up late because lack of sleep would affect my judgment."

Mutual encouragement with you.

“‘Incomplete victories’ require as much reflection as losing money.”

In this context, the author mentions that after taking the advice of an old stock trading hand, he suppressed his impulses, conservatively chose to pocket his profits, and waited for the price to pull back. This operation turned a potential profit of $20,000 into $2,000.

For the author, the pursuit was for complete victory.

At that time, this was also part of Livermore’s trend trading principle. He would only consider selling when the trend (or the company’s fundamentals) deteriorated.

"A half-baked trader thinks he has some experience and buys when a stock falls. He calculates the bargain he got by the drop in points."

This is anchoring bias, which is likely the reason many retail investors lose money and get trapped.

"Old Pat said painfully: 'Sorry, my boy. If I sell my stock now, I will lose my position. What will I do then?'"

I used to have similar situations, sometimes being obsessed with high-frequency trading. However, after years of surviving in the stock market, I have learned:

1. A certain stock market guru once said that stocks are not farmland; trading more does not mean earning more. Often, alpha returns far exceed beta returns. In the words of this book, “What ultimately makes you money is the big moves.”

2. Stock trading should not affect normal work and life. Your job provides you with a continuous cash flow.

"Going long in a bull market and short in a bear market sounds silly, doesn’t it? But this is a fundamental principle. After grasping this principle, I found that in practice, the main task is to predict the overall market trend."

Focus on the big trend, ignore the small fluctuations. For non-professionals, I think this is enough. Because nowadays, supercomputers have many advantages over humans in day trading.

"I have always believed that stock prices do not stop at round numbers like 100, 200, or 300 points."

This theory may sound somewhat mystical. However, it has internal logic. Livermore believed that a substantial rise in stock prices indicated significant positive factors for the company. For ordinary investors, I think there is no need to delve into what these positives are (or even try to do so).

"Timid people don’t like to buy when stock prices hit new highs, but the truth is the opposite because similar experiences guide me."

"Stock price drops are never a reason to buy, because it can always drop lower." — Peter Lynch (who commented on this book).

“I have summarized the following rule: if the price fluctuates narrowly, with negligible volatility, trying to predict the next big move, whether up or down, is meaningless. Make a firm decision: do not act unless the price breaks the range.”

The key price level theory remains consistent in many of Livermore’s thoughts and practices.

For example, if you look at the chart of Apple's stock price, you see it fluctuating for a period and then suddenly gapping up on May 3, 2024. According to the key price level theory, this is a buying opportunity and I add more positions. At the same time, We don't need to delve into the reasons behind the gap. Even if the purchase results in a loss, we can always set a stop- loss at the right time.

“That’s how I made a comeback. After repaying all my debts, I decided never to let myself fall into a penniless, anxious, and underfunded situation again. After getting married, I transferred some money to my wife’s name. When my child was born, I also set aside some money for him. I did this not because I was worried that the stock market would take my money, but because I knew I would use every fund I could get my hands on. By doing this, my wife and child would not be affected by my trading activities.”

It turns out professional investors also have moments when they cannot control themselves, which indeed reflects the weaknesses of human nature.

"Try to push the stock price to the highest, then sell to the public during the decline." This should be a common tactic of market manipulators.

This shows that you should not catch a falling knife during a downturn.

In conclusion, Livermore led a legendary life. Despite his success in the stock market, he went bankrupt several times. Although he made several comebacks, his later years were not good.

So, can we draw a somewhat less rigorous conclusion?

Wealth is just one aspect of life. More precisely, wealth makes life better. In the pursuit of wealth, don’t forget the people around you.

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