"History repeats itself all the time in Wall Street."
A fictionalized biography of Jesse Livermore, one of history's most famous speculators. This is an enriching book, worth reading every decade or so across your investment career. And it's a genuinely fun read, conveying the free-wheeling investment culture of the days before the Securities and Exchange Act.
When you're young and beginning to invest, this book thrills you with all the bravado of speculating. When you're older, after you've seen a few things and learned many of the manipulations and other techniques the investment industry uses to extract money from you, the book becomes more of a cautionary tale of things not to do, traps not to step in, things to avoid.
This is the third time I've read this book (I'm now in my fourth decade as an investor, so I guess that makes me one reading behind schedule), and what struck me most this time around was Livermore's self-admitted weaknesses: how they set him back, but how he (mostly) learns from these setbacks and recovers from them. Mostly, but not entirely: Livermore repeatedly bankrupted himself over the course of an incredibly volatile career, but yet he never drew the ultimate conclusion: don't blow up. You'll see in a couple of paragraphs why this was a catastrophic oversight.
The rules of the markets have changed quite a bit since the 1920s when this book came out. Back then there weren't any rules on insider trading, there were no form 13Fs that big investment firms had to file (revealing their holdings and their buys and sells). Insiders could and would form buying (or selling) syndicates to manipulate their stocks up or down as needed. There weren't even any KYC (know your customer) rules: you could open up an account in a local bucket shop with an assumed name and start trading right away using 10:1 leverage!
The rules may have been different back then but one thing that hasn't changed is human nature. We are greedy, we are fearful, we are foolish... at all the wrong times. Therefore, please do not use leverage! Everyone should know that some twenty years after this celebratory book was published Livermore committed suicide. He had yet again gone bankrupt in the markets--for the fifth time if I'm counting correctly--and he shot himself in the face in the cloakroom of a Manhattan hotel, leaving a wife and young son. Don't blow up.
Notes:
Introduction by Roger Lowenstein
* On how investments don't care what "reasons" are given for their moves; on reading "the tape"
* On the history of this book: it was written in 1922 in the first person, but it was based on the speculative trading of Jesse Livermore, it's his life history, starting in small bucket shops outside of New York City and then moving on up to Wall Street. This is a fictionalized history of his "early and ascendant years," not about Livermore's tragic death later in 1940.
* There are a lot more tricks and techniques people could use back then to manipulate stock prices. There were no insider trading laws or anything.
* On the difference between speculators and investors, "they are a different breed of cats." But noting that Livermore, 100% a speculator, had all the traits that work for investors too: "patience, self-discipline, and a mind-set of detachment."
* "One could get angry at the tape, but the tape didn't care."
* On realizing that it was better to learn from your mistakes rather than pretend that you hadn't made them.
Chapter I
* Developing a sense for numbers, for patterns in stock prices, the author has a real knack for this. Note that at this point in his career he usually knows next to nothing about the underlying business! [See Nassim Taleb's "green lumber" fallacy].
* He starts to put money on the line to test his methods, interesting how "the testing and seeing if you are right" part of investing is more meaningful to him than the money. [I know the feeling!]
* He plays the market by himself with his own system. "I have always played a lone hand."
* On the old bucket shops and how they would either cheat customers or kick out customers who made too much money.
* His mother doesn't get it when she sees the money he's making. "...all she could see was that ten thousand dollars was a lot of money and all I could see was more margin" [read: buying power to do more trading]. [Also note that ten grand in those days would be equivalent to $350-400k today, quite a lot of dough for a teenager to milk out of the stock market!]
Chapter II
* "What beat me was not having brains enough to stick to my own game--that is, to play the market only when I was satisfied that precedents favored my play." [You have to wait for your pitch, or to quote Buffett: there are no called strikes in investing. An easy way to lose money is to press too much, to try to take swings when you shouldn't.]
* He goes broke, explains how the game is different at an NYSE firm vs a bucket shop, he's not able to scalp points, largely because he doesn't know what execution price he's going to get by the time the trade goes down to the floor. "...in A.R. Fullerton's office the tape always talked ancient history to me, as far as my system of trading went, and I didn't realise it... In short, I did not know the game of stock speculation. I knew a part of it..." [Note here that he as least knows that he doesn't know, and that he has a lot more to learn, that's a major step.]
* Livermore borrows money from Fullerton himself, travels to St. Louis and extracts money from bucket shops there before he gets kicked out for winning too much; he then heads back to New York and hears that one of the St Louis firms opened a branch in Hoboken, he goes there to trade against it, once again successfully.
* Interesting discussion here of some of the mechanics of the bucket shop: the margin borrowing they offered clients leveraged the trades so much that it effectively functioned like a stop loss 1 point or so below your purchase price, so you were unlikely to get badly wiped out: you'd get stopped out at a small loss.
Chapter III
* "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 of the stock market; and it is not the bull side or the bear side, but the right side." [Basically he's talking about the difference between theorizing and talking about what will happen ("the market will go up!") vs actually putting your real money behind your opinions. One is a hypothetical exercise where you can paper trade and win a bet or an argument. The other is actually on a real scoreboard with actual gains or losses.]
* "The game taught me the game." "...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."
* On the 1901 bull market: "And no taxes to pay on stock sales!"
* On the famous Northern Pacific corner in May 1901, with J.P. Morgan and Harriman bidding against each other for control of the company. "I was dead right and--I lost everything I had! ...The tape was way behind the market..." [Basically what he's saying here was he thought he got fills at certain prices where he bought or sold but it turned out the executions were at a much different and much worse prices, both buying and selling; this happens sometimes even today in fast market conditions which is why you need to use limit orders.] "The divergence between the printed and the actual prices undid me."
* "If I hadn't made money some of the time I might have acquired market wisdom quicker." [Another interesting comment here about having a binary indicator of how you're doing (I made money, thus I was "right") versus maybe a comparing yourself in relative terms to how you should be doing, with the additional goal of getting wiser and learning and making fewer mistakes in the future.] "I didn't keep on trading the way I did through stubbornness. I simply wasn't able to state my own problem to myself, and, of course, it was utterly hopeless to try to solve it. I harp on this topic so much to show what I had to go through before I got to where I could really make money."
Chapter IV
* Good section here on how Livermore looks into a firm that he knows is crooked, and he knows the tricks they play on their customers, yet he uses the broker anyway, just sidestepping the broker's tricks.
* The firms all expect to extract money from customers who overtrade. [What's fascinating is if you compare stock prices or index levels) in the early 1900s to today, the real money was made just by buying and holding, Warren Buffett-like. But every era has their people who think they can make it as daytraders. Very few can.]
* "The beauty of doing business with a crook is that he always forgives you for catching him, so long as you don't stop doing business with him."
* He puts in orders through four different bucket shop firms to buy the same stock and while those orders were waiting for the next quote to come out on the tape, he sends an order through his stock exchange house to sell 100 shares [this would be a lot in those days] of the same stock at the market. The transaction would be printed on the tape and that was the price he would pay on his five buying orders! Then he did the reverse on the same day at the end of the session. [You could think of this like a 19-teens era high frequency trading gambit.] "I worked that trick on them several times." However, the problem was that the last time you did this it turned out to be much more profitable than he expected and this put an end to his work with these firms, they wouldn't do business with him anymore.
* "There is nothing like losing all you have in the world for teaching you what not to do. And when you know 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!"
Chapter V
* On understanding how a stock acts, seeing its behavior and making sure it is acting the way you expect it to before you start speculating in it.
* He starts to see that he's leaving a lot of money on the table in clipping a few points here and there only to sell and see the stock go up another twenty points. "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."
* Amusing taxonomy of suckers here: the tyro who knows he knows nothing; the second-grade sucker (or semi-sucker) who thinks he knows a great deal, who quotes all the stock market "wisdom" but yet doesn't know the most single important piece of wisdom: Don't be a sucker!
* The story of Mr. Partridge, who always said, "Well, you know this is a bull market!" [Basically the idea here is to just sit there and let the greater trend play out; don't overthink things.]
* "It was never my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight."
Chapter VI
* He shorts Union Pacific on a "feeling"...he doesn't know why, just that he thinks it's the right trade. Turns out it was just a couple of days before the San Francisco earthquake in 1906.
* What's interesting about this trade is how slowly the overall market recognizes the gravity of the earthquake and the implications on this company: it takes days, and it gives Livermore an opportunity to short even more! "The Street paid no attention to the earthquake the first day or two. They'll tell you that it was because the first despatches were not so alarming, but I think it was because it took so long to change the point of view of the public toward the securities markets."
* "I have no explanation to give you, either scientific or childish. I am telling you what I did, and why, and what came of it. I was much less concerned with the mystery of the hunch than with the fact that I got a quarter of a million out of it. It meant that I can now swing a much bigger line than ever, if or when the time came for it." [He's immediately on to the next thing, and the implications of this big win just mean that he can make bigger plays going forward, he doesn't actually relish the triumph, he's not interested in the money per se. Sounds familiar.]
* Later he's reading the tape and discovers Union Pacific stock "acts" like it's being accumulated by somebody very savvy, so he starts buying too. Ed Harding, one of the the owners of Harding Brothers actually calls him on the phone long distance: "'Why are you buying all that Union pacific?' 'It's going up,' I said." He tries to warn Livermore out of the stock and Livermore unfortunately goes against his own experience and sells, and then goes short right before Union Pacific announces a huge dividend, making the stock hit new highs. "What was plain was that I had read the tape accurately and that I had been a ninny to let Ed Harding shake my own resolution. There is no sense in recriminations, because I had no time to lose; and besides, what's done is done... But he did me a very great service, for it was the lesson of that episode that, I firmly believe, completed my education as a trader."
Chapter VII
* Interesting section here where he goes through his mechanics of testing a combination of buys and sells to see how a stock handles it, and to test whether his beliefs about the stock are right.
* Story here about Deacon White, when a tipster came up to him about a company (American Sugar) and he did the exact opposite of what the tipster said to do: he first sells two big blocks of stock to see how the market handles the selling pressure, this helps him to corroborate the tip, then he buys in size.
Chapter VIII
* "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."
* On becoming a star customer, not just offering commissions to a brokerage firm, but being a customer who genuinely makes money, which means "to have a value beyond the actual volume of my trading." [On the institutional side of the industry where I used to work, some sell-side brokers would talk about what "my smart customers" are thinking, this kind of color is occasionally extremely useful.]
* On the "propitiousness" of your timing. He faced some severe counter trend rallies during a bear market in 1906. "But the first time I traded because of a crisis that was still to come I found that I had been using a telescope. Between my first glimpse of the storm cloud and the time for cashing in on the big break the stretch was evidently so much greater than I had thought that I began to wonder whether I really saw what I thought I saw so clearly." Note that Livermore went bust again here!!
* He then sees the (bearish) cue he needs, a big secondary from the two big railroads, Great Northern and Northern Pacific, and then another one--announced later but scheduled earlier--from St. Paul.
* Scuttlebutt on the Reading bull pool. It broke too, eventually, in the face of the bear market.
* He doesn't play the long side after the selloff happens. "The market would not be right for me to trade in for a while. The first ten thousand dollars I made in the bucket shops I lost because I traded in and out of season, every day, whether or not conditions were right. I wasn't making that mistake twice."
Chapter IX
* Interesting chapter here on the October 24, 1907 crash. Livermore was in Florida after closing out all of his trades; also a side story here on Anaconda [this was a big mining company that, much later, would be on the wrong side of Chile's mining nationalization under under President Allende in 1971: Anaconda's mines in Chile were taken by government decree, without compensation] where Livermore played it around the $300 price on a technical move, assuming it would blow through 300: when it didn't he went short the stock and several others. Then he left for Europe for the summer, spending the summer in Aix-les-Bains. Interesting cultural context here: "It was good to be in a place like that with plenty of money and friends and acquaintances and everybody intent upon having a good time. Not much trouble about having that, in Aix."
* He sees an article in the Paris Herald about Smelters declaring a dividend and he believes that it's the company trying to run up the stock price, and that the news was actually really bearish: "I knew that all bull manipulation was for doomed to failure in that bear market. The instant I read the dispatch I knew there was only one thing to do to be comfortable, and that was to sell Smelters short. Why, the insiders as much as begged me on their knees to do it, when they increased the dividend rate on the verge of a money panic." [Sometimes you see a trigger event that crystallizes a view that you have, and it's obvious exactly what to do.]
* He leaves for New York right away and starts selling short. [Keep in mind that this is long before the uptick rule was put in place, so this selling actually begets more selling, especially if you're a large short seller. In those days they called this a "bear raid."]
* Discussion here of "the money post" at the stock exchange where brokers would go to settle up and get overnight money to make sure they were solvent; there was such a tremendous shortage of money at the money post that the president of the stock exchange, R.H. Thomas, called James Stillman, who was president of National City Bank, and he said, "Mr. Thomas, we'll have to go and see Mr. Morgan about this."
* J.P. Morgan then rounds up all the bankers of New York, telling them "that they must provide the money the Stock Exchange needed."
* "But we haven't got any. We're loaned up to the hilt," the banks protested.
"You've got your reserves," snapped J.P.
"But we're already below the legal limit," they howled.
"Use them! That's what reserves are for!"... "He was a man, J.P. Morgan was. They don't come much bigger."
* Livermore actually turns around and begins buying: "When the commission houses found out there was not a cent to be had at any price I knew the time had come. I sent brokers into the various crowds. Why, at one time there wasn't a single bid for Union Pacific. Not at any price! Think of it! And in other stocks the same thing. No money to hold stocks and nobody to buy them."
* Also interesting section here on how he felt like he was "king for a day" because of the credibility and respect he received from everyone for having been right on the downside, and then turning around and betting the other way, and being right again; also at the very time he covered and went long, one of the key stock exchange bankers reached out to him to ask him to stop shorting. He also talks about how his winnings were not in dollars but in intangibles; that he learned here what he has to do in order to make truly big money. "I was permanently out of the gambler class; I had at last learned to trade intelligently in a big way. It was a day of days for me." [Again, it's not actually about the money per se, although the money is the scoreboard and shows you you're right or wrong; it's really more about respect and credibility.]
Chapter X
* On "selling down to the sleeping point" [lowering your stress level, making sure your decision-making isn't affected by having too much money at stake.]
* Also on standard of living changes due to big fluctuations in your wealth. "It does not take a reasonably young and normal man very long to lose the habit of being poor. It requires a little longer to forget that he used to be rich." [It's hard to lose the habit of not spending, and worse, money also tends to create more "needs" as you become subjected to constructed preferences.]
* Distinguishing between investors and speculators; various tidbits on watching the tape; "establish your resistance points and be ready to trade along the line of least resistance as soon as you have determined it." Also at the same time you have to pay attention to the basic conditions on the market; on being flexible, not having set opinions.
* Discussion here of the wheat market: Livermore saw what he considered was a resistance level at $1.20, he could see that it was sitting in a certain range, and it turned out that breaking through that level caused a cascade of buying and short covering. [The point here is that, sometimes, higher prices bring out still higher prices in the short run (and this can happen with equities as well). Note also that the current wheat price is only around $6.00 a bushel, it is astounding how much less inflation there is in wheat prices! If you look at the overall price level, money has inflated away by a factor of some 35-40x over this time, thus you'd expect a wheat price of some $40 a bushel all else equal: obviously yields and efficiencies in ag have brought about a declining cost curve. It's fascinating how some commodities have (as Julian Simon would put it) a non-finite supply. Thus we have a paradox in asset and commodity prices: sometimes high prices cause higher prices, but yet also "the cure for high prices is high prices" in the sense that higher prices eventually bring out more supply/production.]
* Also interesting comments here on how Livermore would "build a line": he would take maybe a fifth of a full position in, say, cotton (or whatever stock or commodity) but would then buy more at a higher price, then buy a little more higher still, but he wouldn't buy if the price broke below his initial purchase price. And then he would basically cut his losses after the first couple of buys if the price went against him, this would mean he was "wrong." But these were basically feeling out plays, to see if there was the potential to capture a real move in the underlying asset. Essentially he might be wrong somewhat frequently with small bets, but he would definitely have a lot on the sheets if it turned out he was right, and thus his bigger bets would tend to work out. This is an interesting way to structure short-term trades; it's not at all how I usually put on a position though!
* On pyramiding a trade: buying your first lot at one price, then buying the next lot at one point higher, and the next lot another notch higher; this lets you scale into a rising price with a stop-loss put on one point below the last buy, thus you set the stop higher with each buy. This is a way to make money on a consistent basis while cutting off major downside.
* Discussion here on how the speculator has to reverse his hope and fear, he has to fear that his loss will develop into a much bigger loss, and hope that his profit may become a big profit, whereas the average man looks at it the opposite: he hopes that when the market goes against him it will change and when the market goes your way you fear that it will take away your profit; thus you fear to get out because it will be too soon.
* "A man may beat a stock or a group at a certain time, but no man living can be the stock market... It's like the track. A man may beat a horse race, but he cannot be horse racing." [The whole idea here is to stay humble and to try to adjust to the probabilities as best you can. Also note that a lot of these problems are solved by finding a great business and just buying and holding: the more you're trading in and out of names the more you are at the mercy of luck, and this is why traders need to use various risk-minimization methods (like using stops, pyramiding/scaling in, etc.) to cut off their left tail.]
Chapter XI
* He describes a fascinating play here in corn, wheat and oats in the Chicago commodities market where the play depended on knowing who was shorting what and who hated whom. Livermore did a transaction in oats that made it look like one firm was attacking another, and then all the traders jumped on board because he had read the various players and their psychology correctly.
* A similar play by Addison Cammack, where he bought up stock in St. Paul as it was being sold by an insider to have as a lever to drive the entire stock market down, he was already short a bunch of other stocks, but he was willing to lose money in this name as "ammunition for his bear campaign."
* Then an anecdote where Livermore builds a huge position in cotton, contrary to the consensus view, which was to sell July futures; he engineered squeeze/corner on that month. Then, coincidentally, an article came out in The New York World talking about July cotton being "cornered" and the market spiked, which let Livermore dispose of all the cotton he had bought within ten minutes of the open that day. "Without it [the article] I wouldn't have had a market big enough to unload in. That is one trouble about trading on a large scale. You cannot sneak out as you can when you pike along. You cannot always sell out when you wish or when you think it is wise. You have to get out when you can; when you have a market that will absorb your entire line."
Chapter XII
* He meets Percy Thomas, the famous commodity speculator, who tries to convince him to work with him: he would give Livermore information and the trading ideas, Livermore would then do the actual trading. Livermore rejects the idea. "I did not think I could run in double harness and wasn't keen about trying to learn." [Again, know your strengths and stay within them.]
* A side story here about a tremendously talented salesman who sold Livermore a set of books for $500. Basically selling him something he didn't even want. He uses this side story to show how Percy Thomas ultimately ended up convincing him to work with him anyway, even though we didn't want to.
* On being convinced by someone else against your own convictions: "I couldn't see the market with my own eyes... I ceased to do my own thinking." Thomas convinces him that he's wrong to be bearish on cotton, so Livermore covers and then immediately goes long. [Another takeaway: you may be right or you may be wrong but if you discover you're wrong it doesn't mean you automatically take the opposite side of the trade right away--a perfectly good option is to do nothing!!] "It was the most asinine play of my career."
* He lost some 90% of his capital here on this cotton trade.
* Several stories here about retail investors using the stock market to pay for an automobile, a bracelet, a motorboat or a painting: Livermore argues that those who the stock market to "pay for something" usually end up losing money. The author ties it to investors hoping and gambling, which causes them to run greater risks. The author makes this exact mistake hoping the stock market would cover his expenses for a period of time: he lost all of his capital (what little was left after his cotton debacle), and also went into debt. "I not only got in debt but I stayed in debt from then on."
Chapter XIII
* Everything starts going wrong for him: he loses his confidence, he can't seem to show good judgment even doing small trades (which was all he could afford to do at the tie). "I can't describe to you how weaponless I felt."
* He heads to Chicago, but then quickly comes back to New York after receiving a cryptic telegram from a friend telling him to "Come to New York at once."
* Blurb here about James Stillman president of the National City Bank who "made it his practice to listen in silence, with an impassive face, to anybody who brought a proposition to him. After the man got through Mr. Stillman continued to look at him, as though the man had not finished. So the man, feeling urged to say something more, did so. Simply by looking and listening Stillman often made the man offer terms much more advantageous to the bank than he had meant to offer when he began to speak." [In other words: this is business. It doesn't say anywhere that you have to follow any conventional "rules" of conversations!]
* "I don't keep silent just to induce people to offer a better bargain, but because I like to know all the facts of the case. By letting a man have his say in full you are able to decide at once. It is a great time saver. It averts debates and prolonged discussions that get nowhere."
* The deal was to recruit Livermore to do his trading at the firm, and in particular have his short-selling be used as "cover" to obscure the firm's other large clients as they sold their long positions. Also it would give Livermore "a chance to come back and come back quickly." [Note how your credibility and reputation can be incredibly valuable, it can get people to offer you another chance even after you've blown up.] But then Livermore, for some reason, can't handle the fact that the broker tells him that there's no need to pay back the original $25k stake: this caused Livermore to have a streak of terrible performance; he also realized he wasn't doing what he wanted to do, making the trades he wanted to make, but rather he was doing was what the owner of this brokerage firm wished him to do. Livermore than guesses that Dan Williamson (the owner of this brokerage firm) was using Livermore to cover for sales that Williamson himself was doing for his largest client [Alvin Marquand is the name given in the book, but this is probably a pseudonym, as are most of the names here] who had died around that time; basically he was helping this incredibly wealthy guy's estate by tying up Livermore. "It was much cheaper for them to let me get into debt and then to pay off the debt and to have me in some other office operating actively on the bear side" as they were liquidating Marquand's estate for the heirs. "A very shrewd boy, that Dan Williamson; as slick as they make them... He did his own sizing up and soon doped out just what to do to me in order to reduce me to complete in offensiveness in the market. He did not actually do me out of any money. On the contrary, he was to all appearances extremely nice about it. He loved his sister, Mrs. Marquand, and he did his duty toward her as he saw it." [This was some legit 4-D chess played on Livermore right here.]
* Then a period of lean years 1911 through 1914. "...I was worse off than ever."
Chapter XIV
* Now into "four mighty lean years" where "I was trying to force the market into giving me what it didn't have to give... Still I plugged along, trying to make a stake and succeeding only in increasing my indebtedness." [Again, the reader can't help but wonder: why didn't he always keep back a "safety stake" just in case during the fat years? Never blow up.]
* "I convinced myself that whatever was wrong was wrong with me and not with the market. Now what could be the trouble with me? I asked myself that question In the same spirit In which I always study the various phases of my trading problems. I thought about it calmly and came to the conclusion that my main trouble came from worrying about the money I owed." [Leverage, and debt, they're toxic, they make you fragile, not just financially but also emotionally fragile!]
* He goes through bankruptcy, and he actually gets a release from all of his largest creditors, with the intent to pay them back in the future at some point, although a couple of smaller creditors kept hounding him for smaller debts, see the example here of the one guy he owed $800 to.
* Note that in 1914, the stock market was closed from July 31st until the middle of December.
* He sees a play in Bethlehem steel, an old trader tactic when a stock hits "par" ($100 a share) usually it goes up another several points, sometimes 30 or 40 points right afterwards; the trade works.
* The Lusitania happens; he has a disappointing 1915; but then in 1916, "I was rampantly bullish in a wild bull market... there wasn't anything to do but to make money. It made me remember a saying of the late H.H. Rogers, of the Standard Oil Company, to the effect that there were times when a man could no more help making money then he could help getting wet if you went out in a rainstorm without an umbrella." [It's true, sometimes you get gifted market environments like this and you have to be in on it: think the mid-1990s, the mid-1980s, much of the 1920s, etc.]
* This period involved Allied purchases of all kinds of supplies from the United States; it made the United States incredibly prosperous as all sorts of cash and gold came pouring into the country, which meant inflation and "that meant rising prices for everything." [Including stocks.]
* He pays off all his debts, and then, finally, does something to make himself less fragile: "I put a pretty fair amount into annuities. I made up my mind it wasn't going to be strapped and uncomfortable and minus a stake ever again. Of course, after I married I put some money in trust for my wife. And after the boy came I put some in trust for him... By doing what I did my wife and child are safe from me." [!!!]
Chapter XV
* In this chapter he talks about instances where he was cheated out of gains even when he was right on an investment play.
* Interesting thesis here on the coffee commodity price, it was the only commodity whose price stayed low during World War I, because the European market had closed and that excess coffee stock came to the United States. Livermore reasons that with German submarine activity there would be far fewer ships moving coffee in the future and thus as those surplus coffee stocks ran down, price would recover. "It didn't require a Sherlock Holmes to size up the situation."
* Note that he was "early" with this trade and his first batch of futures expired worthless (or he sold them at a loss, it isn't clear). He then did the trade again, but triple the size. But this time the people on the other side of the trade (basically, this means coffee producers who were long coffee but didn't have any ships to get it to deliver to the coffee to fulfill the futures contracts that Livermore held) went to Washington and appeared before the price fixing committee, "and made a patriotic appeal to that body to protect the American breakfaster." [Fascinating on a few levels: first this trade looks a lot like the key trade in the climax of The Shipping Man, where one guy has to deliver grain but lacks a ship to deliver it in. Second, when you're catastrophically in the hole on a trade, you can always appeal to the political powers to bail you out, this was a savvy move by those guys. Third, it sort of looks like a mini-example of the political response to the 2008-2009 real estate crisis.]
* Livermore's name starts showing up in the press as responsible for any kind of break in prices. Also see the useful insight here on the "inverted tip," "the explanation that does not explain... There is a reason--an unknown reason but a good reason; therefore get out. But it is not wise to get out when the break is the result of a raid by an operator, because the moment he stops the price must rebound. Inverted tips!" [Essentially here the media will "explain" a selloff by blaming a noted short-seller, and thus implying that the market will quickly rebound. But this is a sort of a sucker play: this phony explanation actually masks the insight that conditions are poor and as an investor you probably should be shorting/selling as well, not counting on some rebound that is predicated on a false reason! As always the financial media almost always misleads, you usually want to fade it.]
Chapter XVI
* This is a chapter on tips, "tip-broadcasting becomes a sort of endless-chain advertising"; and how promoters and manipulators use them, how the average customer of the average commission house uses them, etc. [Again, usually this stuff is "fed" out there by someone with connections into the media, you want to be aware of this and always be thinking second-order when it comes to tips, media explanations, market rumors, etc.]
* He gives his wife $500 that he made speculating ("That money hadn't cost me anything and it was outside her allowance") and at dinner she gets a tip about Borneo Tin from the president of the company (!!). She buys it secretly, but unbeknownst to her Livermore shorts it!
* "I saw what had happened. Wisenstein was an astute person. He figured that Mrs Livingston would tell me what he had told her and I'd study the stock... It was one of the most cleverly planned and artistically propelled tips I'd ever heard of... He was also utterly wrong in his guess about the kind of trader I was. I never take tips and I was bearish on the entire market. The tactics that he thought would prove effective in inducing me to buy Borneo...were precisely what made me pick Borneo as a starter when I decided to sell the entire market."
* "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... 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... The belief in miracles that all men cherish is born of immoderate indulgence in hope." [Timeless advice right here. Ignore tips, or consider going second-order on them and fading them. Most important: don't be a tip-taking sucker.]
* Also a hilarious story about old Westlake and John "bet-a-million" Gates, where Westlake tips Gates saying to sell Reading, and Gates goes long and makes $60,000. "'You told me to sell Reading; so I bought it! I've always made money coppering your tips, Westlake.' Old Westlake looked at the bluff Westerner and presently remarked admiringly, 'Gates, what a rich man I'd be if I had your brains!'"
* Another good story about the cartoonist W.A. Rogers, who accidentally traded hats with broker friend while that friend was trying to figure out whether there would be a war with Spain in the lead-up to 1898; this friend looked inside of this hat--which was really Rogers' hat--and saw the initials: WAR. He ended up making a ton of money selling stocks right before the Spanish-American War.
* Quote here from Baron Rothschild saying how easy it was to make money on the stock market: "I never buy at the bottom and I always sell too soon."
* Also a hilarious story here that could fit in the category of the "office furniture indicator" [a company with cheap office furniture tends to be better at managing costs]: this was an example where an investor saw one railroad president wasting page after page of very expensive engraved linen paper, while around the same time also watching another railroad president tearing up envelopes to re-use it as scratch paper. The investor sold the first railroad and went long the other.
Chapter XVII
* On having "ticker-sense": where you can see a lot of warning signals, but not any one signal is obvious enough to give you a definite reason for doing something (like sell or buy). And then sometimes your subconscious mind works on the problem. Livermore likens it to a medical education: you have long years of learning anatomy, physiology, etc., as well as a lot of clinical experience, and then you can spontaneously "see" a diagnosis. "After years at the game it becomes a habit to keep posted. He [the experienced trader] acts almost automatically."
* A good example of ticker-sense here using the bumper wheat crop of 1921, which happened during both a coal miner's strike and a railroad shopman's strike; he thought transport would interfere with the winter wheat crop, delaying it until it would arrive around the same time as the bumper spring wheat crop: this would mean a lot of wheat pouring into the market at one time, driving down the price. He tests the market (likening it to taking a patient's temperature or pulse), and sees the market very soft in response to his first sale. "Such being the case, what was the only thing to do? Of course, to sell a lot more."
* On paying attention to the "group tendency" of stocks: if there is buying one stock in a sector, the other names should be acting accordingly [note that this is even more true today in the world of ETFs and sector funds, in fact often there can be buying opportunities as a specific stock in a given sector is off "too much" because of group pressure, you can take advantage and buy that stock at lower prices than you'd normally get].
* A good expression on playing the probabilities. "An old broker once said to me: 'If I am walking along a railroad track and I see a train coming toward me at sixty miles an hour, do I keep walking on the ties? Friend, I side-step. And I do not even pat myself on the back for being so wise and prudent.'"
* Likewise a good anecdote about the Guiana Gold Mining Company: there was insider selling from a group that had bought into the name. "The tape plainly told me that there was something wrong--something that kept insiders from buying it--insiders who knew exactly why they should not buy their own stock in a bull market." [Insider buying, and/or a lack of insider buying when there should be, these are important tells.] Then news came out that the company had struck "barren rock instead of rich ore" and the news reached Livermore before the public [note that this is nearly a century before Reg FD] but Livermore had already sold: "I am a trader and therefore look for one sign: inside buying. There wasn't any. I didn't have to know why insiders did not think enough of their own stock to buy it on the decline."
* "I am not telling you this to moralise on the public's losses through their buying of Guiana or on my profit through my selling of it, but to emphasise how important the study of group-behaviourism is and how its lessons are disregarded by inadequately equipped traders, big and little."
* An almost miraculous story here about how he lost a million dollars trying to short cotton and covered at the wrong time but then re-shorted it and made most of the money back shortly thereafter: here the takeaway is how it takes a lot of experience and courage to be able to go back to the same stock or commodity after huge losses and make a play like that. Livermore doesn't take it personally, he looks at these trades and actions as discrete events, etc. Very, very interesting.
Chapter XVIII
* "History repeats itself all the time in Wall Street."
* On the Tropical Trading Company, where the president and his friends would frequently manipulate the stock to exploit outside investors. "Many times they have encouraged the bears to sell TT short and then have proceeded to squeeze them with business-like thoroughness. There was no more vindictiveness about the process than is felt by a hydraulic press--or no more squeamishness, either." [Recognize that some companies literally have zero problem fucking over their shareholders: know this and use that knowledge either to protect yourself or to use it against them.]
* "Why do the room traders, who have suffered so often from the loaded dice of the insiders, continue to go up against the game?"
* He also thinks about what the guys on the other side of his trade are thinking... "I went back to my fishing but I kept thinking of what the insiders in Tropical Trading were trying to do."
* Livermore is short the stock, and the company tries to squeeze it by floating all kinds of rumors, but because he's already short 30,000 shares he doesn't want to sell and go short even more, so he sold short another company that happened to also own a large block of Tropical Trading. [!!! Savvy!] He broke the stock badly with this selling and then everyone could see that TT was being manipulated.
Chapter XIX
* This is a chapter on manipulation; "Most of the tricks, devices and expedients of bygone days are obsolete and futile; or illegal and impracticable... The story--even the accurately detailed story--of what Daniel Drew or Jacob Little or Jay Gould could do fifty or seventy-five years ago is scarcely worth listening to." The author likens it to a cadet at West Point studying archery.
* "Weapons change, but strategy remains strategy." On understanding the psychology of speculators, not necessarily the specific methods they use. Quoting Thomas F. Woodlock: "The principles of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes that they have made in the past."
* Discussion of corners, and how all the big operators of half a century ago [thus this would be the 1860s] all wanted to work a corner. It was a status thing.
* "He that sells what isn't hisn
Must buy it back or go to prisn"
* On Addison G Jerome and watering stock, he was squeezed for millions in 1863 by Henry Keep, known as "William the Silent" during the Old Southern corner.
* On Jay Gould ("his touch is death!") "head and shoulders above all other manipulators past and present." "adapting himself to new conditions," he "varied his methods of attack and defense..." "He early saw that the big money was in owning the railroads instead of rigging their securities on the floor of the Stock Exchange."
* "Vision without money means heartaches; with money, it means achievement; and that means power; and that means money; and that means achievement; and so on, over and over and over."
* Finally on an old technique of shylocking, cliques would lock up money by borrowing it and then getting a certified check: this would reduce the amount of money available to Stock Exchange borrowers. [It was an effective form of manipulation, likely because there was much more margin debt used throughout the system back then, not to mention there was no Fed Funds window that banks and brokers could go to to get overnight funds.]
Chapter XX
* It's interesting here to see how Livermore regrets not paying closer attention to the great manipulators from the generations before him; when he was young he didn't pay attention. [This was true for me too when I started investing, and it's true of most investors: most people do not know their history, and thus they go to gunfights with dull butter knives.]
* On the various exploits of James R. Keene, who famously manipulated U.S. Steel in 1901, and then also worked Amalgamated Copper.
* "Usually the object of manipulation is to develop marketability--that is, the ability to dispose of fair-sized blocks at some price at any time. Of course a pool, by reason of a reversal of general market conditions, may find itself unable to sell except at a sacrifice too great to be pleasing. They then may decide to employ a professional, believing that his skill and experience will enable him to conduct an orderly retreat instead of suffering an appalling rout."
* Also an interesting mention here of Jay Gould trying to get control of Western Union. Gould sent Washington E. Connor to the floor of the stock exchange to bid for it, but traders thought it was too transparent a trick: they thought there was no way Gould would use this guy, so they sold all the stock he wanted to buy. Livermore asks "Was that manipulation? I think I can only answer that by saying 'No; and yes!'"
* "It is well to remember a rule of manipulation, a rule that Keene and his able predecessors well knew. It is this: Stocks are manipulated to the highest point possible and then sold to the public on the way down."
* Now a discussion of some of the mechanics of stock manipulation, including the [rather circular] statement that "the first step in a bull movement in a stock is to advertise the fact that there is a bull movement on." On using the tape and tactical buying to move the stock to make it "look bullish": making the stock active, which then drives "a synchronous demand for explanations" [among traders, in the financial media] and then the "reasons" end up in stock market publications, they "supply themselves without the slightest aid from me."
* Using floor traders both to conceal the source of the manipulation and also to spread tips. On giving away call options (struck at higher prices) to rumor-spreaders and tip-distributors, this would encourage them to try to move the stock; also the operator would also himself be moving the stock up as well with his own buying alongside them; also on the operator holding a smallish short position all through to up move, covering the short when there's weakness in the following days; all of this gives the impression that there is "true demand" for the stock, even after it "digests" a bit move up. "That tends to check both reckless short selling by the professionals and liquidation by frightened holders--which is the selling you usually see when a stock gets weaker and weaker, which in turn is what a stock does when it is not supported. These covering purchases of mine constitute what I call the stabilising process." He calls the short position "riskless buying power." [Wow. Fascinating!]
* "The principal marketing of the stock, as you know, is done on the way down. It is perfectly astonishing how much stock a man can get rid of on a decline."
Chapter XXI
* He gives another example of manipulating Imperial Steel up 30 points while only accumulating 7,000 shares, and developing a market "that would absorb almost any amount of stock." It was a "gentlemanly" stock, never behaving sensationally. He's approached by a syndicate member representing control of 70% of the stock. "They wanted me to dispose of their holdings at better prices than they thought they would obtain if they try to sell in the open market."
* Fascinating how it goes about doing this deal, first of all he makes sure it's a real company, with really good prospects; then he asks for his fee: in call options for 100k shares, struck from 70 to 100, thus this is a sort of contingency fee at prices where management wouldn't have been able to sell without his help; then he made the buying syndicate put their 70% of the company in a trust so that Livermore wouldn't end up be a dumping ground for the big holders. [Very, very savvy.]
* Making "little bull flurries" in the stock you are manipulating, as "excellent advertising." "...whatever demand was created by those spurts I supplied."
* "At one hundred dollars a share everybody wanted to buy Imperial Steel. Why not? Everybody now knew it was a good stock; that it had been and still was a bargain. The proof was the rise." ... "It had been, if I do say so myself, A beautiful piece of manipulation, strictly legitimate and deservedly successful." [Absolutely wild.]
* He gives another example of a pool hiring him to move Petroleum Products, but the market conditions wouldn't allow it, it was too bearish a market and the guy who hired him couldn't see that fact.
Chapter XXII
* Now during the WWI stock market boom and the "boy banker" type, doing consolidations; there's an example here of three well-known stove companies that were combined into Consolidated Stove. [A great example here of history rhyming with examples of young bankers making their name recommending industry rollups.]
* "One trouble was that the stove business was so prosperous that all three companies were actually earning dividends on their common stock for the first time in their history. Their principal stockholders did not wish to part with the control. There was a good market for their stocks on the Curb; and they had sold as much as they cared to part with and they were content with things as they were. Their individual capitalisation was too small to justify big market movements, and that is where Jim Barnes' firm came in. It pointed out that the consolidated company must be big enough to list on the stock exchange, where the new shares could be made more valuable than the old ones. It is an old device in Wall Street--to change the colour of the certificates in order to make them more valuable. Say a stock ceases to be easily vendible at par. Well, sometimes by quadrupling the stock you may make the new shares sell at 30 or 35. this is equivalent to 120 or 140 for the old stock--a figure it never could have reached."
* The guys doing this deal did it too late in a bull market to get it off, plus they underallocated stock to the public and the syndicate took a smaller short position than it normally would have to support the stock [this is actually how investment banks run IPOs today, with an outstanding short position to support liquidity when the stock begins trading]. Then they approach Livermore to sell 100,000 shares to get enough to pay off the bank that underwrote the deal.
* "I discovered for one thing that there was too much stock held by too few people" and these people were experienced Wall Street people who in any kind of bullish manipulated conditions would would be selling, "and not in homeopathic doses either." "He had given me a waterlogged stock to sell in a bull market that was about to breathe its last."
* He goes to the holders of a block of 100,000 shares and encourages them to hold off selling and then in return for helping them "make a market for all of us to unload on."
* He meets with the three largest holders and organizes a syndicate. "If everything goes well you chaps will get rid of your dead pet and the syndicate will make some money." It turns out the operation was easier than expected because the stock started going up before Livermore even went to work. And then word got out that Livermore was involved, other rumors got spread. Basically he didn't even have to operate, just the rumor that he was going to operate made the stock move higher.
* It turns out one of the original syndicate members, Joshua Wolf, was the one doing the buying before Livermore got to work on it. He made himself more long and this was what was driving the stock higher! He comes to Livermore in a rage. "They forgot that their stock had been unsalable in bulk when they formed the syndicate."
* "...a speculator who loses his temper is a goner."
* Later his wife goes to a dressmaker who tells her she hopes that Livermore will operate on Consolidated Stove soon: "'We have some that we bought because we were told he was going to put it up, and we'd always heard that he was very successful in all his deals.' I tell you it isn't pleasant to think that innocent people may have lost money following a tip of that sort. Perhaps you understand why I never give any myself. That dressmaker made me feel that in the matter of grievances I had a real one against Wolff."
Chapter XXIII
* Interesting discussion here about how the stock market has gotten more complicated: back in 1901 there were only 275 stocks on the stock exchange, now there's 900. "Almost every industry in the world is represented. It requires more time and more work to keep posted and to that extent stock speculation has become much more difficult for those who operate intelligently." [Remember obviously this was written in the 1920s, now obviously there are thousands of stocks just in the USA alone.]
* The speculator's deadly enemies are: ignorance, greed, fear and hope... There remains another source of loss and that is, deliberate misinformation as distinguished from straight tips. And because it is apt to come to a stock trader variously disguised and camouflaged, it is the more insidious and dangerous."
* "Wholesale dealers in securities, manipulators, pools and individuals resort to various devices to aid them in disposing of their surplus holdings at the best possible prices. The circulation of bullish items by the newspapers and the tickers is the most pernicious of all."
* "It is therefore well to remember that manipulation of some sort enters into practically all advances in individual stocks and that such advances are engineered by insiders with one object in view and one only and that is to sell at the best profit possible... Naturally, the manipulators 'explain' the advance in a way calculated to facilitate distribution. I am firmly convinced that the public's losses would be greatly reduced if no anonymous statements of a bullish nature were allowed to be printed... The public loses many millions of dollars every year by accepting such statements as semi-official and therefore trustworthy."
* And then the author plays out this whole pattern: first insider buying, then circulating tips, then a turn in the business, then the perception of it by the public, then continued moves upward in the stock, then a turn for the worse in the business, then the silence of management ("Just as they bought without any flourish of trumpets when the company's business turn for the better, they now silently sell."), and then the inevitable round trip the other way in the stock price.
* "The public ought to grasp firmly this one point: that the real reason for a protracted decline is never bear raiding. When a stock keeps on going down you can bet there is something wrong with it, either with the market for it or with the company. If the decline were unjustified the stock would soon sell below its real value and that would bring in buying that would check the decline." [In theory this is true but in practice lots of time stocks go down and people think something bad is happening, and that's are afraid to buy and thus you get sell-offs that "make no sense" all the time.]
* An example of the New Haven, a railroad company that sold at 255 In 1902 and then went to 12, not because of stock operators, but because the company became completely mismanaged; the "insiders knew it and the public did not."
* "The public might profitably consider the disadvantages under which it labours when it tries to make money buying and selling the stock of a company concerning whose affairs only a few men are in position to know the whole truth." [One could restate the wisdom of this tortured sentence by just saying know that you don't know, and know that you're up against insiders who know better than you.]
* "The stocks which have had the worst breaks in the past 20 years did not decline on bear raiding. But the easy acceptance of that form of explanation has been responsible for losses by the public amounting to millions upon millions of dollars. It has kept people from selling who did not like the way his stock was acting and would have liquidated if they had not expected the price to go right back after the bears stopped their raiding."
* "In a bull market and particularly in booms the public at first makes money which it later loses simply by overstaying the bull market. This talk of 'bear raids' helps them to overstay. The public should beware of explanations that explain only what unnamed insiders wish the public to believe."
Chapter XXIV
* "The public always wants to be told. That is what makes tip-giving and tip-taking universal practices." [Do not let others do your thinking for you! Don't "be told" ever. Don't ever give away your power or agency like that.]
* Description here of how an insider could go to a broker with large retail following, offer both calls and puts to "collar" a block of stock and then sell it above a certain price, and then the house will move the merchandise out to retail, doing this transaction totally safely because there's a put option; and then the broker makes even more money on the broker commissions too.
* Then the author goes through various practices that he thinks should be made illegal in the stock market, like having listings for stocks that are available to the public on a partial payment plan, various splitting techniques of shares to get a lower price but a higher overall value. "Why does not the public ask why the stock is made easy to buy?"
* "If a law were passed that would punish bull liars as the law now punishes bear liars, I believe the public would save millions." [This is another great point: most financial commentary is bullish, and it can be at least as costly to retail investors if they take it at face value.]
To Read:
Edwin Lefevre: Wall Street Stories
Edwin Lefevre: Sampson Rock of Wall Street
Edwin Lefevre: The Golden Flood
Edwin Lefevre: To the Last Penny
Edwin Lefevre: H.R. [Hendrik Rutgers]
Dickson G. Watts: Speculation as a Fine Art
John Steele Gordon: The Scarlet Woman of Wall Street
Drawings of W.A. Rogers