3 Big Investing Lessons from the World’s Greatest Stock Market Speculator

I have been reading Edwin Lefèvre Reminiscences of a Stock Operator over the past few days.

It’s a brilliant first-person account of the career of “Lawrence Livingston”, who is a slightly fictionalized version of Jesse Livermore, one of the greatest stock speculators of all times.

Livingston, just out of school, goes to work as a quotation-board boy in a stock-brokerage office. This was sometime in the 1890s, one hundred years before the advent of real-time internet stock quotes. Stock quotes were written on chalkboards.

He develops a feel for the stock market and, in time, begins to speculate. He’s not an investor — he’s a speculator. He gambles in stocks. And he does a great job at it, building a million-dollar fortune during his twenties.

Then he loses everything. In fact, Livingston builds — and loses — several million-dollar fortunes between the first twenty years of 1900s.

Reminiscences of a Stock Operator is an entertaining and educational book on Livingston’s career (read Livermore’s). It contains great many lessons that are also valid for investors.

Here are three such lessons straight out of the book that I believe would serve you well. The emphasis is mine.

Lesson #1: It’s More about Sitting than Buying

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.

…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.

Lesson #2: It’s Foolish to Seek Stock Tips

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 tip-seeker is not really after good tips, but after any tip. If it makes good, fine! If it doesn’t, better luck with the next.

It has always seemed to me the height of damfoolishness to trade on tips.

Tips are just that. Tips. Following blindly is setting you up for epic ruin. First of all you have no idea what position that tipper is in. He may not even hold the stock he is recommending. Even if he is, you have no idea when he will unload his lot. Suppose he is selling his stock to you. Then you would be forced to dump it to someone else for a higher price.

Lesson #3: It Pays to Study Human Behaviour

There is profit in studying the human factors — the ease with which human beings believe what it pleases them to believe; and how they allow themselves — indeed, urge themselves — to be influenced by their cupidity or by the dollar-cost of the average man’s carelessness. Fear and hope remain the same; therefore the study of the psychology of speculators is as valuable as it ever was.

…nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature.

Bonus Lesson: Learn How to Lose
Humility is one of the greatest assets for any stock market investor. Knowing that you don’t know a lot of things, knowing that you will make a lot of mistakes, and knowing that you will often be crucified for your mistakes…and accepting these as part of the game that must still be played, is what creates a successful investor.

Livermore (speaking through Livingston in this book) made a huge number of mistakes in his career that cost him a lot of money (and his life). These losses, he admits, were painful but educational –

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.

After going broke three times in less than two years, Livermore has this advice – “Being broke is a very efficient educational agency.”

He says that you learn little from your winners because they often take care of themselves. It’s the losers that will teach you lessons to last a lifetime. And as long as you don’t make the same mistake twice, you always have the opportunity to trade/invest another day.

Overall, Reminiscences of a Stock Operator is a great book if you wish to succeed in speculation in the stock market (before ruining yourself, like Livermore did several times).

It’s also a great book if, as an investor, you wish to know what NOT to do in the stock market.