The current environment reminded me of Reminiscences of a Stock Operator, the greatest trading book ever written. I can’t remember who said words to this effect, but to determine the quality of a secondary analysis/critique, compare it to how much one gets from simply reading the original. In the case of Reminiscences, I fear my entries will add little. Nevertheless, after re-reading the book, I’ve decided to post my own notes.
This is the edition I’m basing the page numbers on:
Chapter 1, Page 11
“Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore. It doesn’t go into explanations. I didn’t ask the tape why when I was 14, and I don’t ask it today at 40. The reason for what a certain stock does today may not be known for two or three days, or weeks, or months. But what the dickens does that matter? Your business with the tape is now – not tomorrow.”
This passage confused me for years because it seems illogical. In order to have a position, don’t you need to disagree with the market? If so, then why are you using the market’s price action to inform your trading views? Market price action “should” only affect your decisions insofar as loss management. Livermore didn’t elaborate, and for what it’s worth, I came to view this in the context of price action which goes contrary to commonly accepted wisdom. Hence, I’m particularly sensitive when price action is contrary to my position AND is illogical not just from my perspective but also from common “wisdom.” The key question then is how much of a divergence is needed to qualify as being noteworthy vis a vis noise. That is more art than science.
Chapter 1, Page 12 and Page 13
“I wasn’t interested in doubling my money, but in his saying that Burlington was going up.
“That’s all the fun there is – being right by using your head.”
I couldn’t agree more. Trading is such a fascinating exercise in applied sociology, psychology, and economics. Trading to get rich is not a lasting source of motivation except for the preternaturally greedy.
Chapter 1, Page 13
“If I was right when I tested my convictions with 10 shares, I would be ten times more right if I traded in a hundred shares.”
I don’t agree with this. Position sizing is based on portfolio loss management and one’s level of conviction. For example, if my conviction is twice as strong for one position versus another and yet my position is only 50% bigger, I’m not 1.5 times more right in one position than another (assuming both make money). If anything, assuming there was no portfolio risk constraints, it means I was a dumbass for not having an even bigger position. Furthermore, he doesn’t mention the volatility and asymmetry in each position.
Chapter 1, Page 13 and Chapter 3 Page 36-37
“I didn’t have a following. I kept my business to myself. It was a one-man business, anyhow. It was my head, wasn’t it? Prices either were going the way I doped them out, without any help from friends or partners, or they were going the other way, and nobody could stop them out of kindness to me.”
“A man must believe in himself and his judgment if he expects to make a living at this game. That is why I don’t believe in tips. If I buy stocks on Smith’s tip I must sell those same stocks on Smith’s tip. I am depending on him.”
“No, sir, nobody can make big money on what someone else tells him to do. I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgment.”
This is one of those quotes that I’m naturally sympathetic to because I’m very introverted and as my wife would say, my ego could use deflating more frequently. However, I do strongly believe in what Livermore said. If you rely on another person’s idea/advice, you will never have the same level of conviction. Without that conviction, you will never have as big of a position nor will you be able to weather significant retracements. There is a difference between KNOWING in your bones versus just kinda sorta understanding in your head.
Chapter 2, Page 21
“In fact, I always made money when I was sure I was right before I began. 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. There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily – or sufficient knowledge to make his play an intelligent play.”
This is in line with what Buffett said about only being allowed to make 20 investments in your life. Traders need to be very selective when it comes to the big positions. Sometimes I’ll have little tourist positions here and there just to keep me involved because otherwise I run the risk of not logging into my bloomberg or trading platform for weeks/months. Most of the time, I don’t have a strong opinion about things, and my positions mostly reflect that. However, I do occasionally goof (e.g. early 2017) and doing so is just another reminder how dangerous I can be to my own financial well-being.
Chapter 2, Page 22
“The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they MUST TAKE HOME SOME MONEY EVERY DAY (my emphasis), as though they were working for regular wages.”
When I first started in Citi NYK STIRT, I remember the Professor saying that to make $5 mm/year, all he had to do was make $20K/day. Doesn’t that sound eminently reasonable? At the time, I thought, gee, that makes sense and 20K/day seems pretty easy… OMG, how I would’ve slapped my younger self silly today. If you are running a market-making book that naturally makes around $20k/day from customer flow, then yes, it is indeed that easy. Sit there, quote the customers, and basically work a glorified, overpaid 8 am to 4 pm job. However, if you are a true position taker that has a time frame longer than intraday, thinking in terms of 20K/day is the worst thing you can do to yourself. Medium-long-term position taking is feast or famine. Sometimes there are a lot of opportunities, and other times not.
Chapter 2, Page 22
“A stock operator has to fight a lot of expensive enemies within himself.”
So true… The difficult part about trading isn’t analyzing the markets. There’s a reason why so few strategists/economists become successful traders/investors. The skill sets are different. More than anything else, being a successful trader involves knowing yourself inside out and acting on that knowledge to counter your naturally destructive tendencies.
Chapter 2, Page 23
“At all events, what was a perfect system for trading in bucket shops didn’t work in Fullerton’s office… When I surely would have made $3K on the same transaction in a bucket shop I might not make a cent in a stock exchange house. Of course, I have taken an extreme case, but the fact remains that 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 realize it.”
It is incredibly important to understand the environment one trades in. Market structure evolves over time, and it’s pointless to complain about how the market is more “difficult” today. It’s just different. It’s only more difficult if you insist on fitting a square peg into a round hole. To take an old school macro example, it used to be fashionable and profitable to fight central bank intervention. If you read Soros’ books and/or Market Wizards, there are countless tales of intrepid speculators fighting against a distorted price set by central banks. These are the same type of people who were convinced QE was going to result in massively higher long-term yields due to inflation and inflation expectations going up. They are also the same people who lament the lack of “honest” price discovery due to central bank manipulation. Seriously? Cry me a river. If you’re dumb and/or inflexible enough to not realize the market has changed and you insist on doing things the old way, then that’s your problem. Of course, eventually, the market environment might change yet again and fighting the central bank could become very profitable (btw, to use a reasonably recent example, selling eurchf from 1.40 all the way down to 1.20 would’ve worked really well despite the SNB’s repeated attempts to put a floor.)
Chapter 2, Page 24-25
“There I was, a mere kid, who had never before been away from home, flat broke; but I knew there wasn’t anything wrong with me; only with my play. I don’t know whether I make myself plain, but I never lose my temper over the stock market. I never argue with the tape. Getting sore at the market doesn’t get you anywhere.”
As a 20 year old who thought he would be fired 3 months into his trading career, yeah… My copy of Reminiscences saw a lot of use during my first few years of trading. The only reason my copy is still in good shape is I was petrified about damaging it and having to spend money to buy another one. Unlike Livermore, I definitely doubted myself, but as failure was not an option, I had to figure out how to trade better. Between desperation, luck, the goodwill of Rabbi, and a lot of introspection, it all worked out.
This passage demonstrates what we should all work towards. Learn from the lessons that trading hands out, but do not internalize failure.
Chapter 2, Page 25
“I’m not sure yet I can beat the game in this office, but I am sure I can take money out of the bucket shops. I know that game. I have a notion that I know just where I went wrong here.”
Wow! No pride! He’s willing to go back to the “minor-leagues,” in order to rebuild his stake and try again. Unlike others who would’ve taken out credit line after credit line, he was able to stop the bleeding.
Chapter 3, Page 36
“I have heard of people who amuse themselves conducting imaginary operations in the stock market to prove with imaginary dollars how right they are.”
“I can snap the stem of a wine-glass at twenty paces… That’s all very well, but can you snap the stem of the wineglass while the wineglass is pointing a loaded pistol straight at your heart?”
Apart from dealing with back and middle office, nothing irritated me more at Citi than listening to people lament about how they knew xyz was going to happen and how they didn’t have a position because of a random stupid reason. Stay away from the should’ve, would’ve, could’ve types.
Chapter 3, Page 36
“My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat.”
This is where you see some big divergences between Livermore versus value-type investors. The common view amongst value investors is nobody rings a bell at the bottom or the top and hence you shouldn’t try to time the markets. Because of their longer-time-frame, they are willing to buy on a scale even as prices drop. Livermore, on the other hand, advocates capturing short-term momentum in order to build a cushion for one’s positions. In later chapters, he talks about waiting for breakouts.
Personally, I do both. Given the choice, I prefer the Livermore method. It’s nice to be in the money right away and to not have to sit through short-term losses. However, I know I’m not a very good short-term trader, and hence if there’s a position that I really love, and the downside seems contained, I will put it on even before momentum has convincingly turned in my favor.
Chapter 3, Page 37
“I went broke several times, and that is never pleasant, but the way I lost money is the way everybody loses money who loses money in Wall Street. Speculation is a hard and trying business, and a speculator must be on the job all the time or he’ll soon have no job to be on.”
Complacency will break you. No ifs and/or buts. You are either getting better or you are getting worse.
Chapter 3, Page 38
“If somebody had told me my method would not work, I nevertheless would have tried it out to make sure for myself, for when I am wrong only one thing convinces me of it, and that is, to lose money.”
On the one hand, it’s admirable he doesn’t take other people’s word for it. After all, the vast majority of speculators lose money so why would you want to listen to people who don’t make money? However, as the old Russian proverb goes, learn to shave on someone else’s face. There is a balancing act. For the most part, I ignore what anybody says to me unless I respect the person’s intellect and/or track record.
Chapter 3, Page 42
“The ticker beat me by lagging so far behind the market. I was accustomed to regarding the tape as the best little friend I had because I bet according to what it told me. But this time, the tape double-crossed me. The divergence between the printed and the actual prices undid me. It was the sublimation of my previous unsuccess, the selfsame thing that had beaten me before. It seems so obvious now that tape reading is not enough, irrespective of the brokers’ execution, that I wonder why I didn’t then see both my trouble and the remedy for it.”
I didn’t quote the entire story as that would’ve taken a couple of pages, but to summarize, Livermore was making allowances for slippage between the last printed price on the ticker versus where he would execute. However, he still didn’t fully appreciate the difference between the stock exchange and the bucket shop and it cost him dearly. Sometimes when we think we’ve learned the lesson from our mistakes, we’ve really only learned it part way and are due for yet another smacking in order to make sure we really get the point.
Chapter 3, Page 43
“If I hadn’t made money some of the time I might have acquired market wisdom quicker. But I was making enough to enable me to live well. I liked friends and a good time. I was living down the Jersey Coast that summer, like hundreds of prosperous Wall Street men. My winnings were not quite enough to offset both my losses and my livings expenses.”
NO!!!! There aren’t that many things I completely disagree with, but this is a catastrophic mistake. To spend more than what one makes means eating into one’s capital (in Livermore’s parlance, margin). I don’t care how much one likes hanging out with friends, it is stupid to eat into one’s trading capital just in order to have a good time.
Chapter 3, Page 43
“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.”
To paraphrase G.I. Joe, framing the challenge accurately is most of the challenge. One of the things I love about Reminiscences is that Livermore doesn’t get bogged down in the weeds about the nitty gritty rationales, and instead he focuses on his emotional and intellectual mindset. It’s this focus on what’s truly important that makes the book as relevant today as it was in 1923.
Chapter 3, Page 43-44
“Early that fall I not only was cleaned out again but I was so sick of the game I could no longer beat that I decided to leave New York and try something else some other place. I had been trading since my 14th year. I had made my first thousand dollars when I was a kid of 15, and my first 10,000 before I was 21. I had made and lost a $10,000 stake more than once. In New York, I had made thousands and lost them. I got up to $50,000 and two days later that went. I had no other business and knew no other game. After several years I was back where I began. No–worse, for I had acquired habits and a style of living that required money; though that part didn’t bother me as much as being wrong so consistently.”
Having read Reminiscences before I started trading at Citi, I distinctly remembered this part and hence I was notoriously cheap for many years. Even when I was already making > 1mm/year, I was still eating corn flakes and chocolate milk for dinner on a regular basis. Instant noodles + one century egg was still common. 2 medium pizzas for 5 dinners was still wonderful. I was always paranoid that I would fail and hence I never wanted to spend unnecessarily. In order to trade well, money must not hold you hostage. If you spend freely, money becomes meaningful rather than a way of keeping score.
Trading Retrospectives & Endless Learning 
“You’re either getting better or worse.” – also has a parallel to Ricky Bobby’s “If you’re not first, you’re last!” from Talledega Nights. I guess Jesse has a bit more pedigree than than Ricky. Both I would say are true. Thanks for taking the time to write your thoughts, highlights many of the shortfalls in my own attempts at trading…
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