Reminiscences of a Stock Operator by Edwin Lefèvre

A short book review from an investing classic.

I enjoyed the turn of the century historical context, the booms and busts of the time and the different character of the investment management industry. For example, when Livermore was on holiday in Palm Beach Florida, he had to go into the physical trading houses to see the prices and even those were delayed because they had to be sent from NYC. Frequently he would return home early to NYC to get close to the stock exchange. I guess a similar dynamic still exists where high frequency trading firms need to get the quickest feed from the stock exchange to be profitable but for most investors market access is pretty seamless no matter where you are in the world.

There were numerous valuable insights about trading weaved through the story. Some of them were a little dated due to the structure of the market at the time but they were interesting nevertheless. For example, markets do not get cornered frequently today, but that was a common feature of trading in the late 1800s and it was interesting to hear how the operators went about managing them. They were smart but also ruthless and quite thuggish as they threw their weight around in the more.

Investment Emotions don’t change

Most of the insights stand the test of time because they are focused on investment emotions and strategy. Technologically speaking, the world changes dramatically, but humans encounter the same emotions through the ages. Personally, I expect that personal mastery of my own state of mind is the path to greater trading success, so I digested as many of these insights as possible. I loved this passage (paraphrasing):

The weaknesses that all men are prone to are fatal to success in speculation. The weaknesses we may guard against in other ventures where they are not nearly so dangerous as they are in trading.

The speculators chief enemies are always boring from within.

When the market is going against you, you hope that every day will be the last and you end up losing more than if you had not listened to hope in the first place. You hope that things will be fine.

When the market goes your way, you become fearful that the next day will take your profit away, which gets you out too soon

The successful trader must fight these two deep-seated instincts. He must reverse his natural impulses

Instead of hoping, he must fear; instead of fearing he must hope

He must fear that a loss turns into a much bigger loss

He must hope that his profit may become a bigger profit.

Personal mastery of our natural weaknesses

I liked the way in which Livermore points out that trading brings our natural weaknesses to the surface. I frequently find myself having to face up to my weaknesses. As I face up to them it becomes clear that they have existed for years but have been left unattended because they did not seem to be a particularly big problem. In the high-stakes world of professional investment there is nowhere to hide. I am compelled to face these weaknesses head on.

Embrace Speculation Moniker

I am glad that Livermore always refers to investment trading as speculation. I strongly believe that no matter your time horizon or strategy, you are speculating on an inherently unknown future. We should embrace the speculation moniker, rather than run away from it.

Another major focus of mine is persistent improvement each day/ week/ month/ quarter, including cultivation of the ability to reflect on the past but not get caught up on it with the expectation that we should have been perfect. Alan Watts argues that life is a dance – we must practice to dance well. Similarly, trading is also an art-form – we must practice to sharpen our skill set. Paraphrasing from the book again:

The training of a trader is like a medical education.

He learns the theory, but they he must devote his life to the practice, learning to observe, classify and diagnose

If those are done reasonably, prognosis should be correct but there is always a risk of human error and unforeseen risks.

The more the doctor gains experience, the quicker he acts, becoming so responsive that people think he is acting instinctively and making judgment calls in every moment based on some innate skill. In reality, he has honed his craft, allowing quicker decision making

A few other useful insights:

  • There are few techniques more important than trading in sync with the primary market trend. Trade with the bulls during the bull and trade with the bears during the bear

  • Over-trading is a major cause of lost returns.

  • Trading too frequently can cause you to “lose your position”

  • “It was never my thinking that got me my big money. It was always my sitting”

  • The last 8th and the first 8th of the bull market are the most expensive

  • NEVER LISTEN TO TIPS

  • Not advisable to take a position all at once. Take partials to enter and exit and watch the markets reaction

All-in-all – I recommend the book if you enjoy trading. It probably has a little too much history for many, but I enjoyed that aspect. All the dates and annotation of the historical events were definitely overkill but I glossed over those areas when I got bored. It was wonderful to be reminded that the investment greats suffer from the same biases and weaknesses as we do. Perhaps the biggest reason I enjoy trading is because it places acute pressure on the need for personal mastery. I am happy to take on any tool or technique that places another step on that path. This book fit the bill for me.


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