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Wisdom of Jesse Livermore 7
"don't put the speculation cart before the horse that drives it!"

Adam Hamilton
January 2, 2004

Legendary speculator Jesse Livermore is surely one of the most fascinating characters in all of financial-market history.

About a century ago Jesse Livermore blossomed into one of the most celebrated speculators of all time. He was trading heavily in the early decades of the 1900s, a wondrous era to speculate in stocks. His renowned exploits are still viewed with great awe and reverence by today's elite speculators and his towering speculation wisdom will stand tall for ages to come.

If you are interested in more background information on Jesse Livermore and my reasons behind writing this series of essays on the man's awesome speculation wisdom, you may wish to skim the introduction of the first essay in this series.

Mr. Livermore's exploits were recorded in the greatest book on speculation of all time. Originally published in 1923, it is called "Reminiscences of a Stock Operator" and was written by a gifted financial journalist named Edwin Lefevre. Mr. Lefevre penned the account as if from the first-person perspective of a fictional trader named Larry Livingston. As Lefevre had spent weeks extensively interviewing Jesse Livermore, market historians are virtually unanimous in viewing Lefevre's classic book as a thinly-disguised biography of Livermore's trading life.

Today "Reminiscences of a Stock Operator" is fondly read with awe by speculators of all levels and abilities all around the globe. I have personally read the book many times and I try to re-read it at least once a year now. The speculation wisdom contained within these magical pages is just awesome and truly priceless for all speculators to digest.

If you are interested in speculation and you haven't read this book yet you owe it to yourself to buy it today at Amazon or Barnes & Noble. I can almost guarantee that it will forever change you as a speculator and help you soar to new heights of understanding of the game and achieving real-world success.

Jesse Livermore's words and experiences are so endearing and powerful because he presents himself as just another mere mortal like you and I, with hopes, fears, and frailties. He is brutally honest in critiquing his own evolution as a speculator and thoroughly explaining his own mistakes and the great wisdom they ultimately led to.

In this series of essays Jesse Livermore's wisdom is presented chronologically from the book. All the bold-faced passages below are his words directly out of Lefevre's book, while the following normal text is my own feeble thoughts and commentary attempting to pull Livermore's wisdom a century into the future to today. Before every quotation below, the chapter in "Reminiscences" from which it is pulled is noted so you can quickly find it and dig deeper by reading the valuable surrounding background context if you wish.

I hope and pray that you find Jesse Livermore's awesome wisdom as exciting and valuable as I have!

(Chapter V) ..."Without faith in his own judgment no man can go very far in this game. That is about all I have learned - to study general conditions, to take a position and stick to it. I can wait without a twinge of impatience."

Jesse Livermore, just like modern students of the art of speculation, studied the financial markets relentlessly. Good sound judgment is one of the most valuable attributes that a speculator can possess, and good judgment is always the product of real-world experience and time. Studying and trading the markets over time leads to this experience, and the actual speculation wins and losses with your own capital on the line ultimately begets judgment.

While judgment takes years to learn, and can continue to increase indefinitely until we die and cease studying and playing the markets, a speculator still must maintain faith in his own judgment in order to fully utilize this priceless wisdom. Once you make a judgment on a particular market, it can take a great deal of faith to hold the line and maintain your positions, to sit tight even though the markets haven't proven you right yet.

These judgments, keeping the faith in them, and the resulting ironclad patience necessary to wait for a trade to mature even in sometimes adverse market conditions really define contrarianism. Jesse Livermore was speaking as an elite master speculator here, able to make judgments based on his experiences, be confident in his judgments and the actual resulting trades, and finally to hold fast unflustered until the large swing that he was looking for finally came home to roost and blessed him with magnificent profits.

(Chapter V) ..."As a matter of fact, the only incidents that I remember without special effort are those that taught me something of definite value to me in my trading; something that added to my store of knowledge of the game - and of myself!"

The matchless Jesse Livermore closed the magnificent Chapter V of "Reminiscences" highlighting some of his most important lessons for us speculators of the future. Play the big swings only, because that is where the truly legendary profits are earned!

Mistakes and losses are just part of the game, but use them wisely and make darned sure that you seize the opportunity to learn from every loss that you suffer. After all, these very painful losses provide the priceless experience that will lead to stellar speculation instincts and judgment in the future!

And while reminiscing about betting big and losing it all three times in only two years, Livermore points out that "being broke is a very efficient educational agency." Losing it all in the early years is just par for this challenging course and happens to almost all speculators, so if you are new to the game and bet big and lose big, have no fear! Start saving and rebuilding your capital war chest right away, diligently learn from your mistakes, and get ready to jump right back into the game when the opportunity arises.

Jesse Livermore ultimately concludes this awesome chapter with the amazing words above, kind of a closely held secret amongst speculators. Speculation not only teaches us a great deal about the markets, but also about ourselves! Indeed, learning about our own internal workings and psychology is one of the greatest side benefits of speculation, a rare opportunity that only exists in challenging and stressful paths in life.

The markets and capital are emotional beasts, and they will relentlessly expose every single chink in your and my spiritual, mental, emotional, and psychological armor. As the markets obstinately probe our own individual weaknesses through our own trades though, we become aware of our own unique failings and are gradually able to overcome them.

While all speculators face common adversities, there are little challenges unique to me and also other ones unique to you. The markets ultimately expose all of these individual weaknesses and failings eventually and force us to deal with them and our own fragile emotions.

After many years or decades of speculating, a speculator already knows most of his or her unique weaknesses and has learned to ignore them, compensate for them, or totally overcome them. If you choose the hard path of a speculator, then before your journey ends you will know vastly more about yourself than when you started. This is truly a great and worthy reward by any standard.

(Chapter VI) ..."You may remember the story I told you about that time when I was short thirty-five-hundred Sugar in the Cosmopolitan and I had a hunch something was wrong and I'd better close the trade? Well, I have often had that curious feeling. As a rule, I yield to it. But at times I have pooh-poohed the idea and have told myself that it was simply asinine to follow any of these sudden blind impulses to reverse my position. I have ascribed my hunch to a state of nerves resulting from too many cigars or insufficient sleep or a torpid liver or something of that kind. When I have argued myself into disregarding my impulse and have stood pat I have always had cause to regret it."

Jesse Livermore is talking about that almost magical quality of intuition here. You have seen all the statistics about our marvelous brains! They are fearfully and wonderfully created, each more powerful than supercomputers with more internal connections than exist in the entire telecommunications networks of our whole planet! Our brains constantly assimilate and process vast amounts of raw data and it doesn't all come back to the surface immediately.

But sometimes, we get a nagging feeling and a glimmer or hint of some crucial piece of information that will most probably affect one of our open trades. Livermore said that we should run with these curious feelings or hunches.

I suspect that this precious speculators' intuition arises when our brains are processing information to such a parallel and non-related degree that we just can't fully grasp the full reasoning behind a nagging conclusion. So, our brains flash us a tantalizing inkling that something is up and we ought to heed it, sometimes by closing our relevant position if necessary.

Now heeding hunches and being right and sitting tight are certainly not mutually exclusive, as might appear at first glance! There is indeed a fine line between acting on a solid hunch and being flighty, but I suspect this razor's edge is dipped in emotion. A hunch is intellectual and emotionally neutral, while any idea even remotely tainted with greed or fear is probably merely emotional and shouldn't stop a speculator from sitting tight through challenging market conditions.

For example, if you get a nagging feeling that something isn't right on one of your trades, but you can't place it, you need to farther analyze this hunch. If your hunch is completely devoid of emotion, you probably ought to heed it and get out of potential harm's way. Losing capital is much worse than missing an opportunity, since opportunities are like trains in the markets, they are always coming and going and always will. Missing one is no big deal since you can always catch the next!

But if your feeling is tinged with greed or fear, it is probably not a righteous subconscious hunch. For example, if you are scared about losing money, fearful of not making enough, or greedily expecting to retire and buy a private island from your projected million-to-one win on your next trade, then you probably ought to disregard it. Our own internal emotions springing from our mortal hearts can be our own worst enemies as speculators.

So if you find yourself greedy or frightened, sit tight and fight the death grip of emotions on your heart! But, if an uneasy feeling arises about a position you are holding that is totally emotionally neutral, then it is prudent to close your position and sit back until your subconscious brain can finally relay the data and logic underneath the hunch in such a fashion that your conscious mind can understand the subtle peril at hand.

This priceless intuition, interestingly enough, goes hand-in-hand with judgment and can only be obtained as well through the very same real-world study, speculation, and experience. The more time that you spend in the markets, the sharper that your intuition will become and the greater of an ally it will be for you.

A little later in his fascinating narrative Jesse Livermore wisely points out, "it isn't a hunch but the subconscious mind, which is the creative mind, at work. That is the mind which makes artists do things without their knowing how they came to do them. Perhaps with me it was the cumulative effect of a lot of little things individually insignificant but collectively powerful."

(Chapter VI) ..."I can always give up trading to play, unless of course it is an exceptionally active market in which my commitments are rather heavy."

Since speculation is so intellectually challenging and emotionally draining, Jesse Livermore points out that leisure time is absolutely crucial. All speculators need a break from the game, and leisure time is totally necessary for us to relax and unwind. It doesn't really matter what type of leisure that you fancy, just as long as that activity allows you to totally disconnect from the markets and your trades and mentally and emotionally decompress.

Personally, I truly savor reading great nonfiction and fiction books, both historical and contemporary. I enjoy the adrenaline rush of seeing great action movies during this winter season, and the fast-paced thrill of mercilessly pounding the rough single-track trails on my trusty carbon-fiber mountain-bike steed in the summers. Life is chock full of so many great wonders to enjoy!

I have speculator friends that escape via golf, in hiking through the mountains, in flying airplanes, in sailing, in traveling and exploring, in all kinds of neat things. I even know three separate fellows who run their own private hobby gold mines for fun, chiseling rock by hand when they aren't trading! It doesn't matter what kind of leisure you prefer, just that you force yourself to take fun downtime, "play" time as Livermore called it, away from the perpetual stress of the markets.

As an added bonus, leisure time grants our subconscious minds excellent quality time to chew on current market conditions without us consciously badgering and nagging and can lead to great insights and intuition. How many times have you been taking a steaming hot shower after a morning workout, or coming home from a fun outing, when all of a sudden, out of the blue, bam, a fantastic speculation idea emerges from the rested subconscious that you are just going to have to pursue when you return to the markets!

(Chapter VI) ..."The bull forces were at work, and the public never is independently responsive to news. You see that all the time. If there is a solid bull foundation, for instance, whether or not what the papers call bull manipulation is going on at the same time, certain news items fail to have the effect they would have if the Street was bearish. It is all in the state of sentiment at the time."

Boy, if this was true in Jesse Livermore's day, imagine how much more so it is today in the frenetic Information Age! News alone is not all that important, it is only when news is filtered through the currently prevailing sentiment that it will have a material impact on the markets. If sentiment is bullish then bad news is ignored, and if sentiment is bearish then good news is disregarded. Sentiment is king for short-term trading!

In this quotation's fascinating original context, Livermore is talking about the day that the news of the awful great San Francisco earthquake of 1906 arrived on Wall Street in New York. Our hero was short 5,000 shares of the Union Pacific railroad on a hunch before the earthquake hit, a perfect trade, but Livermore noted that the stock markets were only down a couple percent as the shocking news hit.

Livermore's massive short position was fundamentally correct, as the railroad damage had probably been catastrophic and hence rotten news for Union Pacific, but since Wall Street was not in the mood for bad news at the moment the markets initially ignored the horrible tidings. Prices even recovered before the trading day ended. Jesse Livermore said, "The blow had fallen, but my stock hadn't." One of Livermore's friends told him that the tape didn't lie, to which Jesse brilliantly replied that neither does it "always tell the truth on the instant."

UP had suffered tremendous damage that would eat up future earnings and dividends but the Street was stuck in a bullish sentiment phase and wasn't ready to digest the ill news yet. Naturally Livermore knew that he was right so he sat tight, and after a couple of days the real damage reports started trickling in and the railroad selloff started. Livermore ended up pocketing $250k on this single trade, the equivalent of at least $5m in today's inflated dollars, in his biggest win to that point in his life!

Just like the Great 1906 San Francisco Quake, all news is first filtered through the prevailing market sentiment of the moment, and people specifically and the Street in general are often shortsighted and slow to change in the face of new news that threatens a specific fashionable worldview. Often times market prices lag real-world events by as long as it takes for sentiment to shift to reflect the new realities. Sometimes this only takes days, but other times the shifts drag out for weeks or longer.

So if you have a position, and you are aware of some major undisputable fundamental change underlying it, have no fear if the markets don't react instantly to the news. If the breaking news flies in the face of the prevailing bullishness or bearishness at the moment, it can take some time for the markets to digest the new fundamentals and the prices to move accordingly. Livermore's incredible railroad short through the 1906 San Francisco earthquake magnificently illustrates this important lesson.

(Chapter VI) ..."From then on I began to think of basic conditions instead of individual stocks. I promoted myself to a higher grade in the hard school of speculation. It was a long and difficult step to take."

The legendary Jesse Livermore closed out this sixth chapter in his wonderful treatise on the art of speculation by concluding that it is the general market conditions that speculators must diligently strive to understand first, not individual stocks. Individual stocks are certainly still important, but only when considered within the overriding prevailing strategic background context of existing market conditions and sentiment at the time.

For example, when the NASDAQ sells off hard, pretty much all of the technology stocks today fall with it regardless of their individual fundamentals. During our awesome gold-stock rally of 2003, almost all gold stocks had great years, the rising golden tide lifted almost all of the boats regardless of the individual merits of specific gold-mining companies. You can know everything that there is to know about individual companies but still make the wrong bets at the wrong times if you cannot correctly perceive and handicap the markets' currently prevailing "basic conditions."

If you want to play tech stocks, before you dump the considerable time into culling out your plays of choice, make sure that you know whether or not the general markets ought to be heading higher or lower in the months ahead based on historical probabilities. Even if you buy the best technology company on earth right before a major NASDAQ decline odds are that you are going to lose a lot of money on that trade!

As I was hard at work on the just-published shiny new January issue of our acclaimed Zeal Intelligence newsletter for our dear subscribers this week, which details fundamental analysis on six of the most promising elite unhedged blue-chip gold and silver stocks for the next major precious-metals upleg in 2004, I pondered this great Livermore truth a great deal.

No matter how much time and painstaking effort that we spend ferreting out the best blue-chip gold and silver speculations around, whether we will win or lose on these plays totally depends on the prevailing market conditions and sentiment at the time.

If we buy near the cusp of a short-term bull-market interim high right before a major correction, then we will lose money over the short-term no matter how good our companies are. But if we can discern the technical signs and summon the patience to wait to buy near the next interim lows after a major correction, our potential profits could be immense!

Individual-stock analysis is certainly important, but only within the crucial overarching strategic context of general market conditions, the very drivers of the coveted big swings that Jesse Livermore so diligently stalked. Don't make the dangerous mistake of putting the speculation cart before the horse that drives it!

Well, unfortunately this is all of Jesse Livermore's wisdom that fits into this seventh essay of my series on "Reminiscences." I hope you found Mr. Livermore's great wisdom enlightening!

Go buy and read "Reminiscences of a Stock Operator" today! I can almost guarantee that it will forever change your life as a speculator! Jesse Livermore's quotes are even more impressive in their proper context and are delightful to read and digest. This essay format can't even start to do them justice.

Until next time, Godspeed and happy speculating!

Adam Hamilton, CPA
email: zelotes@zealllc.com
January 2, 2004

The Series:
Wisdom of Jesse Livermore 7
Wisdom of Jesse Livermore 6 10.31.2003
Wisdom of Jesse Livermore 5 8.29.2003
Wisdom of Jesse Livermore 4 7.3.2003
Wisdom of Jesse Livermore 3 5.2.2003
Wisdom of Jesse Livermore 2 2.28.2003
Wisdom of Jesse Livermore 1 1.31.2003

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