Benjamin Graham: It is fortunate for Wall Street as an institution that a small minority of people can trade successfully and that many others think they can.
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rssEmotion Is More Important Than Intelligence In Trading
There is nothing new on Wall Street or in stock speculation.
What has happened in the past will happen again, and again, and again.
This is because human nature does not change, and it is human emotion, solidly built into human nature, that always gets in the way of human intelligence.
Of this I am sure.
Jesse Livermore
Book Review: Wall Street and the Wilds
Wall Street and the Wilds by A.W. Dimock, 1915, contains the sage of the rise and fall and rise and fall of a Wall Street gold trader, options seller, stock manipulator, developer of the clearing house, pool operator, Steamship promoter, real estate developer of Elizabeth, New Jersey, telegraph line builders, railroad builder, hunter, photographer and naturalist from 1850 to 1915.
It includes chapters on black Friday, the day that the gold bulls broke the US Treasury in 1870, the effect on prices of the civil way, the way manipulations were carried out in those days, the relation of the flexions to financiers in those days (not much different from today), systems for profiting in gold, the legal system in those days (fees of a million dollars for routine cases were common even in 1880, the early developments of photography in the wilds, hair raising tails of wars between the Native Americans and the US military, pinpoint shooting, advanced fly casting techniques, and much more.
Everything talked about is totally a propos of current techniques in Wall Street. Dimock was a minister’s son born in 1840 who went to Andover and came to Wall Street at 15 and got his start scalping odd lots in insurance stocks. He developed a system of selling gold every 1/8 up and buying it every eight down. He became the Little Napoleon of Wall Street and dominated the gold exchange the way the big grain companies dominate the grain market today, using some of the same techniques. He made so much money that it was easy come, easy go, and he lost it all by guaranteeing the purchase of friends, defrauding by the Goulds during Black Friday, and finally in the crash of 1873.
The book is compelling, and instructive and a great history of 19th century stock and commodity markets, very much akin and resonant of today. It’s highly instructive. I’ll quote from some of the more resonant and sagacious passages: (more…)
The Virtue of Patience
Waiting for the right opportunity increases the probability of success. You don’t always have to be in the market. As Edwin Lefevre put it in his classic Reminiscences of a Stock Operator, “There is the plain fool who does the wrong thing at all times anywhere, but there is the Wall Street fool who thinks he must trade all the time.”
One of the more colorful descriptions of patience in trading was offered by Jim Rogers in Market Wizards: “I just wait until there is money lying in the comer, and all I have to do is go over there and pick it up.” In other words, until he is so sure of a trade that it seems as easy as picking money off the floor, he does nothing.
Watch -Before the Crash Wall Street Week October 16, 1987-Video
No particular reason to post this except that all fundamental analysis sounds the same regardless of decade
My notes on Reminiscences of a Stock Operator
Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore.
My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I’d have been right perhaps as often as seven out of ten times.
What beat me was not having brains enough to stick to my own game.
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.
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, as though they were working for regular wages.
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 to the stock market; and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation.
My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat. But if I cannot advance I do not move at all. I do not mean by this that a man should not limit his losses when he is wrong. He should. But that should not breed indecision.
I was still ignoring general principles; and as long as I did that I could not spot the exact trouble with my game. (more…)
Trading Lessons From Nicolas Darvas
There are no good or bad stocks. There are only stocks that rise in price and stocks that decline in price, and that price is based on the laws of supply and demand in the marketplace - “You can never go broke taking a profit” is bad advice that will result in overtrading and cutting winners short. Selling winners and holding losers is to be avoided at all times
- There is a “follow-the-leader” style in the market. You will find success by selecting the most active and strongest industry group and trading its top leader
- The combination of price and increased volume is key to stock selection. Focus your time on new leaders emerging with a new market cycle
- It is the anticipation of growth rather than the growth itself that leads to great profits in growth stocks. “You have to find out what the public wants and go along with it. You can’t fight the tape, or the public.”
- One of the quickest ways to lose money in the market is to listen to others and all of their so-called expert opinions. To succeed, you must ignore all outside opinions and predictions. Follow your own strategy!
- Losses are tuition on Wall Street. Learn from them.
- You should expect to be wrong half of the time. Your goal is to lose as little as possible when you are. “I have no ego in the stock market. If I make a mistake I admit it immediately and get out fast. If you could play roulette with the assurance that whenever you bet $100 you could get out for $98 if you lost your bet, wouldn’t you call that good odds?”
- Most of your big failures will come from three things: 1) when you abandon your rules, 2) you become overconfident, and 3) trade in despair when unsuccessful
- The best speculators search only for the very best opportunities. To be truly successful, you must wait for the right opportunities to present themselves and this often means doing nothing for long periods of time
- The market behaves the way it does due to participants behaving the way they do. No one knows what they will do until they actually do it
- Long-term investors are the real gamblers in the market due to their eternal hope that losing stocks will come back in price
- It is difficult to be profitable on the short side of the market versus the long side – trading in rising or bull markets will give you the best chance for success
- Most, if not all stocks, will follow the general trend of the market
- To train your emotions, write down the reasons for making every trade. When you lose, write down what you thought contributed to the loss. Then study and set new rules to avoid making those same mistakes
- Concentrate your trades. At the peak of his success, Darvas would hold only 5 to 8 stocks at one time which was in contrast to his earlier days when he was overtrading and would hold up to 30 stocks at a time
- Avoid fallen leaders. Overhead resistance will keep upside potential limited due to supply from previous buyers who had not cut short their losses. According to Darvas, the only sound reason for a stock is one that is rising in price. If that is not happening, then there is “no other reason worth considering.”
- Darvas used his “box theory” to trade using boxes to time his entries (on breaking out to a new higher box) and exits (breaking below the current trading box).
- For new trades, Darvas used “pilot buys” which basically were starter positions in stocks he liked. Only if the stock continued to move higher would he then pyramid and increase his position. He learned never to buy more of a losing position
- He thought many unsuccessful investors made the mistake of looking at the same familiar names that might have worked well for them in the past instead of focusing on the next stock with the right elements for the new market cycle. “I am only in infant industries where earnings could double or triple. The biggest factor in stock prices is the lure of future earnings. The dream of the future is what excites people, not the reality.”
- Perfection has no role in successful trading. No one can buy at the absolute lowest price and sell at the highest price. No time or effort should be devoted to that goal. “I never bought a stock at the low or sold one at the high in my life. I am satisfied to be along for most of the ride.”
- Trade only when the environment is in your favor. Darvas’ strategy kept him out of poor and bear markets because he wouldn’t trade stocks that didn’t fit his requirements which were only found in raging bull markets
- Be aggressive when warranted. Darvas believed in making aggressive trades when his system pointed to a great trade. In fact, sometimes 50% of his capital was devoted to just one stock
- While his trading approach was very technical, after studying the market’s winners he understood the relevance of finding stocks also with good fundamentals. Namely, Darvas thought that earnings and the future estimate of increased earnings were very important
- Be a student of the market. Darvas learned by reading more than 200 books about speculators and the market and devoted studying the market for many hours a day. In fact, Gerald Loeb’s books & approach served as key inspiration
- No one can completely master the market. After millions of dollars and best selling books, Darvas was still learning and tweaking his system until he passed away
There are no good or bad stocks. There are only stocks that rise in price and stocks that decline in price, and that price is based on the laws of supply and demand in the marketplace 10 Favorite Quotes from Reminiscences of a Stock Operator
Markets, trading methodologies and products may change, but timeless investing advice does not. That’s why my favorite trading book remains Reminiscences of a Stock Operator by Edwin Lefevre with Jessie Livermore—it is chocked full of great advice for any investor. First appearing as a series of articles in the Sunday Evening Post during the 1920s, the book is largely a biographical account of Livermore’s professional life. He is remembered as one of the world’s greatest traders who won and lost tremendous fortunes before tragically taking his own life in 1940.
Although Jessie’s life ended too early, his words of wisdom live on for discovery. The book is filled with obscure references and colorful characters long forgotten by the general public, but the key themes of the text remain as relevant as ever. Therefore, I’ve pulled out my favorite quotes, below, though I highly recommend reading the entire text.
There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.
The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among professionals.
I never lose my temper over the stock market. I never argue the tape. Getting sore at the market doesn’t get you anywhere.
They say you can never go poor taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market. Where I should have made twenty thousand I made two thousand. That was what my conservatism did for me.
Remember that stocks are never too high for you to begin buying or too low to begin selling.
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…nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.
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 the sitting. Got that? My sitting tight!
Personal Life And Its Influence On Trading
I’ve just finnished reading a book of Richard Smitten “Jesse Livermore World’s Greatest Stock Trader”. Amazing read. For those who want to know how important psycholigal influence on trading, this is a book to read. I’d like to say a few things about greatest trader. He failed in the market when he started going to other women, he stopped being focused on the market, his 3-d wife (who brought him 2 beautiful boys Jesse Jr and Paul) Dorothy was his soul companion as later his son Jesse Jr will say. Jesse Livermore made 100 millions during October 1929 crash, at that time he was one of the richest men in the world, in 1932 his wife filed for divorce and took away their 2 boys from him, he was empty, depressed, sitting on his cash, understanding that he’s life is actually a failure(its why he later commited a suicide). Its when he started losing it all. No one knows his trades after 1932, but the majority were losses and then he finally filed bankruptsy. He still had 1 million untouchable fun for his kids and about 3 million dollars in cash(in his apartment in New York), his 4-th wife took it 3 million in cash in the bags out of house after he commited suicide( his son Paul tells about it). (more…)
12 Market Wisdoms from Gerald Loeb
It is funny how the best traders of all times basically repeat the same things with different words.
Gerald Loeb is the author of ‘The Battle for Investment Survival’ and is one of the most quotable men on Wall Street. Here are 12 of the smartest things he has ever said about the stock market:
1. The single most important factor in shaping security markets is public psychology.
2. To make money in the stock market you either have to be ahead of the crowd or very sure they are going in the same direction for some time to come.
3. Accepting losses is the most important single investment device to insure safety of capital.
4. The difference between the investor who year in and year out procures for himself a final net profit, and the one who is usually in the red, is not entirely a question of superior selection of stocks or superior timing. Rather, it is also a case of knowing how to capitalize successes and curtail failures.
5. One useful fact to remember is that the most important indications are made in the early stages of a broad market move. Nine times out of ten the leaders of an advance are the stocks that make new highs ahead of the averages. (more…)