Two things cause a stock to move- the expected and the unexpected. -Gary Helms

I recently finished reading Reminiscences of a Stock Operator by Edwin Lefèvre. It is a story about Jesse Livermore and his journey of learning the markets. It was not always a pleasant ride for young Jesse. I think he went bust (lost it all plus owed some) at least three times throughout the story. I was getting the shivers just reading those sections. It really made me want to trade again though. However, my taxable account with vanguard is still intact probably for the better. I had the money-suicide urge to liquidate it and go all in on NAT since it was very beaten down. The ever elusive double-bagger still escapes me. I am still in my boring index funds. I took away five points from this book that can be implemented even with a (boring) long term perspective.

1) Less is More

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. (Reminiscences of a Stock Operator)

Less is more sounds very yoda like, but what does it mean? A couple of things come to my mind. First, commissions can start to eat away at your account. Commission prices are relatively cheap these days compared to what they were before I was dabbling in the markets. However, if you have a small account or place a lot of trades then commissions could quickly become a factor. Next, is everyone’s favorite, taxes.  If you sell the security before a year then you will be taxed under the short-term capital gains rate as opposed to the long-term capital gains rate if held for greater than a year. As I am not a tax professional and taxes are not my forte that is all I will mention on that. I did get to experience that first hand this year. I am not a fan.

2) Know Yourself

A stock operator has to fight a lot of expensive enemies within himself. (Reminiscences of a Stock Operator)

There is a whole new(ish) field about this topic called “behavioral finance.” If you want the quick and dirty then check out the wiki page:

A good easy to read book on this subject is Your Money and Your Brain by Jason Zweig. The book talks about heuristics which is just a fancy pants word for mental shortcuts that we all have. This is a good thing for driving your car down I-95 but not such a good thing for putting your hard earned dollars to work. I think one of my own problems with trading/investing is confirmation bias. This means I find information that supports my position and put up blinders to everything else. I am very glad that I didn’t liquidate my account and go all in on NAT. However, I am a glutton for pain and keep checking the price of it to see if/when it takes off to the moon!

3) Have a Plan

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. (Reminiscences of a Stock Operator)

A “duh” point but few people survive that long in the markets without one. Many people take on too much leverage or have too much exposure to a single equity. Some try to time the markets. Some successfully time the market but most do not. There are many different plans with different time horizons that can all be used successfully if followed. Personally, I am focusing more on asset allocation with index funds. I am trying to keep:

  • 35% VTIAX
  • 35% VTSAX
  • 10% VSIAX
  • 20% VBTLX

I plan on re-balancing at +/- 5% of goal allocation. This will help me unemotionally ‘buy low, sell high.’  This took some tinkering and thinking for me to become satisfied with. I originally wanted 0% bonds! However, I have not experienced a snarling bear market yet so I finally convinced myself that it was prudent to have a portion of my portfolio allocated to bonds. I don’t expect to increase my bond position (of 20%) for a very long time. I have no idea if US or International stocks will outperform in the years to come. I have read points for both sides. “DOW 30k, DOW 50k, US Stocks have poor outlook, US stocks likely average 4% or less,  International stocks better value, etc.” There is no way Britain will pull out guys. Right? Right!?! That evening / next morning solidified in my mind how bad we are at making predictions.  I am no different. Oh yeah, and I like to tilt to small cap value with my VSIAX fund. Some will scoff at it being considered small cap value. It’s done right by me, and I kind of like the (lack of) fees too! Do you have a plan? If it can help you meet your goals, stay within your risk tolerance, and lets you sleep at night, then my friend, you have found a keeper!

4) Learn from Mistakes

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. Did you get that? You begin to learn! (Reminiscences of a Stock Operator)

Even with the best plan, there will be setbacks and mistakes. As long as you can learn something from the mistake then it is not a complete failure. I have unsuccessfully shorted one stock that I do not even remember the name of. It was some pharmaceutical company that looked like it matched a set up for a short position from what I had been reading. However, before entering the position, I decided I would place a tight stop and only risk $38. I was able to get in the position at the price I wanted and then placed my stops. I got stopped out and lost…$38. I learned that a set up on a chart is by no means a guarantee that you will get the ‘expected’ result. I was happy with my money management in this scenario. Another mistake I have made a couple of times is buying the ‘value trap’ or trying to ‘catch the falling knife.’ The common phrase “it cannot go much lower than this” has probably broken a lot of brokerage accounts backs. KMI…

5) Market Timing

I have said many times and cannot say it too often that the experience of years as a stock operator has convinced me that no man can consistently and continuously beat the stock market though he may make money in individual stocks on certain occasions. No matter how experienced a trader is the possibility of his making losing plays is always present because speculation cannot be made 100 percent safe. (Reminiscences of a Stock Operator)

We have all read the stats about timing the markets. Many books like A Random Walk Down Wall Street talk about it. Why do we keep trying to do it then? I am more and more convinced it is  for the thrill and mental challenge of being ‘right’. However, if I want a thrill, I will go sky-diving (no thank you), and if I want a mental challenge I should do chess puzzles. The market is an expensive way to seek out thrills and an expensive way for self-discovery. I may eventually add money to my other brokerage for a mad money account. This will be a set dollar amount to play with (being honest it’s play). This will help me avoid the stupid urges I still get like liquidating my account to go all in on NAT. Reading this book made me want to do iron condor and butterfly trades, and I have no idea what those even mean!

Reminiscences of a Stock Operator is a classic that  will definitely keep your attention if you are a market enthusiast. Jesse Livermore had an interesting journey that can maybe help your own trading/investing results. Hopefully you will not have to go through the pain of losing it all to get on the right path.


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