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Inside the mind of the legendary master trader and speculator Jesse Livermore

by admin on March 18, 2013

4 Blog PicBelieve it or not, our own beliefs and attitudes determine our results in everything we do and money is not an exception, so let’s get inside the mind of the best speculator ever known and learn some of his secrets to beat the markets.

Repetitive patterns. Jesse Livermore believed that people acted the same way over and over again and that it was the reason why numeric patterns were constant in the markets. He used to say: “The pockets change, the stocks change, but Wall Street never changes, because human nature never changes.” One of the main reasons for his financial success was that he understood very well the markets cyclic and emotional patterns and learned how to profit from them.

Detachment in investments. People, as human beings, have emotions, these emotions are always present in any moment of our lives, but there are those who are trained to react appropriately to them. This is the case of Jesse Livermore who used a notebook to keep track of his investments and with this he could detach emotionally from them. Once he had already taken notes and with mental quietude achieved, he would analyze his log and get his own conclusions.
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Using a log. Jesse Livermore was convinced that by maintaining an honest, sincere and appropriate personal record he could use his log as a guide. His thinking was that no person can be kept physically and mentally fit just “reading a book” and leaving the physical exercises to another, therefore, the discipline to take notes, analyze and personally engage and develop a concrete method of execution were part of the discipline that led to his success.

Reunion with the money. Jesse Livermore also had the belief that paper money (bank statements) had to be turned into something tangible, so once a year he would ask the bank to put his 50 million in cash inside a bank vault, in which, he locked himself for a week. Because in the words of Richard Smitten: “At the end of the year, he needed to feel the power of money. However, he went further and he understood that the only money he got from Wall Street was the withdrawn money from his account once he closed a successful transaction. In this sense, it had to be tangible, so touching, feeling and turning it into something tangible became a policy or ritual for him.

Timing. The entry and exit time are vital. When you are entering a transaction is important not only to determine where the movement is heading, but also to confirm that the action confirms that movement and to actually execute it at the right time. Sounds complicated? Perhaps it’s a matter of training, but it is a reality that a good speculator always has the patience to wait for the market itself to confirm his judgment, then it will be time to act. Anxiety or fear of letting go of a transaction in this case are not good advisers.

Opinions and news. Jesse Livermore rarely paid attention to the opinions of others on the market. His foundation has logic and common sense. The market has its own language and what others think is irrelevant and has no impact on the result, therefore, We must pay attention strictly to the action of the market itself. Markets are never wrong- opinions often are.”

Protect the capital. The only way to ensure that an investor will remain in business is taking care of the capital. No investor or speculator must allow himself to take losses of such magnitude that will endanger his account. Jesse Livermore said: “Profits always take care of themselves but losses never do. The speculator has to insure himself against considerable losses”. Thus, when a stock goes against you and touches the allowable limit you must have the strength to remove it immediately. Professionals care about losses, novices care about gains.

Never average losses. Jesse Livermore argued that once a transaction shows losses, it must be immediately removed. This is especially true when we are trainees. The reason is simple, no individual account is able to hold a proper average when a) a stock plummets, b) our account is small compared to the entire market, c) our entry price is very distant from the current market price. Each time it will require more financial and emotional effort to get out of a barrel that has no bottom.

Personally I’ve known people who get large gains averaging, however, they are true professionals who have trained themselves for years to acquire the ability of averaging at the right time and with adequate capital, but above all, they have the control from the first transaction they perform and have a proven plan to run systematically and consistently well. While this is not our case, it is better not to try. “When a person tries to average he is most likely to be on the opposite side of the market.” – Jesse Levermore.

The personality of stocks. It is true that stocks, like individuals, have a character and a personality of their own. By the same token, by being a predictable person, also the “actions” are predictable under certain circumstances, the same way, there are trends or repetitive patterns that work automatically and consistently during the development of its tendency or movement. Understanding these patterns and personality of stocks is a fundamental part of an investor’s arsenal.

Beating the stock market. Beating the market is impossible and beating the 100% of the time is a complete utopia. We can win in a transaction, we can put the odds in our favor and achieve consistent results, but beating the market, never. Jesse Livermore said, “you can win a horse race, but you cannot beat the races”.

Overconfidence. When a person achieves a profit for several consecutive times, or has a highly successful transaction, he must be very careful not to act under the influence of excessive self-confidence. The idea of returning immediately to invest is a clear effect of what adrenaline causes us. It is therefore important to achieve a balance in our emotions in order to have enough patience. Jesse Livermore said “After achieving a good profit, you must have patience, but don’t let patience create a state of mind that makes you ignore the warning signs.”

Measured diversification. A good investor or speculator must be constrained to have a smaller universe of possibilities, the reason is that too much information, too much news, too many activities, too many actions, tend to cloud the ability of any person, despite how good, clever, intelligent or capable he is. Additionally, spending too much time on something looking for reasons to its movements can be equally harmful. Because in the words of Jesse Livermore. “It is not good to be too curious about the reasons behind every move. You run the risk of filling your mind with too many non-essential things. ”

Learn not to make excuses. One of the biggest mistakes of any human being is trying to justify himself when something is wrong, even more so, when one promotes or commits the same mistake. When we take this defect into our investments we get into a swamp, as the fact of wanting to prove that we are right prevents us from determining we did wrong in a transaction and he who does not correct a mistake is destined to repeat it. Man is the only being capable of making the same mistake several times. The repetition of any mistake can kill any bank account.

Jesse Livermore said, “… everyone should learn not to hide behind when something is wrong. Just admit it and try to profit from it. We all know when something is wrong. The market will tell the speculator when something goes wrong, simply because he will lose money. ”

Things are as they are. One of the main problems of any trader, investor or speculator is not to follow a methodology or ignoring the warning signs. Let’s see an example that, albeit crude, is illustrative. If we were in front of a rabid dog, the last thing that would occur to us would be to try to reason with it or convincing ourselves it is not there. The same should happen when we invest, many traders that have failed to get an emotional balance tend to be blind to warning signs. Jesse Livermore said:
“When I see any sign of alarm in front of me, I do not argue with it. I just leave. Interestingly, the problem with most speculators is that something within them does not allow them to have the courage to close a transaction and fulfill their mission. Again, the individual human is the worst enemy of the average investor. ”

One of Livermore’s inspiring ideas is that anyone can become a successful investor. This fulfills the dream of many people looking to get results beyond what is considered “normal and common” or that you could get in a job, in fact, there are people who can become millionaire overnight, but that similarly may be in bankruptcy in the blink of an eye.

There is nothing better than Livermore himself to express his own ideas about it … “is the most uniformly fascinating game in the world. But it is not a game for fools, lazy-minded, men with poor emotional balance or the adventurer who wants to become a millionaire overnight. They will die poor.” “Success comes only to those who work to get it. ”

This note of my blog was inspired by the notes of Jesse Livermore published by Richard Smitten in his book “How to trade in stocks.” I highly recommend reading this book as a source of inspiration and guidance.

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