Livermore: Three Million Dollar Profit

I found Chapter 7 of Jesse Livermore’s How To Trade In Stocks to be a bit of a throwaway chapter. Livermore himself admits at the end of the chapter that the example he uses could not be duplicated today. The entire chapter revolves around a specific trade he made where he used positions in Rye to determine someone else’s positions in Wheat. It is hard to believe that anyone could have that kind of influence on a market these days, certainly not a single individual trader like myself. I did, however, manage to find a few nuggets of wisdom that I feel still apply to today’s markets.

“I was altogether too anxious to convert a paper profit into actual cash, when I should have been patient and had the courage to play the deal out to the end. I knew that in due time, when the upward trend had reached its Pivotal Point, I would be given a danger signal in ample time.” – Livermore

Livermore is describing an error he made in taking a profit on a position that was still rising. After selling the position and watching it keep moving higher, he realized that his lack of patience had cost him. I have always found it interesting that despite knowing that it is essential to let profitable positions run, it is often the hardest thing to do. The thought of giving back profit that you are sitting on is frightening. We must constantly fight our human nature to run to safety and cash in our small profits. We must have a little patience and let our winning positions run.

“This illustrates the value of having short interest in speculative markets because the short interests become willing buyers when they cover their shorts, and those-willing buyers, the short sellers, act as a much-needed stabilizer in times of panic.” – Livermore

Here we see Livermore presenting the opposing side to the argument against short selling. It seems like every time there is a major market crash, many of the talking heads are quick to blame “the evil short sellers.” It is interesting to hear an opposite view to this argument. Livermore suggests that those short sellers are helpful in that they are the ones buying at the bottom as they take their profits. Imagine hearing someone on TV thanking short sellers for beginning the process of finding a bottom.

“I therefore believe the day of the old speculator has gone. His place will be taken in the future by the semi-investor, who, while not able to make such large sums in the market quickly, will be able to make more money over a given period and be able to keep it. I hold the firm belief that the future semi-investor will only operate at the psychological time and will eventually realize a much larger percentage out of every minor or major movement than the purely speculative-minded operator ever did.” – Livermore

What is interesting about this quote is that it has been proven true time and time again by people like those featured in the Market Wizards series. It’s obvious that we, as individual investors, are not able to have the same impact on markets that Livermore did. We can, however, use much of his market psychology combined with new technology to level out the process and make money far more consistently than even Livermore could. We are essentially trading his huge windfall profits, for a more steady return.