My go-to book on the world of Wall Street has always been Edwin Lefevre’s Reminiscences of a Stock Operator. Though my profession undoubtedly biases me towards this classic, its impact is undeniable. The book’s protagonist, Larry Livingston, mirrors the real-life Jesee Livermore, a prominent early 20th century trader known for his spectacular highs and lows in the stock market. Lefevre is able to weave timeless market insights into eloquent prose uncommon to today’s publications. 100 years after its publication it is still, for me, the greatest book on trading.
In this series I will delve into Reminiscences, examining my favorite quotes from each chapter. My goal is to blend insights from the book with reflections on my own trading experiences. Throughout this journey, I aim to uncover the enduring lessons of Lefèvre’s masterpiece and how they resonate in today’s trading world. I hope you enjoy.
Chapters I-II
“Another lesson I learned early is that 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 to-day has happened before and will happen again.”
One of the fundamental precepts of trading involves understanding crowd psychology. When you understand how expectations and emotions – hope, greed, panic, etc. – drive price action, you can begin to capitalize on the deviations they cause. This is of course predicated on the idea that the human brain has remained effectively unchanged since the emergence of financial markets and will likely remain so for the foreseeable future.
“The reason for what a certain stock does to-day may not be known for two or three days, or weeks, or months. But what the dickens does that matter? Your business with the tape is now – not to-morrow. The reason can wait. But you must act instantly or be left.”
Technical things happen for fundamental reasons, and those fundamental reasons are often unknown to the public until price has largely corrected. This is why price alone is the most critical piece of information to a tape reaper like Livingston (or your standard technician today). I have found that when price begins to move against expectations, there is often a damn good reason.
“I didn’t have a following. I kept my business to myself. It was a one-man business, anyhow. It was my head, wasn’t it? Prices either were going the way I doped them out, without any help from friends or partners, or they were going the other way, and nobody could stop them out of kindness to me.”
This is one of my favorite quotes. Livingston’s commitment to being separated from the thoughts and opinions of others removes a lot of anchoring bias (the observation that one will modify their estimate simply by hearing someone else’s first). This allows him to win or lose exclusively by his own hand. My philosophy is the same.
“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. In fact, I always made money when I was sure I was right before I began. 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.”
And…
“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.” Here Livingston highlights the repercussions of not following a trading principle related to self-mastery. When you have an edge, stick to it. Otherwise you do nothing. Early in my career I often traded out of a desire for action rather than sticking to a system. This led to a painful habit driven by what behavioral psychologists called variable reward. Variable reward is the idea that uncertain and unpredictable rewards are more habit-forming that predictable or fixed ones. It is one of the powerful mechanisms reinforcing gambling addiction. By not realizing and correcting this issue, I suffered my largest portfolio drawdown in 2019.
