Chapters III-IV
“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. All my life I have made mistakes, but in losing money I have gained experience and accumulated a lot of valuable don’ts.”
What Livingston is describing is the tendency to only enter when he is sure the market will continue to move his way, and to never add to a position when it moves against you. In fact, it’s better to close than wait it out. This is a trading rule employed by many traders, sometimes exclusively, though I find it limiting. I appreciate the success of a properly timed breakout trade, however I employ mean reversion tactics in equal volume. There is nothing quite rewarding as timing a top or bottom. It’s also shunned by nearly everyone in the business, so if you can develop a knack for it, you’ll do quite well for yourself. Of course doing so will require a greater degree of tolerance for paper losses, but with proper work any adverse excursions should be negligible.
“I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgment. It took me five years to learn to play the game intelligently enough to make big money when I was right.”
Simply put, if you are going to trade, then trade on your own analysis and no one else’s. The tip chaser, as Livingston calls them, is the perpetual fool. They trade on any tip, regardless of the source. Don’t be a tip chaser. Reading a few articles in the WSJ and basing your investment decisions off them is not analysis. It’s tip chasing.
“If somebody had told me my method would not work I nevertheless would have tried it out to make sure for myself, for when I am wrong only one thing convinces me of it, and that is, to lose money. And I am only right when I make money. That is speculating.”
If you allow yourself the opinions of others, you can be talked out of a good trade just as easily as you can be talked into a bad one. This harkens back to the anchoring effect. Rather than be dissuaded, the best way to learn whether your analysis is sound is to commit real money. If the trade goes south, the pain of failure will allow you to reflect, after which you no longer make the same mistake. If you are correct, you walk away with more confidence. Win-win.
“I didn’t keep on trading the way I did through stubbornness. I simply wasn’t able to state my own problem to myself, and, of course, it was utterly hopeless to try to solve it. I harp on this topic so much to show what I had to go through before I got to where I could really make money… After several years I was back where I began. No – worse, for I had acquired habits and a style of living that required money; though that part didn’t bother me as much as being wrong so consistently.”
And,
“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!” This quote touched me deeply. I too underwent a particularly difficult period early in my career following a bout of huge success. I was blind, or possibly in denial, to the reason for my malperformance. Rather than look at things objectively I flailed about, disregarding everything that had been the cause of my success in the first place. Worse yet, I had taken on a lifestyle with significantly more overhead. It was a stressful time in my life, but eventually I was able to “state my own problem to myself” and after taking proper action the ship course corrected.