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Echoes of a Stock Operator: Quotes and Commentary Part 6

Chapters XI-XIII

“Everybody was bearish and everybody was selling July cotton. You know how people are. I suppose it is the contagion of example that makes a man do something because everybody around him is doing the same thing. Perhaps it is some phase or variety in the herd instinct.”

This quote delves into the psychological aspects of market behavior beautifully, highlighting how individual decision-making is heavily influenced by the collective actions and sentiments of others. It speaks to the phenomenon often observed in financial markets, where the prevailing mood or trend among traders and investors can drive others to follow suit, sometimes irrespective of their own analysis or beliefs.

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“That is one trouble about trading on a large scale. You cannot sneak out as you can when you pike along. You cannot always sell out when you wish or when you think it wise. You have to get out when you can; when you have a market that will absorb your entire line. Failure to grasp the opportunity to get out may cost you millions.”

Here Livingston describes a key strategic dilemma that large-scale traders or institutional investors face: the difficulty of exiting positions without significantly impacting the market price of the asset being traded. Small traders can enter and exit positions with minimal impact on the market, making their operations more nimble and less visible to other market participants. In contrast, large-scale traders have a much more challenging task when they decide to liquidate a position, as their trades can significantly move the market, potentially to their disadvantage. I have routinely found my best exits to be when I’m not attempting to time the “best profit” but rather exiting into what the market is irrationally willing to absorb.

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“I have learned that a man may possess an original mind and a lifelong habit of independent thinking and withal be vulnerable to attacks by a persuasive personality. I am fairly immune from the commoner speculative ailments, such as greed and fear and hope. But being an ordinary man I find I can err with great ease.”

“To learn that a man can make foolish plays for no reason whatever was a valuable lesion. It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibly expressed by a brilliant mind.”

This reflection brings to light the delicate balance between self-assurance in one’s analytical abilities and the humbling recognition of one’s susceptibility to external influences, emphasizing the perpetual challenge of maintaining objectivity and critical thinking amidst the persuasive forces that surround us. Livingston may possess a sharp mind for trading, but he is not infallible. Neither are any of us.

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“What does a man do when he sets out to make the stock market pay for a sudden need? Why, he merely hopes. He gambles. He therefore runs much greater risks than he would if he were speculating intelligently, in accordance with opinions or beliefs logically arrived at after a dispassionate study of underlying conditions.”

The moment we decide the market must satisfy some immediate financial need is the moment we’ve removed objectivity from the equation. Livingston’s distinction underlines the peril of allowing desires to dictate investment decisions. Only just recently I made this exact type of error. The market was strong and I decided to utilize margin to extract some quick gains to pay for a debt owed to me that had gone bad. I recouped 50% of what was owed to me before getting hit with a sizable loss equal to my gains up to that point. When you gamble, it’s only a matter of time before the pain arrives.

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“Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee. A man has to have experience and he has to pay for it. But there was something that hurt a whole lot in that experience of mine… and that was the loss of a great opportunity. The money a man loses is nothing; he can make it up. But opportunities such as I had then do not come every day.”

Livingston employs a pragmatic approach to financial losses, framing them as educational rather than purely negative experiences. He suggests that each loss is an investment in gaining valuable experience, akin to paying tuition for learning. But the pain that dogs a trader following a missed opportunity is particularly stinging. These are the moments when, if you’re not careful, you begin to trade recklessly in an attempt to make up for what could have been. I learned this lesson on the short side. I missed an opportunity to get bottom of the barrel prices (never to be seen again) and after realizing what I’d missed I attempted to make the market do what I wanted by going short. It’s insult to injury when everyone else is making loads of money and you’re losing it. Better to stay level headed and wait for the next opportunity.

JANUARY 12, 2025 OBSERVATIONS

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