Book Reviews, Trading

Book Review of Reminiscences of a Stock Operator by Edwin Lefèvre

This is the famous book on Jesse Livermore by Edwin Lefèvre, and it is a must-read book for all traders and investors alike. This is the only book I have read so far that wrote in detail how stock manipulation is done, which I think is necessary background knowledge for appreciating price-volume action.

The book is basically the story of how Jesse Livermore became successful, from starting off beating bucket shops using his tape reading skills, to making and losing fortunes as his refined his trading strategy. The book is peppered with lots of interesting stories, written in a very personable way that gives you a better appreciation of the experiences and personality that shaped his trading strategy.

The book goes through all the foundations of successful trading, and I would recommend the book to be read at least twice because it contains so much good nuggets of information that may not be picked up in your first reading. Paul Tudor Jones wrote that he read this book multiple times and constantly picked up new stuff in his re-reads.

There are 3 versions of this book in the market. There’s the popular Wiley paperback version with just the story, the large, thick annotated edition with commentary on the historical references and a foreward written by Paul Tudor Jones, and a large, thin illustrated edition with a foreword written by William O’Neil. There are pros/cons with each edition. The story was actually published as a series of articles in the Saturday Evening Post. The illustrated edition captures the original text, while the text for the other two books are slightly different (the phrasing of sentences were changed, and some material were removed). So if you want the full original content, go for the illustrated edition. If you want portability to read on the go, go for the paperback version. If you want to better understand the historical references made in the text, go for the annotated edition.

The key points below are captured from the annotated / paperback editions.

The Big Money is in the Main Movements

  • Tape reading is not enough
    • I was accustomed to regarding the tape as the best little friend I had because I bet according to what it told me. But this time the tape double crossed me. The divergence between the printed and the actual prices undid me.
    • It seems so obvious now that tape reading is not enough, irrespective of the brokers’ execution, that I wonder why I didn’t then see both my trouble and the remedy for it.
    • I can’t tell you how it came to take me so many years to learn that instead of placing piking bets on what the next few quotations were going to be, my game was to anticipate what was going to happen in a big way.
    • The first change I made in my play was in the matter of time. I couldn’t wait for the sure thing to come along and then take a point or two out of it as I could in the bucket shops. I had to start much earlier if I wanted to catch the move in Fullerton’s office.
    • It taught me, little by little, the essential difference between betting on fluctuations and anticipating inevitable advances and declines, between gambling and speculating.
  • Hold and stay in the bull market
    • I discovered that although I often was 100% right on the market — that is, in my diagnosis of conditions and general trend — I was not making as much money as my market “rightness” entitled me to. For instance, I had been bullish from the very start of a bull market, and I had backed my opinion by buying stocks. An advanced followed, as I had clearly foreseen. So far, all very well. But what else did I do? Why, I listened to the elder statesmen and curbed my youthful impetuousness.
    • Everyone knew that the way to do that was to take profits and buy back your stocks on reactions. And that is precisely what I did, or rather what I tried to do; for I often took profits and waited for a reaction that never came. And I saw my stock go kiting up ten points more and I sitting there with my four point profit safe in my conservative pocket. They say you never grow poor taking profits. No you don’t. But neither do you grow rich taking a four-point profit in a bull market.
    • Mr. Partridge: “And when you are as old as I am and you’ve been through as many booms and panics as I have, you’ll learn that to lose your position is something nobody can afford;…” I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements — that is, not in reading the tape but in sizing up the entire market and its trend.
    • After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.
  • The big money is in the big swing
    • I begin to realize that the big money must necessarily be in the big swing. Whatever might seem to give a big swing its initial impulse, the fact is that its continuance is not the result of manipulation by pools or artifice by financiers, but depends upon basic conditions. And no matter who opposes it, the swing must inevitably run as far and as fast and as long as the impelling forces determine.
    • I always had — or felt that I had — to make my daily bread out of the stock market. It interfered with my efforts to increase the stake available for the more profitable but slower and therefore more immediately expensive method of trading on swings.
    • … since the entire list moves in accordance with the main current there was not so much need as I had imagined to study individual plays or the behaviour of this or the other stock. Also, by thinking of the swing, a man was not limited in his trading. He could buy or sell the entire list.
  • Nevertheless, read the tape to determine when to enter
    • Thus I eventually discovered that it was all very well not to lose your  bear position in a bear market, but that at all times the tape should be read to determine the propitiousness of the time for operating.
    • I didn’t wait to determine whether or not the time was right for plunging on the bear side. On the one occasion when I should have invoked the aid of my tape reading, I didn’t do it. That is how I came to learn that even when one is properly bearish at the very beginning of a bear market, it is well not to begin selling in bulk until there is no danger of the engine back-firing.

Size Up General Conditions

  • Tape reading was an important part of the game; so was beginning at the right time; so was sticking to your position. But my greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities.
  • But I can tell you after the market began to go my way I felt for the first time in my life that I had allies — the strongest and truest in the world: underlying conditions…. but they were dependable, provided I did not get too impatient. I was not pitting my tape-reading knack or my hunches against chance. The inexorable logic of events was making money for me.
  • The thing was to be right; to know it and to act accordingly. General conditions, my true allies, said “Down!”

Have the Courage to Stay in Your Position But Watch the Character of the Movements

  • … I thought it particularly asinine for the insiders to run up the price of TT in the face of the heaviness of the general list… What I learned strengthened my conviction that the insiders had been worse than reckless in jacking up the price at a time when such an advance was not justified either by the tone of the general market or by the company’s earnings.
  • The public’s purchases reduced the floating supply and the insiders, knowing that a lot of room traders were short, thought the time propitious for a squeezing. The price was duly run up to 150. I daresay there was plenty of covering but I stayed pat. Why shouldn’t I?…. The reasons that had impelled me to begin selling at 153 and keep at it on the way down to 133, not only still existed but were stronger than ever… Fundamental conditions were fighting for me. It was not difficult to be both fearless and patient.
  • There was nothing in the character of the rally from 133 to 150 to frighten me into covering and presently the stock, as was to be expected, started down again.
  • I stood pat throughout because I knew my position was sound. I wasn’t bucking the trend of the market or going against basic conditions but the reverse, that was what made me so sure of the failure of an over-confident inside clique. What they tried to do others had tried before and it had always failed. The frequent rallies, even when I knew as well as anybody that they were due could not frighten me. I knew I’d do much better in the end by staying pat than by trying to cover to put out a new short line at a higher price.

Trade in the Same Direction as the Market Trend

  • Nobody should be puzzled as to whether a market is a bull or a bear market after it fairly starts. The trend is evident to a man who has an open mind and reasonably clear sight, for it is never wise for a speculator to fit his facts to his theories.
  • Such a man will, or ought to, know whether it is a bull or a bear market, and if he knows that he knows whether to buy or to sell.

Don’t Play If You Can’t Identify the Trend

  • I had made a good bit, but the reason I cleaned up was that I figured that the decline had discounted the immediate future. I looked for a fair recovery but I wasn’t bullish enough to play for a turn. I wasn’t going to lose my position entirely. The market would not be right for me to trade in for a while.
  • The first ten thousand dollars I made in the bucket shops I lost because I traded in and out of season, every day, whether or not conditions were right. I wasn’t making that mistake twice.

Identify the Line of Least Resistance from Tape Reading

  • The object of reading the tape is to ascertain, first, how and next, when to trade — that is whether it is wiser to buy than to sell. It works exactly the same for stocks as for cotton or wheat or corn or oats.
  • You watch the market — that is, the course of prices as recorded by the tape — with one object: to determine the direction — that is, the price tendency.
  • Prices, we know, will move either up or down according to the resistance they encounter. For purposes of easy explanation we will say that prices, like everything else, move along the line of least resistance. They will do whatever comes easiest, therefore they will go up if there is less resistance to an advance than to a decline; and vice versa.

Buy / Sell on Breakouts / Breakdowns

  • Eventually something happens that increases the power of either the upward or the downward force and the point of greatest resistance moves up or down — that is, the buying at 130 will for the first time be stronger than the selling, or the selling at 120 be stronger than the buying. The price will break through the old barrier or movement-limit and go on.
  • … the intelligent trader who has patiently waited to determine this line will enlist the aid of fundamental trade conditions and also of the force of the trading of that part of the community that happened to guess wrong and must now rectify mistakes. Such corrections tend to push prices along the line of least resistance.

Wait for the Line of Least Resistance to Present Itself

  • I recall how I missed a big play just by trying to anticipate the starting signal. I felt so sure of conditions that I thought it was not necessary to wait for the line of least resistance fo define itself.
  • In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be — up or down. The thing to do is to watch the market, read the tape to determine the limits of the get-nowhere prices, and make up your mind that you will not take an interest until the price breaks through the limit in either direction.

Accumulate Your Line On The Way Up

  • It would not be so difficult to make money if a trader always stuck to his speculative guns — that is, waited for the line of least resistance to define itself and began buying only when the tape said up or selling only when it said down. He should accumulate his line on the way up.
  • Suppose I had decided that my line would be 40 to 50 thousand bales [of cotton]… Suppose the line of least resistance indicated a bull movement. Well, I would buy 10 thousand bales. After I got through buying that, if the market went up 10 points over my initial purchase price, I would take on another 10 thousand bales. Same thing. Then, if I could get 20 points’ profit, or 1 dollar a bale, I would buy 20 thousand more. But if after buying the first 10 or 20 thousand bales, it showed me a loss, out I’d go.
  • What I accomplished by sticking to my system was that I always had a line of cotton in every real movement. In the course of accumulating my full line I might chip out 50 or 60 thousand dollars in these feeling-out plays of mine. This looks like a very expensive testing, but it wasn’t. After the real movement started, how long would it take me to make up the fifty thousand dollars I had dropped in order to make sure that I began to load up at exactly the right time? No time at all! It always pays a man to be right at the right time.

Pat Hearne’s Money Making Method

  • He would buy 100 shares of some active stock and when, or if, it went up 1% he would buy another 100. On another point’s advance, another 100; and so on.
  • He used to say he wasn’t playing the game to make money for others and therefore he would put in a stop-loss order 1 point below the price of his last purchase.
  • When the price kept going up he simply moved up his stop with it. On a 1% reaction he was stopped out. He declared he did not see any sense in losing more than 1 point, whether it came out of his original margin or out of this paper profits.
  • As old Pat Hearne used to remark, “You can’t tell till you bet.”

Market Movements Precede News

  • You will find in actual practice that if you trade as I have indicated, any important piece of news given out between the closing of one market and the opening of another is usually in harmony with the line of least resistance.
  • The trend has been established before the news is published, and in bull markets bear items are ignored and bull news exaggerated, and vice versa.

When to Sell

  • Another thing to bear in mind is this: Never try to sell at the top. It isn’t wise. Sell after a reaction if there is no rally.

Detecting a Market Downturn

  • And there is another thing to remember, and that is that a market does not culminate in one grand blaze of glory. Neither does it end with a sudden reversal of form. A market can and does often cease to be a bull market long before prices generally begin to break. My long expected warning came to me when the leaders of the market reacted several points from the top and — for the first time in many months — did not come back. Their race evidently was run, and that clearly necessitated a change in my trading tactics.
  • It was simple enough. In a bull market the trend of prices, of course, is decidedly and definitely upward. Therefore whenever a stock goes against the general trend you are justified in assuming that there is something wrong with that particular stock. It is enough for the experienced trader to perceive that something is wrong. He must not expect the tape to become a lecturer. His job is to listen for it to say “Get out!” and not wait for it to submit a legal brief for approval.
  • The leaders that had ceased to lead I sold. I put out a short line of five thousand shares in each of them; and then I went long of the new leaders. The stocks I was short of didn’t do much, but my long stocks kept on rising. When finally these in turn ceased to advance I sold them out and went short—five thousand shares of each. By this time I was more bearish than bullish, because obviously the next big money was going to be made on the down side.
  • Then one day the entire market became quite weak and prices of all stocks began to fall. When I had a profit of at least four points in each and every one of the twelve stocks that I was short of, I knew that I was right. The tape told me it was now safe to be bearish, so I promptly double up.

Trading on a Large Scale – Get Out When You Can

  • 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. You cannot hesitate. if you do you are lost.
  • Neither can you try stunts like running up the price on the bears by means of competitive buying, for you may thereby reduce the absorbing capacity. And I want to tell you that perceiving your opportunity is not as easy as it sounds. A man must be on the lookout so alertly that when his chance sticks in its head at his door he must grab it.
  • As I said before, in a bear market it is always wise to cover if complete demoralisation suddenly develops. That is the only way, if you swing a good-sized line, of turning a big paper profit into real money both quickly and without regrettable reductions.

Limit versus Market Orders

  • You see, I never could trade with a limit. I must take my chances with the market. That is what I am trying to beat — the market, not the particular price. When I think I should sell, I sell. When I think stocks will go up, I buy.
  • My adherence to that general principle of speculation saved me. To have traded at limited prices simply would have been my old bucket-shop method inefficiently adapted for use in a reputable commission broker’s office. I would never have learned to know what stock speculation is.
  • Whenever I did try to limit the prices in order to minimize the disadvantages of trading at the market when the ticker lagged, I simply found that the market got away from me. This happened so often that I stopped trying.

Stocks Crossing Key Prices Go Up a Good Deal Higher

  • It was an old trading theory of mine that when a stock crosses 100 or 200 or 300 for the first time the price does not stop at the even figure but goes a good deal higher [30 to 50 points higher — and after 300 faster than after 100 or 200], so that if you buy it as soon as it crosses the line it is almost certain to show you a profit. Timid people don’t like to buy a stock at a new high record. But I had the history of such movements to guide me.
  • I figured that when it [Anaconda] crossed 300 it ought to keep on going and probably touch 340 in a jiffy… On a legitimate advance the price should have gone to 310 without stopping. If instead it reacted it meant that precedents had failed me and I was wrong; and the only thing to do when a man is wrong is to be right by ceasing to be wrong.

Commodities are a Better Play than Stocks

  • I would rather play commodities than stocks… It partakes more of the nature of a commercial venture than trading in stocks does… It may be possible to use fictitious arguments for or against a certain trend in a commodity market; but success will be only temporary, for in the end the facts are bound to prevail, so that a trader gets dividends on study and observation, as he does in a regular business.
  • He can watch and weigh conditions and he knows as much about it as anyone else. He need not guard against inside cliques. Dividends are not unexpectedly passed or increased overnight in the cotton market or in wheat or corn.
  • In the long run commodity prices are governed but by one law — the economic law of demand and supply. The business of the trader in commodities is simply to get facts about the demand and the supply, present and prospective. He does not indulge in guesses about a dozen things as he does in stocks.

Testing the Market Strength

  • Now, ordinarily a man ought to be able to buy or sell a million bushels of wheat within a range of 1/4 cent. On this day when I sold the 250,000 bushels to test the market for timeliness, the price went down 1/4 cent. Then, since the reaction did not definitely tell me all I wished to know, I sold another quarter of a million bushels. I noticed that it was taken in driblets; that is, the buying was in lots of 10,000 or 15,000 bushels instead of being taken in two or three transactions which would have been the normal way. In addition to the homeopathic buying the price went down 1 and 1/4 cents on my selling. Now, I need not waste time pointing out that the way in which the market took my wheat and the disproportionate decline on my selling told me that there was no buying power there. Such being the case, what was the only thing to do? Of course, to sell a lot more. Following the dictates of experience may possibly fool you, now and then. But not following them invariably makes an ass of you.

Group Dynamics

  • Trade conditions and prospects should work alike with all stocks of a group and the prosperity should be shared by all. On the theory, corroborated by experience times without number [i.e. by lots of experience], that every dog has his day in the market, the public will buy A. B. Steel because it has not advanced while C. D. Steel and X. Y. Steel have gone up.
  • .. experience shows you how to profit by variations from the usual, that is, from the probable (e.g. stocks move together in a group).
  • I never buy a stock even in a bull market, if it doesn’t act as it ought to act in that kind of market. I have sometimes bought a stock during an undoubted bull market and found that other stocks in the same group were not acting bullishly and I have sold out my stock. Why? Experience tells me that it is not wise to buck against what I may call the manifest group-tendency.
  • Experiences had taught me to beware of buying a stock that refuses to follow the group-leader.
  • Perhaps the insiders did not put it up because there might they wished to accumulate more stock before advancing the price. But this was an untenable theory if you analysed the volume and character of the trading in Chester.

Pay Attention to Changes in Behaviour

  • The trade [a short position in cotton] had gone against me. There were times when it almost looked as if I might win out. I noticed that whenever anybody sold heavily there was a good reaction. But almost instantly the price would rally and make a new high for the move… This had indicated that the line of least resistance was upward and it had cost me a million to shut my eyes to it.
  • Now, however, the reason that had made me cover at a big loss was no longer a good reason since there had not been the usual prompt and vigorous rally.
  • The way the market took my first 10 thousand bales made me sell the second 10 thousand, and the way the market took the second made me certain the turn had come. It was the difference in behaviour.

Stocks are Distributed on the Way Down

  • In the majority of the cases the object of manipulation is, as I said, to sell stock to the public at the best possible price. It is not alone a question of selling but of distributing. It is obviously better in every way for a stock to be held by a thousand people than by one man — better for the market in it. So it is not alone the sale at a good price but the character of the distribution [i.e. to make a market] that a manipulator must consider.
  • … it is well to remember a rule of manipulation, a rule that Keene and his able predecessors well knew. It is this: Stocks are manipulated to the highest point possible and then sold to the public on the way down…. There is no sense in marking up the price to a very high level if you cannot induce the public to take it off your hands later.

How a Stock Manipulation Campaign is Conducted

  • Make the Stock Active: The first step in a bull movement in a stock is to advertise the fact that there is a bull movement on… The most effective way to advertise what, in effect, are your honourable intentions is to make the stock active and strong. After all is said and done, the greatest publicity agent in the wide world is the ticker, and by far the best advertising medium is the tape… I accomplish all these highly desirable things by merely making the stock active. When there is activity there is a synchronous demand for explanations; and that means, of course, that the necessary reasons — for publication — supply themselves without the slightest aid from me.
  • Bid the Stock Up: The selling pressure is not apt to be strong where a man has as much speculatively held stock sewed up — in calls — as I insist in having.
  • Sell Stock on Balance: The buying, therefore, prevails over the selling, and the public follows the lead not so much of the manipulator as of the room traders. It comes in as a buyer. This highly desirable demand I fill — that is, I sell stock on balance.
  • If demand is what it ought to be it will absorb more than the amount of stock I was compelled to accumulate in the earlier stages of the manipulation; and when this happens I sell the stock short. It is perfectly safe for me to do so since I am really selling against my calls.
  • Wait When Stock Ceases to Advance: Of course, when the demand from the public slackens, the stock ceases to advance. Then I wait. Say, then, that the stock has ceased to advance. There comes a weak day. The entire market may develop a reactionary tendency or some sharp-eyed trader might perceive that there are no buying orders to speak of in my stock, and he sells it, and his fellows follow. Whatever the reason may be, my stock starts to go down.
  • Support the Stock When It Goes Down: Well, I begin to buy it. I give it the support that a stock ought to have if it is in good odour with its own sponsors. And more: I am able to support it without accumulating it — that is, without increasing the amount I shall have to sell later. Of course what I am really doing is covering stock I sold short at higher prices when the demand from the public or from the traders or from both enabled me to do it.
  • It is always well to make it plain to the traders — and to the public, also — that there is a demand for the stock on the way down. That tends to check both reckless short selling by the professionals and liquidation by frightened holders — which is the selling you usually see when a stock gets weaker and weaker, which in turn is what a stock does when it is not supported.These covering purchases of mine constitute what I call the stabilising process.
  • Sell Stock on the Way Up Again: As the market broadens I of course sell stock on the way up, but never enough to check the rise…. It is obvious that the more stock I sell on a reasonable and orderly advance the more I encourage the conservative speculators, who are more numerous than the reckless room traders; and in addition the more support I shall be able to give to the stock on the inevitable weak days. By always being short I always am in a position to support the stock without danger to myself.
  • As a rule I begin my selling at a price that will show me a profit. But I often sell without having a profit, simply to create or to increase what I may call my riskless buying power (my note: i.e. riskless buying later on due to covering of the short).
  • Make the Final Sale From the Top: A stock which it is desired to distribute should be manipulated to the highest possible point and then sold.
  • Sometimes a stock gets water-logged, as it were; it doesn’t go up. That is the time to sell.
  • When my buying does not put the stock up I stop buying and then proceed to sell it down; and that also is exactly what I would do with that same stock if I did not happen to be manipulating it.
  • Well, when the price line of least resistance is down is established I follow it, not because I am manipulating that particular stock at that particular moment but because I am a stock operator at all times.
  • All manipulation comes to an end when the manipulator cannot make a stock do what he wants it to do. When the stock you are manipulating doesn’t act as it should, quit. Don’t argue with the tape.

Don’t Short Sell a Closely Held Stock

  • … nobody likes to go short of a stock that is not well distributed; the seller is too much at the mercy of the loaded-up inside clique.

Bear Raids Cannot Cause a Protracted Decline

  • The public ought to grasp firmly this one point: That the real reason for a protracted decline is never bear raiding. When a stock keeps on going down you can bet there is something wrong with it, either with the market for it or with the company.
  • If the decline were unjustified the stock would soon sell below its real value and that would bring in buying that would check the decline.
  • As a matter of fact, the only time a bear can make big money selling a stock is when that stock is too high.

Continuous Buying is Needed to Keep a Stock Going Up

  • The public ought always to keep in mind the elementals of stock trading. When a stock is going up no elaborate explanation is needed as to why it is going up.
  • It takes continuous buying to make a stock keep on going up. As long as it does so, with only small and natural reactions from time to time, it is a pretty safe proposition to trail along with it.
  • But if after a long steady rise a stock turns and gradually begins to go down, with only occasional small rallies, it is obvious that the line of least resistance has changed from upward to downward.
  • There are probably very good reasons why it should go down, but these reasons are known only to a few people who either keep those reasons to themselves, or else actually tell the public that the stock is cheap. The nature of the game as it is played is such that the public should realise that the truth cannot be told by the few who know.

The Enemy is Within

  • The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you you hope that every day will be the last day —and you lose more than you should had you not listened to hope — to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out — too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.


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