Edwin Lefevre's classic stock market text Reminiscences of a Stock Operator centers on Larry Livingston, a thinly veiled depiction of Jesse Livermore, one of the most famous traders of all time. Lefevre's book takes place in the early twentieth century and gives a first-person account of Livingston's journey from quotation-board boy in a bucket shop to stock-price scalper to large-position trader. Readers follow Livingston as he sharpens his trading chops in a process that leaves him dead broke more than once, but each time even more dedicated to catching his white whale.
Livingston, a trader to the end, is certainly not known for taking a particularly Foolish approach to the markets, but that's not to say that there isn't plenty that a true-blue Foolish investor can learn from Reminiscences. Beyond its educational merits, though, Reminiscences is simply a very well-written book and an engulfing story for anyone interested in the stock market.
The boy plunger
Watching the price movements of various individual issues on the ticker tape was Livingston's specialty. As a young employee at a bucket shop -- a pre-Depression house of stock trading shenanigans -- Livingston found that he had a particular knack for figuring out when a price was going to rise or fall. After a successful first trade proved his system accurate, he went on to have such a successful run price scalping (trading for very small price changes) in bucket shops that he was blacklisted in shops around the country.
Already well-known from his bucket shop exploits, the "boy plunger," as Livingston was called, found the larger, greener pastures of Wall Street challenging. The price scalping that made him a scourge on bucket shops proved less effective on The Street. Some early setbacks on calls that in many cases were right but ill timed sent him back to square one with a very light wallet. Through a bit of a trial-and-error process that sent him packing a few more times, Livingston eventually figured out that there was more to the market than capturing quick, small price blips.
Beyond the tape
Throughout Reminiscences, Livingston gives a handful of little parables based on interactions with fellow traders. One that he recounts as he's still feeling out Wall Street involves a fellow named Mr. Partridge, who's known to the other traders as "Old Turkey." Turkey stands out because he's unlike most of the other traders Larry comes in contact with. Instead of waiting on tips and impatiently trading in and out of stocks for small profits, Turkey takes a position and holds it through short-term fluctuations in order to capture the larger profit of the macro market movement.
Turkey's advice to any and all questions about individual stocks -- "Well, you know this is a bull market!" -- resonated with Livingston when he thought about his own trading troubles. He realized that his fault wasn't in being wrong on the direction of the market; rather, he was just not patient enough to collect the full bounty from his analysis. "Men who can both be right and sit tight are uncommon," Livingston declared. He continued:
Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end.... One of the most helpful things that anybody can learn is to give up trying to catch the last eighth -- or the first. These two are the most expensive eighths in the world.
This realization helped Livingston pull himself out of the legions of suckers and "semisuckers" that, while they weren't always wrong directionally, never seemed able to get the kind of big wins that Livingston hoped to notch.
Tips are for waiters
In another bit of strategy that Reminiscences hits on numerous times throughout the book, Livingston comes out as a strong opponent of acting on tips to buy or sell a particular stock. Livingston plays a lone hand, and even points out on a number of occasions how trading opposite of tips can be the best way to make money off of them. However, most of the traders around him didn't share that sentiment.
In one particular instance, a trader is given a tip from an insider at Atlantic and Southern. The insider said that the board was planning to raise the dividend, and so buying A&S was a "sure thing." Well, the sure thing fell through (as sure things seem apt to do), and the stock broke down six points. Salty over the poor tip, the trader went back to the insider, who offered his apologies and tried to make amends by giving him a "double-riveted, lead-pipe cinch to buy A&S." The result? The stock dropped further. After queuing up a nasty telegraph, the angry trader is urged by a comrade, who likewise lost on the pair of tips, to not send the message because, "we'll never get another tip from him again if you send that telegram!" Livingston said that this was a pretty typical attitude for traders of the day.
Though regulations have since been put in place to restrict insiders from giving these types of bogus tips, the time-honored tradition of tip-giving still lives on today. And the racket really hasn't changed one bit -- the army of tipsters out there are still the same crooks and crazies that they were back in the day. Just ask the Fool's resident scam smasher, Seth Jayson!
What would Jesse do?
At the end of the day, the real life Larry Livingston -- Jesse Livermore -- may have been the greatest trader to grace Wall Street, but I don't know that his style would get the nod from the investment All-Stars like Buffett and Bogle that I typically look to. While Lefevre's book goes just far enough to see Livingston make a few million in the 1907 market downturn and then lose it on a poor cotton trade, Livermore would go on to make an even larger fortune, go short on the 1929 market crash, and lose this windfall, too. Livermore didn't exactly end up destitute, but he never was able to quite get his trading rhythm back after the losses he took following the 1929 crash.
And what if Livermore was around today? Since his style depended on getting big swings from highly volatile issues, I imagine that a 21st century Livermore would swap his railroads and utilities for hot movers like Google
My Foolish takeaway is that if market-fueled adrenaline is your thing, then Jesse was probably a kindred spirit. As for me, when it comes to the markets, I prefer to make money slowly and hang onto it. I get more than enough adrenaline kicks trying to pick out the unspoiled food from my refrigerator.
Fool on, Jesse!
- The Role of Intuition in Trading
- Vague Reminiscences of a Stock Operator
- Foolish Book Review: "Confessions of a Street Addict"
Is your investing strategy more "Buffet" than "Livingston"? Let Motley Fool Inside Valueguide you to the market's best bargains. Best of all, you can try it free for 30 days.
When it comes to short-term trading, Fool contributor Matt Koppenheffer is less Jesse Livermore and more Uncle Jesse . He does not own shares of any of the companies mentioned. The Fool's disclosure policy never comes up short.