Jesse Livermore Discovers the Missing Piece in the Trading Jigsaw
From the age of 15, Jesse Livermore had become an expert at reading the ticker tape that brought price and volume data from the trading floor of the New York Stock Exchange.
Livermore had learned, with a high probability of being right, to predict whether a stock was due to rise or fall.
He had also learned that the time delay involved in trading on the stock exchange through a broker, rather than trading in a bucket shop, meant he had to choose his trades carefully. He should accept only those trades that offered the highest probability of large movements in price. The time-delay meant he could no longer step into trades where he thought he could very quickly grab a one-point profit.
Finally, he had learned through bitter experience to trust his own reading of the tape in preference to listening to experts. He had also learned that the insider tips he was regularly privy to were often worthless and that they should be ignored.
Something was still missing from his trading though and Livermore tried to find it.
First of all, rather than solely relying on the tape, Livermore began to look further afield, reading trade reports, earnings figures and financial statements. This gave him a better feel for the companies that should be rising and those that should be falling.
Then, studying his own trading records, he found that although he was often 100 percent right in predicting small movements in prices, he was making much less profit than he should in the bull market that prevailed. Livermore realized that by jumping into and out of stocks on the basis of his daily reading of the tape he was missing out on profits.
A Crucial Conversation – “It’s a Bull Market”
Listening to the (repeated daily) advice of an old stager in the offices of Fullerton, it suddenly dawned on him why he was making less profit than he should. Whatever question the old fellow – known to everyone as Turkey although his real name was Partridge – was asked about the market, he would reply, “well, it’s a bull market.”
At first Livermore thought this was a mere platitude. Hearing “It’s a Bull Market” daily, he began thinking about it more. Then, listening to a conversation between Turkey and Elmer Harwood – a young trader – he realized that it was more than a platitude – it was the missing piece in his own education.
Elmer: “Mr. Partridge, I have just sold my Climax Motors. My people say the market is entitled to a reaction and that I’ll be able to buy it back cheaper. So you’d better do likewise. That is, if you’ve still got yours.”
Turkey: “Yes, Mr. Harwood, I still have it. Of course!”
Elmer: “Well, now is the time to take your profit and get in again on the next dip,” said Elmer, “I have just sold every share I owned!”
Turkey: “No! No! I can’t do that!”
Elmer: “Didn’t I give you the tip to buy it?”
Turkey: “You did, Mr. Harwood, and I am very grateful to you.
Elmer: And didn’t that stock go up seven points in ten days? Didn’t it?”
Turkey: “It did, and I am much obliged to you, my dear boy. But I couldn’t think of selling that stock.”
Elmer: “Why not?”
Turkey: “Why, this is a bull market!” (The old fellow said it as though he had given a detailed explanation.)
Elmer: “I know this is a bull market as well as you do. But you’d better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself.”
Turkey: “My dear boy, if I sold that stock now I’d lose my position; and then where would I be? And when you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be able to repurchase your line at a substantial concession, sir. But I myself can only trade in accordance with the experience of many years. I paid a high price for it and I don’t feel like throwing away a second tuition fee. But I am as much obliged to you as if I had the money in the bank. It’s a bull market, you know.”
Jesse Livermore realized that Turkey’s consistent message was that the big money was to be made not in trying to trade small moves on the tape but to catch the major trend.
“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. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear. 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.”
With this step in place, Jesse Livermore’s trading philosophy was complete.