Long term investors – Warren Buffett is the best-known example – prefer to leave their money in the markets to reap the rewards of compounding.
Jesse Livermore – a trader – thought this was unwise. His opinion was that, after a successful trade, traders “should make it a rule to take one-half of the profits and lock this sum up in a safe deposit box.”
In How To Trade In Stocks Jesse Livermore describes how he was staying in Palm Beach after a highly successful trade. He requested the telegraph operator to tell his broker in New York to deposit one million dollars from the trade into his bank account. After sending the message, the operator asked if he could keep the slip. Why? Livermore asked. The operator replied:
“I’ve been an operator here in Palm Beach for twenty years and that was the first message I’ve ever sent asking a broker to deposit money in a bank account of a customer.
“I’ve seen thousands and thousands of messages passing over the wire from brokers demanding margins from customers. But never before one like yours.”
What Wall Street Giveth, It Taketh Back
Edwin Lefèvre, near the end of Reminiscences of a Stock Operator, said prophetically:
“My study of the history of Wall Street justifies a belief that the same ticker which giveth also taketh away. The only kings that were not ignominiously dethroned were those who abdicated in time and ran away from the danger of destitution.
“And then I thought of other kings for a day. Men who were the leaders of the market after beating the game for millions were eventually beaten by the game in the end.”
I’m not trying to be negative here – just realistic. If you’ve been taking big profits out of the market, put some of them aside occasionally to build tangible assets, like real estate.
Although cold, mathematical logic dictates that a successful trader should usually keep as much money as possible in the market, history gives another perspective – the perspective of traders who were once successful bankrupting themselves. Who’s to say we won’t suffer this fate? Turning some of our trading profits into tangible assets might not help us become kings of Wall Street – but we might make the grade as princes – and it should stop us sinking to the status of paupers.