People sometimes make the mistake of believing that Jesse Livermore was a purely technical trader.
It’s true that Jesse would try to exploit the market using his technically based tape-reading skills and it’s also true he wouldn’t worry too much about the reasons behind the numbers on the tape.
At other times though – as explained in Reminiscences of a Stock Operator – he would act on his understanding of the fundamental economics of a situation.
The United State World Trade Corporation operated around the world. It owned shipping lines, coffee plantations in Guatemala, hydroelectric plants in Bolivia, banks in Peru and conducted a huge export business.
It helps to read about other traders’ errors. There is a slight possibility that doing so will prevent us making the same trading errors.
In How To Trade In Stocks Jesse Livermore describes how he missed a one million-dollar profit through impatience. He also repeatedly broke his own trading rules and, as a result, lost $200,000.
Many years ago I became strongly bullish on cotton. I had formed a definite opinion that cotton was in for a big rise. But as frequently happens the market itself was not ready to start. No sooner had I reached my conclusion, however, than I had to poke my nose into cotton.
My initial play was for 20,000 bales, purchased at the market. This order ran the dull market up fifteen points. Then, after my last 100 bales had been bought, the market proceeded to slip back in twenty-four hours to the price at which it had been selling when I started buying. There it slept for a number of days. Finally, in disgust, I sold out, taking a loss of around $30,000, including commissions. Naturally, my last 100 bales were sold at the lowest price of the reaction.
A Second Attempt
A few days later the market appealed to me again. I could not dismiss it from my mind, nor could I revise my original belief that it was in for a big move. So I re-bought my 20,000 bales. The same thing happened. Up jumped the market on my buying order and, after that, right back down it came with a thud. Waiting irked me, so once more I sold my holdings, the last lot at the lowest price again.
If You Don’t Succeed at First, Try, Try Again
This costly operation I repeated five times in six weeks, losing on each operation between $25,000 to $30,000. I became disgusted with myself. Here I had chipped away almost $200,000 with not even a semblance of satisfaction.
A Mood Not Conducive to Clear Thinking
So I gave my manager an order to have the cotton ticker removed before my arrival next morning. I did not want to be tempted to look at the cotton market any more. It was too depressing, a mood not conducive to clear thinking which is required at all times in the field of speculation.
One of the Most Attractive and Soundest Trades Lost
And what happened? Two days after I had the ticker removed and had lost all interest in Cotton, the market started up, and it never stopped until it had risen 500 points. I had thus lost one of the most attractive and soundest plays I had ever figured out.
Failure to wait (for the Pivotal Point to be passed)
There were two basic reasons. First, I lacked the patience to wait until the psychological time had arrived, pricewise, to begin my operation. I had known that if cotton ever sold up to 12.5 cents a pound it would be on its way to much higher prices. But no, I did not have the will power to wait. I though I must make a few extra dollars quickly, before cotton reached the buying point, and I acted before the market was ripe. Not only did I lose around $200,000 in actual money, but a profit of $1,000,000. For my original plan, well fixed in mind, contemplated the accumulation of 100,000 bales after the Pivotal Point had been passed. I could not have missed making a profit of 200 points or more on that move.
Emotional Involvement – Trading Errors
Secondly, to allow myself to become angry and disgusted with the cotton market just because I had used bad judgment was not consistent with good speculative procedure. My loss was due wholly to lack of patience in awaiting the proper time to back up a preconceived opinion and plan. I have long since learned, as all should learn, not to make excuses when wrong. Just admit it and try to profit by it.
The Market Tells Traders When They Are Wrong
The market will tell the speculator when he is wrong, because he is losing money. When he first realized he is wrong is the time to clear out, take his losses, try to keep smiling, study the record to determine the cause of his error, and await the next big opportunity. It is the net result over a period of time in which he is interested.