Tuesday, July 1, 2014

Book Review #5: Reminiscences of a stock operator: Author:Edvin LeFevre

First published in 1923, "Reminiscences of a Stock Operator" is the most widely read, highly recommended investment book ever. Generations of readers have found that it has more to teach them about markets and people than years of experience. This is a timeless tale that will enrich your life--and your portfolio.
Delightful, Splendid, Perfect and Brilliant are some of the adjectives that I would use to describe this book, if I were a Brit.

'Reminiscences....' tells the story of evolution of Lawrence Livermore, big time stock operator in the US Stock Markets in the late 1800s and early 1900s. At the age of 15, Livermore works as quotation-board boy in a Stock Brokerage Office. While working, he finds that he has a way with numbers and a phenomenal memory. Soon he finds the by looking at the pattern of quotes in the ticket tape, he is able to predict the future prices of stocks.

He wins about 3 Dollars in his first trade and very soon is actively trading in stocks. By the age of fifteen he has made his first 1000 Dollars by trading in Bucket Shops. Soon he is trading full time in Bucket Shops (Small time stock trading agencies) and quickly builds a reputation of beating the bucket shops on a regular basis. Consequently he is barred from trading in most of the bucket shops.

Livermore decides to move to New York. There he finds that the system which helped him make money in Bucket Shops will not help him make money in New York. Initially he loses money in Stock Market, but considers each failure as opportunity to learn something new and loss is a tuition fee.

Soon he is trading as an Operator in Stock Exchange and earns a reputation as one who can move the prices of stocks either up or down. He doesn't consider himself either as a bull or a bear. His only focus is the tape and he does what the tape tells him to do. He trades in both Stocks and Commodities. And makes and loses money in both.

While talking about trading in Coffee, he mentions an experience which is worth mentioning for its current relevance. After a lot of analysis, Livermore realized that prices of coffee is bound to come down. He became bearish on coffee and started shorting coffee. He kept his position open for 9 months and in those 9 months the price of coffee did not come down and he lost a lot of money. But he was very convinced of his view regarding coffee prices that he again opened a short position on coffee.

Soon the price of coffee started behaving as he had expected. Soon he was sitting on a lot of paper profit. That is when the sellers of the coffee played their little game. They realized that the price of coffee was going down and they were staring at a huge loss. They lobbied the government to fix a minimum price for coffee. Due to this trick by the sellers, Livermore couldn't cash in on his paper profits and closed his position at a small loss.

As he had anticipated, the market forces had their final say and the price of coffee started falling soon and many small traders lost money.

This happens even now. You only have to read papers to read about minister warning Commodity Manipulators from manipulating the prices of essential commodities.

While reading this book, I was surprised to see how much of this book was about me. About my thoughts and actions that I take as a stock investor. He says that worst suckers in stock market are the half-baked knowledge guys who talk as if they know a lot but there is no depth to their knowledge. They may have some profit but they are only spewing various market aphorisms in their attempt to show off their limited knowledge.

He was talking about me. Read this and decide for yourself. 

Right from the first word, this book is unputdownable. It has everything. Lucre, adventures, ups, downs....

And wisdom. Tonnes of it.

This book packs enough wisdom in its first 50 pages than all the other books that I read put together. For example, while talking of a loss made in one transaction that he undertook to show his gratitude to a friend, the author mentions that 'Gratitude is something that  a decent man can't help feel but it is for a fellow to keep it from completely tying him up.' You can't help feel grateful, but a smart man should keep gratitude from hampering his thought process and intellectual clarity.

Life of a stock market operator is filled with thrills and adventure. There are days when Mr.Livermore made more than a million dollars (Yeah, you heard me right !. That too in early 1900s) and there are days when he lost a million dollars. At least in this book, he appears to take it all in his stride.

There is a part in this book where Livermore is deep into debt and is besieged by a few creditors. He is confident that he can recoup the losses and pay back all his debt. However the stress created by being indebted to creditors is too much for him to take and he feels that he can't perform well and recoup his losses with all this pressure on him like a Damocles sword.

So he decide to declare bankruptcy. He approached his creditors and inform them of his intention to declare bankruptcy. Most of them are supportive. So he declares bankruptcy and then with a free mind trades and recoups all his losses and some and pays back all his debt. 

He talks about trading in Bethlehem Steel after he declared bankruptcy. He kept observing the tape and became more and more convinced that this was the stock to buy. Everyday the stock was screaming 'Buy !'. However, Mr.Livermore followed a specific method and till the price reached his target, he decided not to take any action. He was tempted by every information to buy the stock. But he maintained his discipline and in his words quote 'But I sat tight and instead of listening to my loud-mouthed hopes or to my clamorous beliefs, I heeded only the level voice of my experience and counsel of common sense.'. Since he waited till the right time to buy, he was able to make huge profits in this stock. As he mentions, and I quote, 'There is a great deal in starting right, whatever may be the enterprise'. Great wisdom in those words.


There are multiple instances when manipulative interests approach him to run up the price of some of their shares. He obliges them at some profit to himself, of course. That is one instance when I did not like the protagonist in a novel.

The strategies that he adopts to bring down the prices of stocks and commodities are very interesting. Once he took a bearish stance on a specific stock (Company X). He shorted the stock. However the bull operators on the stock purchased the same and ran up the prices leading to a loss for Livermore. Every time he shorted the stock, the bull operators ran it up. So he approached this through another track. He shorted another company (Company Y) that had invested a lot in Company X. When he shorted Company Y, the bull operators were forced to buy more of Company X to prop up the value of Company Y. So the investors thought that Company X stock was being purchased to prop up the falling Company Y and that led to selling in both the stocks and Livermore ended up with huge profits on his short position !!

The reason I am mentioning this long winded strategy is to show how clinically and with precision does the Stock Market Operator operate !. 

Here are some additional pearls of wisdom from the book.
  • In fact I always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my game.
  • There is a time for all things, but I don't know it. And that is precisely what beats so many men in wall street who are very far from being in the main sucker class.
  • There is the very plain fool who does the wrong thing at all times everywhere, but there is the wall street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily or sufficient knowledge to make his play an intelligent play.
  • The desire for constant action irrespective of underlying conditions is responsible for may losses in wall street even among professionals.
  • As stock operator has to fight a lot of enemies within himself.
  • Without faith in his judgement no man can go far in this game.
  • It is the big swing that make big money for you.
  • Sit tight !
  • When I am bearish and sell stocks, each sale must be at a price lower than the previous. When I am going long, each purchase should be at a price higher than the previous one...
  • If the man didn't make any mistakes, he would own the world in a month. But if he didn't profit from his mistakes, he wouldn't own a blessed thing.
  • The way to make money is to make it.
  • A speculator must not be merely a student. He must be a student and a speculator
If you are a stock market operator you have to have this book in your library. There is nothing like money (losing tonnes of it) to teach you a lot about yourself. If you have dabbled in stock market, you can see yourself in this book. It also tells you that you have to do a lot of analysis, come to a conclusion and once you have done that, you have to take decision. You cannot afford to vacillate in Stock Market. 

Let me end this review with a story from the book.

A man was so nervous that a friend asked him what is the matter.

'I can't sleep', replied the man.

'Why not?', the friend asked him.

'I am carrying so much cotton that it is wearing me out. What should I do?', asked the man.

'Sell down to the sleeping point', replied the friend.

A winner in stock market is one who can identify his sleeping point and sell down to it...

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