In 1940, shortly before his death, Jesse Livermore wrote a slim volume How to Trade in Stocks which detailed his "Classic formula for understanding timing, money management, and emotional control".
Again, like Reminiscences of a Stock Operator, it is a treasure trove of advice, which has stood the test of time. The short sections quoted below should give you some food for thought:
"We know that prices move up and down. They always have and always will.
My theory is that: "Behind these major movements is an irresistible force."
That is all one needs to know. It is not good to be too curious about all the reasons behind price movements. You risk the danger of clouding your mind with non-essentials. Just recognize that the movement is there and take advantage of it by steering your speculative ship along with the tide. Do not argue with the condition, and most of all, do not try to combat it."
"It has always been my experience that I never benefited much from a move if I did not get in at somewhere near the beginning of that move. And the reason is that I missed the backlog of profit which is very necessary to provide the courage and patience to sit through a move until the end comes - and to stay through any minor reactions or rallies which were bound to occur from time to time before the movement had completed its course."
"Stick with the winners - as long as the stock is acting right - do not be in a hurry to take a profit. You must know you are right in your basic judgement, or you would have no profit at all."
"If I bought a stock and it went against me I would sell it immediately. You can't stop and try to figure out "WHY" it is going in the wrong direction - the fact that it "IS" going in the wrong direction and that is enough for an experienced speculator to close the trade."
The only aspect that most traders will disagree with Livermore is his money management parameters. He said "Never sustain a loss of more that 10% of invested capital!". Modern theory is that you risk no more than 1% - 2% per trade.
It is not known how someone reputedly amassed profits of $100 million in the 1929 stock market crash, yet was declared bankrupt five years later. Yet this one aspect of his approach probably accounted for the wild swings between his bankruptcies and those periods such as 1907 and 1929 when he made fortunes.
Livermore liked to scale in to his positions, quickly accumulating his full position if price moved in his favour, up to his 10% of risk. This is very similar to the pyramiding technique used by Richard Dennis and the Turtle traders more than 50 years later. However Dennis had ensured that total risk on a position was no more than 2% of capital. So, he had learned from Livermore to de-leverage the basic approach. Still, when reviewing the monthly returns achieved by the Turtles, you can still see the volatility in their recorded results.
Readers of this blog will know about the huge losses racked up by the Turtles on the day after the 1987 stock market crash, when markets reversed following government intervention. Curtis Faith (one of the Turtles) talked about suffering a 65% drawdown overnight. One shudders as to how big the losses could have been had they used similar risk management parameters to Livermore.
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