“There’s nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.” Thus opens Reminiscences of a Stock Operator, a stock trading book authored by journalist Edwin Lefevre and trader Jesse Livermore that became an instant classic when it was first published as a series of articles in 1923. Every trader alive has probably read the book at one point or another, and they should read it again if it’s Jon D. Markman’s annotated edition. Providing extensive detail behind the names, places, and deals described in the book, it transports the reader back into the days when the market was simpler, but just as ruthless.
Like the original, the book provides tons of timeless advice born from long, hard experience. Tips like:
- Stick with your winning trades and don’t bother with retractments to get into a trending market.
- Don’t buy stocks when they’re cheap. Buy them when they’re right and have proven themselves.
- Knowing when NOT to trade is as important as knowing when to trade.
- Focus on general movments, not individual stocks.
- If you have a large position, sell down to the sleeping point (i.e. the point where you can sleep soundly at night).
All of these words (and more) are as good today as they were nearly a century ago. Like most areas of expertise, the road to success is known and paved. It’s driving down that road that’s the tough part.
The book also discusses how the big players operate – the underwriters, brokers, etc. – when selling millions of shares on behalf of their clients to raise money without crashing a stock’s price. By simply creating activity and volatility they advertise a stock and create a market of willing buyers and sellers. They then strategically go long or sell short the stock to minimize fluctuations in price while slowly unloading their position – boosting price when needed by buying and then selling into the frenzy, shorting the top, and then covering their shorts to limit the decline afterwards. Everyone knows that the stock market today is shaped by the smart money, the big hedge funds and investment banks. The actual techniques involved though are much less discussed and I greatly enjoyed this window into the industry.
Arguably, the best part of the new edition is short biographies it gives of various traders that are mentioned. By doing so, the book highlights a key concern of the FIRE Community: the role personal finances play in long-term success. Traders like Daniel Drew and Jacob Little were some of the wealthiest men in the country, but suffered one crash too many before ending their lives as broken men. Livermore’s expenses were out of control by his own admission, and it wasn’t until he had made and lost several fortunes that he started to realize that he needed to put money aside.
Conversely, people like Russell Sage and Henry Keep knew how to bank their money and pass it on to their descendents. The former was famous for his frugality and ended life with $70 million in the bank. The latter was a multimillionaire after a long career that saw many other wiped out. As Keep said:
“Would you like to know how I made my money? I did it by cooping the chickens; I did not wait till the whole brood was hatched. I caught the first little chicken that chipped the shell and put it in the coop. I then went after more. If there were no chickens, I had one safe at least. I never despised small gains. What I earned, I took care of. I never periled what I had, for the sake of grasping what I had not secured.”
It’s this sense of calculated risk that is often missing from discussions in both the FIRE community, as well as the stock trading community at large. You don’t only save, but you learn to speculate too; you don’t just blindly throw your winnings in the market, you must claw some back and separate it from all of your other funds. By this strategic asset building, people can build larger nest eggs than are typically seen in the FIRE community, if not the gargantuan stockpiles advocated by the likes of Robert Kiyosaki.
Overall, the annotated version is a marvellous update of the original. It gives priceless perspective on how money and character inform each other, and ought to be mandatory reading for anyone even remotely involved in the financial world. Pick up a copy today!