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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Livermore agreed with his friend, the gambler, Colonel Ed Bradleyafter timing and money management comes emotionsTHE WILL Livermore agreed with his friend, the gambler, Colonel Ed Bradleyafter timing and money management comes emotions. It is one thing to know what to do. It is quite another thing to have the will to actually do it. This is true of the stock market. This is true of life. Who knew better than Jesse Livermore? Having the discipline to follow your rules is essential. Without specific, clear, and tested rules speculators do not have any real chance of success. Speculators without a plan are like a general without a strategy, and therefore without an actionable battle plan. Speculators without a single clear plan can only act randomly and they must react, to the slings and arrows of stock market misfortune. This leads inevitably to the traders defeat. Playing the market is partly an art form, it is not just pure reason. If it were pure reason, then somebody would have figured it out long ago. Thats why every speculator must analyze his own emotions to find out just what stress level he can endure. Every speculator is different; every human psyche is unique; every personality is unique and exclusive to an individual. Learn your own emotional limits before attempting to speculate. If you cant sleep at night because of your stock market position, then you have gone too far. If this is the case, then sell your position down to the sleeping level. On the other hand, anyone who is intelligent, conscientious, and willing to put in the necessary time can be successful on Wall Street. As long as they realize the market is a business like any other business, they have a good chance to prosper. Until this latest decline in the market starting in 1999, many people believed making money in the market was easy. Yet most Americans work, and anyone who works knows how hard it is to consistently make money in business, no matter what the business; it is never easy to make money. Livermores friends all had their own businesses. He would never ask his good friends like Ed Kelly, the head of the United Fruit Company, to tell him the secrets of the fruit business or Walter Chrysler about the automotive business. It would just never occur to him. So, he could never understand when people asked him the question, over and over again: How can I make some fast money in the stock market? He would smile and say to himself, How could he possibly know how you could make money in the market? He always evaded the question. He felt it was the same as asking him How can I make some quick money in brain surgery? Or how can I make a few fast bucks defending some person in a murder case? He remained silent when asked because he believed that even attempting to answer these questions affects a persons emotions, because you have to take a firm position and actively defend your recommendations, which could change tomorrow, depending on the conditions of a dynamic stock market. But he fully understood that he was not the only one who knew that the stock market is the worlds biggest, most profitable gold mine, sitting at the foot of the island of Manhattan. A gold mine that opens its doors every day and invites any and all people in to plumb its depths and leave with wheelbarrows full of gold bars, if they can. And Livermore had done it many times. The gold mine is there all right, and when the bell rings at the end of the day, someone has gone from pauper to prince, or from prince to supreme potentate . . or stony broke. And its always there, the mountain of gold, waiting for the trader to pick up the phone and pull the trigger on a trade. Livermore truly believed that uncontroled basic emotions were the true and deadly enemy of the speculator: Hope, fear, and greed are always present, sitting on the edge of a traders psyche, waiting on the sidelines, waiting to jump into the action, plow into the game and mess things up. This is one of the reasons he never used the words bullish or bearish. These words were removed from his vocabulary because he believed they create an emotional mindset of a specific market direction in a traders mind. Saying its a bull market or a bear market causes the trader to believe that is the direction of the market. And there is a good chance the speculator will blindly follow that trend or direction for an extended period of time, even if the facts change. Well-defined trends often do not last for extended periods of time. When people asked Livermore for a tip, he would say, the market is currently in an upward trend or a downward trend or a sideways trendor tell them that the line of least resistance is currently upor down, as the case might be. That is all he would say and even that often got him in trouble with the public, because he wasnt around to tell them when the trend changed. This strategy left him with the flexibility to change his mind, according to market behavior. He tried never to predict or anticipate the market, he only tried to react to what the market was telling him by its behavior. Always be aware that when stocks decline swiftly, and abruptly, they are being driven by fear. When they rise, they are being driven by hope. Thats why stocks go up slowly and fall rapidly. If people are hoping a stock will rise, they are slower to sell. If they fear the stock will decline, they are usually fast to dump that stock. That is why declines produce faster, more abrupt market action. So, if you play the short side you must be ready to react to faster, more drastic market patterns and conditions. There is no good direction to trade, short or long, there is only the money-making way. To sell short often goes against human nature, which is basically optimistic and positive. In 2003, less than 4 percent of traders ever traded the short side of the stock market. There is also no question that it is extremely dangerous to sell short because the potential loss is unlimited. It takes strong control of your emotions to trade on the short side. But the stock market moves up roughly a third of the time, sideways a third of the time, and downward a third of the time. If you only played the bull side of the market, you are out of the action, and your chance to make money, two-thirds of the time. And for good or bad, Livermore was not a man who wanted to wait, and hope, and wonder. He wanted to play the game, and he wanted to win more times than he lost. Livermore was fully aware that, even in his time, of the millions of people who speculate in the stock market, few people spend full time involved in the art of speculation. Yet, as far as he was concerned, it was a full-time job, perhaps even more than a job, perhaps it is a vocation where many are called and few are singled out for real success. It is also interesting to observe that there are now, in 2004, more mutual funds than stocks on the NYSE. Most of these funds have strict charters demanding that they stay no less that 95 percent invested, with no more than 5 percent in cash. Also, in the charters of most mutual funds the managers of the funds can only go long in their trades. So, they have broken two of the Livermore rules-always keep a cash reserve, and always be ready to trade either long or short and also feel free to just sit in cash and wait for the perfect trade to appear. This is one of the reasons the hedge funds have done so well in the last few years. BEWARE OF STOCKS TIPS By far, the hardest emotional pitfall a speculator must deal with is tips. It was the main reason Livermore moved uptown to Fifth Avenueto get out of the reach of everyone who was trying to help him by giving him sure things and inside information. Beware of all inside information and tips. Below is an excerpt from the biography Jesse LivermoreWorlds Greatest Stock Trader. Tips come from all sources. Once, long ago, one of these tips was passed on to me from the Chairman of a major American corporation who spoke to me at a dinner party at my house in Great Neck. How are things going? I asked him. Great, weve turned the company around, not that it was really in trouble, but it looks like clear sailing from here. In fact, our quarterly earnings are coming out in a week and they are going to be terrific. I liked him and believed him. So, the next morning I bought a thousand shares to test it out. The earnings came in just as the chief executive said they would. The stock rose nicely, the earnings continued to rise for the next three quarters, and the stock rose steadily. I was lulled into a feeling of security, as the stock continued to rise. Then it stopped and started plummeting in the opposite direction, like a waterfall. I called the Chairman and said: This fall in your stock price has me worried. Whats going on? He answered,I know the price has fallen, J.L., but we consider it nothing more than a natural correctionafter all we have had a pretty damn steady rise in the price of the stock for almost a year now. Hows business? I asked. Well, our sales are slightly off and that news may have leaked out, Im afraid. Looks like the bears got hold of that information and are hammering the stock. Its mostly short selling, a bear raid, we think. Well drive them out on the next rally, squeeze them a little, eh J.L.? Are you guys selling any of your holdings? I asked. Absolutely not! Where would I put my money with more safety than my own company? Well, sure enough, I later found out that the insiders were busy selling into the stocks strength, the minute they got wind of the business going into a slump. I never got mad. It was my stupidity and greed. I knew that all key executives were basically cheerleaders, and they must remain positive, must be bearers of only good news. They could never tell shareholders or competitors that things were not as rosy as they appeared. In fact, it always made me smile to listen to their mendacity. The misstatements, the lies, were just a matter of self-preservation, an essential part of the job of a chief executive officerat every level of power, including politics. But it was my self-preservation I was interested in, not the top executives and shareholders of the companies I invested in. Therefore after a while, and some substantial lost money, I never asked an insider again about how their business was doing. Why waste my time listening to half-truths, shadowy statements, inaccurate projections, and just plain bold-faced lies when I could simply just look at the behavior of the stock? The story was clear in the action of the stock. The truth was in the tape for anyone and everyone to see. I have suggested to people who were interested in the stock market that they carry around a small notebook, keep notes on interesting general market information and perhaps develop their own stock market trading strategy. I always suggested that the first thing they write down in their little notebooks was Beware of inside information . . . all inside information! There is only one way to achieve success in speculationthrough hard work, persistently hard work. If there is any easy money lying around, no one is going to try and give it to methis I know. My satisfaction always came from beating the market, solving the puzzle. The money was the reward, but it was not the main reason I loved the market. The stock market is the greatest, most complex puzzle ever invented, and it pays the biggest jackpot. And always remember: You can win a horse race, but you cant beat the races. You can win on a stock, but you cannot beat Wall Street all the timenobody can. People always talked about my instincts, especially after the Union Pacific story and the San Francisco earthquake. But I never thought my instincts were that special. The instincts of a seasoned speculator are really no different than the instincts of a farmer, like my father. In fact, I consider farmers the biggest gamblers in the world. Planting their crops every year, gambling on the price of wheat, corn, cotton, or soy beans, choosing the right crop to plant, gambling on the weather, and insectsthe unpredictable demand for the cropwas more speculative. These same principles apply to all business. So, after 20, 30, 40 years, of growing wheat or corn or raising cattle or making automobiles or bicycles, the person naturally gets his sixth sense, his intuition, his experience-based hunches for his business. I consider myself no different. The only area I may have differed from most speculators was when I felt I was truly right, dead right, for-damn-sure rightthen I would go all the way, shoot the works. The way I did during the 1929 market crash when I had a line of one million shares of stock out on the short side, and every rise and fall of a single point meant a million dollars profit or loss to me. Even then, during my biggest play, it was never the money that drove me. It was the game, solving the puzzle, beating a game that confused and confounded the greatest minds in the history of mankind. For me, the passion, the challenge, the exhilaration, was in beating the game, a game that was a living dynamic riddle, a conundrum, to all the men and women who speculated on Wall Street. Perhaps it was like combat is to a soldier. Its a mental high thats visceral, where all your senses are pushed to the limit and the stakes are very high. I told my boysstay in the business youre good at. I was good at speculating. Over the years I took many millions of dollars out of Wall Street and invested them in Florida land, aircraft companies, oil wells, and new miracle products based on new inventionsthey were all abject failures, disasters. I lost every cent I ever invested in them. Just remember, without discipline, a clear strategy, and a concise plan, the speculator will fall into all the emotional pitfalls of the market and jump from one stock to another, hold a losing position too long, cutout of a winner too soon, and for no reason other than fear of losing the profit. Greed, fear, impatience, ignorance, and hope will all fight for mental dominance over the speculator. Then, after a few failures and catastrophes, the speculator may become demoralized, depressed, despondent, and abandon the market and the chance to make a fortune from what the market has to offer. Develop your own strategy, discipline and approach to the market. I offer my suggestions as one who has traveled the road before you. Perhaps I can act as a guide for you and save you from falling into some of the pitfalls that befell me. But in the end the decisions must be your own. |
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