a-stock-operator

The Wisdom of a Stock Operator

a-stock-operator

"Stock operator" is a term that is now obsolete. It essentially describes someone who makes a living by trading or speculating in individual stocks. Given the computerization of trading with the competition to obtain information whose age is measured in nanoseconds, the concept of a fast human trader making split second decisions is utterly irrelevant today.  Perhaps the best known stock operator of all time is Jesse Livermore, and IFA just acquired a first edition of his thinly-disguised autobiography, Reminiscences of a Stock Operator.

Livermore began his career as a teenager with a few dollars in a bucket shop, a shady (and now illegal) operation where customers would bet on the future direction of stocks without actually trading shares. He claimed that he could predict future prices from past price data, and he made a small fortune until he was banned from all the bucket shops in his city. When Livermore graduated to actual trading, a funny thing happened—the strategies that served him so well in the bucket shops no longer worked in the real world where his trades actually moved prices. While making and losing his fortune four times over, Livermore gained many insights into how financial markets work, and he shared many of his hard-learned lessons with us. For us, the most important lesson came at the end of the tenth chapter:

"I have been in the speculative game ever since I was fourteen. It is all I have ever done. I think I know what I am talking about. And the conclusion that I have reached after nearly thirty years of constant trading, both on a shoestring and with millions of dollars in back of me, is this: A man may beat a stock or a group at a certain time, but no man living can beat the stock market! A man may make money out of individual deals in cotton or grain, but no man can beat the cotton market or the grain market. It’s like the track. A man may beat a horse race, but he cannot beat horse racing. If I knew how to make these statements stronger or more emphatic I certainly would. It does not make any difference what anybody says to the contrary. I know I am right in saying these are incontrovertible statements."

At the height of his trading in 1929, Livermore made a profit of $100 million (which is well into the billions in today’s dollars). He even sold short ahead of the October crash, but by 1934, he was flat broke, except for funds that he purposely put out of his own reach such as annuities and trusts for his heirs. Livermore suffered from depression and may have been bipolar and perhaps even autistic, with a Rain Man-like ability to read the ticker tape. In 1940, after publishing How to Trade in Stocks which was not well-received because so many people had become thoroughly disgusted with the stock market and wanted no part of it, Livermore shot and killed himself in a Manhattan hotel room. Interestingly, his widow had been married four times before, and all of her ex-husbands committed suicide as well! One might think that someone as smart as Livermore would have known when the odds were not in his favor.

One other important speculation lesson from Livermore that applies even more so to investing is that you don’t always have to be doing something. Many times (actually the majority of the time), an investor’s best course of action is to do nothing, counter-intuitive as it may seem. Here is how Livermore explained it:

"It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon."

This reminded of us one of our favorite quotes from Warren Buffett who said in his 1996 letter to shareholders, "We continue to make more money when snoring than when active. Inactivity strikes us as intelligent behavior."

In Reminiscences, one gets a very strong flavor of the characters that dominated the bucket shops and the brokerage firms in the days of the ticker tape and big board. From the old man who always says, "It's a bull market you know" to the tout who demands appropriate compensation for his allegedly valuable tip, you can't help but feel as though you are right in the thick of it. It is a world that exists no more, but we are better off for having taken the time to understand it and experience it vicariously through Mr. Livermore. 

Below you will find some images IFA has obtained of the Saturday Evening Post:

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