Jesse Livemore - 2

http://www.zealllc.com/2004/jesse08.htm

(Chapter VII) … “I never hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any particular stock. In a bear market all stocks go down and in a bull market they go up. I don’t mean of course that in a bear market caused by a war, ammunition shares do not go up. I speak in a general sense. But the average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think.”


(Chapter VII) … “When it comes to selling stocks, it is plain that nobody can sell unless somebody wants those stocks. If you operate on a large scale you will have to bear that in mind all the time. A man studies conditions, plans his operations carefully and proceeds to act. He swings a pretty fair line and he accumulates a big profit – on paper. Well, that man can’t sell at will.”

The larger your position in a given stock, the harder it will be for you to sell when you are ready. If the buyers aren’t there the day you wish to sell, your sale will push a stock lower or even crash it and you will end up losing much of your paper profits just in the process of selling. Lots of folks think this kind of risk only applies to very large players like fund managers, but it also applies to individual speculators today as well. -- me, me, me!!! Instead of realising 200% profits on Swiber, it become 100% during the Aug 07 correction, and instead of 11% paper profit on SGX on last Fri, 7 Dec, it become 3% paper profit... *sob*


(Chapter VII) … “Suppose a man’s line is five hundred shares of stock. I say that he ought not to buy it all at once; not if he is speculating. If he is merely gambling the only advice I have to give him is, don’t! Suppose he buys his first hundred, and that promptly shows him a loss. Why should he go to work and get more stock? He ought to see at once that he is in wrong, at least temporarily.”

Here Jesse Livermore further fleshes out the all-important distinctions between intelligent speculation and flat-out Vegas-style gambling. A speculator will gradually layer in positions, immediately stopping if the markets prove him wrong over the short-term. Yes, he may be right in the near future, but why absorb a big loss if he happens to be early? Why not preserve capital for a better opportunity in the weeks ahead?

Gamblers, on the other hand, will bet it all on one roll of the dice. They will get excited, grow convinced of a sure thing, and they will drop their entire war chest of speculative capital on the table at one time. The problem with this approach is that no one wins all the time, and by betting everything every time sooner or later a speculator will get crushed by some massive loss.

Part of the education of a speculator involves learning how to merely survive, to ensure that no single bets are ever so large that a major loss will wipe out the speculator. Speculators, like any other profession, grow better through time, experience, and practice. Using Livermore’s scaling, a speculator can protect himself from deploying bets that are too large at the wrong time and losing so much capital that he simply cannot afford to speculate anymore.

Preserving capital is crucial to ensuring a speculator’s survival and longevity. The longer that you prudently manage your risk so that you can stay in the game, the better you will become. If you lose it all on one big bad bet, then you are out of the game until you can rebuild your capital, a difficult task. Using intelligent strategies like Livermore’s scaling vastly increase speculators’ ability to prudently manage their own risks and keep themselves in this grand game.