How to Trade in Stocks* is a great autobiography that plunges you into Livermore’s life. Jesse Livermore was a famous and successful speculator. He dedicated his life to speculating and decided to teach what he learnt by writing a book.
Livermore delivers sounded principles that are useful teaching for investors. This article shares with you my analysis of some principles I find really important. Although everyone has his own investment style and rules, I strongly believe successful investors widely respect the following principles.
Reading is a first step. I encourage you to treat this post as a checklist. Bookmark it and come back everytime you have to invest. It is by applying those principles that you’ll become a better investor.
Read these 12 principles, you’ll never regret it
1. Pay attention to danger signals
The danger signals are used to limit risk. When something you do not understand happens, you should sell. It means that you are not in position to anticipate what can happen and you risk to lose money.
If you observe an abnormal break of several points, it must be considered as an immediate danger signal. Just sell. A few days latter, if everything looks right, you can always go back in. You will save a lot of worry and money.
2. Respect danger signals
Do not argue with a danger signal. Just get out.
Do not follow your human side that tries to negotiate for you to stay in. Do not base your decision on wishful thinking. React with rationality.
3. Do not trade daily
Day trading is bad. While you try to profit from daily minor upward trends, you limit your ability to spot real big moves. Worst, it increases the risk you are taking. The only way to make money from day trading used be writing a book about it (even this way became too competitive). At the end, day trading is only profitable for brokers.
Move when their is a real opportunity. Do not focus on minor ups and down, you’ll miss the big move. This not a problem to have some cash for a while.
4. Track stock price movements
Study records of stock price movements. Understand patterns and analyze how they occur by taking into account: volume, time and the price element.
5. Do not break your personal rules
If you do so, you’ll regret it. You must not be emotionally involved. Volatility can make you feel sick. But as long as you respect your strategy, you must be fine.
Learn to control your human instinct.
6. Do not delegate speculating to anyone
Speculating is a tough job in which you can only trust your stomach. Because speculating is exciting, anyone in charge of someone else’s money is biased. We do not manage others’ money as if it were our own. The risk is not upon our shoulders. And this can have a devious effect on how fund managers invest.
7. Avoid averaging losses
Do not average losses. Keep your money for another day. When we face abnormal moves (non-anticipated downward movements), we should sell the stocks rather than buying cheaper with the underlying ideas that it will go back up.
Such an abnormal move is the proof that we failed somewhere. We bought stocks thinking that the price would increase, instead it decreased. The safest thing to do is to sell. It will always be possible to go back when growing moves become more certain.
8. Risk only a limited amount of capital on one venture
Spread the risk. You will avoid spending all your money on a loosing deal. This can be analyzed as what we call now diversification. Basically, you should avoid putting all your eggs in one basket. (I wrote about this idea in my last eBook).
9. Be patient
Have a fair goal. Think about your return in years not in months.
According to Livermore, speculating is a business. A speculator, as a businessman, should not expect incredible return on his speculation, especially during the first years.
Entrepreneurship and speculating are not that far from each other. Do you know any entrepreneur who became millionaire in a year? It happens exceptionally. Most the time, their overnight success is based on bubbles rather than real value.
10. Save your money
Isn’t weird to speak about saving money from our earning as a speculator? As I said, Livermore considered speculating as a real full time job. As a consequence, a wise speculator should save part of what he earns (his salary).
Livermore underlined that most of the time speculators are so deeply committed in their activities that to them the money isn’t real.
11. Don’t be influenced by your broker
Buy or sell only when there is a real opportunity. Brokers make commissions when customers trade. It is in their interest to push you to trade and trade again. It is easy to end up in an over-trading position. This must be avoided because it leads you to take too much risk.
Once again, day trading won’t make you rich. The reality is quite the opposite.
12. Underlying principle: Be focused on what you are good at
Livermore’s track record shows how successful he was. Yet he confessed that although he was a wonderful speculator, he was a terrible investor. Livermore never succeeded to make money from an investment outside Wall Street.
This story seems contrary to the common belief that the stockmarket is riskier than other kind of investments. It teaches us than most of the risk we take comes from lack of homework, knowledge and interest in our investments.
Limiting risk requires us to do our homework and to understand the market.
What you can learn from the life of a successful speculator
The underlying principle, which arises from How to Trade in Stocks, points out that passion is key to success. When you read Livermore’s book, you understand that speculating was more than a way to make money. It was his job and his passion.
Being passionate made Livermore a successful speculator. He woke up every morning with one idea in mind: the stock market. While he speculated, he was in his element. I believe that being passionate is a requirement to succeed as an individual or a company. Passion makes success accessible.
If you want to become a successful investor, you should focus on two things:
1. Make investment one of your passions. If your only goal is to make money, you will never thrive as an investor. Investing requires time. The only way for you to spend time on doing your analysis is to be interested in what you do. Look at successful investors. They are all passionate about investing.
2. Invest in companies where employees are passionate about what they do. This ‘passion’ rule also applies to companies. If its employees are passionate, the company is likely to succeed. This rule is even more important for smaller companies. When venture capitalists or business angels invest in a startup, they mostly look at the team. One of the key ingredients they are looking for is passion.
Of course passion is not everything. You must learn how to do your job or how to invest. These basic rules are easy to learn when you like what you do. Livermore was so passionate about speculating that he wrote everyday in a notebook what he learnt. Speculation was his life and that made him a successful speculator.
Be passionate about what you do. Stay committed to your passion. Success will come.
*If you want to learn how to become a better investor, reading How to Trade in Stocks is a first step. Livermore will teach you how to limit risk and help you to improve your approach of the stock market.