http://www.amazon.com/gp/product/09...rd_t=36701&pf_rd_p=2079475242&pf_rd_i=desktop Foreword by Paul Tudor Jones.
From the foreword by Paul Tudor Jones: "...I think it's no coincidence that our greatest champions, our greatest artists, our greatest leaders, our greatest everything all seem to have experienced some kind of gut-wrenching loss. I think their greatness, in part, was fashioned on the crucible of defeat... ...There are two unpleasant experiences that every trader will face in his lifetime at least once, and, most likely, multiple times. First, there will come a day after a devastatingly brutal and agonizing long stretch of losing trades and you'll wonder if you will ever make a winning trade again. And second, there will come a point you begin to ask yourself why it is you make money, and if this is truly sustainable. The first experience tests an individual's grit; does he have the stamina, courage, guts and smarts to get up and engage the battle again? The second moment of enlightenment is the one that is actually scarier because it acknowledges a certain lack of control over anything. I think I was 38 years old when, one day, in a moment of frightening enlightenment in 1993, I knew that I really did not know exactly how and why I had made all the money that I had over the prior 17 years. That threw my confidence for a jolt. It sent me down on a path of self-discovery that even today is a work in progress..."
The book is an interesting read, although somewhat depressing towards the end for obvious reasons. It occurred to me, as I was reading it, how many parallels there are between Livermore and Fitzgerald's Gatsby. Consider this: both came from very humble beginnings; both made a lot of money fairly quickly; both lived ostentatiously and were given to extreme conspicuous consumption; both had a mansion on Long Island (Livermore bought his in 1922, The Great Gatsby was published in 1925); Livermore's mansion on Long Island was situated in Great Neck, which Fitzgerald thinly disguised as West Egg, where the fictitious Gatsby lived; both entertained lavishly and regularly at their respective homes and were widely known for it; both drove a yellow Rolls Royce. Of course, these are probably mere coincidences, given the period in question. But the notion gave me pause. That both their lives ended tragically is by necessity coincidental since Livermore died 15 years after The Great Gatsby was published. But again, the parallel gave me pause.
Two more bonus coincidences, just for fun. In the novel, Nick Carraway muses that Gatsby looked like he had his hair trimmed every day. Livermore had a live-in barber. (Perhaps the very rich attended to their grooming more fastidiously in those days.) And finally, the book has what is believed to be the earliest photo of Livermore: Okay, this is where we get a little silly to lighten the mood. The author, Tom Rubython, commented in the book that in his youth Livermore was a young Robert Redford lookalike. Redford, of course, played the title role in the 1974 version of The Great Gatsby.
After reading this biography, and having read Reminiscences a few times, including Jon Markman’s annotated version a few years ago, something occurred to me regarding Jesse Livermore’s trading. Here are my thoughts. JL invariably made money when he traded in the bucket shops, capitalizing on relatively small moves and using substantial leverage. After he was barred from those establishments and they eventually closed shop anyway, he was not able to translate his method of trading at a real brokerage office. The principal reason at the time was because the ticker could be substantially delayed by many minutes, so that actual prices were already far removed by the time JL read them off the ticker. And since he played a precise game, this wreaked havoc on his play and his results. (There is the other matter of one’s own trading affecting price, but that would not likely have been a serious issue in his early days as a relatively small trader.) He adjusted to these circumstances by taking a larger, longer-term view and by taking general conditions into account. He had no choice because his delayed fills required him to do so. His detail orientation was getting swamped by data delay. And it was here where, after a time, he started making more money, but he also ran into the kind of losses that he never experienced, even proportionately, in the bucket shops. And I am not referring to when he got bamboozled a few times along the way. And so, I ask myself, are the losses he took a natural consequence of adhering to a longer-term view in spite of what was happening right in front of him? When he set up his own office, he had direct telephone lines to the exchanges so that he could circumvent the delays on the tickers. So I imagine he once again could have played a game perhaps at least passably similar to the one he played at the bucket shops, after also having to allow for the effect of his own trading on prices when he started trading size. However, my understanding is that he stayed with the longer view. Granted, he would probably not have made the same kind of money when profitable had he played a closer game. And the actual fills would still not have been quite as precise as the “fills” at the bucket shops anyway. However, it is perhaps equally probable that he would not have seen anywhere near the lows he endured. And so, I wonder how things might have turned out had he stuck to a closer variation of his bucket shop game when he finally obtained access to ~real time exchange prices via telephone. It still entailed trading with the trend (path of least resistance and so on), and while probably not oblivious to the longer term, and perhaps even general conditions, it evidently placed a heavier premium on the here and now. Yes, he suffered psychological lapses in his trading that resulted in his not playing by his own rules, but that didn't happened in the bucket shops. His psychology only seemed to suffer when he gave his trades more rope. Of course, there could have been other variables at play but I am not aware of them. I know it’s easy to make all kinds of observations after the fact, either right or wrong, but I’m curious to know if anyone else might have asked themselves the same kinds of questions.
Please note that my above post was not intended to criticize a genius and legend, but to try to better understand what happened to him and his trading and why he did what he did. As PTJ also wrote in the foreword: “…Many of us are blind to key psychological elements of ourselves; that’s why people go to therapists or get outside help for any number of problems… “…It’s easier for someone on the outside to understand why people do what they do than it is for people to figure it out for themselves… “…The point is that it is in many ways easier for readers of this book and Edwin Lefevre, the author of Livermore’s fictional biography, to figure out the psychology of Jesse Livermore’s trading than it was for Jesse himself…” And so, if anything, I was hoping to get a discussion going. Instead, it looks like more of a soliloquy.
Jesse Livermore: "...Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore. It doesn't go into explanations. I didn't ask the tape 'why' when I was fourteen, and I don't ask it today at forty. The reason for what a certain stock does today may not be known for two or three days, or weeks, or months. But what the Dickens does that matter? Your business with the tape is now -- not tomorrow. The reason can wait. But you must act instantly or be left behind." JL only got into trouble when he didn't adhere to his own principles. And he had a more spotty record of adhering to those principles when he lengthened his game. Aside from ticker delays, which I mentioned in a earlier post and which JL eventually circumvented with direct telephone lines to the exchanges, what would have caused him to loosen his game beyond the proportion of longer time frames alone? Perhaps ego got in the way when he gave his trades more room and they went against him (even though he was fully aware of the dangers of ego). As Edward Allen Toppel wrote in his book Zen in the Markets, medicine is easier to swallow when the pills are smaller. So while his longer game gave his trading more upside potential when he was right, it seems to have placed him at disproportionate risk when his trades went against him.
I've known more than one trader who had perfectly good trading plans but at some point began to believe that they were smarter than their own plans, leading to rule-breaking and "trading by feel". This never ended well.