WHAT I LEARNED FROM THE EARLY 1900S: THE MARKET HASN’T CHANGED THAT MUCH :Business Strategy /Financial Advisors

While we were being tortured by our crude short, various people attempted
to give me succor of one type or another. Guys I know who are
professional commodity traders effusively offered advice, most of which
was to buy strength and sell weakness, in other words to go with the
flow.They unabashedly told me their short-selling trading tactic invariably
was “Don’t fight a losing position. If it doesn’t show you a profit,
cover it.” Not very helpful, because we were and are value investors.
In my agony, I took out and reread passages from my trading bible,
Reminiscences of a Stock Operator by Edwin Lefevre. The book was first
published in 1923 and is long out of print, but it can be bought from
time to time on the Internet.There is little doubt that the stock operator
who is the narrator in the book was the legendary Jesse Livermore.

The late Gerald Loeb, who wrote The Battle for Investment Survival (“Put
all your eggs in one basket and then watch the basket”), and who often
acted as Livermore’s broker, told me that Livermore had used Lefevre as
his scribe for Reminiscences. Regardless of who actually wrote it, the
book is the distilled trading wisdom and market anecdotes of a professional
trader operating in the frantic milieu of pools, tips, manipulation,
and tape reading of the first third of the past century. Markets haven’t
changed that much a century later. It is, by far, the best trading book
ever written.

Livermore was a fascinating character. He was a boardroom tape
watcher and trader in the style of the times, but he was also very sensitive
to market sentiment and value. He stressed how crucial was a deep
understanding of human psychology and the interplay of greed and
fear. Trading was much more about human nature than tips and
hunches. In the early 1900s, he came out of nowhere to make his first
big killing trading grain from a Chicago bucket shop. He sidestepped
the panic of 1907 and came to Wall Street in 1908 with $3 million,
which was a decent fortune in those days. Handsome, dapper, and articulate,
Livermore bought a seat on the New York Stock Exchange and
proceeded to challenge the Wall Street tycoon establishment.The great
financiers like J.P. Morgan disdained stock-market operators, but a man
like Livermore could rattle their cages.

Livermore was a bear by disposition, and in 1915 he went short
stocks and suffered heavy losses. However, realizing he was wrong, he
reversed his position and made big gains in the 1916 to 1919 bull market,
but so did a lot of other people. However, he really distinguished
himself by anticipating the sudden and brutal postwar depression and
crash that wiped out so many businessmen and speculators. In 1919, he
sold everything, went short, and although he was early, eventually made
a fortune in the bust that followed. In 1922, Livermore had a big hit in
grain, and in the early 1920s he managed the infamous Piggly-Wiggly
pool that ignited speculation and ignited the bull market. However, his
inherent bearish bias and his sense that greed was in total ascendancy
kept him from fully participating in the madness of the late 1920s. Loeb
once told me that Livermore was a great admirer of Walter Bagehot, the
first editor of The Economist, and often cited this stupid-money paragraph
from Bagehot’s essay on Edward Gibbon:

Much has been written about panics and manias,much more than with
the most outstretched intellect we are able to follow or conceive, but one
thing is certain, that at particular times a great deal of stupid people
have a great deal of stupid money. . . . At intervals, from causes which
are not to the present purpose, the money of these people—the blind
capital, as we call it, of the country—is particularly large and craving; it
seeks for someone to devour it, and there is a “plethora”; it finds someone,
and there is “speculation”; it is devoured, and there is a “panic.”
Livermore wanted to be there, short of stocks, when the “stupid
money” was “devoured,” as he was convinced it always would be—
eventually. I am fascinated with his credo of being an investor/trader. In
the book, the protagonist for Livermore, the Old Turkey, sounds like
Buffett’s spiritual father as he repeatedly preaches “sitting tight” with a
position you really believe in.“Don’t over-think it and don’t over-trade.
Men who can be both right and sit tight are uncommon,” says the Old
Turkey. “I found it [this principle] one of the hardest things to learn.
But it is only after a stock operator has grasped this that he can make
the big money.”

The Old Turkey, like Livermore, is essentially a professional trader in
commodities and stocks. However, again like Livermore and unlike the
plungers and the peacocks of that speculative era that was coming to an
end, he understood that, without the cover of a pool or inside information,
trading was essentially a zero-sum game but that investing could be
a winner’s game.

Without faith in his own judgment no man can go very far in this
game.That is about all I have learned—to study general conditions, to
take a position and stick to it. I can wait without a twinge of impatience.
I can see a setback without being shaken, knowing that it is only
temporary. I have been short one hundred thousand shares and I have
seen a big rally coming. I knew it would make a difference of one million
dollars in my paper profits. And I nevertheless have stood pat and
seen half my profit wiped out without once considering the advisability
of covering my shorts to put them out again in the rally. I knew that if
I did I might lose my position and with it the certainty of a big killing.
It is the big swings that make the big money for you.

Of course none of this “sitting tight” means that if the fundamentals
of your investment deteriorate, you don’t sell your long or cover your
short. As John Maynard Keynes famously said, “If the facts change, I
change my mind, sir.What would you do, sir?”
We have an investor who has been a commodity trader all his business
life. I read him the Old Turkey’s quotation. “Yeah,” he said, “and
you know how Jesse Livermore ended up?” I said no. He told me.“After
being bearish in the late 1920s, Livermore finally capitulated in mid-
1929, went heavily long, and was virtually wiped out in the Crash.
Some years later he committed suicide in the men’s room of The Biltmore.”
I don’t know if that is true or not.
Meanwhile oil continued to work higher.