Edwin Lefèvre in Reminiscences of a Stock Operator, a 1923 pseudo-fictional novel, chronicles the life of Jesse Livermore, a real person who was a stock trader par excellence of the time. He made and lost fortunes many times over but ultimately and tragically ended up taking his own life.
Jesse Livermore went from being one of the richest people in the world, made famous by a timely call shorting US stocks right before the crash of 1929. Shorting stocks is an extremely risky strategy that profits from stock price declines. Never short stocks because people buy stupid investments at stupider prices all the time. Even if you are eventually proven right, it could be way after you were margin-called into liquidation.
But then we are talking about the great Jesse Livermore. He made $100 million overnight in 1929 dollars, shorting stocks in what amounted to one of the greatest trades ever.
A mere decade later though, he was bankrupt. The ensuing stress and misery likely killed him. This story unfortunately repeats itself time and again with most lottery-like outcomes.
A few of the best excerpts from the book that relates to the topic at hand…
The sucker has always tried to get something for nothing, and the appeal in all booms is always frankly to the gambling instinct aroused by cupidity and spurred by a pervasive prosperity. People who look for easy money invariably pay for the privilege of proving conclusively that it cannot be found on this sordid earth.
Edwin Lefèvre in Reminiscences of a Stock Operator
Andrew Carnegie, the 19th century steel baron said something along the same lines (not from the book)…
There is scarcely an instance of a man who has made a fortune by speculation and kept it.
Andrew Carnegie
And that is because there is a defect with our wiring. We love easy money. And we think we can keep the wins coming so we get overconfident with whatever seems to be working so we bet more.
But it was all luck what we thought was skill and suddenly it is too late. The bubble eventually bursts.
And it is especially dangerous when lady luck shines on us early in our investing lives. I know someone who made 10 times his money in less than a year playing crypto.
What happens to him now? None of what is real investing that counts dividends and interest and cash flows will sound exciting. Because exciting it is not.
Excitement with investing is like sitting on a powder keg of explosives. Sooner or later, it will blow up. More on that later but back to a few more quotes from the book…
The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.
Edwin Lefèvre in Reminiscences of a Stock Operator
This was written in the 1920s. Nothing has changed.
And take home some money every day? That is a typical day trading mindset. Exchanging pieces of paper is not a job, just like playing poker is not.
Day trading is and will remain a zero-sum game and that is before taxes and fees. After accounting for those costs, it is a guaranteed money loser. Don’t waste your life doing it.
And very reluctantly change anything with your money based upon short-term market events. It is one thing to start with a set of assumptions and intelligently change them in light of new data but it is a completely different ball game to change anything with your money based upon whims, rumors and FOMO (fear of missing out).
So, once you’ve got a solid financial plan, any big changes to your money is in fact a sign of instability. It is a sign of a lack of conviction. And once you lack conviction, you’ll guarantee bail the next time the market crashes and then you are done.
But back to another quote from the book…
Speculators buy the trend; investors are in for the long haul; “they are a different breed of cats.” One reason that people lose money today is that they have lost sight of this distinction; they profess to have the long term in mind and yet cannot resist following where the hot money has led.
Edwin Lefèvre in Reminiscences of a Stock Operator
This last one rings especially true considering what economist Charles Kindleberger once said…
There is nothing as disturbing to one’s well-being and judgement as to see a friend get rich.
Charles Kindleberger
Do not let envy override a good financial plan regardless of how imperfect it might seem to appear at any given time.
They say you never grow poor taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market.
Edwin Lefèvre in Reminiscences of a Stock Operator
So, you doubled your money buying some random investment. I say great. How much did you bet? If it was not a life-changing amount, why did you bother?
And say you did invest in something that you believed in but cannot muster the courage to double or triple down when that investment temporarily flounders because flounder it will, why did you own it in the first place?
A man must believe in himself and his judgment if he expects to make a living at this game.
Edwin Lefèvre in Reminiscences of a Stock Operator
Wall Street Bets, a Redditt community where investing for a week is considered long-term and a year, an eternity, had someone post that he did 20 times his money in four years, a story you’d find mostly at bull market peaks. That poster’s investment strategy…
He said that he usually focuses on a single position, sometimes as much as 90% of his portfolio will be concentrated on his conviction pick. At the moment, he’s “the most diversified” he’s ever been, with his portfolio split between AMD and Norwegian Cruise Line.
Investor turns $100,000 into $2.2 million — now he’s banking on a cruise line to reach his early retirement goals by Shawn Langlois in MarketWatch
So, he bet, and he won. Just like he would have had he gambled in Las Vegas. Do not try this at home because just a week later, in another piece coincidently written by the same author about another Redditter with the exact opposite and probabilistically more likely outcome…
Italian trader loses his ‘entire life savings’ on one insanely risky position.
Italian trader loses his ‘entire life savings’ on one insanely risky position by Shawn Langlois in MarketWatch
His investment strategy…
Yes, StopFapForever, who claims to be a 28-year-old Italian, shared his brutal market mistake with the bunch on WallStreetBets. He apparently went all-in on Luckin and lost his entire life savings in the process. “Now I’m broke af,” he wrote.
After getting hammered overnight, he shared the expensive lesson he learned. “I’m gonna just invest in ETFs, gold and bonds for the rest of my hopefully long but quite useless life,” he said.
Italian trader loses his ‘entire life savings’ on one insanely risky position by Shawn Langlois in MarketWatch
And when you buy an investment, there is always a seller at the other end. If someone doesn’t sell, you cannot buy.
And with more than 90% of the trading done by institutions, that seller is likely a Goldman Sachs. Or Carl Icahn. Or some hedge fund who lives and breathes these things every waking hour. You think they’ll let go of a potentially profitable investment that easy?
So, you better have a real good reason to buy that someone as skilled as they are selling.
But say you still feel compelled to seek excitement with your money. I wouldn’t do it but if you must, slice off a tiny portion of your money and have at it.
And keep it away from polluting the rest of your money. Start with today and take say five percent of what you own and never add to it. When it is gone, it is gone.
And hopefully with it will go that desire to speculate.
Thank you for reading.
Cover image credit: Javon Swaby, Pexels