Jesse Livermore on Emotional Control

Later in his life he (Jesse Livermore) was asked an important question by his sons, Paul and Jesse, Jr.: “Dad, why are you so good in the market and other people lose all their money?”

He said, “Well, boys, I have also lost money, but each time I lost, I tried to learn why I had lost. The stock market must be studied, not in a casual way, but in a deep, knowledgable way. It’s my conclusion that most people pay more care and attention to the purchase of an appliance for their house, or to buying a car, than they do to the purchase of stocks. The stock market, with its allure of easy money and fast action, induces people into foolishness and the careless handling of their hard-earned money, like no other entity. “You see, the purchase of a stock is simple, easily done by placing your buy order with a broker; later a phone call to sell completes the trade. If you profit from this transaction, it appears to be easy money with seemingly no work. You didn’t have to get to work and labor for eight hours a day. It was simply a paper transaction, requiring what appears to be no labor. It gives the clear appearance of an easy way to get rich. Simply buy the stock at $10 and sell it later for more than $10. The more you trade, the more you made, that’s how it appears. “Simply put, it’s ignorance.”

The boys listened attentively, but they never had any interest in trading the market like their father. A stock trader must constantly deal with emotions—when things go bad, there’s often fear to deal with. Fear lies buried just beneath the surface of all normal human life. Fear, like violence, can suddenly appear in your life in the space of a single heartbeat, a fast breath, a blink of the eye, the grab of a hand, the noise of a gun. When it appears, natural survival tactics come alive, normal reasoning is distorted. Reasonable people act unreasonably when they are afraid. And people become afraid when they start to lose money; their judgment becomes impaired.

This is our human nature in this stage of our evolution. It cannot be denied. It must be understood, particularly in trading the market. Sooner or later, fear will come to visit every stock trader who actively trades the market.

The unsuccessful investor or trader is usually best friends with hope—when it comes to the stock market, hope skips along the trader’s path hand in hand with greed, but fear is always trailing along as well, hiding in the shadows. Once a stock trade is entered, hope springs to life. It is human nature to be hopeful, to be positive, to hope for the best. Hope has been and will always be an important survival technique for the human race. But hope, like its stock market cousins ignorance, greed, and fear, distorts reason.

The trader must be acutely aware that the stock market only deals in facts, in reality, in cold numbers; the stock market is never wrong— traders are wrong. Similar to the spinning of a roulette wheel, the little black ball tells the final outcome—not greed, fear, or hope. The final result of stock market trading, which is posted in the newspaper at the end of every day, is objective and conclusive, with no appeal, like pure nature in the raw, a life and death struggle. Livermore believed that the public wanted to be led, to be instructed, to be told what to do. They wanted reassurance. He believed that they would always move en masse, a mob, a herd, a group, because people want the safety of human company. They are afraid to stand alone because the belief is that it is safer to be included within the herd, not to be the lone calf standing on the desolate, dangerous wolf-patrolled prairie of contrary opinion—and the truth is that it usually is safer to go with the trend.

This is where it gets slightly complicated for most traders. Livermore was an independent thinker, yet he always wanted to trade along the line of least resistance—the trend, so he was generally moving along with the crowd, the herd, most of the time. It was when the change in trend started to appear, the change in overall market direction—that was the most difficult moment to catch and act upon. He was always on the hunt for the clues to recognize a coming change in basic trend, looking for the Pivotal Point to form.

A trader can never become complacent. Livermore was always alert, ready, prepared to separate himself from the popular thinking of the moment, the group thinking that usually always drives the market, and to go in the opposite direction. Livermore believed in cycles. There is a time when things are good and a time when things turn bad. It is true in this life for all of us, and it is true in the stock market. The good times are coming and so are the bad times—the question for a successful trader is not will they come...it is when will they come?

Livermore’s conclusion—usually when you least expect it, the trend will change. The change in trend is the most difficult time in a speculator’s trading life. These major changes in trends were and remain hell. But Livermore knew these were the points where most of the money was lost, as was just experienced from 1999 to 2002. It is best to avoid the downhill slide of stocks, unless you have sold stocks short.

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Livermore had heard many of his fellow traders say: “That stock was good to me.” Or “That stock cost me money, so I am staying away from it!” The stock had nothing to do with it. Everything that happens is a result of the trader’s judgment and no excuses are acceptable. To put it simply, it is the trader or speculator who makes the conscious decision to enter a trade, and it is always the trader who makes the conscious decision to exit a trade. The judgment was either correct or it wasn’t.

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