Reminiscences of a Stock Operator
The book Reminiscences of a Stock Operator is written about events that occured approximately hundred years ago, but the lessons still ring true today. Mr. Livingston is the basis of the book and details how he earned a fortune through the stock market. It wasn’t easy at times, as Livingston would say he paid tuition and lost everything he had. I wouldn’t recommend speculating the same way today, some of the manipulation would be impossible, but by reading Reminiscences of a Stock Operator you might be able to avoid paying some tuition.
Livingston got his start as a boy reading the ticker in bucket shops and posting the numbers on the quotation board, where people could speculate before you could just log in into Fidelity and trade. Livingston had an ability to recognize patterns in numbers as they scrolled across. He began to notice what trends indicated the next action on individual stocks would be, and thought he could earn a few dollars with a small line to trade on. Before Livingston began to speculate on his beliefs he started to track his predictions and keep record of his hits and misses. After realizing the potential earnings he could of made Livingston began to trade with real money. He began to accumulate a fortune, the bucket shops didn’t want his business as it was costing them money and eventually Livingston ran out of places to speculate.
This led Livingston to New York to trade on the exchange. In New York, he quickly realized the system perfected in bucket shops wouldn’t work on the exchange. In the bucket shops one can sell at the price on the quotation board in an instant, while in the market you need a buyer to purchase your shares. By the time a broker would process the transaction on the stock market, Livingston would lose the advantage which was his ability to recognize patterns he learned in the bucket shops. This created the need for Livingston to return to the bucket shops. He headed west to Saint Louis, a location where his reputation was not known, to trade in bucket shops again. While in Saint Louis, Livingston quickly made some money before he was recognized and banned from the bucket shops there.
Livingston highlighted the importance of recognizing the general trends of the market and testing out theories. One of Livingston theories is identify the general direction of the market and place your bets in that direction. When speculating concern isn’t about bull or bear exactly just that your on the right side of the movement. Livingston noted the news often exaggerated the current direction of the market and warning signs of the reversing market are ignored. Livingston determined the market by finding the line of least resistance and following that line. If he bought one thousand shares and the market went up, confirming the bull market he would buy another round of shares and continue as the market increased. Livingston sold before the market reached the pinnacle, which he was able to determine by a decreasing rise in the price between rounds, an indication to start selling. If he bet wrong to begin with and lost Livingston would sell his line, it doesn’t make sense to chase your losses. Livingston made his first million dollars by identifying the general trends of the market and being right. He shorted stocks in a bear market and kept shorting as other investors bet on a rally when general conditions didn’t indicate it was time for a bull market. The financial situation eventually gets so bad that the banks do not have enough cash to loan individuals requesting loans. This limited the public ability to buy securities worsening the bear market, increasing Livingston’s gains. Livingston made a killing during the early years of the exchange and lost it a few times to but left us with a few lessons.
Discipline is also an important characteristic for a trader to have or obtain. It is impossible to be right every time, when one has a proven plan to make money in the market, one sticks to the plan despite occasional losses. Decisions in the market must be based on facts and strategy. Changing your bets on speculation, tips, or favors you owe will cost one money. If you don’t have facts to place your bets in the market or unsure of the direction of the market, you do not need to be active in the market. Livingston also informs the reader that nowhere does history repeat itself more often or uniformly than in the stock market. While no one can predict the exact future, previous trends can help us make an educated guess upon what will happen. One can’t say exactly that you will be a millionaire if you invest five hundred dollars a month in well ran mutual funds and exchange traded funds from college until retirement but it is pretty certain.
The most important lesson from the entire book is “A man may beat a horse race, but no man can beat horse racing”. Now one may be wondering what in the hell does horse racing have to do with the stock market. One may be the most talented evaluator of horses alive and still won’t be able to predict half of the races because of circumstances. A horse got injured during the race, the unknown track conditions favor one horse over the other, the horse could be ill, another horse given performance enhancing drugs, got a bad gate pick etc. the list goes on and on. The stock market is the same way, history provides evidence to try and make educated guesses, but that's all it is, a guess. You may be able to pick the right horse a few times but it is impossible to beat horse racing.
Another lesson Livingston teaches is that as he says every dog will have its day. Now you're probably saying another animal reference, but stick with me. Trade conditions and prospects should cause stocks in a group to react alike. Success should be shared by all yet not to the same degree. Livingston uses the example of steel companies in the book. If C.D. Steel and X.Y. Steel both go up, it is reasonable to assume even the dog like A.B. Steel will go up to. A dog is referencing BCG matrix of a company with low market share and growth. The subject of the stories may change but the information and lessons remain the same. Think of Livingston the next time you hear one say they beat the stock market and the horse race story.
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