Danger, Danger
Too many first time investors / traders read a few books and, having absorbed the authors’ wisdom, launch themselves (and their savings) into market activity. They then learn that there’s no substitute for losing money in the markets to complete a stock market education. Some - like the investor this post is about - then wish they had committed less money to their initial foray.

I found this investor while I was looking at reviews of Phil Fisher’s book - Common Stocks and Uncommon Profits - on Amazon.com. In 1998 the investor announces that, having read Mr. Fisher’s book, he has decided to invest all of his money!!! in Coca-Cola. Here’s what he says:

Phillip Fisher is the father of qualitative analysis. This book changed my life like no other. It has made me settle down as an investor and think as a businessman, and put all notions of trading aside. From reading Fisher, I now understand that one should only invest in a small number of stocks, but these stocks must be perfect in all aspects. He shows one what signs to look for in a company and how to analyze it. From reading Mr. Fisher’s book I have put all my money in Coca-Cola, and have been well rewarded. Mr. Warren Buffett who read this book in the 1960’s found it to be one of the best investment books ever written. I myself consider it my family bible. Life as an investor was pure hell until I read this book, and after reading it I feel that nothing can stop me from becoming very wealthy. All I have to do is follow the steps that are in this book. Thank You Mr. Fisher.

April 25, 1998

Here’s Coca-Cola’s stock price chart since 1997 (with all of the reviewer’s money invested in it!):

Coca-Cola (KO) chart 1997 to 2007

Result:
If he has stuck doggedly with his original strategy, our intrepid investor will have spent nine fruitless years in Coca-Cola. I sincerely hope he got out soon after his review and invested his money more profitably elsewhere.

Putting too many eggs in one basket after reading a book or two is not smart. Occasionally you might get lucky but I’d strongly advise market newcomers against being too bold. Edge your way into the markets carefully. Give yourself time to learn while putting a little of your money on the line. You learn faster and better when your money’s in the market than when you’re just reading books.

A Pivotal Point - Get Ready to Buy Coca-Cola?
Interestingly, Coca-Cola has been in an uptrend since the beginning of 2006. It’s now approaching a pivotal point. Jesse Livermore, if he were alive, would be watching this one carefully.

Lemon Stocks
One of the tenets of fundamental analysis is that you should buy stocks when they are undervalued and sell them when they are overvalued.

When I began investing in the stock market, this is the method I chose. I didn’t do very well because I wasn’t very good at judging the value of companies.

I bought companies that looked undervalued only to read an announcement within weeks or months showing why the stock had been trading so “cheaply”. I realized I’d developed a talent for finding “lemon” stocks.

Ben Graham’s Voting Maching - The Lemons’ Enemy
I’m keen on Jesse Livermore’s methods because they’ve helped me make better decisions. For several years now, I’ve enjoyed much more success based on trend-following than I did using fundamental analysis on its own. I think one of the reasons for this is that I’m no longer dependent on reading out-of-date and occasionally downright mendacious company reports in order to decide which stocks to buy and sell. Several years on, I’ve learned enough to avoid lemons and my fundamental analysis has improved. I NEVER rely on fundamental analysis alone though. I ALWAYS allow the market to confirm my choices.

After all, who am I to assign a true price to any stock? In the real world it’s supply and demand that determine price. In saying this I’m aware of Ben Graham’s famous dictum that markets, in the short term, act like voting machines while in the longer term they act like weighing machines. I’ve discovered I’m perfectly happy to take profits on short term or (preferably) medium term trades using the results from the “voting machine” (trend) to guide me.

Stocks and Childish Fads
Remember Cabbage Patch Dolls? Or Furbies? - toys worth a few bucks each. A few Christmases ago some parents were paying hundreds of dollars for these toys. Later – once the fad was over - the same toys could be bought in second hand stores for no more than a few cents.

The parallel with stocks is exact. Once the market gets it into its head that a stock is hot, prices reach heights that horrify traditional fundamental analysts. Our job is not to sell these stocks too early. Just because a stock is trading at twice what we think it’s worth, there’s no reason that it won’t reach five times that. Hang in there until the trend is over. Then get out.

In How To Trade In Stocks, Jesse Livermore wrote:

“As long as a stock is acting right, and the market is right, do not be in a hurry to take a profit. You know you are right, because if you were not, you would have no profit at all. Let it ride and ride along with it. It may grow into a very large profit, and as long as the action of the market does not give you any cause to worry, have the courage of your convictions and stay with it.”

Similarly, don’t buy a stock just because it looks cheap on the basis of fundamental analysis. Wait for THE MARKET to recognize that it’s cheap. Let other people take the risk of buying too early. Jesse Livermore always said that the most profitable trades resulted when he entered a trade soon AFTER the market had confirmed his belief that prices were going to move in a particular direction. That’s been my experience too.

Having just added a post about Edward Jerome Dies’ book Street Of Adventure, I thought I’d finish writing about him by reproducing the preface he wrote for Livermore’s How To Trade In Stocks - The Livermore Formula for Combining Time Element and Price.

Dies’ preface from 1940 is as follows:

The career of Jesse L. Livermore is a bright patch in the pattern of speculation. He has been in the public eye as a stock-market factor almost continuously since as a youth he flashed like a comet across the speculative skies and became known as the millionaire Boy Plunger.

He has indeed been a plunger, and on rare occasions the magnitude of his operations cause The Street to blink in wonderment. Yet blind chance never entered into his market sallies. Each move was touched with singular genius, buttressed by endless research and the dogged patience of Griselda.

For forty years Jesse Livermore has studied world and domestic economic conditions with almost fanatic intensity. In the same four decades he has studied, talked, dreamed, lived with, and traded in the speculative markets. His world has been the movement of prices; his science the correct anticipation of such movements.

It has been my privilege to know personally some of the great speculators of our times and to observe at close range their fascination activities. For intellectual scope and for natural aptitude I regard Jesse Livermore as the greatest speculator and market analyst since the turn of the century. In one of my books I made the statement that he could be shorn of every dollar, given a small brokerage credit, locked in a room with several tickers, and in the course of a few market months he could emerge with a new fortune. Such is the mark of his genius.

He created his first sensation when he was fifteen years old. His mother was the party most surprised, for he dumped into he lap a thousand dollars in five dollar bills, his first gleanings from the stock market.

He created his next sensation by completing four years of mathematics in a single year while holding a job as a board marker in a brokerage house.

He has been creating market sensations ever since and to those interested in the science of speculations this little book, if not a sensation, is at least a surprising departure.

The reason is obvious. Every great speculator has his own method of operation, his own course of study for arriving at conclusions upon which he is willing to risk vast sums of money. Such methods are guarded like state secrets, sometimes through vanity or suspicion, but more often for very practical reasons.

So when Jesse Livermore, with characteristic frankness, draws back the curtain and reveals publicly his rules for combining time element and prices he takes the spotlight for audacity among the top-flight speculators of the age. He lays before the reader the fruits of forty years of speculative study.

It is a new chapter in the colorful saga of a brilliant operator.

In 1940, Edward Jerome Dies wrote the preface to Jesse Livermore’s How to Trade in Stocks.

Five years earlier Dies had written Street of Adventure examining the careers of fourteen of Wall Street’s biggest names, including Jesse Livermore, who Dies described as a “daring genius”.

From its preface, Street of Adventure looks like an interesting read:

“Swiftly and with deft strokes Mr. Dies etches the lives of fourteen colorful characters - great and near great - actors in the quick drama of western finance.…

We watch the rise and fall of the incredible Insull, and the blink at the collapse of his cyclonian empire. We see the dauntless Alexander Legge battle with Hoover millions to stem the onrush of economic ruin.

Through the pages strut such almost legendary figures as Bet-a-million Gates, Joe Leiter, and Doc Crawford… contrasted by the calm capitalist speculators, Patten and Cutten, and the daring geniuses, Howell, Livermore and others.

Here is vivid history and biography with the sweep of fiction - dramatic tales from la Salle Street, the western powerhouse of finance, the street of adventure.”

Edward Jerome Dies went on to write further investment related books including Behind the Wall Street Curtain and The Plunger, a Tale of the Wheat Pit.

If you’re looking to buy a copy of Street of Adventure, it won’t come cheap.

I noticed Global Investor is selling a rare first edition (poor condition) for UK£475 (US$950).

The only other copy I found available on the net (and from which I’ve borrowed the picture of the book’s cover shown above) - Rare List - was in much better condition and was selling for US$7,500 (negotiable).

I noticed an article in The Economist the other day reviewing a collection of trading books and publications that’s on the market for $738,000.

It’s a 700 volume collection compiled by Christopher Dennistoun, a British antiquarian book dealer and part-time stock trader. Dennistoun spent 30 years collecting works about the history of the stock market and trading.

Naturally Jesse Livermore’s career occupies part of Dennistoun’s huge compilation, as does the career of Livermore’s lesser-known rival - Arthur Cutten. Cutten, although lesser-known than Livermore, was not a lesser trader. In 1925 Cutten was believed to have taken as much as $15m profit from trading wheat and he was undoubtedly America’s most important commodities trader during the 1920s.

The Economist comments that Cutten’s biography “The Story of a Speculator”, which he had privately printed in 1936, has to be the world’s driest attempt at autobiography. “I like to make money,” Cutten begins. “I have made it because I like to make it.”

When, like Livermore, Cutten was criticized for making a living through speculation. Cutten responded:

“Who other than the speculators are going to assume the necessary risks of commerce which cannot and should not be borne entirely by the merchants? Do not tell yourselves that we can dispense with these risks. They are part of existence on earth.”

Despite his being a contemporary of Livermore, Cutten is not mentioned in Reminiscences of a Stock Operator. He did, however, make the front cover of Time Magazine - as shown above. Here’s an article about Cutten printed by Time in 1932.