Thought For A Day
Who Am I ?
My first job was as a quote boy (posting stock quotes on a chalk board) at Paine Webber in Boston, Mass. At the outset I had no money, no contacts, no education and no support…not exactly a traditional formula for winning the game of life. However, it was here, in these early years, that I noticed the patterns that the stock quotes followed, began to develop my system for trading the markets and made my first trades.
My first trades were made in what were then known as “bucket shops.” These were generally unlicensed brokerage houses that were little more than backroom gambling houses. Most bucket shop customers lost money, but I did not because my trading was based on the “tape” (the ever-changing stock price patterns printing on the ticker tape). I am known as perhaps the best pure “tapereader” of all time. It was also during this time that I came to be known as the Boy Plunger for my willingness to place large “bets” on trades for which I had great conviction.
My success in the bucket shops led to me being banned from them, forced to travel and disguise myself to make trades, trade by proxy, and, ultimately, to a thinly veiled threat from a well-known mob figure.
I would go on to make trading my profession and one true passion in life. I would continue to refine my trading system for many years learning more as my experience expanded but always keeping the foundation of those early years as the base of my activities.
In my early 30s I was worth $3,000,000, but lost it by virtue of “getting away from my knitting.” After filing for bankruptcy, I was bankrolled by a benefactor who would ultimately use me to help hide the liquidation of his family accounts. Chastened I returned to the simple basics more determined than ever to succeed as a trader.
By 1929 I was well positioned to capitalize on the crash. My fortune rose to over $100,000,000 and my market influence was such that J.P. Morgan himself sent word asking that I forgo the additional profits that I could make for the sake of the overall market. This was arguably the peak of my market power.
Over the course of my life I experienced all of the spoils of great wealth… multiple houses, yachts, parties, vacations, clothes, and cars. Within my network were some of the most powerful people of my generation. Still, I was married multiple times and suffered with what I knew as the dark periods (but has since been confirmed as clinical depression) for most of my life. This depression culminated in me taking my own life at the age of 63, but not before establishing myself as arguably the greatest trader that ever lived.
I am Jesse Lauriston Livermore (July 26, 1877 – November 28, 1940).
Confidence in Trading: The Approach
Have you ever seen a gorgeous goddess? A woman so magnificent you just are beeming energy inside to go talk to her? But as you walk over you start to notice how you’re walking, what facial gestures you’re making, where your hands are, confidence fading… You’re becoming self-conscious and that wonderful feeling of excitement has now turned into fear. Do you remember the last time you talked to a woman in this energy? In this self-conscious / fear mentality? Didn’t go so well did it? Why is a stock any different?
It’s all about the approach and mental confidence prior to the trade. When you approach an event with fear that energy gets transferred into it. I’ve talked about how The Energy of Fear is Consumption in this prior post. So if you’re feeling nervous before a trade take note of this. Where is this fear coming from? Is it related to money? Lack of confidence in yourself? Lack of self worth? It could be a million different things but you need to find and focus on the one that resonates with you. I’m currently working on a meditation that will assist you through the process of finding this fear and making it your ally.
Remember the emotion will come during the “approach.” Keep track of how you feel, as this will set the course of how the rest of your interaction with the trade will go. Keep in mind that magnificent woman: Do you approach her as nervous, not confident, and fearful of reject or strong, confident and full of love?
It’s all about the approach and mental confidence prior to the trade. When you approach an event with fear that energy gets transferred into it. I’ve talked about how The Energy of Fear is Consumption in this prior post. So if you’re feeling nervous before a trade take note of this. Where is this fear coming from? Is it related to money? Lack of confidence in yourself? Lack of self worth? It could be a million different things but you need to find and focus on the one that resonates with you. I’m currently working on a meditation that will assist you through the process of finding this fear and making it your ally.
Remember the emotion will come during the “approach.” Keep track of how you feel, as this will set the course of how the rest of your interaction with the trade will go. Keep in mind that magnificent woman: Do you approach her as nervous, not confident, and fearful of reject or strong, confident and full of love?
Trading Mistakes
If you’re not making mistakes, then you’re not doing anything. I’m positive that a doer makes mistakes.
–John Wooden
We had our first losing day in quite awhile last Wednesday. And that’s not to say that we are loss free intraday everyday…quite the contrary in fact. We take intraday risk management losses almost daily. However, we do not often suffer overall losses for the day. Wednesday was an exception.
The loss was related to trying to force the market to give us our Daily Goal when it was not being offered. The loss was within our risk parameters, so it was not a big deal…except it was a big deal. We were annoyed. We were angry. We wanted revenge. Worse, we were up on the day only to gave it all back and then some. Worse still, the loss was due solely to a trading mistake we made as we approached the end of the day. A MENTAL mistake. Worst of all? We KNEW it was not prudent when we were doing it.
We recovered the losses on Thursday and had extended gains on Friday, but coming into the weekend, the only thing we were thinking about was why we made such an obvious mistake and, more importantly, how to avoid that mistake going forward. Our answer? We are unlikely to avoid repeating this mistake in some form or another.
Trading is risky by definition. Our job, as we see it, is to engage that risk intelligently in order to secure profits. We take steps such as minimizing our position size and using stop losses to mitigate the inherent risks, but we cannot remove them completely without removing the opportunity to profit (no risk, no reward).
So what do we do? We remind ourselves that we will not make our Daily Goal everyday…and that is ok. More importantly, that particular form of mistake is now a part of our experience and will subconsciously inform our trading in the future. It will become the little voice that speaks to us the next time we are three quarters to our Daily Goal at the end of the day and maybe, just maybe, we will heed that warning.
–John Wooden
We had our first losing day in quite awhile last Wednesday. And that’s not to say that we are loss free intraday everyday…quite the contrary in fact. We take intraday risk management losses almost daily. However, we do not often suffer overall losses for the day. Wednesday was an exception.
The loss was related to trying to force the market to give us our Daily Goal when it was not being offered. The loss was within our risk parameters, so it was not a big deal…except it was a big deal. We were annoyed. We were angry. We wanted revenge. Worse, we were up on the day only to gave it all back and then some. Worse still, the loss was due solely to a trading mistake we made as we approached the end of the day. A MENTAL mistake. Worst of all? We KNEW it was not prudent when we were doing it.
We recovered the losses on Thursday and had extended gains on Friday, but coming into the weekend, the only thing we were thinking about was why we made such an obvious mistake and, more importantly, how to avoid that mistake going forward. Our answer? We are unlikely to avoid repeating this mistake in some form or another.
Trading is risky by definition. Our job, as we see it, is to engage that risk intelligently in order to secure profits. We take steps such as minimizing our position size and using stop losses to mitigate the inherent risks, but we cannot remove them completely without removing the opportunity to profit (no risk, no reward).
So what do we do? We remind ourselves that we will not make our Daily Goal everyday…and that is ok. More importantly, that particular form of mistake is now a part of our experience and will subconsciously inform our trading in the future. It will become the little voice that speaks to us the next time we are three quarters to our Daily Goal at the end of the day and maybe, just maybe, we will heed that warning.
7 Words for Traders
- Think risk first and profit second — Profitable traders view every potential and actual trade through the lens of risk or whether they are willing to truly accept the potential damage to their account as opposed to focusing on the potential reward of trades.
- Accept risk — Profitable traders truly accept the associated risks once they decide the potential reward is worth it. These traders understand that in order to win consistently they MUST experience controlled losses. They know that if they minimize losses and exercise patience with winners, they can reap incredible profits.
- Think more/Trade less – Profitable traders know that their profit on every trade lay in the short distance between their ears. They understand that the siren song of securities is an invitation to trouble much of the time. They spend more time assessing a security’s overall chart structure and identifying optimal transaction points rather than focusing on the physical activity of clicking an entry or exit.
- Stalkers — Profitable traders are disciplined and patient. They will pass up a good entry to wait for a great one.
- Decisive — Profitable traders make decisions. They know that as long as their decisions are framed properly (i.e. from a risk perspective), their first thought is generally the right one.
- Forgetful — Profitable traders have short memories. As we were told many years ago on a Wall Street trading desk, “If you have a losing trade, forget it quickly… the chance to profit is coming up. If you have a winning trade, forget it even more quickly… the chance to give up those profits is coming up… stay in the moment.”
- Group think — Profitable traders care little for any one trade. They know they have already taken steps to minimize the impact of any single trade. Instead they focus on groups of trades as groups are more indicative of their process… which is what’s really important.
‘Monkeys’ beat the stock market
Ten million portfolios containing stocks randomly selected as if by monkeys managed to produce better profits than a tracker fund over 40 years, academic research has concluded.
The tracker fund was made up of stocks weighted according to their share of the market, thus raising the question as to whether this is an appropriate strategy to build passive investment funds.
The majority of passive tracker funds are constructed this way. A tracker aims to mirror or “track” the performance of any of a number of worldwide stock market indexes, such as the FTSE 100.
A FTSE 100 tracker is proportionally invested into the 100 companies in the index based on how large those companies are – their market capitalisation. But the new research, conducted by Cass Business School and sponsored by Aon Hewitt, questions whether there is a better way to construct indices and the funds that track them.
So an index could instead, researchers suggested, be based on the size of the dividends paid by the companies or on “book value”, which is the value of a companies assets if it were wound up and sold. Unlike market capitalisations, these measures are not inflated by market sentiment.
The study is based on monthly US share data from 1968 to 2011 and looked at 10 million indices weighted randomly. These “monkey” funds consistently delivered much better returns to the weighted approach.
John Belgrove, senior partner at Aon Hewitt, said: “While market capitalisation weighted benchmarks remain the bedrock to performance assessment and portfolio construction, this work sheds fresh light on the age-old active versus passive investment management industry debate.
“Inherent weaknesses in cap-weighted investment strategies are well documented, although they have been an enduring and challenging benchmark for active managers to beat. The good news for investors is that there is more implementation choice than ever to consider when selecting a preferred long term portfolio construction and fund manager style.”
Passive funds have become increasingly popular over the last couple of years as investors get fed up for paying over the odds for failure.
“Charges are an increasingly important factor for investors, and rightly so, as the greater transparency of fund costs is allowing investors to see more clearly how much they are paying for their fund manager’s expertise,” said Philippa Gee, a wealth manager. “While you might expect the annual fee of an active fund to be at least 1.75pc, or much higher for certain specialist funds, a tracker fee could be as low as 0.2pc, depending on which index it is covering.”
Passive investment can be done using a tracker unit trust or exchange-traded fund (ETF). Trackers can be bought and sold like any other unit trust or Oeic via a fund platform. ETFs are listed on the stock exchange like a share.
JIM CHANOS: Charity Can Be A Sign Of Fraud
It’s an incredible coincidence that the story was published today, since the news broke that former Enron CEO Jeff Skilling, a man Chanos helped put behind bars, could be getting out of jail early.
Enron is held up as the paragon of 1990s corporate greed. There, not everything was as it seemed despite excellent press all over the business world and a great reputation.
The point is that companies can build amazing brands without being amazing businesses, and as Chanos points out, part of that brand can be doing charity work.
From Salon:
One of the more interesting observations in the world of fraud is that some of the most egregious frauds were some of the most philanthropic companies in their communities. In some ways, if you look at Bill Black’s theory of the corporation as both a weapon and shield (we teach a lot of Bill Black’s things in my class), you can begin to see that that would be one way in which the bad guys in corporate suites would basically use the corporation as a shield. They’d say, well, look at all the wonderful things we do in the community, how many people we employ. We give to hospitals, we give to the Little League team, and so on. Not all these things would be immediately obvious to the casual observer.
So forget the frosting people, look at the cake.