Lessons from the Greatest Stock Traders of All Time: Proven Strategies Active Traders Can Use Today to Beat the Markets - Brossura

Boik, John

Brossura

ISBN 10: 0071437886 ISBN 13: 9780071437882

Casa editrice: McGraw-Hill Education, 2004

Riassunto

The trading strategies of legends Jesse Livermore, Bernard Baruch, Gerald Loeb, and more provide ways to triumph in the market

Today's bookshelves are so laden with Johnny-come-lately experts, eager to sell their knowledge to any and all, that it's sometimes hard for traders to know which way to turn or whom to trust. Lessons from the Greatest Stock Traders of All Time makes the choice simple, examining the careers of five traders--Jesse Livermore, Bernard Baruch, Gerald Loeb, Nicolas Darvas, and Bill O'Neil--who, more than any others over the past century, demonstrated tremendous success at conquering Wall Street.

This technique-filled book presents numerous ways in which the timeless strategies of these investing icons can be used to tame today's high-speed, unforgiving marketplaces. Comparing and contrasting the successes--and occasional failures--of these five giants of finance, it reveals:

• What Jesse Livermore did to correctly call every market break between 1917 and 1940
• How Bill O'Neil stuck to basics to create his famously effective CANSLIM system
• The strategies Nicolas Darvas used to become a self-made millionaire several times over

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McGraw-Hill authors represent the leading experts in their fields and are dedicated to improving the lives, careers, and interests of readers worldwide

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Timeless rules for profitable, low-risk trading--from five investing legends

Over the course of a century, in every type of economy and market, five traders wrote and perfected the rules for successful stock trading. Lessons from the Greatest Stock Traders of All Time examines these amazing traders and their careers, and reveals how you can use their remarkably similar skills, disciplines, and trading rules to improve your performance in today's high-risk, high-reward markets.

Look to these "Babe Ruths of Trading" to discover:

• Jesse Livermore--How early market defeats taught him the number one rule of profitable trading--Cut your losses and move on!
• Bernard Baruch--Techniques Baruch learned from his $5 a week Wall Street job--and how they helped him build a multimillion dollar portfolio
• Nicolas Darvas--What this "outsider" did to regularly outmaneuver Wall Street's top pros in his spare time
• Gerald Loeb--What Loeb saw that many others missed, allowing him to sidestep the Crash of 1929
• William O'Neil--How O'Neil expanded on the time-honored rules of his predecessors to become a great modern-day success story

Certain rules and techniques have always distinguished the best traders. Discover what those strategies are, and how to use them to power your trading profits while dramatically cutting your losses, in the entertaining, technique-driven, and always fascinating Lessons from the Greatest Stock Traders of All Time.

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LESSONS FROM THE GREATEST STOCK TRADERS OF ALL TIME

By JOHN BOIK

The McGraw-Hill Companies, Inc.

Copyright © 2004 The McGraw-Hill Companies, Inc.
All rights reserved.

ISBN: 978-0-07-143788-2

Contents

Acknowledgments
Introduction
1 Jesse Livermore
2 Bernard Baruch
3 Gerald M. Loeb
4 Nicolas Darvas
5 William J. O'Neil
6 Strategies of the Greatest Traders
Conclusion
Bibliography/Resources
Index

Excerpt

CHAPTER 1

Jesse Livermore

"It's not the thinking that makes the money; it's the sitting."

The Reclusive Genius

Jesse Livermore was born on July 26, 1877 in Massachusetts. He came from a poorfamily, as his father struggled as a farmer with the challenging New Englandsoil. Young Jesse knew he wanted more from life, and when his father pulled himout of school to follow in his footsteps, Jesse ran away from home at the age of14. With just a few dollars in his pocket—given to him by hismother—he headed to Boston. He landed a job as a chalkboard boy for PayneWebber that paid him the minimal wage of $6 per week. His responsibilities inhis new job required him to post the stock quotes on big chalkboards coveringthe length of the brokerage house as prices were called out by tape watcherssitting in the gallery as fast as they could yell them out from the ticker tapemachines.

Livermore always excelled at mathematics in school, and he found the tape of theStreet to be his calling. He was truly gifted, with a photographic memory whenit came to numbers. He actually performed three years of mathematics in one yearof school during his youth. He would memorize prices and ticker symbols from hisjob at Payne Webber. He became a voracious tape reader and watched the tape withtotal concentration and focus. He also started to keep a notebook of the numbersfrom his chalkboard job, and he soon noticed that certain patterns emerged. Hewould keep thousands of price changes in this notebook diary and study them,looking for these certain price patterns. By the time Livermore was 15, he wasseriously studying stock patterns and price changes. His "on the job training"allowed him to be ever observant of the activities and how people participatedin the market. He noticed that most people lost money in the stock marketbecause they acted randomly, did not act on rules or a predefined plan, and didnot put forth the required study that the market and its actions required.

His first trade was made jointly with a friend. They invested a total of $5 inBurlington because Livermore's friend thought the stock would rise. Theyexecuted the trade with one of the "bucket shops" in Boston. The atmospherewithin the shops was more conducive to low-budget speculation, as one wasbasically betting on the next move of the stock, or very short term trading. Youcould also bet on the movement of the stock without actually owning the stockcertificates. If the stock moved against you by 10 percent, your trade was wipedout. This was the 10-percent margin rule that was in effect at the time, and itwould establish a strict loss-cutting rule for Livermore that he adhered to mostof the time during his trading career. Over time and due to experience, he wouldactually improve on this and he would be able to cut his losses to less than 10percent.

Concerning Burlington, Livermore first checked his notebook and became convincedthat the stock would rise based on its recent trading pattern. So his firststock trade took place when he was 15, and he ended up making a profit of $3.12on his share of the trade.

He continued to trade in the bucket shops, and by the time he was 16 he wasmaking more money trading than he was making at his job with Payne Webber. Whenhe made a total of $1000 he quit his job to trade full time in the bucket shops.

Livermore made so much money by the time he was 20 that he was banned from thebucket shops of Boston and New York, as he was having an adverse effect on theshop owners' profits. (He would bounce back and forth between the two citieswhen he would be discovered in one or the other.) His success earned him thenickname "The Boy Plunger." Bucket shop owners wanted nothing to do with him, orhis winning trades, which were constantly taking profits from their shops.

With his confidence high he decided to head to New York and trade the stocks onthe listed New York Stock Exchange. After all, this was the big time and he wasnow ready to test his skills in the big league. He set up an account with abrokerage office with $2500 he had as his capital stake. This was down from ahigh of $10,000 he had attained at one time from his bucket shop trades.

As he lost his profits, Livermore learned the hard way that trading wasn'talways easy. As a result, he started to analyze the mistakes he made that causedhis losses. This detailed analysis of past mistakes would prove to be a vitaltrait of his later success. This also became one of his best learning tools.

One of the lessons he discovered during this first analysis period was he wouldbecome impatient and thought he had to trade. Impatience in the market usuallyleads one to making impulse trades, which rarely leads to profitable success.This mistake would cost him dearly, and it is a mistake made by many tradersstill today.

New York did not produce much success for Livermore. He went broke within sixmonths and had to borrow $500 from his brokerage firm. With money in hand heheaded back to the bucket shops to regain his stake. He discovered that thebucket shops would quote prices instantaneously, whereas there was a delay inthe New York quotes. His system at the time was based on instant quotes andquick trades. He returned to New York in two days with $2800 and repaid the $500loan to the brokerage firm.

But upon his return he found it more difficult than he had expected and stillfound he was only able to break even in New York, so he returned for a finaltime to the bucket shops. Just when Livermore successfully brought his accountup to $10,000 by trading in disguise, the bucket shop owners finally discoveredhim again and he was banned for good from the shops.

In 1901, now in New York and trading stocks listed on The New York StockExchange during a strong bull market, Livermore went long (bought) on NorthernPacific, and he turned his $10,000 into $50,000. Then just as quickly, he gaveit all back on two short positions (borrowing stock from your broker in hopes ofbuying it back at a lower price and profiting from the difference), as hethought the market would break for a short time. Though he lost on these twotrades, he was initially right, but the delays due to the huge volume in tryingto fill the trades caused his losses when the stocks reversed on him.

It was from this experience that he learned how difficult very short termtrading was going to be on The Big Board. Livermore realized he had to learn howto adapt to the different trading environment that separated the instantaneousaction of the bucket shops when compared to the more sophisticated processes oforganized trading. So once again, by the spring of 1901, Livermore found himselfbroke. He then discovered a new hybrid bucket shop that had opened for business.He thought he could regain his stake quickly if he traded in these hybrids. Foralmost a year he successfully regained his capital until he was discovered andbanned from these shops as well.

Through it all, the losses Livermore endured taught him that one must experiencelosing real money in order to learn the correct ways of the market. He stayedpersistent in his pursuit of success and kept learning from his mistakes andexperience.

It was also at this time that he discovered the time element. The time elementin stock trading means that it takes patience, and the road to profitabletrading will occur over time, as in trying to master most pursuits. It can alsomean understanding how stocks trade. In the bucket shops, the time element wasvery short and instant, due to the more gambling nature of how the bucket shopswere set up and how they operated. In New York the time element meant there wasmore of a delay as opposed to instant transactions. There was also the fact thatonce you purchased a stock on The Big Board, you actually took possession of thecertificates reflecting the company in which you owned the stock. This timedifference between how the bucket shops operated and how The Big Board operatedmeant one had to react more to future time. This required patience, which wouldbecome a strong trait of Livermore's years later and would lead to some of hislargest gains. The time element also proved to him that the road to success instock speculation was indeed going to happen over an extended period of time. Itwould not happen overnight.

He was certain of this because he had already experienced many ups and downswhen it came to his own capital. He achieved some milestones early on. By theage of 15, he made his first $1000. Before turning 21 he made his first $10,000.He got his account up to $50,000, and then gave it all back two days later. Hewas experiencing the usual ways of the market, but he was determined to staypersistent, as he knew the life of the market was to be his calling.

Livermore made a definition at this point. He defined gambling as anticipatingthe market, which was very difficult to do, and he saw the odds as being stackedagainst the individual trader. He defined speculating as having the ability tobe patient and react only when market conditions give you the signals tospeculate. Here in his early years, he was constantly learning new skillsrequired to achieve great success in the market. He kept refining his rules ashe stayed observant and persistent.

Livermore was, at this time, by no means an expert. He kept listening to othersand their so-called "tips." He also kept trading too much. Another mistake hewas making was taking his profits—especially in a bull market—waytoo early. At this time he also discovered the importance of the general marketand how important it was to learn and understand what the market is doingoverall and how it affects most stocks. He had to learn how to interpret whatthe market was currently doing and at what stage it was currently in, instead oftrying to predict what it was going to do in the future.

During these early years Livermore was in a constant learning mode. Hediscovered that being impatient in the stock market is one of the biggestmistakes one can make. Through experience he would learn to trust the faith inhis own judgment. His constant observations would lend credence to his judgmentand not allow him to be distracted by the minor fluctuations that would alwaysoccur in the market.

Through experience, his strategies began to work and, at age 30, he was becomingmore successful in his trading. At this time he developed his probing strategy(discussed in more detail later in this chapter). The other key strategy heimplemented was his pyramiding strategy.

Pyramiding was a strategy that would also become a key trading rule of all theother great traders profiled in this book as well. Pyramiding was buying more ofa stock as it kept advancing in price. Imagine how different this strategy musthave seemed in those early years, as most people are taught to purchase thingsat lower prices in order to get a bargain, as opposed to paying higher prices.This concept of adding to your most recent purchases when they prove you wereright compounds your returns. Livermore discovered that after he would purchasea stock from observing its price action, if the stock kept increasing in price,the action of the stock was proving to him that he had made the right decision.This confirmation of his correct decision was proof enough for him to continuepurchasing more of the stock. This compounding effect would only add more to hisincreasing gains on those particular stocks.

Livermore used probing and pyramiding strategies on the short side of the marketin late 1906, as the market was having difficulty keeping a sustained rally inan upward trend. Here he would add more to his short positions as a weak stockkept declining in price. He had so much success being short in the market duringthe beginning stages of the bear market of 1907, that he had become amillionaire before he turned 31.

Livermore called the crash of 1907 and made $3 million in a single day onOctober 24th, as he closed out and covered his short positions. In October 1907,J.P. Morgan, then the most influential person on the financial scene, saved WallStreet from near collapse as he injected the market with the required liquidityneeded to continue as a viable institution. Morgan even sent a personal messagedirectly to Livermore requesting that he stop shorting the market. The fact thatthe great J.P. Morgan acknowledged Livermore's action in the market was a truetestament to the reputation and impact that Livermore was gaining on the street.

The Great Bear of Wall Street

By this time, Jesse Livermore was indeed establishing himself as a prominentfigure on Wall Street. His newfound wealth made Livermore discover that the bigmoney was made in the big swings of the market, earning the nickname "The GreatBear of Wall Street" from his shorting positions that earned him a fortune inthe crash of 1907. Throughout these winning years, Livermore reiterated hisbelief in never-ending stock market analysis and its essential importance tosuccess.

From his successes in the stock market, he began to speculate in the commoditiesmarket as well. He became involved with Percy Thomas, who was considered, atthat time, the Cotton King. At the time he started socializing with Thomas,Thomas had lost all of his fortune on a few bad trades. But Livermore listenednonetheless, as he knew of Thomas's prior success and that he was stillconsidered the legend of cotton. Thomas convinced Livermore to take a certainposition in cotton. As Livermore soon found out, his long position in cottonwould cost him nearly his total fortune. He lost many of the millions he hadbuilt up on his profitable trades with this transaction on cotton—largelyby breaking many of the market rules he spent so much of his early yearsdeveloping.

Livermore broke his own rules of playing a lone hand and not listening toothers. He also broke his loss-cutting rule, as he kept holding on to a losingposition. This experience cost him emotionally as well. As he tried to get hismoney back, he lost even more money in desperate trading. By this point,Livermore was now deeply in debt to many creditors. This only furthered hisdepression and he began to lose his confidence, which is devastating to a stocktrader.

It took many years for Livermore to get back to his winning ways. The marketswere mostly flat to down in the years from 1910 through 1914 (the market wasactually closed from August 1914 to mid-December 1914 due to the beginning ofWorld War I). Livermore, at this time, was broke, depressed, and owed creditorsmore than $1 million. The market also offered no great opportunities duringthese flat years. In order to clear to his head and get back into his game, hedecided to declare bankruptcy in 1914. Still down on his luck, in 1915 during awar-time rally in the market, he was given a line of 500 shares with anunlimited price per share from one of the brokerage houses he traded with. Forsix weeks he did nothing but study the market and watch the tape. He noticedthat certain par levels would be established by a stock. This was an old tradingprinciple that he actually used in his bucket shop trading days. A par levelwould mean that when a stock rose to a round number such as $100 or $200 pershare, it more than likely would keep increasing in price as it cleared this parlevel.

He bought Bethlehem Steel at $98 and watched it passed through $100 and keptrising. He bought another 500 shares as it hit $114 per share. The next day ithit $145 and he sold out for a profit of $50,000 on the 1000 shares. Thistransaction helped him regain his confidence and got him to stick to his rulesagain. He brought his account up to $500,000 at one point, and he finished theyear of 1915 with $150,000 in his account.

By the end of 1916, Livermore had started shorting the market. The market soonbegan to decline. Many leading stocks had topped and started to decline in pricewhen the famous "leak" spread that President Wilson was set to offer a peaceplan to the Germans. Wall Street would view this as a negative event because itwould hurt the wartime economy of supplying goods to foreign nations. BernardBaruch (featured in Chapter 2), who had become a friend of Liver-more's,was also short in the market at this time and was rumored to have made $3million on the news leak. A Congressional committee was formed to investigatethe rumor leak, and Baruch and Livermore were called on to address thecommittee. Baruch had admitted that he made $470,000 on his short positionsduring this time, but he vowed it was not due to having advanced information ofthe rumor. The New York Stock Exchange nonetheless enacted a new rule statingthat it was not proper to trade on news leaks. Of course, this ruling wasdifficult to enforce but it showed the influence of Livermore and Baruch on themarket at that time. Livermore himself cleared approximately $3 million in 1916by being both long during the rising part of the year and short during the laterfew months, in which the market turned sharply downward.

On April 6, 1917 the United States entered World War I, and after many successesin the market Livermore would begin to pay off all of his previous debts, eventhough legally through his 1914 bankruptcy filing, he was not obligated to doso. He also, at the age of 40, established a trust account to insure that hewould never go broke again.

Regaining Prominence

By 1917 Livermore was now gaining back his once prominent reputation on WallStreet. On May 13,1917 a New York Times article ran called "Exit theSwashbuckling Trader of Wall Street: Present Day Speculator in Stocks Is More ofa Student and Economist Than the Sensational Manipulator of Other Years." Thearticle featured both Jesse Livermore and Bernard Baruch and further identifiedthem as major players and influential and successful stock traders on WallStreet.

During the 1920s Livermore determined that experience was one of the keyessentials for continued success in the market. His reputation as one of thebest and most successful traders on the street was increasing. He was trulyliving the American dream, becoming a very wealthy man by following his tradingrules. He always considered himself a student of the market and thought it was acontinuous learning process. Livermore was convinced that no one could evermaster the market.

At about this time he began to find out how important it was to discover whichstocks were the real leaders of a strong market movement. He would continuouslystudy how leaders would stand out from the crowd and become the real pricegainers. His study of the tape and improved understanding of how the marketworked led him to refine his industry leader's approach. He would discover thateach new major uptrend in the market would produce these new leaders in newleading industries, usually based on the greatest profit expectations. Thisreiterated to him the importance that fundamentals have in the market and onstock prices. His other discovery of how certain stocks act alike in the samegroups and how the leading groups act in conjunction with the general marketswould be a key to his even greater success that was coming his way in The GreatCrash of 1929.

(Continues...)

Excerpted from LESSONS FROM THE GREATEST STOCK TRADERS OF ALL TIME by JOHN BOIK. Copyright © 2004 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
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Dettagli dell?edizione

• Editore: McGraw-Hill Education
• Data di pubblicazione: 2004
• ISBN 10: 0071437886
• ISBN 13: 9780071437882
• Rilegatura: Copertina flessibile
• Lingua: Inglese
• Numero di pagine: 160
• Contatto del produttore: non disponibile