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The Original Master Of Speculation: Jesse Livermore | Market Wizards
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Time to learn some more lessons from the trading greats. And this time we're learning from Jesse Livermore, the most famous and exalted trader there is. You know, they called him the boy wonder, the boy plunder, the great bear of wall street. He was trading way back when, back when there was the biggest market crash ever, the great depression. He trade through all of that. And Livermore was immortalized in the trading classic reminiscences of a stock operator by Edwin Lefevre. Lefevre, still can't say the name, but this reminiscences is really the best book on speculation.
And you'll see it has stories of him from way back when, right? But they always apply to today, no matter when you're reading it. And it's one of those books that you will read over and over again over the years. So this article that we're going to go over is from MacroOps, which is a global macro research firm I co-founded with Alex and Tyler. And this article was actually written by Alex. So one of the things that Alex explains is that he spent years dissecting the habits and practices of top traders, just like Livermore. But he realized that there is nothing special to what they do.
He's not saying they aren't amazing, because of course they are, but he's saying that there is no special or secret knowledge or ability or anything that's specially unique to them. Now the thing is in trading, especially when you're newer and just getting into the market, you're always looking for that secret indicator, that special sauce, like the Holy grail that is going to fix all your problems. But the reality is, is that there is no secret. That's the reason why you can trade the market so many different ways and still be successful. And it's also the reason why I could give you a super successful strategy, but you might not be able to execute it.
There are some important pillars that every trader needs to be successful in the markets. And without them, whether you have a good strategy or not, it's not going to work out. As Alex says, all of the important truths that a speculator needs to understand were plainly communicated by Livermore over 75 years ago. Now that doesn't mean you can just read this book and all of a sudden become a great trader. That's not how it works. You need the knowledge that's in this book and other books, but then you also need to practice. Theory and practice are two different things. So here's how Jesse Livermore put it.
He said, the training of a stock trader is like a medical education. The physician has spent long years learning anatomy, physiology, materia medica, and the collateral subjects by the dozen. He learns the theory and then proceeds to devote his life to the practice. The practice is really the hard part. You can't do proper practice without the theory, but you need to focus on the practice. In this video though, let's go over the theory. Now, one of the first things you got to learn when trading is how to take a loss.
But before we jump into that, I want to shamelessly plug this explosive stocks cheat sheet, which jots down the fundamental and technical criteria we use in macro ops to find the best stocks. And we call it explosive for a reason because these stocks really take off. So you get cheap optionality where you can risk a little, but make a lot, a symmetry, which is one of the things of course, Jesse Livermore talks about, but you should definitely get that checklist because it's free and it'll give you a really good strategy. And it's kind of the theory that you need, you know, you're going to still have to practice on your own, but this is a great help.
So I'll put a link to that page where you can enter your email and I'll send it to you. That link will be right up above here and down below in the description and comments. But okay, Jesse Livermore on learning how to lose. So here's a quote from him. An old broker once said to me, if I'm walking along a railroad track and see a train coming towards me at 60 miles an hour, do I keep on walking on the ties? Friend, I sidestep, and I do not even pat myself on the back for being so wise and prudent. So in this analogy, the train coming towards you is complete disaster.
It's like blowing up your account. So sidestepping the train is just taking the loss earlier. So you don't blow up. And like he said, for doing that, you shouldn't even be patting yourself on the back. It's just the natural thing you should do. Why would you want to get hit by a train? So the point is to be a great trader, you have to be a great loser. The fact is great traders will typically have more losing trades than profitable ones. They'll spend more time in an equity draw down than at new highs. And we've talked about this before about how the market distributes returns.
You're going to make most of your returns from just a few trades. Most of your trades are going to be losers, but the few winners you have should more than cover all the losses. And that's where asymmetrical trades become so important. Like in that checklist I was telling you about, because you only lose a little bit when you lose and you make a lot when you win. So Mark Spitsenagel, I think that's how you say his name, wrote in The Dough of Capital that the most valuable lesson he learned was from his Chicago trading pit mentor, Everett Clipp. He said, you got to love to lose money.
If you love to take small losses, then you'll never take a large one. That's important because it's the large ones that'll kill you. So as humans, we are naturally wired to avoid losses, right? Loss aversion. It's a psychological fallacy, which we've actually talked about. If you haven't seen that video, I'll link to it right here. But what you need to do is invert that loss inversion, a double inversion. Does that make sense? No? Well, you just got to learn how to love to lose, be completely fine with it. As Jesse Livermore says, losing money is the least of my troubles. A loss never bothers me after I take it.
I forget it overnight, but being wrong, not taking the loss, this is what does damage to the pocketbook and to the soul. Now, when he says being wrong, he means not making money because if you're taking a loss and yeah, you were wrong on the thesis, but who cares? It doesn't matter being right or wrong in the market. The only thing that matters in the market is that you're making money and it's beautiful because in the market, you can just switch your position. So if you're wrong, you could be right real quick and then you're making money and it's all good.
So logically, why would you ever get attached to something that's losing? It's that problem with the ego. It always happens. It happens to me too, but just try to think about it objectively. Switch your position and you're right all of a sudden and you're making money. And here, Jesse Livermore talks about one of the most important aspects of trading. Of all speculative blunders, there are few worse than trying to average a losing game. My cotton deal proved it to the hilt a little later. Always sell what shows you a loss and keep what shows you a profit.
That was so obviously the wise thing to do and was so well known to me that even now I marvel at myself for doing the reverse. And this concept was so important that Paul Tudor Jones, another market wizard legend, had that saying plastered right on his wall. Losers average losers. Now there's this concept of dollar cost averaging, right? Oh, if a stock goes down, you just buy more and then your average price is even lower. Now maybe that works for a few value guys, but in general, I would not be averaging down. If you're a trader, definitely you don't want to be averaging down.
The point is to cut your losses, not add more money into them so they become even bigger losses. That doesn't make sense. The only time it starts to make sense is when you start doing those mental gymnastics and you rationalize, but that's when you lose your money. So don't let that happen. Livermore's occasional failure to follow this rule is what led to the multiple blowups he experienced throughout his career. He wasn't perfect. He actually blew a lot of money more than a few times. He lost when he failed to follow his own advice, which was, it's foolhardy to make a second trade if your first trade shows you a loss.
Never average losses. Let this thought be written indelibly upon your mind. Livermore learned that your natural instincts need to be flipped. Instead of hoping, he must fear. And instead of fearing, he must hope. He must fear that his loss may develop into a much bigger loss and hope that his profit may become a big profit. Moral of the story, be happy to take your losses, take them quick, live to fight another day. Why would you hang out with losers? You don't want to hang out with losers. Just get rid of them. Get rid of your losing stocks.
It is one of the key pillars when it comes to investing in trading. Now, if you want to see how we find stocks and invest in them, then make sure you check out this cheat sheet that I was talking about. It's a great checklist with fundamental and technical factors that you can use to find huge explosive stocks. Remember, asymmetry. We want to risk a little to make a lot. This checklist will help you do that. I will link to the page where you can get it. You just got to put in your email so I know where to send it. I'll put that link up above and down below.
Get it. It's important. It's good. And it's free. And if you haven't already, make sure you subscribe to this channel and hit that notification bell so you get email notifications when our future videos come out. We're not done with Livermore. That was only one part. We are going to do more videos on him and other trading greats that we could learn from. So subscribe so you can see those videos. I will see you in the next one. Stay foul, bot there. Bye. .
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Skrybot. 2023, Video transcriptions from YouTube
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