How to Make "The Big Money"

Circa 1923, the otherwise media-aloof Jesse Livermore confided in journalist Edwin Lefevre and gave the world what became in my view history's greatest written work on the stock market. Livermore's observations are as pertinent, and prescient, today as they were nearly a century ago.

While the following passages from Reminiscences of a Stock Operator will ring pertinent relative to the present moment, and to what we forever preach here on the blog, it ultimately speaks to why so many people (professionals and amateurs alike) struggle in the markets. 

As young Livermore was himself struggling his way to trading enlightenment, he had the good sense, and the great fortune, to ponder the redundant musings of an older gentleman, a Mr. Partridge, whom -- during a critical stretch in his development -- he found himself interned with during regular trading hours.

Livermore tells of an instance where a young trader named Elmer Harwood, who had given Mr. Partridge (or "Mr. Turkey", as he was nicknamed due to his unique physical stature) a tip that he ultimately acted on (and had since seen a several point rise in the shares), rushed over to the older gentleman and told him that he had just sold his own position on good authority that the market was about to suffer a setback; one that will allow for the repurchasing of the same stock at a much lower price. The young tipster became exasperated when Partridge explained that while he didn't doubt his eager benefactor's information, relinquishing his position at that point was absolutely out of the question. Why? Because "this is a bull market!":

"My people say the market is entitled to a reaction and that I’ll be able to buy it back cheaper. So you’d better do likewise. That is, if you’ve still got yours.” Elmer looked suspiciously at the man to whom he had given the original tip to buy. The amateur, or gratuitous, tipster always thinks he owns the receiver of his tip body and soul, even before he knows how the tip is going to turn out. “Yes, Mr. Harwood, I still have it. Of course!” said Turkey gratefully. It was nice of Elmer to think of the old chap."

“Well, now is the time to take your profit and get in again on the next dip,” said Elmer, as if he had just made out the deposit slip for the old man. Failing to perceive enthusiastic gratitude in the beneficiary’s face Elmer went on: “I have just sold every share I owned!” From his voice and manner you would have conservatively estimated it at ten thousand shares. But Mr. Partridge shook his head regretfully and whined, “No! No! I can’t do that!” “What?” yelled Elmer. “I simply can’t!” said Mr. Partridge. He was in great trouble. “Didn’t I give you the tip to buy it?”

“You did, Mr. Harwood, and I am very grateful to you. Indeed, I am, sir. But———“Hold on! Let me talk! And didn’t that stock go up seven points in ten days? Didn’t it?” “It did, and I am much obliged to you, my dear boy. But I couldn’t think of selling that stock.” “You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “No, I couldn’t.” “Why not?” And Elmer drew nearer. “Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation. “That’s all right,” said Elmer, looking angry because of his disappointment. “I know this is a bull market as well as you do. But you’d better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself.”

“My dear boy,” said old Partridge, in great distress—“ my dear boy, if I sold that stock now I’d lose my position; and then where would I be?” Elmer Harwood threw up his hands, shook his head and walked over to me to get sympathy: “Can you beat it?” he asked me in a stage whisper. “I ask you!” I didn't say anything."

And here's Livermore describing the epiphany that for a time (life and ego ultimately got in his way) made him one of the top ten richest people in the world, and history's greatest trader:   emphasis mine...

"What old Mr. Partridge said did not mean much to me until I began to think about my own numerous failures to make as much money as I ought to when I was so right on the general market. The more I studied the more I realized how wise that old chap was. He had evidently suffered from the same defect in his young days and knew his own human weaknesses. He would not lay himself open to a temptation that experience had taught him was hard to resist and had always proved expensive to him, as it was to me.

I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements—that is, not in reading the tape but in sizing up the entire market and its trend.

And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine—that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance."