7 Trading Lessons from Wall Street’s Legendary “Stock Operator”

If you trade crypto, this will make you squirm

Almost a century after its publication in 1923, Reminiscences of a Stock Operator by Edwin Lefèvre remains a Wall Street classic.

The book is a fictional account of the life of Wall Street speculator Jesse Livermore. Written in the first person, the story is entertaining, readable, and packed with investment wisdom. Each page bristles with insights into speculation that is as relevant today as ever.

Indeed, quotes from the book are the source of adages such as "bulls and bears make money; pigs get slaughtered" that have made it permanently into Wall Street jargon.

In his memoirs, former Fed Chairman Alan Greenspan called the book "a font of investing wisdom." It still occupies a spot on Goldman Sachs' recommended reading list. (You can download a copy here.)

My copy is by far the most marked-up book I have ever read.

The Life (and Death) of One of Wall Street’s Greatest

Livermore started speculating at a young age as a “tape reader” – making bets on the direction of stocks with 100-1 margin based on the ticker tape machines at local “bucket shop” brokerage houses.

Livermore soon realized that stock prices were not random. He got so good at recognizing patterns that Midwestern bucket shops banned him from trading.

Livermore packed his bags and moved to Wall Street.

Livermore’s life was an ever-repeating series of booms and busts. He made a fortune several times – but lost it again and again.

By 1934, Livermore lost the $100 million fortune he earned by shorting the Great October Crash of 1929 just five years earlier.

He declared a third bankruptcy and went through his second divorce,

On Thanksgiving day, November 28, 1940, just after 5:30 pm, Livermore committed suicide with an Automatic Colt Pistol in the cloakroom of The Sherry-Netherland hotel in Manhattan, where he usually had cocktails.

Livermore was depressed – and perhaps even broke.

His demise notwithstanding, Livermore’s insights, as set out in Lefèvre’s book, have shaped the thinking of many generations of successful speculators.

Here are seven of these insights below…

No. 1: There Is Nothing New Under the Financial Sun

“There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”

Stocks and the players change over time. A different narrative drives each boom and bust. Cryptocurrencies may be new. But the game remains the same. Those who understand this can swat away the noisome crypto bulls, even as they bet on their demise.

No. 2: Markets Are Never Wrong

“They say there are two sides to everything. But there is only one side to the stock market, and it is not the bull side or the bear side, but the right side.”

“A prudent speculator never argues with the tape. Markets are never wrong – opinions often are.”

Speculators must always ask themselves the same question: Do you want to be right, or do you want to make money?

If you buy a cheap stock, but it keeps sliding and you're 50% down – you're wrong. The value of a stock is the price that the market values it.

Your primary focus must be on making money, not on being “right.”

No. 3: Cut Your Losses

“I did precisely the wrong thing. The cotton showed me a loss, and I kept it. The wheat showed me a profit, and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game.”

Losers average losers.

Successful traders cut losses.

As Livermore said, "A loss never bothers me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocketbook and to the soul."

Limit your losses whenever possible. It’s always better to sell and take small losses early. Never compound your errors.

No. 4: Let Your Profits Run

“Never sell a stock because it seems high-priced.”

Calling a top in the price of a stock is a fool’s game.

An overvalued stock can become much more overvalued. If sentiment toward an asset is positive, it can keep going up for a lot longer than you’d think.

Just look at tulip bulbs in Holland in 1637… the dot-com bubble of the 1990s…or a now finally fading Tesla (TSLA).

Some speculators will always be willing to pay a higher price. Until one day, they aren't…

No. 5: Add to Your Winners

“[A speculator] should accumulate his line on the way up. Let him buy one-fifth of his full line. If that does not show him a profit, he must not increase his holdings because he has obviously begun wrong; he is wrong temporarily and there is no profit in being wrong at any time.”

Speculators love to average down. After all, we all like to buy things cheaply.

But no one likes to average up.

A successful speculator knows the value of adding to a position when he’s on the right side of the trade.

Don’t fight the trend. Instead, stick with it. Sometimes the best stock to buy is one you already own, even if you need to pay a higher price.

No. 6: Most of the Time, Do Nothing

“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… Men who can both be right and sit tight are uncommon.”

Many speculators need constant, daily action. Boredom – and the urge to “do something” – is their greatest challenge.

Traders should trade only when they see an edge – a particular setup or pattern.

A trader must be both right – and able to sit tight.

No. 7: Know Yourself

“If you do not know who you are, the stock market is an expensive place to find out.”

The trading arena is a nonstop real-life video game. Many come in hopes of quick riches.

To be successful, you must internalize some basic principles. You must be objective, stay disciplined and remain rational.

Let your emotions control you – and you can wave your trading profits goodbye.

Each of these trading lessons is timeless.

I recommend that you join the thousands of speculators over the past 100 years who have read – and learned from – this remarkable book.