Tuesday, 10 December 2013

Edwin Lefevre - Reminiscences Of A Stock Operator

I am going to do a book review on Reminiscences of a Stock Operator by Edwin Lefevre. Since I am a proponent of active learning, whenever I see useful nuggets of wisdom, I will put it down here. As one might guess, finance biographies are usually full of stories and sometimes, one has to look extremely deeply to find tiny nuggets of invaluable lessons. However, I am going to do it for you guys here.

This book is about a stock speculator, Larry Livingston who is supposedly incredibly good at forecasting future prices. My friend recommended this book to me and I thought it would be good to learn even though my test just ended today and I am supposed to be out celebrating. What I am going to put is just the personal lessons that I have gained instead of the summarized story of the book.

1. There is a time for all things.
One does not have to trade all the time. If you have a strategy, stick to it and wait for the strategy to happen. Do not be an impulsive trader and ruin your own finances. You know your strategy is right when you win money with it. Emotional play is rarely wise and can actually costs you in the long run.

2. Make sure you know the game you are playing.
Always trade under the right kind of conditions. If you are good with trading commodities, do not suddenly switch to trading forex as the gameplay might be totally different. Likewise, a strategy for equities might not work as well as a strategy for forex, considering that forex is a highly liquid game.

3. Accept your losses and learn from it.
It is pointless to dwell on the past. Therefore, when one encounters any losses, learn from the mistake and move on. I guess with this lesson, I can finally put an end to the failure that I experienced during the bulge bracket bank interview.

4. There is only one side to the stock market, the right side.
I just started on chapter 3 and saw this quote and decided to put it here. People say that there is two sides to everything, but there is only one side to the stock market. Thinking about it, it is quite true as you are either right, or you are wrong in the stock market. And if you are wrong, it is wise to cut losses right away.

5. Believe in yourself and your judgement.
A stock speculator should always get some real life experience by putting real money on the line instead of always doing mock trading. Also, if you expect to make a living out of this stock market game, you have to believe in yourself and the judgement that you made. A speculator has to be always ready otherwise he will have no job to be on.

6. Make money when you are right, and lose money when you are wrong.
When you make money as a speculator, you are right. When you lose money as a speculator, you are wrong. That is speculating.

7. Learn from your mistakes.
Each mistake is an invaluable lesson because it lets you become better than the previous you. Learn consistently from your mistakes and become better and better each time. Learn to avoid mistakes and eventually you will make the right moves.

8. Do not touch a stock that does not act the right way.
This is quite a strong lesson. If a stock does not act right, do not act on it. This is because the direction of the stock will be hard to gauge. A quote from the book is most appropriate here. "No diagnosis, no prognosis. No prognosis, no profits."

9. Let your profits ride.
If you are sure about the bulls and the bears in the market, do not be afraid to let your profits ride even if the market temporarily rallies.

10. Do not be tempted by small fluctuations in the market.
Lets say you bought a stock but sees unusual volatility, do you hold or sell? As long as the general market conditions do not change and fundamentals of the company remain strong, it might be wise to ignore the noises as majority of the investors in the market are often wrong.

11. Nobody can sell their stocks if someone does not want it.
There always have to be a buyer and seller in order for a transaction to be successful. Know the psychology behind factors influencing buyers and sellers and use it to your advantage.

12. A man must study general conditions.
Studying general conditions in the market will pre-empt a man and makes forecasting of future probabilities much more easier.

13. The art of speculating is different from the art of investing.
The objective of speculators is not to secure a steady return on their money at a good rate of return, but to profit by either a rise or fall in whatever asset classes they might be speculating in.

14. Follow the market, do not force the market to follow you.
Do not insist that your speculation is definitely correct. Look at the basic conditions and what other traders are doing before being certain of market conditions.

15. When you lose, lose small. When you win, win big.
Have the big bet only when you win, and when you lose, only lose a small amount of your initial exploratory bet.

16. Fight against fear and hope to become a master of speculation.
Very often, people fear that the market will take away their profits when the market is strong, and are hopeful when the market is weak, hoping that the market will turn in your favor. To become a master of speculation, guard against hope and fear and instead, try to do the opposite of what is normally followed. Be hopeful when the market is strong and be fearful when the market is weak. Simply put, it means that one has to let their profits ride and cut their losses right.

17. When the market tells you there is no profit to be made, trust it and wait.
Mr Larry mentioned making a serious mistake that turned millions of his net worth into debt by trying to trade even during a down market, even while acknowledging that the market is not apt for trading. Trust your judgement and wait, while exploring alternative better uses of time and resources to build your wealth.

18. Success from trading in the markets come from these few factors:
  • Know the basic market conditions right now
  • Remember about market history, and how it affects the market
  • Understand mass psychology
  • Know the limitations set by your brokerage account
  • Know oneself and provide against your own weaknesses

19. Trust yourself, not tips you hear. If you lose based on tips, you cannot really improve your own speculation skills.
One of the most crucial lesson I learnt from the book is that one should never rely on others to help them make money. They should do their own homework and believe in what they know. Contrary to what the book says, I would rather know what are the tips and do my own research further. Of course, if one just chooses to buy without doing any research, it truly is unwise and damaging. This is because one of my most profitable investment came from a tip which I personally analyzed further.

20. Do not always trust news sources. Do your own research, looking at trade volume, insider trades and more.
Sometimes, the media can be misleading in what they are trying to convey. Take the financial news you see with a grain of salt and do your own research over various channels for maximum efficiency.

With that, I have come to an end of studying this book. This book gives me some general principles about speculation but I am actually more interested in investing. However, to become a good hedge fund manager in the future, I believe I have to learn both, as well as trading. Therefore, my next book review cum study will be an investment classic. Do keep on checking back and witness my growth.

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