Every field has seminal introductory texts. For traders, investors, and speculators, Reminiscences of a Stock Operator by Edwin Lefèvre is considered by many to be one of the seminal introductory texts. The book is written as first person fiction and was originally published in the form of several articles, but it is generally accepted as the biography of Jesse Livermore, an American trader that operated in the early 1900’s. Livermore made and lost several multi million fortunes by trading in financial markets. After the 1929 market crash, he was reportedly worth $100 million, which is equivalent to around $1.4 billion in today’s dollars. The surprising thing is that he did this without managing other people’s capital.
I am obsessed with retaining knowledge and fearful of forgetting it, so I have often found myself re-reading things over again after some time has passed. I should stop doing this. And hopefully writing this post about why you should read Reminiscences of a Stock Operator will help me stop doing this.
1. Financial markets evolve, but the fundamentals of financial markets remain the same.
The book was published in 1923, and a lot has changed in financial markets since then. But a surprising amount of fundamental principles that govern financial markets remain unchanged because human psychology generally remains unchanged. The book states:
Another lesson I learned early is that 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 to-day has happened before and will happen again. I’ve never forgotten that. I suppose I really manage to remember when and how it happened. The fact that I remember that way is my way of capitalizing experience.
At the hedge fund I used to work for, there was a strong emphasis on studying historical examples of the thing that we were looking at to fully understand the cause-and-effect linkages and to predict the range of future outcomes. We looked at examples that occurred in different countries and in different eras, even dating back to the early 1900s. The book describes several major historical events from Livermore’s point of view (among them, the Panic of 1907), and studying historical examples and cycles can be enlightening.
2. Reminiscences of a Stock Operator provides an introduction to market microstructure.
Market microstructure is the branch of finance that examines determinants of transaction costs, prices, quotes, volume, trading behavior, and by extension, market manipulation and abuse. Why is understanding market microstructure important? Once you have determined a view on a security (going long, short, and so on), your next priority is to enter into a position based on your view as cheaply and as secretly as possible. How you enter into your position determines what costs you end up paying — as a simple example, entering into a large position all at once using a market order should cause prices to increase meaning that your order will be filled at inferior prices.
For retail traders who only trade on a small scale in highly liquid stocks, understanding market microstructure isn’t really that important. But once you start trading at significant scale or in illiquid securities, you really need to have an in-depth understanding of market microstructure.
The book describes several of Livermore’s trades in detail, and since financial markets had less depth and liquidity back then, a lot of Livermore’s focus is on how he entered into his positions, how prices changed in response to his actions, and the things he looks for to enter his positions at the best possible price.
3. Reminiscences of a Stock Operator contains a lesson on gaining experience, identifying your mistakes, and using those mistakes to improve.
Livermore loses all his trading capital several times in the book, and each time he examines the mistakes he made that led to it. What I noticed was that Livermore always took full responsibility for losing money — he does not blame others or external factors. It’s always him and what he did wrong:
That is how I came back to Wall Street for a third attempt. I had been studying, of course, trying to locate the exact trouble with my system that had been responsible for my defeats in A. R. Fullerton & Co.’s office. I was twenty when I made my first ten thousand, and I lost that. But I knew how and why because I traded out of season all the time; because when I couldn’t play according to my system, which was based on study and experience, I went in and gambled. I hoped to win, instead of knowing that I ought to win on form. When I was about twenty-two I ran up my stake to fifty thousand dollars; I lost it on May ninth. But I knew exactly why and how. It was the laggard tape and the unprecedented violence of the movements that awful day. But I didn’t know why I had lost after my return from St. Louis or after the May ninth panic. I had theories that is, remedies for some of the faults that I thought I found in my play. But I needed actual practice. There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!
For readers not interested in reading the roughly 250 page book, I have curated and condensed the book into 14 lessons along with supporting passages.
For readers interested in reading the full book, a free copy is available in several different formats at archive.org.
For readers interested in purchasing a physical copy of the book, it is available at Amazon. I have included an affiliate link which will give me a small commission. If you do purchase through my affiliate link, thank you for the support.