1. “An investor looks for safety… The speculator looks for a quick profit.” Livermore is saying that what differentiated him and other speculators from investors was: (1) a willingness to make bets with short duration and (2) not seeking safety. Anyone reading about Livermore must remember that he was not a person who often/always followed his own advice. He eventually shot himself leaving a suicide note which included the sentence: “I am a failure.”
2. “A professional gambler is not looking for long shots, but for sure money…Since suckers always lose money when they gamble in stocks – they never really speculate…” Livermore believed he was not a gambler since he only speculated when the odds were substantially in his favor (“sure money”). Livermore’s statement reminds me of a quotation from Peter Lynch: “An investment is simply a [bet] in which you’ve managed to tilt the odds in your favor.” Livermore’s statement also reminds me of the poker player Puggy Pearson who famously talked about need to know “the 60/40 end of a proposition.” When the odds are substantially in your favor you are not a gambler; when the odds are not substantially in your favor, you are a sucker.
3. “I trade in accordance to my means and always leave myself an ample margin of safety. …After I paid off my debts in full I put a pretty fair amount into annuities. I made up my mind I wasn’t going to be strapped and uncomfortable and minus a stake ever again.” Livermore is not referring here to seeking a Benjamin Graham style “margin of safety” on each bet but rather to this: once you establish a big financial stake as a speculator, setting aside enough money so you don’t need to “return to go” financially is wise. Livermore wanted a margin of safety in terms of safe assets so that he would always have a grubstake to start over in his chosen profession of speculation. On this point and others, he failed to follow his own advice.
4. “Keep the number of stocks you own to a controllable number. It’s hard to herd cats, and it’s hard to track a lot of securities.” There is only so much information a single person can track in terms of stocks whether you are in investor or a speculator. By focusing on a smaller number of stocks you are more likely to (1) know what you are doing (which lowers risk) and (2) find an informational advantage you can arbitrage.
5. “Only make a big move, a real big plunge, when a majority of factors are in your favor.” Only bet when the odds are substantially in your favor. And when that happens, bet in a big way. The rest of the time, don’t do anything.
6. ” It never was my thinking that made big money for me. It was always my sitting. Got that? My sitting tight! There is the plain fool who does the wrong thing at all times anywhere, but there is the Wall Street fool who thinks he must trade all the time.” Neither investors nor speculators get any benefits from activity and instead generate fees and mistakes.
7. “The professional concerns himself with doing the right thing rather than with making money, knowing that the profit takes care of itself if the other things are attended to.” Michael Mauboussin: “the best long-term performers in any probabilistic field — such as investing, sports-team management, and pari-mutuel betting — all emphasize process over outcome.”
8. “When you know what not to do in order not to lose money, you begin to learn what to do in order to win.” The finest art is not to lose money. Making money in the stock market can be done by anybody.” This is another way of saying what Warren Buffett has said many times: “The first rule of investing is: don’t lose money; the second rule is don’t forget Rule No. 1.” It is amazing how much benefit once can get from consistently not being stupid.
9. “If I buy stocks on Smith’s tip I must sell those same stocks on Smith’s tip. I am depending on him. Suppose Smith is away on a holiday when the selling time comes around? No sir, nobody can make big money on what someone else tells him.” Livermore claimed that he was never someone to rely on others. He did his own work and made his own decisions as a speculator (with a few well known exceptions that hurt him badly).
10. “The speculator’s deadly enemies are: ignorance, greed, fear and hope. All the statute books in the world and all the rule books on all the Exchanges of the earth cannot eliminate these from the human animal….” Jesse Livermore was a student of behavioral economics when the idea had not yet been given a name. Being greedy when other are fearful and vice versa is a simple rule that is hard to execute in practice. For example, buying assets at the lows of 2009 required courage few people had at the time. Livermore was clearly a brave fellow. But being brave when the odds are not substantially in your favor is unwise.
11. “Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee.” The source of good judgment is often bad judgment. Unfortunately for him, Livermore did not always make new mistakes and repeated some old ones too.
12. “Whatever happens in the stock market today has happened before and will happen again.” When people are saying: “this time it is different” grab your wallet and walk carefully toward the door. History never precisely repeats, but it does rhyme. Markets move is cycles because Mr. Market is bi=polar (fluctuating between free and greed). That markets will fluctuate in cycles is inevitable; predicting the timing and extent of the cycles is impossible. Value investing is about putting yourself in position to benefit when the inevitable happens. Price, don’t predict!