Lessons from Jesse Livermore pt 10: Sit Tight

The Lessons from Jesse Livermore Series explores the trading philosophy and trading rules of renowned trader, Jesse Livermore.  Here Livermore preaches the virtue of patience. Although developed a century ago, Jesse Livermore’s ideas have great relevance for today’s traders.

Reminiscences of a Stock Operator   pg 57
… 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.”

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.”

“All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”     Blaise Pascal

The Lesson
Question for you.  What is your job as a “Trader”?   Is it to “Trade” or to “make money”?  I often am confused on this point. I know it is to make money but at times I believe it is to trade.
One of the great paradoxes of “trading” is that fewer times you actually “trade” the more money you make. As Jesse says sitting is when you make the big money. It is a lesson I have not fully learned yet.

What can we learn from a long -term chart of the S&P 500

The monthly chart of the SPX for the past 20 years nicely illustrates the point. Somewhere out there is a guy who has managed his IRA over the past 25 years with 5 trades and is doing quite well. In fact I know one, my Dad.  He never made over $45K in his career but was long from 1982, sold in 2000, re-entered in 2004……  etc.   He retired in 1995 with $400K and has seen his net worth grow and grow to this day all the while living the good life.  Mom and Dad are heading to Europe in a couple of weeks to enjoy a 3 week cruise on the Danube and Rhine. Simply incredible.  All on less than 10 trades in 40 years. Probably a slight exaggeration but you get the point. And you know what, he still looks at the charts every damn day because there will be a day he gets out, just like in 2000 and 2007.  He’s been lucky, good, and very very patient.

Am I advising “Buy and Hold”?  No.  What I am saying is that if we are smart enough to identify a trend, we should stick with it. Let it play out on it’s own time table, not whatever time table we assign to it.  It’s the impatience that gets us and I’ve been as guilty as the next guy.  It makes me sick to look at stocks I’ve owned, then sold, that have gone on to the moon without me.  I am often right, but can’t seem to sit tight. Maybe you’re the same way.

Actionable Activities

I think there are a few things we can do to improve our patience. See what you think.

  • Zoom out one or two time frames. If you are trading the daily charts, what are the weekly and monthly charts telling you?  The higher the time frame, the more important the trend is.  If the monthly or weekly chart is in a strong uptrend, then that 3 point dip on the daily likely means nothing. Sit tight.
  • Both Buffett and Livingston have said, the first eighth and the last eighth are the most expensive that you’ll ever try to capture.  The real money is made capturing the 80% in the middle of the trend.   Something to remember when contemplating a move with every little wiggle of the chart or trying to go long on the bottom tick or shorting the top tick.
  • Try this….Take a week or two and simply stare at your charts and your platform….and do nothing. Our tendency is to fiddle out of boredom or because we are trying to get cute.  This will test your patience. Its tough. Ask me how I know.
  • Re-examine your holdings.  Are they trending or in consolidation?  Simply knowing helps us gain patience.  If a stock is resting, we shouldn’ t expect big moves. Just watching for the breakout / breakdown builds a habit of patience.
  • Begin Meditating; it quiets the mind. If nothing else, it will be 20 minutes of practice doing nothing. 

Thanks for Reading; Hope it helps and see you next time

Like the Series so far?  Here are links to additional installments

Part 2:  Stop asking why   HERE              Part 3: Play a Lone Hand  HERE

Part 4:  A Time for all Things  HERE     Part 5: Expensive Enemies  HERE

Part 6: Commissions Matter  HERE     Part 7: Blown up Accounts  HERE

Part 8: Imaginary Millions HERE            Part 9: Give it Time    HERE 

Part 10: Sit Tight    HERE            Part 11: How to Buy and Sell Stocks   HERE

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