Tuesday, November 11, 2014

Jesse Livermore: "There is a time for all things"

A correspondent wrote in,

To all those perma-bulls and asset gathering fund managers who feel they must be fully invested at all times I offer this timeless wisdom, from the immortal Jesse Livermore:

'I came to New York at the age of 21, bringing with me all that I had, twenty five hundred dollars.

'I told you that I had ten thousand dollars when I was twenty, and my margin on the Sugar deal was over ten thousand. But I did not always win. My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I'd have been right perhaps as often as seven out of ten times. In fact, I always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own game – that is to play the market only when I was satisfied that precedents favored my play. There is a time for all things, but I didn't know it. And that is precisely what beats so many men in Wall Street who are very far from being in the sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time.'
Being fully invested in stocks (or bonds) at all times is a trade that continues in perpetuity. It is a continuing bet each and every trading day that the long term gains will outweigh the losses if one stays fully invested, coupled with a second bet in the case of asset gatherers that the “system” will make sure retail investors will have no place better to go with their money than the stock and bond markets.

Never trust an asset manager that stays fully invested at all times. If he does, he is claiming without say so directly that he knows what he is doing all the time and that he will be right all the time. Best of luck!!

I wrote about this in my essay about "investor genotypes in an investing ecosystem":
I often write about mainstream asset managers like Buffett, Ken Fisher, and Bill Miller, whose investing styles expressly disconsider the possibility of severe bear markets/depressions. Most investors - and all long-only investors - are resigned to failure and capital impairment should a severe bear market occur.

This doesn't bother them because they figure they will "make it up" on the next wave up. And, as Prechter puts it, "most of the time, ill-timed optimism is harmless because most of the time, recessions are indeed mild and brief. [...] Small, mild retrenchments occur more frequently than large ones so forecasting errors are only mildly damaging. (p66)"
The idea that most investors don't care about losing money in bear markets (they really don't!) is an important Credit Bubble Stocks concept. Two other posts that I would say are worth re-reading right now are:


Stagflationary Mark said...

Never trust an asset manager that stays fully invested at all times. If he does, he is claiming without say so directly that he knows what he is doing all the time and that he will be right all the time. Best of luck!!

I think there may be one exception to this rule.

I am nearly fully invested in long-term TIPS and I-Bonds (not technically all long-term, since these are bond ladders). I have a small savings account on the side to handle my near term expenses.

I actually do it because I am very unsure about the future. It certainly isn't hubris or greed. I simply wished to lock in a real rate of return in case real returns fell further (so far that's been working out very well).

Further, I hope I am wrong. Since I am holding to maturity, I'd love to see real rates of return rise so that when my TIPS and I-Bonds mature, I could reinvest at a higher interest rates. Seriously.

I wonder how many stock market investors truly hope they are wrong? How many are saying, "I sure hope my stock crashes by 50% so the dividend yield doubles?" Probably not that many! ;)

Once again, and I will sound like a broken record when I say this, if I am financially ruined by my decision to be fully invested then I will most certainly not be ruined alone! I'll be taking the stock market investors with me! I have no doubt about that. It will being me no comfort of course, but it is the truth.

John said...


It used to be so easy back in the 1970s, 80s and early 90s when you could sell and put your cash in a money market fund yielding 5%, or in the case of an IRA, a GIC (guaranteed interest contract with an insurance company) yielding 10% from 1980 thru 1995 or so.

This ability to wait out the market at a decent yield made timing comfortable and tended to limit bullish stock market extremes.

The present day zero interest rate environment makes timing much more difficult and has produced a bifurcated market of tanking sectors such as gold stocks, oil service stocks, mining stocks, and materials stocks and guarantees that stock and bond prices will go to extremes on the back of the story stocks and other momentum favorites for which capital is essentially free.

At the same time profits elevated by stagnant wages are financing buy backs that float the S&P 500 ever higher.

Rather than trying to read the Fed entrails, I would prefer to base a timing decision on the dollar volume of buy backs. Once that data series rolls over the bear has arrived.

Stagflationary Mark said...


This is pretty much what we would expect to see with falling real long-term growth.

There is a great push to fill in the missing parts with unsustainable illusions. Governments do it. Corporations do it. Investors desperately want to believe (especially ones in or nearing retirement looking at 0% yields on savings). Sigh.

CP said...

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