Reminiscences of a Stock Operator the book about Jesse Livermore written by Edwin Lefèvre constantly references Speculation As A Fine Art by Dickson G. Watts, written in the 1880s. Livermore is quoted as saying that Watts "wrote the book on speculation."
I base my trading approach upon many of these simple ideals. The truth about markets and how to look at them is quite simple. Don't make it complicated.
Here some excerpts from the book:
1. Self-Reliance. A man must think for himself,
must follow his own convictions. George
MacDonald says: "A man cannot have another
man's ideas any more than he can another
man's soul or another man's body." Self-trust
is the foundation of successful effort.
2. Judgment. That equipoise, that nice
adjustment of the faculties one to the other,
which is called good judgment, is an essential
to the speculator.
3. Courage. That is, confidence to act on the
decisions of the mind. In speculation there is
value in Mirabeau's dictum: "Be bold, still be
bold; always be bold."
4. Prudence. The power of measuring the
danger, together with a certain alertness and
watchfulness, is very important. There should be
a balance of these two, Prudence and Courage;
Prudence in contemplation, Courage in execution.
Lord Bacon says: "In meditation all dangers
should be seen; in execution one, unless very formidable."
Connected with these qualities,
properly an outgrowth of them, is a third, viz:
promptness. The mind convinced, the act should
follow. In the words of Macbeth; "Henceforth the
very firstlings of my heart shall be the firstlings
of my hand." Think, act, promptly.
5. Pliability the ability to change an opinion,
the power of revision. "He who observes,"
says Emerson, "and observes again, is always
formidable."
The qualifications named are necessary to the
makeup of a speculator, but they must be in well-balanced
combination. A deficiency or an overplus of one
quality will destroy the effectiveness of all. The possession
of such faculties, in a proper adjustment is, of
course, uncommon. In speculation, as in life, few succeed,
many fail
LAWS ABSOLUTE.
1. Never Overtrade. To take an interest larger than
the capital justifies is to invite disaster. With such an
interest a fluctuation in the market unnerves the
operator, and his judgment becomes worthless.
2. Never "Double Up"; that is, never completely and
at once reverse a position. Being "long," for instance,
do not "sell out" and go as much "short." This may
occasionally succeed, but is very hazardous, for should
the market begin again to advance, the mind reverts
to its original opinion and the speculator "covers up"
and "goes long" again. Should this last change be
wrong, complete demoralization ensues. The change
in the original position should have been made moderately,
cautiously, thus keeping the judgment clear
and preserving the balance of the mind.
3. "Run Quickly," or not at all; that is to say, act
promptly at the first approach of danger, but failing
to do this until others see the danger, hold on or close
out part of the "interest."
4. Another rule is, when doubtful, reduce the amount
of the interest; for either the mind is not satisfied with
the position taken, or the interest is too large for
[10]safety. One man told another that he could not sleep
on account of his position in the market; his friend
judiciously and laconically replied: "Sell down to a
sleeping point."
RULES CONDITIONAL.
These rules are subject to modification according
to the circumstances, individuality and temperament
of the operator.
1. It is better to "average up" than to "average down."
This opinion is contrary to the one commonly held
and acted upon; it being the practice to buy, and on a
decline to buy more. This reduces the average.
Probably four times out of five this method will result
in striking a reaction in the market that will prevent
loss, but the fifth time, meeting with a permanently
declining market, the operator loses his head and
closes out, making a heavy loss - a loss so great as to
bring complete demoralization, often ruin.
But buying at first moderately, and, as the market
advances, adding slowly and cautiously to the "line"
- this is a way of speculating that requires great care
and watchfulness, for the market will often (probably
four times out of five) react to the point of "average."
Here lies the danger. Failure to close out at the point of
average destroys the safety of the whole operation.
Occasionally a permanently advancing market is met
with and a big profit secured.
In such an operation the original risk is small, the
danger at no time great, and when successful, the
profit is large. The method should only be employed
when an important advance or decline is expected,
and with a moderate capital can be undertaken with
comparative safety.
2. To "buy down" requires a long purse and a
strong nerve, and ruin often overtakes those who have
both nerve and money. The stronger the nerve the
more probability of staying too long. There is, however,
a class of successful operators who "buy down"
and hold on. They deal in relatively small amounts.
Entering the market prudently with the determination
of holding on for a long period, they are not
disturbed by its fluctuations. They are men of good
judgment, who buy in times of depression to hold for
a general revival of business - an investing rather than
a speculating class.(I buy down when I am swing trading)
3. In all ordinary circumstances our advice would
be to buy at once an amount that is within the
proper limits of capital, etc., "selling out" at a loss or
profit, according to judgment. The rule is to stop losses
and let profits run. If small profits are taken, then small
losses must be taken. Not to have the courage to accept
a loss, and to be too eager to take a profit, is fatal. It
is the ruin of many.
4. Public opinion is not to be ignored. A strong
speculative current is for the time being overwhelming,
and should be closely watched. The rule is, to act
cautiously with public opinion; against it, boldly. To
go with the market, even when the basis is a good one,
is dangerous. It may at any time turn and rend you.
Every speculator knows the danger of too much "company."
It is equally necessary to exercise common
caution in going against the market. This caution
should be continued to the point of wavering - of loss
of confidence - when the market should be boldly
encountered to the full extent of strength, nerve and
capital. The market has a pulse on which the hand of
the operator should be placed as that of the physician
on the wrist of the patient. This pulse-beat must be
the guide when and how to act.
5. Quiet, weak markets are good markets to sell. They
ordinarily develop into declining markets. But when a
market has gone through the stages of quiet and weak to
active and declining, then on to semi-panic or panic, it
should be bought freely. When vice versa, a quiet and
firm market develops into activity and strength, then
into excitement, it should be sold with great confidence.
(This rule is the least applicable to my trading)
6. In forming an opinion of the market, the element
of chance ought not be omitted. There is a
doctrine of chances - Napoleon in his campaigns
allowed a margin for chance - for the accidents that
come in to destroy or modify the best calculation.
Calculation must measure the incalculable. In the
"reproof of chance lies the true proof of men."
It is better to act on general than special information
(it is not so misleading), viz., the state of the country,
the condition of the crops, manufacturers, etc. Statistics
are valuable, hut they must be kept subordinate to a comprehensive
view of the whole situation. Those who
confine themselves too closely to statistics are poor
guides. "There is nothing," said Canning, "so fallacious
as facts, except figures."
"When in doubt, do nothing. Don't enter the market
on half convictions; wait till the convictions are fully
matured."
