Source: Qilehui, compiled from the internet.
Introduction:
One day, Livermore called his two sons to his "eternal" study. He sat behind the big table, and the two children sat in front of him. He bent over and took out a wad of cash from his pocket, pulled ten $1 bills out of it, pulled them out the same way, and then folded the two piles of money and handed them to each of his sons. The children held the money and looked at him. "Sons, always fold the money and put it in your left pocket. Okay, do as I say, the money is yours." The children did as they were told and folded the money into their left pockets. "You need to understand that thieves always look for wallets, often looking for them in the back pocket, or they will come up from behind you and look for your front right pocket, because most people are right-handed. Do you understand now, my sons?" He asked. The children nodded. He continued, "Well, that's why I want you to fold the money and put it in your left pocket. You see, if a thief wants to touch your left pocket, he's getting close to your vital point, and you'll notice." The children looked at each other. Their father continued, "Never lose your money, sons, that's the key. Keep it close and don't let anyone get close to it."
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The children held the money and looked at him. "Sons, always fold the money and put it in your left pocket. Okay, do as I say, the money is yours." The children did as they were told and folded the money into their left pockets. "You need to understand that thieves always look for wallets, often looking for them in the back pocket, or they will come up from behind you and look for your front right pocket, because most people are right-handed. Do you understand now, my sons?" He asked. The children nodded. He continued, "Well, that's why I want you to fold the money and put it in your left pocket. You see, if a thief wants to touch your left pocket, he's getting close to your vital point, and you'll notice." The children looked at each other. Their father continued, "Never lose your money, sons, that's the key. Keep it close and don't let anyone get close to it."
Buffett once said that there are two principles to follow when trading: Rule number one: don't lose money; Rule number two: don't forget rule number one. He is telling us about capital management.
And capital management is one of the three puzzles: timing, capital management and emotional control, which is the most fascinating one for Jesse Livermore. Jesse Livemore had five main principles in capital management. In his trading theory, which he explained to his son years later, capital management accounted for a large part of the content.
Capital giant Gou Weidong posted a table of Livermore's 10% loss on his account, saying, "This table should be the first lesson in learning investment! Who can know his outcome if he only read his autobiography! His peak net worth seemed to be only a little over 100 million dollars at that time, but how much was America's GDP then? From this point of view, he was much richer than Buffett and Soros! What a wonderful life! But what can we do!"
Regardless of how Livermore's story ended, his capital management system is definitely worth learning for every financial investor.
Livermore Capital Management Principle 1
"Don't lose money -- don't lose your capital, don't lose your credit line. Traders without money are like shopkeepers without goods. Money is your inventory, your lifeline, and your best friend. If you have no money, you're out of the game. Don't lose your credit line."
"It's wrong and dangerous to be fully invested at one price. You should first decide how many shares you want to buy. For example, you want to buy 1,000 shares most importantly. Here's how to do it: You buy 200 shares in the experimental stage, if it's still rising, buy 200 more shares, then look at the market reaction again. If it continues to rise or consolidate and then rise again, then you can relax and buy 400 shares all at once. You also need to be aware that the price of each subsequent purchase will definitely be higher, and that's important. Short selling follows the same principle, but the price goes lower and lower. The fundamental reason is simple: in the process of buying 1,000 shares in the end, every transaction must show that the trader has made a profit. Every profit is clear evidence that irrefutably shows that your basic judgment is correct. You need this and nothing more. But if you lose, you know right away that your judgment was wrong."
"The biggest challenge for novice traders is that the price of each subsequent purchase is always higher. Why? Because everyone wants to get cheap stocks, that's why. Don't waste your mind on arguing with facts, hoping and distinguishing right from wrong with a piece of paper. The piece of paper is always correct. Speculation cannot be held by indulgence, wild thoughts, anxiety, insatiable greed and emotional behavior. The piece of paper speaks the truth, but people often misinterpret it."
"Finally, you don't have to buy stock according to my proportion. For example, you can buy 30% the first time, 30% the second time, and 40% the last time, which is entirely up to you, as long as you think it works best. I'm just telling you the method that works best for me. The core principle is not to cut your positions at one time. Wait until your judgment is confirmed, and every purchase price must be higher. The instinctive reaction of most traders is the opposite."
"Remember to determine your total position before trading."
Livermore Capital Management Principle 2
"You should determine the total volume of shares purchased, the portfolio ratio in all situations, the price target generally rises, and similarly, you should have a clear goal for when to sell shares. If the stock market moves in the opposite direction of your estimate, always remember to set a stop loss according to your principle. You must follow your principle and cannot sit idly by and deceive yourself! My basic principle is to always keep losses within 10% of the principal."
"If the stock market moves in the opposite direction of your estimate, you should sell shares at a clear time. You must follow your principle! Do not let the loss exceed 10% of your investment. It takes twice the effort to make up for the loss."
This is what I learned from speculative stores - they only require 10% margin. If the loss exceeds 10%, the speculative store naturally kicks me out. The 10% loss principle is my most important capital management principle, and it is also a crucial "determination timing" principle.
Remember: Before trading, you must determine a strong stop-loss point and avoid bearing losses exceeding 10% of your investment!
If you lose 50%, you have to win 100% to make up for it!
Leefermole 10% Loss Table
I also learned that if your broker calls and tells you that your margin is not enough because the stock has fallen, then tell him to liquidate the position. If you bought stocks at 50 yuan and they are now at 45 yuan, don't buy more in order to lower the average buying price. The fact that the stock price did not run as expected is enough to prove that your judgment was wrong! Quickly admit defeat and exit.
Remember, don't respond to calls requesting more margin, don't continuously buy low.
I have cleared my position many times even though the loss is less than 10%, just because I bought the wrong stock at the beginning. My "intuition" often whispers to me, "JL (Jesse Livermore likes to be called JL by others), this stock has some problems, it's a stupid one that can't even fart with three sticks, it's abnormal to be alive", so I will close all positions at once.
Maybe the "inner self" played its role, refined the content I have witnessed thousands of times before, sent subconscious signals, and stored these repeated patterns in my memory, so I unconsciously remembered them. Whatever it is, my many years of market experience tell me to trust these instincts.
I absolutely believe that the pattern of price movement is constantly repeating, repeating again and again with only slight changes. The reason is that human nature drives the stock market, and human nature is always unchanging.
I have observed many times that people often passively become investors. They buy stocks, but when the stock falls, they don't want to sell and accept the loss, preferring to hold the stock and hope it rebounds and rises again. The reason why the 10% principle is important is here. Don't be a passive investor, admit defeat and exit quickly! This is easier said than done.
Livermore's capital management principle three
A successful speculator always keeps cash in hand, just like a general who is good at using troops, reserves a special army for good war opportunities, and then takes action with confidence, allowing the defense forces to make the final blow to achieve victory. He watches and waits, waiting for the opportunity to be fully mature.
The opportunities in the stock market are endless and infinite. If you miss a good opportunity, just wait, don't be anxious, the next good opportunity is coming soon. Don't chase lost opportunities, never hold on to this losing trade. If it is a good transaction, then all the conditions you hope for will appear.
Remember, there is no need to stay in the stock market all the time. Livermore applied the same principle to playing cards, golden metro cards, poker, and bridge-all of these are games manipulated by human nature. The desire to "participate in it all the time" seems to be one of the speculator's biggest enemies, and it may eventually bring disaster, as Livermore has learned from several past lessons.
When investing in the stock market, sometimes you have to let your money rest and wait on the side, waiting for the start time to come. This will not lose any money, time is time, and money is money.
The money that is still idle now will be triggered under appropriate conditions and at the appropriate time, launching a swift and decisive battle and making a big profit. The secret to success is patience, patience, patience, not speed. If used properly, time is the best friend of a smart speculator.
Remember, smart speculators always have patience and always keep cash in hand.
Livermore's capital management principle four
As long as the stock market runs as expected, don't rush to arbitrage. You should know that your basic judgment is correct, otherwise you won't make any profit. If there are no major negative factors, then follow the stock as it rises! It may rise and the profits could be huge. As long as the basic fundamentals and the stock market's behavior don't worry you, have the courage to believe in your own judgment. Don't hesitate!
If a trade is profitable, I never panic. I may have bought tens of thousands of shares in one stock, but I sleep soundly because I have made money. I'm just 'using the money brought by the rise, it is the money of the stock market', and even if I lose all the profits, the money lost was not mine in the first place.
Of course, the opposite is also true. If I buy stocks and they don't perform as expected, I will sell immediately. I cannot sit idly by; instead, I must figure out why the stock market did not operate as expected. The reality now is that the stock market is 'operating' in this way, and this evidence is enough to make experienced speculators withdraw.
Making money can make people worry-free, but losing money can be very distressing.
Don't confuse riding the rise of stocks with blindly holding onto them. I never randomly buy a stock and hold onto it. How could we know what the future holds? Things change: life changes, relationships change, physical condition changes, seasons change, children grow up, partners change. Why shouldn't the basic conditions for buying stocks change as well? Blindly buying and holding onto stocks just because the company is good, the industry is strong, and the economy is in good shape is equivalent to seeking death in the stock market in my opinion.
Stick with the leaders, and unless there is a clear reason to sell, go along with the rise of the stock.
Jesse Livermore's Fund Management Principle 5
I suggest setting aside 50% of the profits. If the profit is 100%, it should be done even more so. Set the money aside, place it in a bank as a reserve, or lock it in a secure safe deposit box.
Just like in a casino winning money, one should occasionally step away from the table, go exchange the chips won for cash. This is never wrong. The best time is when you have made a big profit in the stock market. Cash is like bullets in a gun, you should always have cash on hand.
The biggest regret of my financial career is that I did not give this principle enough importance.
Editor / jayden