There is always an opportunity to read great business literature. Warren Buffet’s investment partner, Charlie Munger, is quoted as saying “In my whole life I have known no wise people (over a broad subject matter area) who didn’t read all the time—none, zero.”
Great business literature comes in many flavors. Some of it is foundational reading like The Intelligent Investor by Benjamin Graham, One up on Wall Street by Peter Lynch, and all of Warren Buffet’s annual letters to shareholders. Some of the literature is either actual research or poetic license around a historical event like all of Michael Lewis’ books about Wall Street including The Big Short (credit derivative nerds get Wall Street to make a market in the very same securities that unhinge the housing market in 2008), Flash Boys (Program Traders), Liars Poker (John Guttfreund and the heyday of proprietary trading at Salomon Bros, an institution Warren Buffet called “a fine French restaurant with a whore house in back”), Barbarians at the Gate (KKR and the big buyout of RJR Nabisco), The Smartest Guys in the Room (Fall of Enron), or The House of Morgan by Ron Chernow (rise, fall and rebirth of the Morgan banks). Other literature is economic or business theory or strategy like Fooled by Randomness and The Black Swan by Nicholas Taleb (ruled by randomness and imagining the impossible), Built to Last and Good to Great by Jim Collins, Competitive Strategy by Michael Porter, The 7 Habits of Highly Successful People by Stephen Covey, In Search of Excellence by Peters and Waterman and Who Moved My Cheese by Spencer Johnson. There are highly popular self-discovery and improvement books like Think and Grow Rich by Napoleon Hill, Strength Finders 2.0 by Tom Rath and The Millionaire Next Door by Thomas J. Stanley. Finally, there is Malcomb Gladwell whose business books like Blink and Outliers challenge conventional thinking on talent and self-determination.
Over a lifetime I have enjoyed these books and several of them I have read multiple times. They will appear on many of the top 100 business books. I confess to a real affinity for Michael Lewis because he is one of the best Wall Street story tellers of all time.
A Special Book
However, there is one book, Reminiscences of a Stock Operator by Edwin Le Fevre, I come back to whenever I am particularly confused about markets, investment trends, investment cycles, investment discipline and the cloud of dust from the thundering herd. It is not a book I could find on anyone else’s list which gives me a misplaced feeling of exceptionalism – sort of like coming to your Friday Christmas party on Saturday night upset that you missed the hangover. This is a book patterned after a real life trader by the name of Jessie Livermore who had many booms and busts in the early days of ticker tapes and bucket shops from 1900-1929; and who committed suicide at an early age with great regret at having failed even though he left a $5 million fortune. Wikipedia summarizes his success and failure:
During his lifetime, Livermore gained and lost several multi-million dollar fortunes. He sometimes played hunches, famously selling Union Pacific railroad short right before the 1906 San Francisco earthquake. Most notably, he was worth $3 million and $100 million after the 1907 and 1929 market crashes, respectively. Adjusted for inflation, $100 million in 1929, equals about in $1.384 billion in 2014,  it would be over $125 billion today if put into Dow Jones Index with dividends reinvested.  He subsequently lost both fortunes. Apart from his success as a securities speculator, Livermore left traders a working philosophy for trading securities that emphasizes increasing the size of one’s position as it goes in the right direction and cutting losses quickly.
Follow the Rules in Business and Life
Mr. Livermore who was nicknamed “The Boy Plunger” actually wrote his own book about his formula for success before he died called How to Trade in Stocks, but it never caught on probably because the stock market crash of 1929 had tamed people’s interest in speculation. Mr. Le Fevre’s book, however, is considered to be a primer for stock and bond traders. It contains rules and trading strategies that have become more popular with time including:
- Trade with the trend – buy in a bull market and short in a bear market
- Do nothing when you cannot find an environment where you are suited to make money
- Let the market confirm your opinion.
- Let profits run.
- Close trades that go against you.
- Know your exit price before you enter a trade
- Don’t average down a losing position
On the first and last points Mr. Livermore did not follow his own rules about his third wife, Harriet Metz Noble who had been married 4 times before and 4 times widowed by her husband’s suicide. Mr. Livermore would agree that he had missed her trend line for keeping husbands and that she certainly was averaging down on a losing position to which he was the fifth unwitting counterparty.
Buy It and Read It
The three best things about Jessie that frame my investment philosophy today and influence many of the private equity rules we have at CapitalWorks today are his price discipline (he had a system and usually stuck to it), his willingness to do nothing and go fishing when the environment was not right for his investment style and his formulation of an exit strategy before he entered a trade.
I recommend this book to anyone who wants to learn about investing. I have suggested it to many of the young people with whom I have worked in investment banking and private equity as foundational reading for their careers. I often ask them what are the greatest lessons they learned from this book. A few of them confirmed my trend line analysis of them when they commented that the book was “stupid” or “confusing” or “not worth reading”. A few of them were intoxicated with the speculation “boom and bust” and “the big money”. So far there have not been many young readers who shared my most important takeaways.
Buy this wonderful book for the holidays and share your reflections with me.
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