In this book, John Boik, who is a respected money manager on Wall Street, has focussed on the methods of five great traders. His chosen ones are Jesse Livermore, Bernard Baruch, Nicholas Darvas, Gerald Loeb and William O’Neil.
Their collective activities span Wall Street from 1890 to the present day. Boik describes each career in some detail, outlining specific trades and quoting his heroes’ perspectives. Then he summarises what he sees as the common factors in their success.
The most interesting of the five was Darvas, a professional dancer who made over $2 million trading while on a global performance tour in the 1950s. He traded through telegrams from places like Cape Town and Kathmandu on the basis of week-old stock market quotes.Loeb was a stockbroker and columnist who won consistently through most bull and bear markets between 1920 and 1960. O’Neil is the founder of the Investor’s Business Daily, the creator of the CANSLIM system of stock picking and one of the most successful traders of the Internet era and this century.
Common skills and trading rules
|Rigid discipline. Each studied their losing trades and developed rules they adhered to.|
|All of them found ways to emotionally accept mistakes and cut losses quickly.|
|All held very few positions and watched price-volume action closely.|
|All pyramided and added to winning positions,“averaging up” in sight of sure profits.|
|A work ethic that helped each to make a dedicated effort to understanding the market.They observed, studied and learnt from experience.|
Livermore was known as the “Great Bear”. He made and lost several fortunes between 1890 and 1940 after starting with $5 and making a profit of $3 on his first trade. Most famously, he shorted during the Wall Street Crash of 1929, one of the worst crashes in the history of markets.
Baruch who died in 1965, also started trading in the 1890s. He went onto to be an important US policymaker, who managed the US industrial effort in both World Wars and held important administrative posts under several presidents. He donated over $20 million in scholarships during his lifetime and left an estate of $14 million.
One obvious common factor is that all were excellent writers who described their respective careers and methods. Few traders are consistently successful. Even fewer explain their methods. If you’ve made a fortune, why tell other people how to do it?
There are other common factors Boik isolates. One is that they all started small and lost money early on. They analysed their mistakes and learnt their lessons. Later, they set up systems that helped maximise gains and minimise losses.
They were all focussed and disciplined. They held very few positions. You could say that they were “focus traders” in comparison to focus investors who hold very few stocks. This is unusual—most investors worship diversification. But a trader must track prices and volumes continuously. In practical terms, this is easier if you hold few positions.
These five all used the “pyramiding” technique. They added onto winning positions. Again, this is unusual. Most people “average down”— they cut the average costs by buying more in a falling stock. Trading is a high-risk strategy. It can fetch higher rewards than vanilla investing. It requires special skills that can be acquired only with hard work and an acceptance of mistakes. Most ordinary investors lack the discipline to control their egos and to work hard to rectify their errors. Chance always plays a role but good traders learn to manage chance.
My opinion is that a trader’s skill set is of utility to long-term investors as well. Discipline is always useful. Good traders are also excellent at maximising returns—this is something investors are often sloppy about.
The specific methods may not work for you but consider this logic. Why not add to an already winning trade if you think it will continue to generate returns? Also, focus investors who pick the right stocks often outperform safer diversified investors.
This is a good, but not a great, book. However, two caveats occur. One is that the author has underplayed the role of chance in financial markets and its effect on stock prices. The other is that it’s aimed at the professional trader. So you may need to adjust your mindset if you are an investor by temperament.
Investors don’t go short. If they think a stock-price will drop, they sell the stock if they own it and ignore it otherwise. Investors avoid leverage. They don’t need to borrow shares. And, they don’t borrow money because they hold over long periods.
A lot of historical material is presented and arranged in accessible fashion. He has logically summarised his evidence to show that successful high-risk traders use similar strategies. Lessons From The Greatest Stock Traders Of All Time clearly describes common threads of hard work, good nerves and sensible financial management that successful traders have in common. The methods are described in sufficient detail for a lay investor.
There are repeated warnings about the dangers of trading and the guarantee that you will make expensive mistakes. In fact, Boik confesses that he wrote the book only after he had made every mistake described in it!
Now, if you feel you can implement such highrisk strategies, take the inevitable hits, and learn from your mistakes, go ahead and trade. Or else, look for normal returns with normal strategies. Don’t expect extraordinary returns without taking extraordinary risks and giving your brain an extraordinary workout.
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