Home 2017-05-26T15:27:56+00:00


Paul Tudor Jones on Jesse Livermore

One of the greatest trading books ever written is Reminiscences of a Stock Operator. The original book was published in 1923, but in 2010, an Annotated Edition was produced by Jon Markman. This edition reveals the truth about Jesse Livermore and provides colorful, historically accurate commentary on the characters, places, and events that have made Reminiscences such an enjoyable and educational read for generations.

The foreward to the Annotated Edition is written by legendary trader Paul Tudor Jones. At the end of the book, Jones answers a few questions about his relationship with the book and its themes. Here is one of the insightful questions that was asked to Jones. I found a profound meaning in his response. I hope you discover it as well.

Question: Part of the appeal of the book is Livermore’s journey of self-discovery as a person and as a trader. Have you had the same experience as a trader and portfolio manager, or was your path easier or harder?

Jones: Probably the best lessons to be learned from this book come from his repeated failures and how he dealt with them. In the book I think he lost his entire fortune four or five times. I did the same thing but was fortunate enough to do it all in my early twenties on very small stakes of capital. I think I lost $10,000 when I was 22, and when I was 25 I lost about $50,000, which was all I had to my name. It felt like a fortune at the time. It was then that my father flew up from Memphis and sat me down in my New York City apartment and began lecturing me as lawyers do. He commanded, “Leave the gambling den behind. Come home and get a real job in a safe profession like real estate.” Of course, I did not, and the rest is history. And real estate these past few years has been about as safe as shooting craps to pay the rent, so I was twice blessed. If I’d have taken my father’s advice, I might have lost all of my money again these past few years in my fifties.

Anyway, I think it’s no coincidence that our greatest champions, our greatest artists, our greatest leaders, our greatest everything all seem to have experienced some kind of gut-wrenching loss. I think their greatness, in part, was fashioned on the crucible of that defeat. Two years before Lincoln was elected as maybe our finest president, he lost that monumental Senate race to Stephen Douglas. To a certain extent, I think that holds true in my field as well, and I am leery of traders who have never lost it all. I think that intense feeling of desperation that accompanies such a horrifically deflating experience indelibly cauterizes great risk management reflexes into a trader’s very being.

There are two unpleasant experiences that every trader will face in his lifetime at least once and most likely multiple times. First, there will come a day after a devastatingly brutal and agonizing stretch of losing trades that you’ll wonder if you will ever make a winning trade again. And second, there will come a point when you begin to ask yourself why it is you make money and if this is truly sustainable. That first experience tests an individual’s grit; does he have the stamina, courage, guts, and smarts to get up and engage the battle again? That second moment of enlightenment is the one that is actually scarier because it acknowledges a certain lack of control over anything. I think I was almost 38 years old when one day, in a moment of frightening enlightenment, I knew that I really did not know exactly how and why I had made all the money that I had over the prior 17 years. This threw my confidence for a jolt. It sent me down a path of self-discovery that today is still a work in progress.

Here is the Amazon link to the Annotated Edition of Reminiscences of a Stock Operator.

I can be reached at: [email protected].

A Few Warning Signs

Legendary fund manager Stanley Druckenmiller once said: “Probably one of my greatest assets is that I’m open-minded and I can change my mind very quickly.” Although I’ve been very bullish on the markets the past few months, a few warning signs have shown up that have turned me cautious over the near-term:

1) The Nasdaq Composite has experienced heavy distribution recently. 6 of the past 11 days have seen higher volume down days, showing me there’s a decent amount of institutional selling.

2) The major indexes are below their 50-day moving averages, which is usually an area of institutional support. In addition, the Russell 2000 decisively broke through its 50-day moving average and is now approaching its 200-day.

3) Many leading stocks are reporting strong earnings but they are being met with selling pressure. While I still like many of these companies, I reduced my exposure because they need time to digest their gains from earlier this year and to reset technical bases.

We are heading into a seasonally difficult time of year, as August and September are traditionally volatile months. Since the majority of S&P 500 companies have already reported earnings, the news focus will be on the escalating geopolitical tensions, the September debt ceiling vote, and the upcoming Fed meeting. In other words, the news cycle will be filled with headlines that could further rattle the markets.

One point I would like to stress is that traditionally, when these warning signs show up, it usually leads to some form of a market pullback or increased volatility. However, over the past few years, the market has been incredibly resilient and brushes everything off.

So what does one do? The most important thing right now is to know your time frame and to not follow anyone blindly. For me, the disciplined thing to do is to heed these warning signs and proceed with caution. As a professional money manager, my number one priority is to protect client assets in case these signs lead to more downside. It wouldn’t surprise me to see some choppiness over the next 6-8 weeks, which is why I currently have a heavy cash position for clients. I will of course keep in mind how resilient the market has been over the past few years and how sentiment can turn VERY negative VERY quickly. It is prudent, however, to show some patience and discipline right now. As I’ve always said, it hasn’t paid to turn bearish, but there is nothing wrong with being cautious until market conditions improve.

I can be reached at: [email protected]

Disclaimer: This information is issued solely for informational and educational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. None of the information contained in this blog constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. From time to time, the content creator or its affiliates may hold positions or other interests in securities mentioned in this blog. The stocks presented are not to be considered a recommendation to buy any stock. This material does not take into account your particular investment objectives. Investors should consult their own financial or investment adviser before trading or acting upon any information provided. Past performance is not indicative of future results.


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