Thursday, October 12, 2006

Reminiscences of a Stock Operator - Book Review

"Reminiscences of a Stock Operator"

What Is It About?

Reminiscences of a Stock Operator was written by Edwin Lefèvre, a noted financial writer during the first few decades of the twentieth century. The book is a fictionalized account of a prominent trader on Wall Street covering the period from the 1890’s through the original publication date in 1923. While a work of fiction, it is generally accepted that Lefèvre wrote this as a fictional account of the true life experience of Jesse Livermore.

The book is written as a first person narrative. The protagonist takes us through his early beginnings and explains his struggles towards a maturation of his trading process. Along the way, the reader is subtly instructed as to how this transformation was accomplished – as investing lessons are woven into the personal narrative.

What Did I Get Out Of It As A New Investor?

An argument could be made that a book about one of the most (in)famous stock traders ever to have swung on Wall Street can't possibly provide any insight to those who adhere to the tenets of value investing. That is the wrong position to take. This book provides one of the earliest articulations of understanding who is the best friend and worst foe of the trader and investor alike.

While this book provides a valuable learning experience throughout, its true value can be found early on in Chapter 5. Here, the narrative sets forth the realization of our trader that many people on Wall Street do not fail because they are wrong in their decisions; rather it is being right in their analysis but not being able to sit tight and hold fast to their convictions that lead these people to failure.

A selection from the text eloquently sets forth the proposition as follows:

“a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figures it must do…the market does not beat them…they beat themselves, because even though they have brains they cannot sit tight.”

This lesson doesn't apply to stock traders alone. Value investing is, at its core, the purchase of a company through common stock which is undervalued by the market as a whole. Yet how many value investors have bought a stock which reasoned analysis indicates is undervalued, only to grow nervous as the stock price falls, and then to sell too soon? As this book instructs, if one would have merely sat tight they would have been proved right.

Being a value investor is about finding value that others cannot (or do not) see. If your thesis is correct, then the hardest part of practicing value investing is resisting the siren song of the market as it tries to convince you that you are wrong. That is the lesson this book has taught me.

The Good News

Reminiscences of a Stock Operator is considered one of the all-time classics, and after reading it I understand why. It is well written; after 80 years, the book still makes for an interesting and satisfying read. An article in this month's issue of Smart Money (the monthly magazine of The Wall Street Journal) noted that famed investor Bill Miller re-reads this tome every year. Simply put, the book remains fresh no matter how many times it has been read before.

The Bad News

Those who strictly adhere to a value investing methodology may feel that this book is outside their investing framework. That point is not without merit. But whether one is an investor or a trader, understanding the role of emotions in either process is important. In order to gain the full benefit from this book, you must accept that the greatest impediment to successful stock market participation is one's own self. Anything short of that and this book will seem uninteresting.

The Bottom Line

I agree with the general consensus; this book is a classic that offers valuable investing insights. Reminiscences of a Stock Operator belongs on every investor’s and trader's bookshelf. I highly recommend purchasing it.


dover121 said...

A good book. Just remember he died broke.


Great book reviews.