Category: Market Wisdom

Jesse Livermore is one of the world’s greatest traders, having shorted the 1907 and 1929 stock market crash’s and amassing a fortune. Here is a summary of his trading rules, from Richard Smitten’s Jesse Livermore: World’s Greatest Stock Trader.

"Livermore’s rules are often based on thinking against the grain:

• Cut your losses quickly
• Be sure to confirm your judgement before you take your full position
• Let your profits ride if there is no good reason to close out the position
• The action is with the leading stocks, which change with every new market
• Keep the number of stocks you follow limited in order to focus
• New all-time highs are to be bought on breakouts
• Cheap stocks often appear to be bargains after a large drop. They often continue to fall, or have little potential to rise in price. Leave them alone!
• Use pivotal points to identify changes in trends and confirmations in trend
• Don’t fight the tape!"

Bob was a research analyst at Merrill from 1957; Head of Research for nearly a decade from the mid-80s and regarded by most macro people as an old school legend.

1. Markets tend to return to the mean over time. (If you go back in history, every market is mean reverting.)
2. Excesses in one direction will lead to an opposite excess in the other.(Oil is the classic example)
3. There are no new eras, excesses are never permanent.(Remember “peak oil” and the “new economy”)
4. Exponentially rapidly rising and falling markets usually go further than you think, but they do not correct by going sideways. (Chinese equities and home prices!)
5. The public buys the most at the top, the least at the bottom.(Emerging markets!)
6. Fear and greed are stronger than long term resolve. (Markets bottom when the public throws in the towel)
7. Markets are stronger when they are broad and weakest when they narrow to handful of blue-chip names.
8. Bear markets have three stages: sharp down, reflexive rebound and a drawn out fundamental downtrend.
9. When all experts and forecasts agree, something else is going to happen.
10. Bull markets are more fun than bear markets

David Rosenberg is currently Chief Economist and Strategist at Gluskin Sheff, one of Canada’s pre-eminent wealth management firms. Mr. Rosenberg was Chief North American Economist at Bank of America-Merrill Lynch in New York and prior thereto, a Senior Economist at BMO Nesbitt Burns and Bank of Nova Scotia.

1. In order for an economic forecast to be relevant, it must be combined with a market call
2. Never be a slave to the data – they are no substitute for astute observation of the big picture
3. The consensus rarely gets it right and almost always errs on the side of optimism – except at the bottom
4. Fall in love with your partner, not your forecast
5. No two cycles are ever the same
6. Never hide behind your model
7. Always seek out corroborating evidence
8. Be constantly aware with your forecast horizon – many clients live in the short run
9. Have respect for what the markets are telling you
10. Of all the market forecasters, Mr. Bond gets it right most often
11. Highlight the risks to your forecasts
12. Get the US consumer right and everything else will take care of itself
13. Expansions are more fun than recessions

-documented 1st July 1997

Every investor needs to develop a philosophy, a set of rules or principles, that can form the basis for action and review. Over the years we have found whenever we have made an error of substance we have blisfully ignored our own rules and exposed ourselves to loss (or limited our profits) which could have easily been avoided. Our rules may not suit your experience, your approach to the market, your psyche etc etc. But hopefully our rules will help to make you think and encourage you to develop your own rules. Our rules are a combination of our own thinking, The Zurich Axioms of Max Gunther , and the thoughts of John Templeton.

1. It is unlikely that God’s plan for the universe includes making you rich. Success in the stockmarket requires effort, discipline and patience. 90% of success is having the discipline to be consistent.

2. "Research" is to contemplate the possibility that, intuitively, you may not know the answers, and worse still, you may not even know the questions. Information insightfully interpreted will help avoid being caught in a position where you can lose a lot for reasons not understood. Try to avoid making the facts fit the theory, especially in relation to timing. Speculation is not investment.
Buffetology: Can we understand the business? Does it have a sustainable competitive advantage? Do we like the people? Are we getting it at the right price?

3. Trust falling interest rates to begin a new bull market. Bull markets are driven by liquidity. It takes a lot of bad news to reverse a bull market, and a lot of good news to reverse a bear market. Calculate and analyse ‘trend’ very carefully.

4. Long range plans engender the dangerous belief that the future is under control. Try to stay flexible, open minded and sceptical. Good trading is a peculiar balance between the conviction to follow your ideas and the flexibility to recognise when you have made a mistake. In a bull market focus on price & momentum, a bear market focus on valuation. Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria. BUY when others are despondently selling. SELL when others are greedily buying. When too many people are doing the same thing the market will adjust. Bull markets are driven by liquidity.

5. Markets over-react slowly; resist the temptation to buy ‘falling knives’. Momentum is essentially the market behaviour of the participants. There is a lot of ‘motion’ in ’emotion’. Do not underestimate the tendency of a trend to ultimately reach a level, either up or down, that is illogical and just plain wrong, and hence, unsustainable.

6. Focus on value and strength. Cut losses, let profits run. Good profits are generally made on new highs. When a market is making a new high it is telling you something. Buy stocks that are coming out of broad bases and are beginning to make new highs. Price going back into a base is bearish.

7. In the long run the stock market indices fluctuate around the upward trend in earnings per share. Calculate see thru earnings for the portfolio.

8. Human behaviour cannot be predicted. Distrust anyone who claims to know the future. Chaos is not dangerous until it begins to look orderly. Beware the historian’s trap, beware the chartist’s illusion.

9. Resist the allure of diversification. Try to get 60% of the portfolio in 12 stocks.

10. Try to find the ‘big story’ every now and again – a recovery, an out of favour cyclical, a takeover, a change in management, a new product, an industry or company undergoing fundamental transformation, a tax change, interest rates.