MONEY IN THE HAND
When you are handling surplus income do not delegate the task to anyone. whether you are dealing In millions or in thousands the same principal lesson applies. It is your money. It will remain with you just so long as you guard it. Faulty speculation is one of the most certain ways of losing it.
Blunders by incompetent speculators cover a wide scale. I have warned against averaging losses. That is a most common practice. Great numbers of people will buy a stock, let us say at 50, and two or three days later if they can buy it at 47 they are seized with the urge to average down by buying another hundred, making a price of 48.50 on all. Having bought at 50 and being concerned over a three-point loss on a hundred shares, what rhyme or reason is there in adding another hundred shares and having the double worry when the price hits 44? At that point there would be a $600 loss on the first hundred shares and a $300 loss on the second hundred shares.
If one is to apply such an unsound principle, he should keep on averaging by buying two hundred shares at 44, then four hundred at 41, eight hundred at 38, sixteen hundred at 35. thirty-two hundred at 32, sixty-four hundred at 29 and so on. How many speculators could stand such pressure? Yet if the policy is sound it should not be abandoned. Of course abnormal moves such the one indicated do not happen often. But it is just such abnormal moves against which the speculator must guard to avoid disaster.
So, at the risk of repetition and preaching, let me urge you to avoid averaging down.
I know but one sure tip from a broker. It is your margin call. When it reaches you, close your account. You are on the wrong side of the market. Why send good money after bad? Keep that good money for another day. Risk it on something more attractive than an obviously losing deal.
A successful businessman extends credit to various customers but would dislike to sell his entire output to one customer. The larger the number of customers the more widely the risk is spread. Just so, a person engaged in the business of speculation should risk only a limited amount of capital on any one venture. Cash to the speculator is as merchandise on the shelves of the merchant.
One major mistake of all speculators is the urge to enrich themselves in too short a time. Instead of taking two or three years to make 500% on their capital, they try to do it in two or three months. Now and then they succeed. But do such daring traders keep it? They do not. Why? Because it is unhealthy money, rolling in rapidly, and stopping for but a short visit. The speculator in such instances loses his sense of balance. He says: “If I can make 500% on my capital in two months, think what I will do in the next two! I will make a fortune.”
Such speculators are never satisfied. They continue to shoot the works until somewhere a cog slips, something happens—something drastic, unforeseen, and devastating. At length comes that final margin call from the broker, the call that cannot be met, and this type of plunger goes out like a lamp. He may plead with the broker for a little more time, or if he is not too unfortunate, he may have saved a nest-egg permitting a modest new start.
Businessmen opening a shop or a store would not expect to make over 25% on their investment the first year. But to people who enter the speculative field 25% is nothing. They are looking for 100%. And their calculations are faulty; they fail to make speculation a business and run it on business principles.
Here is another little point that might well be remembered. A speculator should make it a rule each time he closes out a successful deal to take one-half of his profits and lock this sum up in a safe deposit box. The only money that is ever taken out of Wall Street by speculators is the money they draw out of their accounts after closing a successful deal.
I recall one day in Palm Beach. I left New York with a fairly large short position open. A few days after my arrival in Palm Beach the market had a severe break. That was an opportunity to cash ‘paper profits” into real money—and I did.
After the market closed I gave a message to the telegraph operator to tell the New York office to send immediately to my bank one million dollars to be deposited to my credit. The telegraph operator almost passed out. After sending the message, he asked if he might keep that slip. I inquired why. He said he had been an operator for twenty years and that was the first message he ever sent asking a broker to deposit in a bank money for the account of a customer. He went on:
“Thousands and thousands of messages have gone over the wire from brokers demanding margins from customers. But never before one like yours. I want to show it to the boys.”
The only time the average speculator can draw money from his brokerage account is when he has no position open or when he has an excessive equity. He won’t draw it out when the markets are going against him because he needs all his capital for margin. He won’t draw it out after closing a successful deal because he says to himself: “Next time I’ll make twice as much.”
Consequently most speculators rarely see the money. To them the money is nothing real, nothing tangible. For years, after a successful deal was closed, I made it a habit to draw out cash. I used to draw it out at the rate of $200,000 or $300,000 a clip. It is a good policy. It has a psychological value. Make it a policy to do that. Count the money over. I did. I knew I had something in my hand. I felt it. It was real.
Money in a brokers account or in a bank account at is not the same as if you feel it in your own fingers once in a while. Then it means something. There is a sense of possession that makes you just a little bit less inclined to take headstrong chances of losing your gains. So have a look at your real money once in a while, particularly between your market deals.
There is too much looseness in these matters on the part of the average speculator.
When a speculator is fortunate enough to double his original capital he should at once draw out one- half of his profit to be set aside for reserve. This policy has been tremendously helpful to me on many occasions. I only regret that I have not observed it throughout my career. In some places it would have smoothed the path.
I never have been able to make a dollar outside of Wall Street. But I have lost many millions of dollars, which I had taken from Wall Street, “investing” in other ventures. I have in mind real estate in the Florida boom, oil wells, airplane manufacturing, and the perfecting and marketing of products based on new inventions. Always I lost every cent.
In one of these outside Ventures which had whipped up my enthusiasm I sought to interest a friend of mine to the extent of $50,000. He listened to my story very attentively. When I had finished he said: ‘Livermore, you will never make a success in any business outside of your own. Now if you want $50,000 with which to speculate it is yours for the asking. But please speculate and stay away from business.” Next morning, to my surprise, the mail brought a check for that amount which I did not need.
The lesson here again is that speculation itself is a business and should be so viewed by all. Do not permit yourself to be influenced by excitement, flattery or temptation. Keep in mind that brokers sometimes innocently become the undoing of many speculators. Brokers are in the business to make commissions. They cannot make commissions unless customers trade. The more trade, the more commissions. The speculator wants to trade and the broker not only is willing but too often encourages over-trading. The uninformed speculator regards the broker as his friend and is soon over-trading.
Now if the speculator were smart enough to know at just which time he should over-trade, the practice would be justified. He may know at times when he could or should over-trade. But once acquiring the habit, very few Solicitors are smart enough to stop. They are carried away, and they lose that peculiar sense of balance so essential to success. They never think of the day when they will be wrong. But that day arrives. The easy money takes wing, and another speculator is broke.
Never make any trade unless you know you can do so with financial safety.
Part of “How to Trade in Stocks” by Jesse Livermore.