Jesse Livermore

[HengHeng]

lol greed and lust mah .. always there and always will be .. just like hope and fear.

[kennynah]

oh...lust....ic... this one...i oso agree lah... downfall...small head does all the thinking after that...big head become useless...

[millionairemind]

There is a never-ending stream of opportunities in the stock market and, if you miss a good
opportunity, wait a little while, be patient, and another one will come along. Don’t reach for a trade,
all the conditions for a good trade must be on your side. Remember, you do not have to be in the
market all the time.

The desire to always be in the game is one of the speculator’s greatest hazards.

When playing the stock market, there are times when your money should be waiting on the sidelines
in cash…waiting to come into play. Time is not money – time is time, and money is money.
Often money that is just sitting can later be moved into the right situation at the right time and make
a fast fortune. Patience is the key to success, not speed. Time is a cunning speculator’s best friend
if it is used wisely.

mm comments - What I get from this is there is no need to be in the market every day. Just like what WB used to say - wait for the perfect pitch.. sometimes doing nothing is better cos' if you are caught on the wrong side of the market, you can lose money in double quick time just becos' one had no patience to wait for all the factors to come into line in one's favor. Factors include market trend, stocks ready for breakout, sector rotation etc..

[millionairemind]

The public ought always to keep in mind the elementals of stock trading. When a stock is going up no elaborate explanation is needed as to why it is going up. It takes continuous buying to make a stock keep on going up. As long as it does so, with only small and natural reactions from time to time, it is a pretty safe proposition to trail along with it.

But if after a long steady rise a stock turns and gradually begins to go down, with only occasional small rallies, it is obvious that the line of least resistance has changed from upward to downward. Such being the case why should any one ask for explanations? There are probably very good reasons why it should go down, but these reasons are known only to a few people who either keep those reasons to themselves, or else actually tell the public that the stock is cheap. The nature of the game as it is played is such that the public should realise that the truth cannot be told by the few who know.

Die hard fans keep insisting they are right and market is wrong and keep averaging down...

Such simple advice, so difficult to follow.....

[millionairemind]

Profits Take Care of Themselves—Losses Never Do
Never confuse this approach of letting the position ride with the “buy and hold forever” strategy. How can any trader know what will occur far into the future? Things change: Life changes, relationships change, health changes, seasons change, your children change, your lover changes, why shouldn’t the basic conditions that originally caused you to buy a stock change? To buy and hold blindly on the basis that it is a great company, or a strong industry, or that the economy’s generally
healthy was to Livermore the equivalent of stock-market suicide. He said: “There are no good stocks—there are only stocks that make you money.”

mm comments - stocks generally run ahead of the annual reports. If one waits till the annual report is out to find out that the earnings has slowed, or worse still, a loss with no earnings, it would be too late.

[winston]

I'm aware of a major Mutual Fund who would visit the companies about 1.5 months before the release of any results.

They would then pump the companies for information.

From the reply or body language, they would then buy, sell or hold..

[-dol-]

Another "averaging down" disaster story.

Legg Mason has a unit trust registered in Singapore that is managed along the same lines by Bill Miller.

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

09 Sep 2008
Fan and Fred Are Dead -- and So Is Bill Miller
Written by Justice Litle, Editorial Director, Taipan Publishing Group

With the government’s Fannie and Freddie rescue, investing legend Bill Miller is toast. Should investors cut Miller some slack, or break out the tar and feathers? Justice explores...

Fabienne: Whose motorcycle is this?
Butch: It's a chopper, baby.
Fabienne: Whose chopper is this?
Butch: It's Zed's.
Fabienne: Who's Zed?
Butch: Zed's dead, baby. Zed's dead.
-- Quentin Tarantino’s Pulp Fiction

As you probably already know, the Fannie and Freddie bailout news broke over the weekend.

On reading how the government planned to rescue the mortgage giants, my first thought was, “Bill Miller is toast.”

It’s a sad thing, really. Miller was once hailed as the greatest mutual fund manager of all time. His long-time winning streak -- beating the S&P 500 index 15 years in a row -- was the stuff of legend.

But that was all in the past, before Miller elected to double down on a slew of bad financial bets... and then doubled down yet again when things didn’t go his way.

Now Miller is “done like a dinner,” as the Australians sometimes say. His reputation is in tatters, utterly destroyed. They might not throw him out of the Legg Mason building and into the Baltimore streets, but many would no doubt like to. And you know what? I don’t blame them.

To see why Miller is a walking dead man, check out this Freddie Mac (FRE:NYSE) chart:




As I sit and write to you on Monday afternoon, FRE has fallen more than 80% in a single day. Fannie Mae (FNM:NYSE) has dropped more than 85%.

The government rescue plan means Fan and Fred shareholders are likely to get nothing -- pennies on the dollar if they’re lucky. So Freddie Mac, a $65 stock less than two years ago, is now a penny stock. Bill Miller is toast because he bet most of his chips on Freddie Mac.

On August 11, about a month ago, Barron’s reported on Miller’s big bet:

Shares of Freddie Mac (ticker: FRE) have been in freefall recently but Legg Mason [the ship that Bill Miller steers] has kicked off a buying spree at the mortgage lender, becoming its largest shareholder.

On Monday Legg Mason (LM) disclosed it now owns 79,880,998 shares of Freddie Mac, or a 12.4% stake. At the end of the first quarter, Legg Mason owned 50,244,068 shares of the government-sponsored finance giant.

Bye-Bye Billion

I don’t know what Miller’s average price is on his Freddie Mac shares. If he owned 50 million shares of FRE in the first quarter, and then added roughly 30 million more as the stock fell below $10, I’d guess his average to be somewhere in the teens.

Let’s call it an average price of $15 per share, just for the sake of quick calculation. I suspect the true average price is higher, but we’ll be generous here.

At an average price of $15 per share -- the result of doubling down on an insanely bad bet -- Miller’s investment in Freddie Mac would come to roughly $1.2 billion. (That’s 80 million shares times $15 per share.)

A drop from $15 per share to 82 cents per share (where FRE trades as I write) is a loss of almost 95%. If you start with $1.2 billion and lose 95% of it, you have a lousy $60 million left.

So, after losing 40% of investors’ money over the past 12 months or so, Miller bet all his chips on red in perhaps the dumbest move of all... and lost another cool billion.

The Cardinal Sin

Chances are, Legg Mason won’t kick Miller out the door. His reputation may be dead, but his job is still intact. In my humble opinion, this is not right. Miller should be tarred, feathered and ridden out of town on a rail. (Agree? Disagree? Let me know: [email protected] e-mail address is being protected from spambots. You need JavaScript enabled to view it .)

I don’t say this just because Miller lost money (albeit a heck of a lot of money). I say it due to the utter lack of respect he has shown to his investors. He committed the cardinal sin, and showed no remorse for it.

The cardinal sin of trading and investing is not being wrong, by the way. Everyone gets it wrong from time to time. Nor is the cardinal sin just about losing money. Losing money is what happens when you’re wrong in markets, which happens to everyone.

No, the cardinal sin of trading and investing is staying wrong... and throwing good money after bad. Eighty-five years ago, the great Jesse Livermore put it like this: “Losing money is the least of my troubles. A loss never bothers me after I take it. I forget it overnight. But being wrong -- not taking the loss -- that is what does damage to the pocketbook and to the soul.”

Damn right.

The ideal way to build an investment fortune would be to never lose on a single investment or trade. Since that really isn’t possible -- everyone gets it wrong now and then -- the next best option is not to lose much when the inevitable loss comes.

The trouble for guys like Miller boils down to ego. “Not losing much” requires a willingness to cut losses quickly when an investment just isn’t working out. And that requires an ability to be humble.

It requires the ability to say, “You know what? Something just isn’t working here. My timing might not have been right... or my analysis might have been flawed... or maybe there’s some hidden factor that hasn’t surfaced yet. But, whatever the reason, I need to keep this loss manageable and not let it get out of hand.” Bill Miller couldn’t do that.

It further boggles my mind that a man who ran $20 billion for widows, retirees, pension funds and the like simply never had a Plan B. How can you take on $20 billion worth of investors’ money and not have a Plan B, just in case Plan A goes wrong? I just don’t get it.

It’s not as if the FRE debacle came out of nowhere, either. Over the past year, Miller had been getting crushed on bet after bet after bet.

In fact, Miller’s position list reads like a who’s who of financial disasters: Bear Stearns, Washington Mutual (WM:NYSE), Citigroup (C:NYSE), Merrill Lynch (MER:NYSE), AIG (AIG:NYSE), Countrywide (CFC:NYSE)… and, of course, Freddie Mac.

So how is it that this mutual fund legend -- a man feted on the cover of Fortune as one of the greatest of all time -- wound up plowing money into nearly every disaster he could find?

My theory is Miller started to believe his own press. He started to think all that stuff about being a legend was true... that somehow he was bigger than the markets. And so he didn’t need a Plan B, because there was no chance, just no chance, that his thesis on buying the financials was wrong.

And so when things started to go against him, he just had to double down... and then double down again... because his ego wouldn’t let him do otherwise. Ego killed Miller’s career and reputation -- and his investors’ portfolios, too.


Lessons From Afar

There are at least two lessons you and I can take from this Shakespearean tale of woe.

First, never forget the cardinal sin of trading and investing. The cardinal sin is not being wrong, but staying wrong. As Livermore says, that’s what does damage to the pocketbook and the soul.

Second, just think of all the good things that can happen when you cut losses quickly and let profits run.

Every investment needs to be given some “elbow room,” so to speak, so that you don’t get shaken out on an insignificant movement. And long-term investments need more elbow room than short-term trades.

But if you maintain the habit of cutting losses on a timely basis, the good news is you never have to worry about the Enrons or the Citigroups or the Freddie Macs... because you’ll be on the sidelines long before the real damage is done to your portfolio.

Meanwhile, if you get in the habit of letting your winners run, you can sit back as the positions that are going up continue to go up.

And, as a nice bonus, all the investment capital you save by not riding losers into the dirt can be put to work at very opportune times. The best time to have a boatload of cash on hand is when guys like Miller have been forced to unload at fire-sale prices, dumping the good alongside the bad.

It seems so elementary to me: sticking with what works and cutting loose what doesn’t... keeping losses small and letting gains compound... and so on. So why is it that so many fund managers seem to do the opposite? (The industry even has a term for it: “Picking your flowers and watering your weeds.”)

Am I missing something here? And was I too hard on Miller... or maybe not hard enough? There’s more to say on this topic, but I’m curious as to your interest. Do you want to hear more about money management techniques? What kind of mutual fund experiences have you had? Let me know: [email protected] e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Warm Regards,

JL

[kennynah]

what cannot be made profitable by the actual underlying, can possibly be achieved using options.

[helios]

The industry even has a term for it: “Picking your flowers and watering your weeds.”

dear dól ge ge,

for your information, the original sentence is coined by Peter Lynch.

ie. pulling out the flowers and watering the weeds.

Warren Buffett used the above expression in his annual reports as well. literally, it means abandoning attractive, valued companies for lesser $$$, pre-matured selling.

good metaphors [flowers and weeds comparison] used, but of course, it can be interpreted differently by different people in the industry.

i guess, over here, it leaves more to the imagination of the readers, ie. to cut losses and 'not watering the weeds'.

[-dol-]

Dear San,

Thanks for the information - you are the Peter Lynch expert

Fidelity also have large positions in FRE/FNM, and continue to add to them earlier this year.