myriseandfall

my rise and fall and rise
again in the stock market

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jesse livermore
--the boy plunger

jesse's yacht

What do you see when you look at this chart.
You see the same thing I see: nothing.

O’Neil sees this:

Later on the chart becomes this:

That’s how O’Neil became the youngest person to
buy a seat on the New York Stock Exchange.

So there I was reading the O’Neil book and
rereading the O’Neil book and reading the reread
of the O’Neil book and I was buying the IBD—
Investors Business Daily—a paper published by
O’Neil that served as supplement to the
books to spare people such as myself— the
average investing chump--from getting
everything backwards and proceeding to
lose our shirt and I decided I needed a system—
to replace the one I had—praying to Jesus—and
this one seemed worth taking a crack at. The
worst that could happen was to lose 8% of my
money.

Meanwhile I had a broker. Ill call him Mike. I
liked Mike. He was a nice guy and a pleasure to
work with. I was small potatoes compared to
some of his accounts but he took my calls and
patiently explained my many questions about
the market. The downside was: trading fees. The
fees were high. You werent charged a flat fee but
a percentage of the amount of the trade. A $5000
trade could cost $100. Or you could switch to E-
trade and do the trade for $6.

My other question was: did I really need a broker
to tell me to sit tight during a crash and to watch
half my stash disappear into the toilet? There are
some savvy brokers and investment counselors
out there who doubtless do very well for their
customers in the long term but the one thing none
of them can tell you is the one thing you most
want to know: what happens tomorrow?

So I dumped mike and transferred the account to
e-trade where, as an incentive, the first 50 trades
were on the house.

Now that I had the idea—investing the Jesse
Livermore/Bill O’Neil way—it was time to take the
idea and translate thought into action. Its done in
one way: by laying down your hard earned cash
and buying stock. You can fart around doing
paper trades until you drop dead but a paper
trade means nothing. All lessons learned in the
stock market—and they are endless—can only be
learned in one way: by losing money.

I had my recent copy of IBD with the charts of the
stocks conveniently analyzed and to nail down
the relevant info pertaining to accumulation/
distribution, return on equity, earnings history,
etc, etc and from these I assembled a list of a
dozen stocks hovering around a buy point and
narrowed it down to 5 and bought $3000 worth of
each.

These were the stocks:

1) Tempur Pedic (TPX): a mattress company of
the memory type, high end item. I had a theory
companies that produced high end items should
be considered a safe buy because because they
were favored by rich people who were immune to
recession. That was my theory, the theory of an
AIC—the average investing chump. But it was
also a stock touted by IBD, founded by the
youngest person to buy a seat on the New York
Stock Exchange. I bought 60 shares @ 48.60 a
share.

2: Decker Outdoor (DECK): shoes including the
UGG shoe, standing for ugly, and well named,
something you might find an Eskimo wearing
north of the arctic circle, but another high end
item and wildly popular among women. I had
come across Decker three years before during a
previous hit or miss encounter with the market
and went back and forth for a bit but finally to
decide against and naturally the stock proceeded
to go thru the roof. Now it seemed poised for
another move. I bought 40 shares @ 76.32

3: Volvo (VOLV): not the car but the truck
division. Trucks were a leading sector at this time
and there were two companies Volvo and Paccar
both with terrific charts and good fundamentals—
the perfect stock—poised for a launch into outer
space

4: Blue Nile (NILE): Another new company 6
years old, selling diamonds and jewelry on line
and only on line. There were no retail outlets. No
retail outlets meant low overhead which meant a
discount on the merchandise and in this way to
undercut by 40% or more the high quality retail
jewelers such as Tiffany’s, DeBeers, Harry
Winston, etc. The company had started slow but
in the last 3 years the earnings were through the
roof. I was a great believer of the online
purchase. 2 years previous, invited to a fancy
wedding in New York I picked up an Armani suit
via eBay for $125—and the suit arrived and I took
it to my tailor for a minor alteration sleeve-wise
and it was a perfect fit. I attended the wedding
and the first thing to occur was for a guest to
introduce himself and he says: where did you get
that suit?

5: Manitowoc (MTW): cranes and derricks.
Another company from a hot sector—heavy
machinery—with terrific earnings and getting a lot
of play from some of the big mutual funds.

6: Compania del Valle Rio (RIO): Brazilian mining
co that controlled 60% of the worlds nickel
deposits—a prime ingredient for steel production
and there were rumors of a huge contract
pending with China that had already driven
the stock up 40% in 3 months.

That was the lineup. I was in business. This was
aggressive investing—not for the faint of heart. At
my age—68--I should be relaxing at a condo on
the golf course collecting a juicy annuity from a
bond fund—not investing in companies like Blue
Nile that sell jewelry on the internet.

I wont give a blow by blow account of the ups
and downs stock-wise that occurred in the
following months—from mid-April when I first
decided to test drive this project until late July,
July 26, when the market took a dive and lost 700
points in 3 days and I decided a call had to be
made and I made the call—but will describe some
key moments of action along the way.

Week one started off with a bang. The Dow was
up 160 pts equals 1.3% My mini portfolio of IBD
stocks did 2.2%--not bad. Blue Nile led the way
up 3.1% from 42.6 to 45 followed by Decker (+2.
3%) and Rio (+1.6%) the rest were cool. There
was one loser--Volvo--down a half point.

Week 2 was more of the same. The indexes
continued to climb, the Dow flirting with 13000 a
new all time high.

Weeks 3/4 The Dow was steaming along and my
stocks were on a tear. already in one month on
an investment of $18,360 I had scored for 5.7%
equals $1,046. We were in a bull market. If you
cant make money in a bull market you need your
head examined.

Weeks 5/6. Now during week 5 there was a stall
in the Dow—a sideways move, followed by
another up move and to resume the rally and
score for a tasty gain of 1.6%. My IBD stocks
were up another 2.2% led by Blue Nile and
Decker that were going thru the roof. Blue Nile in
6 weeks was already up 23% My head was
spinning. Was this a dream? I said: where have
these stocks been all my life? Now I knew why at
age 30 Bill O’Neil was the youngest person to buy
a seat on the New York Stock Exchange. Could it
be that everything he claimed in the book, how
you could do it like he did it—to beat the market—
was true?

I had one laggard--Volvo--stuck at 20 and a
loser—TPX--mattresses. TPX had been going
sideways and now it started taking some small
hits and in week 6 a big hit that drove it below
the buy point of 26.8 to 24.1—a loss of 8.4%
There were no stories I could find—of securities
fraud, a missed earnings report, the CEO jailed
on a child porno charge, etc, etc. There was
nothing. But I had my story: the stock was down
8.4%

I had a decision to make: to sell or no. I thought
of Jesse Livermore and his mantra: We dont buy
stocks for them to go down. Here was this system
I had committed myself to and a vow invoked to
obey in scrupulous fashion with no exceptions the
cardinal rule: to cut my losses and the sell point
was 8%--not 8.4%

A system is a system. I sold the stock. I entered
$270 in the loss column.

What about Blue Nile—in 4 weeks up 23%. The
chart was an erection. O’Neil says: dont sit on
those profits too long. He says: a 25% profit on a
stock that is sold to re-invest in another stock
that makes 25% profit that is sold to reinvest in
another stock and if you can pull this one off--the
triple play--inside a year, due to the laws of the
compounding of interest you wind up making
100% on the investment.

He was right. I sold the Blue Nile. With it I bought
Huron consulting, a company I knew nothing
about but the fundamentals were in place and
there were 11 straight quarters of accelerating
earnings—the single most important stat to drive
a stock. Also a new company 4 yrs old, the exact
type company O’Neil had a preference for and the
reason was: it was in the new companies that the
next Microsoft, Wal-Mart, Starbucks, etc was to
be found. The chart looked good, hovering around
a buy point. I bought 40 shares at 66.2 that left
me with a profit of $900 from the sale of Blue Nile
and this I dumped into a money market fund.

Time passed—3 weeks. It was June. The market
hit a bumpy stretch—the churn and turn effect. It
was up, then it was down, then up and then down
and then down some more and then a rally and
then down the next day. The market had been
steaming—going up, up, up for 3 months or
nearly and it was time for a breather—to
"digest" the gains—as the analysts—the market
guru types on TV liked to say. I still tuned into the
analysts on the Nightly Business Report but no
longer as a mindless fool to blindly swallow every
word uttered by these people as if they were
privy to info no one else had and if they were why
would they share it with me. Bill O’Neil was fond
of saying: the market is a Contrary Animal. That
observation could be interpreted in many ways
and one of them was to discount everything being
said by the market guru TV types on the Nightly
Business Report.

Into July. There was more action, mostly good
and even great. I wont bother with the details.
The details were: in 10 weeks on an investment
of $18,360 I was up 16.4% equals $3,011. My
star was Decker—pushing 21% and Huron
consulting that I bought off the sale of Blue Nile
was on a tear—up 8 points in 3 weeks equals
12.2%.

On July 14 the Dow topped 14,000--a new all
time high. Now what? On to 15,000? That would
be nice. Or we could go backwards, way
backwards, way way backwards—not so
nice. We were in a bull market, entering its 5th
year, to be followed by a bear market, as sure as
night follows day and when that occurred, as I
have said, only Jesus knows—maybe tomorrow

The business news tends to focus on extremes.
The business news is just another form of
journalism and the function of journalism is to fire
you up—for good or bad—and if its for bad so
much the better. Nothing will do that stock
market wise like signs of a precipitous plunge
into the toilet.

The toilet loomed. The toilet had been looming for
some time. Its always something—as O’Neil likes
to say tulips in 1620, Florida real estate in 1929,
the dot com bloodbath of 2002 and now in 2007 it
was housing. 8 months previous in nov of 2006 9
out of 10 of the market guru types on TV had all
agreed: the slide in housing was over. A bottom
had been reached. Dont ask why but--they were
wrong. The bottom hadnt been reached, not even
close and now these massive foreclosures were
occurring due to something called a sub-prime
mortgage to create turmoil in the banking/finance
sector and there was an urgency to the
mutterings among these types that didnt qualify
as panic but close enough.

The new buzz words were the housing “woes”
precipitating a mortgage “crises” leading to a
“credit crunch” in the impenetrable world of
banking/finance.

These were the buzz words. Its the buzz words
that precipitate a crises of their own to create a
climate of fear to induce a plunging morale and at
some point the panic button is pushed.

Was I worried? Yes and no. I never worried until
the analysts told me not to worry and then I
worried big time.

Tues July 23. The Dow opened at 13,800. climbed
to 13,980 and then, on more bad news from the
housing sector, dropped 310 pts to 13670 and
closed near the low for the day on high volume.
That is a bad sign--to take a big hit and close near
the low for the day on large volume.

On Wednesday there was a bit of rally but volume
was weak. There was no conviction.

On to Thursday--the 26th. The Dow fell 185 pts
equals 1.35 %. My IBD stocks were down 3.2%.
Investing the IBD way has a downside. There is a
preference for the small and mid-cap stocks
because thats where the action is—the growth.
They go up fast and come down faster. You can
excuse yourself from the computer to take a piss
and when you return the stock has tanked
another 3%.

As Jesse Livermore was fond of saying: a
punctured balloon does not deflate in an orderly
way.

Friday 27 july. There is another expression: the
shit hitting the fan. On Friday the shit hit the fan.
The DOW tanked 207 pts on high volume. In 4
days the DOW was down 720 pts and I was out
$4500. My IBD stocks which were cruising in the
neighborhood of 14.7% combined had dropped
8.6% equals $1425. At this point I was still
showing a profit--of $1,360. But for how long?

I had two choices: to sell or sit tight. O'Neil in one
of his books mentions a call he made in 1968
when he sold off a large position in Medtronics
because he identified some bad signals the
market was giving off and in the next 14 months
watched the stock gain 640%.

I thought about Jesse Livermore--the boy
plunger. What would Jesse have done? To this
question no reply was forthcoming. But my
mother had an expression: better safe than sorry.
My mind drifted back to 2000 when I watched my
stash get reduced by half. That wasnt going
to happen again.

I sold off--everything. The IBD stocks, my core
portfolio, the mutual funds. I jumped into cash--
100%

And there you have it. Im on the sidelines. Today
as I write its Sept 4 and the Dow continues to
bump along along in the neighborhood of 13,100.
Its up then down then up then down, etc There is
no conviction. Everyone waits. The news
continues to focus on housing and these mortgage
problems--sub-prime mortgage problems. I am
so tired of that mess--the sub-prime mess. We
need some other mess. There is talk, as always,
of action on the Feds part in the form of a rate
cut. Yesterday a friend said: what does the Fed
do? I said: something about interest rates. But
there is another thing--called the business cycle—
that has a mind of its own, also an ass and on the
ass of the business cycle the Fed is but a pimple.

So I wait. Jesse said: you must learn to wait. If
from here the market tanks and our fate is to
endure a repeat of the bloodbath of 2000 I will
have saved a bundle and be hailed as a genius--at
least by myself. Or: the market could rebound
and to go on another tear and I will jump back in
at some point. Then I will have left money on the
table--not a lot, not a little--by making that July
sell call and the perception will transform itself
from genius to pussy. But so be it. I will pick up
my balls and move on.

Some random observations

a stock that declines by 50% must then double to
return to the original price. But if you cut your
losses at 8% the next stock you buy need only
advance 8.1% for you to recover your money.

To sell or not to sell a stock. Look at it this way: if
you didnt own the stock and the stock was
tanking—would you buy it?

We are all heroes during a bull market. Its who
loses the least during a downturn that separates
the men from the boys.

Tips: Jesse Livermore said: promise never to give
me a tip and I promise never to give you a tip

Tips (continued): I had a friend who walked her
dog around the block every day at 3 o’clock on
the dot and on the same block lived a guy who
walked his dog around the block every day at 3 o
clock in the opposite direction and when they met
he gave her a stock tip. I leave it for you to figure
what happened to her money.

The stocks that participate in a market rebound
are generally not the stocks that disappeared into
the toilet during the decline.

The long term investor. There is nothing wrong
with this one. Warren Buffet has become the
world second richest man via this investment
style. But there is only one Warren Buffet and
need I remind you of John Maynard Keynes who
said: "in the long term we are all dead".

The market is a contrary animal. The day the
CEO of a company in whose stock you hold a
large position announces the building of new
headquarters on a prime chunk of Manhattan real
estate is the day you must consider selling the
stock.

Its not a bad idea to pass on the lower priced
stocks--say $15 and under. They are low for a
reason.

The greatest investor of all time, hands down, is
Jesus and the reason is: he is the only one who
knows what is going to happen tomorrow.

william o'neil

How I got interested in the market I have written
about elsewhere--go to me and the market
The culprit was my mother—who was fond of
referring to a popular quote: its the only way for
poor people to make money.

The year was 1994, following the plunging of my
business into the toilet and I took a year off to
ponder my next move and I started fooling around in
the market—to read some books and magazines
and the business section of the Times and watching
Louis Rukyser on TV and so forth and in this way I
began to acquire some of the lingo, the lingo of
accounting—pithy expressions such as accumulation/
distribution, relative price strength, return on equity,
etc.

I could read the tables and rattle off the names and
symbols of the 30 stocks that make up the DOW and
dividend yields and price/earnings ratios, etc.

We were locked into a roaring bull market with
everyone in a delirious state and it was possible to
enter Denny’s and sit down to order a cheeseburger
and the waitress says: Im thinking it might be time
to rotate into the cyclicals.

Lets move ahead a few years—6 years. The market
moves in cycles as we know, as certain as night
follows day and the storm an interval of splendid
weather.

The storm was about to begin and the first casualty
was my Lucent stock—my baby, my retirement
stock, that split twice in 6 months and continued to
climb and was now at 70

It got hit hard—to take a drop of 20 points in one
day from 70 to 50. When I recovered from the
shock of this one I took immediate action. I bought
another 50 shares. I averaged down. It seems a
reasonable thing to do. Here you have a good
company, even a great company (Bell Labs for
Christs Sake!) that is bound to recover and when it
does you can recoup your losses more quickly, etc,
etc.

Thats the idea. Its a popular strategy among brokers
and mutual fund Companies whose services are not
being retained for them to advise you of a jump into
cash at 5%.

The plunge continued, Lucent-wise and three weeks
later was at 20. I bought another 100 shares. In my
mind I said: it cant go lower But a stock can always
go lower. It can go to zero. And Lucent tried. It went
to 2. Meanwhile on its way from 20 to 2 it had to
pass 10 where it briefly paused in case I preferred
to snap up another 200 shares which I did.

Lucent wasnt the only stock to participate in the
bloodbath. I also had ATT, Dell, Charles Schwab, and
a mutual fund heavy in the tech and internet stocks.
It was a nightmare.

Time passed. I took a sabbatical from the market. I
needed to recover from the carnage—to restore
some equilibrium and a sense of perspective. I had
friends who endured a similar fate and the effect was
so traumatic the word “market” was incapable of
being formed upon their lips except to say: never
again.

I didnt do that. I still believed in the market. You
must take the bad with the good. Money is made by
taking risks. Was it the markets fault I lost half my
stash?

I read a book—Reminiscences of a Stock Speculator
by Edwin Lefevre. This is one of the classics of stock
market literature, first published in 1933 and never
out of print since and the reason is: its fun to read.

The book is fiction, or poses as such, but doesnt
stray too far from the truth--the story of Jesse
Livermore--a legendary figure on Wall Street during
the early years of the century and on into the 20’s.

In the book he is called Larry Livingston

Livermore had a nickname—“The Boy Plunger”. He
earned this name by his investing style—to gamble
everything on a single play. He was born in 1877 and
was a millionaire at 21. He never finished high
school. He dropped out at 15 and went to work for a
broker—writing quotes on a chalkboard as they
came off the ticker. The job suited him. He had a
gift—and a nice gift to have—to look at a set of
figures that occur over a period of time in the
financial statements—and rise or fall of the stock--of
a company and to see in these figures a pattern or
rhythm that suggested a future move—up or down.
Later, when he graduated from working the board at
the brokers office and began to invest on his own, at
age 18, he cultivated a preference for going short—
to sell into the uptrend that precedes the downtrend--
a bear market. That accounts for his other
nickname. He had two: he was “The Boy Plunger”
and “The Bear Of Wall Street”. It was during the
great crash of ‘29 that he went short and spared
himself the fate of many colleagues—jumping out
the office window or a bullet to the head. Instead
he made $100,000,000.

I said this was a book that was fun to read. JL was a
monkey with a checkbook type and every fortune
made was a fortune to be pissed away—on three
things: women, houses, yachts. Following his score
during the crash he was hit by a succession of bad
investments, bad loans, bad relationships and went
broke for the fourth and final time. In 1940 he killed
himself.

Livermores investment style can be boiled down to a
single sentence: dont fight the market. Another way
of putting it is: the market is always right.

The market goes in 3 directions: up, down,
sideways. If its going up—you buy, down and you
sell and sideways you wait. Remember my Lucent—
the falling knife? What did I do? I did the worst
possible thing: I bought into a downtrend. I threw
good money after bad.

There is something else to be learned from the
Lefevre book. The market doesnt change.
Companies change, ways of doing business change,
countries come and go, but the forces that drive the
market, and there are only 2—greed and fear—
never change—as true today as in the days of Jesse
Livermore—the boy plunger.

I read another book—Making Money in Stocks by
William O’Neil. I had read the O’Neil book before and
was impressed by something—that it was written
with a certain amount of common sense—always a
good concept to apply to the subject of money.

O’Neil—who is still with us--is a Harvard grad and
from there it was on to Wall St where he
demonstrated a gift for stock analysis, put together
a small investment company and was a millionaire at
age 30. Instead of a yacht he bought a seat on
the New York Stock Exchange—the youngest person
to do so.

O’Neil knew all about Jesse Livermore and the
investing style he eventually arrived at duplicates
the Livermore method practically point for point.
These are the points.

1: to cut your losses. This is the cardinal rule.
Warren Buffet said: there are 2 rules in investing.
Rule #1: cut your losses. Rule #2: don’t forget rule
#1. For O’Neil if the stock drops 8% below the point
at which it was bought it must be sold—no
exceptions. And if you do it at 7% thats even better.

Why is it so hard to sell a stock? Because if the stock
is making money we want for it to make more
money and if the stock is losing money we insist on
waiting for a recovery that may never come.

Remember my Lucent? Why did I average down, not
once, not twice but 3 times. I could have saved
myself $16,000 on that one stock. But I did none of
this because I wasnt operating according to the
imprecations of common sense but to the premise
of another system called: praying to Jesus.

O’Neil makes a simple analogy. If you were in the
dress business and you sold dresses in two colors—
red and yellow and the red dresses were flying out
the door but you havent sold a yellow dress in six
months what would you do—buy more yellow
dresses?

And it was Livermore who said it over and over. It
was his mantra: keep your emotions out of the stock
market. Emotion will kill you every time.

2: Dont fight the market. The market is always
right. Livermore put it this way: to follow the path
of least resistance. For Livermore there were no bull
or bear markets. These were symbols--of profit and
loss--and attached to them a powerful emotional tug
that clouded the investment process. Instead he
used the words uptrend or downtrend. You buy into
an uptrend and sell during a downtrend.

3: buy good companies There are some good
companies out there and many stinkers as well and
it behooves you to choose the good ones—the cream
of the crop—a solid company under good
management making a new high with strong
profit margins, accelerating earnings, solid return on
equity and so forth. The cost of a stock relates not to
the price of the stock but the relationship of price to
earnings——the price to earnings ratio. It is the PE
that generally qualifies a stock as expensive or
selling at a discount. But O’Neil rejects this concept.
In his view there are no bargains in the stock
market. In the stock market as in every other
market—you get what you pay for. Every company
is selling for exactly what it is worth at that time. O’
Neils point is: momentum. He looks for companies
making new highs with sold fundamentals and he
analyzes the charts and sometimes what he sees is a
company that still has a long way to go. At one point
early in the companies history Cisco sported a PE of
530. That is like visiting the doctor and being told
your blood pressure is too high by a factor of 40. But
in this case the patient was fine and 9 years later,
accounting for splits and the compounding of
dividends, Cisco earned a 75,000% return for
investors (that is not a typo).

4: Chart analysis. Livermore didnt use charts. He
scribbled figures in rows on columns and each
column represented some tendency of the stock to
react in a particular way. But the idea was the same:
to identify patterns in the movement of a stock that
suggested buy or sell points.

For example: