The danger of followint tips in the stock markets

Don not pay attention to stock market tips, not even to mine.

I am going to talk about one of the chapters of the book “Reminiscences of a Stock Operator” about the life of legendary trader Jesse Livermore.

Livermore was on a holiday with some good friend. He had taken a deserved rest from his frenzied activity in the New York Stock Exchange. But Livermore never rested; he just could not resist the temptation.

Those days he was going for walks on the beach with a friend, but they could not help themselves and would end up in a local branch of their own broker.

Livermore narrated how the market was very bullish those days. He did not know why, but he could not keep an eye of a particular stock those days: Union Pacific.

His instinct told him that Union Pacific rise was signaling a much higher rise in the future. That is what the tape and his years of experience reading it told him.

Trading own money

Livermore used to say that most times he trusted his hunch, he was right. Also, when he did the opposite he would normally end up regretting.

It does not mean that traders should trade emotionally, but there are times, after many years of experience, when you just “know” that there is something in the making.

Sometimes you do not need indicators or news or whatever. You just see the way the price moves, and you know that something is going to happen.

The fact is that Livermore could not avoid buying a huge amount of Union Pacific stocks. The tape told him the stock was bullish.

After that, he received a call from the brokerage´s manager in New York telling him if he was crazy; that how could he be long on that stock. He (the manager) knew, from good sources that insiders and big money was selling the stock like crazy. It meant that after a few days, the stock should collapse and Livermore would eventually go bust (Livermore used to bet very big).

Today tips stock market

That manager was someone Livermore held in high regard. Livermore told him that he did not see a reason the sell that stock; that the tape was telling him to go long, but the manager insisted so much that Livermore finally sold the assets. And as he believed the manager he did what he was used to: go short on that stock. He followed his friend´s tip.

Well, within a short period there was a Union Pacific announcement of a 10% dividend, and the stock went up in a dramatic way.

Livermore suffered terrible losses and had to cover his shorts with a 40.000 $ loss (a fortune at that time). But he went long again immediately, and even managed to win 40 and 15 thousand $ more.

If he did not pay attention to his friend and manager advice, he would have made a killing.

He told himself that was the last time he followed someone else tip.

The lesson was quite expensive but good.