Lessons from the Greatest Stock Traders of All Time

These traders discovered, through their own mistakes and experiences, some common conclusions in the basic strategies and principles that eventually led them to succeed beyond most others in the stock market. By measuring similarities with the different periods of the market, one very important point concerning the stock market may be demonstrated. As the market goes either up or down year after year and business cycle after business cycle, the elements that drive it never really change that much. Why? Because human nature rarely changes. And even though millions of people are involved in the market every day, there are only a handful of human traits that play in the market no matter what day, year, or decade it is. Those human traits include fear, greed, hope, and ignorance. And human nature has a huge impact on the market. After all, the market is consistently comprised of opinions of many different people and market professionals.

A famous observation from Jesse Livermore was, "There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again and again and again. This is because human nature does not change, and it is human emotion that always gets in the way of human intelligence."

Jesse Livermore—The reclusive, private genius whose revolutionary trading strategies are still being used today. Livermore attained incredible wealth in the stock market.

Most of Livermore's strategies and rules were based on thinking differently about the market than most others did in his day. His main strategies could be summarized by the following:

• Understand the general trend of the market. You must be in tune with what the market is currently doing and be observant of it at all times. Watch and move with the market; don't fight against it.

• Buy stocks hitting new highs in price as they pass through certain resistance areas. Use a probing strategy to test your moves and pyramid additional buys on increases in price.

• Cut your losses short: Protect yourself from a wrong decision at no more than a 10-percent loss. Sell drifting stocks, as their inaction is an opportunity cost.

• Let your profits ride, as your strongest stocks keep moving up or down (if in short positions). Be patient with stocks that are acting correctly. The big money is made by sitting tight.

• Leading stocks in leading and strong industries is where your concentration should be.

• Stick with the facts, and understand the fundamentals.

• Avoid cheap stocks. The big money is made in the big swings, and they usually don't come from cheap stocks.

Bernard Baruch—The intelligent, sophisticated financier whose trading success earned him great riches and entry into successful financial dealings.

He believed that it doesn't really matter how high your IQ might be or what status you might have attained in some other profession, the market reacts indifferently to participants and doesn't really care who you might be as an individual.

His views on determining the reasons why so many people lose money in the market is that they think they can make money by not working for it. He believed that most people view the market as the place where the miracle of great and quick riches can be performed with little effort. However, he proved that the market is not a place to expect riches without the required sacrifice that the market demands.

Baruch believed that you simply must get the facts of a situation before you act and commit hard-earned money to a transaction.

Baruch did not believe that one needed to diversify too much, but that it was better to have a few stocks and to watch them carefully. He thought that one could simply not know all the relevant facts concerning too many stocks at one time. Focus was also a key skill he discovered that led to his success in the market.

He found through his years of trading that the two main mistakes that contributed to his early losses were the same mistakes he believed that most investors make, which were:

• They know too little about the company's management, earnings, prospects, and possibility for future growth.

• They tend to trade beyond their financial capital capacity.

Baruch was more of a fundamentalist type of trader than a technical trader. In evaluating the fundamentals and general qualities of a company, he would look at three main areas:

• The real assets of the company. Its cash and properties.

• That it must perform or produce something that is needed.

• That it must have good management.

 Gerald M. Loeb—The financial writer, stockbroker, and skittish trader who made millions for more than half a century, "battling" the market by staying disciplined to his strict trading rules. Work was a requirement to succeed in trading. He believed that to do well in short term trading, it took someone's full-time attention and dedication.

The best traits for successful speculation are knowledge, experience, and judgment. As far as money management rules, Loeb would follow these, which he found to be sound over his many years in the market.

• Strive for ultimate gains of 1 to 2 times your capital in 6 to 18 months.

• Professionals risk a maximum of 20 percent of their capital on one issue.

• It is more advantageous to invest in an advancing issue at seemingly higher prices than to attempt to discover when the bottom will turn up for a particular issue. To the best traders "the most expensive is actually the cheapest."

Loeb thought that the age and extent of an advance was an important element and factor in his sell decisions. Some sell guidelines he adhered to when he was in a bull market were:

• Sell when you see a bear market ahead (in Bear       Markets he would go to 100-percent cash)

• Sell when you see trouble for your particular particular particular company

• Sell when time has offered a far better buy (rid yourself of laggards in your portfolio and move on to new leaders)

He always believed that if your stock stops going up and begins to decline, you should always sell your worst shares first and keep your best performers in your portfolio.

Some other sell signals he would look for was when the stock rose sharply on big volume but ended the day at no gain or at a loss. This indicated a reversal of the earlier strength in the stock and signaled a possible waning of the strong demand for the stock.

He identified three main reasons why many tend to lose money in the market:

• Paid too much (not paying attention to the technical side)

• Did not recognize a bad balance sheet (loss of focus of the fundamentals)

• Misled by inaccurate earnings estimates (another fundamental item)

Another possible reason for selling is if a stock is going up rapidly and becomes overvalued and splits because of its high price. This would be a strong signal for him, as he noticed many times that this action would lead to price declines.