Book Review: How I Trade and Invest in Stocks and Bonds by Richard Wyckoff
I recently read How I Trade and Invest in Stocks and Bonds by Richard Wyckoff. This book can currently be had for the princely sum of $0.99 via Amazon Kindle.
Wyckoff doesn’t get the same recognition as other guys from the era like Livermore, but he was a big deal back then. He was a trader, investor, writer of books, and he published the widely circulated Magazine of Wall Street which, as best I can tell having not read them, covered a lot of ground including strategies for investing and trading as well as interviews with prominent people of the era.
Like a lot of older books, this one shows that not much changes as it relates to trading, investing, markets, etc. If you ever find yourself thinking you’ve come up with something new in terms of an investment strategy, I suggest heading to the library and reading a lot of old books as, if you’re like me, you will probably discover there isn’t much new in trading, investing, etc. As Livermore said, “Speculation is as old as the hills.”
Here are some of my favorite excerpts on trading from the book. Anything in caps was capitalized by Wyckoff.
…investors were the most satisfactory clients because they kept coming around year after year, while those who speculated disappeared one after the other. As for the latter, I noticed a very marked tendency to accept a small profit and stand for a big loss.
He [successful speculator client] stuck out from the rest because of his fixed policy of cutting his losses short (here was that same principle bobbing up again). He never gave an order unless it was accompanied by a two-point stop.
While I was with that firm the panic of 1893 occurred. General Electric declined from 114 to 20, and American Cordage crashed down from 140 to reorganization levels. This experience showed me what risks people ran who made speculative commitments without limiting their possible losses or watching them closely and getting out when they found they were wrong.
In and out of many brokerage offices there hustled wild-eyed individuals with charts under their arms, who would hold forth at length on double tops and bottoms and show you just where and how and why the “big fellows” were doing this or that with their favorite stocks. Yet none of them seemed to have much money. Possibly it was because they followed a strict set of rules and did not use much intelligence.
I was surprised to find that the market itself did give frequent evidence of its future course and began to investigate along those lines. Having secured a new angle on the market I began myself to try to judge it from its own action, principally with regard to the general trend…THE MAIN FACTOR IS THE TREND. If you work in harmony with the trend of the market, your chances for success are three or four times what they would be if you buck the trend.
As demand arose from many quarters for information on the subject of judging the market from its own action, I decided to make a specialty of this subject, study it out and write about it as I went along. The outcome of this was the book, “Studies in Tape Reading,” which has since been reprinted in many editions. And the principles therein stated have not changed through all the vicissitudes of the market during the dozen years which have elapsed since the book first appeared in serial form in The Magazine of Wall Street. Many people will say it is one thing to write about a difficult proposition like the security market, and quite another to put your ideas into practical operation, that is, to make money out of them. Suffice it to say that, since I wrote that book, I have made a very considerable amount of money for myself and in the aggregate millions of dollars for my subscribers by applying the methods therein set forth, viz., judging from the future course of the market and of individual securities by their own action.
In “Studies in Tape Reading” I suggested trading for daily profits with the object of making a fractional profit over losses, expenses, commissions, etc., on the average, per day. But eventually I found that I could get much better results by operating for the five, ten and twenty point swings. Furthermore, I learned that to operate in the latter way was to lessen the nervous strain occasioned by watching the tape every minute of the day and carrying all the quotations of the leading active stocks and their previous action in my head…the real money was to be made in the important swings running thirty to sixty days on the average…
As Charles Hayden once said to me, “The day to buy is not the day to sell.”
RISK SHOULD ALMOST INVARIABLY BE LIMITED. The best way to limit your risk is to form a habit of placing two-or three-point stops behind any trade which is made for the purpose of deriving a profit from the fluctuations.
Subscribers to The Magazine frequently write me and explain that they are far removed from the market and ask whether they had not better come to New York or go to Chicago so as to be in “close touch with things.” Very often this “closeness” is a handicap. One’s real studying is done away from the market, not in a broker’s office. The best work I ever did in judging the market was when I devoted one hour a day in the middle of each session. I did not come to Wall Street. I had no news ticker. I seldom read the news items but judged solely from the action of the market itself; hence I was not influenced by any of the rumors, gossip, information or misinformation with which the Street is deluged day after day. The out-of-town investor is therefore not under as much of a handicap as he might suppose.
In order to make a profit, a stock must move. A great deal of money and many opportunities are lost by traders who keep themselves tied up in stocks which are sluggish in their action.
No one can avoid having his capital tied up at times in mediums which are not satisfactory. But there should be no hesitation about switching, even though it necessitates the taking of a loss in your present holdings. “Are there any other issues which will work for me more profitably and in a shorter time than these? I cannot afford to let money sleep, nor have it work slowly. I am like a merchant: I must turn my money over as often as I can, so that the average yearly return will be at its maximum.” In making one’s capital do the greatest amount of work in the shortest length of time, it is necessary to be forever on the lookout for better opportunities than those which you now have.
This reminds me of a very clever trading rule followed by Jesse Livermore. Unless a stock shows him a profit within two or three days after he buys or sells it short, he closes the trade, on the ground that his judgment was wrong as to the immediate action of the stock, and he cannot afford to be tied up.
Everyone should occasionally sit down and take account of stock—not securities, but his own ability, judgment, and what is most important, results thus far obtained. If he finds that the past few months or years have been unsatisfactory and unprofitable, judging from the amount of time, thought, study, and capital employed, he should suspend operations until he ascertains the cause; then he should set about to cure it.
In the present generation Jesse Livermore’s operations are the most spectacular, but he is not by any means always right. Like all other traders, big or little, he makes serious mistakes at times.
…no one can stay in the security market for a great many years without growing used to punishment.
IF ONE IS NOT ADAPTED TO TRADING HE SHOULD PROVE IT TO HIS OWN SATISFACTION AND THEN ABANDON THE BUSINESS. He should then attempt to become an intelligent and successful investor. Failing of this, he should turn to savings banks and mortgages or other non-fluctuating mediums for the investment of his funds.
It is true that a few large traders make spectacular profits at times. But their losses are usually in proportion, and these you never hear of.
...[I] have met thousands and thousands of people who were endeavoring to make money in speculation and regret to say that very few are really qualified to become successful traders of any importance. But there are hundreds of thousands of successful investors...
In trading I get the best results by watching carefully for an important turning point, limiting my risk, and trading for the ten or twenty point swings.
[I] used to wait for U.S. Steel to get into position where I expected such a sharp upward or downward move and then I would buy (or sell) 300 shares, placing a three point stop order for protection. Every two points up I would buy another hundred shares, protecting each additional lot with a three-point stop.
Before I was really successful, I had to practically rebuild my own trading character. One of my greatest difficulties was impatience.
The “secrets” to successful trading are perhaps as old as the hills as well.
One final point of interest, Wyckoff said:
You don’t have to risk real money when you are learning, and I always advocate two or three years—not two or three months [of study]…in my case I did not begin to invest until eight years after I started to study, and I did not commence trading for six years after that…
In short, Wyckoff didn’t make his first trade until he had been in the business for 14 years! And he clearly believes people should take a few years to really study and learn before acting. Compare that to the reality that most people don’t study at all and start trading as soon as they possibly can. Then compare their results to Wyckoff’s results.