STREET DOGS

From an article at the Motley Fool:

In April 1906, Jesse Livermore was heavily short Union Pacific, a market bellwether in a roaring bull market, when news came of the great San Francisco earthquake. The entire city had been levelled and the tracks of Union Pacific, which were heavily spread around the area, were ripped apart.

Despite the news of the earthquake, the entire stock market remained strong, giving up only a few points at first and then rebounding. Union Pacific stock just would not go down. Livermore’s associates urged him to cover. “The market never lies,” said the one. To which Livermore replied, “Yes, the market never lies, but it doesn’t always tell the truth on an instant, either.”

Livermore knew that the bulls who had been accumulating huge holdings for months weren’t going to be easily dislodged. Still, he held on. Sticking to the hunch — and he had acted purely on a hunch —

that had impelled him to go short Union Pacific in the first place.

Sure enough, as the full scope of the disaster became apparent, the market began to slide. At first it was a measured, orderly retreat without any indication of panic. Then it utterly gave way into the full-fledged crash that Livermore had been expecting.

The moral of the story: we all fight the internal battle between what our “gut” is telling us and what our analytical skills are telling us. We also battle with what we want to happen based on the positions we’re holding. (This last is deadly.)

An experienced trader should take a lesson from Livermore and allow intuition to play a part in the decision-making process when trading, but not all of us have Livermore’s uncanny intuition.

It’s a very fine line between what our gut tells us, what our brain says, and what our emotions leave us hoping for.

/Michel Pireu (pireum@streetdogs.co.za)