Jesse Livermore: Lessons From A Legendary Trader

Born in 1877, Jesse Livermore is one of the greatest traders that few people know about. While a book on his life written by Edwin Lefèvre, “Reminiscences of a Stock Operator” (1923), is highly regarded as a must-read for all traders, it deserves more than a passing recommendation. Livermore, who is the author of “How to Trade in Stocks”(1940), was one of the greatest traders of all time. At his peak in 1929, Jesse Livermore was worth $100 million, which in today’s dollars roughly equates to $1.5-13 billion, depending on the index used.

The enormity of his success becomes even more staggering when considering that he traded on his own, using his own funds, his own system, and not trading anyone else’s capital in conjunction. There is no question that times have changed since Mr. Livermore traded stocks and commodities. Markets were thinly traded, compared to today, and the moves volatile. Jesse speaks of sliding major stocks multiple points with the purchase or sale of 1,000 shares. And yet, despite the difference in the markets, such automation increased liquidity, technology, regulation and a host of other factors that still drive the markets today.

The Test of Time
Given that this trader’s rules still apply, and the price patterns he looked for are still very relevant today, we will look at a summary of the patterns Jesse traded, as well his timing indicators and trading rules.

Read more: Jesse Livermore: Lessons From A Legendary Trader http://www.investopedia.com/articles/trading/09/legendary-trader-jesse-livermore.asp#ixzz3k117aEE7 
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Hindsight Bias Continued

In hindsight things are obvious that were not obvious from the outset; one is able to evaluate past choices more clearly than at the time of the choice.

Perfect understanding of  events only after they have happened – The twenty twenty hindsight Bias.

Taking into consideration the Economy or gaining the perspective on the same; elaborating on the Perfect Economy.

The perfect economic system

REPLYThu 20 Feb, 2014 01:09 pm
What do you guys think the perfect economic system would look like?

Personally, I think the world should be the following:
1) consolidate into one global exchange (stock markets etc)
2) one global government, 
3) one global set of constitutions, including legislation that governs every moving part in the economy.
4) globalized intelligence/skill/aptitude/potentiality tests that determine which jobs an individual would be best suited for. I.E usually you end up in a job that best suits your strengths, and place these individuals on a track plan to be the best at these things. 
5) Limit maximum potential wealth so that more demanding jobs are higher paying, but not so much so that it exploits lower demanding jobs that are equally important to the sustenance of the global economy. For example, in mcdonalds, someone needs to make the burger. If you lose all your burger flippers, you’re suddenly losing out on efficiency. In a competitive market, this leads to loss of revenue.

On a side note:

I also think that all drug addicts and homeless( those non working/ those mentally unstable people should be placed outside of the city and be rehabilitated to be reintegrated back into society. They will be provided with medical care, housing, food all at no cost. In exchange, they are required to do minimal hours of labour for sustenance of that community and are paid a low wage. Over time, the hope is that, the minimal labour resocializes them to want to work in areas they want. In terms of drug addicts, provide these individuals with gradual diminishing doses of w.e their poison be in exchange for labour. In that sense, the belief is that, this weens the body to be not dependent on it.

Convicts should be turned into a global workforce that does the shitty of the shitty jobs. That way they are earning their keep. In canada, the average prisoner costs the system about $100,000. They shouldn’t be rewarded for going to jail. One prisoner is equivalent to hiring two employees in another field. Those convicts convicted of murder/rape/etc with intent, should be put into the hardest of labour jobs. Or just house all these people into one large cell and let them police themselves. Why should convicts go into prison skinny and come out jacked ? why should these people who’ve disregarded other people’s rights be given rights? Humanity in this sense is a joke. The old adage an eye for an eye and the world is blind, is moot here. You rid the world of killers and rapists, and you’ll likely have less people willing to do those things. 

URL: http://able2know.org/topic/235736-1

 

Hindsight Bias – continued

Hindsight bias, also known as the knew-it-all-along effect or creeping determinism, is the inclination, after an event has occurred, to see the event as having been predictable, despite there having been little or no objective basis for predicting it.

Abstract

Traditional accounts of “hindsight bias” inadequately distinguish “primary” hindsight bias from both “secondary” and “tertiary” hindsight bias. A subject exhibits primary bias when she assigns a higher ex ante probability estimate to actual outcomes, secondary bias when she believes that she herself would have made the same estimate of the prior probability of an event before receiving outcome information as she made after receiving it, and tertiary bias when she believes that third parties lacking outcome information were unreasonable if they did not make the same prior probability judgments that subjects now possessing such information make.

In our experiments, we find that when people can readily calculate the actual ex ante probability of an outcome, they don’t reassess that probability when told what outcomes actually occurred. They reassess only in situations in which they are unable to assess prior probabilities or when given information that the outcome was not simply a result of sampling or chance but the result of an imperceptible feature of the initial situation. Observed primary bias may therefore often be rational.

Hindsight Bias – Behavioral Finance – Confirmation and Hindsight Bias

Confirmation Bias
It can be difficult to encounter something or someone without having a preconceived opinion. This first impression can be hard to shake because people also tend to selectively filter and pay more attention to information that supports their opinions, while ignoring or rationalizing the rest. This type of selective thinking is often referred to as the confirmation bias.

In investing, the confirmation bias suggests that an investor would be more likely to look for information that supports his or her original idea about an investment rather than seek out information that contradicts it. As a result, this bias can often result in faulty decision making because one-sided information tends to skew an investor’s frame of reference, leaving them with an incomplete picture of the situation.

Consider, for example, an investor that hears about a hot stock from an unverified source and is intrigued by the potential returns. That investor might choose to research the stock in order to “prove” its touted potential is real.

What ends up happening is that the investor finds all sorts of green flags about the investment (such as growing cash flow or a low debt/equity ratio), while glossing over financially disastrous red flags, such as loss of critical customers or dwindling markets.
Hindsight Bias
Another common perception bias is hindsight bias, which tends to occur in situations where a person believes (after the fact) that the onset of some past event was predictable and completely obvious, whereas in fact, the event could not have been reasonably predicted.

Many events seem obvious in hindsight. Psychologists attribute hindsight bias to our innate need to find order in the world by creating explanations that allow us to believe that events are predictable. While this sense of curiosity is useful in many cases (take science, for example), finding erroneous links between the cause and effect of an event may result in incorrect oversimplifications.

For example, many people now claim that signs of the technology bubble of the late 1990s and early 2000s (or any bubble from history, such as the Tulip bubble from the 1630s or the SouthSea bubble of 1711) were very obvious. This is a clear example of hindsight bias: If the formation of a bubble had been obvious at the time, it probably wouldn’t have escalated and eventually burst. (To learn more, read The Greatest Market Crashes.)

For investors and other participants in the financial world, the hindsight bias is a cause for one of the most potentially dangerous mindsets that an investor or trader can have: overconfidence. In this case, overconfidence refers to investors’ or traders’ unfounded belief that they possess superior stock-picking abilities.

Avoiding Confirmation Bias
Confirmation bias represents a tendency for us to focus on information that confirms some pre-existing thought. Part of the problem with confirmation bias is that being aware of it isn’t good enough to prevent you from doing it. One solution to overcoming this bias would be finding someone to act as a “dissenting voice of reason”. That way you’ll be confronted with a contrary viewpoint to examine.

source : http://www.investopedia.com

Price to Earning Ratio P/E Ratio

  1. A valuation ratio of a company’s current share price compared to its per-share earnings. For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).

Demystified: How to use PE ratio to value a stock During bear markets, stocks generally trade at lower PE multiples and during bull markets at higher levels in relation to historical values.

The PE ratio is probably the most common measure to help investors compare how cheap or expensive a firm’s shares are, as stock prices, for lack of a better term, are arbitrary. The trailing PE is just the price per share of the stock divided by the annual net diluted earnings per share the firm generated in its last fiscal year. The forward PE is the price per share of the stock divided by next fiscal year’s annual net diluted earnings per share of the firm. It’s only when investors compare a firm’s share price to its annual net diluted earnings per share that they can get a sense for whether a company’s shares are expensive (overvalued, overpriced) or cheap (undervalued, underpriced). The higher the PE, the more expensive the company.