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Tim Quast
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We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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August 31, 2004

How the Big Pros Won: Lessons from the Greatest Stock Traders of All Time Proven Strategies Active

By Gregory Bresiger

Also in this article

  • How the Big Pros Won: Lessons from the Greatest Stock Traders of All Time Proven Strategies Active

by John Boik

(McGraw Hill, New York, 150 pages) $14.95

Scientists relentlessly use the trial and error method to find out what works and what doesn't. Time and again, things go wrong in experiments. But these failures eventually point them in the right direction. In the end, there is the great irony of triumph: Nothing succeeds like failure.

That is one of the themes of this lively, once-over lightly book. All the great traders briefly profiled here - Jesse Livermore, Bernard Baruch, Nicholas Darvas, Gerald Loeb and William O'Neil - shared one humbling characteristic: They made fortunes, but they also lost fortunes.

This little book's main value may be in its study of the latter. The errors of the great are probably more important than their victories. For example, the author, a private money manager, and former stock trader, notes that many of the greats couldn't resist overdoing their initial successes. They often started venturing into areas they should have avoided.

Writing of Jesse Livermore, the boy plunger who turned heads at a tender age, the author notes he didn't know when to quit, or, at least, when to take a rest.

"He kept listening to others and their so-called stock tips. He also kept trading too much." (page 5). Livermore, who made a fortune in stocks when he was very young, couldn't avoid jumping into commodities. His move into cotton futures soon wiped out even his considerable fortune. Livermore, who significantly enough died broke, violated his own loss control rules and losing positions by letting his emotions rule.

"As he tried to get his money back, he lost even more in desperate trading." (page 7). Yet Livermore, when he stuck to his disciplined strategies of riding gains - pyramiding and identifying opportunities to short in a weak market - was brilliant. He made so much money in the stock market crash of 1929 that many people believed he was the one personally responsible for their misfortunes and made threats on his life.

What makes these trading mini-biographies interesting is the common skepticism of these men about themselves and markets. For example, Bernard Baruch, who at the end of his life was proclaimed as an investment genius, a man who was consulted by many presidents, had many of his plans blow up. He made and lost much early in his life. Indeed, he followed the same wayward path at almost the same time as Livermore.

"He (Baruch) made a mistake in 1906 when he entered the commodities market and bought coffee (which he did not know about - his first mistake), and as it started to drop in price he was told to hold on (another mistake - listening to others). He held on and watched it drop," the author writes. (page 44).

Rocky Experience

And despite all Baruch's experience and self-criticism, he came to believe that most investment and trading plans must go awry. I conclude from these annals of rocky experiences, that one must approach trading the way the premier hitters in baseball approach the game.