Fifteen investment lessons from Jesse Livermore and John Paulson

The post below comes courtesy of my friend Blain Reinkensmeyer who runs the very popular Stock Trading To Go blog.

To be a great trader you must be disciplined. Following a set of rules can make the difference between successful story telling versus ruminating on last week’s losses.

Jesse Livermore, one of the best traders of all time, and John Paulson, one of the best traders of the last few years, both have a set of rules they follow religiously. Their success serves as your opportunity to enhance your investment savviness.

Below are the rules of both Livermore and Paulson alongside a bit more background information on who they are (hat tip Minyanville and WSJ).

Jesse Livermore, one of the greatest investors of all time, has been featured in many investment books. The most popular was “Reminiscences of a Stock Operator” by Edwin Lefevre in 1923. During the course of his life he made and lost millions, going broke several times before committing suicide in 1940. These are his seven greatest trading lessons:

1.     Cut your losses quickly.

2.     Confirm your judgments before going all in.

3.     Watch leading stocks for the best action.

4.     Let profits ride until price action dictates otherwise.

5.     Buy all-time new highs.

6.     Use pivot points to determine trends.

7.     Control your emotions.

For those investors wondering whether they are emotional, we suggest reading our post “50 Ways You Know You Are An Emotional Investor“.

John Paulson, a hedge-fund manager in New York, led his firm to make $20 billion in profits between 2007 and early 2009. By betting heavily against first the housing market and then later financial stocks, his firm made a killing. Paulson’s success netted him a paycheck of some $4 billion, or more than $10 million a day. His funds during this time had returns of several hundred per cent.

Here are his eight investment lessons:

1.     Don’t rely on experts, be skeptical.

2.     Always have an exit strategy.

3.     Debt markets can do a better job predicting problems than stock markets.

4.     Always educate yourself on new investment vehicles.

5.     Don’t underestimate insurance (such as put options).

6.     Experience counts.

7.     Don’t fall in love with any single investment, keep emotions aside.

8.     Don’t risk too much on any single trade, diversify risk.

By applying any of the above fifteen lessons you can become a better trader. Success takes time, and these rules will lead you in the right direction.

For further reading, look through our stock education archives that house more than 100 articles on a variety of investment topics.

Source: StockTradingToGo, November 18, 2009.

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