Individual Trading Psychology

Financial markets are full of surprises, letting some get enormously rich while others (who are in majority unfortunately) lose all their capitals. But being patient and striving to perfect their skills many of those who lost in the very beginning still have their chance to become lucky millionaires someday. On the other hand those who got rich in the beginning thus becoming all too confident and stubbornly righteous may someday turn into complete failures complaining about the injustice of financial markets. The stories of those failures are dull and monotonous and you can read them on any forum dedicated to trading, while the stories of those who succeeded and falling from the top climbed their again without losing their confidence are inspiring. Earning a lot of money dealing in volatility arbitrage is not rocket science. To keep one’s earnings augmenting the capital is a more tricky business. Many great traders and financiers became famous only after they managed to find their way in trading after a series of failures.

Jesse Livermore is an example of such trader. He was a genius of trading who made millions only to lose them and to make them again. The press nicknamed him the Great Bear of Wall Street as his trading had its impact on the market, while the lad even had no secondary education! His trading career began at the age of 14, when a son of a simple farmer mastered a three-year course of math just in a year. Having done so he decided to look for any other trade except farming and left his home. His initial capital amounted to $5 and the clothes he had on. He ran off to come to Boston. The stagecoach he rode stopped in front of a bookmaker’s office. This coincidence gave birth to a great career in trading. The year was 1891 and the bookmaker’s office hired him to write down on the board the quotes cabled from the stock exchange. The office profited from the bets for price changes. The office gained from the losses of the betters. Having a mathematical mind and good memory Jesse noticed the repeating figures and started to record them. Grasping certain regularity in the repetitions Jesse understood that he can forecast changes in the figures sometimes. His first winning bet amounted to $3. Improving his skills he soon managed to become more accurate in his forecasts, achieving great excellence. His abilities made his colleagues call him Boy Plunger and Wonder Boy. Having earned his first capital he repaid $5 to his mother adding $300 for her help in his escape. Soon he became popular all over the city and in a month his bets became banned in every betting office in the city, as he almost never lost in betting. This was unbearable, as bookmakers make their revenue from losing betters. Betting on shares Jesse managed to improve his mathematical skills and to develop his own method of forecasting which was based on technical analysis. As Boston grew too small for him, Jesse went to New York to earn more money on real stock exchange.

He came to New York having $ 2000 in his pocket. He became a stock trader having no idea of real stock trading. With no skills in long-term forecasting he managed to earn his first $ 50 000 by 1906 only to lose the amount for trading on a stock exchange is very different from betting with bookmakers. Ill luck did not break him down. He understood his mistakes and took measures to prepare himself for the next try. He returned to his first employer and started studying new analysis and forecasting methods to discover the news analysis. His inborn abilities, good judgment and persistence help him develop a new strategy within a very short time. He turned back to trading during that same year to recover his losses and to earn much more. His success did not go unnoticed on the stock exchange where he was nicknamed a “Millionaire for a day”.

It did not take much time for the nickname to be justified. Jesse preferred bear-style trading often running down the prices for many assets. In 1907 his professional trading operations caused a crisis on the stock exchange when his bear-style trading made the whole US stock market collapse. The owners of the New York Stock Exchange even had to ask him to suspend his trading operations in order for the stock market to recover. The collapse of the national stock market made Jesse a real millionaire. During the twenties he was the most influential and wealthy trader with an office of his own staffed with six clerks writing the quotes down for him on a large board in absolute silence. He began living on a grand scale, buying expensive cars and yachts and making expensive gifts to his wife and mistresses. He also became a celebrity with te press. He lost his fortune four times and each time he earned even more, getting back triumphantly and repaying all his debts and losses. His career peaked in 1929 when he made a tremendous fortune at the start of the Great Depression by predicting market disruption. In view of this he was declared to be the principal party guilty of the crisis. It was the year when many traders and brokers committed suicide because they went broke, while Jesse could live as if nothing happened.

In the beginning of the thirties Jesse’s career came to an end. He put his entire capital at stake and lost. This time he failed to recover and being prone to depression he locked himself in a hotel room and committed suicide. Having outstanding analytical skills, Jesse Livermore was a great trader, but his risky temperament and ineffective capital management took him off the top more than often. Should he spend a fraction of his analytical skills to control the risks, he could hold Wall Street at bay much longer by his bear-style trading.

Charles Merrill was a quite different type of a successful financier. He wanted to earn money, but he also wanted to open stock markets to anybody who wished to trade. Despite his extraordinary abilities Charles Merrill sometimes felt the need for a piece of advice.

Once he confessed to his doctor that he feels himself like a madman trying to convince people in the coming market disruption, as nobody believes him. All the people see is the growing market and they think it will grow for long. The doctor reassured him by saying that if he thinks himself mad, then the doctor is madder still for he did as Charles told him to do, i.e. he sold all his shares.

The conversation took place in the end of 1928 in an office of a New York psychiatrist who was a customer of Merrill Lynch Investment Company. The psychiatrist’s patient was none other than Charles Merrill, one of the co-owners of the Company, a successful stock trader and financier. He began to doubt his mental health after he became almost the only one who failed to share the excitement about the rapid economic upturn in the USA. At the start of that year he advised his customers and friends to sell the shares at their then current overestimated price. The unprecedented growth of the market caused by the traders going bull was too risky and prone to abrupt disruption. The majority of his customers failed to follow the advice, so he made another attempt to warn his countrymen of the coming danger by making recourse to the words of President Coolidge, a greater authority for the Americans. He offered a retiring President to become a partner to the Company should the President warn the Americans by a broad statement. But the President refused the offer, accusing Merrill of being unreasonably pessimistic. All this made Charles Merrill turn to his psychiatrist.

Reassured by the doctor Merrill stopped his attempts to warn the investors of the future collapse, hastening to sell the stock he owned and leaving only the chain stores and some other companies in his portfolio. Having safely survived the market crash in October 1929 Charles Merrill retired temporarily as the onset of the Great Depression made the stock market practically inoperable. Selling his stock in the right time he had enough means to survive the Depression safely. As his company owned Safeway Stores which was extended and due to Merrill’s talents became the top third national retailer during the Great Depression Charles Merrill returned to the stock exchange triumphantly after the prolonged crisis was over.

Young Charlie helped his father, a rural doctor and the owner of a drugstore to sell drugs. He was tasked with preparing and selling milkshakes. Soon his father noticed the growing popularity of his son’s produce. It turned out that the secret was quite simple, as Charlie added spirit to his milkshakes. Charles Morton Merrill, Charlie’s father was a wise man and instead of punishing his son he made use of his recipe by selling “spirited” milkshakes at a higher price. Having noticed a talent in his son Merrill Senior sent him to college. Due to the lack of money the Merrill family moved around a lot. This resulted in Charlie’s changing many schools and seeing many different people, gaining a lot of experience in life. Back in his native town, Charles graduates from the college and enters the law school of the Michigan University. As Charles lacked the money to pay for his education he failed to get it in full. But during his term at the University he managed to engage a coed whose father owned Patchogue-Plymouth Mills, a small textile facility in New York. Soon he becomes an employee of his future father-in-law. The latter employed the potential son-in-law as a courier, but as soon as Charles began working there came the crisis of 19007, and the company went almost broke. They needed money to save the company, but credit was hardly available at that time. To avoid possible humiliation and refusal the company owner decided to assign the task of getting credit money to Charles. Charles turned out to be a good negotiator, as his experience in socializing gained during frequent relocations of his family served a good service to him. He succeeded not only in meeting the President of the National Copper Bank, but in getting three hundred thousand dollars on credit. Charles’ success was a complete surprise for his future father-in-law, who gave him a promotion to recognize his achievement. Two years later the likely son-in-law became so reputable that the owner of the textile company viewed him as a likely partner, but Charles terminated his engagement with the daughter of the company owner and left to work in Wall Street.

After moving to New York Charles met Edmund Lynch with whom he shared a room at YMCA hostel. At that time Edmund busied himself selling soda water fountains. They became close quickly due to shared dissatisfaction with their routine jobs and low incomes. The young men started discussing plans for possible joint future. While still working at the textile facility Charles got interested in the stock market which was at its prime at the time. On seeing the amount in circulation on the stock exchange Charles began to study the market more closely. It was the time when no special permissions were required to become a broker therefore Charles learns the trade very quickly only to leave the company and get employed as a broker with George H. Burr & Company.

In two years he becomes a successful professional ready to become a head of the company’s bonds department. The only thing he was displeased with lied in the fact that the company remained indifferent to the success of its customers. The company made its earnings from commission fees and wanted its customers to have as many transactions as possible regardless of their outcome. Such situation led Charles to the idea of reforming the company to improve its performance. He laid his ideas out to the top management of the company but to no avail – the managers refused to change anything. So Charles decided to establish a company of his own to implement the ideas in question.

Charles E. Merrill & Co. was established on January 6, 1914. As broker companies usually dealt with major investors, it was no easy task for a new player on the market to find willing customers. But it did not discourage Charles Merrill. In 1912 while employed by George H. Burr & Company he was responsible for the IPO of the major retail chain owned by Sebastian Kresge. The successful IPO brought experience and reputation to the young broker while letting him look at broking at a different angle. The new look resulted from the in-depth study of retail chain operations which made Charles think that retailing can be useful not only in goods trading. It can also find its way to trading stock through a chain of broker companies. Market studies and computations revealed to Charles that the total capital owned by the middle class will exceed the total capital owned by the rich if attracted to the stock market. The idea got so tight hold of him that he made it his mission to implement it in practice. To start with, he decided to succeed and to earn some capital. He used his reputation and connections he established during his work with Kresge. He busied himself with the placement of shares of chain companies. As he was short of employees he invited Edmund Lynch, an old friend of his having extraordinary analytical skills. So in 1915 his company was renamed to become Merrill, Lynch & Co.

Having received considerable brokerage fees and initial capital from the placement of J.G. McCrory Co shares, the partners started buying the shares of minor chain and grocery stores sold cheap. Charles Merrill understood the potential of chain stores at the time he was engaged in placing the shares of Kmart on the market, as it is in chain stores that consumers can buy everything they need without wasting much time. The company’s capital grew due to the growing prices for the shares of retailers. As the owner of such shares Charles was able to participate in the management of retailers and he did everything in his power to improve the efficiency of their operations. In 1926 his activities resulted in gaining control over Safeway Stores, a major chain of stores. Merging it with smaller retailers owned by Merrill Lynch & Co at that time the partners managed to increase the capitalization of the company, as well as the price of its shares. The Great Depression started soon, but Charles Merrill and his company had quite a considerable capital.

During the depression Charles Merrill handed a share of his capital and the remaining customers of the company over to E.A. Pierce & Co while busying himself with the management of Safeway Stores. Having considerable means resulting from the sale of shares and a considerable income from his retail chain Charlie survived the crisis painlessly and acquired worthy experience in the retail business. Once the Great Depression was over Charles got back to his idea of attracting the middle class money onto the stock market. To avoid starting from scratch he organized a merger of Merrill Lynch with A. Pierce in 1940 investing his own $2.5 million and getting 56% of the new company shares. Then he fixed the salary of his employees, making it independent from the amount of customer fees, and thus allowing the employees concentrate on studying stock purchase offers intended for customers, making it a point to achieve positive results. After the Great Depression ordinary Americans became more indifferent to the stock market and brokers did their best to attract new customers. But Charles found an easy way to make himself known to the entire country. To get the result he decided to emphasize the secrecy and non-transparent nature of business done by the Wall Street tycoons of the day. Merrill Lynch, E.A.Pierce & Cassatt was the first company to publish its last year’s profit report. It was also the first to publish its last year’s losses report. The company finished the year 1940 with the losses amounting to $308 thousand. It was like a bomb explosion – all American media covered the event advertising Charles Merrill’s company for free. Charles turned out to be quite right – feeling confident about the company customers started turning to it more frequently. In 1944 the company dealt with 10% of securities traded on NYSE. Without sticking to the result Charles began an aggressive advertising campaign aimed at improving the financial literacy of an ordinary citizen, rather than at the promotion of his brand. Merrill Lynch organized free seminars for ordinary Americans pioneering a family pair approach that involved the provision of a babysitter to those listeners who had nobody to leave their children with. Charles used to say that he needed both members of the family to be present at the seminar so as not to hear “I need to discuss the issue with my wife” later. Such advertising bore fruit and by 1950 the company had 106 offices across the country with customers amounting to 104800.

The enterprising financier benefitted from the coming cold war also, as the purchase of shares owned by national companies was considered a patriotic act. The chain consisting of 106 “stock supermarkets” started working at top speed, making Merrill Lynch the most famous investment company in America and beyond. NYSE’s urge to materialize the idea of democratic capitalism played a significant role in making the company so famous – Monthly Investment Plan program was initiated in January 1954. The program allowed investors to invest in securities a fixed amount ranging from $40 to $999. During the fifties the number of shareholders in America grew at a rate of half a million per year.

Charles Merrill became famous not only for his talent and persistence in earning fabulous wealth, but also for the reforms he initiated on the America’s stock market, allowing many simple Americans to start investing and to generate income from the stock market.