How Legendary Traders Made Millions

What did i learn from this book?

this book explain last 100 years of stock market in detail
each chapter explain 10 year cycle of stock market, why market start going up, why it's choppy trend and why it started going down
this also explain in detail how each famous trader manage to make profit by forecasting right trend of market

Quotes

The stock market doesn't care who we as individuals are, what we think, or how we feel. It's a beast like no other: indifferent to human desires, oblivious to common wisdom, maddening contrary, and seemingly bent on confounding the majority at every turn. The only law it obeys is the law of supply and demand. And until you, as an investor, come to grips with this reality and learn to move with the market rather than against it, you'll plagued by results that are mediocre at best. - William O'neil, The Successful Investor

'You can always learn from history, because human nature doesn't change and there's really not as much that's new in the market as most people believe. CWH patterns have appeared and reappeared in every cycle throughout market history. In every stock market and economic cycle through the entire twentieth century, the big funds and professional pools went after the best growth stocks at the time, ran them up, and eventually pushed PEs to levels no one could justify. It's just history repeating itself over and over again, human nature continually on parade' - William J. O'Neil

The truly flexible man in the market is the man who can be foolish at times, bullish at times, bearish at times, borrow money at times, be short at times, the person who can learn to be an expert on gold stocks in one period and some other style of stock in some other period. These men are exceedingly super rate. but they exist. And these are men to watch, the men to learn from, they are the men who really make money on wall street. - Gerald Loeb

Author’s Note

The stock market doesn’t care who we as individuals are, what we think, or how we feel. It’s a beast like no other: indifferent to human desires, oblivious to common wisdom, maddening contrary, and seemingly bent on confounding the majority at every turn. The only law it obeys is the law of supply and demand. And until you, as an investor, come to grips with this reality and learn to move with the market rather than against it, you’ll plagued by results that are mediocre at best. - William O’neil, The Successful Investor

As you’ll come to see, personal opinions and other’s opinions, which are what most people follow or mention when it comes to the stock market, don’t mean a thing and usually end up getting most people in trouble in the market. Lack of discipline, patience and solid trading rules are reasons for failure as well.

The successful traders profiled in this book lost money when they strayed from basic fundamental traits and skills, lost their discipline, and began to ignore trading rules that have stood the test of time in the stock market. I hope this historical real world analysis can help others in discovering how these people battled the stock market and succeeded in a place where many others fail.

Introduction

Most losses in the stock market can be traced to the average speculator’s persistent disregard of the lessons of the past - Jesse Livermore (1923)

The market cycle of 1998-2002 was much like all those that preceded it. The losses suffered may have been extraordinary, but the mistakes that lead to them were not. They were the same mistakes investors have made in every market cycle - William O’Neil (2003)

recurring patterns occur over and over because stocks are driven by humans and human nature never changes - Jesse Livermore (1940)

The first step in learning to pick stock market winners is for you to examine leading winners of the past to learn all the characteristics of the most successful stocks - William O’Neil

This book will showcase the many lessons that you can learn as you analyze and understand history so as to be better prepared to profit from current and future time periods. and as the market has consistently proven, because human emotions are involved, repeatable patterns keep recurring over and over. if you have the blue print of history, study and know it well and understand how the very best performers managed to reap the best returns, that knowledge can only benefit you for future profitable successes. and through many may state that it is easy to look in the rearview mirror and then conduct reasonable analysis, this book will show that experience and knowledge from the past does not hurt your probability for future success and can definitely assit in your quest for future stock market profits.

1: Industrial stocks Produce a Millionaire (1897-1909)

This is story about trader name Bernard Baruch.

From Baruch’s limited experience and as his observation of market activity began to improve, he noticed that many times during his era the market would experience many downtrending cycles only to bounce right back with strong upward reversals. he also noticed that the best profitable opportunities presented themselves when these reversals to the upside would begin. he thought that if he could time his purchases of new leaders that possessed very strong fundamentals when the market began to turn he could reap positive returns.

2: A Few Sidestep Landmines to Profit (1910-19)

this is world war era and how every one made his money in this time.

1910-1911

Market mostly moved sideways in last 5 month of 1909
New recession started from start of 1910 and will continue for next 25 month
government also started to get more involved in market to protect investor

1911-1913

October 1911,Wyckoff created the trend letter, for stock market weekly advise. this weekly would advise on what stock to buy and sell and when to buy and sell them. this got great response because most of his forecast were turning out to be correct
1912 Witness end of long recession in February and start of new uptrend.
This past few years are very frustration for most developers due to choppy and flat market
Jesse Livermore lost all his million s in profit that he made from is successful short positions during panic of 1907 when he became involved in commodities market . he took tip from percy thomas, who at the time considered the cotton king. even though thomas had been hit by a losing streak and lost many of his profits, Livermore still listened to him and ended up losing his entire stake trading in cotton. Taking tips from others is dangerous way to try and make money in any market.
Livermore was desperate to try his capital back. He traded constantly during a flat and dangerous market environment. this proves one of the major lessons from great traders. it’s not always wise to be active in market environments that don’t offer profitable opportunities.
Traders like Baruch stayed out of market this time. One must trade with the trend of the market instead of constantly trying to force profits in a dull market
wycyoff’s patience and hard work paying off for him. his reputation continued to increase and many firms were now approaching him. wyckoff was discovering that the more time and thought he put into the market the better his judgment of the market’s action became. he also at this time decided to change the name of his magazine from the ticker to wall streat magazine.

1913-1914

war broke out in this era so market started declining
It’s worth repeating that it is very important to remember that one of the key traits that all the greatest traders would employ was that it was wise to stay away from the market from time to time when opportunities to capitalize were minimized. this discipline protects one from one of the worst enemy’s of stock trader - overtrading.
in end of 1914 world war started and market just created new bottom at end of 1914
In july 1914, as uncerrtainty began to grow stronger over europe and impending war market sank by 30% in 2-3 days, it’s worst day since panic of 1907.
London stock market and yew youk stock exchange decide to close for and undisclosed period of time. it was only second time in us history that nyse was closed.
trading resumed in decmeber for only issues that had no internation nature, prices rose. this relief caused the exchange to resume all trading three days later
Jesse livermore filed personal bankruptcy after losing all his profits of 1907 market.
Wyckoff was not mucking much money as the slow dragging downward market with light activity caused him to reduce his publishing expenses and cutt back on any expansion plans due to the slowed interest in the market.

1915-1916

two year recession ended in January 1915. due to war uncertainties were lifeted, and the market started to rise.
The war broght many to view the us as a safe haven since many infamous predictions of disaster had not come to fruition. demands for american exports began to escalate. with the economy coming out of recession and allied conuntries looking to us for goods to expand their war time efforts, many companies profit prospects began to increase.
America started to become the supplier of arms and food for war, many leading stocks look poised for solid returns.
Livermore was still broke but because of his bankruptcy he now has clear head to concentrate. one brokerage house offered him line of 500 shares to trade. Livermore then noticing the general trend of the market had turned upward, began observing market action and who the leaders of this renewed uptrend would be. he did nothing for six weeks but just watch and observe the market action of leading stocks.
He began watchingone of the strong leaders benefiting from the war time economy, which was bethlehme steel. he purchased that stock and it kept going up. he sold out for quick profit of 50k. It turned out he actually broke one of the vital rules of trading: don’t be quick to sell a winning leader. stock rose up to 900% after that.
livermore at this time more interested in keeping a solid gain and regaining his stake and his confidence. now with some trading capital and his confidence back he ended year with 150K in his account.
Wyckoff trend letter kept gaining popularity, more and more people became subscribers. it should be noted that he always advised in trend letter to have a stop-loss of three points in place to reduce losses as quickly as possible. Remember that the greatest trader’s number one rule was to limit losses. wyckoff was no different in his day, and it was a major reason why he never suffered large losses in his trading career.
In early September 1916 after the market had staged a strong two month advance, wyckoff advised taking profits in his leaders. He as baruch did, liked to sell on the way up to take profits.
Wyckoff stayed out of the market in october when market seemed to stall, and then in november he advised to short the prior leaders as market began to quickly turn down. Here we see the flexibility of an experienced market operator not becoming biased in one direction or the other but rather moving with the actions of the market itself.
As the leading stocks of the prior bull market began to peak and break down, the greatest traders knew from past market cycles what that meant. baruch and livermore were right there watching the action of the market and its current leadership as they both started to fade. baruch began shorting the market leaders as they weakend.
Jessi Livermore also began sending his probes out to test the market. He noticed that when the current leaders corrected several points, which is normal market action, many of them didn’t come back, as they had done during the prior few years when a normal reaction in the market took effect. this was also the first time in many months that leading stocks, which were correcting did not bounce back, which when they do is a sign of strength during a strong market. this weakness was the first signal to him that a top might be near. He had learned this lesson and profited handsomely during the 1907 market, as he noticed the exact same type of behaviour leading stocks toping and then starting to break down without bounce back in price. this topping action in market leading stocks will repeat itself over and over in coming decades when other market peaks have been reached.

1917-18

1917 start with rumor that us will enter the war and market became more volatile in first few months
on 6th april 1917, Us entered world war 1 and market started it’s downtrend.
The best traders throughout history sell their stocks when they begin to crumble, and they make sure to take their profits and not ride a stock all the way back down again.
Right at end of 1917 market bottomed and began moving higher in first two months of 1918 , market began choppy range again and would continue that way until summer. Wyckoff stayed mostly out of the market during this choppy environment. he had scored big profits in 1917 and he wanted to retain his positive returns. He also began to refine his strategies. they were as follows
- Trade only with the identified trend of the market
- stay out of flat or directionless market
- pyramid your winning positions to compound your returns
- Adhere to strict loss cutting policy. his was 3% from his buy point
- stay focus on only handful of stocks at a time - usually 10 or less
- trade only the real leaders from the leading industries

1919

the market started dipping in january, but then it turned upward and began to climb.
from 1917 to 1919 the national debt rose from 1.3billion to 27 billion as a result of the war and due to the granting of credit to our allies.
it also started to look postwar prospects were good even though many industries would be hit by reduced demand for war goods. the war transformed the us into the world largest economy, and new york replaced longdon as the central market of the world.
the economy was also coming out of its recession, and the federal reserve was still in the expansive monetary policy that was in place during the war, it kept interest rates low to finance the war and keep puming money into banking system.
there was a sector rotation that began that was directly tied to end of the war. Those industries that led that cycle (steel, chemical, industrial manufacturing) would begin to be replaced by other peacetime and rebuilding industries.
Another skill of the great stock traders was their ability tot always understand what was happening in the economy and the world as new industries took shape and older ones matured.
In 1919 new industries stepped up to the leadership role included agricultural products and rail road equipment to rebuild europe damaged system. other leading industries included clothing , food processor and machinery companies.
Just as things were looking bright, the federal reserve began raising interest rates in november for the first time in its brief history. the fed wanted to put the brakes on the easy money environment that was still currently in place following the war. also many sector rotation takes time to complete. many also thought there was over expansion during the war and winding that down would not go unnoticed in economic terms.
In early November prices peaked and hten sharply broke until the end of the year, again foreseeing the next slowdown that was right around the corner as new decade would begin.

3: Shrewd Traders Made and kept Million (1920-29)

1920-1921

the market began 1920 where they left off in 1919 sliding downward. A recession began in january 1920 one that would lastt 19 months. the year 1920 saw the dow drop from just over 100to around 75
this decline show how the prior steel leader was caught in an industry rotation that was just beginning.
Richard wyckoff, during his continued study of the markets, remarked in 1920 that the market was changing. He noticed that after the war ended, that there were many more industries vying for the lead in the market. This was in contrast to the preceding decade when really only handful of industries seemed to lead most market upward cycles.
As the market kept falling further in early in 1921 and the recession continue to drag on, there were a few bright points. for one, president Harding began his administration and his republican status was viewed as more business friendly than that of his predecessor. Also federal reserve began to lower interest rates. here we see again the market falling for somewhat for prolonged period of time and many possibly giving up on the market when in fact what was happening was the market was just beginning to shake off the decline and begin one of its greatest moves in market history. by June the market had began to flatten out, and by july the recession would officially end. we have seen instances of this in prior decades - a flattening out of the market after a prolonged decline and the end of a recession period. Combined with easing of interest rates, an economy thatt was beginning to broaden in terms of industries and consumption starting to improve, the market was looking ahead to better times.
The year 1921 would sever as pivotal point in the economy as it started to strengthen with accommodative policies. In fact, the federal reserve would lower interest rates to 4.5% by year end. this was quite a reduction since they stood at 7% earlier in that year.
During this time Famous trader Gerald Loeb was really beginning his personal operations in the market. He started with 25000$ which he inherited from his father. In early 1923 loeb bought a tip from someone and put everything he had into auto stock. He bought 5000 shares with 10x leverage because margin was cheap at that time. Shortly after purchase stock began to decline and the market topped and began slight correction. As stock continue to fall loeb refused to sell. In end loeb lost his all money in single trade. He again took 10000$ from his mom by selling some jewelry. Again he bought something from tip and lost everything again.
This second loss taught him one of the most valuable lessons for success in the market- do your own research. and with time, research and experience will lead one to better judgement. Loeb would later say that those first two major early losses for him were keys to why he did not lose money in the great crash of 1929. As we know, it takes losses in the stock market to make future great traders. when it comes to the stock market, perseverance is one of the best traits to have, and learning from mistakes is one of the best teachers.

1927-1929

It was in 1927 that leob began to really notice how psychology and crowd behaviour played a major role in the market and how certain wall street valuation methods didn’t matter as much. For example, every stock he purchased in 1927 was based purely on fundamentals and a model he would use to value stocks. as his stocks rose to higher levels he sold them because his models informed him that the prices had reached an overvalued basis. what he noticed however was that once he sold them they continued to rise in price due to the strong trend of the market during that time. he then came right back into the market and bought them again. this understanding of how crowd psychology worked was the exact same discovery that livermore and baruch had learned in their early years.
From the near end of july at just above 200, the market surged through november to near 300 with only month of rest. Some of the best market operators however, tried to keep their heads during this rise that many on wall street had not seen before.
Livermore was said to have been looking for a top to the marketby late 1928. He had seen how markets top from some of his earlier days, for example back in 1903 and 1907. His remembrance of those experiences and how people’s behaviour really doesn’t change kept him alert. It was a major reason why he would profit so handsomely in the coming year. He kept his head and didn’t get too exited. this is part of the critical emotional control that the best traders employ
Bernard Baruch, however, seemed to get more caught up in the exitement. He acutually moved his offices closer to wall street, a mistake of getting too wrapped up in the action. We will see this happen to nicolas darvas as well in the late 1950s. Though baruch was extremely bullish on america’s prospects for the future, he would start to feel uneasy about the market rapid increase in share prices, and mention few times that prices seemed exceedingly high. He was astute observer of crowd psychology and he studied it well. he knew that a mob type behavior was somwhat responsible for this rise of market. he did sell out of his positions a few times during the rapid run up in prices, as he liked to sell his winners on the way up. Repeatadly in market operations i have sold stock while it was rising and that’s is one reason i have held on my fortune. But each time he sold in 1928 the market kept moving higher.
A sharp pullback occurredd in November 1928, but it didn’t last long as the market shot right back up again in december and finished the year near 300. The 1928 gain was solid 48%.
The federal reserve began to get concerned aboutt the rapidly rising market and began to raise interest rates to cub some of speculative buying. they raised rates form 3.5% to 5% from end of 1928
1929 started off with another buying frenzy. From there it would mostly whipsaw action (up and down) still may end as bulls found a fight with some cashing in their profits.
A continued strong demand for margin money raised those rates to 12%. Even at those high rates, people thought that since the market was risign so fast, their returns on the increase in stock prices would dwarf the higher margin rates they were being charged.
Consumption by consumers stayed strong, as the gross nation product risen by 50% since 1921. It’s remarkable incrase in many respects from an aconomic standpoint. worker productivity had incresed by some 40% during the time frame 1921-1929. Buing on credit, advertising and consumption were all rising. it was clearly continuing to be the roaring 20s, and most everyone was caught u pin it and excited about continued prosperity.
By the summer of 1929 many of the mroe active and astute traders of the day would again be questioning the euphoric rise in stock prices. Livermore was beginning his probing on the short side looking for a top. He remember his successful experience in 1907 to know that all markets don’t go straight up forever.
barush by august when the market was rising so fast would buy stock one day and then turn around and sell profits the next day. as the market kept shooting up he would continue this fast paced trading, though he had sold out most of his positions on the way up prior to this. baruch near this time became really suspicious when beggars and shoeshine boys began offering stock tips. the action of mob psychology was in full force, as more people where racing to get in the markets. Many would leave their jobs during the day and just watch the tape in brokerage houses or at the exchange
by mid 1929, because of demand, the broker rates for margin loans was near 20%, quite an increase from where they were just two years earlier at 3.5%. Because of this high demand for money and the attractive rates in the market, corporations even started lending money to consumers for securities purchases. Money was being funnelled into speculative stock purchases and being directed away from productive capital investments that could eventually create new jobs adn opportunities.
A sharp spike upward in the market in june was followed by only pause in july, and then the final climax run began in august. By this time many leading stocks were rising in dramatic fashion in what is callled “classic climax run”
Volume on exchange was also rising. One curious divergence that was occurring for the astute observer was that economic conditions were slowing down even though optimism was running at an all time high. auto and construction figures that were coming out were all down. also european stocks had already began to fall. in august an official recession set in and this would be first time that market would actually rise and keep rising just before and right into the beginning for new recession.
The peak close of the market was around 381.15. this from 200 in June of 1928. 90% up in 14 months. The market nearly quadrapled from the point of when it started its historic run in late 1924. Here now are some of the interesting details of how that market topped and gave out plenty of cues before it really started to sink. Some smart money began to sell in September, and some of the best traders in history were either liquidating their stock holdings and retaining their profits or beginning to sell short. Remember that a key trait of the very best traders is their ability to control their emotions. The difficulty in not getting too caught up in the hysteria but following sound judgment and using experience from either prior mistakes or successes is a main reason why so few are able to conduct sustained profitable operations in the market.
After the market peaked in early september, heavy selling began to set in and actually became quite common. this is a very strong signal that gradually smart money ws leaving the market. the dow average suffered five declines on heavy volume throught September. we will see as we go along that if for numerous days after the market hits a high, heavy selling begins to build and continue, the markets will start major correction phases. this action and pattern has repeated itself time and time again through market history. all this selling during September was occurring a full month before the bottom fell out. it was clear that the price action of stocks, especially the leaders, and the volume activity that was taking place were causing a change in general trend of the market.
After fall in September, a sharp rise on October 6 calmed some nerves on the street. However, the big and astute selling traders were not quite finished yet. as trading began to slow down a bit, more economic report came out showing continued weakness. stell production was poor and construction figures continued to weaken. also momentum of the October rebound was short lived. after sharp fall one good day is not enough to turn around what was becoming a new direction in the overall trend of market. in late October stocks sank again and leading stocks were taking more hits. People then started getting more concerned, and many started talking about the panic of 1907. but many thought that, due to federal reserve, more established leadership in the market, and previous experience form 1907, an event like that could not occur again. +
Livermore remembered 1907, and his thoughts were that since human emotions are involved, an event like that could happen again no matter what was in place. his memory of his actions and the market during that time helped him tremendously during this current time. on Saturday market fell again with heavy volume. this was the first day that heavy margin calls were being placed by brokerage houses. also, rumors started to circulate that jesse livermore might be responsible for the selling and that he was trying to pound the market lower. by that time though, he had already established plenty of short positions in the market since he had seen the change in trend to the downside weeks before
In short in few months market lost 1.5 years of gain. If one hadn’t sold correctly. by the end of november a mild rally brought stock up off their low point for the year and breathed some life back to market. This clearly show that market don’t go straight up or straight down, but clearly the longer term trend had changed
Livermore, Kennedy and Loeb were mostly out of their long holdings by the time the end fo october came around. their astuteness and observation skills, while keeping their emotions in check, are just a few of the key successful traits of the great traders.
- Baruch sold because he began to get bit uncomfortable with high prices and also because he liked to sell on the way up
- Livermore, through his short positions, netted another multimillion dollar profit when he finally closed those positions, just as he had done in prior market tops
- Gerald Loeb belied strongly that stocks had risen to unrecorded and overvaluation statuses. a few instances alerted him to this conclusion. One leading stocks had topped and then began to fall from their peak prices. another was that tips were flying everywhere, which is what Baruch also discovered and alerted him to be more cautious as well. He sold out of all his positions in early october and 100% in cash three weeks before the major damange was occur.

4: Patience and Flexibility (1930-39)

Loeb Quick Trades on Upturn

1930 started off with the market sprinting higher from january through mid april as it rose back up to near the 300 level.
Loeb was back from his vacation and remained active and attuned to the market. He also found out that short selling was not well suited for him. this is another vital trait we will see from some of the greatest traders, they find place in the market that is suited to their own personality and strengths. Loeb would discover through his experience that short selling never was very profitable for him, and he felt it was too difficult to master, even in bear market environments. what he would rather do in bad market times was either stay out of market or trade in very quick turns from the long side on much smalller scale than if the markets were in confirmed uptrend.
in 1930 when market snapped back, he of course noticed this and did get back into the market. he was much more cautious though, as his skittshness had increased after he had witnessed how much damage a severe break in the market could cause. as he went along in his career, loeb would many times mention how valuable experience, knowledge and judgment are in the quest for stock market profits.
He stated “ Knowledge born from actual experience is the answer to why one profits; lack of it is the reason one loses.”
Because Loeb would come into the market on smaller scale and dart in and out of certain stocks, always cutting his losses short, he had profitable month. He kept his losses limited. Notice that he kept active during this short rising trend in the market and he kept his mistakes small. He would actually end up trading similar to this as the market was falling the way down. The fact that he made profits each year during the worst decline in the history of the stock market and from long side is amazing accomplishment.
after April 1930, the market would begin its dramatic decline, as that would be the highest point it would reach until the early 1950s, or more than 20 years from then. so much for long term holding.
As we’ll see, the rallies up over the decline were short lived and many called it sucker’s rallies. It lasted only few month and led to even steeper decline. this hurt many traders who were told to “buy on the dips” during a dangerously falling market.

5: Victory Creates More Opportunity for Legendary Trader (1940-49)

The new decade began with the uncertainty of world war 2 hanging over the market. Reflecting this uncertainty the market continued in an almost perfect sideways fashion through april. Then when the German took Paris, the market dived from 150 straight to 120 in may. it also seemed certain that us would eventually enter the war as well. it would be huge task to finance another war, especially one as large as world war 2 was turning out to be.

Loeb Gets cautious and offers words of wisdom

The year 1941 began with downward market in January and February. from there through may, it traded basically sideways as war uncertainty continued to hang over the market. Trading volume was again light as more eyes continued their focus on looming world events.
Many companies from railroad and steel industries began gaining popularity. Loeb also made some important statements that all stock operators need to heed. One of the statements Loeb made was

“There’s always the discounting factor in any stock. The price of a stock doesn’t reflect its value at the moment, ever. it reflects the expectation of the value and there’s no precise measurement of the amount of time involved in that expectation. it’s not a mathematical thing; it’s a human thing.”

He then went on to say, “That’s why investing can’t be an exact science.” - From those comments he concluded that this is the reason why no one, ever, can be right all the time in the stock market. and because of that fact, he stated, “And i think the big secret of those who have made more money than others is to realize their mistakes and get out quickly.”

“Cut your losses short” - In june and july of 1941 the market rose slightly and then flattened out and traded in slightly choppy fashion through September market started heading down and continued it’s downward trent. On December 7, Japan attacked pearl harbor. The next day the market only feel slightly, as if it had already expected something of this sort. there was a lot of uncertainty during the year, and many fears were realized on that tragic day in early December. - The year 1942 continued the steady downtrend through april as the us was no deeply engaged in the war. By the end of April the dow sank just below the 100 mark for the first time in nearly 7 years. From that point on, however, the market would never revisit the 100 level again. - And just as we’ve seen more than few times, when things look their wors and most people give up hope, that is when the smartest traders keep up their study and observation skills. In loeb made statement “the market today offers opportunities of 1932”, even though, as yet, it is clear that the trend has not changed from down” . Here we see an experienced and knowledgeable operator relying on his past market cycle knowledge adn understanding of how the market works to try and identify what the current situation looked like. he stated this when the trend had not yet changed, but offered up at leastt the point that oen should not take their eyes off the market when there could be possiblity of a change based on historical market action. he made those statements just before the market tuned and would advance over 130% during the next two years. He also stated, “when the news gets good, and the situation clarifies, it will be too late”

Loeb Makes a Mistake

while the market was weakening and showing classic topping action, Loeb started to sell his holdings, but he sold too slowly. He later admitted that he had made a mjor mistake as he was thinking that rebound would occur in the market.
Even though he saw the same type of action that had alerted him to quickly sell out of his holdings and go to 100% cash position in 1929 and again in 1937, he hesitated. He ended up losing money during this downtrend, but he did sell out in time to not get hurt in a major way. It still shows just how challenging the market is and how your own thoughts can at times become your worst enemy.
Loeb, one of the best stock traders of all, knowing from past experiences what he should have been doing, but instead hesitating because he thought his contradictory idea might be right. Remember O’Neil definition “The stock market doesn’t care who we as individuals are, what we think, or how we feel… it only obeys the law of supply and demand.” If you are proven wrong, you must correct your judgment by reversing your positions.
Even loeb, in the late 1940s, commented that it was easy to write a book and say “cut your losses and never let emotion out rule investment principles” but much harder to do in practice because we are all human and as human we all make mistakes.

6: Innovative Stocks produce Fabulous Profits (1950-1959)

Nicolas Darvas saw the trend and took full advantage of it

As the new decade began and many areas of the economy were improving, there was a new sense of optimism in the air, though it was still measured. the market would begin what would trun out to be a slow steady rising trend in early 1950s.

while the market rose, new leadership began taking shape, as is usually the case when new uptrend begin. zenith, mostly due to the new tv craze, stepped up to help lead the market. It rose from 31.5 to 70 in just first part of 1950. Motorola was another strong leader. it double in just a few months in early 1950. It was benefitting from strong orders as its revenues jumped 134% in 1950. net income soars 207%.

A sharp drop near the end of june coincided with the beginningof the korean war, when on 24 june, north korea attacked south korea and it looked again as if america would get involved and enaged in war issues. the setback in the market was slight, and after august market kept it’s steady rise. strong corporate earnings and new war orders that were coming in seemed to blunt the negative impact of the start of the Korean war. It also become clear as months went on that the war would not be las large as world war as many had originally feared.

Darvas Begins his quest

Nicolas Darvas was given shares in small Canadian mining for dancing engagement his main professoin. he was going to perform at toronto. He recieved 6000 shares of 0.5$ penny stock callled brilund. Speculation in canadian penny stocks was actually gaining popularity back then, and when darvas checked the price for the first time in early 1953, he was amazed at the appreciation to 1.9$ per share. He sold at once and retained an excellent profit. it was from that experience he whoudl develop an insatiable desire to learn more about the stock market.

Darvas soon found out how challenging this going to be. he made many mistakes along the way in trying to find out how the stock market actually worked. but darvas had one thing going from him- a trait that is found in all the other successful traders that preceded him and one that will also embrace the great ones that would follow him -perseverance.

Darvas would refuse to give up even after many long hours of trial, error and frustration. His commitment to study and learning from his mistakes are vital traits to success in the market. Remember it took him nearly six years before he would really start to succeed. we saw same learning curve with bernard baruch already. Jesse liver more commented that it took an average fo fiver years of man making the same mistakes before he would finally begin to honestly learn and cause positive change.

Trying to gain consistent success in the stock market is a difficult endeavor, and it takes many years of learning, but those who stuck it out, refused to give in, and kept to their studies were rewarded.

7: A ”Go-Go” Bull Run Puts Profits in Pockets that studied History (1960-1969)

O’Neil start his trading in this decade. so first few part of this chapter explain his journey when and how he started, what mistakes he made in beginning and how he made his first big profit.

O’Neil Sees a topping market

watching the market and especially how leading stocks act with price and volume action is the key to staying in sync and in rhythm with the market. this pattern has occurred over and over again in the market, especially when the market has staged a very strong uptrend for extended period of time and then other conditions begin to weight on the future outlook of corporate profitability and the ability for sustained increases.

Here are just few of the early warning signals that occurred in 1966 that may have meant that the market was probably about to enter a major correction. O’Neil would notice these through his intense study and observation: He in fact was trying to get all his institutional clients to sell stocks and raise cash.

Boeing : From near 20$ per share in January 1964, boing was the leader rising the increased demand for aircraft manufacturing. the moved up strong throughout 1964, 1965 and the very beginning of 1966. By april 1966 the stock had reached 91 per share with 350% gain in two years. after topping with the market and forming a classic head and shoulders pattern, boeing started to break down and sell off on heavy volume. Many who had gained strong returns on this leader were cashing in their profits. the stock had undercut previous level of support (50 day moving average) and it was accompanied by heavy volume. And by October it was 44% off from its top.
Motorola : another leading stock rose up to 215%. It was also topped in the same head and shoulders pattern as boeing at about same time. Volume increased notieably on the downside, the stock broke through areas it had not violated before, the market’s trend had changed, and other leading stocks were following the same pattern. By october motorola was down 55% from it’s high

While many readers may point out that it’s easy to pinpoint tops and bottoms and calculate percentage ups and downs when looking from a historical perspective, as compared to making he proper decisions in the market at that exact time, it is important to learn that many of these same patterns in the market and in stocks do occur over again. also, many of these great traders understood this, and this is how they made decisions that lead to their incredible gains.

Nobody is every going to be able to buy at the exact bottom and then sell at the exact top. but the best traders used signals like these to at least help increase the returns when the market would turn upward and then lessen the damage when things tuned the other way as they did in early 1966.

By late april with many leaders topping like we saw earlier, the market would begin its downtrend as the direction of the market had clearly changed. There were other leaders topping as well, so it would have been somewhat clear to an experienced stock market operator that things had turned. Simmons precision, which was in the aerospace computer market and was one of the best performing groups of 1965, also topped.

With Vietnam growing to be more of a concern and the market topping out, the dow headed lower throughout the spring, summer, and early fall. Dow fell nearly 27%, in just under 6 months. it was a major correction in such a short period of time, and those market breaks can cause monetary and emotional damage to trader unless the trader heeds the market’s signals and takes appropriate action. No one knows just how bad a correction can get, so the best thing to do in a topping market is to sell stocks and go to cash. Or short formal leaders if you’re experienced enough. That’s what the best traders did, and that’s what the next great traders will do as we move forward. That is the strategy that all the individual market operators adhered to in order to profit and protect themselves from bad market periods.

Words of Wisdom from a Legend

While market was falling Gerald Loeb would discuss some of the more challenging aspects for battling the market for profits. Loeb would have been investing in the market for nearly 45 years by this time. One thing he cautioned about was that many leaders, but probably not all, may never come back in price when the market recovers. We’ll see the same thing occur again and again , as market history continues to repeat itself.

“Only the professional market man knows how to move from stocks to cash or cash to stocks, or long to short or vice versa.” - Gerald Loeb

Only the pros knows how to go from certain groups to others such as gold will rise when the market falls, but nobody can always pick tops and bottoms. “Buy low and sell high” is one of the wall street’s rainbows that many chase and nobody completely catches.

Loeb would also talk about selling, to which he would say “Selling is the hardest decision to make”. He didn’t have certain fixed percentage, though he would almost always seem to be out before any position would fall greater than 10% from his buy point. He didn’t like to lose more than 3% when he was in trade for short terms. 10% would be maximum if he was trading for longer term. The trick, he would remind, would be to not lose good positions on temporary declines but to get out of the ones that continued to fall. the first key he would emphasize was to cut all losses short. On winning positions he held, if they fell by 10% off strong peak, he would sell portion of his holding. He would also sell more if the market was acting right but that particular stock was not following the upward trend of the market.

Finally he retired that he would use his ruling reasons write down the reasons for the trade, before he entered the trade. This helped him control his emotions, which is needed due to the fact that the market is the most inexact science because public psychology is its greatest single shaping factor.

while the market was falling and looking for possible bottom, many leaders that feel hard began slowing down their declines. the market also seemed to exhaust its selling, and by mid-october, even with the war worries present, there seemed to be a change in the trend of the market. keen observation pays off if when things get so bad that they couldn’t seem to get any better.

8: Most Get Whipped Up and Down Except the Best(1970-79)

The new decade for the 1970s didn’t start off so well for economy and stock market. A slowing down business conditions that ushered in a recession just as the 1960s were ending greeted the new century and its president - Richard Nixon. The unemployment rate would begin rising; Also american troops would begin marching into cambodia, which just kept raising antiwar sentiments and concerns about this very unpopular and expensive campaign. Interest rates also moving higher.

Many leading stocks were still sliding downward, and some of the best performers of the prior run up had already started showing signs of cracking as there was clear lack of buying power in the market to support these former leaders.

It’s critical to keep watching even the best stocks that produced the best returns at some prior time. O’Neil made great profits on some of these stocks, but he knew how to sell them correctly when they broke down so he would retain his previous profits made. Great stock traders don’t ride their gains all the way back down they listen to the action of the market and their holdings, and they act appropriately. They try to master the art of holding on long enough to big winners in order to get the most of their gain but also try to sell them on their way up after a prolonged advance. this skill comes from many years of experience in the market. they also know that most stocks follow the market and they reduce their holdings when the market turns and begin to break key support areas, especially when the general market starts to experience heavy selling, are actually the best stocks to possibly become excellent opportunities for taking short positions and profiting when the market is clearly headed in downtrend. They all did well on the short side by shorting the former big winners that led the prior uptrends in the market.

9: A Great Trader Outruns the Bull and Avoids the Crash (1980-89)

The new decade of the 1980s started off with hope, and the major indexes climbed throughout january. But by early February it seemed the choppy and whipsawing 1970s market environment was back. The markets fell sharply throughout February and march. Times are still very challenging, and the economy actually fell into a recession beginning in january 1980. The federal reserve was still maintaining a very tight control over the money supply and interest rates keep rising.

While the market was still weak in early part of 1980, decline would be short lived. In fact, the market and its forecasting ability would soon sense better times just ahead. The third and fourth quarters of 1980 exhibited a very strong surge in GDP, which brought the economy out of it’s short recession.

It was no means all clear signal but markets showing temporary change in direction. Nasdaq would explode to the upside and up 57% in 6 months. With the expansion of the personal computer catching on, many of the best returns were found in the smaller and faster growing computer stocks that were mentioned in the previous chapters, as they kept their upward moves intact.

O’Neil’s Warning is correct again

Some of the best performers of the prior several years had been stocks from the oil and oil service groups. while they provided investor with great returns from the late 1970 to early 1980, they were beginning to show signs of weakness. As with almost all market cycles, former leaders of prior cycles do fall and take a backseat to others at some point.

ONeil made some great profits in the energy groups during their run, but his experience adn the market’s action was telling him that things were changing. In fact, he had been trying to get many of his institutional clients to get out of the oil and oil service groups starting in November 1980. He kept advising that this groups were topping and heading down. Oil prices stabilized some what, and many of the leaders from this group looked tired after such tremendous run ups. Stocks don’t keep going up forever. it’s the ability to change when the stocks begin to change course that really separates the experts from all the rest.

When the market broke down in June 1981, the oil and oil service firms came tumbling down. It was a wise call and one of the best up to that point for O'Neil. It would actually propel the reputation of his firm and earn him accolades.

How Did he do it?

He just followed the actions of the general market and kept a close eye on the leading stocks. He knew from experience that when the general market seemed to top out and begin to show distribution that it was time to look for volume selling signals in your holdings.
The leaders who usually bring the market up during up trending markets are also the ones that bring the market down if no other strong leadership is there to keep the uptrend intact.
Many times there are sector rotations during strong markets when one leading group will pass the leadership on to another strong up and coming groups. But in this case oil and oil service had risen very far already over the prior several years, mostly due to rapid increase in oil prices and how those higher prices were a benefit to those firms. with oil prices steading a bit, but still high, many would think the oil companies would keep on increasing in stock price with no end in sight. But remember market always looks forward. Here, the smart money was just starting to take the great profits they had earned already during these stocks spectacular run.
ONeil’s experience, rules and judgment were all telling him the top was near for these leaders. He therefore cashed out of them, retained profits and avoided the misery that many would realize who refused to sell stocks in that group.
Experience and objectivity can pay huge rewards in the stock market. One needs to assess volume action in a chart.

10: New Technologies Produce Unprecedented Opportunities (1990-99)

11: Avoiding Bear Tracks Keeps Prior Profits in Expert Accounts (2000-2004)

12: Learning from the lessons of History and the Greatest Traders

“You can always learn from history, because human nature doesn’t change and there’s really not as much that’s new in the market as most people believe. CWH patterns have appeared and reappeared in every cycle throughout market history. In every stock market and economic cycle through the entire twentieth century, the big funds and professional pools went after the best growth stocks at the time, ran them up, and eventually pushed PEs to levels no one could justify. It’s just history repeating itself over and over again, human nature continually on parade” - William J. O’Neil

What Successful traders do to beat the market

Understand the general trend of the market
- you must be in tune with trend and rhythm of the market. One must be observant of its action at all times and then follow its lead.
- Don’t try to predict what it will do as no one ever has been able to do that with reliable accuracy for any sustained period of time. we saw many time how the market can turn around quickly.
- Many times throughout history the market would top and begin to turn down when just about every was running around and was excited and jubilant as they could be. Then many other times, the market would turn up and begin a new uptrend when most people had given up on the market and were scared to death and licking their wounds from prior losses that were not managed properly.
- It is very critical to study the market’s action day to day as it is occurring to understand what kind of environment you are dealing with.
Use History in your study and observation of the markets
- Best traders knew that knowledge of history was very important to success in the stock market. I have already listed many of the times when great traders used history to profit in their current environment
DO your own study and research and don’t listen to others and their opinions
- All the best traders made money by making their own decisions. Listening to others and other’s opinions all led to losses for the best market operators early on in their careers. This is what forced them to study and conduct their own research in order to get on and stay on the profitable side of the market.
Buy Fundamentally strong stocks that are leaders in their industry
- Leading stocks are one that are leading profit generators and that usually have a new product and/or service that has been introduced and has been widely accepted by the general public to increase the quality of many lives in some positive way.
- Strong revenue and profit growth accompanies these leaders. The leaders always change with each new market cycle, so flexibility is an important trait that must be implemented. Of utmost importance is knowing the fundamentals of the stock.
- All these great traders made their big money in stocks that displayed great fundamentals.
- O’neil believes that in addition to learning to read charts skillfully to improve your selection and timing, it’s key to make sure your selections contain the following fundamentals
  - Each of the last three years earnings per share are up a minimum of 25%, plus at least the last two quarters earnings are up sharply and in most cases five or six quarters in row up and showing acceleration in their rate of increase, the bigger the increase, the better
  - A superior product with sales up 25% or more
  - A superior return on equity 25% to 50% , 17% min. A stock must have either strong pretax profit margin or high return on equity, and the best stocks are entitledto bigger PE ratio
  - You should be looking for the real leaders, the number one company in its field in terms of these fundamentals not lower quality number 3 or 4 company
  - You are looking for the top 1% or 2% of all stocks and you should know and understand their products
  - Eighty percent of all new leaders in the past 20 years either had recent new issue or IPO in the prior eight years.
- Buy those leading stocks in Up trending market when the break out of proper basing patterns on large volume and then use pyramiding strategy to add to those winners
  - Key to making the really big money in the market was when these traders had patience to wait for the market to confirm an uptrend and then they purchased strong stocks breaking out, mostly into new high ground on heavy volume.
  - Then if only if the stock keep moving up as they expected, they would make pyramid or addon purchase in addition to their initial positions.
  - Key was that they added to their strongest stocks in order to compound their gains. The pyramiding strategy, on the buy side is major buying strategy that led to millions for these traders.
- Cut your losses short on the ventures where you have been proven wrong
  - This is number one golden rule for success in the stock market. without this you can rest assured your results will be mediocre at best
  - very best know this, and they actually improve on it as they continue to go along. while it is probably the most difficult discipline to implement, it is the one that clearly separates the very best from everyone else.
  - what does seem to stay the same from era to era is the amount of successful trades vs the unsuccessful trades. all the best still experienced win/loss ratios of near 50%. O’Neil may be one of the best ever at approximately 66% rate for successful traders.
- Hold on to your winning positions until classic sell signals tell you to unload your position
  - Let your winners run.
  - This is easy to say but difficult to do. With practice and study using charts of best winners from past, you have already seen two successful traders gain the benefit of this classic strategy
  - O’Neil will hold positions for years, if they acted right. If they don’t he doesn’t look at the calendar and say he can’t do something because the stock hasn’t been held for tis or that length of time.
  - The other thing these traders proved that timing is everything in the market. And with proper study and observation, one’s timing can actually improve to the point where profitable transactions can occur

After all this i would like to conclude by citing a quote from gerald loeb