Trading the Market - Livermore or Buffett
October 30 2007:
Which is the best way to profit from the Chinese stock market?
The two polar opposites of trading/investing philosophy are probably best defined by Jesse Livermore and Warren Buffett. The former the epitome of the reckless speculator, the latter the hero of value investors.
Berkshire Hathaway - Warren Buffett's investment vehicle - completed the sale of its 2.3 billion shares in PetroChina earlier this month.
Berkshire bought its stake at an average price of less than HK$1.70 a share in 2003. Campaigners have been urging Buffett to sell his company's stake PetroChina because of its links to Sudan, whose government has been accused of humanitarian violations.
Buffett said last week that people should be cautious about buying Chinese stocks. He'd made an 11-fold return since 2003 and his decision to sell his PetroChina stock was based entirely on its current valuation.
Despite Warren Buffett's value-based concerns about Chinese stock prices, investors, undeterred by the world's highest valuations, are continuing to buy into a stock market that has increased in value almost threefold in the last year.
As such, their behaviour is akin to that of Jesse Livermore, who famously said that no stock should ever be consider too high to buy or too low to sell. Livermore made and lost several fortunes speculating in stocks and commodities in the USA in the first half of the nineteen hundreds.
Livermore, however, was well aware of the risks of speculating and offered the following advice, which investors in the Chinese markets at the moment would do well to heed:
"The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day - and you lose more than you should had you not listened to hope - to the same ally that is so potent a success bringer to empire builders and pioneers, big and little.
"And when the market goes your way you become fearful that the next day will take away your profit, and you get out-too soon.
"Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does."