It has been my experience that the older a still available book on the markets is, the more timeless its lessons truly are – for they have stayed relevant through the ups and downs of different market environments and time, while still being appreciated and adhered to by today’s speculators. Previoulsy, I wrote about how legendary trader and broker Gerald Loeb’s ideas still guide today’s best traders.
However, often the deeds of the known greats stand in the shadows of the deeds of the unknown greats, and it might pay to dig deeper into history to unearth the teachings of the latter. Let’s talk about Dixon G. Watts – a mostly obscure but highly successful speculator of the 19th century. And no, that is not him in the image above. In fact, there are barely any known photographs of him, most prominently from a bearded caricature apparently reflecting his aging profile on a 1960s reprint of his book. However I would like to think that his working environment would have looked just like that – an old ticker machine, a wooden desk, windows overlooking the busy roads near Wall Street, with Dixon lost in thought of considering what his best play in the market on that day should be.
“Old Dickson” was a charter member and president of the New York Cotton Exchange in the late 1870s. Written in 1880, many today’s aspiring traders will quickly dismiss his book Speculation As A Fine Art as antiquated, outdated, or worse, boring. The joke however is on them – as you will see, his teachings are as relevant today as ever, in line with Jesse Livermore’s warning that “there is nothing new in the markets, for speculation is as old as the hills”.
Let’s dive into a few select passages from his booklet on successful speculation, and see how his ideas compare to more modern market psychology and tactics.
The need to operate in odds and embrace uncertainty
“There is no royal road to success in speculation. Those who make for themselves or others an infallible plan delude themselves and others.“
Nothing is truly certain in the markets – no rewards, no fundamentals, no technicals or chart, no hope or fear, no panic nor exuberance. Everything has to be read in context, nothing exists in isolation. Everything can look bad and still work out, or everything can look amazing and still fall apart. In effect, no plan will or can work all the time – far from it.
Success in speculation is not about finding a method that works 100% of the time. Such a panacaea, the holy grail sought by many beginners, does not and can not exist – if it did, the market would cease to be.
Money is made in any instance by seeing an inefficiency in the marketplace and risking a certain amount of money to make a certain amount. The connection lies in embracing the uncertainty of that bet – in tying probabilities and money management together. That may mean winning often and small with rarer chunky losses that still lead to an overall up-trending equity curve, or winning only here and there but making large profits at a time while taking minimal risks … or anything in between.
Money is made consistently by executing a sound plan continuously.
Which path you choose does not matter – but your method need to be based on understanding uncertainty, your probability of success, where you take profits and where you cut losses/how much you risk – in short, positive expectancy. Understand that a perceived “sure thing is a dangerous thing.” There are no sure things – only high- and low-odds things. Any consideration of risking money should start “not with how much can you make, but how much can you lose.”
All this can be represented and measured explicitly, but the concrete way of doing so is different for every strategy. What matters is an understanding of whether the odds are in your favor, and how to characterize risk vs. reward.
“Is there any difference between speculation and gambling? The terms are often used interchangeably, but speculation presupposes intellectual effort; gambling, blind chance. Speculation is a venture based upon calculation. Gambling is a venture without calculation.”
One of the cornerstones of my own approach, and probably the main commandment to the successful speculator – get the odds in your favor.
Virtues of the successful speculator
Here, just a few of the character traits Dixon considered virtuous for a speculator, drawing parallels to what I wrote in a similar compendium previously:
- Self-Reliance – a critical trait of those traversing the storms of the marketplace. You have to live and die by your own analysis, interpretation and methods. The moment you listen to other people and their opinions, you are doomed. Any strategy works within strict boundaries and rules of engagement with the market, and a single act of breaking rules due to outside interference can kill your account, even if the ‘tipster’ or that one engaging news report seems to mean well. There are innumerable scores of examples of this having happened to famous speculators.
- Judgment – a clarity in making decisions, knowing what to do and more importantly what not to do in any given moment, based on clear rules, market observation and hard-gained scars from long-year experience. There lies high value in trying to gain the latter from the mistakes of others, and Dixon goes so far to describe experience as a product that gains value if it is “second-hand”. However, most humans do not learn to not put their hand into the fire by watching others – they need to feel the pain themselves.
- Courage – not just the ability to judge, but the fortitude to act on it. As he writes, “look before you leap, but not when you leap” – because “imagination makes cowards of us all.” This is often also called ‘being able to pull the trigger’. Stand by your judgement in the face of volatility and conflicting opinions. Also, have courage when looking at yourself and your shortcomings – for a “fault recognized is half conquered“.
- Prudence – the ability to assess risk of an action, and its likelihood of coming true. As Dixon writes, you need “prudence in contemplation, courage in execution“.
- Pliability – the ability to bend with the wind. “Stubborn men don’t live long — financially.” Sticking to your rules is necessary to survive, but not obsessing on your own opinion is what will make your thrive. The market is the judge, jury and executioner – what it says and does is divine law, and you better stay in sync with it, for it is a capricious master, frequently changing its will. Also, the need to have the flexibility of recognizing that you are/were wrong, and adapt to an ever-changing marketplace. Of course, “Recognize a fault, but don’t dwell on it.” Rather learn from it, adapt, reshape, and get back on your feet.
Patience & money management
“Never overtrade“. Save your firepower for when it really matters – that one trade that makes you sit up in your chair, staring at the chart in disbelief of its quality and odds. Don’t try to see the mirage that is not there … “make your theories fit your facts, not your facts your theories“. Until then, and “when in doubt, do nothing. Don’t enter the market on half convictions; wait till the convictions are fully matured.” Only risk your capital when something looks so strong that it’s impossible to ignore, which may mean waiting for sustained periods of time. For your strategy that may mean anything between minutes to months. To Dixon, “patience is sustained courage“. What a powerful statement from a master speculator who clearly kept his inner demons of fear and greed on a short leash.
He further writes that “fools try to prove that they are right, but wise men try to find when they are wrong”. Remember the distinguishing line between an amateur and a Pro – the amateur will try to find reasons to justify a marginal trade, whereas the Pro will try to find reasons to reject a marginal trade. Wait for the real stuff, and get rid of the fluff.
Take an “original risk that is small, the danger at no time great, and when successful, the profit is large“. Start small, and only trade large when you are right, i.e. it is “better to average up than to average down“. Add exposure only when you are already showing a profit, and use that unrealized profit to finance a much larger risk. If the market sours, “stop losses” – and lose nothing but your initial small profits. If it marches on, “let profits run” – and you make money hand over fist. In short, “Take care of the losses; the profits will take care of themselves.”
Last, get out of a trend when it is obvious to the masses. “Every speculator knows the danger of too much company” – the smart money sells into the frenzied buying of the late-comer public, volatility rises, and selling depresses prices, leaving the public to believe that markets are rigged. No, they’re not – they just don’t understand them (yet).
On strategies of speculation
Dixon suggests a few more nuggets of wisdom applicable to the realm of strategy development and refinement.
“Conquer fate, advance to meet it.” Though written in the part of the book where he dispenses life advice, this is equally true to the market. You should have a strategy that proactively looks at what could go right or wrong at any time, and for any possible scenario make a coherent set of rules (a plan) to decide on how to act at that time, as well as contingency plans. Unexpected things will happen, and you’d better make room for them. Go through your strategy (and yes, it should be written down clearly and with good structure), and painstakingly ask “what if X happens instead?”, or “how do I react if Y does not materialize?”
On top, “Nothing is so impressive as simplicity“. Dispense with complicated sets of rules, and rather try to go the difficult route – deriving a universal set of simple rules of operation that apply for any market environment and situation (even those seemingly opposing each other conceptually), based on first principles of how the market works. “Genius consists of seeing instantly the vital point” in anything, i.e. it is an intellectual simplification process.
Try to take a step back, and never become myopic. The larger picture will usually make you see things that previously lay hidden. Dixon comments that “all movements are in waves – in politics, in business, in the atmosphere, in spirit.” And of course, also in the market. This is in line with my ‘theory of states’, which essentially describes that any worthwhile move (or period of stagnation) in the market will neither start nor finish in just a day, week or month. Markets enter states that take time to resolve, and its movements happen in waves that take time to unfold – both tend to stay intact for meaningful periods of time, and will be recognizable once we stop staring at the crevices in the bark of the tree in front of us with a microscope, take a step back, and look at the forest.
Wrapping up
It is said “be wary of old men in a profession where men die young” – this is as true for the military as it is for market wisdom. Do not casually dismiss the teachings of those that lived centuries ago, just because their ideas come in leather-bound books that smell of old libraries and fall apart at the seams. Their ideas have survived … and may yet surprise you. There are tons of other inspirations and advice in Speculation As A Fine Art, but any attempt at bringing them here together would explode the scope of this article. Try giving the book a read – it’s only a few bucks on Amazon.
If you are interested to learn an integrated strategy of speculation in stocks featuring the ideas of all the eminent speculators of the last 150 years, check out the many free articles and guides on this website, as well as my educational content!
