On November 28, 1940, police were called to investigate a shot heard at the Sherry Netherland Hotel in Manhattan. A man was dead, a suicide who had written an eight-page note which was found alongside him. The police didn’t know it at the time, but the deceased was a Wall Street legend, one of the very best stock traders ever.
Even as a young man, Jesse Livermore had developed a keen understanding of the market. He was able to recognize opportunities quickly, develop strategies to profit from them, and have the courage to act on his convictions, even when that meant standing against the herd and taking huge risks. Today, 80 years after his passing, his insights and approach to trading are still highly regarded and studied.
Livermore was born to a poor farming family in Massachusetts in 1877; he was not independently wealthy, nor could he rely on financial assistance from his family. But he did have one asset even more important than money: Brains.
A fast learner, he was able to read and write by the time he was three and a half; at age five he used to pore over newspapers every day, particularly their financial pages. His father, however, was not impressed and pulled him out of school to work on the family farm.
But Livermore had absolutely no interest in becoming a farmer, so he packed his belongings and went to Boston. There he noticed an office of the investment firm Paine Webber and applied for a job. Although just 14 he looked older; more importantly, he elicited a feeling of trust in people.
He was hired as a board boy at a salary of $5 a week. This was back in the days when traders would sit in what was called a “bucket shop.” Essentially this was a brokerage office that enabled investors and speculators to monitor the prices of stocks and commodities as they were updated on a blackboard every hour, and to trade on the spot.
Many board boys found updating prices boring, but Livermore didn’t just update them; he looked for trends and found them. A year later, at age 15, he quit his job and became a full-time trader, now studying the changes in stock prices updated by other board boys. He plunked down $5 he had saved and quickly earned a profit of $3.12, a small amount, but one that was both gratifying and encouraging; his career was on the way.
Livermore made so many profitable trades that he was given the moniker “The Boy Plunger of Wall Street.” Bucket shops banned him from trading because he was taking many thousands of dollars out of them, and to get around those restrictions, he began wearing disguises. Over time, the number of trades he made increased, and so did the amount of money he invested. And with that, his profits also increased.
Livermore began making big money, not only by the standards of the late 1800s, but even by today’s standards. In 1899 he moved to New York and married a woman he had known for only a few weeks. In addition to changing his address, he also began trading based on delayed ticker prices. It didn’t work out: He lost everything and soon afterward separated from his wife.
Livermore decided to return to the arena he understood very well and where he had profited in the past: bucket shops. Still banned, he gave instructions to people to trade on his behalf and soon was making significant money again - thousands of dollars a week. He made $50,000 in the bull market in 1901. But then a
“friend” recommended that he buy cotton. Livermore lost all of his money - $5 million - and was bankrupt for a year.
Although he had made $100,000 trading by age 28, he decided to take a break from the market. But before doing so, he wanted to make one more trade: shorting the shares of Union Pacific Railroad. To his chagrin, however, shares began moving up steadily and soon he was looking at a significant loss. Then the earthquake of 1906 devastated San Francisco, the market plunged, and took Union Pacific with it.
Livermore made $250,000 on that trade, but soon afterward lost $40,000 on a tip. The following year was much better; he made $1 million in a single day, a remarkable profit. But that wasn’t even close to his best score. In 1925 he made $10 million trading commodities. In 1929 he made $100 million shorting the market.
Livermore’s personal life also was characterized by spectacular successes and failures. There were financial fiascos that cost him millions of dollars, his reputation was ruined, there were failed marriages, drinking binges, and a former wife who shot and killed his older son in an alcoholic rage, among other crises. There also was another bankruptcy.
Without doubt, he could have borrowed money to start again, and very likely would have recouped at least part of his fortune, but the years of roller coaster trading and the numerous personal tragedies left him emotionally exhausted and he killed himself.
Jesse Livermore’s market strategies are still analyzed in great detail, and to this day he is held in high esteem for his brilliance, insight, and daring. In 2013, a strategist at the investment firm Raymond James wrote that, “I studied the tactics of Jesse Livermore...and have found many of them to be as valid today as they were years ago.” Other equity analysts are also impressed by his approach.
Those wishing to learn more about his ideas and strategies should read Edwin Lefevre’s “Reminiscenses of a Stock Operator,” a fictionalized biography often referred to as a trader’s bible.
There is a great deal that investors can learn from about investing from all of his market activities, but there are even more important lessons about what not to do in one’s personal life.
Following are some of the observations and ideas he formulated about trading:
*Markets are never wrong; opinions often are;
*As long as a stock is acting right and the market is right, do not be in a hurry to take profits;
*Never buy a stock because it has had a big decline from its previous high;
*Never sell a stock because it seems high priced;
*Never average down losses;
*If you cannot make money out of the leading issues, you cannot make money out of the stock market as a whole;
*Few people ever make money on tips.
Of course, the strategies that worked for Livermore in his era won’t necessarily be helpful to us today, but they are nonetheless worth considering. At a time when the market is experiencing extreme volatility and a horrible pandemic is raging in the world, investors need all the advice they can get. Learning from Jesse Livermore is as good a place to get some as anywhere else.