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"Jesse Livermore - Market Master"
Jesse Lauriston Livermore was one of the best-known traders of the 20th Century. Few could accumulate money, or lose money, as quickly as Livermore.
Known as the 'boy plunger' because of the manner in which he would take large stock or commodity positions, Livermore lived as he traded - full steam ahead. He was very popular with members of the opposite sex due to his good looks and flamboyant life style.
Just Who Was Jesse Livermore?
Jesse Livermore was born in South Acton, Massachusetts, in 1877. The son of a farmer, he left school in his early teens, and traveled to Boston where he became a 'board boy' for Paine Webber. His position required him to update stock, bond and commodity prices on their large chalkboard.
As Livermore recorded the ever-changing prices, he noted that prices often moved in predictable patterns. He soon concluded that the markets could be beaten, and that large sums of money could be made.
At that time Livermore did not have sufficient money to trade in stocks himself, so he spent his lunch hours in bucket shops, where he could attempt to make money by predicting the direction of selected stocks and commodities. By the age of 15 he had made more than $1,000 - which would be a considerable sum in today's dollars.
Bucket shops were little more than gambling dens. After ignoring a warning to keep away from these establishments by his supervisor at Paine Webber, Livermore was sacked from his position.
The Boy Plunger was now a full-time trader. Such was his success that he was banned from entering the bucket shops in Boston. He then tried the mid-West and East Coasts, where he made some $50,000. He resorted to disguises and used false names in order to circumvent the bans. In his 20s, Jesse Livermore moved to New York.
In New York Livermore commenced his career as one of the greatest stock traders of all time. In 1906 he received a tip to short Union Pacific, and did so in a big way. The stock began to rise, and Livermore was in trouble. The San Francisco earthquake caused Union Pacific stock to plummet, leaving Livermore with a $250,000 profit. It also left him with a clear understanding of the dangers of blindly following tips.
In 1907, he gained a reputation as a 'bear raider', trading the short side of the market on a massive scale. It is believed that the powerful J.P. Morgan sent go-betweens to Livermore to ask him to scale down his activities.
W.D. Gann, in 45 Years in Wall Street (page 117) described Livermore as "one of the most spectacular traders of his day". Gann stated that Livermore was an honourable man who "believed in paying debts even after he had been relieved through the courts of bankruptcy".
In fact, Livermore and many other traders and investors, including Gann himself, once lost their money when the brokerage firm Murray Mitchell and Company failed in 1913. In Gann's words "In 1917 when Livermore came back and made a fortune, he not only paid back my proportionate part of money which I lost through the Mitchell failure, but paid everyone else". Gann added, "This was an honourable thing to do, and because of Livermore's honor and honesty, in 1934 when he was broke, I backed him and got other people to raise money and back him. Livermore came back again and made money".
Gann's one criticism of Livermore was that Livermore had only studied how to make money - not how to keep money. In Gann's words "He had the greed and the drive for power, and when he got a large amount of money, he could not trade conservatively. He tried to make the market go his way instead of waiting until the market was ready to follow the natural trend".
Livermore's success gave him a lifestyle that many could only dream about. The tall, thin blonde speculator bought a 200-foot yacht, the Anita. He dated famous women, including actress Lillian Russell. His trading exploits soon became well known, and people would often comment that someone was "as rich as Jesse Livermore".
During World War I, Livermore anticipated that coffee would have a substantial rise in price, and established huge long positions. His profits amounted to millions of dollars, however the coffee contract was voided. The government believed that he was profiteering at wartime. This bankrupted Livermore for the third time.
An aggressive trader, Livermore made, and subsequently lost, four million dollar fortunes. Much of the money was made using tactics prior to them being declared illegal by the Securities and Exchange Commission in the 1930s. The new regulations either prevented, or limited, tactics such as:
* using inside information;
* concealing his market positions;
* cornering stocks; and / or
* arranging for misleading, or incorrect, information to be published.
Livermore became well known for his tactic of waiting until a stock he had bought had risen to the point where he had made substantial paper profits, and then 'confiding' in a journalist from the New York Times, or other influential newspapers, that the stock was a great buy. Livermore would then unload his massive position, selling into the buying frenzy created by the journalist's article.
At his peak, he owned huge estates in several countries, Rolls Royce cars, and yachts, and was famous for his lavish parties.
He also maintained a secret suite of offices in Fifth Avenue. It was in these offices that Livermore ran a full-scale brokerage operation, with numerous telephone lines and private telegraph lines. The office featured a full size quote board, updated by his clerks. He also employed a team of research staff. The sole purpose of this office was to facilitate his own trading and investment activities.
In 1933, Livermore was suffering from depression. After a 26-hour drinking binge, he fell into a police station and told the policemen that he had lost his memory.
Unable to accumulate money at the rate he previously did, Livermore decided to sell his trading secrets in the form of a book. How to Trade Stocks was published in 1940 in two versions - a leather-bound edition, and an 'any man's' edition. The book failed to capture the trading public's hearts and minds.
Later that year, Jesse Livermore consumed two drinks in the Sherry-Netherland Hotel in Manhattan. He wrote an eight-page letter to his third wife, saying to her "my life has been a failure".
The man who had affectionately become known as the Boy Plunger, the Great Bear, and the Cotton King, then walked into the hotel's hat-check room, sat in a chair, and shot himself in the head. So ended the life of someone who was arguably the greatest trader of all time. Jesse Livermore, trader extraordinaire, the man who had made millions, left an estate of less than $10,000.
The New York Times had Jesse Livermore's epitaph as its editorial:
What good he did, what harm he did, what his life meant to himself and to others - such questions are for the novelist· His passion drove him on· He lived in a time when the speculating he did came to seem like that of boys pinching pennies· He left no clouds of glory behind him, nor any miasma of human misery that he had created· The 'Street' in which he operated is not what it used to be. His death punctuated the end of an era.
Livermore's Legacy
Jesse Livermore died more than 60 years ago. He left the world of trading three things:
How to Trade In Stocks
How to Trade In Stocks was copyrighted in 1940 - the year Livermore died. It is believed that he wrote the book in a desperate attempt to raise capital.
The book talks about the rationale of Livermore's decision-making process while trading.
Its ten chapters are:
I. The Challenge of Speculation
II. When Does a Stock Act Right?
III. Follow the Leaders
IV. Money in the Hand
V. The Pivotal Point
VI. The Million Dollar Blunder
VII. The Three Million Dollar Profit
VIII. The Livermore Market Key
IX. Explanatory Rules
X. Charts and Explanations for the Livermore Market Key
Following are some quotations from How to Trade in Stocks:
The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the man of inferior emotional balance, nor for the get-rich-quick adventurer. They will die poor. (Page 15)
On understanding the value of learning how to trade:
"How can I make some quick money in law or surgery?" (Page 15)
On doing your own work and thinking for yourself:
· let me warn you that the fruits of your success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking, and reaching your own conclusions. (Page 16)
On the best trades:
Experience has proved to me that real money made in speculating has been in commitments in a stock or commodity showing a profit right from the start. (Page 19)
On taking losses:
Profits always take care of themselves but losses never do. The speculator has to insure himself against considerable losses by taking their first small loss. (Page 21)
On holding and hoping:
If my stock does not act as I anticipated, I immediate determine that the time is not yet ripe - so I close out my commitment. (Page 22)
On so-called 'blue chips' (Livermore was pointing out the danger in the commonly held market belief, at the time he wrote the book, that it was safer to invest in railroad stocks then to have the money in the bank:
New York, New Haven and Hartford Railroad
* Price on April 28, 1902 - $255. Price in January 2, 1940 - $0.50.
Chicago, Milwaukee & St. Paul Railroad
* Price in December 1906 - $199.62. Price January 5, 1940 - $0.25.
Chicago Northwestern
* Price in January 1906 - $240. Price January 2, 1940 - $0.31.
Great Northern Railway
* Price in February 9, 1906 - $348. Price on January 2, 1940 - $26.63.
(Page 24)
On 'buy and hold' investing:
Speculators in stock markets have lost money. But I believe that it is a safe statement that the money lost by speculators alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride. (Page 25)
From my point of view, the investors are the big gamblers. They make a bet, stay with it, and if all goes wrong, they lose it all. (Page 25)
On history repeating, and learning from the past:
The price pattern reminds you that every movement of importance is but a repetition of similar price movements, that just as soon as you can familiarize yourself with the actions of the past, you will be able to anticipate and act correctly and profitably upon forthcoming movements. (Page 51)
On tips:
Beware of inside information· all inside information. (Page 58)
·and if there was any easy money lying around, no one would be forcing it in your pocket. (Page 58)
The chart tells the entire story:
The only reason an investor or speculator should ever want to have pointed out to him is the action of the market itself. Whenever the market does not act right or in the way it should - that is reason enough for you to change your opinion and change it immediately· Remember, there is always a reason for a stock acting the way it does. But also remember: the chances are that you will not become acquainted with that reason until some time in the future, when it is too late to act on it profitably. (Page 71)
Reminiscences of a Stock Operator
This trading and investment classic, supposedly written by Edwin Lefevre in 1923, is arguably the most popular book ever written about speculation.
Lefevre was a financial journalist, and the book was dedicated to Jesse Livermore. It is supposedly a novel about a fictional trader called Larry Livingston.
In reality, Livermore almost certainly wrote the book himself, with Lefevre being the editor. The book is a thinly disguised account of Livermore's life.
Despite the book being one of the most enjoyable books on trading ever written, Reminiscences of a Stock Operator contains market truths from cover to cover. A few examples include:
To learn that a man can make foolish plays for no reason whatever was a valuable lesson. [Pages 155 and 156]
In fact, I always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own game - that is, to play the market only when I was satisfied that precedents favored my play. [Page 14]
The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. [Page 129]
· after a while, I heard a lot of calamity howling and the old stagers said everybody - except themselves - had gone crazy. [Page 34]
· and the only thing to do when a man is wrong is to be right by ceasing to be wrong. [Page 103]
But in actual practice a man has to guard against many things, and most of all against himself. [Page 122]
No trading library should be without a copy of Reminiscences of a Stock Operator. It is no wonder that many authors today regularly quote passages from this book.
Martin Zweig once stated that Reminiscences of a Stock Operator was "The best book I've read. I keep a supply for people who come to work for me".
Jack Schwager, author of Market Wizards and New Market Wizards says of the book:
In my interviews with over 30 of the best traders of our time, there were some questions that I raised in each conversation. One of these was: "Are there any books that you find particularly valuable and would recommend to aspiring traders?" By far, the most frequent response was 'Reminiscences of a Stock Operator'.
Jesse Livermore's third legacy to the world was his life story. On the one hand he was an honourable man who paid debts that he was not legally required to pay. On the other hand, he was a big time trader who would use any legal tactic to enhance his chances of making money.
The one thing his supporters and his critics agree on is that he was a true market master.
[This article was first published in the Australian Technical Analysts' Association Journal, May/June 2000. It is republished here with the permission of the Association.]
DISCLAIMER:
Every effort has been made to ensure that the content and conclusions presented in The New W. D. Gann Technical Review are complete and accurate.
No part of The New W. D. Gann Technical Review contains trading advice - stated or implied, nor is an invitation to trade. The directors and associates of Lambert-Gann Educators, Inc. are NOT licensed trading or investment advisors. Lambert-Gann Educators, Inc. is an organization designed to assist traders and investors to become more knowledgeable and independent.
The giving of advice is therefore contrary to the very objectives of Lambert-Gann Educators, Inc.
Traders requiring trading or investment advice should contact a licensed advisor.
Stockbrokers and futures brokers are licensed advisors.
Neither Lambert-Gann Educators, Inc., nor anyone else involved in the production of The New W. D. Gann Technical Review, will be liable for any liability, loss or damage directly or indirectly caused, or believed to be caused, by The New W. D. Gann Technical Review.
Traders, to be successful, must take full responsibility for their own actions.
With respect to trading results, past performance is not necessarily an indication of future performance.
By maintaining your subscription to The New W. D. Gann Technical Review, you acknowledge that you understand and accept the contents of this disclaimer.
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