Investment Greats: Jesse Livermore

Published in Investing Strategy on 15 May 2009

In the early decades of the twentieth century, Jesse Livermore was a high-flying, extravagant, stock market celebrity, but his story is not a happy one.

Investment gurus are not just a modern phenomenon, and one of the most famous plied his trade at the beginning of the last century. Jesse Livermore became a high-profile media celebrity, living an extravagant lifestyle, but the stress of winning and losing several fortunes eventually took its toll.

Background

Livermore was born into a poor farming family in Massachusetts in 1877, and at the age of fifteen he left home to seek his fortune in Boston. He found a job with stockbroking firm Paine Webber, but this was no privileged fast-track to a career in investment -- his job was to run up and down ladders, chalking prices on a blackboard.

After some time doing this, he took to predicting future prices, and eventually placing bets on share price movements in the 'bucket shops' of the day; bucket shops were basically bookmakers who set odds on share prices without buying the underlying stocks. He had a habit of making more money than he lost, to the extent that he was barred from some of these establishments.

After a few years he decided to raise his game and move to Wall Street to start speculating properly.

Successes and failures

One of Livermore's more dramatic successes was in 1906, when he shorted the railroad operator Union Pacific, a darling of the bull market at that time. Days later, the great San Francisco earthquake struck, reducing much of Union Pacific's real estate and infrastructure to rubble. Livermore made $300k profit on that trade.

A year later, he was correctly positioned on the bear side of the 1907 stock market crash, and again made significant gains, bringing his wealth to an estimated $3m. Most of this was lost in subsequent trades on the cotton market, and a few years later he was wiped out.

Managing to pick himself up again, he managed to rebuild his fortune. Many ups and downs followed, but again it was his uncanny timing ahead of the Wall Street Crash of 1929 that really propelled him to the top. While others lost their shirts, Livermore was worth an estimated $100m by the time the dust settled, and this was back when $100m was considered a lot of money.

He went on to lose much of this fortune during the 1930s, and was in serious financial difficulties when he wrote his book, How to Trade In Stocks, shortly before his untimely death in 1940.

Investing Style

A remarkable element of Livermore's style was a readiness to act on hunches. His apparent ability to guess correctly while chalking numbers on the blackboard was what initially lured him into playing the market. And there is no way he could have predicted the San Francisco earthquake, but he just had a feeling that he needed to go short. Some have suggested that he regarded himself as clairvoyant.

He was also a great proponent of using price charts to predict future movements. It's a practice that doesn't have much support in the Motley Fool community, although we do have a discussion board dedicated to it. As Livermore explained it: "All through time, people have basically acted the same way in the market as a result of greed, fear, ignorance and hope -- that is why the numerical formations and patterns recur on a constant basis."

Making the right call on the general direction of the market was very important to him, and in that sense he could be thought of as a momentum investor. He wasn't interested in the concept of buying businesses, in the way that Warren Buffett is, but neither was he a short-term trader. "No man can have adequate reasons for buying or selling stocks daily – or sufficient knowledge to make his play an intelligent play."

"... the big money was never made in the buying or the selling. The big money was made in the waiting." This should not be confused with the long-term-buy-and-hold (LTBH) strategy popular with many Fools; Livermore would always use charting techniques and gut instinct to tell him when to bale out.

"Money lost by [short-term] speculation is small compared with the gigantic sums lost by so-called investors who have let their investments ride. … investors are the big gamblers. They make a bet, stay with it, and if it goes wrong, they can lose it all."

It's a risky business, and at one level he seemed to be comfortable with that and even embrace the danger. "Every occupation has its aches and pains. If you keep bees, you get stung. Me, I get worried. It's either that or stay poor. If I've got a choice between worried and poor, I'll take worried anytime".

Untimely death

Sadly, this story doesn't have a happy ending. It seems that worry eventually did get the better of him, and when his empire crumbled yet again in 1940 he had had enough, and took his own life at the age of 63.

Given his tragic end, the somewhat random nature of his gains and losses, it may be inappropriate to include him in the category of 'Investing Greats'. But he is without question one of the most colourful characters in the in ranks of investors/speculators/gamblers, and stands in stark contrast to the more understated, and arguably more disciplined and logical, investment gurus of modern times.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

c189767 15 May 2009 , 10:07pm

Much respect for including Jesse Livermore in TMF list of investing greats.

I am surprised however that you did not recommend his biography book titled: "Reminiscences of a Stock Operator" as the one to read.

The internet is filled with websites quoting from Livermore's books.

Below are a few of the many quotes you will find:

“It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation.”

“They say you never grow poor taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market.”

“The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.”

lotontech 16 May 2009 , 8:29am

Will you be covering Nicolas Darvas in this Investment Greats series?

I thoroughly recommend his books "How I Made $2 Million in the Stock Market" and "Wall Street: The Other Las Vegas".

Luniversal 16 May 2009 , 2:19pm

Darvas the Dancer is widely believed to have talked a good game, mind. His claims to profits in the late 1950s were found to have been greatly overstated by the Attorney General of New York in a 1961 investigation.

lotontech 16 May 2009 , 6:34pm

I don't know whether Luniversal is right about that or not, but in any case the story of Darvas's evolution as a trader from The Gambler, to The Fundamentalist, to The Technician, to the Techn-Fundamentalist (the titles of his chapters) is very enlightening for any would-be trader.

Esquilax100 18 May 2009 , 12:05pm

Thanks all for your comments.

Re "Reminiscences of a Stock Operator", in general I mention books by the subject rather than books about the subject, but probably should have made an exception in this case.

Livermore's "How to trade in stocks" is usually sold in a heavily edited/re-written version, so purists may want to seek out the original.

Thanks too for the suggestion to include Darvas. He wasn't on my list, but I'll consider including him.

- Padraig

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