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.
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.
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".
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.
Books by Jesse Livermore:
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