Oracle-Jesse Livermore

Jesse Lauriston Livermore (July 26, 1877 — November 28, 1940), also known as the Boy Plunger,[1] was an early 20th century stock trader. He was famed for making and losing several multi-million dollar fortunes and short selling during the stock market crashes in 1907 and 1929.

Biography

Born in Acton, Massachusetts, Jesse Livermore started his trading career at the age of fourteen. He ran away from home with his mother's blessing to escape a life of farming his father wished him to have. He then began his career by posting stock quotes at the Paine Webber brokerage in Boston.

He married his first wife, Netit (Nettie) Jordan of Indianapolis, at the age of 23 in October 1900. Less than a year later, he went broke after some reverses in his stock trading; he asked her to pawn the substantial collection of jewelry he had bought her for a new stake, but she refused, permanently damaging their relationship. They separated and finally divorced in October 1917.[2] His second wife was Dorthea (Dorothy) Wendt. They had two sons, Jesse Jr.[3] and Paul. His third wife was Harriett Metz Noble.

[edit] Wall Street

While working, he would write down certain hunches he had about future market prices, which he would check for accuracy later. A friend convinced him to put his first actual money on the market by making a bet at a bucket shop, a type of gambling establishment that took bets on stock prices but did not actually buy or sell the stock.[4]

By the age of fifteen, he had earned profits of over $1,000 (which equates to about $20,000 today[5]). In the next several years, he continued betting at the bucket shops. He was eventually banned from most bucket shops for winning too much money from them. He then moved to New York City and devoted his energies towards trading in legitimate markets. This change would lead him to devise a new set of rules to trade the market.

During his lifetime, Livermore gained and lost several multi-million dollar fortunes. Most notably, he was worth $3 million and $100 million after the 1907 and 1929 market crashes, respectively. He subsequently lost both fortunes. Apart from his success as a securities speculator, Livermore left traders a working philosophy for trading securities that emphasizes increasing the size of one's position as it goes in the right direction and cutting losses quickly.

Livermore sometimes did not follow his own rules strictly. He claimed that his lack of adherence to his own rules was the main reason for his losses after making his 1907 and 1929 fortunes.

[edit] Reminiscences of a Stock Operator

The popular book Reminiscences of a Stock Operator, by Edwin Lefevre, reflects on many of those lessons. Livermore himself wrote a less widely read book, "How to trade in stocks; the Livermore formula for combining time element and price". It was published in 1940, the same year he committed suicide. It was later revealed by Livermore that he had actually penned the book Reminiscences of a Stock Operator, and that Lefevre had acted as the editor and coach.[citation needed] There is some speculation that this partnership between the two men was not their first collaboration. Since LeFevre was a writer and journalist, it is thought that he was one of the friendly newspapermen that Livermore employed for both information and planted articles.

[edit] Wall Street success

Livermore first became famous after the Panic of 1907 when he sold the market short as it crashed. He noticed conditions where a lack of capital existed to buy stock. Accordingly, he predicted that there would be a sharp drop in prices when many speculators were simultaneously forced to sell by margin calls and a lack of credit. With the lack of capital, there would be no buyers in sight to absorb the sold stock, further driving down prices. After the crash and its aftermath, he was worth $3 million.

He proceeded to lose 90% of that 1907 fortune on a blown cotton trade. He violated many of his key rules; he listened to another person's advice (he preferred working alone) and added to a losing position. He continued losing money in the flat markets from 1908-1912. He was $1 million in debt and declared bankruptcy. He proceeded to regain his fortune and repay his creditors during the World War I bull market and resulting downtrend.

He owned a series of mansions around the world, each fully staffed with servants, a fleet of limousines, and a steel-hulled yacht for trips to Europe. He married his second wife, Dorothy, a beautiful Ziegfeld Follies showgirl, on December 2, 1918, when he was 41 and she was 18.[6]

Livermore continued to make money in the bull markets of the 1920s. In 1929, he noticed market conditions similar to that of the 1907 market. He began shorting various stocks and adding to his positions, and they kept declining in price. When just about everyone in the markets lost money in the Wall Street crash of 1929, Livermore was worth $100 million after his short-selling profits.

[edit] Favorite book

One of Livermore's favorite books was Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackay, first published in 1841. This was also a favorite book of Bernard Baruch, a stock trader and close friend of Livermore who also was one of the few people that did well in the crash of 1929.[7]

Jesse cited a lot of jokes, including an old story about "selling down to the sleeping point" from the book Speculation as a Fine Art by Dickson G. Watts.[8]

[edit] After the Crash of '29

Dorothy finally filed for divorce and took up temporary residence in Reno, Nevada, with her new lover, (and later 2nd husband) Walter Longcope. On September 16, 1932, Dorothy divorced Livermore on grounds of desertion. They had been married 14 years. Dorothy retained custody of their boys.[9]

On March 28, 1933, Livermore married 38 year old Harriet Metz Noble in Geneva, Illinois; there was no honeymoon. It was Harriet's fifth marriage; all four of her previous husbands had committed suicide.[10]

Through unknown mechanisms, he yet again lost much of his trading capital, accumulated through 1929. Thus, on March 7, 1934, the bankrupt Livermore was automatically suspended as a member of the Chicago Board of Trade. It was never disclosed to anyone what happened to the great fortune he had made in the crash of 1929, but he had lost it all.[11]

[edit] His book

“ All through time, people have basically acted and reacted 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. ”

—Jesse Livermore, How To Trade In Stocks

In late 1939, Livermore's son, Jesse Jr., suggested to his father that he write a book about his experiences and techniques in trading in the stock and commodity markets. This brought a flash of life back into Livermore, and the book was completed and published by Duell, Sloan and Pearce in March 1940. It was titled How To Trade In Stocks.[12] The book did not sell well, World War II was underway, and the general interest in the stock market was low. His methods were still new and controversial at the time, and they received mixed reviews from stock market gurus of the period.[13]

“ 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 person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor. ”

—Jesse Livermore, How To Trade In Stocks

Suicide

On November 28, 1940, Livermore shot and killed himself in the cloakroom of the Sherry Netherland Hotel in Manhattan. The police revealed that there was a suicide note of eight small handwritten pages in Livermore's personal notebook. It was reported in the November 30 issue of the New York Tribune. The press wanted to know what it said, and the police tersely responded: “There was a leather-bound memo book found in Mr. Livermore's pocket. It was addressed to his wife.” A police spokesman read from the notebook: “My dear Nina: Can’t help it. Things have been bad with me. I am tired of fighting. Can’t carry on any longer. This is the only way out. I am unworthy of your love. I am a failure. I am truly sorry, but this is the only way out for me. Love Laurie".

He left behind two sons Jesse Jnr and Paul.

Untouchable trusts and cash assets at his death totalled over $5 million. A lifelong history of clinical depression had become the dominant factor in his final years.

 

Jesse Livermore: Original Trend Follower and Great Trader

People wonder where great traders such as Ed Seykota find inspiration and influence? Jesse Livermore is one such man from the early 20th century. He is the early Trend Follower.

Jesse L. Livermore was born in South Acton, Massachusetts, in 1877. At the age of fifteen he went to Boston and began working in Paine Webber's Boston brokerage office. His job was to post the stock and commodities prices on the brokerage's price quotations chalk board. He studied the price movements and began to trade on their price fluctuations. When Jesse was in his twenties he moved to New York City to speculate in trading in the stock and commodities market. Over a time period of fourty years of trading, he developed a knack for speculating on price movements in stock and commodity prices. He was said to have accumulated and lost millions of dollars several times over. He earned the nickname of Boy Wonder. Jesse Livermore created a set of trading rules, based upon the lesssons of his personal trading experience. One of his foremost rules was: Never act on tips.

The unofficial biography of Jesse Livermore was Reminiscences of a Stock Operator published 1923. Below are selected quotes:

• Another lesson I learned early is that there is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.
• I told you I had ten thousand dollars when I was twenty, and my margin on that Sugar deal was over ten thousand. But I didn't always win. My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I'd have been right perhaps as often as seven out of ten times. In fact, I have 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. There is a time for all things, but I didn't know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily- or sufficient knowledge to make his play an intelligent play.
• It takes a man a long time to learn all the lessons of 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.
• There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!
• I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, Well, you know this is a bull market! he really meant to tell them that the big money was not in the individual fluctuations but in the main movements- that is, not in reading the tape but in sizing up the entire market and its trend.
• The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but the intelligent patience to sit tight.
• ?the average man doesn't wish to be told that it is a bull or bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn't even wish to have to think. It is too much bother to have to count the money that he picks up from the ground.
• To tell you about the first of my million dollar mistakes I shall have to go back to this time when I first became a millionaire, right after the big break of October, 1907. As far as my trading went, having a million merely meant more reserves. Money does not give a trader more comfort, because, rich or poor, he can make mistakes and it is never comfortable to be wrong. And when a millionaire is right his money is merely one of his several servants. Losing money is the least of my troubles. A loss never bothers me after I take it. I forget it overnight. But being wrong- not taking the loss- that is what does damage to the pocketbook and to the soul.
• What I have told you gives you the essence of my trading system as based on studying the tape. I merely learn the way prices are most probably going to move. I check up my own trading by additional tests, to determine the psychological moment. I do that by watching the way the price acts after I begin.
• Of all speculative blunders there are few worse than trying to average a losing game. My cotton deal proved it to the hilt a little later. Always sell what shows you a loss and keep what shows you a profit. That was so obviously the wise thing to do and was so well known to me that even now I marvel at myself for doing the reverse.
• The loss of the money didn't bother me. Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee. A man has to have experience and he has to pay for it.
• In booms, which is when the public is in the market in the greatest numbers, there is never any need of subtlety, so there is no sense of wasting time discussing either manipulation or speculation during such times; it would be like trying to find the difference in raindrops that are falling synchronously on the same roof across the street. The sucker has always tried to get something for nothing, and the appeal in all booms is always frankly to the gambling instinct aroused by cupidity and spurred by a pervasive prosperity. People who look for easy money invariably pay for the privelege of proving conclusively that it cannot be found on this sordid earth. At first, when I listened to the accounts of old-time deals and devices I used to think that people were more gullible in the 1860's and 70's than in the 1900's. But I was sure to read in the newspapers that very day or the next something about the latest Ponzi or the bust-up of some bucketing broker and about the millions of sucker money gone to join the silent majority of vanished savings.
• There are men whose gait is far quicker than the mob's. They are bound to lead- no matter how much the mob changes.

Jesse Livermore wrote one book: How to Trade in Stocks: The Livermore Formula for Combining Time, Element and Price. It was published in 1940. The book is very rare and not easily found.

Some excerpts from the original version are below:

Trust Yourself

When you are handling surplus income to do not delegate the task to anyone. Whether you are dealing in millions or in thousands the same principal lesson applies. It is your money. It will remain with you just so long as you guard it. Faulty speculation is one of the most certain ways of losing it. Blunders by incompetent speculators cover a wide scale.

Losers Average Losers

I have warned against averaging losses. That is a most common practice. Great numbers of people will buy a stock, let us say at 50, and two or three days later if they can buy it at 47 they are seized with the urge to average down by buying another hundred shares, making a price of 48.5 on all. Having bought at 50 and being concerned over a three-point loss on a hundred shares, what rhyme or reason is there in adding another hundred shares and having the double worry when the price hits 44? At that point there would be a $600 loss on the first hundred shares and a $300 loss on the second shares. If one is to apply such an unsound principle, he should keep on averaging by buying two hundred shares at 44, then four hundred at 41, eight hundred at 38, sixteen hundred at 35, thirty-two hundred at 32, sixty-four hundred at 29 and so on. How many speculators could stand such pressure? So, at the risk of repetition and preaching, let me urge you to avoid averaging down.

More.

Margin

I know but one sure tip from a broker. It is your margin call. When it reaches you, close your account. You are on the wrong side of the market. Why send good money after bad? Keep that good money for another day. Risk it on something more attractive than an obviously losing deal.

Price Movement

We know that prices move up and down. They always have and they always will. My theory is that behind these major movements is an irresistible force. That is all one needs to know. It is not well to be too curious about all the reasons behind price movements. You risk the danger of clouding your mind with non-essentials. Just recognize that the movement is there and take advantage of it by steering your speculative ship along with the tide. Do not argue with the condition, and most of all, do not try to combat it.