Jesse Livermore started trading at the age of 15 after running away from home, and made thousands of dollars profit before he was 20 years old.  He became one of the world’s trading greats, making and losing several fortunes trading stocks and commodities such as wheat and coffee.  He was reputed to have made over $100 million in one day in the stock market crash of 1929, an amount that would be equivalent to billions of dollars in today’s money.

In his day, Jesse Livermore was a larger than life character, with his 300 foot yacht, and opulent lifestyle and was noted as playing the short side of the market on an enormous scale. How did he make so much money, and what can we learn from his life story?

Jesse Lauriston Livermore was born in 1877.  He was always very good with numbers, and ran away from home (with his mother’s blessing) to work as a board boy in a stock broking firm.  It wasn’t long before he was tracking how individual shares traded, and he made his first successful trade in a bucket shop with $5 of his savings.  Bucket shops were disreputable brokers that “bucketed” the customer’s trades, automatically closed them out if the trade went to a loss of 10% and kept the money and took the opposite side of the trade and reluctantly paid out in the event of a win.

Livermore quickly learned the benefit of the automatic stop loss provided by bucket shops, and rapidly started making a lot of money out of them.  Not surprisingly, he was banned, and looked for real brokers to start trading stocks.

In his day, the ticker tapes were often substantially behind the market.  By the time Livermore placed a trade, the market had already moved away.  He quickly lost his money.  He started making it again when he understood that money was made with the large movements, not the small ups and downs that most traders pursue.  In addition, he had his own special trading room, with board markers updating trades directly from the floor.  In this way, he had the most up to date information available.  He used his own pattern recognition approach:

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.

While he was refining his methods, Livermore was sometimes left without a trading stake.  He played with huge amounts of money and leverage, and took on enormous risks, and sometimes he was on the wrong side of trades.  This typically happened when he ignored his own personal rules, or trusted someone else instead of relying on his own judgement.  Later in life, he took special measures to isolate himself from market gossip and set up multimillion dollar annuities to ensure that he always had income to start again.

In time, Livermore developed a good sense of the markets.  But instead of placing his entire trade at once, he used “probes”, which were smaller trades to test the direction of the market.  If they went his way, he invested more into the market, until his entire trade was placed.  He did the opposite of what traders do when they average into a losing position.

After his great triumph in 1929, Livermore lost his edge in the market.  This may have been due to his depression, which was not treatable in his day, and in addition, the rules of the market were changing - new laws were being introduced.  He lost his money again by the mid 1930’s - it is not known how this happened.  He had been down before, but never bounced back despite having his trusts to raise a trading stake.  Unfortunately he shot himself in 1940, and his note said that he saw his life as a failure.

There is no doubt that despite his failures, Livermore was still a market great.  What lessons can we learn from Livermore’s successes and failures?

Well, he started at zero and made several fortunes, starting again from scratch.  He had early success through studying and recognising market patterns, but lost when he had to trade in a different market.  After time, he discovered that the overall long term trends were where he could make the most money, and he was willing to trade wherever opportunities arose, and trade either long or short.

He became extremely financially successful, but he was always interested in the markets for the intellectual challenge rather than the money itself:

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.

Although he didn’t always follow his own rules (and lost when he didn’t), he developed money management techniques that involved testing the waters with a small amount of money before progressively adding his trade.  He set up his own trading room, and developed a trading style that fit with his personality.  He ignored tips and market gossips and became confident in his own judgement.

One of the best books on Jesse Livermore was the semi-fictional biography “Reminiscences of a Stock Market Operator” by Edwin Lefevre, written in 1923.

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Tags: Jesse Livermore, millionaire trader, stock trader, Trader biography

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