Jesse Lauriston Livermore

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Jesse Livermore
Jesse Livermore

Jesse Lauriston Livermore (July 26, 1877 - November 28, 1940), also known as Boy Plunger,[1] was a notable 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.

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[edit] Overview

Born in South Acton, Massachusetts, Jesse Livermore started his trading career at the age of fifteen. 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.

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 in his first money trade. He risked $5 and made $3.12 in profit from his first trade from Burlington stock.[2] With these humble beginnings, he began trading for himself.

At the age of fifteen, he had earned profits of over $1000 (a significant amount of money in the early 1890s). In the next several years, he made his money at bucket shops. These were places where people would enter trades, but no actual trades were executed; they were betting against the house. Most people would lose money to the bucket shops because of fluctuations in stocks that would wipe out their slim margins. Livermore would regularly beat the bucket shops and was eventually banned from them. He then devoted his energies towards trading in legitimate markets. This change would lead him to devise a new set of rules to beat 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.

Ironically, Livermore sometimes did not follow his rules strictly. This lack of adherence was the main reason for his losses after making his 1907 and 1929 fortunes.

The popular book Reminiscences of a Stock Operator, by Edwin Lefevre, reflects 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.

[edit] Wall Street success

Livermore became a successful trader at an early age. He claims to have made 1,000 dollars by the age of 15 trading stocks). In his book, he claims his parents were against his trading even after his success because they couldn't understand how a person who didn't work could make such a sum of money relatively quickly. Livermore made his money by following trends in market prices. He would choose a particular stock or commodity to buy or short based on its price and volume action. Then, he would establish relatively small initial positions. He would then add to his positions if they made him money or sell them if they were unprofitable. This technique resulted in large gains and small losses. He also bucked the trends of prevailing sentiment of the markets at critical points. For example, when people were exuberant about the markets near the tops in 1907 and 1929, he began short-selling.

After devising his rules, he temporarily disregarded them in 1906. He repeatedly shorted Union Pacific in a rising market and kept adding to his position even when the stock temporarily rose. He couldn't explain why, but he had a strong urge to short the company. A few days later, the San Francisco Earthquake of 1906 struck. Livermore kept adding to his position and made $250,000.

He first became famous In 1907, when he short sold the market as it crashed. He noticed conditions where a lack of capital existed to buy stock. Accordingly, there would be drops in prices with too many sellers, driven by margin calls. 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 Dorothy, a beautiful Ziegfeld Follies showgirl when he was about 40 years old.

Livermore continued to make money in the bull markets of The roaring 20's. 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's who also was one of the few people that did well in the crash of 1929.[3]

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.[4]

[edit] After the Crash of '29

Dorothy finally filed for divorce and took up temporary residence in Reno, Nevada, with her new lover, Agent Longcope. On September 16, 1932, Dorothy divorced Livermore on grounds of desertion. They had been married since December 2, 1918 - 14 years. Dorothy retained custody of their boys.[5]

On March 28, 1933, Livermore married the 38 year old Harriet Metz Noble in Geneva, Illinois; there was no honeymoon. It was Harriet's fifth marriage, and ironically all four of her previous husbands had committed suicide.[6].

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.[7]

[edit] Livermore writes his book

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.[8] 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.[9]

[edit] Suicide

In the Squibb building at 745 Fifth Avenue, at the age of 63, Livermore entered the Sherry-Netherland Hotel on November 28, 1940, at 4:30 in the afternoon. Sitting on a stool at the end of the cloakroom, he withdrew a .32-caliber Colt automatic pistol (he had bought the gun in 1928 while he was living in Evermore), placed the barrel of the gun behind his right ear and pulled the trigger, dying instantly.[10]

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.[11] 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”.[12]

Although untouchable trusts and cash assets at his death totalled over $5 million, Livermore had failed to regain his trading confidence before his death. A lifelong history of clinical depression had become the dominant factor in his final years.

[edit] See also

[edit] References

  1. ^ Edwin Lefèvre (1923). Reminiscences of a Stock Operator, p. 14. 
  2. ^ Edwin Lefèvre (1923). Reminiscences of a Stock Operator, p. 12. 
  3. ^ Richard Smitten (October 21, 2004). Trade Like Jesse Livermore, p. 76. 
  4. ^ Edwin Lefèvre (1923). Reminiscences of a Stock Operator, Chapter X, p. 98. 
  5. ^ Richard Smitten (September 14, 2001). Jesse Livermore: The World's Greatest Stock Trader, p. 248. 
  6. ^ Richard Smitten (September 14, 2001). Jesse Livermore: The World's Greatest Stock Trader, p. 250. 
  7. ^ Richard Smitten (September 14, 2001). Jesse Livermore: The World's Greatest Stock Trader, p. 260. 
  8. ^ Richard Smitten (September 14, 2001). Jesse Livermore: The World's Greatest Stock Trader, p. 276. 
  9. ^ Richard Smitten (September 14, 2001). Jesse Livermore: The World's Greatest Stock Trader, p. 276. 
  10. ^ Richard Smitten (September 14, 2001). Jesse Livermore: The World's Greatest Stock Trader, p. 278-279. 
  11. ^ Richard Smitten (September 14, 2001). Jesse Livermore: The World's Greatest Stock Trader, p. 281. 
  12. ^ Richard Smitten (September 14, 2001). Jesse Livermore: The World's Greatest Stock Trader, p. 281-182. 

[edit] Books

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