Tuesday, June 06, 2006

Personalities: Jesse Livermore 0 comments

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The greatest trader that ever lived, they call him. I use the figure of the bear (see above) because he made his name shorting the market crashes of 1907 and 1929. More than the money that he made, it was the way he made them and lost them --- several times over --- and the immortalisation of his trading philosophies in the classic "Reminiscences of a Stock Operator" that mark him as one of the greats.

According to the book, written by Edwin Lefevre in the persona of Larry Livingston which was a pseudonym for Jesse Livermore, the man himself started his trading career at the age of fifteen, after he ran away from home to escape a life of farming his father wished him to have. He then began his career by posting stock quotes at a brokerage in Boston, where he first learnt about stocks and honed his ticker-tape reading skills, enabling him to read and predict price movements and tendencies. In the next several years, he made his money at the bucket shops (a kind of gambling outlet allowing margin trading on stocks), and then devoted his energies towards trading in legitimate markets, first on the stock exchange and then moving on to commodities as well. His life was filled with ups and downs; his big money was made in the market collapse of 1907 and Black October in 1929, which made him $3M and $100M(!) respectively, but in between he lost most of his fortune in commodities and a sideways trading market, and subsequently after 1929 again lost most of his trading capital in a depression market. He declared bankruptcy several times in his trading career, and committed suicide in 1940, having lost confidence in his abilities and suffering from depression. A sorry end to a great speculator.

I guess the ups and downs only added to the romanticism of his life story and enhanced his status in the eyes of professional traders (somehow). His teachings and trading philosophies, learnt through hard experience, are probably standard traders' rules nowadays: trend-following, buying and holding in a bull market, industry analyses, following the leaders, identifying pivot points, and of course, risk management. Speculators before him had practised some of these ideas, but he probably formalised these philosophies and profited greatly from them like no other before him, by sheer application on the markets.

One should really go and read the abovementioned classic (Reminiscences of a Stock Operator) to get a full view of his ideas and their evolution. Below are probably some of the most important ones:

- The greatest amount of money is made following the major trends - not in the day-to-day fluctuations of a stock or in a particular commodity. A useful piece of advice for the day-traders of today, from one of the all-time great speculators. "The courage of your convictions and the intelligent patience to sit tight" (in this sense he shares a certain similarity of spirit with Warren Buffett).

- While his tape-reading skills were still important, they were not as important as studying the fundamentals of each company and the credit conditions of the stock market and the economy; such studies served him well in his bear raid during the Panic of 1907 where he observed tightening of credit conditions and the bankruptcy of a number of businesses and Wall Street brokerages

- Always average up; buy more of what shows you a profit, and sell off if the price is not behaving right (ie. goes down). This is consistent with his view of trend trading and cut loss. "Always sell what shows you a loss and keep what shows you a profit".

- Do not depend your analysis solely on "insider information.", or more generally, trust your own analysis and do not rely blindly on other people's advice however convincing and knowledgeable they are. He learnt this from personal experience, most significantly in a cotton trade where he reversed his original position on the advice of an expert and consequently suffered huge losses.

- The need to continuously evolve in the stock market. Thus he was able to switch from the bucket shops to the exchange, and continuously evolve new philosophies and trading styles from his observations. He also learnt to trust his instincts (a point also emphasised, incidentally, in "The Zurich Axioms").

The 1920s to 1930s were probably some of the most treacherous times for speculators. Having thrived on one crisis (Black October 1929), Livermore then probably misread the severity of the crash and made bad calls leading to his last bankruptcy and his eventual depression and suicide. Perhaps this is the final lesson for traders: be ready to admit defeat rather than go all out .... the nature of the market might have changed.

1. Marketthoughts.com: On Jesse Livermore And His Legacy
2. Wikipedia entry: Jesse Livermore
3. Wisdom of Jesse Livermore
4. Reminiscences of a Stock Operator (Edwin Lefevre)




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