“Of all the offspring of Time, Error is the most ancient, and is so old and familiar an acquaintance, that Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome.” This was a quote out of a book titled, ‘Extraordinary Popular Delusions and the Madness of Crowds’ by a Scottish journalist named Charles Mackay, first published in 1841. This happened to be one of Jesse Livermore’s favorite books to read. He was known as the greatest investor of all time, Jesse Livermore.
When people talk about the greatest investor of all time, the name Jesse Livermore most likely will come up. The sad truth is that some people are unaware of the life Livermore lived and the path which took a boy born into poverty to the height of the financial markets of his time.
Pain Webber and The Big City
As the story goes, young Jesse wanted to head to the big city instead of working the farm for his father. His mother had worked with him since age three on learning math, so the young man developed a gift for analysis. He soon figured out he needed to venture into the city to find what he was looking for because reporting to the farm was definitely not what he was after. When he was 14 years old, he set out for the city with the help of his mother. Instead of reporting to the address his mother assigned him, he stopped at a Paine Webber, a Boston stockbroker house.
Jesse found himself inside a ‘bucket shop’ where shares of stocks and commodities would trade hands along with each corresponding price. A person engaged in this trading would be referred to as a bucketeer, and the practice they were involved in was known as bucketeering, hence the term bucket shop.
Inside the bucket shop is where Jesse found his calling. Soon after arriving in Boston, Jesse would become a “chalk boy,” someone who would track the price of the recent sales on a black chalkboard for everyone to see. He was able to make a small salary with this newly acquired job so he could rent an apartment nearby. He was known as a trustworthy chalk boy and someone who was dedicated to learning everything there was to know about the bucket shop.
Numbers, Psychology and The Emotions of Crowds
Jesse learned the market inside and out reading newspapers, studying the bucket shop system and the companies listed for trade. He studied the price movements and how they moved in conjunction with other similar stocks in the same industry. He also noticed how news events of the day flowed through the office and affected the prices he was recording.
Patterns were emerging at times when bad news was reported regarding a particular company. Most notably, the emotions of the traders were observed by Jesse as he saw people rushing to sell as the price moved lower to minimize their losses. As soon as the panic selling concluded, prices would recover and jump higher. He thought if emotions were driving the buying and selling in his bucket shop, surely they were also at play in other places throughout the country.
Jesse kept a notebook full of observations and trade ideas. His goal was to set out on his own to trade with his private funds. Part of the reason for this was to get away from the crowd and be alone with his own emotions and ideas, not to be influenced by the herd. He began to make trades in his notebook that were from his observations of the day’s trading. These were not real trades as he didn’t have a large account with actual money but his ideas to confirm different patterns he was noticing.
One day at age 15, Livermore decided to make a real trade using $5 of his wages from the bucket shop. His trade returned a profit of $3.12, and he was off and running. The new few weeks found Jesse earning more on his own trades as he was making in wages from Paine Webber. He decided to leave the bucket shop and start trading on his own, with his own money, at nearby Boston shops when he was 16 years old.
Jesse would go on to make profits at various bucket shops, and eventually, he was banned from entering many of them. Bucket shops were not set up to lose money, and that’s what Livermore caused whenever he visited them. Jesse refused to stop trading even after getting banned, so he would resort to wearing fake beards to go unnoticed. Often he would hire someone to enter the bucket shops and execute the trades on his behalf.
The First Big Score
In 1906 Jesse had his first big win. He mostly attributes the trade to dumb luck and says he just “got a feeling” that he should short Union Pacific stock. In April of 1906, Jesse shorted 5000 shares of Union Pacific railroad stock, starting with 1000 shares and eventually building up his position. The very next day, the San Francisco earthquake rocks the west coast, and the shares of Union Pacific stock plummet along with rising fears of a possible U.S. recession.
Immediately following the quake news reports begin to stream out with news of hundreds injured or dead with buildings damaged. Livermore has a feeling the newspapers are underestimating the extent of the quake, and it’s damage, so he quadruples his bet to go short 20,000 shares of Union Pacific. That amount equals roughly a $3.5 million bet with much of the sum having been borrowed from the bank on leverage.
In the following weeks, reports began to spread about the reality in San Francisco. Buildings were catching fire and burning to the ground. An estimated 80% of the structures in the city were gone or on fire. Not only that, but because of insurance companies coverage insured fire but did not include earthquakes, building owners were also setting their own buildings on fire. Over 3,000 people were dead, ten times the amount of some of the initial newspaper reports. Jesse continued his trade for the next few months and eventually came away with $300,000.
The Short of 1907
Livermore was convinced the market was due for a drop and decided to short heavily. Liquidity shortages and the fear of easy borrowing coming to an end had the market nervous. Panic set in at the banks of New York as what would be known as “The Knickerbocker Crisis” began to unfold. During a three week period in October of 1907, the New York Stock Exchange fell almost 50% from the peak of the previous year.
As the panic played out, Jesse was short and made huge profits. By all accounts, he walked away from the crisis with about $3 million in profit. The crisis subsided late in 1907 as intervention by banker J.P. Morgan. He pledged vast amounts of his own money and convinced other wealthy investors to do the same to shore up the financial system.
Wheat Trade 1925
In 1925 the greatest investor of all-time Jesse Livermore made $10 million trading in the wheat market on the Chicago Board of Trade. The year prior saw a rival trader, Arthur Cutten, make a massive profit on the rising price of wheat. Commodity prices, in general, were volatile, and many speculators participated in the wild swings of the market. Legislation was introduced to ban futures trading in grain and cotton unless the parties intended to take delivery in the contract traded, but the rules were not passed.
The price of wheat would rise to $2.05 per bushel by January 1925, and Jesse saw the overheated market as a potential short trade. By the middle of March, Jesse and fellow short-sellers, “loosed an avalanche of wheat and rye that proceeded right through the bottom of the grain market,” as described later by a Time Magazine news article.
As the price plummeted, Livermore cashed out over $10 million. This set of a wave of investigations and rule propositions by the secretary of agriculture. A report by the secretary concluded that there were two groups of speculators in the market, “constructive” in trading on their view of market fundamentals and traders who were “destructive” in their actions based on “mob psychology” and abuse of the market by large-size trades.
1929 Meltdown for $100 Million
The stock market crashed in 1929 and signaled the start of the 12-year Great Depression. On October 24th, known as “Black Thursday,” stocks began plummeting. What would be known as “Black Monday” and Black Tuesday” started where the two-day decline had stocks losing 25% of their value. The Dow Jones Industrial Average lost 47% in the fall of 1929, and over the next three years, the index would fall 89%.
Livermore began shorting the market during this time and amassed a considerable position. As the market continued to sink, the greatest investor of all time Jesse Livermore inked gains of $100 million. With the Dow going up five-fold over the previous six years, it was an environment that was perfect for Livermore, who was, by this time, an expert in market psychology. He understood the signals and warning signs of an overheated market. Euphoria was gripping the entire economy, and the stock market was directly benefiting.
Brokers were making loans to the public so people could buy stock on margin and get involved in the hype. The total amount of outstanding loans to purchase stock reached a staggering $8.5 billion at one point, a huge red flag for Jesse.
Livermore would later write a book about his trading experience and techniques titled, ‘How to Trade in Stocks.’ He cites two of the essential characteristics of his success as discipline and patience. Another method he used was “pivotal price levels,” where he would watch the strongest stocks in a sector, and while they made new highs, he would buy.
Once the stocks turned down and were unable to begin making new highs again, he took it as a cue that the psychology had changed, and the odds of a more significant downturn were ahead. He would then begin to short the stocks as they fell lower and lower.
Busted in 1934
In 1934 Jesse Livermore was banned from the Chicago Board of Trade. Rumors began swirling that he had lost his entire fortune, and no one knew how. Only five years after his legendary $100 million win he was broke again. Lavish spending, divorce, lawsuits, alcohol abuse, scandals, affairs, and the stress of the market all contributed to Jesse’s downfall. Mystery surrounded the loss of his fortune.
Livermore wrote at length about many of the rules he tried to follow during his trading career. Investors today are well aware of the path Jesse took, and many, to this day, still try to replicate his trading style. Some of the more well-known rules being, ‘always trade with a well-formulated plan,’ trade with a stop and adhere to it,’ ‘trade only at the pivotal points in a stock, if there are no clear signals do not attempt to trade.’
Even with some of the best trading results in history and arguably one of the best investors to ever live, Jesse made huge mistakes and misjudgments in the market. He would lose his fortune multiple times and then gain it back again. He’s known as the greatest investor of all time. Livermore went bankrupt four times and worked to get back on top of the market over and over again.
On November 28th, 1940, the greatest investor of all time, Jesse Livermore, shot himself in a room at the Sherry Netherland Hotel in Manhattan. He left an eight-page suicide note to his wife Harriet, where he said, “My dear Nina: Can’t help it. Things have been bad with me. I am tired of fighting…” The note goes on to say it was the only way out for Jesse.
Livermore is studied still to this day in the financial markets because of his ability to identify the psychology of crowds during booms and busts, manias and panics. Not only to identify these trends but to act on them and execute winning trades off them. Although going bust multiple times, he was able to come back from his trading failures because he knew the pattern would emerge again and again. A quote that is attributed to Jesse highlights his thinking on the topic,
“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