Monday, October 28, 2013

Who Was Jesse Livermore?

Why Hollywood never made a movie about this guy, I'll never know. I'd buy a ticket. Talk
about rags-to-riches!

A young kid leaves the family farm, mom secretly gives him some traveling money (God bless
moms), because he believes there's got to be more to life. Nothing unusual about that,
many young people leave small towns or farms for the same reason. Some make it, some don't.

Hitching a ride on a wagon, young Livermore arrives in Boston and, by chance, stops in
front of a Paine Webber brokerage office. Livermore wanders inside. It's love at first

It just so happens the brokerage firm needs a "board monkey" to post prices for the
customers. Livermore jumps at the chance. So, within hours of leaving the farm, young
Jesse has a job, rents a room, and becomes his own man before the age of 15.

His mathematical brain sets to work immediately as the customers yell out quotes in an
endless stream from the ticker tape. Before long, Livermore challenges the crowd to yell
out the quotes faster. With chalk in hand, brain in high gear, concentration focused,
he writes down the numbers faster than the crowd can yell them. Livermore's alive with the

But Livermore's not just writing down numbers. He's in sync with them, in harmony with
them. He soon notices recurring patterns. He keeps a notebook.

He's also sensitive to the crowd. As numbers change and stocks move up and down, so too
does the mood of the crowd.

As a stock's volume increases, the excitement level increases. He feels the electricity
in the air. He sees their eyes light up as the price increases along with their increased
trading. He notices how their personalities change as they spot opportunities to make
money (that's called greed).

All of a sudden, the price rolls over and falls - the crowd becomes quiet, sullen,
apprehensive (that's called fear).

He notices how the traders talk among themselves, buoying each others confidence,
reassuring themselves (that's called denial). Livermore also notices how often
their wrong.

Over time, Livermore figures out that it doesn't matter what people say that counts - it
only matters what the tape says that counts! Don't waste time trying to figure out
why things are happening, only pay attention to what is happening. By the
time the reason why becomes known, it will be too late - the move will be over.

This becomes the foundation of his trading system. People such as economists and
fundamentalists, who are always trying to figure out the why of something before
they make a move, have a hard time accepting this conceptual approach.

Jesse Livermore first tries out his theories in the local "bucket shops" which are stock
market betting parlors of the day. He wins so much money that, eventually, they refuse
to take his bets.

Barred from the bucket shops, he moves into the real stock market losing at first,
until he figures out how to overcome the effect of the time lag between when the order is
entered and, unlike the bucket shops, when the order is actually filled.

Nor does Jesse Livermore limit his trading to stocks. He also trades commodities where he
accomplishes such feats as cornering entire commodity markets such as cotton and coffee.
When asked why, he replies, "Just to see if it could be done." When the President of the
United States, on behalf of the commodity exchanges involved, asks what it would take
for him to unwind his positions, he replies, "Mr. President, all you have to do is ask."

He makes $3 million dollars in a single day by going short in the crash of 1907. Just to
grasp the magnitude of such a trade, by comparison, remember that we're talking about
the purchasing power of 1907 dollars. The dollar went a lot further then than it does
today, 2007, a hundred years later.

Jesse Livermore doesn't always win. He goes bankrupt more than once. Whenever he invests
in private business he always loses every cent. He always manages to find backers that
stake him on condition that he engage in the only business in which he is truly expert:
the stock market.

He never talks about his trades, before or after.

Because people follow his every move, Livermore masks his moves in complete secrecy. He
moves his offices uptown to get away from the crowd and to maintain privacy. He is forced
to use as many as 50 brokers at a time in putting on and taking off positions so that no
one is able to see the whole picture of his trading activity. Sometimes purposefully
losing money just to shake off followers. Each broker sees only a small piece of the
puzzle. Everyone is on a strictly "need to know" basis.

His most spectacular coup comes when he, correctly calling the top of the market, puts
on massive short positions netting him over $100 million dollars in a single day during
the crash of 1929, just as the nation was entering the Great Depression.

People blame him for causing the crash, but it isn't true. Unlike others, Jesse Livermore
simply observes what is happening, never mind the why, and follows what he
describes as the market's "line of least resistance", by going short.

Eleven years later, in November 1940, Jesse Livermore commits suicide by gun shot. No one
knows why. He leaves no note. Some suggest he was losing his touch. Others wonder if the
pressure of being blamed for the 1929 crash was too much for him to bear. Who knows?

If Hollywood made such a movie, who wouldn't want to see it?

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