If you were to ask professional traders to name the people that have influenced their development in trading, you will find very few people cited more often than Jesse Livermore.
This is largely thanks to the part biographical, part fictional account of Livermore’s life in the famous book Reminiscences of a Stock Operator, which is usually top of the list of the most useful and influential trading books of all time.
However, the thing that is most fascinating about Jesse Livermore and what makes him such an amazing person for traders to learn about, is the extreme polarity between his successes and failures.
On one hand, you have someone that has scaled the absolute heights of success in the markets. Someone that we can use as an example of what you can achieve if you work hard to truly understand the skill of trading and how the markets function.
But, on the other hand, within the same person’s story, you also have clear examples of the pitfalls of trading and how disastrously wrong things can go if you don’t remain cautious about the markets and if you allow complacency to creep into your trading.
Although Livermore was trading a century ago, many aspects of his approach are still absolutely relevant today. His style of trading in many ways was ahead of its time and his wisdom and observations in many cases are timeless.
This is his story.
Jesse Livermore was born on 26th July 1877 in Massachusetts. His father was a farmer and his mother was a homemaker.
It is claimed that Jesse learned to read and write by the time he was 3 and a half. By the age of five, he was said to have already started reading the financial newspapers.
He attended grammar school and, unsurprisingly, was very good with numbers, particularly mental arithmetic. In fact, while at school he said he completed three years’ worth of arithmetic in just one year.
At the age of fourteen, under his father’s insistence, he left school and finished his education. His father who had also dropped out of school at a similar age to become a farmer wanted Jesse to join him and devote his life to farming.
However, Jesse was devastated by this idea. He wanted to continue his love of numbers and arithmetic and to carve out his own path in life.
Due to this burning desire, his mother agreed to help Jesse run away from home and to keep it a secret from his father.
She sent him packing with just $5 in his pocket, which would be equivalent to over $100 in terms of today’s money.
Life as a Chalk Boy
Jesse got his first job as a chalk boy for a brokerage firm called Paine Webber while he was still just fourteen.
He had been in the firm looking around and was asked if he could step in, since one of the boys was off sick. He was soon given a permanent position.
This was an ideal job for him because of his love of numbers. Prices would come through the ticker tape and be called out. He would then write them all on the chalkboard for the customers to see.
While he was working at this job, he became so fascinated with the way that prices moved that he started keeping a little notebook. Since he could clearly remember all the numbers at the end of the day, he would write these out in his notebook and observe the patterns in the price movements. He kept this as his own hobby or project outside of his work as a chalk boy.
Trading at the Bucket Shops
Up until this point, Livermore hadn’t done any trading as he believed you needed to have a lot of money to be able to participate. However, it was whilst working as a chalk boy that he was introduced to bucket shops.
The bucket shops were almost like betting shops where you could back a particular stock based on whether it was going to go up or down, without actually investing in the underlying asset. You could do this with low amounts of money and on very thin margin. The bucket shop would be taking the other side of your bet.
Livermore decided this would be a good opportunity to test out his work and see if his theories about prices actually worked.
He would check the figures he had recorded in his notebook and the patterns in the movement of prices and then decide which trades to play on.
Jesse started using his system to play at the bucket shops during his lunch hour and the first profit he made was just over $3. It wasn’t long before he was making more than he was in his day job, so he quit this to focus on his hobby full time. At fifteen years old Jesse had made $1,000 from trading at the bucket shops, which is roughly the equivalent to $20,000 in today’s money.
Jesse continued to do well against the bucket shops by following his own system and one-by-one the bucket shops began banning him, due to the amount of money he was earning at their expense. He would even resort to using a disguise so that he could carry on trading, but word got around and everyone at the bucket shops knew who he was.
Eventually, he was banned from the majority of the bucket shops in his town.
Trading at the NYSE
By the age of twenty, Livermore had accumulated his first $10,000. However, this reduced massively by the age of 21 to $2,500.
He says that if he stuck with his system, he would make more profits than losses, as his system would usually win around 70% of the time. But, most of his losses came unnecessarily when he would not stick to his own system; a problem that a lot of traders have to overcome.
At the age of twenty-one, having been banned from most bucket shops in Boston, Jesse took his $2,500 and decided to move to New York to start trading legitimately at the New York Stock Exchange.
In New York, it wasn’t long before Jesse gained a reputation for being a winning trader. But soon after, he lost his money again.
It seemed his winning formula was only designed for winning at bucket shops and not for the real stock exchange. One of the issues was that he was still using the numbers from the ticker, which were delayed compared to the real market numbers.
He went to St Louis to go back to betting at bucket shops and increase his money again. This was a new town for him with new bucket shops, so he thought they wouldn’t know who he was.
But he did eventually get recognised again, and again was banned from the shops. Instead, his solution was to send someone in on his behalf. He managed to make enough money by doing this to go back to trading in New York.
The Crash of 1907
Although he had already started to make a name for himself around trading circles, Livermore first became famous for his trading during the panic of 1907. It was during this time that he managed to earn $1 million in just one day.
He made his money by shorting the market as it crashed. By the end of the crash, he was worth $3million.
At this point, he knew the market was in a bad way and it was possible for it to move even more negatively. He had already decided that he would do what he could to avoid a deeper crisis when he received a request from the financier J.P. Morgan, who was putting together a plan to bring the market back to health.
Livermore looked up to Morgan and was happy to help. He began buying as many stocks as he could, which also led other people to take the same action. Thanks to this, the market started to recover and many people that followed Livermore’s lead also made a lot of money. As a result of this, in some circles, Livermore was branded a hero.
He had now acquired a new level of wealth, which meant he could live in luxury; enjoying lavish things like yachts and becoming part of the elite. He would be seen going out to the most exclusive clubs and enjoying life in the city as a young, rich bachelor and womaniser.
To keep up with his new expensive lifestyle he turned back to trading.
Hitting Hard Times
There are certain aspects of Jesse Livermore’s trading approach that have been well documented. One of the main things was his desire to work completely on his own. In fact, there are stories of his trading office only having a few chalk boys writing prices on the board and no one speaking. Even when a visitor would come in, they would have to sit quietly and Livermore would refuse to answer questions about what he was doing.
However, in 1908, he broke his own rule of not taking advice from other people. He trusted a tip from a famous cotton trader.
The trader told Livermore to keep buying cotton, which Livermore did, against his own instincts. At the same time, this trader, as well as others, were actually selling in the market, leading to the price moving heavily against Livermore. As a result, he lost 90% of everything he had earned during the 1907 crash.
Throughout the following years, Livermore’s losses grew deeper and deeper. He eventually built up a debt of $1 million and had to declare bankruptcy by 1915.
Without a stake to begin trading again, he had to ask for some help. He was offered a trading facility of just 500 shares. Livermore knew he had to play this perfectly, so he spent 6 weeks just tape-reading in the markets before finally making his move. The result was a success and he finally had a stake to begin trading with again.
Unsurprisingly, given the rollercoaster ride that was Livermore’s trading career, over the next couple of years Livermore managed to earn his fortune back and pay off his debts.
Newspapers from 1917 report headlines such as “Boy Plunger Scores Come Back in Operations on Wall Street” and the articles spoke of the shrewd young speculator who “made and lost millions in the stock market and then came back and made more millions”.
Reminiscences of a Stock Operator
In 1922, Jesse Livermore took part in a series of interviews with Edwin Lefevre for a series of articles. These interviews eventually led to Lefevre writing the book “Reminiscences of a Stock Operator” which is one of the most highly-regarded trading books of all time.
The book is a fictitious biography of Livermore and details his ups and downs in life and the markets. It’s thought that the book could actually be the true story of Livermore’s life based on the interviews, but some also think it could be completely made up. The book became very popular and is still one of the most popular investment books to this day.
It was shortly after this that Livermore decided to move to a new office to have more secrecy with his trading and to be even more removed from Wall Street.
Wall Street Crash of 1929
Livermore began noticing certain patterns occurring in the market leading up to 1929. These were similar patterns to those he had observed in the build-up to the crash of 1907.
Feeling confident about his hunch, he began opening short trades in anticipation. At one point he was even living in his office just so he could keep placing trades in the lead up to what he expected to be a large negative movement.
Of course, the ‘Boy Plunger’ Livermore was correct and he enjoyed the most successful periods of trading of his entire life.
By the end of the crash, Livermore was worth the equivalent of around $1.4 billion in terms of today’s money. Most people had lost their money during the crash, which is now known as Black Tuesday.
Although he had earned all that money, his second wife Dorothy, who he had married in 1918, hadn’t realised he had been shorting the market and began panicking when she heard stories of everyone losing everything. Livermore returned home to Dorothy in a panicked state believing they had lost everything.
Hitting Rock Bottom Once Again
After making it to extreme levels of wealth after the crash of 1929, Livermore started to lose that fortune rapidly.
No one knows the true reasons why or how Livermore lost his fortune as it has never been disclosed. There has only ever been speculation.
During this time, things were extremely unsettled in Livermore’s private life. He got divorced from his second wife, who also went on to shoot his son at a later point in time.
Livermore had spent time in Vienna and met his third wife, Harriet Metz, whose last husband had committed suicide. Livermore’s children didn’t like to be around her, claiming that they felt darkness from her and knew she didn’t want them around, in fact, they even went as far as to call her ‘the Bitch-Witch’.
Eventually, Livermore had to declare bankruptcy again for the 3rd time. In 1934, he was also automatically suspended from being a member of the Chicago Trade Board.
Although he was bankrupt, he still believed he could make a comeback as he had done so many times before. But, after all the pressure and emotional strain of everything that had happened in his work and personal life, it was too much to take and he wasn’t able to achieve it.
Another contributing factor to not being able to start again on Wall Street was that he relied on his wife’s money and got comfortable. He didn’t have the same drive or passion that he had in his former days.
On November 28th 1940, Livermore was found dead in the cloakroom of the Sherry Netherland Hotel in Manhattan, aged sixty-three. He had tragically shot himself. He left an eight-page suicide note to his wife, which was found in his leather-bound notebook.
If you want to know more about Jesse Livermore and other legends of trading and investing, check out our ‘Lessons from the Legends of Trading and Investing’ course at https://courses.duomoinitiative.com
Thank you for reading! :)