On Jesse Livermore And His Legacy

I am choosing to write a short biography of Jesse Livermore and his trading philosophies. Livermore was a great trader and speculator – always willing to learn, study and open to new ideas. He was also an eccentric man, unparalleled in his dedication to always gaining an advantage over all other traders and investors. So why Livermore? Is it because of the glamour of discussing such a man? No. Why not Gann? Or Buffet? Was there some type of “secret recipe” for his successes in both the stock and the commodities market?

Definitely not. I am choosing to discuss Livermore because I believe that the legacy left by Livermore is a very important and instructive legacy for the novice, the amateur, and even the professional trader. His teachings all throughout his books and biographies were all about basic trading philosophies such as trend-following, buying and holding in a bull market, industry analyses, following the leaders, identifying pivot points, and of course, risk management. All this did not come easily. It took Livermore literally years to nearly perfect his system and methods, and it requires intensive studying and effort in order to execute and to stay disciplined. This is what Livermore has emphasized all throughout his writings – that the stock market is not for the lazy nor the uninitiated. If one really wants to succeed in making money in the stock market over the long haul, then one will need to put in the necessary time and effort – not only in the studying of the stock market, but in the studying of one's own psychology and tolerances as well.

A more subtle but if not more important question for professional traders to ask is: If Livermore was so great, why did he ultimately lose his fortune again during the Great Depression and why was he not able to make a “comeback” again? This and the fact that Livermore had periodically suffered from depression throughout his life finally led to his suicide in 1940. What went wrong? Traders would often cite his lack of risk management, but I think it goes deeper than that. Perhaps he was getting older and lost his drive, but I believe there is a more important underlying theme and lesson to all this. I will discuss this in later paragraphs.

Early on, Jesse Livermore learned that in order to succeed in life, one needs to put in a great deal of time and effort to an endeavor that one enjoys doing. Of course, it didn't hurt that Livermore also had a great genius with crunching numbers and a great discipline for keeping records. It also didn't hurt in that Livermore was always willing to learn and was always receptive to new ideas. As a young lad, he chose the stock and commodities market as a way to keep score and to make his fortune, and this is what he did until the day that he died.

Livermore was a self-made man. He ran away from home at the age of only 14 and subsequently went to work as a quotation boy in Boston. He quickly learned the art of “reading the tape” and from here, he proceeded to trade in the bucket shops – and was so successful that he was practically banned from trading in all the major bucket shops in Boston. From the bucket shops, he relocated to New York and started trading on the Big Board in the office of E. F. Hutton. This was in the year 1897. By that time, Livermore had already gained a reputation as the “Boy Plunger” in all the bucket shops in Boston. He was only 20 years old.

Trading “legitimately” on the NYSE taught Jesse Livermore his first major lesson in how to consistently make money in the stock market. How? Within six months of opening his account in a legitimate brokerage firm, he had lost all his money – all $2,500 of it – approximately the equivalent of $60,000 in today's dollars. The average person will most probably swear off stock market speculation forever if he was to lose his entire fortune in the endeavor, but not so for Livermore. Of course, he was depressed. Any emotional being would be depressed on losing his entire fortune. But this unfortunate development only motivated Livermore to study his mistakes more carefully. He was able to beat the game in the bucket shops, so why not on the Big Board?

There are many lessons to be learned here. Let's start with the first lesson. Please note that I am not going to list them in any particular order. Each trader/speculator has to deal with their own trading flaws – some lessons may be more applicable than others to one trader but the same lessons may not apply to another type of trader – especially so if he has conquered them.

jesse livermore Jesse Livermore Lesson One
Livermore had no prior trading experience except for his trading experience in the bucket shops. His first mistake was his belief that he could directly apply his prior system of trading to trading in actual stocks on the New York Stock Exchange as well.

What were the differences? Why couldn't he directly apply his system of trading in the bucket shops to trading on the NYSE as well? Livermore studied the differences intently – major money and his future career were at stake here. He learned several things about the art of speculation. Among them were:

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. This fact was later compounded by his experience during the 1901 bull market. He had always been able to call significant bottoms in the stock market and had always be able to initiate long positions at the most opportune time. And yet, he would always sell his long positions after only making 10% or 20% hoping he will be able to get back in at lower prices. This usually does not happen. He eventually learned that in order to make money in the stock market, one will need to adopt a buy and hold strategy in a bull market and only sell when the bull market is on its last legs.


Livermore had a significant execution disadvantage by taking his actual business to the NYSE. Not only does he have go pay a high commission (compared to virtually none in the bucket shops although he got a severe handicap when he did trade there), there was also a significant delay between the time he places his order to when the order was actually executed. This disadvantage is severely magnified when one traded as often as Livermore did in his early days as a trader on the NYSE. Livermore was handed down the ultimate lesson in the art of execution during the final day of the Northern Pacific Corner on May 9, 1901. Livermore had anticipated a huge downside move in the morning and a subsequent one-day upside reversal. He was right, of course, but he ultimately lost his entire stake of $50,000 that day. Because of the huge volume during that day, the tape was nearly two hours behind; his brokers (who were very able) did place an order to short U.S. Steel and Santa Fe in the morning, but those orders did not get executed until two hours later. By then, both Steel and Santa Fe had already fallen by over two dozen points. When Livermore ultimately covered, he did so at levels that were two dozen points higher. This one-day plunder cost him his entire stake which it took him a long time to build up.

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. His first successful “raid” on the stock market based on his sound, fundamental studies occurred during the Panic of 1907. As credit conditions tightened and as a number of businesses and Wall Street brokerages went bankrupt during the summer, Livermore could sense that something was wrong – despite the hopes of the public as evident in the still-rising stock market. Sooner or later, Livermore concluded, there will be a huge break of epic proportions. Livermore continued to establish his short positions, and by October, the decline of the stock market started accelerating with the collapse of the Knickerbocker Trust in New York City and Westinghouse Electric. J.P. Morgan eventually stepped in to avert the collapse of the banking system and the New York Stock Exchange, but only after Livermore managed to make more than one million dollars by shorting the most popular stocks (and covering on a plea from J.P. Morgan himself) in the stock market.
There are many lessons to be learned here by professional and amateur investors alike. While I have always maintained that the majority of traders and investors in the stock market usually under-perform the stock market, it is doubly true that virtually all traders who focus on the short-term eventually lose their capital. The successful daytraders are a rare breed – and the successful ones can only expect to obtain a return of 10% to 12% a year, at best. The amateur trader who expects a first-year 100% return by daytrading stocks just does not have a chance.

A more subtle lesson to be learned is the idea of evolution – evolving one's style to not only fit one's personality, but evolve to the point so that it will fit the market's personality as well. What made Livermore so successful during the first thirty years of the 20th century was this: Not only was he multi-talented in the traditional sense (his skills in analyzing long-term trends and fundamentals were as good as his skills in tape-reading and in daytrading), he was also multi-talented in the sense that he was able to evolve with the market very successfully. He had always been flexible in either trading the long side or short side – and he was also able to sit out in a market that was devoid of activity as well.
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