Jesse Livermore

Jesse Lauriston Livermore was born on July 26, 1877 in Acton, Massachusetts.
 

In the beginning...
Jesse Livermore started his trading career at the age of fifteen. He ran away from home with his mother's blessing to escape a life of farming his father wished him to have. He then began his career by posting stock quotes at the Paine Webber brokerage in Boston.

Jesse Livermore began his working life at the age of 14, as a quotation board boy in a stockbroker's office. It was 1891 when he began to work in Paine Weber & Co's Boston stockbroking offices. With several other boys, he transferred prices from ticker-tape to quotation board. He was, he believed, particularly suited to the job because of his strong abilities in mental arithmetic and number memorization.
 

Stock prices came into the stockbroker's offices on a ticker tape, a continuous strip of paper bringing the prices from Wall Street. It was Jesse Livermore's job to take the prices from the tape and write them on the board for the stockbroker's customers to see. Little did the 14 year old boy realize that, for the rest of his life, his fortunes would be inextricably linked to the tape and his ability to read its message?
 

Are there Patterns in stock price movements?
As time passed, Jesse Livermore began to believe he could discern patterns, or repetitions, in the waves of numbers that flowed each day from the tape. He began to write the numbers in a notebook and tested himself, predicting the direction that different stock prices would take:

"Say that after studying every fluctuation of the day in Sugar I would conclude that the stock was behaving as she always did before she broke eight or ten points. Well, I would jot down the stock and the price on Monday, and remembering past performances I would write down what it ought to do on Tuesday and Wednesday. Later I would check up with the actual transcriptions from the tape.”
 

How to read the price movements of a stock
“That is how I first came to take an interest in the message of the tape. The fluctuations were from the first associated in my mind with upward or downward movements. Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore. It doesn't go into explanations... The reason for what a certain stock does today may not be known for two or three days, or weeks, or months. But what the dickens does that matter? Your business with the tape is now - not tomorrow. The reason can wait. But you must act instantly or be left. Time and again I see this happen."

 

The Boy Plunger
While working, he would write down certain hunches he had about future market prices, which he would check for accuracy later. A friend convinced him to put in his first money trade. He risked $5 and made $3.12 in profit from his first trade from Burlington stock. With these humble beginnings, he began trading for himself.
 

His first buy
The story is this: One day another office boy told Jesse Livermore that he had been given a tip to buy shares in Burlington and asked if Livermore had any money to join him, predicting they would quickly double their money. Jesse Livermore took out his notebook and looked at the prices he had recorded for Burlington. In Jesse Livermore's estimation, Burlington's price was acting in the way he would expect it to if it were going to rise.

Jesse Livermore invested all he had in Burlington - just a few dollars - and was rewarded two days later with $3.12 profit. Buoyed by his success, in the following months Jesse Livermore went on to make his first $1,000 - a very large sum indeed - by virtue of his ability to read the message of the tape.
 

Buying at the bucket shops
"After that first trade, I got to speculating on my own hook in the bucket shops. I'd go during my lunch hour and buy or sell - it never made any difference to me. I was playing a system and not a favorite stock or backing opinions. All I knew was the arithmetic of it. As a matter of fact, mine was the ideal way to operate in a bucket shop, where all that a trader does is to bet on fluctuations as they are printed by the ticker on the tape.”
 

Making real money
“It was not long before I was taking much more money out of the bucket shops than I was pulling down from my job in the brokerage office. So I gave up my position. My folks objected, but they couldn't say much when they saw what I was making. I was only a kid and office-boy wages were not very high. I did mighty well on my own hook."

Having learned that prices could behave predictably, it was time for the boy Livermore to expand his operations.

At the age of fifteen, he had earned profits of over $1000 (which equates to approximately $90,000 today). However, in 1893, while still only 16 years’ of age, Paine Weber & Co instructed the young Jesse Livermore that he must either quit speculating in bucket shops or quit his job. He quit the job.

The Bucket Shops
In the next several years, he made his money at bucket shops. These were places where people would enter trades, but no actual trades were executed; they were betting against the house. Most people would lose money to the bucket shops because of fluctuations in stocks that would wipe out their slim margins. Jesse Livermore would regularly beat the bucket shops and was eventually banned from them. Since he bet large sums for such a young lad, he became known as the Boy Plunger. He then devoted his energies towards trading in legitimate markets. This change would lead him to devise a new set of rules to beat the market.
 

How the little guy invested
In the late nineteenth and early twentieth century, the little guy who wanted to trade stocks usually did it in a bucket shop rather than through a stockbroker. Bucket shops were set up in all sorts of premises, such as drug stores, hotels, cafés, and many other locations.

In bucket shops, "trades" were carried out instantly at the price quoted on the board. The prices came from Wall Street by a variety of means, including ticker-tape and telephone. The advantages of trading in a bucket shop were: Bucket shops were happy to deal in very small amounts of money. There was no delay in trading caused by the time taken to telephone the order to the trading floor on Wall Street. Each bucket shop was an internal market, trading on quotes from Wall Street but not on Wall Street itself.
 

How the little guy lost his money
Bucket shops, in truth, were little more than betting shops, where fools were quickly parted from their money. Although most bucket shops were not dishonest to the extent that they would refuse to pay a winner or that they would pretend prices had fallen when they had in fact risen, they were adept in employing more subtle ways of profiting from the greed of the would-be stock trader.

Trading in bucket shops invariably involved margin. If your stocks moved in the right direction, you would profit handsomely. If they moved even slightly against you, you would lose all of your money. The natural ups and downs of daily trading served to wipe out most positions, resulting in bucket shops frequently taking all of the money an individual had "invested".

Jesse Livermore's ability to interpret patterns in the stock prices enabled him to beat the bucket shops. He always traded alone - a lifelong habit.

"I began in the smaller bucket shops, where the man who traded in twenty shares at a clip was suspected of being John W. Gates in disguise or J. P. Morgan travelling incognito."
 

Livermore: the one man show
"I kept my business to myself. It was a one-man business, anyhow. It was my head, wasn't it? Prices either were going the way I doped them out, without any help from friends or partners, or they were going the other way, and nobody could stop them out of kindness to me. I couldn't see where I needed to tell my business to anybody else. I've got friends, of course, but my business has always been the same - a one-man affair. That is why I have always played a lone hand."

Jesse Livermore's success soon caused him problems. Bucket shop owners began to recognize him as a consistent winner - and they only wanted to trade against losers. He began having to take smaller positions than he wanted to, or even lose money in his first trades, only to later hit the bucket shop with "stings" where he took large winning positions.

As he became widely recognized, the shops began refusing to take his trades. They called him the Kid or Boy Plunger. (Plunger was a euphemism for a reckless gambler.)
 

Livermore was not wanted
"I tried the other branches one after another, but they all got to know me, and my money wasn't any good in any of their offices. I couldn't even go in to look at the quotations without some of the clerks making cracks at me. I tried to get them to let me trade at long intervals by dividing my visits among them all. But that didn't work."

Despite the bucket shops refusing to deal with him (if they recognized him - Jesse Livermore took to disguising himself) or only trading with him under severe handicaps - such as Jesse Livermore paying higher prices for stocks he wanted to buy and getting less for stocks he wanted to sell than other customers - Jesse Livermore continued to trade profitably. By the age of 20 his fortune had grown to $10,000.

At the heart of Jesse Livermore's spectacular trading success was the skill he acquired as an eager 14 year old who spent every day transferring stock prices from ticker tape to quote board – this ability he believed gave him the skill to deduce the likely future movements of stock prices.
 

Speculation is nothing more than anticipating coming movements
Jesse Livermore said, "To invest or speculate successfully, one must form an opinion as to what the next move of importance will be in a given stock. Speculation is nothing more than anticipating coming movements. In order to anticipate correctly, one must have a definite basis for that anticipation... "

Jesse Livermore believed that, if you thought a stock would move in a certain way, you should enter a trade as early as possible after the market had confirmed your judgement.

What Patterns Did Livermore Look For?
Jesse Livermore liked to trade stocks whose price was moving in an obvious trend. He was not interested in trading stocks whose price was meandering - moving up and down with no strong trend - such as the one shown on the left.
 

The trend is your friend
The patterns he sought to identify were patterns in the prices. Modern traders - and indeed many traders in Jesse Livermore's time too - plotted the prices and volumes against time on a chart. Jesse Livermore, however, did not use charts. He preferred to look at the numbers themselves.

The Pivotal Point comes to those that wait
Jesse Livermore wrote: "Whenever I have had the patience to wait for the market to arrive at what I call a Pivotal Point before I started to trade; I have always made money in my operations."

Jesse Livermore said: "I never benefited much from a move if I did not get in at somewhere near the beginning of the move. And the reason is that I missed the backlog of profit which is very necessary to provide the courage and patience to sit through a move until the end comes - and to stay through any minor reactions or rallies which were bound to occur from time to time before the movement had completed its course."

The Normal Reaction
Once a stock had broken out of a trading range, Jesse Livermore would begin trading. In this case the breakout is downwards and so Livermore would sell the stock short.

He would look for signs that the new trend was behaving normally and that it would be safe to stick with the trade.

He had now reached a point where bucket shops began cheating on prices to prevent him winning. It was time, he realized, to move on and begin trading through legitimate stockbrokers.
 

The New York Stock Exchange
At the age of twenty-one, tired of his problems with bucket shops, Jesse Livermore arrived in New York. His goal was to trade in the offices of a member of the New York Stock Exchange.

He began trading at the offices of A.R. Fullerton and Co. and within six months he had lost all of his funds. In retrospect, Jesse Livermore realized that trading in the bucket shops had been a poor preparation for trading in the offices of a stockbroker. The bucket shops because they did not deal with the stock exchange, offered immediate execution of buy and sell orders. In a bucket shop, Jesse Livermore knew the exact prices he was buying and selling at. Dealing through a legitimate broker resulted in delays. It took time to telephone Jesse Livermore's orders through to the exchange and then to execute the order. According to Jesse Livermore his trading style, which "was a perfect system for trading in bucket shops, didn't work in Fullerton's office".
 

Sugar prices ... where it started going wrong
"The price of Sugar on the tape might be 105 and I could see a three-point drop coming. As a matter of fact, at the very moment the ticker was printing 105 on the tape the real price on the floor of the Exchange might be 104 or 103. By the time my order to sell a thousand shares got to Fullerton's floor man to execute, the price might be still lower."

" ...in A. R. Fullerton's office the tape always talked ancient history to me, as far as my system of trading went, and I didn't realize it. And then, too, if my order was fairly big my own sale would tend further to depress the price. In the bucket shop I didn't have to figure on the effect of my own trading. I lost in New York because the game was altogether different."
 

He returns to the bucket shops
So, despite his remarkable powers in interpreting price patterns, Jesse Livermore's trading style, developed in bucket shops, was unsuited to trading in real shares.

He returned to the bucket shops - this time in St Louis where he was less well known. Soon he was recognized and the bucket shops refused him further business. He had, however, managed to accumulate enough money to return to New York and resume trading.

"My task, as I should have known after my first reverses at Fullerton's, was very simple: To look at speculation from another angle. But I didn't know that there was much more to the game than I could possibly learn in the bucket shops. There I thought I was beating the game when in reality I was only beating the shop. ... The game taught me the game. And it didn't spare the rod while teaching."
 

The 1901 boom made him rich
His ability to read the tape in the stock market boom of the 1901 soon made Livermore rich. He had, however, not fully learned his lessons about the dangers of the delay in executing his orders. His trading style still revolved almost entirely around tape reading and disaster would strike soon enough.

Jesse Livermore's Fortune Reaches $50,000
In May 1901 Jesse Livermore had accumulated $50,000 in cash and he had turned bearish. In one day of frantic market activity - when the market moved fast and execution times were slow, Jesse Livermore's orders were executed at prices as much as 20 or 30 points different from where the market stood when he placed them.

"The ticker beat me by lagging so far behind the market. I was accustomed to regarding the tape as the best little friend I had because I bet according to what it told me. But this time the tape double-crossed me. The divergence between the printed and the actual prices undid me. It seems so obvious now that tape reading is not enough, irrespective of the brokers' execution, that I wonder why I didn't then see both my trouble and the remedy for it. I did worse than not see it; I kept on trading, in and out, regardless of the execution."
 

Then he lost it all again ... and began to learn
By autumn Jesse Livermore was broke again. He returned to the bucket shops and, by virtue of out-maneuvering crooked operators with several "stings," he managed once again to get a stake together. He returned to New York.

"There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!"

By the spring of 1906, Jesse Livermore made a profit of $250,000 shorting stocks on a hunch that preceded the San Francisco earthquake. And by 1914, after several years of a flat market, with "no money to be made," Jesse Livermore's debts have grown to well over $1 million. He declared bankruptcy. Of this, he later said, "My mind now being free to take up trading with some prospect of success, the next step was to get another stake."

To get back on track, in February 1915, Jesse Livermore asked Dan Williamson for help. Williamson offered Livermore the facility to trade 500 shares. Jesse Livermore read the tape for six weeks before making a trade because he needed to be 100 percent sure the trade would be profitable. Jesse Livermore bought stock in Bethlehem Steel on high margin at $98. Steel was rising because of demand from World War I. The price moved upward as he expected; and, as the stock rose, he bought more at $115. The following day he sold at $145. He has achieved what he set out to achieve - he had a sizeable stake again.

Ironically, Jesse Livermore sometimes did not follow his rules strictly. He claimed that lack of adherence to his own rules was the main reason for his losses after making his 1907 and 1929 fortunes.

Reminiscences of a Stock Operator
The popular book Reminiscences of a Stock Operator, by Edwin Lefevre, reflects many of those lessons. Jesse Livermore himself wrote a less widely read book, "How to trade in stocks; the Jesse Livermore formula for combining time element and price". It was published in 1940, the same year he committed suicide. It was later revealed by Jesse Livermore that he had actually penned the book Reminiscences of a Stock Operator, and that LeFevre had acted as the editor and coach. There is some speculation that this partnership between the two men was not their first collaboration. Since LeFevre was a writer and journalist, it is thought that he was one of the friendly newspapermen that Jesse Livermore employed for both information and planted articles.

Wall Street Success
Jesse Livermore became a successful trader at an early age. He claims to have made 1,000 dollars by the age of 15 trading stocks. In his book, he claims his parents were against his trading even after his success because they couldn't understand how a person who didn't work could make such a sum of money relatively quickly. Jesse Livermore made his money by following trends in market prices. He would choose a particular stock or commodity to buy or short based on its price and volume action. Then, he would establish relatively small initial positions. He would then add to his positions if they made him money or sell them if they were unprofitable. This technique resulted in large gains and small losses. He also bucked the trends of prevailing sentiment of the markets at critical points. For example, when people were exuberant about the markets near the tops in 1907 and 1929, he began short-selling.
 

The 1906 San Francisco earthquake
After devising his rules, he temporarily disregarded them in 1906. He repeatedly shorted Union Pacific in a rising market and kept adding to his position even when the stock temporarily rose. He could not explain why, but he had a strong urge to short the company. A few days later, the San Francisco Earthquake of 1906 struck. Jesse Livermore kept adding to his position and made $250,000.

He first became famous in 1907, when he short sold the market as it crashed. He noticed conditions where a lack of capital existed to buy stock. Accordingly, there would be drops in prices with too many sellers, driven by margin calls. With the lack of capital, there would be no buyers in sight to absorb the sold stock, further driving down prices. After the crash and its aftermath, he was worth $3 million.
 

How his fortune was destroyed by cotton
He proceeded to lose 90% of that 1907 fortune on a blown cotton trade. He violated many of his key rules; he listened to another person's advice (he preferred working alone) and added to a losing position. He continued losing money in the flat markets from 1908-1912. He was $1 million in debt and declared bankruptcy. He proceeded to regain his fortune and repay his creditors during the World War I bull market and resulting downtrend.

By late 1915, after several months of successful trading, Jesse Livermore's balance stood at $145,000. In the very next year of 1916, Jesse Livermore played the market perfectly: he went long when the market was strongly bullish and then went short when it turned bearish. He made a cool $3 million profit, and went to Palm Beach for the winter.

In 1917, while only 40, Jesse Livermore made another $1.5 million profit. With this, he paid back all his debts from 1914. He also bought $800,000 dollars worth of annuities to ensure his family has a secure income should he ever be wiped out in the markets again. He also put money into trusts for his wife and son. This turned out to be one of his best ever decisions.

The Money Rolls in
He owned a series of mansions around the world, each fully staffed with servants, a fleet of limousines, and a steel-hulled yacht for trips to Europe. He married Dorothy, a beautiful Ziegfeld Follies showgirl when he was about 40 years old.

Jesse Livermore continued to make money in the bull markets of The Roaring 20's. In 1923 he moved his entire operations to custom-designed offices in the Hecksher Building, Fifth Avenue. Behind this fortress, Jesse Livermore wishes to be further removed from Wall Street gossip and to enjoy more secrecy for his trading operations. Keeping strictly to his own council worked. In the 1925 wheat market, Jesse Livermore bought grain in 5 million bushel lots while the market was rising; then turned bear, at the top of the market, and sold 50 million bushels short for a profit of $10 million.
 

The shorting begins

In 1929, he noticed market conditions similar to that of the 1907 market. He began shorting various stocks and adding to his positions and they kept declining in price. When just about everyone in the markets lost money in the Wall Street crash of 1929, Jesse Livermore was worth $100 million after his short-selling profits.

Extraordinary Popular Delusions
One of Jesse Livermore's favorite books was Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackay, first published in 1841. This was also a favorite book of Bernard Baruch, a stock trader and close friend of Jesse Livermore who also was one of the few people that did well in the crash of 1929.

The Crash of 1929
In 1929, his greatest moment as a trader arrived. He went short in the great crash of 1929 and made a stupendous profit of around $100 million. At the moment of his greatest triumph, he realised the futility of his work.

After the Crash of '29
Dorothy finally filed for divorce and took up temporary residence in Reno, Nevada, with her new lover, Agent Longcope. On September 16, 1932, Dorothy divorced Jesse Livermore on grounds of desertion. They had been married since December 2, 1918 - 14 years. Dorothy retained custody of their boys.

On March 28, 1933, Jesse Livermore married the 38 year old Harriet Metz Noble in Geneva, Illinois; there was no honeymoon. It was Harriet's fifth marriage, and all four of her previous husbands had committed suicide.

Through unknown mechanisms, he yet again lost much of his trading capital, accumulated through 1929. Thus, on March 7, 1934, the bankrupt Jesse Livermore was automatically suspended as a member of the Chicago Board of Trade. It was never disclosed to anyone what happened to the great fortune he had made in the crash of 1929, but he had lost it all.
 

He lost everything
In 1933, the police were called when Jesse Livermore went missing. The next day, after disappearing, he returned home, walking unsteadily. He said he spent the night in a hotel and awoke with a blank mind. Reading newspaper headlines about his disappearance brought him to his senses. His doctor's verdict was "Amnesia nervous breakdown."

A year later, in 1934, Jesse Livermore was bankrupt. He had lost his entire trading fortune. How he did this is unknown. However, this time, he was not destitute - his family annuities saved the day. He and his wife sailed to Europe. "I hope to relieve my mind of some of my troubles,” he told reporters.

How to Trade in Stocks
“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, How to Trade in Stocks

In late 1939, Jesse Livermore's son, Jesse Jr., suggested to his father that he write a book about his experiences and techniques in trading in the stock and commodity markets. This brought a flash of life back into Jesse Livermore, and the book was completed and published by Duell, Sloan and Pearce in March 1940. It was titled How to Trade in Stocks. The book did not sell well, World War II was underway, and the general interest in the stock market was low. His methods were still new and controversial at the time, and they received mixed reviews from stock market gurus of the period.

“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor. ” Jesse Livermore, How to Trade in Stocks

The End
In the Squibb building at 745 Fifth Avenue, at the age of 63, Jesse Livermore entered the Sherry-Netherland Hotel on November 28, 1940, at 4:30 in the afternoon. Sitting on a stool at the end of the cloakroom, he withdrew a .32-caliber Colt automatic pistol (he had bought the gun in 1928 while he was living in Evermore), placed the barrel of the gun behind his right ear and pulled the trigger, dying instantly.
 

The police revealed that there was a suicide note of eight small handwritten pages in Jesse Livermore's personal notebook. It was reported in the November 30 issue of the New York Tribune. The press wanted to know what it said, and the police tersely responded: “There was a leather-bound memo book found in Mr. Livermore's pocket. It was addressed to his wife.” A police spokesman read from the notebook: “My dear Nina: Can’t help it. Things have been bad with me. I am tired of fighting. Can’t carry on any longer. This is the only way out. I am unworthy of your love. I am a failure. I am truly sorry, but this is the only way out for me. Love Laurie”.

 

His record
During his lifetime, Jesse Livermore gained and lost several multi-million dollar fortunes. Most notably, he was worth $3 million and $100 million after the 1907 and 1929 market crashes, respectively. He subsequently lost both fortunes. Apart from his success as a securities speculator, Jesse Livermore left traders a working philosophy for trading securities that emphasizes increasing the size of one's position as it goes in the right direction and cutting losses quickly.