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Life (and Trading) Lessons of the World’s Greatest

Chris Campbell

Posted July 08, 2021

Chris Campbell

“You got to know when to hold ‘em
Know when to fold ‘em
Know when to walk away
And know when to run

You never count your money
When you’re sittin’ at the table
There’ll be time enough for countin’
When the dealing’s done”
— Kenny Rogers

--“Wall Street never changes,” said legendary trader Jesse Livermore, “the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes.”

Jesse Livermore is considered a pioneer of day trading. But he’s also a pretty polarizing figure on Wall Street. Some see him as the greatest trader ever, while others see him as a Gatsbyesque cautionary tale.

At one point in his life, he was the richest man on earth. At another point, probably the most broke. As with us all, he was his own worst enemy.

Toward the end of his life, it took only a couple of trades to destroy his gigantic fortune. Had he tempered himself after his first big win, in 1901, at the age of 24, he could’ve coasted.

Perhaps one of the dangers of getting “too lucky” early on is you end up chasing that dragon for the rest of your life. And, though he had developed a great trading strategy, he didn’t always stick to it.

The dragon was always tempting him… and he fell to temptation. And it ruined him.

But, of course, we can learn from both his successes and his failures. Today, we present to you Livermore’s incredible life story, alongside his greatest lessons.

Read on.

Livermore Lessons

Born in 1877 to a poverty-stricken family in Shrewsbury, Massachusetts, Livermore was born bright; he learned to read and write at the age of 3. At the age of 14, with his mother’s blessing, he ran away from home to escape his father.

At fourteen, he started trading stocks. By 20, he’d amassed a small fortune, gaining a reputation and a nickname at the local stockbroking “bucket shops”: Kid Plunger.

Thus, our first “Livermore Lesson.”

Livermore Lessons: His early successes came from cutting losses quickly when wrong and keeping them small. This freed up capital to deploy for better opportunities and kept him from getting wrecked.

“Profits always take care of themselves but losses never do. The speculator has to insure himself against considerable losses by taking the first small loss. In so doing, he keeps his account in order so that at some future time, when he has a constructive idea, he will be in a position to go into another deal, taking on the same amount of stock as he had when he was wrong.”

At 20 years old, with $10,000 in his pocket -- $324,331.33 when adjusted for inflation -- he moved to Wall Street.

At the age of 24, he turned $10,000 into $500,000 -- worth almost $16 million in today’s money -- by trading Northern Pacific Railway.

Livermore Lesson: If he had a stock making higher highs he would hold it until there was a good reason to sell it. That way, he often ended up holding stocks that were under accumulation.

“As long as a stock is acting right, and the market is right, do not be in a hurry to take a profit. You know you are right because if you were not, you would have no profit at all. Let it ride and ride along with it. It may grow into a very large profit, and as long as the action of the market does not give you any cause to worry, have the courage of your convictions and stay with it.”

In 1906, on nothing but a hunch, he shorted Union Pacific Railroad the day before the 1906 San Francisco earthquake, raking in $250,000, or $8 million.

Livermore Lesson: He focused on a small watch list to be an expert on their specific price movement. By focusing his mind on a few specific stocks, he gained a “feel” for them.

“{Limit} interest in too many stocks at one time. It is much easier to watch a few than many.”

“I had always made money following my hunches.”

In the Panic of 1907, Livermore’s massive short position made him $1 million in a single day. J.P. Morgan, his mentor at the time, bailed out the NYSE and asked him to stop short selling. He agreed and instead profited from the upswing, sending his net worth flying to $3 million ($95 million today).

Livermore Lesson: Livermore pioneered the idea of having big wins and small losses. He held large short positions through both the 1907 and 1929 stock market crashes and let the winners run.

“It was never my thinking that made the big money for me, it was always my sitting.”

Shortly after this trade, on a high, he bought a $200,000 yacht, a rail car, and an apartment on the Upper West Side. He joined exclusive clubs and had mistresses. His larger-than-life persona got to his head. He got too cocky and, soon enough, paid for it.

In 1908, he broke one of his life-long rules on following insider tips and listened to a man named Teddy Price who told him to go big on cotton. It was a sure thing, said Price. Meanwhile, as soon as Livermore bought it up, Price secretly sold out from under him. That single trade forced Livermore into bankruptcy, but he was soon able to recover all of his losses. (In 1915, however, he filed for bankruptcy again.)

Livermore Lesson: As a rule, Livermore steered clear from insider tips. He broke this rule and it cost him his fortune.

“Never believe in tips from other people.”

After WWI, perhaps in an unconscious effort to compensate for his former mistake, Livermore quietly cornered the cotton market. He received a call from the US Secretary of Agriculture, inviting him to the White House for “a talk.” President Woodrow Wilson asked him why he’d cornered the cotton market. Livermore said, “To see if I could, Mr. President.”

He agreed to sell the cotton at break-even, preventing a massive rise in the price.

In 1924, however, he made $10 million trading wheat and corn.

Livermore Lesson: He knew his best trades were winners right from the start.

“Experience has proved to me that the real money made in speculating has been: IN COMMITMENTS IN A STOCK OR COMMODITY SHOWING A PROFIT RIGHT FROM THE START.”

In 1929, sensing a crash was afoot, he used more than 100 stockbrokers to hide his tremendous short position. In spring, he was down $6 million on paper. But when October rolled around (“Black Monday”), he pulled in about $100 million -- worth $1.6 billion today.

Livermore Lesson: Livermore’s wealth was built primarily from big position trades that lasted weeks, sometimes longer. He made his biggest money holding a trend, not day trading. Which was very difficult in those days with commission costs and speed of execution.

“Money is made by sitting, not trading.”

The newspapers published story after story about him, most incendiary, calling him the “Great Bear of Wall Street.” The public blamed him for the crash and he received no shortage of death threats, leading him to hire bodyguards.

Livermore Lesson: Like it or not, most people are going to believe what they’re told by official sources. For most people, the world is black and white. They cannot handle the complexity of reality. Livermore spent his career using this to his advantage. This time, however, it almost cost him his life.

“The public always wants to be told. The overwhelming majority of the bullish articles printed on the authority of unnamed directors or insiders convey unreliable and misleading impressions to the public. The public loses many millions of dollars every year by accepting such statements as semiofficial and therefore trustworthy.”

In the 1930s, his mental health suffered. Marital problems, which led to his wife shooting his son, alongside a lawsuit from his Russian mistress, took its toll. In 1934, he lost his fortune and filed for bankruptcy for the third time, listing total assets of $84,000 and debts of $2.5 million. It took him until 1937 to pay off his $800,000 tax bill.

On November 28, 1940, just after 5:30 pm, Livermore fatally shot himself with an Automatic Colt Pistol in the cloakroom of The Sherry-Netherland hotel in Manhattan, where he usually went to relax for a drink.

Police found a suicide note of 8 small handwritten pages in Livermore's personal, leather-bound notebook.

The note was addressed to Livermore's wife, Harriet (whom Livermore nicknamed "Nina"), and it read, "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".

He left his family devastated. His son, Jesse Livermore Jr., also died by suicide in 1975. His grandson also killed himself.

Final lesson: Have skin in the game, but not enough to get skinned alive.

“I have heard of people who amuse themselves conducting imaginary operations in the stock market to prove with imaginary dollars how right they are. Sometimes these ghost gamblers make millions. It is very easy to be a plunger that way. It is like the old story of the man who was going to fight a duel the next day.

His second asked him, "Are you a good shot?"

"Well," said the duelist, "I can snap the stem of a wineglass at twenty paces," and he looked modest.

"That's all very well," said the unimpressed second. "But can you snap the stem of the wineglass while the wineglass is pointing a loaded pistol straight at your heart?"

Armchair speculation is easy. Anyone can do it.

True mettle is developed by having skin in the game.

Until tomorrow,

Chris Campbell
Managing editor, Laissez Faire Today

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