Jesse Livermore: Boy Plunger of Wall Street

Jesse Lauriston Livermore fled his home at age fourteen in the late 1800′s to avoid a dull life of farming. He soon got a job posting stock quotes at a brokerage shop in the city, where he learned to read the story the ticker tape was telling regarding the direction of the stock market.

Livermore first started trading in bucket shops, which weren’t really stock exchanges but more like gambling houses where participants bet against the house on the direction of price movements. After winning so often he was banned, he then moved to New York to trade in the real stock market full-time. There he developed a reputation for accurately reading the ticker for clues to future prices, earning him the nickname the Boy Plunger and the Great Bear on Wall Street.

Livermore made a $3 million fortune by shorting the market during the crash of 1907. He made another huge fortune, $100 million, this time during the 1929 crash. Both of these feats would be in the billion dollar range using today’s money. He is the first well-known technical market timer. Unfortunately he later lost both fortunes by not following his own trading rules.

Investment Strategy

Jesse Livermore’s story and strategy are well known because he wrote a book on investing and then ghost-wrote another investment classic book, Reminiscences of a Stock Operator. Unlike well-known fundamental “buy and hold” investors like Warren Buffett, Ben Graham, and Philip Fisher, Livermore was primarily engaged in technical analysis before the age of the computer.

Livermore had a few basic rules for the bets he made:

• Add to winning positions and cut losses quickly.
• Always have an extra strategy before entering a position.
• Wait for the market to confirm its direction — don’t attempt to pick tops and bottoms.
• Don’t predict what the market should do. Instead focus on and follow what it IS doing.
• Believe in your own research on the market; ignore other people’s opinions.

As a legitimate trader in Wall Street he came to realize that money was not made on daily fluctuations because of commission and manipulation by market makers and other insiders. Instead he focused on determining the overall market direction (trend) and then buying or selling the most attractive shares headed in the same direction.

What to Buy

Livermore claimed to always take a big stake in a just a few positions. He bought companies that had enough shares so he could get in and out of his position without moving the stock price too much.

He bought a wide variety of companies and didn’t focus on long-term macro trends or fundamental analysis. Instead, Livermore looked for the price action to direct his buying and selling.

When to Buy

Livermore liked to buy at a low price but not too low because he realized prices could always go lower. He looked for the market direction to be in alignment with broad economic fundamentals and then purchased stocks whose price pattern indicated they would follow the larger trends.

When to Sell

Sell before the market peaks if you have a long position. Since Livermore took large positions he needed time to unload all his shares. Also sell if the market moves against your position to cut your losses short.

Livermore famously lost his two huge fortunes by holding onto losing positions too long, in violation of his own rules. He put the blame squarely on his own mental failures to act correctly.

Examples

1907 Stock Market Crash

During the panic of 1907 Livermore shorted the market because he thought prices were way too high and there wasn’t enough liquidity to absorb any downward price movements. There were too many speculators who bought on margin — if prices fell just a little, they would have to sell to cover their margin positions. Livermore knew this would lower prices and unwind the whole market.

1929 Stock Market Crash

Livermore recognized the stock market was in the same pattern as in 1907, so he shorted at the peak in 1929 and added to his position on the way down. Supposedly he made the largest fortune of any investor during this crash. His main lesson from this was to bet big when market conditions are similar to something a trader experienced in the past and then grow your position as the market proves you correct.

Failed Cotton Trade

Following the panic of 1907 Livermore was looking for the next big market to move and he found cotton, in which he placed a long position. He lost 90% of his fortune by violating two important rules. First, he got into the position because of a tip from a friend (instead of his own research and analysis). Second, he added to his losing position instead of closing it out when the trade went against him.

Big Bets on Rapid Price Movement

Livermore liked to make big bets on prices to move significantly over an intermediate period of time. His worst returns were during flat markets, where he traded in and out a lot, gaining minimally yet still losing net money due to commissions.

Summary

Jesse Livermore developed amazing stock trading skills from scratch after running away from home and a life of farming at age fourteen. Never an insider or part of the establishment, he made and lost huge fortunes multiple times. His fortune came from adding to his investment position when correctly anticipating big market moves. He subsequently lost those fortunes by excessive trading during flat markets and not cutting his losses when he made a wrong bet (in violation of his own sell rules).

More on Jesse Livermore

• Jesse Livermore Quotes