- Dim Sep 28, 2008 4:28 pm
#59697
cf WIKI
[edit] Overview
Born in Acton, Massachusetts, 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.
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.[2] With these humble beginnings, he began trading for himself.
At the age of fifteen, he had earned profits of over $1000 (which equates to approximately $20,000 today). 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. Livermore would regularly beat the bucket shops and was eventually banned from them. 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.
During his lifetime, 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, 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.
Ironically, 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.
The popular book Reminiscences of a Stock Operator, by Edwin Lefevre, reflects many of those lessons. Livermore himself wrote a less widely read book, "How to trade in stocks; the Livermore formula for combining time element and price". It was published in 1940, the same year he committed suicide. It was later revealed by 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 Livermore employed for both information and planted articles.
A contrary view of Livermore's life is provided by Paul Sarnoff. Sarnoff says that Livermore was a hype merchant and that many of his brilliant successes were gross exaggerations. He states that Livermore did not in fact make much money during the 1929 crash as he was heavily hedged. He accuses Livermore, at the end of his career as being little better than a tout.[3]
[edit] Wall Street success
Livermore became a successful trader at an early age. 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. Livermore made his money by following trends in market prices. He would choose a particular stock or commodity to buy or sell 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.
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 couldn't explain why, but he had a strong urge to short the company. A few days later, the San Francisco Earthquake of 1906 struck. 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.
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.
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.
Livermore continued to make money in the bull markets of The Roaring 20's. 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, Livermore was worth $100 million after his short-selling profits.
