Wisdom of Jesse Livermore

By: Adam Hamilton | Fri, Jan 31, 2003
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Legendary speculator Jesse Livermore is surely one of the most fascinating characters in all of financial-market history.

About a century ago Jesse Livermore blossomed into one of the most celebrated speculators of all time. He was trading heavily in the early decades of the 1900s, a wondrous era to speculate in stocks. His renowned exploits are still viewed with great awe and reverence by today's elite speculators and his towering speculation wisdom will stand tall for ages to come.

Mr. Livermore's illustrious career began as a young lad when he landed a job as a quotation-board boy in a stock-brokerage office. As he transferred stock-price numbers from the ticker tape and posted them on the big board for the brokerage's customers to see, he became captivated by the endless stream of figures.

After a while he began to make observations, noting that when the price of a stock behaved a certain way a substantial drop or rally was probably dead ahead. He began to meticulously keep a "dope book" of his observations and his real-time predictions based on them, and noticed that more often than not the markets proved him right.

Soon Livermore was blessed with the opportunity to actually trade for himself rather than just watch others trade. He amassed his first $1000 by the time he was only 15 years old, much to his mother's amazement.

Now $1000 today isn't much, chump change thanks to 90 years of relentless inflation by the nefarious Federal Reserve, but $1000 way back in the pre-Fed days is the equivalent of about $20,000 in today's inflation-eroded US dollars. Winning the equivalent of $20k in the stock markets at the tender age of 15 would be a monumental achievement today too!

Before he turned 21, an age today when most kids have horrendous finances and mountains of college debt, Livermore's speculative capital had ballooned to $10k, about $200k in purchasing power in today's dollars!

Speculation is a hard and unforgiving business and Jesse Livermore wasn't King Midas, everything he touched did not turn into gold. He did suffer through trying losing streaks like all speculators, even going completely broke several times and deep into debt at least once. Yet, he eventually succeeded in mastering the game to a magnificent degree and ultimately achieved a fantastic level of success in the financial markets.

Livermore's exploits were recorded in the greatest book on speculation of all time. Originally published in 1923, it is called "Reminiscences of a Stock Operator" and was written by a gifted financial journalist named Edwin Lefevre. Lefevre penned the account as if from the first-person perspective of a fictional trader named Larry Livingston. As Lefevre had spent weeks extensively interviewing Jesse Livermore, market historians are virtually unanimous in viewing Lefevre's classic book as a thinly-disguised biography of Livermore's trading life.

Today "Reminiscences of a Stock Operator" is fondly read with awe by speculators of all levels and abilities all around the globe. I have personally read the book many times and I try to re-read it at least once a year now. The speculation wisdom contained within these magical pages is just awesome and truly priceless for all speculators to digest.

If you are interested in speculation and you haven't read the book you owe it to yourself to buy it today at Amazon or Barnes & Noble. I can almost guarantee it will forever change you as a speculator and help you soar to new heights of understanding of the game and achieving real-world success.

Jesse Livermore's words and experiences are so endearing and powerful because he presents himself as just another mere mortal like you and I, with hopes, fears, and frailties. He is brutally honest in critiquing his own evolution as a speculator and thoroughly explaining his own mistakes and the great wisdom they ultimately led to.

Any speculator on Earth today, regardless of if they are interested in QQQ options, futures, gold stocks, or any other financial-market arena, can harvest vast wisdom from the endlessly fascinating life of Mr. Livermore. Other than reading the Bible to understand how unfathomably dangerous the emotion of greed is (1 Timothy 6:10 ... For the love of money is the root of all evil...), there is no book on speculating I can recommend more highly than "Reminiscences".

As my own lifelong personal evolution as a speculator continues and I attempt to continually learn to deepen my own wisdom and understanding, I would like to write some essays highlighting Jesse Livermore's awesome wisdom. Periodically we will publish a new essay delving deeper into the book. I am not sure how many essays it will ultimately take to hit the majority of the wisdom high points in "Reminiscences", but the journey will be fun and enlightening.

My personal goal for embarking upon this "Wisdom of Jesse Livermore" series is two-pronged. First, I want to deeply internalize Livermore's fantastic wisdom myself so I can continue to grow as a speculator and also recommend superior real-world trades for the wonderful subscribers to our acclaimed Zeal Intelligence monthly newsletter.

Second, I have a heart and passion for trying to help others grow into better investors and speculators so it will be a great blessing to help share Livermore's wisdom with a generation that desperately needs it. As we sojourn in a brutal post-bubble bust era, it is more important now than ever that investors and speculators today learn from legends like Livermore so they can avoid making the same painful mistakes with their own precious capital.

To make it easier for everyone to follow along, I will present Jesse Livermore's wisdom chronologically from the book. All the bold-faced passages below are his words directly out of Lefevre's book, while the following normal text is my own feeble thoughts and commentary attempting to pull Livermore's wisdom a century into the future to today. Before every quote below, the chapter in "Reminiscences" it is pulled from is noted so you can quickly find it and dig deeper by reading the valuable surrounding background context if you wish.

I hope and pray that you find Jesse Livermore's awesome wisdom as exciting and valuable as I have!

(Chapter I) … "Another lesson I learned early is that there is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market to-day has happened before and will happen again. I've never forgotten that."

Oh, what a priceless opening lesson!  It reminds me of ancient Israeli King Solomon's unequaled wisdom stating that "there is no new thing under the sun." In the last few years literally trillions of dollars have vaporized, shattering countless families' precious hopes and dreams, because investors foolishly believed the silly new-era hype surrounding the doomed NASDAQ tech-stock bubble. 

Booms, bubbles, bursts, and busts have been around for centuries and will continue into the future. Every major stock-market bubble is heralded as a "New Era" at the time before it bursts. Everything investors and speculators are witnessing in today's markets has come to pass before. Even though technology relentlessly marches forward, there is one ultimate driving force behind the endless financial-market machinations that never changes.

This force is the human heart. Every speculator is both blessed and burdened with one. As long as humans trade, the titanic warring emotions of greed and fear will lead to endless waves of overvalued then undervalued markets, booms then busts, rallies then downlegs. A greedy or fearful trader today behaves no differently than a greedy or fearful trader 100 years ago or 100 years from now in the future. There is nothing new in Wall Street.

(Chapter I) … "That's all the fun there is - being right by using your head. If I was right when I tested my convictions with ten shares I would be ten times more right if I traded in a hundred shares. That is all that having more margin meant to me - I was right more emphatically. More courage? No! No difference! If all I have is ten dollars and I risk it, I am much braver than when I risk a million, if I have another million salted away."

Amen on being right! This is truly the greatest reward of speculating! The huge profits are merely a pleasant byproduct. The real pleasure for speculators involves being right and being rewarded for being right!

Being in the private speculation, financial newsletter, and consulting businesses, I am really blessed to talk with all kinds of speculators around the world on a daily basis. One common opinion I note in many of the speculators newer to the game, and a myth I myself believed when I was younger, is that the size of one's capital matters for success in speculation. In truth, size is irrelevant in the vast, vast majority of speculation!

If you are a new trader and all you have is $1000 to risk, don't worry about it at all. If you are right and your trades are blessed with success, your stake, or "line" as Jesse Livermore called it, will grow. You have to cut your teeth and learn the art of speculation by beginning small, and only then can you eventually grow to become an elite speculator some day.

If you are faithful over a few things, successfully trading whatever meager capital you can scrape up initially, you will eventually be blessed with the opportunity to be a ruler over many things. If you sow the seeds of learning how to speculate starting small, you will eventually reap the magnificent harvests of speculating big with awesome amounts of capital.

Success in speculation is not related to one's bankroll and a very small speculator takes the same risks and plays the game the same way as a large speculator. If you want to be a speculator, please don't let your lack of capital intimidate you. Livermore himself went broke and started again from nothing several times, yet he still became so successful that he will be forever remembered as one of the greatest speculators in all of history. Everyone starts small.

(Chapter I) … "I knew something was wrong somewhere, but I couldn't spot it exactly. But if something was coming and I didn't know where from, I couldn't be on my guard against it. That being the case I'd better be out of the market."

Another common and deadly speculation myth is that speculators must always be in the markets playing the game. As Jesse Livermore wisely pointed out, this is foolishness. Once again the ancient King Solomon's vast wisdom echoes through the ages, "To every thing there is a season, and a time to every purpose under the heaven." There are times to trade and times not to trade.

Mr. Livermore noted that he had an uncomfortable feeling about the market in this quote but didn't quite know why. Something in his subconscious was nagging at him but he couldn't quite verbalize the thought. He wisely closed his position and evacuated. As a speculator it is always far better to be safe on the outside wishing one was in than being trapped on the inside hemorrhaging capital at frightening speeds and wishing one was out!

Speculation opportunities are legion and will always exist. Like missing a flight at an airport, it is never a big deal if you miss a particular speculation opportunity because there is always another one flying out somewhere behind it. In my own experience I have generally found that excellent speculation opportunities arise every few months or so.

If something just doesn't feel right and you are uncomfortable with the markets for some reason, get out and don't trade until your comfort returns. Worst case you will have to wait a few months or so for the next prime opportunity. Best case, however, you will avoid overtrading and finding yourself being flayed alive by a big loss during anomalous market conditions.

(Chapter II) … "My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I'd have been right perhaps as often as seven out of ten times. In fact, I always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own game - that is, to play the market only when I was satisfied that precedents favored my play. There is a time for all things, but I didn't know it."

This hugely important lesson ties in with the one above. Periodically the scales of probability tilt so favorably that a speculator commands high odds of emerging from a specific trade with outstanding profits. As Jesse Livermore learned, a prudent speculator will patiently bide his or her time to stalk a trade. They won't actually commit a dime of capital until they are sure that market precedents favor the speculation they are about to embark upon. In Zeal Intelligence we christen these super-opportunities "The Big Trades".

After Livermore found a speculation that had a high probability of success based on past market behavior, he learned the hard way that he should stick with his position. If he knew he "was right" going into a trade, he said he always won. I have also experienced this in my own personal speculation evolution. I have found that the times I really felt that a trade was "right" before I began were vastly more successful than the times I foolishly succumbed to temptation and traded on a flimsy whim. Planning is crucial and impulse trading is lethal!

Speculators must research the markets, patiently await an awesome opportunity, bravely deploy their capital ahead of the expected market move as contrarians, and diligently ride it out towards the original end they anticipated. If they fail to meticulously follow these 4 steps, research, stalking, deploying, and sitting tight, odds are their speculations will not be very successful on balance. Livermore knew his stuff!

(Chapter II) … "There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily - or sufficient knowledge to make his play an intelligent play. I proved it."

Wow! This wisdom is sure controversial today! Jesse Livermore, one of the greatest speculators of all time, flat-out says that day trading is foolish. He points out that there are never "adequate reasons" to buy or sell stocks constantly, and that someone who tries to play the game of trading all the time is a "Wall Street fool". Interestingly, Wall Street loves these suckers as their constant trading racks up enormous brokerage fees whether the speculators win or lose in the end.

In my own evolution as a speculator, I tried the day-trading game in early 2000 as the tech bubble was topping. I was primarily trading biotech and genomics stocks, entering and exiting single trades within hours or sometimes even minutes. Thankfully I emerged unscathed as I was blessed with modest profits after a couple months of this, but I will never forget the fantastic lessons I learned.

First, trading is stressful. The markets are a hard teacher. Every single time you have an open trade with your precious capital exposed to the markets, you burn some crucial psychological capital. Having open positions is always an emotional burden, sometimes it is light and sometimes it feels like a mighty lead anchor chained around your neck crushing you into powder. In day trading the ultimate stress and psychological capital cost is immensely higher because the volume of trades is so much higher. Today I prefer tactical speculations with multi-month time horizons, as far fewer trades are necessary so they are vastly less of an overall psychological burden.

Second, as Livermore wisely points out, there is no way to have "sufficient knowledge" to consistently intelligently day trade. Especially in the young Information Age today, speculators trying to absorb the torrents of financial information available are essentially trying to drink from a raging fire hose. If a speculator is buying or selling every couple hours every day, he or she cannot possibly have studied each trade enough to fully understand its risks and implications.

Third, the ultra-short-term intraday markets are inherently unpredictable and capricious. Any speculator can make an educated guess about whether the markets will be higher or lower a few months from now, but since information flow and general sentiment can shift so incredibly rapidly no one has a clue whether the markets will be up or down tomorrow. The shorter the expected time horizon for a trade, the more it resembles pure Vegas-style gambling and the less it is like intelligent speculation.

Fourth, a day trader is a slave to the computer. They must constantly be hunched among computers painstakingly watching minute-to-minute market movements and attempting to divine what on Earth will happen a half hour later. Day traders are always exposed and can seldom take mental or physical breaks. In sharp contrast, a tactical multi-month speculator can relax and enjoy life, virtually ignoring the markets for weeks at a time, once their capital is deployed and in position.

Finally, the typical profits in day trading are usually trivial. After commissions, a day-trading scalper is lucky to earn a few percent on each trade on average. Why face the monumental stress of day trading to earn a measly few percent on your capital while risking much larger losses? Conversely, a multi-month tactical speculation played out right can earn profits in the hundreds of percent, such as our current open QQQ options plays outlined in Zeal Intelligence now have the potential to achieve.

Well, unfortunately this is all of Jesse Livermore's wisdom that fits into this first essay in my new series on "Reminiscences". I hope you found Livermore's great wisdom enlightening!

Go buy and read "Reminiscences of a Stock Operator" today! I can almost guarantee it will forever change your life as a speculator! Jesse Livermore's quotes are even more impressive in proper context and are delightful to read and digest. This essay format can't even start to do them justice.

Until next time, Godspeed and happy speculating!


 

Adam Hamilton

Author: Adam Hamilton

Adam Hamilton, CPA
Zeal LLC.com

Do you enjoy these essays? Please help support Zeal Research by subscribing to Zeal Intelligence today! www.zealllc.com/subscribe.htm

If you have questions I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/financial.htm for more information.

Thoughts, comments, flames, letter-bombs? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I WILL read all messages though, and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing delivered from an explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to subscribe.

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