If you were to ask professional traders to
name the people that have influenced their development in trading, you will find very
few people cited more often than Jesse Livermore. This is largely thanks to the part biographical
– part fictional account of Livermore’s life in the famous book Reminiscences of a Stock
Operator, which is usually top of the list of most useful and influential trading books
of all time. However, what’s so fascinating about Jesse
Livermore and what makes him such an amazing person for traders to learn about, is the
polarity of his successes. On one hand, you have someone that has scaled
the absolute heights of success in the market. Someone that we can use as an example of what
you can achieve if you work hard to truly understand the skill of trading and how the
markets function. But on the other hand, within the same person’s
story, you also have clear examples of the pitfalls of trading and how disastrously wrong
things can go if you don’t remain cautious about the markets and if you allow complacency
to creep into your trading. Despite Livermore trading a century ago, his
approach to a large extent is still absolutely relevant today. His approach to trading in
many ways was ahead of its time and his wisdom and observations in many cases are timeless. This is his story. Jesse Livermore was born on 26th July 1877
in Massachusetts. His father was a farmer and his mother was a homemaker.
Jesse learned to read and write by the time he was just 3 and a half years old and by
the age of 5 he was already reading through financial newspapers.
He attended grammar school and, unsurprisingly, was very good with numbers; particularly mental
arithmetic. In fact, while at school he claims that he completed 3 years’ worth of arithmetic
in just 1 year. At the age of 14, under his father’s insistence,
he left school and finished his education. His father who had also dropped out of school
at 14 to become a farmer, wanted Jesse to join him and devote his life to farming.
However, Jesse was devastated by this idea. He wanted to continue with his love of numbers
and arithmetic and to carve out his own path in life.
Due to this burning desire, his mother agreed to help Jesse to run away from home and to
keep it a secret from his father. She sent him packing with just $5 in his pocket,
which would be roughly equivalent to over $100 in terms of today’s money. Jesse got his first job as a chalk boy for
a brokerage firm called Paine Webber whilst he was still just 14 years old.
He had been in the firm looking around and because one of the boys was off sick he was
asked if he could step in. He was soon given a permanent position.
This was an ideal job for him because of his love of numbers. Prices would come through
the ticker tape and be called out. And then he would write them all on the chalk board
for the customers to be able to see. While he was working at this job, he became
so fascinated with the way that prices moved that he started keeping a little notebook.
Since he could clearly remember all the numbers and prices at the end of the day, he would
write these out in his notebook and observe the patterns in the way that they moved. He
kept this as his own little hobby or project outside of his work as a chalk boy. Up until this point, Livermore hadn’t done
any trading as he believed that you needed to have a lot of money to be able to participate.
However, it was whilst working as a chalk boy that he was first introduced to bucket
shops. The bucket shops were almost like betting
shops where you could back a particular stock based on whether it was going to go up or
down without actually needing to invest in the underlying asset. You could do this with
low amounts of money and on very thin margin and the bucket shop would be taking the other
side of your bet. Livermore decided this would be a good opportunity
to test out his work and to see if his theories about prices actually would work out in the
market. He would check his notebook where he had been
recording figures and patterns in the movement of prices and then decide which trades to
play on. Jesse started using his system to play at
the bucket shops on his lunch hour and the first profit he ever made was just over 3
dollars. However, it wasn’t long before he was making more than he was in his day-job,
so he decided to quit this to focus more on his hobby full time. At 15 years old Jesse
had made $1000 from trading at the bucket shops, which is roughly the equivalent to
$25,000 in terms of today’s money. Jesse continued to do well against the bucket
shops by following his own system and one by one the bucket shops began to ban him because
of the amount of money that he was earning at their expense.
He would even have to resort to using a disguise so that he could carry on trading, but word
did get around and eventually everyone at the bucket shops knew who he was anyway.
Eventually he was banned from the majority of the bucket shops in his town. By the age of 20 Livermore had accumulated
his first $10,000. However, this reduced massively by the age of 21 to $2500.
He says that if he stuck with his system, he would make more profits than losses, as
his system would usually win around 70% of the time. However, most of his losses came
unnecessarily when he would not stick with his own system; a problem that a lot of traders
have to overcome at some point in their career. At the age of 21, having been banned from
most of the bucket shops in Boston, Jesse took his $2500 and decided to move to New
York to start trading legitimately at the New York Stock Exchange. In New York it wasn’t long before Jesse gained
a reputation for being a winning trader. But soon after, he lost his money once again.
It seemed his winning formula was only designed for winning at bucket shops and not for the
real stock exchange. He went to St Louis to go back to betting
at bucket shops and to increase his money again. This was a new town for him with new
bucket shops, so he thought they wouldn’t know who he was.
But he did eventually get recognised again, and again he was banned from the shops. Instead,
his solution was to send in people on his behalf. He managed to actually make enough
money by doing this to be able to go back to trading in New York. Although he had already started to make a
name for himself around trading circles, Livermore first became famous for his trading during
the panic of 1907. It was during this time that he managed to earn $1 million in one
day. He made his money by shorting the market as
it crashed. By the end of the crash, he was worth $3million.
At this point, he knew the market was in a bad way and that it was possible for it to
move even more negatively. He had already decided therefore that he would do what he
could to avoid a deeper crisis, when he received a request from the financier JP Morgan, who
was putting together a plan to try to bring the market back to health.
Livermore looked up to JP Morgan, so he was more than happy to help. He began buying as
many stocks as he could, which also led other people to taking the same action. Thanks to
this, the market started to recover and many people that followed Livermore’s lead also
made a lot of money. As a result of this, in some circles Livermore was branded a hero.
But of course, he himself had also acquired a new level of wealth, which meant he could
live in luxury, enjoying things such as yachts and becoming part of the elite, going out
to the most exclusive clubs and enjoying life in the city as a young, rich bachelor.
To keep up with his new expensive lifestyle he turned back to trading. There are certain aspects of Jesse Livermore’s
trading approach that have been well documented. One of the main things was his desire to work
completely on his own. However, in 1908 he broke his own rule of
not taking advice from other people. He trusted a tip from a famous cotton trader.
The cotton trader told Livermore to keep buying cotton, which Livermore did, against his own
instincts. But at the same time as this the trader as well as others were actually selling in
the market, leading the price to move heavily against Livermore.
As a result of this, he lost 90% of everything that he had earned during the 1907 crash.
Throughout the following years Livermore’s losses grew deeper and deeper, until finally
he ended up with a debt of $1 million and had to declare bankruptcy by 1915. Without a stake to be able to begin trading again, he had to ask for some help. He was
offered a trading facility of just 500 shares to get started again. But Livermore knew he
had to play this one perfectly, so he spent 6 weeks just tape-reading in the markets before
finally making his move. The result of this trade was a success and
he finally had a stake to be able to begin trading properly with again.
Unsurprisingly, given the rollercoaster ride that was Livermore’s trading career, over
the next couple of years Livermore managed to earn his fortune back again and pay off
his debts. Newspapers from 1917 report headlines such
as “Boy Plunger Scores Comeback in Operations on Wall Street” and spoke of the shrewd
young speculator who “made and lost millions in the stock market and then came back and
made more millions” In 1922 Jesse Livermore took part in a series
of interviews with Edwin Lefevre for a series of articles. These interviews eventually led
to Lefevre to writing the book “Reminiscences of a Stock Operator” which is one of the most
highly regarded trading books of all time. The book is a ficticious biography of Livermore
and details his ups and downs in life and in investments. It’s thought that the book
could actually be the true story of Livermore’s life based on the interviews, but some also
think it could be completely made up. The book became very popular and is still one
of the most popular investment books to this day It was shortly after this that Livermore decided to move to a new office to have more secrecy
with his trading and to be even more removed from Wall Street. Livermore began noticing certain patterns
occurring in the market leading up to 1929. These were similar patterns to those that
he observed in the build up to the crash of 1907 Feeling confident about the hunch he had, he began opening short trades in anticipation.
At one point he was even living in his office just so he could keep placing trades in the
lead up to what he expected to be a huge negative movement Of course, the boy plunger Livermore was correct and he enjoyed the most successful period
of trading of his entire life. By the end of the crash, Livermore was worth
around $100 million which is over $1.4 billion in terms of today’s money. Most people had
lost their money during the crash, which was known as Black Tuesday. After making it to $100 million after the
crash of 1929, Livermore started to lose that fortune rapidly.
No one knows the true reasons why or how Livermore lost this fortune as it has never been disclosed.
There have only ever been speculations. During this time, things were extremely unsettled
in Livermore’s private life. This included getting a divorce from his second wife, who also went on to shoot his son at a later point in time Livermore had spent time in Vienna and met his third wife, Harriet Metz, whose last husband
had committed suicide. Livermore’s children didn’t like to be around her since they felt
darkness from her and knew that she didn’t want them around, in fact, they even went
as far as to call her the bitch-witch. Eventually Livermore had to declare bankruptcy
again, this was his 3rd time. Although he was bankrupt, he still believed
he could make a comeback as he had done so many times before. But, after all the pressure
and emotional strain of everything that had happened in work and in his personal life,
it was too much to take and he wasn’t able to do it Another contributing factor to not being able to start again on Wall Street was that he now relied on his wife’s money and he had got comfortable He didn’t have the same
drive or passion as he did in his former days. On November 28th 1940, Livermore was found
dead in the cloakroom of the Sherry Netherland Hotel in Manhattan aged 63. He had tragically
shot himself. It’s clear that the story of Jesse Livermore
is one of a highly skilled trader who understood price activity and how to operate successfully
in the markets. This led to some fantastic successes, which we can all learn from as
investors and as traders. However, his downfall in trading was also
due to problems that many traders struggle with. He wasn’t able to avoid being influenced
by his private life and he struggled to stick with his trading rules and system, which would
have helped him to avoid many, many losses. Now many of these rules are still useful today.
They can help us to try to avoid some of the losses Livermore made, while hopefully helping
us to move closer to enjoying some of the success in the markets he did. So here are
some of the rules that you can follow and you’ll also find some books in the description
box for this video that do a good job of detailing Livermore’s trading approach and life, so
we would definitely recommend checking some of those out. I hope you enjoyed this video as much as we
enjoyed putting it together. Jesse Livermore is a true trading icon and inspiration in
many ways. If you enjoyed the video, please do hit the thumbs up button to let us know.
Don’t forget to subscribe to the channel for more videos about trading, the rest of the
trading legends videos are linked below in a playlist so go ahead and check those out.
But before you watch those, please leave a comment below letting us know what your favourite
bit is about the Jesse Livermore story. Thank you very much for watching, we appreciate
it. Take care, we’ll see you soon.