Jesse Livermore: 10 Lessons for Today’s Investor

Jesse Livermore is a must-read for anyone entering the world of investing and the stock market.

In an era without regulations and without much information about companies, he made a name for himself trading, even though he had no formal education.

In fact, many still consider him “the best trader of all time”. Without a doubt, he had a natural talent for stock market speculation.

He made and lost several fortunes until times began to change after the Great Depression. His end was surrounded by doom.

His life leaves great lessons that should not be forgotten by investors, especially retail investors and traders.

In this article we will tell you the highlights of Jesse Livermore’s life. We will emphasize several valuable lessons for our stock market education.

In general, the material about this interesting character focuses on his great operations and the money he made, but we will highlight what we can learn from him, especially from his mistakes.

Jesse Livermore: A very brief bio

Jesse Livermore was born on July 26, 1877, in Massachusetts, U.S.A. He died on November 28, 1940, in New York City, at the age of 63.

He began his career in the stock market at the age of 14 he was born in 1891, working as a board boy in a brokerage house.

Hesoon used his talents in the so-called “bucket shops,” which were establishments that allowed small amounts of money to be wagered on the price of stocks or commodities.

“Eventually, given his positive record, Jesse Livermore was banned from almost every establishment in Boston.”

By 1900 he moves to New York City, where he begins working for another brokerage firm and makes larger trades.

His best operations

His first major transaction came in 1901, at the age of 24, when he bought stock in Northern Pacific Railway. He turned $10,000 into $500,000.

In 1906, he made another big trade, taking a massive short position in Union Pacific Railroad the day before the San Francisco earthquake, which generated a profit of $250,000.

In the stock market panic of 1907, Livermore’s large short positions earned him $1 million in a single day.

However, on the advice of his mentor, J.P. Morgan, who had bailed out the entire New York Stock Exchange during the crisis, he stopped short-selling further. Instead, he benefited from the market rebound, increasing his net worth to $3 million.

Between 1924-1925, he engaged in market manipulation, earning $10 million trading wheat and corn, as well as other trades.

In early 1929, he accumulated huge short positions, using more than 100 brokers to conceal these trades. By spring, he accumulated losses of more than $6 million. However, after the Wall Street crash shortly thereafter, he made approximately $100 million net in profits. It is from this time that he gets the not-so-happy nickname “Great Bear of Wall Street.”

“Taking stock, if we translate all these amounts into 2022 dollars, we are talking about truly gigantic sums that made Jesse Livermore one of the richest men of his time. An era without major state regulation, but that was about to change, and with it Livermore’s fortunes.”

His bankruptcies and ultimate downfall

Despite having made several fortunes in the stock market, he also lost them after a while …

It is estimated that in 1908 he went bankrupt for the first time, although he was able to recover from his losses.

By 1915 he was again in ruins. However, at 38 years of age he still had enough strength to continue. But, eventually, his energies would be exhausted with tragic consequences.

His lifestyle was not exactly stable. He married 3 times, and in fact, his second divorce in 1932, as well as the non-fatal shooting of his son by his wife in 1935 and a lawsuit by his mistress, led to a progressive deterioration of his mental equilibrium.

On the other hand, the creation of the U.S. Securities and Exchange Commission (the SEC) in 1934 imposed new rules that affected his trading.

“Although the details of how it happened are not known, he ended up losing his fortune again, declaring bankruptcy for the third time in 1934. His assets were estimated at $84,000, while his debts reached $2.5 million.”

In addition, he was suspended as a member of the Chicago Board of Trade that same year.

In spite of everything, in 1937, he paid a tax bill for $800,000…

In 1939, he started a financial advisory company, promoting a system of technical analysis.

By the end of that same year, on the advice of one of his sons, he wrote a book on trading. The book, “How to Trade in Stocks”, was published in March 1940, although it was not well received.

However, it seemed that at this mature stage of his life, at the age of 63, he would be able to begin a quieter chapter in his life.

But, the years of licentious life and his many personal and financial problems had taken their toll on him. With the pages of his book, in fact, the final chapter of his life was being written.

It is estimated that at the time of his death he maintained a negative net worth.

The death of Jesse Livermore

On November 28, 1940, shortly after 5:30 p.m., Jesse Livermore fatally shot himself with an automatic pistol in the checkroom of The Sherry-Netherland Hotel in Manhattan, New York.

Police found a suicide note of eight small handwritten pages in Livermore’s leather-bound personal notebook.

The note was addressed to his late wife, Harriet, whom Livermore nicknamed “Nina,” and read:

“My dear Nina: I can’t help it. Things have been going badly for me. I am tired of fighting. I can’t go on any longer. This is the only way out. I am not worthy of your love. I am a failure. I’m so sorry, but this is the only way out for me. Love, Laurie.”

Laurie was short for Livermore’s middle name, Lauriston.

Thus ended the life of a remarkable character who was an icon of the so-called golden age of Wall Street.

His transit through the markets must be judged in the light of his time. An era that, as we have already said, lacked rules and regulations.

However, considering that he started from very humble beginnings, this is a genuine American story of success and failure.

Hollywood has left memorable movies that portray this dizzying world, such as “Wall Street” with Michael Douglas, or more recently, the cartoonish, “The Wolf of Wall Street” with Leonardo DiCaprio. But, reality always ends up surpassing fiction and Jesse Livermore’s life confirms this with creses.

Jesse Livermore’s most important teachings

From his own work, “How to Trade in Stocks”, we can extract several very useful recommendations:

“Throughout time, people have acted and reacted the same way in the market as a result of: greed, fear, ignorance and hope. This is why numerical formations and patterns repeat themselves on a constant basis.”

This is the opening reflection of this interesting book and allows us to appreciate that Jesse Livermore’s method was based on technical analysis. It could not be otherwise in an era devoid of fundamental information about companies, let alone large amounts of real-time data as is the case today.

This work could be summarized in 10 important tips for those who speculate in the markets:

1.- Cut losses quickly

If the market doesn’t agree with you, accept it with humility. If you keep your losses at bay you will be able to recover.

2.- Increase your position if the favorable scenario is confirmed

It is advisable to always enter with a minimum position size to control our risk, we do not know what is going to happen. But, if the market moves in our favor, we should increase our position instead of closing the trade.

3.- Keep the position open until the market takes you out of favor

As the market moves in our favor we should avoid closing a winning trade to take profits. This should only be done when the market signals a change in direction.

4.- Control your emotions

Uncontrolled emotions can be a trader’s worst enemy, as they lead to making wrong decisions. We must remain calm.

5.- Trading is the most fascinating game in the world, but it must be approached with seriousness, discipline and professionalism

The market is not a place for those who want to get rich overnight, nor for those with little emotional balance or lack of discipline. They will end up losing everything.

6.- Few people ever made money by taking advice. Make your own decisions

You need to educate yourself and form your own criteria as an investor. This takes a lot of time and effort, it may even take years. However, it is better than making decisions that compromise your capital based on the opinion of others.

7.- You can’t make money consistently by trading all the time

The big money is in making the most of good opportunities, and they don’t come along every day, so don’t trade indiscriminately.

8.- Never buy a stock just because it has had a steep fall

The market may well continue to fall, so it is best to concentrate on following trends.

9.- Never sell a stock just because it looks expensive

In this case, the market may well continue to rise after a correction, so it is the price action that tells us when to get out. The market doesn’t care about our opinion.

10.- Good moves take time to develop, so you need to be very patient

It is necessary to know how to wait for the appearance of trend movements to enter and go with the flow, and not to exit until the movement is exhausted.

This roadmap seems to be an exhortation to follow the price action at all times, although to tell the truth, it is more oriented to a swing trading style than, for example, to daytrading or even scalping.

Is there anything to learn from Jesse Livermore’s mistakes?

There is certainly a lot to learn from the tragic side of his story. In that sense we leave you with the following reflections:

Considering that Jesse Livermore made and lost several fortunes, don’t forget that the market can go in any direction, at any time, and that is beyond anyone’s control. Therefore, watch the market with detachment and without expectations for the final outcome. Respect the market.

Livermore’s story confirms that the great ones also make mistakes. Therefore, as human beings we must accept the possibility of making mistakes, but never catastrophic mistakes that jeopardize our capital and permanence in the markets in the long term.

If you do not have a good balance in your personal affairs, this will be reflected in your behavior as an investor. When you trade, try to do so in a state of serenity that allows you to be patient, respectful of market dynamics, humble about your results and not greedy.

Finally, the way Livermore squandered his fortune leads us to believe that he did not seriously consider investing for the long term, nor diversifying his capital into real assets or other types of investments.

It is true that his lifestyle greatly influenced his end, but undoubtedly, the story could have been different if he had opened his options beyond mere speculation. Therefore , if you make large profits, diversify your investments among different types of assets, distributing your capital appropriately.

Some observers have regarded Livermore as the greatest trader who ever lived, but others, not a few precisely, have regarded his legacy as a warning about the risks of leverage in pursuit of large gains rather than a strategy focused on smaller, but consistent returns.

If you want to know more about him, a recommended work is Edwin Lefévre’s best-seller, “Reminiscences of a Stock Operator”, published in 1923.

We hope you find the article interesting and that it contributes to a better understanding of the factors that lead to success in this wonderful world of the stock market.