Trading Idols: Jesse Livermore

Following on from Trading Idols: Nicolas Darvas, my next trading idol is legendary trader Jesse Livermore. Although Livermore published his own book ‘How To Trade In Stocks’ which contains many of his pearls of trading wisdom, the more entertaining story of his life and times is contained in the book ‘Reminiscences of a Stock Operator’ by Edwin Lefevre — who many people believe to be Jesse Livermore himself hiding behind a pen name.

Livermore made (and lost) several huge fortunes in his lifetime, and he got started in trading by speculating in the bucketshops of early 1900s America, these bucketshops being the closest thing to spread betting that existed at the time. In a nutshell, these were pseudo-brokerages where you could place bets on the directions of stock prices rather than taking share ownership in the stocks themselves. Sounds familiar, doesn’t it?

When he was doing well, Jesse Livermore liked to trade big and live big, which may have contributed to his ultimate financial ruin… and eventual sad suicide. He was aware of his mistakes — which he documented —  and arguably it was his psychology and mental state rather than his trading prowess that let him down.

Livermore was the source of much of the age-old and time tested financial wisdom that you often hear quoted. Here are some of his pearls of wisdom with my commentary:

Livermore was the source of much of the age-old and time tested financial wisdom that you often hear quoted. Here are some of his pearls of wisdom with my commentary:

1. “My plan of trading was sound enough and won oftener than it lost…What beat me was not having brains enough to stick to my own game…”  Maybe I should also have stuck to my own game rather than breaking one of my rules here.
2. “The desire for constant action… is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day…” is one of the best arguments against day trading and in favour of longer-term position trading.
3. “It took me five years to learn to play the game intelligently enough to make big money when I was right.” and “The game taught me the game.  And it didn’t spare the rod while teaching.” both illustrate the importance of spending real money (and time) at the Trading School of Hard Knocks rather than assuming expert status after reading just one book.
4. “Everything happened as I had foreseen.  I was dead right and – I lost every cent I had!” illustrated — long before Nassim Nicholas Taleb coined the phrase “Black Swan” — that an adverse event can occur at any time.
5. “If I hadn’t made money some of the time I might have acquired market wisdom quicker.” and “There is nothing like losing all you have in the world for teaching you what not to do.” both illustrate the importance of learning from our mistakes, and the danger inherent in experiencing beginner’s luck.
6. “Disregarding the big swing and trying to jump in and out was fatal to me. In a bull market your game is to buy and hold until you believe that the bull market is near its end.” This is one of the best all-round pieces of advice; but of course only applicable when a definite bull market is in progress.

All in all, there’s a lot to learn from trading idol Jesse Livermore. I hope you’ll agree.

Tony Loton is a private trader, and author of the book “Position Trading” (Second Edition) published by LOTONtech.