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On Jesse Livermore And His Legacy

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Henry To, CFA
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jesse livermore On Jesse Livermore And His Legacy - Part 2 of 2 - Henry To, CFA

jesse livermore Jesse Livermore Lesson Two
Do not depend your analysis solely on “insider information.” Jesse Livermore learned this lesson the hard way – twice in all. The first lesson was moderately costly; the second lesson was to cost him his entire fortune:

Livermore had always been skeptical about the dependability on “insider information.” After all, why would top management tell outsiders that he was selling shares in his own company because he thinks business will be bad going forward (these were the days before insider-trading was made illegal)? Telling outsiders would only add more selling pressure to the stock, and vice-versa. The legendary trader, Bernard Baruch, had always maintained that insider information was useless, and that a person was doing him a favor if he would keep the insider information to himself and not reveal it to him. Livermore got his first real lesson sometime after he closed out his profitable short position in Union Pacific right before the 1906 San Francisco Earthquake. After three days of tape-watching, he concluded that the shares of Union Pacific were being accumulated. He started to accumulate shares in Union Pacific as well – only to be stopped by Ed Hutton, the great New York financier and owner of the E.F. Hutton brokerage house, and a personal friend. Hutton told Livermore that he had inside information and that the insiders have set up a pool and were dumping shares to him at a furious rate. Sooner or later, Union Pacific is going to tank. Despite his own beliefs and the reinforcements of all those beliefs from years of tape-watching, Livermore liquidated his 5,000 shares of Union Pacific at $162 – making only $10,000 in the process. The next day, the company announced a 10% dividend and the shares shot up by an additional ten points. The opportunity cost? $50,000 in additional profits which would be equivalent to over one million dollars today. Livermore did not get upset or emotional, but after this incident, he swore that he will never listen to insider information again and that he will only trust his tape-watching skills and instincts from now on.

The second lesson that was handed down to Livermore did not strictly involve insider information, although it was pretty darn close to it. It also taught Livermore a little about himself – his gullibility and his succumbing to another man's sale skills even though he practically knew all the facts of a product (in this case, it was the cotton industry). Let me clarify. This happened soon after the Panic of 1907 – when Livermore was trading successfully at a peak level and soon after he made a small fortune by nearly cornering the cotton market. Some weeks before, a man named Percy Thomas (who was also know as the “Cotton King”) had gone bankrupt in trying to corner the Cotton market, and hearing Livermore's exploits, Thomas would seek him out and ask Livermore to be his partner. Livermore refused to be Thomas' partner since he had always played a lone hand. However, Thomas was a man of knowledge (particularly in the cotton market, of course – where he supposedly had “spies” that would report crop conditions and the like to him as soon as they could) and a great charmer, and Livermore was soon put under his spell. Prior to Livermore meeting Thomas, Livermore was short cotton. After a month of listening to Thomas and falling under his spell, Livermore covered his short position and went long. This was the beginning of Livermore's downfall. With his judgment clouded, Livermore continued to average down on his long position even as Cotton fell. He even sold out his profitable wheat position in order to maintain his margin requirements in cotton and to even buy more cotton on the way down. After realizing what had happened, Livermore soon sold out – with a stake of only $300,000 left – 10% of what he had only some months ago. Livermore sold his apartment and his yacht and tried to recoup his losses in the stock market. By this time, however, his emotions were running wild and his trading skills were shot. Soon thereafter, Livermore was broke once again – not only losing his remaining stake of $300,000 – but now, he was in debt to the tune of over one million dollars. Livermore would ultimately establish himself once again, but this lesson further reinforced his beliefs that he should always play a lone hand, and that he should never tell anyone what he was doing or ask otherwise.

jesse livermore Jesse Livermore Lesson Three
The need to continuously evolve in the stock market. This was initially discussed in lesson one, but I believe this theme is important enough to warrant its own bullet point (no pun intended). In fact, this is probably the most important lesson that could be taught from Jesse Livermore's experience. The most popular rules such as “cutting your losses” and “don't put all your eggs in one basket” have often been cited, but what if one wants to be able to make money in the stock market over the long run? To this I say: “One needs to continuously evolve in the stock market to survive and to flourish.” This is definitely applicable to everyday life and one's career (if one is not a trader or investor) as well.

Jesse Livermore has been able to successfully trade the stock and commodity markets over a period of more than thirty years not only because of his intelligence, cool-headedness, trading skills, and his far-sightedness. He was able to do this successfully for such a long period of time primarily because he was able to evolve. He adopted a more long-term, buy-and-hold-like strategy when he shifted his trading from the bucket shops to the New York Stock Exchange. He was also eager to learn something new everyday. He was also flexible – whether on the long or short side or just being in cash. He figured out when there were opportunities in the stock market, and figured out what strategy to adopt and when there were not. He also made friends with very successful people – whether they were businesspeople or great financiers.

This is actually the heart of this commentary: the need to continuously evolve. In his ground-breaking work “Common Stocks and Uncommon Profits,” originally published in 1958, Philip A Fisher remarked that times have changed and that the way to make the most money over the long-run is to find great stocks and hold them for the long-run through thick and thin. The old way of speculating and making money by catching the inflection points of boom and bust cycles was gone with the advent of the Federal Reserve and the maturing of the SEC and the new regulations. I believe Jesse Livermore failed to see that. By the end of 1929, he had successfully maneuvered his way out of the Great Crash with a cash horde of over $100 million – becoming of the richest men in America. When Franklin Roosevelt came into office in 1932 – taking his “brain-trust” with him – and with the creation of the SEC in 1934, the stock and commodity markets adopted a different character – a character which Livermore had never seen in his entire life and a character which America had never seen before either. There is no documented history of the trades that Livermore during that time – all we knew is that he went bankrupt for the final time in his life during the 1930s and was never able to successfully make a comeback. Some say he lost his fortune going long sugar futures before FDR put a ceiling on the sugar price. Some say he lost his fortune going long after the crash and didn't get out in time – thinking that the 1929 “dip” would be one of the many similar busts that America had endured during the 19th century and the early parts of the 20th century before the creation of the Federal Reserve. The message is clear, however. The character of the market changed in a big way, and Livermore was not flexible enough to go along for the ride – despite the fact that he had successfully evolved his strategies and trading styles many times before in the past.

This is not unsimilar to the period immediately before the technology bubble burst in the spring of 2000. At the time, I stated that the technical indicators that were so successful in the late 1990s would not work anymore – primarily because that we were entering a secular bear market. Few believed me at the time. They continued to use their oversold technical indicators, buying technology stocks during the many dips along the way. They failed to evolve. Warren Buffett had mentioned in the past that only when the tide turns would it be obvious to see who was swimming naked.

The idea of evolution in the stock market continues to hold true today. In fact, with the advent of globalization and information technology, it is now even more imperative to evolve since trends can change much more quickly. Information is now instantaneous. Investors will need to be more nimble. Whereas Philip Fisher emphasized that timing was not too essential in the purchase of stocks in 1958, this has all changed today. Witness the meteoric rise and fall of Taser – all in a short time span of 12 months! Also witness the huge amount of cash that has been sitting on the balance sheet of Warren Buffett's Berkshire Hathaway over the last 24 months. Yes, the company has grown bigger, but as a percentage of total net worth, the amount of cash that Warren Buffett is currently holding is unprecedented. Ten years ago, Buffett would have been able to find opportunities to put this cash to work. Buffett had always been a great timer in the stock market (he had always had the great ability to evolve), and I believe he will be putting all his cash to work once he finds the best time to buy equities, bonds or whole companies. In a weird way, Livermore's trading/timing strategies may have been revived. The point is: Today, the timing of the stock market and individual stocks is all the more essential. And is here to help. While the analyses of individual stocks and industries continues to be important today (and sites such as the Motley Fool does a good job of it), we also believe that the ability to time the stock market on at least the intermediate-term basis (and the ability to adapt to a different style of trading and to recognize which asset class to buy) is going to become more essential down the road. Through our twice-a-week commentaries and our DJIA Timing System, we will seek to complement our analyses of businesses, individual stocks and industries, with our proprietary technical indicators and our timing skills in the stock market.

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Henry To, CFA is the managing member of Independence Partners, LP, a SEC registered hedge fund. Henry is also a business consultant and editor of, whose mission is to provide his readers with a weekly commentary designed to educate subscribers about the stock market and the economy beyond the headlines.

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