Jesse Livermore: World's Greatest Stock Trader
"The stock market is the world's biggest gold mine,
a gold mine that opens its doors every day and invites anyone and everyone in to
plumb its depths and leave with wheelbarrows full of gold bars, if they can!"
That was Jesse Livermore telling his two sons about the stock market. And he
knew because he had done it.
But he cautioned, "when the bell rings at the end of the
day they have gone from pauper to prince... or gone stony broke." And he
had done that too!
Jesse Livermore was known as the Boy Plunger, the Great
Bear of Wall Street, and widely regarded as the greatest stock trader in
history. And Richard Smitten's biography is a fascinating account of the man and
his times. It also gives an excellent account of Livermore's trading secrets -
the rules to success in the stock market that gave him his edge, and the
pitfalls that brought him down.
Without a doubt Livermore was a genius. He had a
brilliant mind for mathematics and a photographic memory for numbers. As a
school boy he plowed through three years of arithmetic in one. He challenged a
teacher to a race to solve a problem and won.
But his father had other ideas. He pulled young Jesse out
of school to work the family farm. With the help of his mother, 14 year old
Jesse ran away to Boston where he landed a job as chalkboard boy at Paine
Every day he would write stock quotes on the blackboards
and he began to notice something. With his photographic memory and facility with
numbers, he noticed patterns in the action. He realized that a careful analysis
of a stock's action could give clues about its future price direction.
With his meager resources Livermore explored the second
great influence in his market education - the bucket shops. These were
quasi-brokers somewhat akin to betting parlors. People could walk in off the
street and bet on a stock with 10% down. The bucket shops were a hustle
and most were owned by underworld kingpin Arnold Rothstein, the man reputed to
have fixed the 1919 Black Sox World Series.
The operators were known at times to manipulate the
market, forcing a ten percent drop in a stock to wipe out a bettor, for that
would wipe out the ten percent margin play. But even without manipulation the
house won 95% of the time because of the high leverage.
At the bucket shops Livermore naturally learned one of
his great trading rules - limit your losses to ten percent. But with his mind
for numbers and patterns, Livermore won consistently. He played the market
both ways - long and short. By age 16 he had over $1000 in cash, a heady
sum in those days. He sent half back to his mother and with his remaining
resources started to create his reputation.
He became known as the Boy Plunger for his youthful good
looks and habit of making large bets. He was so successful that the bucket shops
banned him from their premises, just as casinos will banish consistent winners.
So Livermore moved up to the big leagues - the stock
market proper. And the rest, as they say, is history. Because he played both
sides of the market, Livermore made some of his biggest plays in down markets -
the crash of 1907 and the great crash of 1929 when he made over $100 million
Smitten brings these early episodes as well as the rest
of Livermore's life into sharp focus. Based on extensive research, including an
interview with Livermore's son Paul, Smitten pieced together an account of a man
both brilliant and tragic. A man who developed a set of winning rules for
trading the market, but who as often broke his rules and went broke. In 1934,
five years after making his killing on Wall Street, the great man declared
bankruptcy for last time. He never regained his touch.
The book also gives a fascinating glimpse of his personal
life - his three marriages, his friends and acquaintances including ex-pat
Canadian Arthur Cutten, considered one of the greatest commodity traders in
history, Bernard Baruch the great financier, banker J.P. Morgan and Ed Bradley,
owner of the Beach Club - the longest running illegal gambling parlor in
The most useful parts of the book for investors, of
course, are the chapters dealing with Livermore's methods. But his fascinating
life is also a lesson to us all. Money is not the most important thing in
life. For all his wealth, Livermore suffered from clinical depression. He was a
womanizer who alienated and ultimately divorced the one true love in his life,
his second wife Dorothy. His oldest son, Jesse Jr., was a misfit, spoiled and
often in trouble with the law.
And he obviously didn't recognize the ominous omen of
marrying his last wife, a woman whose four previous husbands had all committed
suicide. Livermore was no exception for the luckless lady and he shot himself in
For all his foibles and problems, Livermore is a great
role model for investors. At the peak of his powers he exhibited a steadfast
confidence, a shrewd analytical mind and the fearlessness to follow his
convictions. The rules he developed are still widely misunderstood and ignored.
But they have been refined and developed to a large degree in the works of
William O'Neil who acknowledges the influence of Livermore in his own thinking.
His basic rules are cut your losses, probe the market
with partial positions before committing full positions, and gauge the market
based on price and volume. For a fuller account with examples, read the book.
This is a fascinating read, both for its subject, the
elegant, handsome and brilliant Jesse Livermore, and for the insight into his
methods. Highly recommended!