Wall Street Crash 1929A cleaner sweeps the floor following the Wall Street crash of 1929. Photo: Wikimedia Commons

Great Trades of History: The Livermore Short

If ever there was a stock market god, then Jesse Livermore was it.Tom Rubython

The Wall Street Crash of 1929 is synonymous with loss, financial ruin and the coming of the Great Depression. But its gave one man the biggest achievement of his trading career and a profit that is among the largest ever made from the stock markets.

This man is Jesse Livermore. He is regarded as one of the best traders of all time, and “the 1929 crash has come to define him more than anything else,” says Tom Rubython, his biographer.

Reminiscences of a Stock Operator

Reminiscences of a Stock Operator, Edwin Lefevre

Born in Massachusetts in 1877, Livermore arrived in Boston at the age of 14 after escaping from his father’s attempts to force him to work on the family farm. Here he found work initially with the “blackboard boys” at stockbroker Paine Webber, where he helped to update share prices received by ticker from Wall Street.

This daily exposure to share price data, plus years of reading newspapers’ financial pages as a schoolboy and an aptitude for mental arithmetic, allowed him to develop strong instincts for how markets move. Soon, he began to trade himself.

His many trading successes included shorting the company running the Union Pacific railroad just before the 1906 San Francisco earthquake. He also experienced failures. Just a year after his railroad triumph he lost 90 per cent of his wealth on a failed cotton gamble.

The most spectacular of his trading activities, however, centred around the Wall Street Crash. Livermore noticed in the weeks before the crash that the value of shares bought exceeded the amount of capital available to back up these purchases.

He had lived – and traded – through a similar series of events with the Panic of 1907 and felt convinced that there would be a similar outcome this time round. “Whatever happens in the stock market today has happened before and will happen again,” states one of the most famous of his 21 trading rules, still pored over by investors today.

The 21 Trading Rules of the Great Stock Trader Jesse Livermore

Livermore began to short US corporate stocks, which quickly paid off when prices started to fall dramatically as market confidence disappeared. After the climax of the crash on 29 October 1929, now known as Black Tuesday, he’d made $100 million.

Another of his rules that he might have had in mind at this time include that there is no easy money and that wishful thinking should be banished.

But by 1934 Livermore had lost all of the profits he made in 1929, plus an additional $5 million. While Livermore’s trading principles are regarded as peerless, the same cannot be said of the man.

“The fortunes lost were incurred when Livermore, for whatever reason, decided to go against his own counsel,” says investment writer Tim Price in his preface to a recent edition of Reminiscences of a Stock Operator, a novelised version of Livermore’s life.

Livermore had recognised the weaknesses and inconsistencies in his own character early on in his career, setting aside money for his family that he couldn’t touch himself. “I knew a trading man would spend anything he can lay his hands on,” he said of his actions.

Sadly, Livermore’s sense of his failings eventually came to overwhelm any pride in his successes. “In the end, he lost sight of his own identity and didn’t know whether he was a highly talented stock speculator or just a lucky gambler who happened to be in the right place at the right time,” writes Rubython. In November 1940, troubled by financial and personal difficulties, he shot himself in the cloakroom of a Manhattan hotel.

His successes are still revered by others, however. Hedge fund bosses reportedly give copies of Reminiscences of a Stock Operator to new employees as Livermore’s trading lessons are seen as just as relevant today as they were a hundred years ago. “The remarkable achievements of his life,” says Rubython, “have defined four generations of investors.”

We can probably see more of what was unique about Livermore than Livermore could ever have seen for himself.Paul Tudor Jones