Legendary speculator Jesse Livermore is surely one of the most fascinating characters in all of financial-market history.
About a century ago Jesse Livermore blossomed into one of the most celebrated speculators of all time. He was trading heavily in the early decades of the 1900s, a wondrous era to speculate in stocks. His renowned exploits are still viewed with great awe and reverence by today's elite speculators and his towering speculation wisdom will stand tall for ages to come.
If you are interested in more background information on Jesse Livermore and my reasons behind writing this series of essays on the man's awesome speculation wisdom, you may wish to skim the introduction of the first essay in this series.
Mr. Livermore's exploits were recorded in the greatest book on speculation of all time. Originally published in 1923, it is called "Reminiscences of a Stock Operator" and was written by a gifted financial journalist named Edwin Lefevre. Mr. Lefevre penned the account as if from the first-person perspective of a fictional trader named Larry Livingston. As Lefevre had spent weeks extensively interviewing Jesse Livermore, market historians are virtually unanimous in viewing Lefevre's classic book as a thinly-disguised biography of Livermore's trading life.
Today "Reminiscences of a Stock Operator" is fondly read with awe by speculators of all levels and abilities all around the globe. I have personally read the book many times and I try to re-read it at least once a year now. The speculation wisdom contained within these magical pages is just awesome and truly priceless for all speculators to digest.
If you are interested in speculation and you haven't read the book yet you owe it to yourself to buy it today at
Jesse Livermore's words and experiences are so endearing and powerful because he presents himself as just another mere mortal like you and I, with hopes, fears, and frailties. He is brutally honest in critiquing his own evolution as a speculator and thoroughly explaining his own mistakes and the great wisdom they ultimately led to.
In this series of essays Jesse Livermore's wisdom is presented chronologically from the book. All the bold-faced passages below are his words directly out of Lefevre's book, while the following normal text is my own feeble thoughts and commentary attempting to pull Livermore's wisdom a century into the future to today. Before every quotation below, the chapter in "Reminiscences" from which it is pulled is noted so you can quickly find it and dig deeper by reading the valuable surrounding background context if you wish.
I hope and pray that you find Jesse Livermore's awesome wisdom as exciting and valuable as I have!
(Chapter V) … "After all, the game of speculation isn't all mathematics or set rules, however rigid the main laws may be."
As speculators we all tend to grow excited when we find past patterns of price behavior that are likely to repeat. Jesse Livermore is specifically discussing a "ticker hound" or "tape-worm" here, a speculator with an "over-specialization" in intensely watching and interpreting price action alone. Often times past patterns in price behavior will repeat and may be successfully traded on, but sometimes the unexpected is bound to happen and end up scuttling a promising trade.
Speculation itself is somewhat of a paradoxical contrast between iron-clad "main laws" and perpetual change. Ultimately there are overarching main laws, such as buying low and selling high and trading opposite the prevailing emotions of others as contrarians, but there is certainly no mathematical precision in speculating. While frustrating at times, this lack of extensive "set rules" is also exhilarating as it keeps the game highly variable and immensely challenging.
Earlier in the book Jesse Livermore adroitly said, "If the unusual never happened there would be no difference in people and then there wouldn't be any fun in life. The game would become merely a matter of addition and subtraction. It would make of us a race of bookkeepers with plodding minds. It's the guessing that develops a man's brain power." Amen!
Never forget the grand "main laws" of speculation that never change, like throwing long fear and shorting greed. At the same time though, realize that literally anything can happen over the short-term and the future is never a certainty predictable with mathematical precision. Don't be surprised by the unexpected!
(Chapter V) … "If a stock doesn't act right don't touch it; because, being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit."
Boy this is sure a priceless morsel of wisdom! How many times has this happened to every speculator? You carefully watch market price action unfold, you relentlessly stalk your trade, but eventually something just doesn't feel right. Your pursued trade ought to be doing one thing but its price behavior is anomalous relative to the past and just doesn't make sense to you. Jesse Livermore said it is best to just walk away in this situation, don't even take the risk if something just "doesn't act right" relative to your expectations.
If a potential trade isn't acting as expected, chances are there are new dynamics acting upon it that are presently unknown to the speculator. If the speculator cannot find out why the strange activity is occurring, he or she risks getting trapped inside a trade subject to the capricious whims of marginal supply and demand pressures that are not yet fully understood by the individual speculator. These rather unpleasant situations often lead to painful losses.
Avoid making a trade when something just "doesn't act right" prior to launching the trade. Instead wait until the anomalous behavior can be understood.
(Chapter V) … "I should say that a chart helps those who can read it or rather who can assimilate what they read. The average chart reader, however, is apt to become obsessed with the notion that the dips and peaks and primary and secondary movements are all there is to stock speculation. If he pushes his confidence to its logical limit he is bound to go broke."
Technical analysis, the art of analyzing price charts, is a wonderful discipline when used wisely but a pit of quicksand if it consumes a speculator to the point of crowding out all other knowledge. Like many good things in life, technical analysis, or indeed any particular perspective through which to view the markets, must be used in moderation and in balance with other perspectives to remain well-rounded.
Technical analysis is so powerful for a couple reasons. Past price activity represents the sum total of all supply and demand, all the buying and selling that ever affected a given speculation in its entire history! While past behavior never predicts future performance with certainty, more often than not the past generally rhymes with the future to some degree. Everything that affects a given speculation is ultimately reflected in its free-market price and hence the charts.
Technical analysis is also incredibly compelling because it is so visual. Vast amounts of raw price data that would effectively be impossible to wrap your mind around in numerical format are almost magically transformed into razor-sharp lines on a chart that immediately enable a speculator to grasp the significant trends in place. Some single
While good technical analysts are always aware of prevailing trends and able to view current price action within proper historical context, a phenomenally valuable skill, charts are a sharp double-edged sword. As Jesse Livermore points out from experience, there is much more to speculation than merely reading charts. Sometimes charts work amazingly well, and other times a price dramatically breaks from past precedent and embarks upon wild acrobatics that no chart could have predicted.
In addition, a fanatically tight focus on technical analysis to the exclusion of all other market perspectives is very dangerous for speculators. As an example, I can't even count the number of times that I have seen technical analysts compare stock-index price action today with historical major market bottoms such as the early 1980s.
While the raw chart patterns alone do look similar, they totally ignore the crucial fact that the markets were vastly undervalued trading around 7x earnings in 1982 while they are vastly overvalued trading around 25x earnings today! History has shown that buying undervalued stocks like in 1982 is brilliant while buying overvalued stocks like today's 2003 crop is foolish.
Past price action is certainly important and well worth studying, but it must be viewed within the proper context of other perspectives on the markets including fundamentals such as valuation. An average speculator can only hope to grow into a great speculator by maintaining a balanced view of the markets, not totally dominated by technical, fundamental, sentimental, or any kind of analysis, but deftly incorporating all of these valuable foci to gain a more realistic strategic perspective on current market conditions.
(Chapter V) … "But not even a world war can keep the stock market from being a bull market when conditions are bullish, or a bear market when conditions are bearish. And all a man needs to know to make money is to appraise conditions."
Jesse Livermore points out another priceless truth here that I have also long believed. The single most important bit of information for any investor or speculator to know is the current primary trend affecting the markets at any given time. There is nothing that can stop a bull market before its time or a bear market before it fully runs its course, so speculators must always have the primary trend in mind as they make their trades.
Geopolitics are exciting and interesting, which is why they usually dominate the news, but geopolitics don't ultimately drive primary trends in the stock markets. In reality it's valuation that drives the really long-term stock-market trends and cycles while sentiment drives the short-term trends and cycles. At best, any surprise geopolitical event, regardless of the magnitude, can only influence trader sentiment over the short-term.
While Jesse Livermore was talking about one of the most destructive and barbaric wars undertaken by the perpetually warmongering governments in all of world history, World War I, we also have two very recent examples to consider. In both of these contemporary traumatic geopolitical situations Wall Street and indeed the majority of players assumed geopolitics would alter underlying primary market trends, but as Jesse Livermore warned this idea is flawed and dangerous.
Remember the 9/11 attacks? Of course you do! Do you also remember the financial media's loud claims at the time? Wall Street was brazenly saying that the Great Bear was dead because patriotic Americans would flock to buy the stocks of American companies to "show the terrorists" that America couldn't be defeated.
Sadly many Americans believed this silly hype that geopolitics could prematurely end a supercycle Great Bear market before valuations were once again mauled back down to historically undervalued levels. Naturally they lost literally trillions of dollars of their scarce capital as the primary bearish downtrend reasserted itself with a vengeance after the post-9/11 bear rally failed. Not even September 11th, one of the greatest non-linear geopolitical shocks of our time, could long delay the primary trend!
Fast-forward to 2003 now. Before Washington invaded and annexed Iraq, contrarians like me drew no end of scorn and criticism for daring to say that an American flag flying over Baghdad ultimately wouldn't change anything in the markets. Whether Washington owned the Iraqi oilfields or not, US corporate profits would still be terribly low relative to hyper-overvalued stock prices and the Great Bear would not go away until general valuations were finally undervalued once again.
The markets were overvalued when Saddam ran Iraq and they are still overvalued now that Saddam ran from Iraq! Saddam didn't cause the Great Bear and assassinating Saddam won't end it. Geopolitics can never change a long-term primary trend.
Our current Great Bear market started in 2000 because valuations were bubbliciously extreme and it won't end until valuations are undervalued, just like in every other major bear market in history following a supercycle bubble. While the war rally on the emotional Iraq sideshow has indeed been intense and powerful, it is just another bear-market rally and will ultimately fail and roll over to fresh new bear-to-date lows too just as the post-9/11 rally did before it.
Jesse Livermore said that even World War I, probably the most brutal war in history, couldn't stop a primary bull or bear already in progress. Neither can comparatively trivial terrorist attacks or modern neo-imperialism and neo-colonialism. Geopolitics can influence the markets via sentiment for a short time, but they cannot alter the dominating primary secular trends already in place. Make sure you always "appraise conditions" and respect the primary long-term trends!
(Chapter V) … "The more I made the more I spent. This is the usual experience with most men. No, not necessarily with easy-money pickers, but with every human being who is not a slave of the hoarding instinct. Some men, like old Russell Sage, have the money-making and money-hoarding instinct equally well developed, and of course they die disgustingly rich."
Jesse Livermore spends much time in the early chapters of "Reminiscences" explaining how his earlier mistakes led to losses and how these losses led to priceless lessons which helped him grow into an elite speculator. This quote is interesting because he changes course and flags a landmine that plagues successful speculators who are winning. While speculation fulfillment really comes from being right, the spoils of being right are partially denominated in capital. A winning speculator can be blessed to accumulate a lot of capital very rapidly.
Of course big wins can lead to big increases in personal spending. We witness this unfortunate phenomenon today in lottery winners profiled on the news. They win big, begin to spend big, and soon their winnings are gone and they are back to square one. Speculators have to be really careful not to allow wins to dramatically alter their spending habits.
The only way to accumulate serious capital through speculation is to preserve it from trade to trade and continually nurture its growth. Diverting an excessive amount of trading capital into an extravagant lifestyle dramatically slows progress at best and leads to financial ruin at worst.
Now there is nothing wrong with materially rewarding yourself with a fraction of your winnings, indeed it is a powerful motivator to convert intangible capital into something tangible that you can actually use and enjoy. But on a percentage basis try to limit the drain on your trading capital for personal expenses and indulgences to a small fraction, no more than 10% or so of your winnings. The more speculative trading capital that you can save now the faster your bankroll will grow and the greater the potential that you will be blessed to trade seriously legendary capital someday.
Just because speculation multiplies your income by many times doesn't mean your lifestyle immediately has to soar to new expensive levels. As Jesse Livermore wisely points out above, earning a high income alone doesn't lead to financial independence and wealth. In America today an amazing number of personal bankruptcies are for folks who earn more than 90% of all other Americans!
True wealth can only be accumulated by prudent and diligent saving, which ultimately means ruthlessly managing your spending and keeping personal expenditures from eroding crucial speculation capital.
(Chapter V) … "I couldn't afford anything that kept me from feeling physically and mentally fit. Even now I am usually in bed by ten. As a young man I never kept late hours, because I could not do business properly on insufficient sleep."
Speculation is one of the most challenging endeavors on Earth. Attempting to predict the future and bet on it is a risky business. When you add personal pride and capital into this volatile mix, speculation becomes a highly emotional crucible. You not only have to constantly fight your own greed and fear and try to trade opposite of what everyone else thinks is right, which is very difficult psychologically, but you also are playing the game directly against other speculators including some of the best and brightest minds on the planet.
Needless to say, to even survive let alone thrive in such a perpetually stressful and hyper-risky environment you need to take great care of yourself!
Jesse Livermore really understood the importance of staying physically and mentally fit as an elite speculator. He went to bed early every night and ensured he got an excellent full night's sleep. He knew from experience that he couldn't speculate well unless his mind was crystal-clear and razor-sharp, a state impossible to obtain when one runs a chronic sleep deficit like the majority of people tragically choose to today. Personally I need 8-9 hours of sleep every night to think clearly and stay mentally sharp and I will reschedule anything necessary to ensure I get it. You have to make sure that you are granting your body and mind enough sleep as well.
Speculators also need to realize that there is a very important relationship between mental fitness and physical fitness. As speculators we are usually sitting in front of computers all day so it is super important to schedule some workout time each day to stay in shape. I prefer to drag my carcass out of bed early every morning at 0500 and exercise, both cardio and weights, so I can watch pre-market futures and European trading action on TV during this workout time to get an initial take on the developing trading day. I know from hard experience that my thinking is far clearer after working out than when I foolishly decide to sleep in and skip a workout.
It's also really important as a speculator to zealously avoid as many bad and unhealthy habits as possible. If you want your mind to work well and increase your probabilities of winning, don't do drugs, don't smoke, and don't drink alcohol or at least only drink in strict moderation. Â Take care of your body and mind!
Speculators also need to be super careful to avoid overeating and gluttony, common weaknesses in our fat culture today, as it is nearly impossible to think clearly if your body is overloaded with glucose from excessive sugars and other carbs. Being fit or overweight is a lifestyle choice, and you need to make the right one if you want a clear head to guide your speculations.
The better you take care of your body, the better your body will take care of your mind, and the better your mind will guide and manage your ultimate speculation performance! Don't neglect good-clean living and a healthy lifestyle if you want your mind to operate at peak efficiency and potency!
Well, unfortunately this is all of Jesse Livermore's wisdom that fits into this fourth essay of my
Go buy and read "
Until next time, Godspeed and happy speculating!