World's Greatest Stock Trader
by Richard Smitten
(John Wiley & Sons, New York, 2001, 319 pages) $19.95
reviewed by Gregory Bresiger
Benjamin Disraeli is once reputed to have recommended biography above all other kinds of reading. He said that it is, "life without theory." The 19th century British statesmen would have likely enjoyed this effort. By exploring one man's controversial life – a life that has lessons in both its massive victories and defeats – I believe one can learn about markets, trading and, most of all, how success can breed hubris and failure sometimes generates eventual success.
This is a superb biography of a fascinating trader. It is well worth every trader's time. Livermore is a rags to riches story of a bright young man who grows up in New England. He is a young man who is fascinated by numbers and does well in school. However, his father removes him from school and insists that the young teenager will have a life as a farmer.
Livermore rebels. Even at an early age he leaves home. He obtains a job as a chalkboard boy at PaineWebber in the 1890s. Livermore is fascinated. Soon he is making trades for himself. Soon afterwards, he starts out with a small stake and begins to make his living by beating bucket shops in New England.
That is until he becomes the market equivalent of a card reader, the man who, once identified, is always shown the door in a casino because of his consistent ability to beat the house and because of the danger of his bankrupting the business. Livermore is soon shown the door at every bucket shop in New England.
Later on he earns a scurrilous reputation with bucket shops in New York and New Jersey. By his early 20s, Livermore is making a reputation as someone who is too good – too good because he sometimes beats himself. He often disguises himself so he can place orders. He becomes known as the boy plunger. He rubs elbows with associates of J.P. Morgan who ask him to stop short selling, which supposedly helps stop the panic of 1907. E.F. Hutton offers to stake him whenever he must start over again.
What makes Livermore great? (But certainly not the greatest.' The title of the book is an example of hyperbole that publishers use to induce people to buy.) Livermore used a trading system that worked up until about the last seven or eight years of his life, when regulation took away many of his trading advantages.
But some of his principles are still worth examining. He had three rules: "First, decide on the overall direction of the market. Determine the line of least resistance. Be sure of the basic trend. Second, develop a buying strategy. Probe the market. Test it by trading small positions first. Do not go in and bet your whole stash on impulse. Third, be patient and wait for all the facts. Wait for a move to play out. It is the big moves that make the big money." (pages 66-67).
Cash Positions
Other principles of Livermore's trading include, "do not be invested in the market all the time. There are many times when I have been completely in cash, especially when I was unsure of the direction of the market and waiting for a confirmation of the next move," Livermore cautioned (page 144).
Livermore also argued that, "it is the change in the major trend that hurts most speculators. They simply get caught invested in the wrong direction, on the wrong side of the market," he said. How does one avoid this risk? "To determine if I was right in my appraisal, that a change in a market trend was coming, I used small position probes, placing small orders, either buy or sell, depending on the direction of the trend change. I did this to test the correctness of my judgment." (page 144).
But there is more to this work than trading rules. The book is written almost in the style of a great novel. Livermore reminds one of Theodore's Dreiser's Trilogy of Desire, the great three novel saga whose chief character, Frank Cowperwood, was based on the life of Chicago streetcar financier/robber baron Charles T. Yerkes.
Yerkes' brilliance combined with some shady trading practices have fascinated historians and novelists to this day. (By the way, Dreiser's great works are The Financier, The Titan and The Stoic. They are – with the exception of the third, which was written by Dreiser on his deathbed to complete the trilogy – as relevant and fresh today for people interested in markets as they were when this cranky giant of American literature wrote them more than third quarters of a century ago. Even the American Communist Party turned down Dreiser's membership application.)
Dreiser – or Jack London or Sinclair Lewis or Emile Zola – would have loved writing about Jesse Livermore's life. Livermore had many ups and downs. He made and lost several fortunes. He filed for bankruptcy several times. After the first time, he eventually paid back all his creditors every last dollar. His greatest triumph was in using his trading principles to short the stock market in the Great Crash of October 1929, a triumph that earned him great public enmity, including several threats on his life from many shell-shocked investors who were convinced that he had pulled a fast one. Livermore, like Cowperwood, also went through many women. Emotions, he believed, must be studied. Bad trades often came from the inability to govern them. It was critically important to study and re-study bad trades, Livermore held. "Successful trading," he told his sons, "is always an emotional battle for the speculator, not an intellectual battle. It is only after a bet has been placed on a stock or a commodity, when the money has changed from cash in hand to stock certificates, that the emotions spring to life." (page 40).
So why couldn't Livermore govern his emotions and passions, especially his passion for toxic relationships? One wonders why Livermore couldn't stop when he was ahead. Time and again, after making tens of millions, he falls into a trap and blows a fortune. For instance, riding high on Wall Street, he becomes involved in trading cotton futures, an area in which he doesn't have the same level of expertise as in trading securities. Yet Livermore keeps pushing ahead. Life doesn't imitate art here. (In Dresier's Trilogy of Desire, Cowperwood, who, at one point, has to go to jail because of his political, trading and amorous hijinks, eventually makes a comeback and dies a very wealthy man.)
Great Game
Tragically, Livermore can never walk away from the great game of trading. He is perpetually in quest of the system that will always beat markets. Livermore comes to realize that, "It was not that he could not deal with failure – he had been dealing with failure all his life – what he could not deal with was success." (page 95).
Long after he has lost the trading touch, he goes on and on, reminding one of an aging sports superstar who cannot gracefully retire. By the end of the book, the Livermore empire, once so great, is in tatters. His kin – his wives, his sons – generally meet tragic ends. His fortune all but gone, his trading touch lost, an old depressed man, Livermore kills himself in 1940 after a famous last photo is taken of him at the Stork Club the night before. This is a fascinating story. One rises after reading this page-turner having experienced a life in all its sad and strange circumstances. And it is more interesting because it all appears to be well documented. It is life without theory.
