Great Bear of Wall Street – Jesse Livermore

Jesse Lauriston Livermore (1877 – 1940) was known as the “Great Bear of Wall Street”. He made and lost several fortunes in the stock market using a system he began to develop at age fourteen when he held an entry-level position at a brokerage in Boston. He analysed price and volume data and became expert at predicting whether a stock or commodity would rise or fall. Livermore played both long and short positions because both offer opportunity for profit. He made his biggest fortunes during the crashes of 1907 and 1929. In each instance, he understood that the existing overextension of credit in the market would inevitably result in falling prices. He accordingly short sold and made 3 million and 100 million dollars in each crash respectively.

All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis. ~ Jesse Lauriston Livermore

Livermore used only his own funds. Trading was his business and he devoted effort and time to improving his skills. Evolving his strategy, learning from experience and remaining flexible were key to his success and it is possible that failing to do so created problems for him later in life. His approach was tactical and thorough. He conducted due diligence, reading companies’ trade reports, financial statements and earnings statements, and he kept track of price patterns and trade volume. He observed that the majority of traders allow fear and hope to interfere with their trading decisions. Fear makes them exit a winning position before making big profits and hope makes them hold onto a losing position when they should sell. Livermore’s strategy was the opposite. He advised traders to fear a loss developing into a much bigger loss, and hope their profit would grow into a much bigger profit.

[box type=”note” style=”rounded”]According to Livermore – The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor. [/box]

Jesse Livermore’s trading rules and lessons include:

• Ignore tips; rely instead on your own judgement, strategy and analysis.
• Learn how to lose. Losing trades offer an invaluable education as long as you learn from them.
• Study underlying market conditions and trends. Trade with the trend, meaning buy in a bull market and short in a bear market.
• Only trade when there are clear opportunities. Otherwise stay out of the game.
• Never risk capital losses of more than 10 percent. If you lose your stake, you’re out of the game.
• Wait for the market to confirm your opinion before entering a trade. Patience is the key to big profits.
• Continue with trades that show a profit and close trades that show a loss. Good trades usually show a profit from the beginning.
• Exit trades where the prospect for further profits is minimal.
• In any sector, trade the leading stock, the one showing the strongest trend. Trade the strongest stocks in a bull market or the weakest stocks in a bear market.
• Limit the number of stocks you follow. Don’t scatter your attention; instead, focus on what matters.

These rules refer specifically to trading in the stock market but Livermore’s general recommendations can easily be applied to all kinds of earning opportunities. In the next chapter, we’ll explore how government obstruction in the free market creates opportunity for speculative profits. Livermore himself made his biggest money in 1929 when he profited from government manipulation of the credit markets through control of the banking system.

[box type=”info” style=”rounded” border=”full”]Excerpts from the Art of Speculation during Civil War – Sun Tzu Meets Jesse Livermore is a private manuscript copyrighted 2012 by Art Fixed.[/box]