I have just finished reading a well-written biography of Jesse Livermore (‘Boy Plunger: The Man Who Sold America Short in 1929’ by Tom Rubython) and am now more comfortable than ever in my avoidance of anything even remotely related to speculation. I am not sure I can think of any other case where a man with so much threw it all away in such an amazingly self-destructive manner.
Potted history
Livermore seemed to embody much of the American dream. Coming from a poor rural background in Massachusetts he seemed to have little more going for him than a head for numbers. As with so many other numerically-minded people he fell in love with the markets and, after finding work posting stock quotes on a brokerage board, began trading on his own account in the bucket shops that proliferated at that time. Eventually his success there led to him being banned, he inevitably found his way to New York.
After initial teething problems, a couple of wipe-outs (one led to divorce after he asked his wife whether he could pawn her jewellery), a return to the bucket shops and a number of sting operations he gained experience and a decent wad in time for the panic of ’07. Livermore played this one beautifully making money on the both the fall ($1 million in a day) and the recovery, in addition to doing a good turn to one JP Morgan.
Unfortunately his bona fide millionaire status did not last long and within two years he was flat broke (on his arse, as they say in Liverpool), having entered into partnership and taken advice from somebody he should have avoided [don’t listen to tipsters]. Following an official bankruptcy, Livermore rediscovered his mojo and really hit his stride accumulating millions relatively smoothly up to the Great Depression of ’29.
1929 is where Livermore really made his name as he was one of the very few sane enough to stand apart from the hysteria and coolly bet against it, making himself about $100 million dollars in the process–an unfathomably large sum in those days; even more unfathomable than it still is today in fact. Tragically, and bewilderingly, within a few years he was bankrupt again having lost everything betting prematurely on the recovery. This bankruptcy was one that Livermore would not recover from.
Livermore’s personal life seemed to mirror the roller-coaster that was his financial fortune – he married three times and seemed to be a determined philanderer, maintaining a veritable flock of dancers in various NY City apartments. When times were good he spent heavily (yachts, houses, help, dancers, and casino-based gambling), but equally didn’t seem to have a problem adjusting to cheaper living when he was broke (although he did keep the dancers).
Momentum and Leverage
Livermore seemed to make most of his money by means of colossal leverage and spotting trends. In fact, as his positions increased in size over the years, he often started the trends. By far his biggest success was in the crash of ’29 when, according to Rubython, he coolly raised every dime he could by borrowing against everything he had, including his house and his yacht, and then strong-arming every broker he knew to leverage him up to the hilt.
By October of ’29, he had equity of about $30 million which gave him potentially plungable capital of $750 million (25x, more leverage even than most Londoners use to buy their homes). This is how you either make millions or go broke very quickly and had he fully deployed his resources a market swing of 3-5% could have wiped him out. As it was, he initially sold about $450 million dollars worth of shares short and added the rest slowly as his equity increased.
While the market and, in time, the economy collapsed, Livermore finished October more than $100 million to the good for his two months of work. Now… why at this point did the man not just retire to his mansion, his yacht, his family and/or his dancers? But no, having taken some time out he returned to the fray no doubt hungry for more action put himself on the road to his second official bankruptcy. Bone-headed beyond belief (at least to this lily-livered investor.)
Suicide and Depression
Livermore’s last public act was the writing of a poorly-received book about trading. I haven’t read it and don’t plan to, but it seems to be full of some sensible advice (be wary of human frailities such as hope and fear), some dubious tips for trend-seekers (buy at pivotal points, such as 100 or 200), and some overt nonsense (an unintelligible market key). The book did not initially sell well, although why this came as a surprise to Livermore given his record is difficult for me to understand.
Having realised that his glory days were not going to return and that he would never be able to re-pay his creditors by his own means, Livermore shot himself in the cloakroom of New York’s Sherry-Netherland hotel. He had been prone to down periods throughout his life and you would wonder whether–had he lived in the modern age–he would have been diagnosed and treated as a manic depressive. Perhaps a bi-polar diagnosis might have gone some way towards explaining the impossibly reckless approach to risk? Rubython tells us that both one of Livermore’s sons and then too his grandson also died by their own hands, which would point to a familial disposition to depression.
His last wife too had already suffered in this sphere as Livermore was no less than her fifth husband who took his own life. (There has never been any suggestion that this was anything other than a horrible series of coincidences.)
Influence
A quick survey of the Web is testament to the enduring influence Livermore has had on the speculator community (unlikely to supply many readers of this blog), but my question is why? Why would anyone hold Jesse Livermore’s career in such high regard? I find it impossible to conceive of a more dangerous man to take as a role model, given his seeming addiction to huge adrenalin and leverage-fuelled positions.
Paul Tudor Jones, who wrote the forward to my edition of the book, cites Livermore’s bouncebackability (if that is a word) as an influence as he notes that he too went broke four or five times early in his career. I think that this is a good point and everyone obviously needs to make mistakes in order to learn. I have made more than my fair share and have no doubt that I will make more on an on-going basis, but… at some point you need to stop making the same mistakes. Livermore didn’t stop–he kept over-extending himself by means of leverage and going broke as a result.
Reading about his expert handling of the initial crash in ’29, I would suggest that Livermore’s real influence is in his hiring of a small office of researchers and traders. This sounds like a prototype of the modern hedge fund, with its highly-paid but skeleton staff of economists, mathematicians, and traders. In addition to his crack team of eggheads and wide boys, Livermore was a news addict who pored over the daily newspapers and carefully cultivated sources of advance information (including a mole at the Bank of England.) Unfortunately his huge losses so soon after his success of 1929 give reason to doubt as to whether that success was ever due to much more than a huge punt and a fair wind.