Markets are always Supreme.

 

Jesse Livermore's life has been a bigger roller coaster than one present at the Ferrari World. But may it be life or an amusement park, roller coasters do come to an end, and in the case of Jesse, the roller coaster had a brutal stop. Who was Jesse Livermore? What is his story? How is it possible that a boy from a poor refugee family went on to become America's biggest speculator, registered three bankruptcies, owned a yacht, and eventually killed himself? Buckle up your belts because we are about to start the roller coaster. Enjoy. 

 Born on July 26, 1877, in Massachusetts to a very poor family, Jesse had the urge to earn money from the beginning. His father was a farmer, and his mother was a housekeeper. His father never really paid attention to him, but his mother realized from the very beginning that he was a gifted child because, at the age of three and a half, he was able to read and write, and by the age of five, he was already reading financial newspapers. In fact, he was so good that while at school, he completed three years' worth of arithmetic in one year, but unfortunately, at the age of fourteen, his father forced him to drop out of school in order to help him with the farming business. Farming was not something that Jesse dreamed of, and hence, one day, with the help of his mother, he ran away from home. His mother was somehow able to gather $5, which is about $8000 in today's money. She arranged for him to go to a place in the city so that he could get a job.

While Jesse was going to the address his mother gave him, young Jesse had made up his mind and knew exactly where to stop the vehicle. Jesse asked the driver to take a diversion and completed his journey at the doorstep of a broker. It was a broker called Paine, Webber, and Co., and this is where Jesse got his first job as a chalk boy. Now, what does a chock boy do? At the time, of course, there were no computers to flash share prices every second. Chock boys used to write down the stock price every 10 to 15 minutes on a chalkboard for everyone to see. Now, this may seem like a boring job for you, but it was actually an ideal job for him because he used numbers. Hell, I would have taken the job if I were there.

 

Due to his love for numbers, he developed a fascination with the stock market. In fact, he became so fascinated with the way the prices used to move that he started to keep a little notebook. At the end of the day, though he used to go back home tired, he used to take the time to write down all the prices that he had written on the chalkboard that day using his memory. What differentiated the winners from the losers was the extra effort that they put in when the body had given up.

 

Very quickly, and I don't know whether it was his genius or his mathematical mind, Jesse started to recognize patterns in which prices moved, and when he looked at these numbers, he realized that these numbers were not random. Hence, he began observing these numbers and studying them. He then developed a system to predict the price moment based on the historical price. What Jesse was doing is basically called "Technical Analysis" in a polished financial world. However, until that time, Jesse had never traded a single day in his life because he didn't have any money. Yet it was about time because while working as a chock boy, he got introduced to bucket shops. 

Bucket shops were basically betting shops where you can place bets on a particular stock based on whether you think it's going to go up or down without actually needing to put a lot of money. So, Jesse decided that this would be a good opportunity to test out his system. "I believe in one thing only, the power of human will". Joseph Stalin famously quotes this. Jesse's will to become rich was eating him alive and he wanted to do anything to become rick. Hence, during the lunch hours, Jesse started sneaking out of his office and went to these bucket shops to test his luck as well as his system. 

It turns out, luck was actually in his favor and his system was capable to making his rich. The first profit that he ever made was about $3, but he was so excited and so pumped up that he started putting more and more efforts towards this. Soon he was making more money from these bucket shops that he was making in his main job. Therefore, he decided to quit his job and focus on trading full-time. Withing one year, Jesse made more than $1000 trading at bucket shops. Now, Jesse was happy because he had a system that was not just beating the market returns but was also making him rich. Even though he was happy, the bucket shop owners weren't. Soon, one after another, these bucket shops started banning him from entering the shops. Eventually Jesse was banned from every bucket shop in that city. He was just 20 years old, and these bucket shops were afraid of him. 

Even though he was printing dollars, he lacked a critical skill that every investor and a trader needs, emotional discipline. Most of the losses that Jesse was facing were not coming because of the system, they were only coming when he used to deviate from that system and trade emotionally. This was something he kept struggling with. Since he was banned from those bucket shops, he decided to give world's largest stock exchange a change and hence landed in New York Stock Exchange. Young Jesse was high on bucket shop trading and had never actually traded on a real stock exchange and hence, the mechanics of the exchange were confusing. 

This naiveness led to Jesse entering a trade where he couldn't figure out the dynamics, eventually wiping out his entire capital. This financial shock put such an immense burden on Jesse and on his marriage that his wife decided to leave him. As luck would have it, Jesse had no money and no wife. However, Jesse was a fighter who did not allow luck to take away what he really deserved and so he shut off all those negative feeling and started to introspect. He realized that he was not ready for the real stock exchange. He made significant changes to his system and reentered the markets. He needed some money because he was almost broke. He again approached his old friend, the bucket shops, but of course he wasn't welcomed. Hence, he went to a smaller city called St, Louis where nobody knew him there. Little did he knew that the same cycle was about to occur. His system worked and soon, he was banned. To counter this, he trained a few people and sent them to these shops, to trade on his behalf. After making substantial money, he went back to New York to test his luck. This time he wasn't naive. 

Fast forward 1907, Jesse recognized some discrepancies in financial stocks and got a sense that something big was about to happen. So, he took a huge short position in the markets which turned out to be true. For those who don't know what shorting is, it is betting that the prices would fall and in order to monetize this, you bet that the rates would fall and earn when it happens. After the 1907 market crash, the entire market collapsed, and Jesse managed to earn $1 million. 

By the end of the crash, he was worth $3 million. Jesse's short position was so massive that it was creating a pressure on the markets and hence, JP Morgan requested his to stop creating short positions and in fact encouraged him to buy the stocks at a cheap level. Having a huge respect for JP Morgan, Jesse switched his position from short to long and earned handsomely. Livermore was now a hero. Young age and boat load of money urged Jesse to engage with luxury. In order to keep up with his expensive lifestyle, he had to trade often which had a bad impact on his emotional intelligence. 

Greed is good but excessive greed can kill you. That's what Jesse forgot to factor in. An influential commentator named Teddy convinced Jesse to buy cotton because their prices were expected to skyrocket. When Jesse started buying cotton, Teddy started to sell. He wanted to offload his positions. He knew that Jesse's EQ was comparatively lower than his IQ and he took advantage. 
QUICK LESSON: Never show your weaknesses. 

In that trade, he lost 90% of his wealth and this incident shook him to core. His losses grew deeper and deeper until finally he ended up with $1 million in debt and finally declared his first bankruptcy in 1950. He spent the next 6 weeks focusing on the price actions and tape reading. He slowly built enough capital to be able to trade again. This time he meant business and he traded with discipline. He managed to recreate his fortune and also paid off his debt. He rose back to riches like a Phoenix. 

Jesse's fortune and fame grew, but a bigger event was yet to come. An event that would help him attain the crown of a "legend". Fast-forward to 1929. America is on the verge of a great recession, and Jesse finds discrepancies that could be monetized. On October 29, the world saw one of the biggest stock market crashes that led to an economic depression. Many traders on the street committed suicide because they were in debt and had lost everything. Jesse wasn't picking up his phone either, and hence his mother and wife declared that even Jesse killed himself. Two days later, when he returned home, his wife hugged him and said that we were poor, to which Jesse said, "You are hugging the richest man in America". BOOM. There was a pin-drop silence in the room. Looking confused, he explained to his wife and his mother that Jesse had already anticipated this fall and had taken a short position. The crash made him $100 million, which is about $1.4 billion in today's money. $1.4 billion in one single trade. That's the power of the stock market. That's the power of emotionally distinct decision-making.

He had so much money that he was finding ridiculous ways to spend it. Jesse purchased a mansion on Long Island, New York, and an office in Manhattan. In order to travel from his house on Long Island to his office in Manhattan, he purchased a boat. Soon, because of infidelity and his wife's drinking habit, he had an emotional setback. He started losing his fortune. He lost his wife to divorce, and this caused him to derail from trading. It's hard to believe, but soon after his wife left him, he declared bankruptcy for the third time. His will to fight back died as he aged and went into depression. On the eve of November 27, Jesse was attending a party, and as he left the perimeter, photographers surrounded him for photos, to which Jesse replied, "Take as many as you want because I am going on a vacation tomorrow". On November 28, 1940, he buckled under all the pressure and shot himself in his Manhattan hotel. He was 63 years old at that point, and it is tragic because the death note that he had written for his wife shows the kind of pressure and strain that he was under. 

There are so many lessons that we can and should implement in our lives from Jesse's story. It would be literal spoon-feeding to point out particular lessons; plus, everyone thinks in a different way, so a takeaway for me might not be a lesson for you. But one quality of Jesse that I would like to highlight is his sheer determination and will to become rich. Jesse had the courage to bounce back not once, not twice, but three times in his life. Setbacks are inevitable and out of our control. What we can do is not give up and keep fighting until we get what we want.

As Charlie Munger has rightly said, "Why should it be easy to get rich"? 

 

HAPPY INVESTING