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Jesse Livermore: World's Greatest Stock Trader

A review of the book by Richard Smitten

By Marco den OudenPublished 2 years ago 4 min read
Jesse Livermore: World's Greatest Stock Trader
Photo by Maxim Hopman on Unsplash

"The stock market is the world's biggest gold mine, a gold mine that opens its doors every day and invites anyone and everyone in to plumb its depths and leave with wheelbarrows full of gold bars, if they can!" That was Jesse Livermore telling his two sons about the stock market. And he knew because he had done it.

But he cautioned, "when the bell rings at the end of the day they have gone from pauper to prince... or gone stony broke." And he had done that too!

Jesse Livermore was known as the Boy Plunger, the Great Bear of Wall Street, and widely regarded as the greatest stock trader in history. And Richard Smitten's biography is a fascinating account of the man and his times. It also gives an excellent account of Livermore's trading secrets - the rules to success in the stock market that gave him his edge, and the pitfalls that brought him down.

Without a doubt Livermore was a genius. He had a brilliant mind for mathematics and a photographic memory for numbers. As a school boy he plowed through three years of arithmetic in one. He challenged a teacher to a race to solve a problem and won.

But his father had other ideas. He pulled young Jesse out of school to work the family farm. With the help of his mother, 14 year old Jesse ran away to Boston where he landed a job as chalkboard boy at Paine Webber.

Every day he would write stock quotes on the blackboards and he began to notice something. With his photographic memory and facility with numbers, he noticed patterns in the action. He realized that a careful analysis of a stock's action could give clues about its future price direction.

With his meager resources Livermore explored the second great influence in his market education - the bucket shops. These were quasi-brokers somewhat akin to betting parlors. People could walk in off the street and bet on a stock with 10% down. The bucket shops were a hustle and most were owned by underworld kingpin Arnold Rothstein, the man reputed to have fixed the 1919 Black Sox World Series.

The operators were known at times to manipulate the market, forcing a ten percent drop in a stock to wipe out a bettor, for that would wipe out the ten percent margin play. But even without manipulation the house won 95% of the time because of the high leverage.

At the bucket shops Livermore naturally learned one of his great trading rules - limit your losses to ten percent. But with his mind for numbers and patterns, Livermore won consistently. He played the market both ways - long and short. By age 16 he had over $1000 in cash, a heady sum in those days. He sent half back to his mother and with his remaining resources started to create his reputation.

He became known as the Boy Plunger for his youthful good looks and habit of making large bets. He was so successful that the bucket shops banned him from their premises, just as casinos will banish consistent winners.

Jesse Livermore – The Boy Plunger

So Livermore moved up to the big leagues - the stock market proper. And the rest, as they say, is history. Because he played both sides of the market, Livermore made some of his biggest plays in down markets - the crash of 1907 and the great crash of 1929 when he made over $100 million going short.

Smitten brings these early episodes as well as the rest of Livermore's life into sharp focus. Based on extensive research, including an interview with Livermore's son Paul, Smitten pieced together an account of a man both brilliant and tragic. A man who developed a set of winning rules for trading the market, but who as often broke his rules and went broke. In 1934, five years after making his killing on Wall Street, the great man declared bankruptcy for last time. He never regained his touch.

The book also gives a fascinating glimpse of his personal life - his three marriages, his friends and acquaintances including ex-pat Canadian Arthur Cutten, considered one of the greatest commodity traders in history, Bernard Baruch the great financier, banker J.P. Morgan and Ed Bradley, owner of the Beach Club - the longest running illegal gambling parlor in American history.

The most useful parts of the book for investors, of course, are the chapters dealing with Livermore's methods. But his fascinating life is also a lesson to us all. Money is not the most important thing in life. For all his wealth, Livermore suffered from clinical depression. He was a womanizer who alienated and ultimately divorced the one true love in his life, his second wife Dorothy. His oldest son, Jesse Jr., was a misfit, spoiled and often in trouble with the law.

And he obviously didn't recognize the ominous omen of marrying his last wife, a woman whose four previous husbands had all committed suicide. Livermore was no exception for the luckless lady and he shot himself in November 1940.

For all his foibles and problems, Livermore is a great role model for investors. At the peak of his powers he exhibited a steadfast confidence, a shrewd analytical mind and the fearlessness to follow his convictions. The rules he developed are still widely misunderstood and ignored. But they have been refined and developed to a large degree in the works of William O'Neil who acknowledges the influence of Livermore in his own thinking.

His basic rules are cut your losses, probe the market with partial positions before committing full positions, and gauge the market based on price and volume. For a fuller account with examples, read the book.

This is a fascinating read, both for its subject, the elegant, handsome and brilliant Jesse Livermore, and for the insight into his methods. Highly recommended!

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About the Creator

Marco den Ouden

Marco is the published author of two books on investing in the stock market. Since retiring in 2014 after forty years in broadcast journalism, Marco has become an avid blogger on philosophy, travel, and music He also writes short stories.

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