Jesse Livermore: Articulate Intuitive Market Genius

Although he lost all his money at least twice, once going into debt for over a million dollars—and although he eventually killed himself (graphically showing that money can’t buy happiness)—Jesse Livermore was a brilliant self-taught stock trader who made millions of dollars during the Crash of 1929. Arguably the greatest trader who ever lived, Livermore’s hard-won insights about the behavior of prices in a publically traded environment such as Wall Street are priceless insights not only into making money, but also into human emotions and the way they interfere with the behaviors needed to make money. Livermore was born in South Acton, Massachusetts. His great work, Reminiscences of a Stock Market Operator, is remarkable not only for the quality of its insights but the clarity of its prose.

“When I am bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don’t buy long stock on a scale down, I buy on a scale up.”

This behavior is exactly the opposite of most retail investors. People tend to buy stocks like they buy groceries or clothes, more when the commodity or service is cheaper. But since stocks vary in prices, and the speculator profits off of price differentials, prices that are moving in the wrong direction can be extremely deleterious, and “sales” can go to zero. Unlike most purchased items, stocks are purchased only for their resale value (unless a big investor buys the whole company).

“Remember that stocks are never too high for you to begin buying or too low to begin selling. But after your initial transaction, don’t make a second unless the first shows you a profit. Wait and watch. Suppose a man’s line is five hundred shares of stock...suppose he buys his first 500 and that promptly shows him a loss. Why should he go to work and get more stock? He ought to see at once that he is wrong; at least temporarily.”

Livermore here is essentially revealing that he is following trends. If the movement of the stock is in the direction he determines (with some uncertainty) that he thought it was going, he adds to his position. The continued movement suggests that he was right in identifying the trend. On the other hand, if he was wrong, then he was wrong (at least for the moment) about the direction of the trend. The method can actually be considered a combination of trend following and an evolutionary algorithm (or rather, the evolutionary algorithm): get rid of what doesn't work. Most people have difficulty admitting they're wrong but, in fact, this is key not only to the stock market but to learning in general. "An expert," as physicist Philip Morrison, former book reviewer of Scientific American, has said, "is someone who makes all possible mistakes."