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A roller coaster ride between rags & riches

From the pages of history, I am narrating the exciting story of a daredevil stock trader who defied all established rules of investing / trading and rose to the pinnacle of riches but not for very long.

Jesse Lauriston Livermore (26th Jul 1877 – 28th Nov 1940) was one of the greatest American stock traders of all time. From rags-to-riches and riches-to-rags, the story of his financial roller coaster ride is probably the most fascinating and thrilling of any Wall Street story.

Livermore was born in a poverty-stricken family. He learned to read and write at a very early age. His father pulled him out of school to help with the farm; however, Livermore ran away from home as he had plans to pursue some other career.

The formative years

Jesse got his first job at a brokerage house as a chalk boy His task was to chalk down share prices coming through the ticker tape on a blackboard for customers to view. He loved the job because he was good at numbers. He kept recording share prices in his notebook and was thrilled to observe patterns in which prices moved up and down. He one day set out to put his price movement theory to a practical test.

During his free hours, he started betting on shares at bucket shopsHe based trades on his price pattern theory. Soon, he started earning more from his trading at bucket shops than what he was earning from his job. So he quit his job to pursue his hobby fulltime. It wasn’t long before he had made $ 1000 (equivalent to today’s $ 20,000.)

Bucket shops were places where people used to bet on or back a stock price to move either up or down, without actually buying a stock. The bucket shop would then take the opposite side of the bet. You could play with a low amount of margin money. 

Jesse became so successful in a short time and started amassing so much money by winning bets at the expense of the bucket shops that most of the shops banned him from playing. He used a disguise also, but it didn’t work for long. Eventually, most of the bucket shops in the town barred his entry.

After this setback, a new avenue of opportunity opened for him. He went to New York and started trading at the NYSE. Initially, he did gain some success but soon after started to lose money because of relying on the prices coming on the old ticker system. The price data received on the ticker was delayed compared to the real live market numbers. It caused him to lose trades.

He reverted to betting at bucket shops at a new town and earned enough money before being recognized again and banned entry. However, with sufficient liquidity, he was able to move back to NYSE to trade like a professional trader.

The journey to success

The Crash of 1907 was a disaster for the majority of the traders. However, for Jesse, it proved to be a success story. It was an event that took him to the millionaire status. He made his money by shorting the market as it crashed. He even managed to earn $1 million in just one day. By the end of the crash, he was worth $3million.

To avert further fall, stock market tycoons had started making efforts to end the bearish spell by extensively buying shares. Jesse strongly supported the market by joining this buying spree on of request of J.P. Morgan.

It led to a sharp recovery in the market. A lot of investors who followed him earned a lot of money, and Jesse acquired the status of a hero. For the first time, he had managed to increase his net worth to the level of the elite and the rich & famous.

Downfall

Jesse had a habit of following his instinct and paying no heed to advise by other people while trading. However, after gaining the recent success, he probably grew overconfident and broke his own rules. He put all his stakes in buying cotton on the advice of a cotton trader.

The cotton trader had betrayed Jesse as, at that time, the trend was the opposite. Traders were heavily selling in the market (including the one who ill-advised Jesse.) As a result, the price of cotton dropped severely. Just because of one wrong move, he lost almost everything he had earned during the 1907 crash. In the next few years, he incurred more and more losses, built up a large amount of debt, and finally declared bankruptcy.

Recouping the loss

Jesse was not left with a single spare penny to start trading again. So he sought help for credit trading. Knowing very well that he had no chance left of committing any further mistake, he made his move with extreme caution and perfection.

As a result, Jesse succeeded in building up enough capital to act as seed money for his future trades. He started trading again, and in the next few years, he managed to recoup his losses and get out of debt.

Reaching the pinnacle

The stock market crash during the Great Depression of 1929 brought a new opportunity for Jesse. He observed that the stock market was making some particular patterns in 1929. These appeared to be similar to those seen at the beginning of the 1907 crash. Based on his instinct, he started short selling in the market, anticipating a severe fall. He even had to live in his office for several days to accomplish his task.

His analysis proved to be correct, and at the end of the crash, Jesse had amassed wealth equivalent to today’s $ 1.5 billion. It happened to be the most successful trading of his life and made him reach the pinnacle of his net worth. It was the time when the majority of the traders had lost their fortune.

Hitting rock bottom once again

After reaching the pinnacle, Jesse started losing his fortune sharply once again. The reason remains unknown as no record is found in history. Maybe it was his reckless decisions, speculative trading, or following someone else’s advice while going against the instinct that made him lose it all again. Eventually, Livermore declared bankruptcy for the 3rd time.

Livermore’s son, Jesse Jr., suggested his father in 1939 to share his experiences with the world by writing a book. He wrote a book, How To Trade In Stocks, but it didn’t gain much publicity as World War II was underway and the general interest in the stock market was low. Moreover, his trading style was also considered risky and controversial.

The end of a legendary trader

In 1934, Jesse committed suicide. He shot himself and was found dead in a hotel room with a lengthy suicide note for his wife. At the time of death, he was 63 years old.

Though this brought an end of a legendary trader, yet his rules of trading, however controversial they may be, are still applied by day traders. His price pattern theory appears relevant for stock traders even today, and he is considered a pioneer of day trading.

Post Author: Kamran Mahmood

The author is a seasoned financial investor and a prolific writer on matters related to stock exchanges, capital markets, wealth creation, and asset management. He keeps a keen eye on the global macroeconomy, financial world, personal wealth management, and investment opportunities.

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