Jesse Livermore – A Trading Legend

In 1929 Jesse Livermore’s fortunes were at their zenith. He had made a profit of $100 million dollars shorting the markets during the great crash. Yet, by 1934, he was bankrupt.
In just five short years one of the greatest stock-traders the world has known lost his entire $100 million fortune. We cannot blame this on the inadequacy of his trading rules – they were fully formulated by then. We must conclude that he ignored at least one of his sacrosanct rules – never to hold on to a losing position.
If Livermore did hold losing positions until his $100 million fortune was wiped out – in spite of the lessons of 41 years of trading – we must presume his mental processes had malfunctioned, due either to stress, depression, or a combination of the two.
Twelve years earlier, Livermore had told Lefèvre how he had put money in trust for his family. Lefèvre had asked if this was because Livermore feared that the stock market might take his money away from him.
Livermore replied prophetically:
“I know this – that a man will spend anything he can lay his hands on; and that he can lose every cent.”
Livermore himself had noted that what ultimately defeated most traders was their inability to stick to their own proven trading rules. Usually hope or fear brought them down. Hope caused traders to increase their losses by holding on to losing positions for too long, hoping the trade would become profitable. Fear caused traders to decrease their profits by selling winning positions too soon, fearful the market would turn and their winning positions would turn into losers.
“I sometimes think that speculation must be an unnatural sort of business, because I find that the average speculator has arrayed against him his own nature. The weaknesses that all men are prone to are fatal to success in speculation…”
“The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day – and you lose more than you should had you not listened to hope – to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little.”
“And when the market goes your way you become fearful that the next day will take away your profit, and you get out-too soon.”
“Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.”
Jesse Livermore concluded that no trader could trade the market constantly and beat it. Everyone who played the market daily would eventually lose. Winning was only possible by trading at times when the market allowed one to win – during clear bull and bear markets when most stocks were moving in a single direction.
“I have been in the speculative game ever since I was fourteen. It is all I have ever done. I think I know what I am talking about. And the conclusion that I have reached after nearly thirty years of constant trading, both on a shoestring and with millions of dollars back of me, is this: A man may beat a stock or a group at a certain time, but no man living can beat the stock market!”
“A man may make money out of individual deals in cotton or grain, but no man can beat the cotton market or the grain market.”
“If I knew how to make these statements stronger or more emphatic I certainly would. It does not make any difference what anybody says to the contrary. I know I am right in saying these are incontrovertible statements.”